Tax Cases

G.R. No.
125355 March 30, 2000
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals, reversing that of the Court of Tax Appeals, which affirmed with modification the decision of
1 2
the Commissioner of Internal Revenue ruling that Commonwealth Management and Services
Corporation, is liable for value added tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation

duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other
technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.
1âwphi1.nêt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for
taxable year 1988, computed as follows:
P1,679,155.00
Taxable sale/receipt
============
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3
============
COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss
in its operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals a petition for review
4
contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other technical assistance,
including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis.
It averred that it was not engaged in the business of providing services to Philamlife and its affiliates.
COMASERCO was established to ensure operational orderliness and administrative efficiency of
Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net
loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was
not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of
Internal Revenue, the dispositive portion of which reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner

deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications.
Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the
amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from
January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter
shall not be included in the payment as there was no compromise agreement entered into
between petitioner and respondent with respect to the value-added tax deficiency. 5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of
the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of
the Court of Tax Appeals, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and

SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment
for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and
penalty charges are ordered CANCELLED for lack of legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving the
same parties, where it was held that COMASERCO was not liable to pay fixed and contractor's tax
7
for services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned
that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates.
In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it
was not engaged in the business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review
on certiorari assailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on
September 26, 1996, COMASERCO complied with the resolution. 8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable
to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different
things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its
affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the
performance of the service. It is immaterial whether profit is derived from rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No.
273 in 1988, provides that:
Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters
or exchanges goods, renders services, or engages in similar transactions and any person
who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100
to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must
be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary
purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost
basis, without any profit." Private respondent argues that profit motive is material in ascertaining who
to tax for purposes of determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT),
amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act
8424, the National Internal Revenue Code of 1997, took effect. The amended law provides that:
Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and
108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise
apply to existing sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
rendered in the course of trade or business.
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-
profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT
is a tax on transactions, imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular conduct or
pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-
oriented.
The definition of the term "in the course of trade or business" present law applies to all transactions
even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in
the course of trade or business, sells, barters or exchanges goods and services, was already liable
to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as
10
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 109, Republic Act 8424
13
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
14
standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such
as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the
study and consideration of tax cases and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No.
34042, declaring the COMASERCO as not engaged in business and not liable for the payment of
fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the
present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person
who sells, barters, or exchanges goods and services, in the course of trade or business, as defined
by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of
Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax
Appeals in C. T. A. Case No. 4853.
No costs. SO ORDERED.
G.R. No. 178697 November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming
the October 26, 2004 Decision of the CTA-First Division 2 which, in turn, partially granted the petition
for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the
deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony
for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late remittance of internal revenue
taxes in the amount of ₱1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for "the period 1997 and unverified prior years." On December 6, 1999,
a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony
protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies. 4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

2000. Sony submitted relevant documents in support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sony’s motor vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of ₱10,523,821.99
was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches. 8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED
to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of
merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax
in the amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue
taxes in the sum of ₱1,269,593.90:
1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3)
of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for
the deficiency VAT in the amount of ₱11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in
the amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10%
tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
₱10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR
1avvphi1
filed a petition for review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;
2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be

subjected to 10% withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of ₱10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July
5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE

IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME. 12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on
December 3, 2008, the Court resolved to give due course to the petition and to decide the case on
the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason,
the CIR acting through its revenue officers went beyond the scope of their authority because the
deficiency VAT assessment they arrived at was based on records from January to March 1998 or
using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-First Division in its
April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation. Thus,
if CIR wanted or intended the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may,
the CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-
EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter. 18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified
that advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the money
came from is another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of our client subject to income
tax. We submit further that our client is not subject to VAT on the subsidy income as this was not
derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in
view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s)
advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It
was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by
Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also
subject to VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case. Sony did not render any service to SIS at all. The
services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising
expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998. 24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is a
natural person. According to the CIR, Sony’s schedule of Selling, General and Administrative
expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing
the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does
not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment
from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment
of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After which, the corresponding return and
remittance must be made within 10 days after the end of each month. The question now is when
does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the
FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10,
1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on
or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of
Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National
Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand, claims
that she served as Assistant Secretary of the Department of Trade and Industry and consultant of the
Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s tax," not a sale
of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT
was never factored into the formula for computing toll fees, its imposition would violate the non-
impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation
of the VAT. The Court required the government, represented by respondents Cesar V. Purisima,
Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue,
to comment on the petition within 10 days from notice.2 Later, the Court issued another resolution
treating the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including
tollway operations, except where the law provides otherwise; that the Court should seek the meaning
and intent of the law from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause cannot limit the State’s
sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing
toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights
of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on
top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on
motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the
BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional
input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be
implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the
Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax
on services; b) will impair the tollway operators’ right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and cannot be implemented.
The Court’s Rulings

A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than
one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The
government has sought reconsideration of the Court’s resolution,7 however, arguing that petitioners’
allegations clearly made out a case for declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule
65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain,
speedy, and adequate remedy in the ordinary course of law against the BIR action in the form of an
appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case
has far-reaching implications and raises questions that need to be resolved for the public good.8 The
Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not
only on the more than half a million motorists who use the tollways everyday, but more so on the
government’s effort to raise revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could
cause more mischief both to the tax-paying public and the government. A belated declaration of nullity
of the BIR action would make any attempt to refund to the motorists what they paid an administrative
nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample
power to waive such technical requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of locus standi which is a mere
procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and
collected, according to Section 108, on the gross receipts derived from the sale or exchange of services
as well as from the use or lease of properties. The third paragraph of Section 108 defines "sale or
exchange of services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code and
non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines
for a fee, including those specified in the list. The enumeration of affected services is not exclusive. 11 By
qualifying "services" with the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to illustrate how pervasive and
broad is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that
can be imagined as a form of "service" rendered for a fee should be deemed included unless some
provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render. Essentially,
tollway operators construct, maintain, and operate expressways, also called tollways, at the operators’
expense. Tollways serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving.
In consideration for constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the
tollway facilities over which the operator enjoys private proprietary rights12 that its contract and the law
recognize. In this sense, the tollway operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and
skills.
And not only do tollway operators come under the broad term "all kinds of services," they also come
under the specific class described in Section 108 as "all other franchise grantees" who are subject to
VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than ₱10 million and gas
and water utilities) that Section 11913 spares from the payment of VAT. The word "franchise" broadly
covers government grants of a special right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under
Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the
"franchise grantees" it speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between franchises granted by Congress and
franchises granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute
as much a legislative franchise as though the grant had been made by Congress itself. 15 The term
"franchise" has been broadly construed as referring, not only to authorizations that Congress directly
issues in the form of a special law, but also to those granted by administrative agencies to which the
power to grant franchises has been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the Philippine National Construction Company,
the former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers
under P.D. 1112.17 The franchise in this case is evidenced by a "Toll Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes such
services from the term "sale of services" under Section 108 of the Code. But, again, nothing in Section
108 supports this contention. The reverse is true. In specifically including by way of example electric
utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section
108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or service is a
franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately determined by the language
of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first
be sought "in the words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and without resorting
to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount to
taxing a tax.21 Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The
term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as one for
public use. Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road through the
toll fees they pay upon using the road. The tollway system is even a more efficient and equitable manner
of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as "one
intended for public use." Even if the government collects toll fees, the road is still "intended for public
use" if anyone can use the road under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed user’s
tax. This means taxing those among the public who actually use a public facility instead of taxing all the
public including those who never use the particular public facility. A user’s tax is more equitable – a
principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City could
sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national government, the Court held that the
City could not proceed with the auction sale. MIAA forms part of the national government although not
integrated in the department framework."24 Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at
public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a
rule that tollway fees are user’s tax, but to make the point that airport lands and buildings are
properties of public dominion and that the collection of terminal fees for their use does not make them
private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it spends for the roadways. This is not the
case here. What the government seeks to tax here are fees collected from tollways that are constructed,
maintained, and operated by private tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for expressways. 26 Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A
tax is imposed under the taxing power of the government principally for the purpose of raising revenues
to fund public expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of
the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for
the use of public facilities, therefore, they are not government exactions that can be properly treated as
a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities, as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as
an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of
the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but
merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to
be a tax30 and simply becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll
fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one
has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf
of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the
alleged diminution in return of investments that may result from the VAT imposition. She has no interest
at all in the profits to be earned under the TOAs. The interest in and right to recover investments solely
belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely affected by imposing
VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation
in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The
Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order
to claim input VAT, the name, address and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT – by
rounding off the toll rate and putting any excess collection in an escrow account – is also illegal, while
the alternative of giving "change" to thousands of motorists in order to meet the exact toll rate would
be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively
feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system
should be capable of being effectively administered and enforced with the least inconvenience to the
taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired." 34 Thus, even if the imposition of
VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,35 the facts pertaining to the matter are not
sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on
tollway operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on
the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section
111(A)36 of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning
inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with
tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll
fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional
input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the
2% transitional input VAT belongs to the tollway operators who have not questioned the circular’s
validity. They are thus the ones who have a right to challenge the circular in a direct and proper action
brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT
law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code
clearly states that services of all other franchise grantees are subject to VAT, except as may be provided
under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to
franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions
under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege,
then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be mistaken.37 But as the law is written, no
such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it
is found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative
of Congress. The Court’s role is to merely uphold this legislative policy, as reflected first and foremost in
the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no discretion on the matter
but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion in
matters pertaining to the implementation and execution of tax laws. Consequently, the executive is
more properly suited to deal with the immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s
temporary restraining order dated August 13, 2010.
SO ORDERED.
G.R. No. L-66416 March 21, 1990

vs.
TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for private respondent.
GUTIERREZ, JR., J.:
This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the
money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room
charges of tourists, travelers and/or foreign travel agencies does not form part of its gross receipts
subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977.
We adopt the findings of facts of the Court of Tax Appeals as follows:
For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a
travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during
their stay in this country. Some of the services extended to the tourists consist of booking said tourists
and travelers in local hotels for their lodging and board needs; transporting these foreign tourists from
the airport to their respective hotels, and from the latter to the airport upon their departure from the
Philippines, transporting them from their hotels to various embarkation points for local tours, visits and
excursions; securing permits for them to visit places of interest; and arranging their cultural
entertainment, shopping and recreational activities.
In order to ably supply these services to the foreign tourists, petitioner and its correspondent
counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. Although the fee
to be paid by said tourists is quoted by the petitioner, the payments of the hotel room accommodations,
food and other personal expenses of said tourists, as a rule, are paid directly either by tourists
themselves, or by their foreign travel agencies to the local hotels (pp. 77, t.s.n., February 2, 1981; Exhs.
O & O-1, p. 29, CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or shops, as the case may be.
It is also the case that some tour agencies abroad request the local tour agencies, such as the petitioner
in the case, that the hotel room charges, in some specific cases, be paid through them. (Exh. Q, Q-1, p.
29 CTA rec., p. 25, T.s.n., ibid, pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh. "U", pp. 22-23, t.s.n.,
Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this arrangement, the foreign tour agency entrusts to
the petitioner Tours Specialists, Inc., the fund for hotel room accommodation, which in turn is paid by
petitioner tour agency to the local hotel when billed. The procedure observed is that the billing hotel
sends the bill to the petitioner. The local hotel identifies the individual tourist, or the particular groups of
tourists by code name or group designation and also the duration of their stay for purposes of payment.
Upon receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by the
foreign tour correspondent agency.
Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for
deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges
in its gross receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979,
petitioner received from respondent the 3% deficiency independent contractor's tax assessment in the
amount of P122,946.93 for the years 1974 to 1976, inclusive, computed as follows:
1974 deficiency percentage tax
per investigation P 3,995.63
15% surcharge for late payment 998.91
—————
P 4,994.54
14% interest computed by quarters
up to 12-28-79 3,953.18 P 8,847.72
1975 deficiency percentage tax
25% surcharge for late payment 2,106.85
—————
P 10,534.24
up to 12-28-79 6,808.47 P 17,342.71
1976 deficiency percentage
25% surcharge for late payment 13,569.11
—————
P 67,845.53
up to 12-28-79 28,910.97 P 96,756.50
————— —————
Total amount due P 122,946.93

=========
In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a
compromise penalty of P500.00.
Subsequently on December 11, 1979, petitioner formally protested the assessment made by respondent
on the ground that the money received and entrusted to it by the tourists, earmarked to pay hotel room
charges, were not considered and have never been considered by it as part of its taxable gross receipts
for purposes of computing and paying its constractor's tax.
During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in
charge of the Accounting Department of petitioner, had testified, her credibility not having been
destroyed on cross examination, categorically stated that the amounts entrusted to it by the foreign
tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel concerned,
without any portion thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981, pp. 7, 25;
t.s.n., Aug. 20, 1981, pp. 5-9, 17-18). The testimony of Serafina Sazon was corroborated by Gerardo
Isada, General Manager of petitioner, declaring to the effect that payments of hotel accommodation are
made through petitioner without any increase in the room charged (t.s.n., Oct. 9, 1981, pp. 21-25) and
that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact
that the room charge is exempt from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness
Isada stated, on cross-examination, that if their payment is made, thru petitioner's tour agency, the
hotel cost or charges "is only an act of accomodation on our (its) part" or that the "agent abroad instead
of sending several telexes and saving on bank charges they take the option to send money to us to be
held in trust to be endorsed to the hotel." (pp. 3-4, t.s.n. Aug. 10, 1982.)
Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's written protest, caused the
issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank
deposits garnished. (pp. 49-50, BIR Rec.)
Taking this action of respondent as the adverse and final decision on the disputed assessment,
petitioner appealed to this Court. (Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:
WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE
FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL
ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX. (Rollo, p. 23)
The petitioner premises the issue raised on the following assumptions:
Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room
accommodations, were received as part of the package fee and, therefore, form part of "gross receipts"
as defined by law.
Secondly, there is no showing and is not established by the evidence. that the amounts received and
"earmarked" are actually what had been paid out as hotel room charges. The mere possibility that the
amounts actually paid could be less than the amounts received is sufficient to destroy the validity of the
ruling. (Rollo, pp. 26-27)
In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent
court.
The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this
Court and absent strong reasons for this Court to delve into facts, only questions of law are open for
determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444
[1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164
SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this
court and can only be disturbed on appeal if not supported by substantial evidence.
In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of
Tax Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency,
like the herein private respondent, rendered to foreign customers. The respondent differentiated
between the package fee — offered by both the local travel agency and its correspondent counterpart
tourist agencies abroad and the requests made by some tour agencies abroad to local tour agencies
wherein the hotel room charges in some specific cases, would be paid to the local hotels through them.
In the latter case, the correspondent court found as a fact ". . . that the foreign tour agency entrusts to
the petitioner Tours Specialists, Inc. the fund for hotel room accommodation, which in turn is paid by
petitioner tour agency to the local hotel when billed." (Rollo, p. 42) The following procedure is followed:
The billing hotel sends the bill to the respondent; the local hotel then identifies the individual tourist, or
the particular group of tourist by code name or group designation plus the duration of their stay for
purposes of payment; upon receipt of the bill the private respondent pays the local hotel with the funds
entrusted to it by the foreign tour correspondent agency.
Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the
foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to
its funds; this arrangement was only an act of accommodation on the part of the private respondent.
This evidence was not refuted.
In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent
were part of the package fee paid by foreign tourists to the respondent is not correct. The evidence is
clear to the effect that the amounts entrusted to the private respondent were exclusively for payment
of hotel room charges of foreign tourists entrusted to it by foreign travel agencies.
As regards the petitioner's second assumption, the respondent court stated:
. . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners' Worksheet
(Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following sums made up the hotel
room accommodations:
July 1976 P 102,702.97
Aug. 1976 121,167.19
Sept. 1976 53,209.61
—————
P 282,079.77
=========
Oct. 1976 P 71,134.80
Nov. 1976 409,019.17

Dec. 1976 142,761.55
—————
622,915.51
—————
Grand Total P 904,995.29
=========
It is not true therefore, as stated by respondent, that there is no evidence proving the amounts
earmarked for hotel room charges. Since the BIR examiners could not have manufactured the above
figures representing "advances for hotel room accommodations," these payments must have certainly
been taken from the records of petitioner, such as the invoices, hotel bills, official receipts and other
pertinent documents. (Rollo, pp. 48-49)
The factual findings of the respondent court are supported by substantial evidence, hence binding upon
this Court.
With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:
. . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and/or
correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross
receipts for purposes of the 3% contractor's tax. (Rollo, p. 45)
The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to
Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the
entire gross receipts of a taxpayer undiminished by any amount. According to the petitioner, this
interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementing
Section 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the
Tax Code is imposed of the gross receipts of the contractor, "no deduction whatever being allowed by
said law." The petitioner contends that the only exception to this rule is when there is a law or
regulation which would exempt such gross receipts from being subjected to the 3% contractor's tax
citing the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. 821 [1960]).
Thus, the petitioner argues that since there is no law or regulation that money entrusted, earmarked
and paid for hotel room charges should not form part of the gross receipts, then the said hotel room
charges are included in the private respondent's gross receipts for purposes of the 3% contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner
appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the
Manila Jockey Club, a duly constituted corporation authorized to hold horse races in Manila. The facts of
the case show that the monies sought to be taxed never really belonged to the club. The decision shows
that during the period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its
commission but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act
309 went to the Board of Races, the owner of horses and jockeys. Section 260 of the Internal Revenue
Code provides that the amusement tax was payable by the operator on its "gross receipts". The Manila
Jockey Club, however, did not consider as part of its "gross receipts" subject to amusement tax the
amounts which it had to deliver to the Board on Races, the horse owners and the jockeys. This view was
fully sustained by three opinions of the Secretary of Justice, to wit:
There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the
Totalizer. This portion represents its share or commission in the total amount of money it handles and
goes to the funds thereof as its own property which it may legally disburse for its own purposes. The 5%
does not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning
horses. It is destined for no other object than the payment of prizes and the club cannot otherwise
appropriate this portion without incurring liability to the owners of winning horses. It cannot be
considered as an item of expense because the sum used for the payment of prizes is not taken from the
funds of the club but from a certain portion of the total bets especially earmarked for that purpose.
In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement
tax of 10% (now it is 20% of the "gross receipts", provided for in Section 260 of the National Internal
Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should
not be included by the Manila Jockey Club, Inc.
The Collector of the Internal Revenue, however had a different opinion on the matter and demanded
payment of amusement taxes. The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of
the Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. The
latter being a Government institution, there would be double taxation, which should be avoided unless
the statute admits of no other interpretation. In the same manner, the Government could not have
intended to consider as gross receipt the portion of the funds which it directed the Club to give, or knew
the Club would give, to winning horses and jockeys — admittedly 5%. It is true that the law says that out
of the total wager funds 12-1/2% shall be set aside as the "commission" of the race track owner, but the
law itself takes official notice, and actually approves or directs payment of the portion that goes to
owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2%
commission. As it did not at that time contemplate the application of "gross receipts" revenue principle,
the law in making a distribution of the total wager funds, took no trouble of separating one item from
the other; and for convenience, grouped three items under one common denomination.
Needless to say, gross receipts of the proprietor of the amusement place should not include any money
which although delivered to the amusement place has been especially earmarked by law or regulation
for some person other than the proprietor. (The situation thus differs from one in which the owner of
the amusement place, by a private contract, with its employees or partners, agrees to reserve for them
a portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off. Gaz. [51]
10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6] 896).
In the second case, the facts of the case are:
The Manila Jockey Club holds once a year a so called "special Novato race", wherein only "novato"
horses, (i.e. horses which are running for the first time in an official [of the club] race), may take part.
Owners of these horses must pay to the Club an inscription fee of P1.00, and a declaration fee of P1.00
per horse. In addition, each of them must contribute to a common fund (P10.00 per horse). The Club
contributes an equal amount P10.00 per horse) to such common fund, the total amount of which is
added to the 5% participation of horse owners already described herein-above in the first case.
Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid
amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it entertained
the belief that in accordance with the three opinions of the Secretary of Justice herein-above described,
such contributions never formed part of its gross receipts. On the inscription fee of the P1.00 per horse,
it paid the tax. It did not on the declaration fee of P1.00 because it was imposed by the Municipal
Ordinance of Manila and was turned over to the City officers.
The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such
contributed fund P10.00 per horse in the special novato race, holding they were part of its gross
receipts. The Manila Jockey Club protested and resorted to the Court of Tax Appeals, where it obtained
favorable judgment on the same grounds sustained by said Court in connection with the 5% of the total
wager funds in the herein-mentioned first case; they were not receipts of the Club.
We resolved the issue in the following manner:
We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-
peso contribution never belonged to the Club. It was held by it as a trust fund. And then, after all, when
it received the ten-peso contribution, it at the same time contributed ten pesos out of its own pocket,
and thereafter distributed both amounts as prizes to horse owners. It would seem unreasonable to
regard the ten-peso contribution of the horse owners as taxable receipt of the Club, since the latter, at
the same moment it received the contribution necessarily lost ten pesos too.
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound
to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would
exempt such monies and receipts within the meaning of gross receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do
not form part of its gross receipts within the definition of the Tax Code. The said receipts never
belonged to the private respondent. The private respondent never benefited from their payment to the
local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.
Another objection raised by the petitioner is to the respondent court's application of Presidential Decree
31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides:
Sec. 1. — Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for
the entire period of their stay in the country.
The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under
Section 191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the
privilege to engage in business as a contractor and that it is imposed on, and collectible from the person
exercising the privilege. He sums his arguments by stating that "while the burden may be shifted to the
person for whom the services are rendered by the contractor, the latter is not relieved from payment of
the tax." (Rollo, p. 28)
The same arguments were submitted by the Commissioner of Internal Revenue in the case
of Commissioner of Internal Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his
imposition of the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the
gross receipts John Gotamco & Sons, Inc., realized from the construction of the World Health
Organization (WHO) office building in Manila. We rejected the petitioner's arguments and ruled:
We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the
respondent court:
"In context, direct taxes are those that are demanded from the very person who, it is intended or
desired, should pay them; while indirect taxes are those that are demanded in the first instance from
one person in the expectation and intention that he can shift the burden to someone else. (Pollock v.
Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course payable
by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the
tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it
is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner,
the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax
indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the
World Health Organization.'"
Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of
Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be
shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this
case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We agree. The
Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the
manufacturer or producer; the fact that the manufacturer or producer might have added the amount of
the tax to the price of the goods did not make the sales tax "a tax on the purchaser." The Court held that
the sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt
entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice
of America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes
which, although not imposed upon or paid by the Organization directly, form part of the price paid or to
be paid by it.
Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room
charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court
aptly stated:
. . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what
respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like
hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may
claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of
petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect
would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges.
One way or the other, it would not have the effect of promoting tourism in the Philippines as that would
increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said
tourists. (Rollo, pp. 51-52)
WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 88291 May 31, 1991
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President; HON.
VICENTE R. JAYME, in his capacity as Secretary of the Department of Finance; HON. SALVADOR
MISON, in his capacity as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his capacity as
Commissioner of Internal Revenue; NATIONAL POWER CORPORATION; the FISCAL INCENTIVES
REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine National Oil
Corporation; and Petrophil Corporation, respondents.
Villamor & Villamor Law Offices for petitioner.

Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the
Fiscal Incentives Review Board FIRB for exempting the National Power Corporation (NPC) from indirect
tax and duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to
undertake the development of hydraulic power and the production of power from other sources.1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under—
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from
all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces,
cities and municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress
declared as a national policy the total electrification of the Philippines through the development of
power from all sources to meet the needs of industrial development and rural electrification which
should be pursued coordinately and supported by all instrumentalities and agencies of the government,
including its financial institutions.2 The corporate existence of NPC was extended to carry out this policy,
specifically to undertake the development of hydro electric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on
a nationwide basis.3 Being a non-profit corporation, Section 13 of the law provided in detail the
exemption of the NPC from all taxes, duties, fees, imposts and other charges by the government and its
instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of
Republic Act No. 6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees,
imposts and other charges imposed "directly or indirectly," on all petroleum products used by NPC in its
operation. Presidential Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by
integrating the tax exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their subsidiaries.4 However, said law
empowered the President and/or the then Minister of Finance, upon recommendation of the FIRB to
restore, partially or totally, the exemption withdrawn, or otherwise revise the scope and coverage of
any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and
duty exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB
issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July
1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty
incentives granted to government and private entities which had been restored under Presidential
Decree Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and prescribe
the date of effectivity of such tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption
privileges effective March 10, 1987. On October 5, 1987, the President, through respondent Executive
Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally
paid by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for
Customs duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its
crude oil importation.
Many of the factual statements are reproduced from the Senate Committee on Accountability of Public
Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and approved by the
Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was
promulgated abolishing the tax exemptions of all government-owned or-controlled corporations, the oil
firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to
the NPC. This non-payment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7, Annex
"A")
During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of
NPC of petroleum products from the oil companies on the erroneous belief that the National Power
Corporation (NPC) was exempt from indirect taxes as reflected in the letter of Deputy Commissioner of
Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to
the NPC to purchase petroleum products from the oil companies without payment of specific tax (copy
of this letter is attached hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC
only after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions granted in
favor of government-owned or-controlled corporations and empowering the FIRB to recommend to the
President or to the Minister of Finance the restoration of the exemptions which were withdrawn.
"Specifically, Caltex paid the total amount of P58,020,110.79 in specific and ad valorem taxes for
deliveries of petroleum products to NPC covering the period from October 31, 1984 to April 27, 1985."
(par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion.
Beginning June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions, Caltex's
billings to NPC always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p, 7,
Annex "A")
4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April,
1985, NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the specific tax
component being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy of
which is hereto attached as Annex "C", restored the tax exemption privileges of NPC effective
retroactively to June 11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as
follows:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a
"refund of Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79. (par.
26, pp. 8-9, Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"),
Acting BIR Commissioner Ruben Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum products from
the oil companies free of specific and ad valorem taxes, during the period in question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985—The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of
the FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax exemption privileges
of the National Power Corporation (NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-85.
(par. 40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed
the ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co.,
Ltd., a Korean contractor of NPC for its infrastructure projects, certified true copy of which is attached
hereto as petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by P.D. 938, this
Office is of the opinion, and so holds, that the scope of the tax exemption privilege enjoyed by NPC
under said section covers only taxes for which it is directly liable and not on taxes which are only shifted
to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since contractor's tax is directly
payable by the contractor, not by NPC, your request for exemption, based on the stipulation in the
aforesaid contract that NPC shall assume payment of your contractor's tax liability, cannot be granted
for lack of legal basis." (Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is directly
liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR, through
Ancheta, reversed its previous position of May 8, 1985 adopted by Ancheta himself favoring NPC's
indirect tax exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex "F"),
the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which PAL is directly
liable, and that the payment of specific and ad valorem taxes on petroleum products is a direct liability
of the manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions
retroactively from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached as
petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79
(corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q") dated
July 7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F," which was
assigned by NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987,
certified true copy of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15,
Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial
settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the assigned tax
credit against its specific tax payments for two (2) months. (per memorandum dated July 28, 1986 of
DCIR Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit
assigned to Caltex, the NPC reiterated its request for the release of the balance of its pending refunds of
taxes paid by respondents Petrophil, Shell and Caltex covering the period from June 11, 1984 to early
part of 1986 amounting to P410.58 million. (The claim of the first two (2) oil companies covers the
period from June 11, 1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to early
1986). This request was denied on August 18, 1986, under BIR Ruling 152-86 (certified true copy of
which is attached hereto as petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege to buy
petroleum products covered only the period from June 11, 1984 up to June 30, 1985. It further declared
that, despite FIRB No. 1-86, NPC had already lost its tax and duty exemptions because it only enjoys
special privilege for taxes for which it is directly liable. This ruling, in effect, denied the P410 Million tax
refund application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved
the motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p. 15)."
(par. 29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR
Commissioner Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "J"), reversed his previous position and states this time that all deliveries of
petroleum products to NPC are tax exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled
"Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the Powers of the
Fiscal Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption
privilege and included in the exemption "those pertaining to its domestic purchases of petroleum and
petroleum products, and the restorations were made to retroact effective March 10, 1987, a certified
true copy of which is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoñez, Secretary of Justice, issued Opinion No. 77, series
of 1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section 2a (b), (c)
and (d) of Executive order No. 93 constitute undue delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the
Chairman of the FIRB a certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987, allegedly
pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by letter
dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the National Power
Corporation is still exempt from taxes, duties . . . on its local purchases of . . . petroleum products . . ."
declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and
taxes imposed on the petroleum products purchased locally and used for the generation of electricity," a
certified true copy of which is attached hereto as petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988
but without the usual official form of "By the Authority of the President," a certified true copy of which
is hereto attached and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive Secretary are based on the
RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC pertaining
to its domestic purchases of petroleum products (petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported that
the Office of the President and the Department of Finance had ordered the BIR to refund the tax
payments of the NPC amounting to Pl.58 Billion which includes the P410 Million Tax refund already
rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988 of
Undersecretary Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was
ordered released to NPC (par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan
requesting them to hold in abeyance the release of the Pl.58 billion and await the outcome of the
investigation in regard to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P" and
"P-1 " (par. 32, p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR
dated August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC until after
the termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs
custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil is one of the
petroleum products processed from the crude oil; and same is sold to NPC. After the sale, NPC applies
for tax credit covering the duties and ad valorem exemption under its Charter. Such applications are
processed by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of
NPC which, in turn assigns it to the oil firm that imported the crude oil. These certificates are eventually
used by the assignee-oil firms in payment of their other duty and tax liabilities with the Bureau of
Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought by
respondent NPC for refund from the Bureau of Customs for duties paid by the oil companies on the
importation of crude oil from which the processed products sold locally by them to NPC was derived.
However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which
conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the
herein petitioner was the sponsor, a much bigger figure was actually refunded to NPC representing
duties and ad valorem taxes paid to the Bureau of Customs by the oil companies on the importation of
crude oil from 1979 to 1985.
26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a Formal and
Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil Companies,
particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made Possible By Their Availing
of the Non-Existing Exemption of National Power Corporation (NPC) from Indirect Taxes, Resulting
Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department of Finance, Their
Refusal to Pay Since 1976 Customs Duties Amounting to Billions of Pesos on Imported Crude Oil
Purportedly for the Use of the National Power Corporation, the Non-Payment of Surtax on Windfall
Profits from Increases in the Price of Oil Products in August 1987 amounting Maybe to as Much as Pl.2
Billion Surtax Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy
formal inquiry on the matter, calling all parties interested to the witness stand including representatives
from the different oil companies, and in due time submitted its Committee Report No. 474 . . . — The
Blue Ribbon Committee recommended the following courses of action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation (NPC) and
its approval of Tax Credit memo covering said amount (Annex "P" hereto), dated July 7, 1986, and cancel
its approval of the Deed of Assignment (Annex "Q" hereto) by NPC to Caltex, dated July 28, 1986, and
collect from Caltex its tax liabilities which were erroneously treated as paid or settled with the use of the
tax credit certificate that NPC assigned to said firm.:
1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 was issued.
Therefore, the grant of a tax refund to NPC in the amount of P58 million was illegal, and therefore, null
and void. Such refund was a nullity right from the beginning. Hence, it never transferred any right in
favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies on the
same ground that the NPC, since May 27, 1976 up to June 17, 1987 was never granted any indirect tax
exemption. So, the P1.58 billion represent taxes legally and properly paid by the oil firms.
3. Start collection actions of specific or excise and ad valorem taxes due on petroleum products sold to
NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of EO 195).
B. For the Bureau of Customs (BOC) to do the following:
1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of petroleum
products by NPC and allegedly granted under the NPC charter covering the years 1978-1988 . . .
28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct
the Bureau of Internal Revenue and of Customs to proceed with the processing of claims for tax
credits/refunds of the NPC, respondent Executive Secretary rendered his ruling, the dispositive portion
of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by
proper authorities, that department and/or its line-tax bureaus may now proceed with the processing of
the claims of the National Power Corporation for duty and tax free exemption and/or tax credits/
refunds, if there be any, in accordance with the ruling of that Department dated May 20,1988, as
confirmed by this Office on June 15, 1988 . . .5
Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary
injunction and/or restraining order, praying among others that:
1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent FIRB
Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other persons acting
for, under, and in their behalf from enforcing their resolution, orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").
2. Said temporary restraining order should also include respondent Commissioners of Customs Mison
and Internal Revenue Ong restraining them from processing and releasing any pending claim or
application by respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against
above-named respondents and all persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up
to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for
P58,020,110.79 (petitioner's Annex "F");
7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987 (petitioner's
Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the Bureau of
Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of tax credit
certificates from 1979 up to the present.
C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC
with the Bureau of Customs and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from

enforcing the abovequestioned resolution, orders and ruling of respondents Executive Secretary,
Secretary of Finance, and FIRB by processing and releasing respondent NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending claims
for refund of respondent NPC with the Bureau of Customs covering the period from 1985 to the present;
to cancel and invalidate the illegal payment made by respondents Caltex, Shell and PNOC by using the
tax credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell and PNOC
all the amounts appearing in said tax credit certificates which were used to settle their duty and tax
liabilities with the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending
claims for refund of respondent NPC with the Bureau of Internal Revenue covering the period from June
11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just and equitable in the premises.6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this
Honorable Court must resolve the following issues:
Main issue—
Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.
Corollary issues—
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax
exemption privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated January
7, 1986 restoring NPC's tax exemption privilege effective July 1, 1985 included the restoration
of indirect tax exemption to NPC and
2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was validly
issued, the nature and extent of the tax exemption privilege restored to NPC.7
In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required
respondents to comment thereon, within ten (10) days from notice. The respondents having submitted
their comment, on October 10, 1989 the Court required petitioner to file a consolidated reply to the
same. After said reply was filed by petitioner on November 15, 1989 the Court gave due course to the
petition, considering the comments of respondents as their answer to the petition, and requiring the
parties to file simultaneously their respective memoranda within twenty (20) days from notice. The
parties having submitted their respective memoranda, the petition was deemed submitted for
resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the questioned orders
and resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-
elected Senator of the Philippines." Public respondent argues that petitioner must show he has
sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general
interest common to all members of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the instant petition
following the ruling in Lozada when it involves illegal expenditure of public money. The petition
questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said
assigned tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR and
Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also allege that the
proper remedy for petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125
instead of this petition. However Section 11 of said law provides—
Sec. 11. Who may appeal; effect of appeal—Any person, association or corporation adversely affected
by a decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs
(Commissioner of Customs) or any provincial or City Board of Assessment Appeals may file an appeal in
the Court of Tax Appeals within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner
of Internal Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal
who may appeal to the Court of Tax Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal
Revenue to impose a tax assessment not found by him to be proper. It would be tantamount to a
usurpation of executive functions.9
Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with
arbitrariness and grave abuse as to go beyond statutory authority.10
Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an
unlawful exercise of jurisdiction11 or to prevent the oppressive exercise of legal authority.12 Precisely,
petitioner questions the lawfulness of the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an
indirect tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies to the
Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to
the Bureau of Internal Revenue after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon
someone else ."13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of
Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like
the NPC, by adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential
Decree No. 938, the exemption of NPC from indirect taxation was revoked and repealed. While
petitioner concedes that NPC enjoyed broad exemption privileges from both direct and indirect taxes on
the petroleum products it used, under Section 13 of Republic Act No, 6395 and more so under
Presidential Decree No. 380, however, by the deletion of the phrases "directly or indirectly" and "on all
petroleum products used by the Corporation in the generation, transmission, utilization and sale of
electric power" he contends that the exemption from indirect taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No.
938 regarding the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax
exemption. He cites Philippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue.14 Petitioner
emphasizes the principle in taxation that the exception contained in the tax statutes must be strictly
construed against the one claiming the exemption, and that the rule that a tax statute granting
exemption must be strictly construed against the one claiming the exemption is similar to the rule that a
statute granting taxing power is to be construed strictly, with doubts resolved against its
existence.15 Petitioner cites rulings of the BIR that the phrase exemption from "all taxes, etc." from "all
forms of taxes" and "in lieu of all taxes" covers only taxes for which the taxpayer is directly liable.16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No.
1931, the relevant provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the
payment of duties, taxes . . . heretofore granted in favor of government-owned or controlled
corporations are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under C.A. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the NPC
is hereby required to furnish the FIRB on a periodic basis the particulars of items received or to be
received through such arrangements, for purposes of tax and duty exemptions privileges.17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power
Corporation (NPC) under Commonwealth Act No. 120, as amended, are restored: Provided, That
importations of fuel oil (crude oil equivalent), and coal of the herein grantee shall be subject to the basic
and additional import duties; Provided, further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other monetary benefits
from deposit substitutes, trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and
improvements owned by it provided that the beneficial use of the property is not transferred to another
pursuant to the provisions of Sec. 10(a) of the Real Property Tax Code, as amended.18
Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86.
Indeed, they were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the
FIRB should make the recommendation subject to the approval of "the President of the Philippines
and/or the Minister of Finance." While said Resolutions do not appear to have been approved by the
President, they were nevertheless approved by the Minister of Finance who is also duly authorized to
approve the same. In fact it was the Minister of Finance who signed and promulgated said resolutions.19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and
1-86 which were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of
Finance Cesar E.A Virata, as Chairman of FIRB respectively, should be separately approved by said
Minister of Finance as required by P.D. 1931 is, a superfluity. An examination of the said resolutions
which are reproduced in full in the dissenting opinion show that the said officials signed said resolutions
in the dual capacity of Chairman of FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of
Albay,20 wherein the Court observed that under P.D. No. 776 the power of the FIRB was only
recommendatory and requires the approval of the President to be valid. Thus, in said case the Court
held that FIRB Resolutions Nos. 10-85 and 1-86 not having been approved by the President were not
valid and effective while the validity of FIRB 17-87 was upheld as it was duly approved by the Office of
the President on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended
P.D. No. 776, it is clearly provided for that such FIRB resolution, may be approved by the "President of
the Philippines and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were
duly approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision
modifies or supersedes the Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges
enjoyed by the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax
exemption privilege; and that it cannot be interpreted to cover indirect taxes under the principle that
tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing
authority.
Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a
tax credit certificate21 which was assigned to respondent Caltex through a deed of assignment approved
by the BIR22 is patently illegal. He also contends that the pending claim of respondent NPC in the amount
of P410.58 million with respondent BIR for the sale and delivery to it of bunker fuel by respondents
Petrophil, Shell and Caltex from July 1, 1985 up to 1986, being illegal, should not be released.
Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24,
1987. It was issued under authority of Executive Order No. 93 dated December 17, 1986 which grants to
the FIRB among others, the power to recommend the restoration of the tax and duty
exemptions/incentives withdrawn thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect
that the powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93
"constitute undue delegation of legislative power and is, therefore, unconstitutional." Petitioner
observes that the FIRB did not merely recommend but categorically restored the tax and duty
exemption of the NPC so that the memorandum of the respondent Executive Secretary dated October 5,
1987 approving the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine
in Philippine Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot
create new indirect tax exemption not otherwise granted in the NPC charter as amended by Presidential
Decree No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the general good and welfare23 wholly owned by
the government of the Republic of the Philippines.24 From the very beginning of its corporate existence,
the NPC enjoyed preferential tax treatment25 to enable the Corporation to pay the indebtedness and
obligation and in furtherance and effective implementation of the policy enunciated in Section one of
"Republic Act No. 6395"26 which provides:
Sec. 1. Declaration of Policy—Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power from
all sources to meet the need of rural electrification are primary objectives of the nation which shall be
pursued coordinately and supported by all instrumentalities and agencies of the government including
its financial institutions.
From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is
obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
other Charges by Government and Governmental Instrumentalities.— The Corporation shall be non-
profit and shall devote all its returns from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines,
its provinces, cities, municipalities and other government agencies and instrumentalities, on all
petroleum products used by the Corporation in the generation, transmission, utilization, and sale of
electric power. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and
other Charges by the Government and Government Instrumentalities.— The Corporation shall be non-
profit and shall devote all its returns from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other governmental agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum produced used by the Corporation in the generation, transmission,
utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and
Other Charges by the Government and Government Instrumentalities.—The Corporation shall be non-
profit and shall devote all its returns from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section One of this Act, the
Corporation, including its subsidiaries hereby declared exempt from the payment of all forms of taxes,
duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings. (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover
"all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No.
6395 enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more
specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all
petroleum products used in its operation. Presidential Decree No. 938 amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties,
fees, imposts, as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in
any court or administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the
NPC "shall devote all its returns from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, . . ."27
The preamble of P.D. No. 938 states—
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit
character of the NPC has not been fully utilized because of restrictive interpretations of the taxing
agencies of the government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938
shall be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted
liberally so as to enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of
statutes granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.28
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment
among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of
non tax liability of such agencies.29
In the case of property owned by the state or a city or other public corporations, the express exemption
should not be construed with the same degree of strictness that applies to exemptions contrary to the
policy of the state, since as to such property "exemption is the rule and taxation the exception."30
The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No.
6395 and P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not
well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are
presumed to be passed with deliberation and with knowledge of all existing ones on the subject, it is
logical to conclude that in passing a statute it is not intended to interfere with or abrogate a former law
relating to the same subject matter, unless the repugnancy between the two is not only irreconcilable
but also clear and convincing as a result of the language used, or unless the latter Act fully embraces the
subject matter of the earlier.31 The first effort of a court must always be to reconcile or adjust the
provisions of one statute with those of another so as to give sensible effect to both provisions.32
The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an
isolated part or a particular provision alone.33 When construing a statute, the reason for its enactment
should be kept in mind and the statute should be construed with reference to its intended scope and
purpose34 and the evil sought to be remedied.35
The NPC is a government instrumentality with the enormous task of undertaking development of
hydroelectric generation of power and production of electricity from other sources, as well as the
transmission of electric power on a nationwide basis, to improve the quality of life of the people
pursuant to the State policy embodied in Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of
NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No.
380 if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given
controlling weight.36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June
26, 1985 confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the
letter of the Secretary of Finance of February 19, 1987, the Memorandum of the Executive Secretary of
October 9, 1987, by authority of the President, confirming and approving FIRB Resolution No. 17-87, the
letter of the Secretary of Finance of May 20, 1988 to the Executive Secretary rendering his opinion as
requested by the latter, and the latter's reply of June 15, 1988, it was uniformly held that the grant of
tax exemption to NPC under C.A. No. 120, as amended, included exemption from payment of all taxes
relative to NPC's petroleum purchases including indirect taxes. 37 Thus, then Secretary of Finance Vicente
Jayme in his letter of May 20, 1988 to the Executive Secretary Macaraig aptly stated the justification for
this tax exemption of NPC —
The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes
imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested that the
change in language evidenced an intention to exempt NPC only from taxes directly imposed on or
payable by it; since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally are
levied on and paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The principal
authority relied on is the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of Internal
Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised Charter, the strengthening of
NPC's preferential tax treatment was clearly the intention. To the extent that the explanatory "whereas
clauses" may disclose the intent of the law-maker, the changes effected by P.D. 938 can only be read as
being expansive rather than restrictive, including its version of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly.
The textbook distinction between a direct and an indirect tax may be based on the possibility of shifting
the incidence of the tax. A direct tax is one which is demanded from the very person intended to be the
payor, although it may ultimately be shifted to another. An example of a direct tax is the personal
income tax. On the other hand, indirect taxes are those which are demanded from one person in the
expectation and intention that he shall indemnify himself at the expense of another. An example of this
type of tax is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no
moment. What is more relevant is that when an "indirect tax" is paid by those upon whom the tax
ultimately falls, it is paid not as a tax but as an additional part of the cost or of the market price of the
commodity.
This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he
analyzed the nature of the percentage (sales) tax to determine whether it is a tax on the producer or on
the purchaser of the commodity. Under out Tax Code, the sales tax falls upon the manufacturer or
producer. The phrase "pass on" the tax was criticized as being inaccurate. Justice Castro says that the tax
remains on the manufacturer alone. The purchaser does not pay the tax; he pays an amount added to
the price because of the tax. Therefore, the tax is not "passed on" and does not for that reason become
an "indirect tax" on the purchaser. It is eminently possible that the law maker in enacting P.D. 938 in
1976 may have used lessons from the analysis of Chief Justice Castro in 1967 Philippine Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil
crunch had already drastically pushed up crude oil Prices from about $1.00 per bbl in 1971 to about $10
and a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was operating the Meralco
thermal plants under a lease agreement. The power generated by the leased plants was sold to Meralco
for distribution to its customers. This lease and sale arrangement was entered into for the benefit of the
consuming public, by reducing the burden on the swiftly rising world crude oil prices. This objective was
achieved by the use of NPC's "tax umbrella under its Revised Charter—the exemption from specific taxes
on locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have withdrawn the
exemption from tax on fuel oil to which NPC was already entitled and which exemption Government in
fact was utilizing to soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil
products sold to NPC, whether paid to them by NPC or no never entered into the rates charged by NPC to
its customers not even during those periods of uncertainty engendered by the issuance of P.D. 1931 and
E. 0. 93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC
through its rates.
There is an import duty on the crude oil imported by the local refineries. After the refining process,
specific and ad valorem taxes are levied on the finished products including fuel oil or residue upon their
withdrawal from the refinery. These taxes are paid by the oil companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component. NPC
pays the oil companies' invoices including the duty component but net of the tax component. NPC then
applies for drawback of customs duties paid and for a credit in amount equivalent to the tax paid (by the
oil companies) on the products purchased. The tax credit is assigned to the oil companies—as payment,
in effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied over time—
There were instances when NPC paid the tax component that was shifted to it and then applied for tax
credit. There were also side issues raised because of P.D. 1931 and E.O. 93 which withdrew all
exemptions of government corporations. In these latter instances, the resolutions of the Fiscal
Incentives Review Board (FIRB) come into play. These incidents will not be touched upon for purposes of
this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without
need of fresh approvals) reflected in the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the
tax and duty component on the oil products, such amount will go into its fuel cost and be passed on to its
customers through corresponding increases in rates. Since 1974, when NPC operated the oil-fired
generating stations leased from Meralco (which plants it bought in 1979), until the present time, no tax
on fuel oil ever went into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me by
yet another circumstance. It is conceded that NPC at the very least, is exempt from taxes to which it is
directly liable. NPC therefore could very well have imported its fuel oil or crude residue for burning at its
thermal plants. There would have been no question in such a case as to its exemption from all duties and
taxes, even under the strictest interpretation that can be put forward. However, at the time P.D. 938 was
issued in 1976, there were already operating in the Philippines three oil refineries. The establishment of
these refineries in the Philippines involved heavy investments, were economically desirable and enabled
the country to import crude oil and process / refine the same into the various petroleum products at a
savings to the industry and the public. The refining process produced as its largest output, in volume, fuel
oil or residue, whose conventional economic use was for burning in electric or steam generating plants.
Had there been no use locally for the residue, the oil refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass
the local oil refineries and import its fossil fuel requirements directly in order to avail itself of its
exemption from "direct taxes." The oil refineries had to keep operating both for economic development
and national security reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931 and
E.O. 93 expressly excluded direct fuel oil importations, so as not to prejudice the continued operations of
the local oil refineries.
To answer your query therefore, it is the opinion of this Department that NPC under the provisions of its
Revised Charter retains its exemption from duties and taxes imposed on the petroleum products
purchased locally and used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and function to supervise and
control the collection of government revenues by the application and implementation of revenue laws.
It is prepared to take the measures supplemental to this ruling necessary to carry the same into full
effect.
As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties
paid on the fuel oil it used. The point is that while these levies were in fact paid to the government, no
part thereof was recovered from the sale of electricity produced. As a consequence, as of our most
recent information, some P1.55 B in claims represent amounts for which the oil suppliers and NPC are
"out-of-pocket. There would have to be specific order to the Bureaus concerned for the resumption of the
processing of these claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the
said opinion ruling of the latter was confirmed and its implementation was directed.39
The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the
Secretary of Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was
exempted from all forms of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means
exactly what it says, i.e., all forms of taxes including those that were imposed directly or indirectly on
petroleum products used in its operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC
extends only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these
rulings are predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It
involved the sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC
was enjoying tax exemption from all taxes under Commonwealth Act No. 120, as amended by Republic
Act No. 358 issued on June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so
plaintiff cannot claim exemptions simply because the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC
whereby Section 13 thereof was amended by emphasizing its non-profit character and expanding the
extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells
out clearly the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380,
the exemption of NPC from indirect taxes was emphasized when it was specified to include those
imposed "directly and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the
same in general terms to cover "all forms of taxes, duties, fees, imposts, etc." which, as hereinabove
discussed, logically includes exemption from indirect taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the
authority of which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93
was promulgated, by which FIRB Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental
circumstances. As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380
and P.D. No. 838 appear to have been brought about by the earlier inconsistent rulings of the tax
agencies due to the doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the
NPC from indirect taxes on petroleum products it uses in its operation. Effectively, said amendments
superseded if not abrogated the ruling in Philippine Acetylene that the tax exemption of NPC should be
limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must consequently be resolved in the
affirmative, that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86
dated January 7, 1986 which restored NPC's tax exemption privileges included the restoration of the
indirect tax exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid
and effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum
products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating the National
Power Corporation, defining its powers, objectives and functions, and for other purposes), as amended,
are restored effective March 10, 1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which include but are not limited to those
financed by the NPC's own internal funds, domestic borrowings from any source whatsoever, borrowing
from foreign-based private financial institutions, etc.); and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition of
relieved tax and duty payments for such expansion on an annual basis or as often as the FIRB may
require it to do so. This report shall be in addition to the usual FIRB reporting requirements on incentive
availment.40
Executive Order No. 93 provides as follows—
Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty
incentives granted " to government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to which the Government of the Republic of
the Philippines is a signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to
Presidential Decree No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No.
1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is
hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/of duty exemption that may be restored.
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of subsidies to
deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or
preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and
the terms and conditions for the grant thereof taking into consideration the international commitments
of the Philippines and the necessary precautions such that the grant of subsidies does not become the
basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that
the powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93
constitute undue delegation of legislative power and is therefore unconstitutional. However, he was
overruled by the respondent Executive Secretary in a letter to the Secretary of Finance dated March 30,
1989. The Executive Secretary, by authority of the President, has the power to modify, alter or reverse
the construction of a statute given by a department secretary.41
A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The
standards of the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu vs. Ericta42 and in De la Llana vs. Alba43 this Court
held: "The standard may be either express or implied. If the former, the non-delegated objection is
easily met. The standard though does not have to be spelled out specifically. It could be implied from
the policy and purpose of the act considered as a whole."
In People vs. Rosenthal44 the broad standard of "public interest" was deemed sufficient. In Calalang vs.
Williams,45, it was "public welfare" and in Cervantes vs. Auditor General,46 it was the purpose of
promotion of "simplicity, economy and efficiency." And, implied from the purpose of the law as a whole,
"national security" was considered sufficient standard47 and so was "protection of fish fry or fish eggs.48
The observation of petitioner that the approval of the President was not even required in said Executive
Order of the tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not
well-taken. On the contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty
exemptions extended by the FIRB must be approved by the President. In this case, FIRB Resolution No.
17-87 was approved by the respondent Executive Secretary, by authority of the President, on October
15, 1987.49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated —
The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its
non-delegation the exception. The reason is the increasing complexity of modern life and many
technical fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by
the growing inability of the legislature to cope directly with the many problems demanding its attention.
The growth of society has ramified its activities and created peculiar and sophisticated problems that
the legislature cannot be expected reasonably to comprehend. Specialization even in legislation has
become necessary. To many of the problems attendant upon present day undertakings, the legislature
may not have the competence, let alone the interest and the time, to provide the required direct and
efficacious, not to say specific solutions.50
Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated the rationale in favor of delegation of
legislative functions—
One thing however, is apparent in the development of the principle of separation of powers and that is
that the maxim of delegatus non potest delegare or delegati potestas non potest delegare, adopted this
practice (Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale University Press, 1922, Vol. 2,
p. 167) but which is also recognized in principle in the Roman Law d. 17.18.3) has been made to adapt
itself to the complexities of modern government, giving rise to the adoption, within certain limits, of the
principle of subordinate legislation, not only in the United States and England but in practically all
modern governments. (People vs. Rosenthal and Osmeña, 68 Phil. 318, 1939). Accordingly, with the
growing complexities of modern life, the multiplication of the subjects of governmental regulation, and
the increased difficulty of administering the laws, there is a constantly growing tendency toward the
delegation of greater power by the legislative, and toward the approval of the practice by the Courts .
(Emphasis supplied.)
The legislative authority could not or is not expected to state all the detailed situations wherein the tax
exemption privileges of persons or entities would be restored. The task may be assigned to an
administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such
presumption can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal
interpretation in favor of constitutionality of legislation should be adopted.52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as
above discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of
June 1987 includes exemption from indirect taxes and duties on petroleum products used in its
operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld
in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by
President Marcos in 1984 are invalid as they were presumably promulgated under the infamous
Amendment No. 6 and that as they cover tax exemption, under Section 17(4), Article VIII of the 1973
Constitution, the same cannot be passed "without the concurrence of the majority of all the members of
the Batasan Pambansa." And, even conceding that the reservation of legislative power in the President
was valid, it is opined that it was not validly exercised as there is no showing that such presidential
encroachment was justified under the conditions then existing. Consequently, it is concluded that
Executive Order No. 93, which was intended to implement said decrees, is also illegal. The authority of
the President to sub-delegate to the FIRB powers delegated to him is also questioned.
In Albay,54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree
withdrew tax exemptions of government-owned or controlled corporations including their subsidiaries
but authorized the FIRB to restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled
that the tax exemptions under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said
resolutions were only recommendatory and were not duly approved by the President of the Philippines
as required by P.D. No. 776.55 The Court also sustained in Albay the validity of Executive Order No. 93,
and of the tax exemptions restored under FIRB Resolution No. 17-87 which was issued pursuant thereto,
as it was duly approved by the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is
provided that:
All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive
issuances not inconsistent with this constitution shall remain operative until amended, repealed or
revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with
the Constitution.1âwphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938
which amended the NPC charter by granting exemption to NPC from all forms of taxes. As above
discussed, this exemption of NPC covers direct and indirect taxes on petroleum products used in its
operation. This is as it should be, if We are to hold as invalid and inoperative the withdrawal of such tax
exemptions under P.D. No. 1931 as well as under Executive Order No. 93 and the delegation of the
power to restore these exemptions to the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court
ruled that the NPC is liable for real estate taxes as of June 11, 1984 (the date of promulgation of P.D. No.
1931) when NPC had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-86
were not validly issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is
estimated to amount to P7.49 billion plus another P4.76 billion in fuel import duties the firm had earlier
paid to the government which the NPC now proposed to pass on to the consumers by another 33-
centavo increase per kilowatt hour in power rates on top of the 17-centavo increase per kilowatt hour
that took effect just over a week ago.,56 Hence, another case has been filed in this Court to stop this
proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated
August 24, 1975 was already amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB
resolutions may be approved not only by the President of the Philippines but also by the Minister of
Finance. Such resolutions were promulgated by the Minister of Finance in his own right and also in his
capacity as FIRB Chairman. Thus, a separate approval thereof by the Minister of Finance or by the
President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and
consequently, Albay must be considered superseded to this extent by this decision. This is because P.D.
No. 938 which is the latest amendment to the NPC charter granting the NPC exemption from all forms
of taxes certainly covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for
the country but more importantly, to assure cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite
correct.1a\^/phi1 There are various arrangements in the payment of crude oil purchased by NPC from
oil companies. Generally, the custom duties paid by the oil companies are added to the selling price paid
by NPC. As to the specific and ad valorem taxes, they are added a part of the seller's price, but NPC pays
the price net of tax, on condition that NPC would seek a tax refund to the oil companies. No tax
component on fuel had been charged or recovered by NPC from the consumers through its power
rates.58 Thus, this is not a case of tax evasion of the oil companies but of tax relief for the NPC. The
billions of pesos involved in these exemptions will certainly inure to the ultimate good and benefit of the
consumers who are thereby spared the additional burden of increased power rates to cover these taxes
paid or to be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors
may claim the same privilege should be dispelled by the fact that (a) this decision particularly treats of
only the exemption of the NPC from all taxes, duties, fees, imposts and all other charges imposed by the
government on the petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A.
No. 6395 and Section 13(d) of P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees,
imposts and all other charges imposed by the government on all petroleum products used in its
operation only, which is the very exemption which this Court deems to be carried over by the passage of
P.D. No. 938. As a matter of fact in Section 13(d) of P.D. No. 380 it is specified that the aforesaid
exemption from taxes, etc. covers those "directly or indirectly" imposed by the "Republic of the
Philippines, its provincies, cities, municipalities and other government agencies and instrumentalities"
on said petroleum products. The exemption therefore from direct and indirect tax on petroleum
products used by NPC cannot benefit the suppliers, importers and contractors of NPC of other products
or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the government. The
amount of revenue received or expected to be received by this tax exemption is, however, not going to
any of the oil companies. There would be no loss to the government. The said amount shall accrue to
the benefit of the NPC, a government corporation, so as to enable it to sustain its tremendous task of
providing electricity for the country and at the least cost to the consumers. Denying this tax exemption
would mean hampering if not paralyzing the operations of the NPC. The resulting increased revenue in
the government will also mean increased power rates to be shouldered by the consumers if the NPC is
to survive and continue to provide our power requirements.59 The greater interest of the people must be
paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.
G.R. No. 153866 February 11, 2005

vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
between exempt entities and exempt transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27,
2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision
reads as follows:
"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the
duties of his office, including, among others, the duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration

Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT
refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;
2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."
4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic
Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As [respondent’s] business is
not subject to VAT, the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital
goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.’
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.”
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,7 respondent is entitled to the

fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment,
machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored,
broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.13 Even so, respondent
would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial
assistance; and exemption from export taxes, local taxes and licenses.14
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors’ taxes, wharfage dues, taxes and duties on imported capital equipment
and spare parts, export taxes, duties, imposts and fees,16 local taxes and licenses, and real property
taxes.17
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary
-- extends20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.22 Banking and finance shall also be liberalized
under minimum Bangko Sentral regulation with the establishment of foreign currency depository units
of local commercial banks and offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax credits 24 for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is
not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade
or business29 as they pass along the production and distribution chain, the tax being limited only to the
value added30 to such goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax
that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services.32 As such, it should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on consumption. 33 In either
case, though, the same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that
law, has been drawn from the tax credit method.35 Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.36 Under the present method that relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.37
If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input
taxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed the input
taxes that the excess has to be paid.41 If, however, the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or quarters.42 Should the input taxes result from zero-
rated or effectively zero-rated transactions or from the acquisition of capital goods, 43 any excess over the
output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal revenue
taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. 47 The tax rate
is set at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax,49 but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate. 52 Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero
output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle53 to the exportation of goods, automatic zero rating 54 is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in
an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or
credit for input taxes paid.58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax
status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject to
the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but
may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or
non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed
on by the seller to the purchaser of the goods, properties or services. 62 While the liability is imposed on
one person, the burden may be passed on to another. Therefore, if a special law merely exempts a party
as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,64 depending again on the application of the destination principle.65
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent. 66 If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent, 67 unless
the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, 68 because
the ecozone within which it is registered is managed and operated by the PEZA as a separate customs
territory.69 This means that in such zone is created the legal fiction of foreign territory. 70 Under the cross-
border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and services from the Philippines to a foreign country
are free of the VAT,73 then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.74 An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.75 This legal fiction is necessary to give meaningful effect to the policies of the special law creating
the zone.76 If respondent is located in an export processing zone77 within that ecozone, sales to the
export processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would
indeed be subject to a zero rate.80
Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax
on consumption, for which the direct liability is imposed on one person but the indirect burden is passed
on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales
nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex
non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments
operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview
of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone under
RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited
indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real
property taxes that presently are imposed on land owned by developers. 82 This similar and repeated
prohibition is an unambiguous ratification of the law’s intent in not imposing local or national taxes on
business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to
x x x internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that
was later amended by RA 7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments and
creating more employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if brought
to the ecozone’s restricted area87 for manufacturing by registered export enterprises,88 of which
respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.89
Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products;91 on required supplies
and spare part for consigned equipment;92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing. 93 In
addition, they are given credits for the value of the national internal revenue taxes imposed on domestic
capital equipment also reasonably needed and exclusively used for the manufacture of their
products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95
Sixth, the exemption from local and national taxes granted under RA 7227 96 are ipso facto accorded to
ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in
favor of the ecozone.98
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,99 and for locally produced raw materials, capital equipment and spare parts
used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar exporters
within the ecozone.101 Indeed, the latter exporters are likewise entitled to such tax exemptions and
credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the
taxpayer103 and liberally in favor of the taxing authority.104
Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the
burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken,
that the legislature intended to exempt them.107 In the present case, all the cited legal provisions are
teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition,
respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.108 Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws109 will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle.110 Revenue
Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered supplier’s sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration -- is
legally entitled to a zero rate.111
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the country."112
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country x x x through the establishment,
among others, of special economic zones x x x that shall effectively attract legitimate and productive
foreign investments."113
Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions of
the country[,] and result in increased volume and value of exports for the economy." 114 Fiscal incentives
that are cost-efficient and simple to administer shall be devised and extended to significant projects "to
compensate for market imperfections, to reward performance contributing to economic
development,"115 and "to stimulate the establishment and assist initial operations of the enterprise."116
Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier
in RA 7227 -- of converting into alternative productive uses118 the former military reservations and their
extensions,119 as well as of providing them incentives120 to enhance the benefits that would be derived
from them121 in promoting economic and social development.122
Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort"123 in order to win international markets. By providing many export and tax incentives,124 the State
is able to drive home the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved."125
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market."126 After all, international competitiveness requires economic and
tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.127
All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,128 as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive. 129 Tax credits for domestic
inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development."130
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law. 131 Petitioner alleges that respondent
did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in
the day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will
use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives
it gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of
respondent, the latter is not subject to the VAT. Consequently, the capital goods and services
respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is
due.134 This is a non sequitur. By the VAT’s very nature as a tax on consumption, the capital goods and
services respondent has purchased are subject to the VAT, although at zero rate. Registration does not
determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,135 petitioner
is deemed to have conceded. It is a cardinal rule that "issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal."136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to assert it."139
The BIR regulations additionally requiring an approved prior application for effective zero
rating140 cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such
regulations is not "within the statutory authority x x x granted by the legislature.141
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.142 The courts will not countenance one that overrides
the statute it seeks to apply and implement.143
Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.144
Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty.145 Respondent’s registration carries with it the
presumption that, in the absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed 146 by
both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for
their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature,
but by the taxpayer’s negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and
national taxes imposable upon business establishments within the ecozone cannot outrightly determine
a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded
or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.150
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex,
in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for
being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and
have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA
7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x
x tax credits for locally sourced inputs x x x."153
And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the
special laws cited above is broad enough to cover even the enforcement of internal revenue laws,
including prescription.154
Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs territory.
As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential
tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero rating of its
transactions is necessary. Being VAT-registered and having satisfactorily complied with all the requisites
for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.
SO ORDERED.

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G.R. No.

125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and

We give due course to the petition.

We agree with the Commissioner.

G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

DEFICIENCY VALUE -ADDED TAX (VAT)

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,

1. VAT on Royalty P 429,242.07

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be

GROUNDS FOR THE ALLOWANCE OF THE PETITION

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE

The Court finds no merit in the petition.

SEC. 106. Value-added Tax on Sale of Goods or Properties. –

WHEREFORE, the petition is DENIED.

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

The Facts and the Case

The Issues Presented

The case presents two procedural issues:

The case also presents two substantive issues:

The Court’s Rulings

B. On the Substantive Issues:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

5. Lending investors (for use of money);

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Gadioma Law Offices for private respondent.

We adopt the findings of facts of the Court of Tax Appeals as follows:

1974 deficiency percentage tax

per investigation P 3,995.63

15% surcharge for late payment 998.91

14% interest computed by quarters

up to 12-28-79 3,953.18 P 8,847.72

1975 deficiency percentage tax

per investigation P 8,427.39

25% surcharge for late payment 2,106.85

14% interest computed by quarters

up to 12-28-79 6,808.47 P 17,342.71

per investigation P 54,276.42

25% surcharge for late payment 13,569.11

14% interest computed by quarters

up to 12-28-79 28,910.97 P 96,756.50

Total amount due P 122,946.93

The petitioner raises the lone issue in this petition as follows:

The petitioner premises the issue raised on the following assumptions:

As regards the petitioner's second assumption, the respondent court stated:

July 1976 P 102,702.97

Aug. 1976 121,167.19

Sept. 1976 53,209.61

Oct. 1976 P 71,134.80

Nov. 1976 409,019.17

Grand Total P 904,995.29