[G.R. NO.

152609 : June 29, 2005]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AMERICAN EXPRESS INTERNATIONAL,

INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT
law itself provides for a clear exception, under which the supply of service shall be zero-rated when
the following requirements are met: (1) the service is performed in the Philippines; (2) the service
falls under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in
acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko
Sentral ng Pilipinas. Since respondent's services meet these requirements, they are zero-rated.
Petitioner's Revenue Regulations that alter or revoke the above requirements are ultra vires and
invalid.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed as
follows:

"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The

assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3

The Facts

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

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly

organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in
the Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets, Legaspi Village,
Makati City. It is a servicing unit of American Express International, Inc. - Hongkong Branch (Amex-
HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office
No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT
Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For the period
January 1, 1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as
follows:

Exhibit Period Covered Date Filed

D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the
following:

Exh 1997 Taxable Sales Output Zero-rated Domestic Input

VAT Sales Purchases VAT
I 1st qtr P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23
J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
Total P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its
total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. [Respondent] cites as basis
therefor, Section 110 (B) of the 1997 Tax Code, to state:

'Section 110. Tax Credits. -

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'(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable
to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.'

"There being no immediate action on the part of the [petitioner], [respondent's] petition was filed on
April 15, 1999.

"In support of its Petition for Review, the following arguments were raised by [respondent]:

A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in accordance with existing
regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According to
[respondent], being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax
Code, to wit:

'Section 102.(sic) Value-added tax on sale of services. - (a) Rate and base of tax. - There shall
be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors: stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; and similar services regardless of whether o[r] not the performance thereof calls for the
exercise or use of the physical or mental faculties:Provided That the following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for

in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in

accordance with the rules and regulations of the BSP. x x x.'

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion
of which reads as follows:

'In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable
foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the
rules and regulations of the Central [B]ank of the Philippines, your service income is automatically
zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended]. 4 For this, there
is no need to file an application for zero-rate.'

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues
are available as tax refund in accordance with Section 106 (now Section 112) of the [Tax Code] and
Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
'Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by
paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may, within two (2)
years after the close of the taxable quarter when such sales were made, apply for the issuance of tax
credit certificate or refund of the input taxes due or attributable to such sales, to the extent that such
input tax has not been applied against output tax. x x x. [Section 106(a) of the Tax Code]'5

'Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added
tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his purchases of goods or services related to such zero-rated
sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations.
x x x. '[Section 8(a), [RR] 5-87]. '6

"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses
that:

7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;

8. Taxes paid and collected are presumed to have been made in accordance with laws and regulations,
hence, not refundable. Claims for tax refund are construed strictly against the claimant as they
partake of the nature of tax exemption from tax and it is incumbent upon the [respondent] to prove
that it is entitled thereto under the law and he who claims exemption must be able to justify his claim
by the clearest grant of organic or statu[t]e law. An exemption from the common burden [cannot] be
permitted to exist upon vague implications;

9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to
tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended,
which are quoted as follows:

'Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. -
The Commissioner may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for
use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within
two (2) years after payment of the tax or penalty: Provided, however, That a return filed with an
overpayment shall be considered a written claim for credit or refund.'

'Section 229. Recovery of tax erroneously or illegally collected. - No suit or proceeding shall be

maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.'

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision 7 in
favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section
108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the
decretal portion of which reads as follows:

'WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the
amount of P3,352,406.59 representing the latter's excess input VAT paid for the year 1997. '"8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondent's services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not of
the same class or of the same nature as project studies, information, or engineering and architectural
designs" for non-resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines." The
consideration in both types of service, however, was paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring
that respondent's services be consumed abroad in order to be zero-rated, petitioner went beyond the
sphere of interpretation and into that of legislation. Even granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled
to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year
1997."10

The Court's Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. - - (a) Rate and base of
tax. - - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by x x x persons engaged in milling, processing, manufacturing or repacking goods for others; x x x
services of banks, non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. The phrase 'sale or exchange of services' shall likewise include:

xxx

'(3) The supply of x x x commercial knowledge or information;

'(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any such knowledge or information as is mentioned in
subparagraph (3);

xxx

'(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or scheme;

xxx

"The term 'gross receipts' means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.

"(b) Transactions subject to zero percent (0%) rate. - - The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]

'(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
'(2) Services other than those mentioned in the preceding subparagraph, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the [BSP];' "

xxx

Zero Rating of "Other" Services

The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.

Respondent is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same category as "processing, manufacturing or
repacking of goods" and should, therefore, be zero-rated. In reply to a query of respondent, the BIR
opined in VAT Ruling No. 080-89 that the income respondent earned from its parent company's
regional operating centers (ROCs) was automatically zero-rated effective January 1, 1988.12

Service has been defined as "the art of doing something useful for a person or company for a fee" 13 or
"useful labor or work rendered or to be rendered by one person to another." 14 For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client,
and getting paid for it in duly accounted acceptable foreign currency, respondent renders service
falling under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should,
therefore, be levied upon the supply of that service.15

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from the main business of
issuing credit cards.16 Under the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly function as separate
billable services.

Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x
or services x x x on credit;"19 and is being used "usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit."21 The card holder is, therefore, given "the power to obtain present control
of goods or service on a promise to pay for them in the future."22

Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers. Under this
system, the establishments do not deposit in their bank accounts the credit card drafts23 that arise
from the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it
does not redeem the drafts at full price. The agreement between them usually provides for discounts
to be taken by the company upon its redemption of the drafts.24 At the end of each month, it then bills
its credit card holders for their respective drafts redeemed during the previous month. If the holders
fail to pay the amounts owed, the company sustains the loss.25

In the present case, respondent's role in the consumer credit26 process described above primarily
consists of gathering the bills and credit card drafts of different service establishments located in the
Philippines and forwarding them to the ROCs outside the country. Servicing the bill is not the same as
billing. For the former type of service alone, respondent already gets paid.

The parent company - - to which the ROCs and respondent belong - - takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but also of
billing the credit card holders for their respective drafts that it has redeemed. While it usually imposes
finance charges27 upon the holders, none may be exacted by respondent upon either the ROCs or the
card holders.

Branch and Home Office

By designation alone, respondent and the ROCs are operated as branches. This means that each of
them is a unit, "an offshoot, lateral extension, or division"28 located at some distance from the home
office29 of the parent company; carrying separate inventories; incurring their own expenses; and
generating their respective incomes. Each may conduct sales operations in any locality as an
extension of the principal office.30

The extent of accounting activity at any of these branches depends upon company policy, 31 but the
financial reports of the entire business enterprise - - the credit card company to which they all belong
- - must always show its financial position, results of operation, and changes in its financial position as
a single unit.32 Reciprocal accounts are reconciled or eliminated, because they lose all significance
when the branches and home office are viewed as a single entity.33 In like manner, intra-company
profits or losses must be offset against each other for accounting purposes.

Contrary to petitioner's assertion,34 respondent can sell its services to another branch of the same
parent company.35 In fact, the business concept of a transfer price allows goods and services to be
sold between and among intra-company units at cost or above cost.36 A branch may be operated as a
revenue center, cost center, profit center or investment center, depending upon the policies and
accounting system of its parent company.37 Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its expenses are allocated to any
of its branches.38

Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
company's subsequent redemption of these drafts and billings of credit card holders is also
attributable to respondent, then with greater reason should the service rendered by respondent be
zero-rated under our VAT system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered person40 that gets paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or

services"42 purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main object is
the transaction46 itself or, more concretely, the performance of all kinds of services47 conducted in the
course of trade or business in the Philippines. 48 These services must be regularly conducted in this
country; undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.50

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all
these requirements.

First, respondent regularly renders in the Philippines the service of facilitating the collection and

payment of receivables belonging to a foreign company that is a clearly separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period of time; on a

significant scale; with a reasonable degree of frequency; and not at random, fortuitous or attenuated.

Third, for this service, respondent definitely receives consideration in foreign currency that is

accounted for in conformity with law.

Finally, respondent is not an entity exempt under any of our laws or international agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach
of the tax.51 Goods and services are taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the
collection  of receivables is different from the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders
assistance to its foreign clients - - the ROCs outside the country - - by receiving the bills of service
establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioner's administrative interpretation,52 does
not imply that the service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performer's release from any past or future liability x x x." 54 The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their destination
is determined. Instead, there can only be a "predetermined end of a course" 55 when determining the
service "location or position x x x for legal purposes." 56 Respondent's facilitation service has no
physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines.
Under the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10
percent.

Respondent's Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP]."57 Thus, for the
supply of service to be zero-rated as an exception, the law merely requires that first, the service be
performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of
the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with
BSP rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by respondent.
Its facilitation service is performed in the Philippines. It falls under the second category found in
Section 102(b) of the Tax Code, because it is a service other than "processing, manufacturing or
repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets the
statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with
BSP rules. Thus, it should be zero-rated.

Performance of Service v. Product Arising from Performance

Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-rated, it need not
be tacked in as part of the cost of goods exported. 58 The law neither imposes such requirement nor
associates services with exported goods. It simply states that the services performed by VAT-
registered persons in the Philippines - - services other than the processing, manufacturing or
repacking of goods for persons doing business outside this country - - if paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated.
The service rendered by respondent is clearly different from the product that arises from the rendition
of such service. The activity that creates the income must not be confused with the main business in
the course of which that income is realized.59

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the service is rendered determines the jurisdiction 60 to
impose the VAT.61 Performed in the Philippines, such service is necessarily subject to its
jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce
a zero rate.64 The place of payment is immaterial;65 much less is the place where the output of the
service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can conditions or limitations be introduced where
none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.

The Court may not construe a statute that is free from doubt. 66 "[W]here the law speaks in clear and
categorical language, there is no room for interpretation. There is only room for application." 67 The
Court has no choice but to "see to it that its mandate is obeyed."68

No Qualifications Under RR 5-87

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of services
other than the processing, manufacturing or repacking of goods - - in general and without
qualifications - - when paid for by the person to whom such services are rendered in acceptable
foreign currency inwardly remitted and duly accounted for in accordance with the BSP (then Central
Bank) regulations. Section 8 of RR 5-87 states:

"SECTION 8. Zero-rating. - - (a) In general. - - A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate
shall not result in any output tax. The input tax on his purchases of goods or services related to such
zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these
Regulations.

xxx

" (c) Zero-rated sales of services. - - The following services rendered by VAT-registered persons are
zero-rated:

'(1) Services in connection with the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines, where such goods are actually shipped out of the Philippines to said
persons or their assignees and the services are paid for in acceptable foreign currency inwardly
remitted and duly accounted for under the regulations of the Central Bank of the Philippines.

xxx

'(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above
which are paid for by the person or entity to whom the service is rendered in acceptable foreign
currency inwardly remitted and duly accounted for in accordance with Central Bank regulations. Where
the contract involves payment in both foreign and local currency, only the service corresponding to
that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be
subject to VAT at the rate of 10%. '"

RR 7-95 Broad Enough

RR 7-95, otherwise known as the "Consolidated VAT Regulations," 69 reiterates the above-quoted
provision and further presents as examples only the services performed in the Philippines by VAT-
registered hotels and other service establishments. Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly remitted and accounted for in accordance with
the rules and regulations of the BSP. The term "other service establishments" is obviously broad
enough to cover respondent's facilitation service. Section 4.102-2 of RR 7-95 provides thus:

"SECTION 4.102-2. Zero-Rating. - - (a) In general. - - A zero-rated sale by a VAT registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with these regulations.

"(b) Transaction subject to zero-rate. - - The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

'(1) Processing, manufacturing or repacking goods for other persons doing business outside the

Philippines which goods are subsequently exported, where the services are paid for in acceptable

foreign currency and accounted for in accordance with the rules and regulations of the BSP;

'(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by

hotels and other service establishments, the consideration for which is paid for in acceptable foreign

currency and accounted for in accordance with the rules and regulations of the BSP;' "

xxx

Meaning of "as well as" in RR 5-96

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:

"Section 4.102-2(b)(2) - - 'Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as well as
services by a resident to a non-resident foreign client such as project studies, information services,
engineering and architectural designs and other similar services, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP. '"
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this provision, the
use of the term "as well as" is not restrictive. As a prepositional phrase with an adverbial relation to
some other word, it simply means "in addition to, besides, also or too."70

Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for a fee, remuneration or consideration. Rather,
both merely enumerate the items of service that fall under the term "sale or exchange of services."71

Ejusdem Generis
Inapplicable

The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does
not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.

First, although the regulatory provision contains an enumeration of particular or specific words,

followed by the general phrase "and other similar services," such words do not constitute a readily

discernible class and are patently not of the same kind. 72 Project studies involve investments or

marketing; information services focus on data technology; engineering and architectural designs

require creativity. Aside from calling for the exercise or use of mental faculties or perhaps producing

written technical outputs, no common denominator to the exclusion of all others characterizes these

three services. Nothing sets them apart from other and similar general services that may involve

advertising, computers, consultancy, health care, management, messengerial work - - to name only a

few.

Second, there is the regulatory intent to give the general phrase "and other similar services" a broader

meaning.73 Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other

similar services."

Third, and most important, the statutory provision upon which this regulation is based is by itself not

restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is broad; it is not

susceptible of narrow interpretation.74  ςηαñrοblεš  Î½Î¹r† Ï…αl  lαω  lιbrαrà ¿

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level,75 rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this ruling states that the service must be "destined
for consumption outside of the Philippines"76 in order to qualify for zero rating, it contravenes both the
law and the regulations issued pursuant to it. 77 This portion of VAT Ruling No. 040-98 is clearly ultra
vires  and invalid.78

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts," 79 this interpretation is
not conclusive and will have to be "ignored if judicially found to be erroneous"80 and "clearly absurd x x
x or improper."81 An administrative issuance that overrides the law it merely seeks to interpret, instead
of remaining consistent and in harmony with it, will not be countenanced by this Court.82

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly deprive respondent of a refund of the substantial
amount of excess input taxes to which it is entitled.

Again, assuming  arguendo  that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny revocation x
x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be given retrospective effect 85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT Ruling
No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code 88 and not bound by
predecessors' acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:

"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly explain
to me - I am referring to the lower part of the first paragraph with the 'Provided'. Section
102. Provided that the following services performed in the Philippines by VAT registered persons shall
be subject to zero percent. 'There are three here. What is the difference between the three here which
is subject to zero percent and Section 103 which is exempt transactions, to being with? cralawlibrary

"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking goods for
persons doing business outside the Philippines which are subsequently exported, and where the
services are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject
to 0%. But if these conditions are not complied with, they are subject to the VAT.

"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the other
one that he indicated are exempted from the very beginning. These three enumerations under Section
102 are zero-rated provided that these conditions indicated in these three paragraphs are also
complied with. If they are not complied with, then they are not entitled to the zero ratings. Just like in
the export of minerals, if these are not exported, then they cannot qualify under this provision of zero
rating.

"Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it is
required that the following services be performed in the Philippines.

"Under No. 2, services other than those mentioned above includes, let us say, manufacturing
computers and computer chips or repacking goods for persons doing business outside the Philippines.
Meaning to say, we ship the goods to them in Chicago or Washington and they send the payment
inwardly to the Philippines in foreign currency, and that is, of course, zero-rated.
ςηαñrοblεš  Î½Î¹r† Ï…αl  lαω  lιbrαrà ¿

"Now, when we say 'services other than those mentioned in the preceding subsection[,'] may I have
some examples of these? cralawlibrary

"Senator Herrera: Which portion is the Gentleman referring to? cralawlibrary

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and they
pay him, that is covered. That is clear to me. The second paragraph says 'Services other than those
mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable foreign
currency''

"One example I could immediately think of - - I do not know why this comes to my mind tonight - - is
for tourism or escort services. For example, the services of the tour operator or tour escort - - just a
good name for all kinds of activities - - is made here at the Midtown Ramada Hotel or at the Philippine
Plaza, but the payment is made from outside and remitted into the country.

"Senator Herrera: What is important here is that these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.

"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the services of
a woman or a tourist guide, it is zero-rated when it is remitted here.

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be
considered as among the professionals. If they earn more than P200,000, they should be covered.

xxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT, and I
am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT? cralawlibrary

"Senator Herrera: This provision applies to a VAT-registered person. When he performs services in

the Philippines, that is zero-rated.

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

Finally, upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly obtains. This principle means that "the
reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress
of a prior executive construction."91

The legislature is presumed to have reenacted the law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT, and to have approved or confirmed them
because they would carry out the legislative purpose. The particular provisions of the regulations we
have mentioned earlier are, therefore, re-enforced. "When a statute is susceptible of the meaning
placed upon it by a ruling of the government agency charged with its enforcement and the
[l]egislature thereafter [reenacts] the provisions [without] substantial change, such action is to some
extent confirmatory that the ruling carries out the legislative purpose."92

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

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

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

pronouncement as to costs.

SO ORDERED.
G.R. No. L-2927             February 26, 1951

SAURA IMPORT AND EXPORT CO., INC., plaintiff-appellant,

vs.
BIBIANO L. MEER, as Collector of Internal Revenue, defendant-appelle.

Marcelino N. Sayo and Ramon E. Saura of appellant.

Assistant Solicitor General Inocencio Rosal and Solicitor Martiniano P. Vivo for appellee.

TUASON, J.:

This was an action to recover a tax paid protest in the amount of P22,593.62. Decision was against
plaintiff.

The parties submitted an agreed statement of facts, from which it appears that in February and March,
1946, the plaintiff, Suara Import and Export Co. Inc., bought from the Foreign Liquidation Commission, a
United States Government agency, jeeps, weapons carriers and trucks, all of which, at the time of the
purchase, were located in different United States Army depots in the Philippines, and that immediately
or soon after, plaintiff took delivery of those goods and later sold them or turned them over to third
persons in the Philippines.

Holding that plaintiff was an importer, the Collector of Internal Revenue levied on the aforesaid motor
vehicles the percentage tax prescribed in sections 185 and 186 of Commonwealth Act No. 466, which tax
amounted to the figure above stated.

Plaintiff-appellant formulates two questions; first, whether it was an importer and, second, whether the
sales it made to third persons were original sales within the meaning of sections 185 and 186 of
Commonwealth Act No. 466, otherwise known as the National Internal Revenue Law. Decision on the
first question will dispose of the second, for, if the plaintiff was an importer, its sales were original sales
and taxable under the sections above mentioned.

An analogous question involving analogous goods bought from the same agency and disposed of in the
same manner, was raised and decided July 17, 1950, in G.R. No. L-2825, entitled Go Cheng
Tee vs. Bibiano L. Meer, etc. (47 Off. Gaz., Supp. to No. 12, p. 269)*. In that case, this Court said among
other things:

Como ya hemos dicho, el ejercito americano no estaba obligado a pagar ningun impuesto sobre tales
efectos, porque no habian sido traidos aqui para fines de comercio sino como objetos de abastecimiento
militar. Solamente se convirtieron en mercancias de commercio cuando el demandante los obtuvo en
compra para dedicarlos al negocio, y solamente desde entonces quedaban sujetos a impuesto. La venta
original deque habla el articulo 5 de la ley No. 503 es la realizada por el demandanteal publico de
Filipinas, y no la venta hecha a el por la "Foreign Liquidation Commission." En esta transaccion, el
demandante compra: no vendio. Y el impuesto se cobro por la venta y no por la compra. La venta hecha
por el demandante a sus parroquianos es la venta original, y no la compra hecha por el de la "Foreign
Liquidation Commission." La primera venta, esto es, la realizada por la "Foreign Liquidation Commission"
en favor del demandante, no estaba sujeta a ningun impuesto, y la hecha por el demandante al publico
es la venta que esta sujeta a impuesto, porque se ha hecho para fines comerciales.

Declaramos que bajo los terminos precisos del Codigo Administrativo Revisado, el demandante fue
importador y de acuerdo con el articulo 5 de la ley del Commonwealth No. 503, la venta original. Como
corolario forzoso, estaba en la obligacion de pagar los impuestos que el Administrador de Rentas
Internas lo cobro. No. erro el Juzgado a quo al absolver al demandado.

To this we may add that the United States enjoyed in the Philippines a privilege akin to extra
territoriality.

The Tydings-McDuffie Act of 1934, as amended, provided section 10 for the retention of American naval
reservations and fueling stations in the Philippines after independence. And the Filipino people in 1934,
in approving the Tydings-McDuffie Act, expressed their willingness that American defense
establishments be located on Philippine soil after independence.
In 1943, the Commonwealth Government-in-Exile held a series of conversations with officials of the
United States Government regarding the liberation of the Philippines, the possible advancement of the
date of independence following liberation, and the military relations between the Philippine Republic
and the United States after independence. Our Government at that time expressed its conformity with
the expansion of the scope of military cooperation between the two countries after independence to
provide for the establishment and maintenance here of bases of the Army, Navy and the Air Force. That
arrangement was incorporated and implemented by a Joint Resolution of the United States Congress
approved by the President of the United States on June 29, 1944. In that resolution, it was resolved by
the Senate and House of Representatives of the United States of America that after negotiation with the
president of the Commonwealth of the Philippines or the President of the Philippine Republic, "the
President of the United States is hereby authorized, by such means as he finds appropriate, to withhold
or to acquire and to retain such bases, necessary appurtenances to such bases, and the rights incident
thereto in addition to any provided for by the Act of March 24, 1934 (Philippine Independence Act), as
he may deem necessary for the mutual protection of the Philippine Islands and the United States."

The Philippine Congress by joint resolution and by unanimous vote on July 28,1945, adhered to the
policy and program set forth in the Joint Resolution of the United States Congress. (See the Message of
President Roxas to the Senate of the Philippines dated March 17, 1947, urging the approval of the
Agreement between the Republic of the Philippines and the United States of America concerning
military bases, 43 Off. Gaz., No. 3, pp. 954-964.)

While the above-mentioned resolutions of the United States Congress and the Philippine Congress
referred to treaties to be made after Philippine independence, there was in March, 1946, an existing
order of affairs not disimilar to that which was to be the subject of future negotiations. By political
relationship between the two countries and by reason of war — which was, at least technically, still in
progress — the United States Government on that date enjoyed jurisdictional rights over certain areas
of the Philippine territory and over military goods brought here and intended for the United States
Army. While on army bases of installations within Philippines those goods were, in contemplation of
law, on foreign soil. The result was that when plaintiff, after acquiring title to such goods, brought them
outside of those bases or depots, there was importation in the ordinary sense, let alone in the sense
envisaged in section 1248 of the Revised Administrative Code.

At time of the purchase in question, the United States Army in the Philippines was a belligerent
occupant, at least of army bases, army depots, and army installations it was using for the prosecution of
the existing war. By section 280 of the Rules of Land Warfare, belligerent occupation (in this case by the
United States Army) ceased only when "the occupant evacuated  the district or was  driven out by the
enemy, or by levee en massee, and the legitimate government actually resumed  its funtions." Having
possible pertinence to this topic is the following passage from Tan Tuan et al. vs. Lucena Food Control
Board, etc., (84 Phil., 687; 47 Off. Gaz., 1739):

The fact that this was not foreign territory did not deprive the United States Army of the status of
belligerent occupant. Military government may be established not only in foreign territory occupied or
invaded in time of war, but also domestic territory in a state of rebellion or civil war. (Chase, C. J., in Ex
parte  Milligan, 4 Wall., 2, 141; 18 L. ed., 281.) This right to establish government is not at all dependent
upon the right of conquest, but is treated as an incident to the mere right of belligerent occupation. A
nation can not conquer its own territory, but it may subdue and occupy such portions of it as are made
the theater of an insurrection against its authority (Hefferman vs. Porter, 96 Am. Dec., 459), or, for that
matter, of foreign invasion. Also, the occupied territory may belong to a state allied to the occupant, and
which willingly confides its domain to the protection of it. (3 Hyde International Law [1945], 1876, 1877.)

The appealed decision is affirmed with costs against the appellant.

G.R. No. 153205             January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

DECISION

CARPIO,  J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision 2 of the Court of Appeals in CA-G.R.
SP No. 66341 affirming the 8 August 2001 Decision 3 of the Court of Tax Appeals (CTA). The CTA ordered
the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in
favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of
the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao
City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor
A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a
contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination
manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of
NAPOCOR’s two power barges as well as the performance of other duties and acts which necessarily
have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and
Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank
accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from
the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if
[respondent] chooses to register as a VAT person and the consideration for its services is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

 2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its
case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read
as follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services by
a resident to a non-resident foreign client such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to
the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December
1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum
of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently,
[respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes
for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting
agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered
by BWSCMI is subject to VAT at zero percent (0%)."

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it
erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of
the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly
remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko
Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish
Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the
consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang
Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-
Denmark for the account of [respondent]. Clearly, [respondent’s] sale of services to the Consortium is
subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

xxxx

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated
January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to
VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying
output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by
mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of
merit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services are
not destined for consumption abroad, they are not of the same nature as project studies, information
services, engineering and architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner,
respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98,
respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s interpretation, there are two kinds of transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported; and (b) services by a resident
to a non-resident foreign client, such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be consumed
abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the
statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioner’s interpretation of Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to
the Tax Code. Petitioner went beyond merely providing the implementing details by adding another
requirement to zero-rating. "This is indicated by the additional phrase ‘as well as services by a resident
to a non-resident foreign client, such as project studies, information services and engineering and
architectural designs and other similar services.’ In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the
nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were
performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1)
payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP.
Section 108(b)(2) of the Tax Code does not provide that services must be "destined for consumption
abroad" in order to be VAT zero-rated.13

The Court of Appeals disagreed with petitioner’s argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if
indeed the ‘destination principle’ underlies and is the basis of the VAT laws, then petitioner’s proper
remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in this case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondent’s services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that
respondent’s services are subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.

Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the
services and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. ― The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas  (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent
asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in
accordance with BSP rules. Moreover, respondent contends that its services which "constitute the actual
operation and management of two (2) power barges in Mindanao" are not "even remotely similar to
project studies, information services and engineering and architectural designs under Section 4.102-2(b)
(2) of Revenue Regulations No. 5-96." As such, respondent’s services need not be "destined to be
consumed abroad in order to be VAT zero-rated."
Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking
of goods" and that payment for such services be in acceptable foreign currency accounted for in
accordance with BSP rules. Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in
the first paragraph of Section 102(b) where the listed services must be "for other persons doing business
outside the Philippines." The phrase "for other persons doing business outside the Philippines" not only
refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the
general term "services" appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be performed for persons doing
business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant.
Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make
the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign
currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax
measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction,
not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those
not doing business in the Philippines can be required under BSP rules20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a domestic transaction, where
the provider and recipient of services are both doing business in the Philippines, the BSP cannot require
any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient
of services is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales
must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The
same rationale does not apply if the provider and recipient of the services are both doing business in the
Philippines since their transaction is not in the nature of an export sale even if payment is denominated
in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed,
this is a purely local sale or exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1
and 2. The requirements for zero-rating, including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies
this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other
than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."
In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing
business in the Philippines. While the Consortium’s principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling
No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-year term,
thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a
contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"),
Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation
and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a
15-year term.23 (Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance of NAPOCOR’s power
barges cannot be classified as a single or isolated transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in
the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign
currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle
respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch),24 the place of payment is immaterial, much less is the place where
the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under
Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the
Philippines. In this case, the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to operate and maintain
NAPOCOR’s two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports
are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is
an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102
and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the
services must be a person doing business outside the Philippines. Thus, to be exempt from the
destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the
Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American Express26 is misplaced. That case involved a recipient of
services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the
Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x
x27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the
Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s services
should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-
99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by
BWSCMI is subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR rulings binds
petitioner.
Petitioner’s filing of his Answer before the CTA challenging respondent’s claim for refund effectively
serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation
cannot be given retroactive effect since it will prejudice respondent. Changing respondent’s status will
deprive respondent of a refund of a substantial amount representing excess output tax.30 Section 246 of
the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not
be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.

However, upon the filing of petitioner’s Answer dated 2 March 2000 before the CTA contesting
respondent’s claim for refund, respondent’s services shall be subject to the regular 10% VAT.31 Such
filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.
G.R. No. 193301               March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review 1 assailing the Decision2 promulgated on 10 March 2010 as well
as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in
CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos.
7227, 7287, and 7317. The CTA First Division denied Mindanao II Geothermal Partnership’s (Mindanao II)
claims for refund or tax credit for the first and second quarters of taxable year 2003 for being filed out of
time (CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added
tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).

G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as
the Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and
483. In its Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s
petition for review in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnership’s
(Mindanao I) claims for refund or tax credit for the first (CTA Case No. 7228), second (CTA Case No.
7286), third, and fourth quarters (CTA Case No. 7318) of 2003.

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value
added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production
Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry
Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997
(1997 Tax Code),9 when it decreed that sales of power by generation companies shall be subjected to a
zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit
of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I
and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of
Mindanao II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No.
7287, Mindanao II claims a tax refund or credit of ₱1,562,085.33 for the second quarter of 2003. In CTA
Case No. 7317, Mindanao II claims a tax refund or credit of ₱3,521,129.50 for the third and fourth
quarters of 2003.

The CTA First Division’s narration of the pertinent facts is as follows:

xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract
with the Philippine National Oil Corporation – Energy Development Company (PNOC-EDC) for finance,
engineering, supply, installation, testing, commissioning, operation, and maintenance of a 48.25
megawatt geothermal power plant, provided that PNOC-EDC shall supply and deliver steam to
Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric capacity and energy for
PNOC-EDC and shall deliver the same to the National Power Corporation (NPC) for and in behalf of
PNOC-EDC. Mindanao II alleges that its sale of generated power and delivery of electric capacity and
energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-generating activity which
is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.

xxxx

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and
accumulates therefrom creditable input taxes. Pursuant to the provisions of the National Internal
Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated input tax credits to offset its
output tax liability. Considering, however that its only revenue-generating activity is VAT zero-rated
under RA No. 9136, Mindanao II’s input tax credits remain unutilized.

Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of
the EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on the following
dates:

CTA Case No. Period Covered Date of Filing

(2003)
Original Return Amended Return

7227 1st Quarter April 23, 2003 July 3, 2002 (sic),

April 1, 2004 &
October 22, 2004

7287 2nd Quarter July 22, 2003 April 1, 2004

7317 3rd Quarter Oct. 27, 2003 April 1, 2004

7317 4th Quarter Jan. 26, 2004 April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-generating
activity, Mindanao II filed an application for refund and/or issuance of tax credit certificate with the
BIR’s Revenue District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the
CIR. Hence, these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for
the 2nd quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of
Mindanao II, these petitions were consolidated on March 15, 2006 as they involve the same parties and
the same subject matter. The only difference lies with the taxable periods involved in each petition.11

The Court of Tax Appeals’ Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin
requirements for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales
from power generation. The CTA First Division also stated that Mindanao II complied with five
requirements to be entitled to a refund:

1. There must be zero-rated or effectively zero-rated sales;

2. That input taxes were incurred or paid;

3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated
sales;

4. That the input VAT payments were not applied against any output VAT liability; and

5. That the claim for refund was filed within the two-year prescriptive period.13

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s
return as well as its administrative and judicial claims, and concluded that Mindanao II’s administrative
and judicial claims were timely filed in compliance with this Court’s ruling in Atlas Consolidated Mining
and Development Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division
declared that the two-year prescriptive period for filing a VAT refund claim should not be counted from
the close of the quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT liability
or entitlement to a refund can only be determined upon the filing of the quarterly VAT return.

CTA Period Date Filing

Case Covered
No. (2003) Original Amended Administrative Judicial Claim
Return Return Return

7227 1st Quarter 23 April 1 April 13 April 2005 22 April 2005

2003 2004

7287 2nd 22 July 2003 1 April 13 April 2005 7 July 2005

Quarter 2004

7317 3rd Quarter 25 Oct. 2003 1 April 13 April 2005 9 Sept. 2005
2004

7317 4th Quarter 26 Jan. 2004 1 April 13 April 2005 9 Sept.

2004 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao
II filed its VAT returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April
2005, 7 July 2005, and 9 September 2005 were timely filed in accordance with Atlas.

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of
₱7,703,957.79, after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from
Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to
₱522,059.91 were disallowed for failure to meet invoicing requirements, while the input VAT on the sale
of the Nissan Patrol was reduced by ₱18,181.82 because the output VAT for the sale was not included in
the VAT declarations.

The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN MILLION
SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS (₱7,703,957.79)
representing its unutilized input VAT for the four (4) quarters of the taxable year 2003.

SO ORDERED.17

Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover,
the disallowed input taxes substantially complied with the requirements for refund or tax credit.

The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and
second quarters of 2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the
1997 Tax Code. The CIR further stated that Section 229 is a general provision, and governs cases not
covered by Section 112(A). The CIR countered the CTA First Division’s 22 September 2008 decision by
citing this Court’s ruling in Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant),19 which stated that unutilized input VAT payments must be claimed within two years reckoned
from the close of the taxable quarter when the relevant sales were made regardless of whether said tax
was paid.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s motion
for partial reconsideration partly meritorious, and rendered an Amended Decision20 on 26 June 2009.
The CTA First Division stated that the claim for refund or credit with the BIR and the subsequent appeal
to the CTA must be filed within the two-year period prescribed under Section 229. The two-year
prescriptive period in Section 229 was denominated as a mandatory statute of limitations. Therefore,
Mindanao II’s claims for refund for the first and second quarters of 2003 had already prescribed.

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of
the Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s
submitted documents failed to substantiate the requisites for the refund or credit claims.

The CTA First Division modified its 22 September 2008 Decision to read as follows:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in
the modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY
SEVEN AND 77/100 PESOS (₱2,980,887.77) representing its unutilized input VAT for the third and fourth
quarters of the taxable year 2003.

SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s
petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-
year prescriptive period for filing the application for refund or credit of input VAT attributable to zero-
rated sales or effectively zero-rated sales shall be counted from the close of the taxable quarter when
the sales were made; (2) the Atlas and Mirant cases applied different tax codes: Atlas applied the 1977
Tax Code while Mirant applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is
incidental to Mindanao II’s VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed
to comply with the substantiation requirements provided under Section 113(A) in relation to Section 237
of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulation
No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be relaxed in the present
case.

The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED
for lack of merit. Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated
June 26, 2009 issued by the First Division are AFFIRMED.

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s Motion for
Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:

1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed
within two (2) years after the close of the taxable quarter when such sales were made.

2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.

3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal
meaning and applied without any interpretation.27
G.R. No. 194637
Mindanao I v. CIR

The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA
EB cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318.
CTA Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax
refund or credit of ₱3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims
a tax refund or credit of ₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao
I claims a tax refund or credit of ₱7,940,727.83 for the third and fourth quarters of 2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent
facts is as follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the
Philippine National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance,
design, construction, testing, commissioning, operation, maintenance and repair of a 47-megawatt
geothermal power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver steam to
Mindanao I at no cost. In turn, Mindanao I will convert the steam into electric capacity and energy for
PNOC-EDC and shall subsequently supply and deliver the same to the National Power Corporation (NPC),
for and in behalf of PNOC-EDC.

Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of
Energy (DOE) as a Private Sector Generation Facility, pursuant to the provision of Executive Order No.
215, wherein Certificate of Accreditation No. 95-037 was issued.

On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National
Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric
Power Industry Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric
power industry, highlighting, among others, the importance of ensuring the reliability, security and
affordability of the supply of electric power to end users. Under the provisions of this Republic Act and
its implementing rules and regulations, the delivery and supply of electric energy by generation
companies became VAT zero-rated, which previously were subject to ten percent (10%) VAT.

xxxx

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT
zero-rating of the EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that
its sales qualify for VAT zero-rating.

Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the
first, second, third, and fourth quarters of taxable year 2003, which were subsequently amended and
filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax
credit certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated
amount of ₱14,185, 294.80.

Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005,
July 7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively.
However, on October 10, 2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic)
of the BIR denying its application for tax credit/refund.28

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and
7318. The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim
90.27% of the amount of substantiated excess input VAT because a portion was not reported in its
quarterly VAT returns; (2) out of the ₱14,185,294.80 excess input VAT applied for refund, only
₱11,657,447.14 can be considered substantiated excess input VAT due to disallowances by the
Independent Certified Public Accountant, adjustment on the disallowances per the CTA Second
Division’s further verification, and additional disallowances per the CTA Second Division’s further
verification;

(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over to
the third quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same
procedure was done for the second, third, and fourth quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year prescriptive period reckoned from the respective
dates of filing of the quarterly VAT returns.

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:

WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY
GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of
Mindanao I in the reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE
HUNDRED SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53) representing Mindanao I’s unutilized
input VAT for the four quarters of the taxable year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November
2008. It claimed that the CTA Second Division should not have allocated proportionately Mindanao I’s
unutilized creditable input taxes for the taxable year 2003, because the proportionate allocation of the
amount of creditable taxes in Section 112(A) applies only when the creditable input taxes due cannot be
directly and entirely attributed to any of the zero-rated or effectively zero-rated sales. Mindanao I claims
that its unreported collection is directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao I’s motion and maintained the proportionate allocation because there was a portion
of the gross receipts that was undeclared in Mindanao I’s gross receipts.

The CIR also filed a motion for partial reconsideration 32 on 11 November 2008. It claimed that Mindanao
I failed to exhaust administrative remedies before it filed its petition for review. The CTA Second Division
denied the CIR’s motion, and cited Atlas33 as the basis for ruling that it is more practical and reasonable
to count the two-year prescriptive period for filing a claim for refund or credit of input VAT on zero-
rated sales from the date of filing of the return and payment of the tax due.

The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:

WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s
Motion for Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied
the petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which have not
yet been considered and passed upon by the CTA Second Division in its assailed decision and resolution.

The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit.
Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second
Division in CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010
Decision. In an Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the
CIR’s claim that Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant.
The CTA En Banc also ruled that the procedure prescribed under Section 112(D) now 112(C) 37 of the
1997 Tax Code should be followed first before the CTA En Banc can act on Mindanao I’s claim. The CTA
En Banc reconsidered its 31 May 2010 Decision in light of this Court’s ruling in Commissioner of Internal
Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).38

The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter
of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
March 31, 2003 or until March 31, 2005 within which to file its administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT
for the first quarter of taxable year 2003 with the BIR, which is beyond the two-year prescriptive period
mentioned above.

C.T.A. Case No. 7286:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second
quarter of 2003. Pursuant to

Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within
which to file its administrative claim for refund for the second quarter of 2003, or until June 30, 2005;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the second quarter of taxable year 2003 with the BIR, which is within the two-year prescriptive period,
provided under Section 112 (A) of the NIRC of 1997, as amended;

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting
documents together with the application for refund) or until August 2, 2005, to decide the
administrative claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005,
Mindanao I should have elevated its claim for refund to the CTA in Division;

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA
Case No. 7286, even before the 120-day period for the CIR to decide the claim for refund had lapsed on
August 2, 2005. The Petition for Review was, therefore, prematurely filed and there was failure to
exhaust administrative remedies;

xxxx

C.T.A. Case No. 7318:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and
fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I
therefore, has two years from September 30, 2003 and December 31, 2003, or until September 30, 2005
and December 31, 2005, respectively, within which to file its administrative claim for the third and
fourth quarters of 2003;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the third and fourth quarters of taxable year 2003 with the BIR, which is well within the two-year
prescriptive period, provided under Section 112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents,
together with the aforesaid application for refund, the CIR has 120 days or until August 2, 2005, to
decide the claim;

(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September
1, 2005 Mindanao I should have elevated its claim for refund to the CTA;

(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9, 2005,
which is 8 days beyond the 30-day period to appeal to the CTA.

Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition
for Review should have been dismissed for being filed late.

In recapitulation:

(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year
prescriptive period;

(2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply with a
condition precedent when it failed to exhaust administrative remedies by filing its Petition for Review
even before the lapse of the 120-day period for the CIR to decide the administrative claim;

(3) C.T.A. Case No. 7318

Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is
hereby GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is
hereby GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second, third
and fourth quarters of 2003 is hereby DENIED.

SO ORDERED.39

The Issues

G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and 2nd
quarters of year 2003 has already prescribed pursuant to the Mirant case.

A. The Atlas case and Mirant case have conflicting interpretations of the law as to the reckoning date of
the two year prescriptive period for filing claims for VAT refund.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3), Article
VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were made
as the reckoning date in counting the two-year prescriptive period cannot be applied retroactively in the
case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as
amended in that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of Mindanao II.

III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent
Certified Public Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax
Code, as amended, for refund/tax credit.

A. The amount of ₱2,090.16 was brought about by the timing difference in the recording of the foreign
currency deposit transaction.

B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV & Company
which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim for refund
or tax credit for the year 2004 subject matter of CTA Case No. 7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40

G.R. No. 194637

Mindanao I v. CIR

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the case
of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue,
which was then the controlling ruling at the time of filing.

A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation, which
uses the end of the taxable quarter when the sales were made as the reckoning date in counting the
two-year prescriptive period, cannot be applied retroactively in the case of Mindanao I.

B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007 was not and
cannot be superseded by the Mirant Pagbilao case promulgated by the Second Division of this
Honorable Court on September 12, 2008 in light of the explicit provision of Section 4(3), Article VIII of
the 1987 Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi
Forging Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the present case.41

In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and
194637 to avoid conflicting rulings in related cases.

The Court’s Ruling

Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or
the interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of
₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s
unutilized input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts of
₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by G.R. No. 194637.

Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and
Mindanao I’s administrative and judicial claims, provide:

SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after
the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and
(2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or
exempt sale of goods or properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

x x x x  (Underscoring supplied)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005,
neither Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant
was promulgated on 12 September 2008. It is therefore misleading to state that Atlas was the
controlling doctrine at the time of filing of the claims. The 1997 Tax Code, which took effect on 1 January
1998, was the applicable law at the time of filing of the claims in issue. As this Court explained in the
recent consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue (San Roque):48

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to
the Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit. It
is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The
waiting period, originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive
Order No. 273, which took effect on 1 January 1988. The waiting period was extended to 120 days
effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies and renders the petition premature and thus without
a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition.
Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When a
taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as
a court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly
provides that if the Commissioner fails to decide within "a specific period" required by law, such
"inaction shall be deemed a denial" of the application for tax refund or credit. It is the Commissioner’s
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a
petition for review.
San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with
the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself authorizes its validity."
There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his
own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions which are against the law or which infringe
upon the rights of others." For violating a mandatory provision of law in filing its petition with the CTA,
San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition with the
CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day
period just because the Commissioner merely asserts that the case was prematurely filed with the CTA
and does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has
undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or excessively
collected from him, does not entitle him as a matter of right to a tax refund or credit. Strict compliance
with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is
essential and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.

The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of
the tax refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because
the Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of
the taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and
non-adherence to exhaustion of administrative remedies bar a taxpayer’s claim for tax refund or credit,
whether or not the Commissioner questions the numerical correctness of the claim of the taxpayer. This
Court should not establish the precedent that non-compliance with mandatory and jurisdictional
conditions can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or
credit. Such precedent will render meaningless compliance with mandatory and jurisdictional
requirements, for then every tax refund case will have to be decided on the numerical correctness of the
amounts claimed, regardless of non-compliance with mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San
Roque filed its petition for review with the CTA more than four years before Atlas was promulgated. The
Atlas doctrine did not exist at the time San Roque failed to comply with the 120-day period. Thus, San
Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to
lapse. In any event, the Atlas doctrine merely stated that the two-year prescriptive period should be
counted from the date of payment of the output VAT, not from the close of the taxable quarter when
the sales involving the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)

Prescriptive Period for

the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have
prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is
clear: "Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales x x x."

We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of
2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003
was on 31 March 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims have prescribed,
pursuant to Section 112(A) of the 1997 Tax Code.

(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of
2003 was on 30 June 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005,
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.

(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of 2003
was on 30 September 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005,
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of
2003 was on 2 January 2006. Mindanao II filed its administrative claim before the CIR on 13 April 2005,
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.

Prescriptive Period for

the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 have been properly
appealed, we still see no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax
Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial
denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer affected may, within thirty (30) days
from the receipt of the decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax Appeals."

The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods
were already in the law. Section 112(C) expressly grants the Commissioner 120 days within which to
decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant
a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents." Following the verba legis doctrine, this law
must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply
file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day
mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot
blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer
may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.
xxxx

There are three compelling reasons why the 30-day period need not necessarily fall within the two-year
prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of the creditable input tax due or paid to such sales." In short, the law states
that the taxpayer may apply with the Commissioner for a refund or credit "within two (2) years," which
means at anytime within two years. Thus, the application for refund or credit may be filed by the
taxpayer with the Commissioner on the last day of the two-year prescriptive period and it will still
strictly comply with the law. The two-year prescriptive period is a grace period in favor of the taxpayer
and he can avail of the full period before his right to apply for a tax refund or credit is barred by
prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit
"within one hundred twenty (120) days from the date of submission of complete documents in support
of the application filed in accordance with Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in accordance with Subsection A" means
that the application in Section 112(A) is the administrative claim that the Commissioner must decide
within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers to the
period within which the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase ‘within
two years x x x apply for the issuance of a tax credit or refund’ refers to applications for refund/credit
with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit within
the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim
beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer file
his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes
utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the
two-year prescriptive period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that
is not found in the law. It results in truncating 120 days from the 730 days that the law grants the
taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law to
defeat, wholly or even partly, a remedy that the law expressly grants in clear, plain, and unequivocal
language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive

period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the
claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day, the
taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also
the only logical interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted)

In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of
its issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held
that the 120+30 day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San
Roque’s recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6
October 2010. Mindanao I and II filed their claims within this period.

We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as
follows:

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April
2005. Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30
days after the CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for the second,
third, and fourth quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be
filed earlier than 11 August 2005, which is the expiration of the 120-day period for the Commissioner to
act on the claim.

(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao
II’s judicial claim for the second quarter of 2003 was prematurely filed.

However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that
Mindanao II’s judicial claim for the second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.

(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao II’s judicial claim for the third quarter of 2003 was thus filed on time, pursuant to Section
112(C) of the 1997 Tax Code.

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April
2005. Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days
after the CIR’s denial by inaction,52 the last day for filing a judicial claim with the CTA for the second,
third, and fourth quarters of 2003 was on 1 September 2005. However, the judicial claim cannot be filed
earlier than 2 August 2005, which is the expiration of the 120-day period for the Commissioner to act on
the claim.

(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao
I’s judicial claim for the second quarter of 2003 was prematurely filed. However, pursuant to San
Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim
for the second quarter of 2003 qualifies under the exception to the strict application of the 120+30 day
periods.

(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after the prescriptive period,
pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September
2005. Mindanao I’s judicial claim for the fourth quarter of 2003 was thus filed after the prescriptive
period, pursuant to Section 112(C) of the 1997 Tax Code.

San Roque: Recognition of BIR Ruling No. DA-489-03

In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims
for tax refund or credit of three different companies. In San Roque, we reiterated that "following the
verba legis doctrine, Section 112(C) must be applied exactly as worded since it is clear, plain, and
unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will have no
jurisdiction because there will be no ‘decision’ or ‘deemed a denial decision’ of the Commissioner for
the CTA to review."

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque
recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 in favor of taxpayers. BIR
Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief with the CTA by way of Petition for Review." This Court
discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on

a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being
made to return the tax refund or credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued by the
Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all
taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not
by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits,
that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance.
This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03.
Thus, while this government agency mentions in its query to the Commissioner the administrative claim
of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in
cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the
lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.

xxxx

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim
prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-
03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its
judicial claim from the vice of prematurity. (Emphasis in the original)

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit
of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate.
The 120-day period may extend beyond the two-year period from the filing of the administrative claim if
the claim is filed in the later part of the two-year period. If the 120-day period expires without any
decision from the CIR, then the administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision
denying the administrative claim or from the expiration of the 120-day period without any action from
the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in
the course of its business; hence, it is an isolated transaction that should not have been subject to 10%
VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act
No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or
an economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business. (Emphasis supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay)55 and

Imperial v. Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the
NIRC of 1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. We ruled that the sale of vessels was not in the course of NDC’s trade or business as it was
involuntary and made pursuant to the Government’s policy for privatization. Magsaysay, in quoting from
the CTA’s decision, imputed upon Imperial the definition of "carrying on business." Imperial, however, is
an unreported case that merely stated that "‘to engage’ is to embark in a business or to employ oneself
therein."57

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not
follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability.
Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of
trade or business" includes "transactions incidental thereto."

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver
the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan
Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s
business which should be liable for VAT.
Substantiation Requirements

Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it has
substantially complied with the substantiation requirements of Section 113(A)58 in relation to Section
23759 of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue
Regulation No. 7-95.60

We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a
finding of fact. The CTA En Banc evaluated the records of the case and found that the transactions in
question are purchases for services and that Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding of fact, which in turn affirmed the finding of the CTA
First Division. We see no reason to overturn their findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in
CT A EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010,
and the Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31
May 2010, as well as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with
MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is
DENIED while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No.
19463 7, the claims of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of
2003 are DENIED while its claim for the second quarter of 2003 is GRANTED.

SO ORDERED.
G.R. No. 111184 August 12, 1996 / GR NO 29994

MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK),
and NATIONAL DEVELOPMENT COMPANY, petitioners,
vs.
HON. COURT OF APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

PANGANIBAN, J.:p

Did the respondent Court act correctly when it set aside its own Resolution dismissing a petition for
review on certiorari  which, according to the petitioners, had been filed "out of time" by the respondent
Commissioner of Internal Revenue? Should the technical rules on reglementary periods for appeal be
applied stringently as to deprive the Government of appeal from an adverse ruling on its cause of action
involving a substantial tax refund?.

These questions are addressed by the Court in resolving the instant petition for certiorari  and
prohibition under Rule 65, seeking to annul the following Resolutions issued by the respondent Court of
Appeals,1 in CA-G.R. SP No. 29994 entitled "Commissioner of Internal Revenue vs. Magsaysay Lines, Inc.,
et al.", to wit:

1) Resolution2 dated February 3, 1993 which ruled that:

As prayed for, petitioner is hereby granted an extension of thirty (30) days from January 7, 1993 or until
February 6, 1993 within which to file the petition for review on certiorari in the above entitled case with
a WARNING that no further extension shall be entertained.

2) Resolution3 dated July 27, 1993 which reads as follows:

Before Us is a motion for reconsideration filed by counsel for the petitioner (respondent Commissioner
herein) from Our resolution dated May 3, 1993 dismissing the petition for review for failure to file the
petition within the extension granted.

After a careful study of the grounds relied upon by the petitioner in support of the motion vis-a-vis the
opposition, We find cogent reason to grant the same, hence, Our resolution dated May 3, 1993 is hereby
LIFTED and SET ASIDE in the interest of substantial justice.

Accordingly, private respondents are hereby directed to file its (sic) comment on the petition for review
within ten (10) days from notice hereof.

The Antecedent Facts

Petitioners filed on April 10, 1989 an "Appeal and Petition for Refund" before the Court of Tax Appeals
(CTA) , followed by a "Supplemental Petition for Review" on July 14, 1989, praying for the reversal of
VAT Ruling Nos. 395-88, 568-88 and 007-89 and the refund of P15,120,000.00, representing
"erroneously paid" 10% value-added tax on the sale through public bidding of five (5) vessels by the NDC
to the group of investors composed of Magsaysay Lines, Inc., Baliwag Navigation and FIM Limited. The
case was docketed as CTA No. 4354 and captioned "Magsaysay Lines, Inc., et al. vs. Commissioner of
Internal Revenue."

On April 27, 1992, the CTA rendered a decision ordering respondent Commissioner "to refund in favor of
petitioners Magsaysay Lines, Inc., Baliwag Navigation, Inc., and FIM Limited of the Marden Group (HK)
for and in behalf of the National Development Corporation the VAT paid amounting to P15,120,000.00
under Confirmation of Receipt No. B 16374703 dated March 16, 1989."

Respondent Commissioner's motion for reconsideration was denied by the CTA in a resolution dated
December 9, 1992, copy of which was received by respondent Commissioner on January 6, 1993.

Immediately upon receipt of said resolution, respondent Commissioner, through the Office of the
Solicitor General (OSG), filed on the same day, January 6, 1993, a motion before respondent appellate
court praying for an "extension of thirty (30) days from January 7, 1993 or until February 6, 1993 within
which to file the petition for review on certiorari."4

However, on February 5, 1993, the Office of the Solicitor General filed on behalf of respondent
Commissioner a second  motion requesting another "extension of thirty (30) days from February 6, 1993
or until March 8, 1993, within which to file a petition for review." As shown by the stamped proof of
receipt on the face of the motion, it was received by the respondent appellate court on February 5,
1993.5

Only after it had filed the second motion did the OSG receive, on February 11, 1993, the first assailed
resolution issued by respondent appellate court, dated February 3, 1993, which granted respondent
commissioner's first motion for extension "with a warning that no further extensions shall be
entertained."

Thus, in its Manifestation and Motion dated February 16, 1993, respondent Commissioner thru the OSG
prayed that the second motion for extension dated February 5, 1993 be granted in view of the following
considerations:

Considering that said resolution was received by the OSG after the requested period of the first motion
for extension had lapsed, the OSG is now left with no recourse but to seek the kind indulgence of this
Honorable Court to grant petitioner's second motion for extension.

On March 8, 1993, or within the period prayed for by respondent Commissioner in its second motion for
extension, the petition for review (dated March 5, 1993) was filed through registered mail.

In its Resolution6 of May 3, 1993, respondent appellate court dismissed the petition for review on the
ground that —

Considering Our resolution dated February 3, 1993 WARNING petitioner that no further extension shall
be entertained, the motion for extension of time dated February 5, 1993 is hereby DENIED, hence, the
petition for review filed on March 8, 1993 is hereby DENIED ADMISSION.

ACCORDINGLY, the instant petition for review is hereby DISMISSED pursuant to Section 1 (f), Rule 50 of
the Revised Rules of Court.

However, respondent Commissioner's motion for reconsideration of the above ruling was granted by
the appellate court in its Resolution dated July 27, 1993 — the second of the herein assailed Resolutions
— which set aside the said dismissal and directed the private respondents (petitioners herein) to
comment on the reinstated petition.

The Issue

Hence, petitioners filed the instant petition alleging this reversible error:7

The questioned resolutions of the Respondent Court of Appeals . . . are erroneous as a matter of law,
having been rendered without jurisdiction and contrary to the applicable rules and doctrines firmly
established . . . in a long line of decisions.

The Court's Ruling

The thrust of the instant petition is that, since the mere filing by respondent Commissioner of the first
motion for extension of time, and the pendency thereof, did not suspend the tolling of the reglementary
period to appeal; and since that period elapsed on January 7, 1993 without any such appeal having been
filed, and without respondent Commissioner's first motion for extension having been granted by the
appellate Court prior to the expiration of said reglementary period, therefore the decision of the Court
of Tax Appeals dated April 27, 1992, had become "final, conclusive and unappealable", and thus, the
appellate court "had been divested of all authority and jurisdiction to take cognizance of the case or to
act on the appeal".8

Petitioners' position is devoid of merit, and must perforce fail. As pointed out by the Solicitor General,
the petition for review pending before the respondent Court had been filed in accordance with this
Court's Circular No. 1-91, dated February 27, 1991, which prescribed the "Rules Governing Appeals to
the Court of Appeals from a Final Order or Decision of the Court of Tax Appeals and Quasi-Judicial
Agencies." Paragraph 4 of said Circular provides:

4. PERIOD OF APPEAL. — The appeal shall be taken within fifteen (15) days from notice of the ruling,
award, order, decision, or judgment or from the date of its last publication, if publication is required by
law for its effectivity. One (1) motion for reconsideration of said ruling, award, order, decision, or
judgment may be allowed. If the motion is denied, the movant may appeal during the remaining period
for appeal reckoned from notice of the resolution of denial. (emphasis supplied)

Pursuant to the aforequoted Circular, where an aggrieved party files a motion for reconsideration from
an adverse decision of the CTA, he has only the balance of the reglementary period within which to
appeal, reckoned from receipt of notice of the resolution denying his motion for reconsideration. There
was no violation of said rule in the instant case. Here, the respondent Commissioner received on January
6, 1993 the CTA resolution denying reconsideration, and had only one (1) day left within which to
perfect his appeal. On the very day he received said resolution, he filed the (first) motion for extension
for thirty days.

While Circular No. 1-91 is silent as to whether a motion far extension of time to file a petition for review
with the Court of Appeals may be permitted, nevertheless, this Court in Liboro vs.  Court of
Appeals9 (promulgated on January 29, 1993, or at about the very time the present controversy was
taking shape in the respondent Court) already ruled that such motion is allowed and should be granted.

Previously, we had held in Lacsamana vs.  Second Special Cases Division of the Intermediate Appellate
Court10 (which was promulgated in 1986, prior to the issuance of Circular No. 1-91) that:

The Court rules, for the guidance of Bench and Bar, that a motion for extension of time to file a petition
for review under Section 22 of The Judiciary Reorganization Act (Batas Pambansa Blg. 129) and Section
22(b) of the Interim Rules, may properly be filed with and granted by the Intermediate Appellate Court
(now renamed Court of Appeals).

xxx xxx xxx

3) APPEALS BY PETITION FOR REVIEW TO THE COURT OF APPEALS.

The final judgment or order of a regional trial court in an appeal from the final judgment or order of a
metropolitan trial court, municipal trial court and municipal circuit trial court, may be appealed to the
Court of Appeals through a petition for review in accordance with Section 22 of BP No. 129 and Section
22(b) of the Interim Rules, or to this Court through a petition for review on certiorari in accordance with
Rule 45 of the Rules of Court and Section 25 of the Interim Rules. The reason for extending the period
for the filing of a record on appeal is also applicable to the filing of a petition for review with the Court
of Appeals. The  period for filing a petition for review is fifteen days. If a motion for reconsideration is
filed with and denied by a regional trial court, the movant has only (the) remaining period within which
to file a petition for review. Hence, it may be necessary  to file a motion  with the Court of Appeals
for extension of time to file such petition for review. (Emphasis are part of original text.)

xxx xxx xxx

6) PERIOD OF EXTENSION OF TIME TO FILE PETITION FOR REVIEW.

Beginning one month after the promulgation  of this Decision, an extension of only fifteen days  for filing
a petition for review may be granted by the Court of Appeals, save in exceptionally meritorious cases.

The motion for extension of time must be filed and the corresponding docket fee paid within the
reglementary period of appeal.

xxx xxx xxx

(Emphasis in the original text.)

Thus, in Liboro, citing Lacsamana, we said that:

From these rules [i.e., the rules on appeals set forth in Lacsamana], it is clear that the prohibition against
granting an extension of time applies only in a case where ordinary appeal is perfected by a mere notice
of appeal. The reason is that only the filing of the notice of appeal is required to perfect an appeal and
nothing more. However, it is different in a petition for review where the pleading is required to be
verified. A petition for review, unlike an ordinary appeal, requires careful preparation and operose
research in order to put up a persuasive and formidable position. In other words, the drafting of a
petition for review entails more time and effort than merely filing a notice of appeal. Hence,
in Lacsamana, a motion for extension of time was granted to enable a party to file a petition for review
from a final decision of the Regional Trial Court to the Court of Appeals in accordance with Sec. 22 of
B.P. 129 and par. 22 (b) of the Interim Rules.

Since Circular No. 1-91 now provides that an appeal from the Court of Tax Appeals or other quasi-judicial
agencies to the Court of Appeals is by a petition for review, and no longer by mere notice of
appeal, . . . a corresponding motion for extension of time to file a petition for review should likewise be
granted. There is indeed no reason why a motion for extension of time to file a petition for review
pursuant to Circular No. 1-91 may not be filed, if a motion for extension of time to file a petition for
review pursuant to Sec. 22 of B.P. 129, and par. 22(b) of the Interim Rules, may be granted.

But the extension nonetheless should be limited only to fifteen (15) days, save in exceptionally
meritorious cases where the Court of Appeals may grant a longer period, as similarly provided
in Lacsamana. Generally, then, a non-extendible period of fifteen (15) days may be granted unless there
are compelling reasons which may warrant the allowance of a longer period. Thus, ubi eadem ratio, ibi
eadem lepis dispositio. (emphasis ours)

Parenthetically, we should mention that this Court's Administrative Circular No. 1-95 (also known as
"Revised Circular No. 1-91") and titled "Rules Governing Appeals to the Court of Appeals from
Judgments or Final Orders of the Court of Tax Appeals and Quasi-Judicial Agencies", 11 which took effect
on February 15, 1995, has a similar provision on motions for extension to file petitions for review.

In brief, then, we deem the resort to the filing of the first motion for extension dated January 6, 1993 as
proper, and consider the said motion as having been validly and timely filed, pursuant to the then
prevailing rules of procedure. The first motion (for 30 days or up to February 6, 1993) having been
granted on February 3, 1993, or well within the period of extension asked for, it is unarguable that such
grant was no less valid and effective. Therefore, petitioner had until February 6, 1993 to file the subject
petition for review.

With respect to respondent Commissioner's second motion for extension filed on February 5, 1993, the
OSG reasoned that, aside from the fact that the grant of the first extension was received only after the
lapse of the period of extension asked for, the OSG had experienced delays in finishing and submitting
the petition caused by "the prolonged daily brownouts which disrupt(ed) office work." We take
cognizance of the fact that the intermittent power failures occurring almost daily (and often, several
times a day, with durations ranging from a few minutes to several hours) throughout 1993 took a heavy
toll on productivity and efficiency at all levels and in all sectors of our society. We therefore hold that
considering the difficult working conditions associated with the serious energy situation prevailing in our
country at that time, substantial work delays were inevitable. Hence, the second motion for extension
was justified, and the grant thereof would have been proper under the circumstances.

This is not  to say that technical and procedural rules for appeal, including reglementary periods
therefor, need not be observed at all or may be disregarded at will, since appeal may be availed of only
in the manner provided for by law.12 While generally speaking, a review on appeal is not a matter of
right but of sound judicial discretion, and may granted only when there are special and important
reasons therefor, 13 still, it must be remembered that appeal is an essential part of our judicial system,
and thus, courts should proceed with caution so as not to deprive a party of the right to appeal,
particularly if the appeal is meritorious. 14 Laws and rules should be interpreted and applied not in a
vacuum or in isolated abstraction, but in light of surrounding circumstances and attendant facts in order
to afford justice to all. In this instance, we have no doubt that substantial justice would be better served
by allowing the appeal.15 Moreover, dismissal of an appeal on purely technical grounds is frowned upon,
since the policy of our courts is to encourage hearings of appeals on their merits.16

In this case, aside from the aforementioned considerations, we are not unmindful of the immediate loss
of revenue in the sum of P15,120,00.00 plus interest of at least P734,534.89 (per the computations of
respondent Commissioner) which the Government would surely suffer if the dismissal of the subject
petition for review by the respondent Court were to be upheld on technicality. And because taxes
constitute the lifeblood of the government, through which its agencies continue to operate and with
which the State effects its functions for the welfare of its constituents, 17 tax exemptions (and, we might
add, refunds in the nature of exemptions) must be strictly construed against the taxpayer and liberally in
favor of the state.18 Hence, technical rules barring a full hearing on the merits should be relaxed, again in
the interest of justice to all.

We therefore hold that it would be ill-advised to allow petitioners to prevail on mere technicality and
compel a refund of the non-insubstantial amount of P15 million without affording the government
reasonable opportunity to contest the assailed CTA ruling. In any event, the subject petition for review
had actually been filed on March 8, 1993, the last day of the period prayed for in the second motion for
extension, so there is no further delay to speak of. And we cannot conceive of any additional undue
prejudice which may befall the petitioners in the event the appeal is heard on the merits, for if their
cause is valid and truly meritorious, petitioners will prevail in the end anyway.

As for the period of extension granted, although the rules provide for fifteen days, we reiterate that, in
meritorious cases the Court of Appeals may grant a longer period. 19 In a few highly exceptional
instances, this Court has allowed the relaxing of the rules on the application of the reglementary period
of appeal,20 particularly in the case of Republic vs.  Court of Appeals,21 where this Court allowed the
perfection of an appeal by the Republic despite the delay of six days to prevent a gross miscarriage of
justice, inasmuch as the Republic stood to lose hundreds of hectares of land already titled in its
name and devoted for educational purposes.

WHEREFORE, in view of the foregoing, the instant Petition is hereby DISMISSED, no grave abuse of
discretion having been committed by respondent Court, and the assailed Resolutions are AFFIRMED in
toto. No costs.

SO ORDERED.
G.R. No. 168129             April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, seeking to reverse the Decision 1 dated February 18, 2005 and Resolution dated
May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449.

The factual antecedents of this case, as culled from the records, are:

The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing
under the laws of the Republic of the Philippines. Pursuant to its Articles of Incorporation, 2 its primary
purpose is "To establish, maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and disabled persons enrolled in
the health care plan and to provide for the administrative, legal, and financial responsibilities of the
organization."1^vvphi1.net

On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the
National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added Tax
(VAT) on the sale of goods and services. This E.O. took effect on January 1, 1988.

Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of
Internal Revenue (CIR), petitioner, inquiring whether the services it provides to the participants in its
health care program are exempt from the payment of the VAT.

On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue
(BIR), issued VAT Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt
from the VAT coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali
of Revenue Region No. 8 in a letter dated April 22, 1994.

Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect,
amending further the National Internal Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424
(National Internal Revenue Code of 1997) became effective. This new Tax Code substantially adopted
and reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for
deficiency in its payment of the VAT and documentary stamp taxes (DST) for taxable years 1996 and
1997.

On October 20, 1999, respondent filed a protest with the BIR.

On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in
the amount of ₱100,505,030.26 and DST in the amount of ₱124,196,610.92, or a total of
₱224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter were four (4)
assessment notices.

On February 23, 2000, respondent filed another protest questioning the assessment notices.

Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000,
respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No.
6166.

On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED TO PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and ₱31,094,163.87
inclusive of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT
deficiency.1awphi1.nét Accordingly, VAT Ruling No. 231-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to
pay the deficiency VAT.

In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus:

WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED.
Accordingly, the VAT assessment issued by herein respondent against petitioner for the taxable years
1996 and 1997 is hereby WITHDRAWN and SET ASIDE.

SO ORDERED.

The CTA held:

Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since
it does not actually render medical service but merely acts as a conduit between the members and
petitioner's accredited and recognized hospitals and clinics.

However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable,
this court resolves to grant petitioner's "Motion for Partial Reconsideration." We are in accord with the
view of petitioner that it is entitled to the benefit of non-retroactivity of rulings guaranteed under
Section 246 of the Tax Code, in the absence of showing of bad faith on its part. Section 246 of the Tax
Code provides:

Sec.  246.  Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, x x x.

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be
retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the respondent itself has
confirmed petitioner's entitlement to VAT exemption under Section 103 of the Tax Code. In saying so,
respondent has actually broadened the scope of "medical services" to include the case of the petitioner.
This VAT ruling was even confirmed subsequently by Regional Director Ormundo G. Umali in his letter
dated April 22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling
in favor of the petitioner sufficiently described the business of petitioner and there is no way BIR could
be misled by the said representation as to the real nature of petitioner's business. Such being the case,
this court is convinced that petitioner's reliance on the said ruling is premised on good faith. The facts of
the case do not show that petitioner deliberately committed mistakes or omitted material facts when it
obtained the said ruling from the Bureau of Internal Revenue. Thus, in the absence of such proof, this
court upholds the application of Section 246 of the Tax Code. Consequently, the pronouncement made
by the BIR in VAT Ruling No. 231-88 as to the VAT exemption of petitioner should be upheld.

Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No.
76449.

In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.

Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its
Resolution4 dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's
services are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting respondent from
payment of VAT has retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years
1996 and 1997.

Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and
R.A. No. 7716 (E-VAT Law), provides:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. -
There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts
derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of service" means the performance of all kinds of services in the
Philippines for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors x x x.

Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus:

SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:

xxx

(l) Medical, dental, hospital and veterinary services except those rendered by professionals

xxx

The import of the above provision is plain. It requires no interpretation. It contemplates the exemption
from VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services.
In Commissioner of International Revenue v. Seagate Technology (Philippines),7 we defined an exempt
transaction as one involving 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 of the party in
the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we
reiterated this definition.

In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its
services as follows:

Under the prepaid group practice health care delivery system adopted by Health Care, individuals
enrolled in Health Care's health care program are entitled to preventive, diagnostic, and corrective
medical services to be dispensed by Health Care's duly licensed physicians, specialists, and other
professional technical staff participating in said group practice health care delivery system established
and operated by Health Care. Such medical services will be dispensed in a hospital or clinic owned,
operated, or accredited by Health Care. To be entitled to receive such medical services from Health
Care, an individual must enroll in Health Care's health care program and pay an annual fee. Enrollment
in Health Care's health care program is on a year-to-year basis and enrollees are issued identification
cards.

From the foregoing, the CTA made the following conclusions:

a) Respondent "is not actually rendering medical service but merely acting as a conduit between the
members and their accredited and recognized hospitals and clinics."

b) It merely "provides and arranges for the provision of pre-need health care services to its members
for a fixed prepaid fee for a specified period of time."

c) It then "contracts the services of physicians, medical and dental practitioners, clinics and hospitals
to perform such services to its enrolled members;" and
d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then
negotiates with them regarding payment schemes, financing and other procedures in the delivery of
health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court of
Appeals. It is a doctrine that findings of fact of the CTA, a special court exercising particular expertise on
the subject of tax, are generally regarded as final, binding, and conclusive upon this Court, more so
where these do not conflict with the findings of the Court of Appeals.9 Perforce, as respondent does not
actually provide medical and/or hospital services, as provided under Section 103 on exempt
transactions, but merely arranges for the same, its services are not VAT-exempt.

Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings,
circulars, rules and regulations promulgated by the Commissioner of Internal Revenue have no
retroactive application if to apply them would prejudice the taxpayer. The exceptions to this rule are: (1)
where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3)
where the taxpayer acted in bad faith.

We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT
liabilities has retroactive application.

In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent
"deliberately committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88
from the BIR. The CTA held that respondent's letter which served as the basis for the VAT ruling
"sufficiently described" its business and "there is no way the BIR could be misled by the said
representation as to the real nature" of said business.

In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a
health maintenance organization is not an indication of bad faith or a deliberate attempt to make false
representations." As "the term health maintenance organization did not as yet have any particular
significance for tax purposes," respondent's failure "to include a term that has yet to acquire its present
definition and significance cannot be equated with bad faith."

We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil
Service Commission v. Maala,10 we described good faith as "that state of mind denoting honesty of
intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an
honest intention to abstain from taking any unconscientious advantage of another, even through
technicalities of law, together with absence of all information, notice, or benefit or belief of facts which
render transaction unconscientious."

According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance
organization," which is subject to VAT, is not tantamount to bad faith. We note that the term "health
maintenance organization" was first recorded in the Philippine statute books only upon the passage of
"The National Health Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3) thereof defines a
health maintenance organization as "an entity that provides, offers, or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium." Under this law, a
health maintenance organization is one of the classes of a "health care provider."

It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health
maintenance organization" was yet unknown or had no significance for taxation purposes. Respondent,
therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the
basis of VAT Ruling No. 231-88.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, 11 this Court held that under Section 246 of the
1997 Tax Code, the Commissioner of Internal Revenue is precluded from adopting a position contrary
to one previously taken where injustice would result to the taxpayer. Hence, where an assessment for
deficiency withholding income taxes was made, three years after a new BIR Circular reversed a previous
one upon which the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To
rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later cases
of Commissioner of Internal Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v. Mega
Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.)
Inc.,14 and Commissioner of Internal Revenue v. Court of Appeals.15 The rule is that the BIR rulings have
no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this
case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the taxpayer was
entitled to tax refunds or credits based on the BIR's own issuances but later was suddenly saddled with
deficiency taxes due to its subsequent ruling changing the category of the taxpayer's transactions for the
purpose of paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to
the taxpayer.

WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 76449. No costs.

SO ORDERED.
G.R. No. 172394 : October 13, 2010

H. TAMBUNTING PAWNSHOP, INC., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.cralaw

DECISION

BERSAMIN, J.:

The issue herein is whether the petitioner, a pawnshop operator, was liable for VAT and the
compromise penalty for taxable year 2000.

On August 29, 2003, petitioner H. Tambunting Pawnshop, Inc. (Tambunting), a domestic corporation
duly licensed to engage in the pawnshop business, received an assessment notice dated August 27, 2003
from the Bureau of Internal Revenue (BIR), demanding the payment of deficiency Value-Added Tax
(VAT) and compromise penalty for taxable year 2000 in the amounts of P5,212,404.52 and P25,000,
respectively.

On September 15, 2003, Tambunting, disclaiming its liability, protested the assessment with the
respondent Commissioner of Internal Revenue (CIR), arguing that a pawnshop business was not subject
to VAT and the compromise penalty.1chanroblesvirtuallawlibrary

Due to the inaction of the CIR on the protest, Tambunting filed on April 2, 2004 its petition for review
with the Court of Tax Appeals (CTA) pursuant to Section 228 of Republic Act No. 8424 (National Internal
Revenue Code or Tax Reform Act of 1997).2chanroblesvirtuallawlibrary

In a decision dated April 11, 2005,3cra1aw the CTA Second Division denied the petition for review, to
wit:chanroblesvirtualawlibrary

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, petitioner is hereby ORDERED to pay respondent Commissioner of Internal Revenue the
deficiency VAT for taxable year 2000 in the amount of PhP 5,212,404.52, plus 25% surcharge and 20%
delinquency interest per annum from September 29, 2003 until fully paid, pursuant to Section 248 and
249 of the NIRC of 1997, as amended.

The amount of PhP25,000 imposed by way of compromise penalty is hereby DELETED.

SO ORDERED.

On April 29, 2005, Tambunting filed a motion for partial reconsideration. 4cra1aw Later on, on May 26,
2005, Tambunting submitted a written manifestation, attaching a copy of Bureau of Internal Revenue
(BIR) tax payment deposit slip (BIR Form No. 0605) and the corresponding schedule evidencing its
payment of P828,809.67 for the years from 2000 to 2002 pursuant to a settlement agreement with BIR
allowing Tambunting to pay 25% of its VAT due.5chanroblesvirtuallawlibrary

On July 14, 2005, however, the CTA Second Division denied Tambuntings motion for partial
reconsideration in a resolution dated July 14, 2005.6chanroblesvirtuallawlibrary

On August 22, 2005, Tambunting appealed by petition for review to the CTA en
banc.7chanroblesvirtuallawlibrary

On March 21, 2006, the CTA en banc rendered its assailed decision,8cra1aw disposing

thus:chanroblesvirtualawlibrary

WHEREFORE, the Court en banc  finds no reversible error to warrant the reversal of the assailed Decision
promulgated on April 11, 2005 and the Resolution dated July 14, 2005, respectively.

Accordingly, the instant Petition for Review is hereby DENIED and the assailed Decision and Resolution
are AFFIRMED in toto.

SO ORDERED.
The CTA en banc denied Tambuntings motion for reconsideration on April 18,
2006.9chanroblesvirtuallawlibrary

Hence, Tambunting has appealed, insisting that:chanroblesvirtualawlibrary

THE CTA EN BANCS DECISION OF 21 MARCH 2006 AND RESOLUTION DATED 18 APRIL 2006 ARE NOT IN
ACCORDANCE WITH LAW AND SETTLED JURISPRUDENCE ON THE MATTER.

Tambuntings main argument is that pawnshops are not within the concept of "all services" and "similar
services" as provided in Section 108 (A) of the National Internal Revenue Code. 10cra1aw Tambunting also
argues that the enumeration under Section 108(A) of the National Internal Revenue Code of services
subject to VAT is exclusive.

The petition has merit.

It is now settled that for purposes of determining their tax liability, pawnshops are treated as non-bank
financial intermediaries.11chanroblesvirtuallawlibrary

The VAT on non-bank financial intermediaries was first levied under R.A. No. 7716 (Expanded Value-
Added Tax Law), where Sections 3 and 17 thereof provide:chanroblesvirtualawlibrary

Section 3. Section 102 of the National Internal Revenue, as amended is hereby further amended to read
as follows:chanroblesvirtualawlibrary

Section 102. Value-added tax on sale of services and use or lease of properties.- There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived from the sale or
exchange of services, including the use or lease of properties.

The phrase sale or exchange of services means the performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration x x x

x x x services of banks, non-bank financial intermediaries and finance companies; x x x

Section 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services.- The value-
added tax shall be levied assessed and collected on the following transactions, two (2) years after the
effectivity of this Act:chanroblesvirtualawlibrary

xxx

(b) Services rendered by banks, nonbank financial intermediaries, finance companies and other financial
companies and other financial intermediaries not performing quasi-banking functions; x x x

However, Section 11 of R.A. No. 8241 amended Section 17 of R.A. No. 7716 to move the effectivity of
the VAT on non-bank financial intermediaries to January 1, 1998, viz:chanroblesvirtualawlibrary

Section 11. Section 17 of Republic Act No. 7716 is hereby amended to read as
follows:chanroblesvirtualawlibrary

Section 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services.- The value-
added tax shall be levied assessed and collected on the following transactions starting January 1,
1998:chanroblesvirtualawlibrary

xxx

(b) Services rendered by banks, nonbank financial intermediaries, finance companies and other financial
intermediaries not performing quasi-banking functions; x x x

Later, R.A. No. 8424 (National Internal Revenue Code or Tax Reform Act of 1997) again moved the
effectivity of the imposition of the VAT to December 31, 1999, to wit:chanroblesvirtualawlibrary

Section 5. Transitory Provisions- Deferment of the Effectivity of the Imposition of VAT on Certain

Services.- The effectivity of the imposition of the value-added tax on services as prescribed in Section
17(a) and (b) of Republic Act No. 7716, as amended by Republic Act No. 8241, is hereby further deferred
until December 31, 1999, unless Congress deems otherwise: Provided, That the said services shall
continue to pay the applicable tax prescribed under the present provisions of the National Internal
Revenue Code, as amended.

Still later, R.A. No. 8761 retarded the effectivity of the VAT on non-bank financial intermediaries to
January 1, 2001, thus:chanroblesvirtualawlibrary

Section 1. Section 5 of Republic Act No. 8424 is hereby amended to read as

follows:chanroblesvirtualawlibrary

Section 5. Transitory Provisions- Effectivity of the Imposition of VAT on Certain Services.- The imposition
of the value-added tax on the following services shall take effect on January 1,
2001:chanroblesvirtualawlibrary

xxx

(b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking functions; x x x

Lastly, R.A. No. 9010 revised the effectivity of the VAT on non-bank financial intermediaries by making it
start on January 1, 2003:chanroblesvirtualawlibrary

Section 1. Section 5 of Republic Act No. 8424 as amended by Republic Act No. 8761 is hereby further
amended to read as follows:chanroblesvirtualawlibrary

Section 5. Transitory Provisions- Effectivity of the Imposition of VAT on Certain Services.- The imposition
of the value-added tax on the following services shall take effect on January 1,
2003:chanroblesvirtualawlibrary

(b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking functions; x x x

Accordingly, the consecutive deferments of the effectivity date of the application of VAT on non-bank
financial intermediaries like pawnshops resulted in their non-liability for VAT during the affected taxable
years. Specifically, in First Planters Pawnshop, supra,  the Court ruled on the VAT liability of pawnshops
for taxable years from 1996 to 2002, holding:chanroblesvirtualawlibrary

xxx Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996
to 2002; however, with the levy, assessment and collection of VAT from non-bank financial
intermediaries being specifically deferred by law, then petitioner is not liable for VAT during these tax
years. But with the full implementation of the VAT system on non-bank financial intermediaries starting
January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present,
by virtue of R.A. No. 9238, Petitioner is no longer liable for VAT but it is subject to percentage tax on
gross receipts from 0% to 5%, as the case may be.

The aforequoted pronouncement in  First Planters Pawnshop has been reiterated in Tambunting
Pawnshop, Inc. v. Commissioner of Internal Revenue12cra1aw and in TFS, Incorporated v. Commissioner
of Internal Revenue,13cra1aw thereby affirming the non-liability for VAT of pawnshops in taxable years
1996-2002 by virtue of the deferment of its imposition. Consequently, the VAT deficiency assessment
and the surcharge served on Tambunting by the BIR lacked legal basis and must be canceled.

As earlier mentioned, however, Tambunting paid to the BIR 25% of its VAT liability for the years 2000 to
2002 pursuant to a settlement agreement. The tax liability in question herein includes taxable year 2000
only. To align with the result herein, therefore, Tambunting is entitled to a refund of any amount paid
pursuant to the settlement agreement corresponding to taxable year 2000 only.

WHEREFORE, we grant the petition for review on certiorari, and reverse and set aside the decision dated
March 21, 2006 and the resolution dated April 18, 2006 of the Court of Tax Appeals en banc. We declare
that the petitioner was not liable for the Value-Added Tax in taxable year 2000; and order the
Commissioner of Internal Revenue to refund to H. Tambunting Pawnshop, Inc. any amount paid
pursuant to the settlement agreement corresponding to taxable year 2000 only.

No pronouncement on cost of suit.

SO ORDERED.