[G.R. No.

157594 : March 09, 2010]

TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., PETITIONER, VS. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT.

DECISION

LEONARDO-DE CASTRO, J.:

In this Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, petitioner Toshiba
Information Equipment (Philippines), Inc. (Toshiba) seeks the reversal and setting aside of (1) the
Decision[2] dated August 29, 2002 of the Court of Appeals in CA-G.R. SP No. 63047, which found that
Toshiba was not entitled to the credit/refund of its unutilized input Value-Added Tax (VAT) payments
attributable to its export sales, because it was a tax-exempt entity and its export sales were VAT-exempt
transactions; and (2) the Resolution[3] dated February 19, 2003 of the appellate court in the same case,
which denied the Motion for Reconsideration of Toshiba. The herein assailed judgment of the Court of
Appeals reversed and set aside the Decision[4] dated October 16, 2000 of the Court of Tax Appeals (CTA)
in CTA Case No. 5762 granting the claim for credit/refund of Toshiba in the amount of P1,385,282.08.

Toshiba is a domestic corporation principally engaged in the business of manufacturing and exporting of
electric machinery, equipment systems, accessories, parts, components, materials and goods of all
kinds, including those relating to office automation and information technology and all types of
computer hardware and software, such as but not limited to HDD-CD-ROM and personal computer
printed circuit board.[5] It is registered with the Philippine Economic Zone Authority (PEZA) as an
Economic Zone (ECOZONE) export enterprise in the Laguna Technopark, Inc., as evidenced by Certificate
of Registration No. 95-99 dated September 27, 1995.[6] It is also registered with Regional District Office
No. 57 of the Bureau of Internal Revenue (BIR) in San Pedro, Laguna, as a VAT-taxpayer with Taxpayer
Identification No. (TIN) 004-739-137.[7]

In its VAT returns for the first and second quarters of 1997,[8] filed on April 14, 1997 and July 21, 1997,
respectively, Toshiba declared input VAT payments on its domestic purchases of taxable goods and
services in the aggregate sum of P3,875,139.65,[9] with no zero-rated sales. Toshiba subsequently
submitted to the BIR on July 23, 1997 its amended VAT returns for the first and second quarters of 1997,
[10] reporting the same amount of input VAT payments but, this time, with zero-rated sales totaling
P7,494,677,000.00.[11]

On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center of the Department of Finance (DOF One-Stop Shop) two separate applications for tax
credit/refund[12] of its unutilized input VAT payments for the first half of 1997 in the total amount of
P3,685,446.73.[13]

The next day, on March 31, 1999, Toshiba likewise filed with the CTA a Petition for Review[14] to toll the
running of the two-year prescriptive period under Section 230 of the Tax Code of 1977,[15] as amended.
[16] In said Petition, docketed as CTA Case No. 5762, Toshiba prayed that -

[A]fter due hearing, judgment be rendered ordering [herein respondent Commissioner of Internal
Revenue (CIR)] to refund or issue to [Toshiba] a tax refund/tax credit certificate in the amount of
P3,875,139.65 representing unutilized input taxes paid on its purchase of taxable goods and services for
the period January 1 to June 30, 1997.[17]

The Commissioner of Internal Revenue (CIR) opposed the claim for tax refund/credit of Toshiba, setting
up the following special and affirmative defenses in his Answer[18] -

5. [Toshiba's] alleged claim for refund/tax credit is subject to administrative routinary

investigation/examination by [CIR's] Bureau;

6. [Toshiba] failed miserably to show that the total amount of P3,875,139.65 claimed as VAT input taxes,
were erroneously or illegally collected, or that the same are properly documented;

7. Taxes paid and collected are presumed to have been made in accordance with law; hence, not
refundable;
8. In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to the claim for refund;

9. It is incumbent upon [Toshiba] to show that it has complied with the provisions of Section 204 in
relation to Section 229 of the Tax Code;

10. Well-established is the rule that claims for refund/tax credit are construed in strictissimi juris against
the taxpayer as it partakes the nature of exemption from tax.[19]

Upon being advised by the CTA,[20] Toshiba and the CIR filed a Joint Stipulation of Facts and Issues,[21]
wherein the opposing parties "agreed and admitted" that -

1. [Toshiba] is a duly registered value-added tax entity in accordance with Section 107 of the Tax Code,
as amended.

2. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales in accordance with then
Section 100(a)(2)(A) of the Tax Code, as amended.

3. [Toshiba] filed its quarterly VAT returns for the first two quarters of 1997 within the legally prescribed
period.

xxxx

7. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales.
8. [Toshiba] has duly filed the instant Petition for Review within the two-year prescriptive period
prescribed by then Section 230 of the Tax Code.[22]

In the same pleading, Toshiba and the CIR jointly submitted the following issues for determination by
the CTA -

Whether or not [Toshiba] has incurred input taxes in the amount of P3,875,139.65 for the period
January 1 to June 30, 1997 which are directly attributable to its export sales[.]

Whether or not the input taxes incurred by [Toshiba] for the period January 1 to June 30, 1997 have not
been carried over to the succeeding quarters[.]

Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 have not been offset
against any output tax[.]

Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997 are properly
substantiated by official receipts and invoices.[23]

During the trial before the CTA, Toshiba presented documentary evidence in support of its claim for tax
credit/refund, while the CIR did not present any evidence at all.

With both parties waiving the right to submit their respective memoranda, the CTA rendered its
Decision in CTA Case No. 5762 on October 16, 2000 favoring Toshiba. According to the CTA, the CIR
himself admitted that the export sales of Toshiba were subject to zero percent (0%) VAT based on
Section 100(a)(2)(A)(i) of the Tax Code of 1977, as amended. Toshiba could then claim tax credit or
refund of input VAT paid on its purchases of goods, properties, or services, directly attributable to such
zero-rated sales, in accordance with Section 4.102-2 of Revenue Regulations No. 7-95. The CTA, though,
reduced the amount to be credited or refunded to Toshiba to P1,385,292.02.

The dispositive portion of the October 16, 2000 Decision of the CTA fully reads -
WHEREFORE, [Toshiba's] claim for refund of unutilized input VAT payments is hereby GRANTED but in a
reduced amount of P1,385,282.08 computed as follows:

1st Quarter

2nd Quarter

Total

Amount of claimed input taxes filed with the DOF One Stop Shop Center

P3,268,682.34

P416,764.39

P3,685,446.73

Less: 1)

Input taxes not properly supported

by VAT invoices and official receipts

a. Per SGV's verification (Exh. I)

P 242,491.45

P154,391.13

P 396,882.58

b. Per this court's further verification (Annex A)

P1,852,437.65

P 35,108.00

P1,887,545.65

2)

1998 4th qtr. Output VAT liability

applied against the cliamed input taxes

15,736.42

15,736.42

Subtotal

P2,11,665.52

P189,499.13

P2,300,164.65

Amount Refundable

P1,158,016.82

P227,265.26

P1,385,282.08

Both Toshiba and the CIR sought reconsideration of the foregoing CTA Decision.

Toshiba asserted in its Motion for Reconsideration[25] that it had presented proper substantiation for
the P1,887,545.65 input VAT disallowed by the CTA.

The CIR, on the other hand, argued in his Motion for Reconsideration[26] that Toshiba was not entitled
to the credit/refund of its input VAT payments because as a PEZA-registered ECOZONE export
enterprise, Toshiba was not subject to VAT. The CIR invoked the following statutory and regulatory
provisions -

Section 24 of Republic Act No. 7916[27]

SECTION 24. Exemption from Taxes Under the National Internal Revenue Code. - Any provision of
existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be
imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent
(5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted
to the national government. x x x.

Section 103(q) of the Tax Code of 1977, as amended

Sec. 103. Exempt transactions. - The following shall be exempt from the value-added tax:

xxxx

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
Nos. 66, 529, 972, 1491, and 1950, and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.

Section 4.103-1 of Revenue Regulations No. 7-95

SEC. 4.103-1. Exemptions. - (A) In general. - An exemption means that the sale of goods or properties
and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not
allowed any tax credit on VAT (input tax) previously paid.

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered
purchaser of VAT-exempt goods, properties or services which are exempt from VAT is not entitled to any
input tax on such purchase despite the issuance of a VAT invoice or receipt.

The CIR contended that under Section 24 of Republic Act No. 7916, a special law, all businesses and
establishments within the ECOZONE were to remit to the government five percent (5%) of their gross
income earned within the zone, in lieu of all taxes, including VAT. This placed Toshiba within the ambit
of Section 103(q) of the Tax Code of 1977, as amended, which exempted from VAT the transactions that
were exempted under special laws. Following Section 4.103-1(A) of Revenue Regulations No. 7-95, the
VAT-exemption of Toshiba meant that its sale of goods was not subject to output VAT and Toshiba as
seller was not allowed any tax credit on the input VAT it had previously paid.

On January 17, 2001, the CTA issued a Resolution[28] denying both Motions for Reconsideration of
Toshiba and the CIR.

The CTA took note that the pieces of evidence referred to by Toshiba in its Motion for Reconsideration
were insufficient substantiation, being mere schedules of input VAT payments it had purportedly paid
for the first and second quarters of 1997. While the CTA gives credence to the report of its
commissioned certified public accountant (CPA), it does not render its decision based on the findings of
the said CPA alone. The CTA has its own CPA and the tax court itself conducts an
investigation/examination of the documents presented. The CTA stood by its earlier disallowance of the
amount of P1,887,545.65 as tax credit/refund because it was not supported by VAT invoices and/or
official receipts.

The CTA refused to consider the argument that Toshiba was not entitled to a tax credit/refund under
Section 24 of Republic Act No. 7916 because it was only raised by the CIR for the first time in his Motion
for Reconsideration. Also, contrary to the assertions of the CIR, the CTA held that Section 23, and not
Section 24, of Republic Act No. 7916, applied to Toshiba. According to Section 23 of Republic Act No.
7916 -

SECTION 23. Fiscal Incentives. - Business establishments operating within the ECOZONES shall be
entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the
Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226,
otherwise known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the benefits provided
for in the Export Development Act of 1994.

Among the fiscal incentives granted to PEZA-registered enterprises by the Omnibus Investments Code of
1987 was the income tax holiday, to wit -

Art. 39. Incentives to Registered Enterprises. - All registered enterprises shall be granted the following
incentives to the extent engaged in a preferred area of investment:

(a) Income Tax Holiday. --

(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer
firms, new registered firms shall be fully exempt from income taxes levied by the national government.
Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be
extended for another year in each of the following cases:

(i) The project meets the prescribed ratio of capital equipment to number of workers set by the Board;

(ii) Utilization of indigenous raw materials at rates set by the Board;

(iii) The net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the
first three (3) years of operation.

The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a
period exceeding eight (8) years.

(2) For a period of three (3) years from commercial operation, registered expanding firms shall be
entitled to an exemption from income taxes levied by the National Government proportionate to their
expansion under such terms and conditions as the Board may determine: Provided, however, That
during the period within which this incentive is availed of by the expanding firm it shall not be entitled to
additional deduction for incremental labor expense.

(3) The provision of Article 7(14) notwithstanding, registered firms shall not be entitled to any extension
of this incentive.

The CTA pointed out that Toshiba availed itself of the income tax holiday under the Omnibus
Investments Code of 1987, so Toshiba was exempt only from income tax but not from other taxes such
as VAT. As a result, Toshiba was liable for output VAT on its export sales, but at zero percent (0%) rate,
and entitled to the credit/refund of the input VAT paid on its purchases of goods and services relative to
such zero-rated export sales.

Unsatisfied, the CIR filed a Petition for Review[29] with the Court of Appeals, docketed as CA-G.R. SP No.
63047.

In its Decision dated August 29, 2002, the Court of Appeals granted the appeal of the CIR, and reversed
and set aside the Decision dated October 16, 2000 and the Resolution dated January 17, 2001 of the
CTA. The appellate court ruled that Toshiba was not entitled to the refund of its alleged unused input
VAT payments because it was a tax-exempt entity under Section 24 of Republic Act No. 7916. As a PEZA-
registered corporation, Toshiba was liable for remitting to the national government the five percent (5%)
preferential rate on its gross income earned within the ECOZONE, in lieu of all other national and local
taxes, including VAT.

The Court of Appeals further adjudged that the export sales of Toshiba were VAT-exempt, not zero-
rated, transactions. The appellate court found that the Answer filed by the CIR in CTA Case No. 5762 did
not contain any admission that the export sales of Toshiba were zero-rated transactions under Section
100(a)(2)(A) of the Tax Code of 1977, as amended. At the least, what was admitted by the CIR in said
Answer was that the Tax Code provisions cited in the Petition for Review of Toshiba in CTA Case No.
5762 were correct. As to the Joint Stipulation of Facts and Issues filed by the parties in CTA Case No.
5762, which stated that Toshiba was subject to zero percent (0%) VAT on its export sales, the appellate
court declared that the CIR signed the said pleading through palpable mistake. This palpable mistake in
the stipulation of facts should not be taken against the CIR, for to do otherwise would result in
suppressing the truth through falsehood. In addition, the State could not be put in estoppel by the
mistakes or errors of its officials or agents.
Given that Toshiba was a tax-exempt entity under Republic Act No. 7916, a special law, the Court of
Appeals concluded that the export sales of Toshiba were VAT-exempt transactions under Section 109(q)
of the Tax Code of 1997, formerly Section 103(q) of the Tax Code of 1977. Therefore, Toshiba could not
claim refund of its input VAT payments on its domestic purchases of goods and services.

The Court of Appeals decreed at the end of its August 29, 2002 Decision -

WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in CTA Case No.
5762, is hereby REVERSED and SET ASIDE, and a new one is hereby rendered finding [Toshiba], being a
tax exempt entity under R.A. No. 7916, not entitled to refund the VAT payments made in its domestic
purchases of goods and services.[30]

Toshiba filed a Motion for Reconsideration[31] of the aforementioned Decision, anchored on the
following arguments: (a) the CIR never raised as an issue before the CTA that Toshiba was tax-exempt
under Section 24 of Republic Act No. 7916; (b) Section 24 of Republic Act No. 7916, subjecting the gross
income earned by a PEZA-registered enterprise within the ECOZONE to a preferential rate of five
percent (5%), in lieu of all taxes, did not apply to Toshiba, which availed itself of the income tax holiday
under Section 23 of the same statute; (c) the conclusion of the CTA that the export sales of Toshiba were
zero-rated was supported by substantial evidence, other than the admission of the CIR in the Joint
Stipulation of Facts and Issues; and (d) the judgment of the CTA granting the refund of the input VAT
payments was supported by substantial evidence and should not have been set aside by the Court of
Appeals.

In a Resolution dated February 19, 2003, the Court of Appeals denied the Motion for Reconsideration of
Toshiba since the arguments presented therein were mere reiterations of those already passed upon
and found to be without merit by the appellate court in its earlier Decision. The Court of Appeals,
however, mentioned that it was incorrect for Toshiba to say that the issue of the applicability of Section
24 of Republic Act No. 7916 was only raised for the first time on appeal before the appellate court. The
said issue was adequately raised by the CIR in his Motion for Reconsideration before the CTA, and was
even ruled upon by the tax court.

Hence, Toshiba filed the instant Petition for Review with the following assignment of errors -
5.1 THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT [TOSHIBA], BEING A PEZA-
REGISTERED ENTERPRISE, IS EXEMPT FROM VAT UNDER SECTION 24 OF R.A. 7916, AND FURTHER
HOLDING THAT [TOSHIBA'S] EXPORT SALES ARE EXEMPT TRANSACTIONS UNDER SECTION 109 OF THE
TAX CODE.

5.2 THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO DISMISS OUTRIGHT AND GAVE DUE
COURSE TO [CIR'S] PETITION NOTWITHSTANDING [CIR'S] FAILURE TO ADEQUATELY RAISE IN ISSUE
DURING THE TRIAL IN THE COURT OF TAX APPEALS THE APPLICABILITY OF SECTION 24 OF R.A. 7916 TO
[TOSHIBA'S] CLAIM FOR REFUND.

5.3 THE HONORABLE COURT OF APPEALS ERRED WHEN [IT] RULED THAT THE COURT OF TAX APPEALS'
FINDINGS, WITH REGARD [TOSHIBA'S] EXPORT SALES BEING ZERO RATED SALES FOR VAT PURPOSES,
WERE BASED MERELY ON THE ADMISSIONS MADE BY [CIR'S] COUNSEL AND NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE.

5.4 THE HONORABLE COURT OF APPEALS ERRED WHEN IT REVERSED THE DECISION OF THE COURT OF
TAX APPEALS GRANTING [TOSHIBA'S] CLAIM FOR REFUND[;][32]

and the following prayer -

WHEREFORE, premises considered, Petitioner TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. most
respectfully prays that the decision and resolution of the Honorable Court of Appeals, reversing the
decision of the CTA in CTA Case No. 5762, be set aside and further prays that a new one be rendered
AFFIRMING AND UPHOLDING the Decision of the CTA promulgated on October 16, 2000 in CTA Case No.
5762.

Other reliefs, which the Honorable Court may deem just and equitable under the circumstances, are
likewise prayed for.[33]

The Petition is impressed with merit.

The CIR did not timely raise before

the CTA the issues on the VAT-

exemptions of Toshiba and its export

sales.

Upon the failure of the CIR to timely plead and prove before the CTA the defenses or objections that
Toshiba was VAT-exempt under Section 24 of Republic Act No. 7916, and that its export sales were VAT-
exempt transactions under Section 103(q) of the Tax Code of 1977, as amended, the CIR is deemed to
have waived the same.

During the pendency of CTA Case No. 5762, the proceedings before the CTA were governed by the Rules
of the Court of Tax Appeals,[34] while the Rules of Court were applied suppletorily.[35]

Rule 9, Section 1 of the Rules of Court provides:

SECTION 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or
the evidence on record that the court has no jurisdiction over the subject matter, that there is another
action pending between the same parties for the same cause, or that the action is barred by a prior
judgment or by statute of limitations, the court shall dismiss the claim.

The CIR did not argue straight away in his Answer in CTA Case No. 5762 that Toshiba had no right to the
credit/refund of its input VAT payments because the latter was VAT-exempt and its export sales were
VAT-exempt transactions. The Pre-Trial Brief[36] of the CIR was equally bereft of such allegations or
arguments. The CIR passed up the opportunity to prove the supposed VAT-exemptions of Toshiba and
its export sales when the CIR chose not to present any evidence at all during the trial before the CTA.
[37] He missed another opportunity to present the said issues before the CTA when he waived the
submission of a Memorandum.[38] The CIR had waited until the CTA already rendered its Decision dated
October 16, 2000 in CTA Case No. 5762, which granted the claim for credit/refund of Toshiba, before
asserting in his Motion for Reconsideration that Toshiba was VAT-exempt and its export sales were VAT-
exempt transactions.
The CIR did not offer any explanation as to why he did not argue the VAT-exemptions of Toshiba and its
export sales before and during the trial held by the CTA, only doing so in his Motion for Reconsideration
of the adverse CTA judgment. Surely, said defenses or objections were already available to the CIR when
the CIR filed his Answer to the Petition for Review of Toshiba in CTA Case No. 5762.

It is axiomatic in pleadings and practice that no new issue in a case can be raised in a pleading which by
due diligence could have been raised in previous pleadings.[39] The Court cannot simply grant the plea
of the CIR that the procedural rules be relaxed based on the general averment of the interest of
substantive justice. It should not be forgotten that the first and fundamental concern of the rules of
procedure is to secure a just determination of every action.[40] Procedural rules are designed to
facilitate the adjudication of cases. Courts and litigants alike are enjoined to abide strictly by the rules.
While in certain instances, the Court allows a relaxation in the application of the rules, it never intends
to forge a weapon for erring litigants to violate the rules with impunity. The liberal interpretation and
application of rules apply only in proper cases of demonstrable merit and under justifiable causes and
circumstances. While it is true that litigation is not a game of technicalities, it is equally true that every
case must be prosecuted in accordance with the prescribed procedure to ensure an orderly and speedy
administration of justice. Party litigants and their counsel are well advised to abide by, rather than
flaunt, procedural rules for these rules illumine the path of the law and rationalize the pursuit of justice.
[41]

The CIR judicially admitted that

Toshiba was VAT-registered and

its export sales were subject to VAT

at zero percent (0%) rate.

More importantly, the arguments of the CIR that Toshiba was VAT-exempt and the latter's export sales
were VAT-exempt transactions are inconsistent with the explicit admissions of the CIR in the Joint
Stipulation of Facts and Issues (Joint Stipulation) that Toshiba was a registered VAT entity and that it was
subject to zero percent (0%) VAT on its export sales.

The Joint Stipulation was executed and submitted by Toshiba and the CIR upon being advised to do so by
the CTA at the end of the pre-trial conference held on June 23, 1999.[42] The approval of the Joint
Stipulation by the CTA, in its Resolution[43] dated July 12, 1999, marked the culmination of the pre-trial
process in CTA Case No. 5762.
Pre-trial is an answer to the clarion call for the speedy disposition of cases. Although it was discretionary
under the 1940 Rules of Court, it was made mandatory under the 1964 Rules and the subsequent
amendments in 1997. It has been hailed as "the most important procedural innovation in Anglo-Saxon
justice in the nineteenth century."[44]

The nature and purpose of a pre-trial have been laid down in Rule 18, Section 2 of the Rules of Court:

SECTION 2. Nature and purpose. - The pre-trial is mandatory. The court shall consider:

(a) The possibility of an amicable settlement or of a submission to alternative modes of dispute

resolution;

(b) The simplification of the issues;

(c) The necessity or desirability of amendments to the pleadings;

(d) The possibility of obtaining stipulations or admissions of facts and of documents to avoid
unnecessary proof;

(e) The limitation of the number of witnesses;

(f) The advisability of a preliminary reference of issues to a commissioner;

(g) The propriety of rendering judgment on the pleadings, or summary judgment, or of dismissing the
action should a valid ground therefor be found to exist;

(h) The advisability or necessity of suspending the proceedings; and

(i) Such other matters as may aid in the prompt disposition of the action. (Emphasis ours.)

The admission having been made in a stipulation of facts at pre-trial by the parties, it must be treated as
a judicial admission.[45] Under Section 4, Rule 129 of the Rules of Court, a judicial admission requires no
proof. The admission may be contradicted only by a showing that it was made through palpable mistake
or that no such admission was made. The Court cannot lightly set aside a judicial admission especially
when the opposing party relied upon the same and accordingly dispensed with further proof of the fact
already admitted. An admission made by a party in the course of the proceedings does not require
proof.[46]

In the instant case, among the facts expressly admitted by the CIR and Toshiba in their CTA-approved
Joint Stipulation are that Toshiba "is a duly registered value-added tax entity in accordance with Section
107 of the Tax Code, as amended[,]"[47] that "is subject to zero percent (0%) value-added tax on its
export sales in accordance with then Section 100(a)(2)(A) of the Tax Code, as amended."[48] The CIR
was bound by these admissions, which he could not eventually contradict in his Motion for
Reconsideration of the CTA Decision dated October 16, 2000, by arguing that Toshiba was actually a
VAT-exempt entity and its export sales were VAT-exempt transactions. Obviously, Toshiba could not
have been subject to VAT and exempt from VAT at the same time. Similarly, the export sales of Toshiba
could not have been subject to zero percent (0%) VAT and exempt from VAT as well.

The CIR cannot escape the binding

effect of his judicial admissions.

The Court disagrees with the Court of Appeals when it ruled in its Decision dated August 29, 2002 that
the CIR could not be bound by his admissions in the Joint Stipulation because (1) the said admissions
were "made through palpable mistake"[49] which, if countenanced, "would result in falsehood,
unfairness and injustice";[50] and (2) the State could not be put in estoppel by the mistakes of its
officials or agents. This ruling of the Court of Appeals is rooted in its conclusion that a "palpable mistake"
had been committed by the CIR in the signing of the Joint Stipulation. However, this Court finds no
evidence of the commission of a mistake, much more, of a palpable one.

The CIR does not deny that his counsel, Atty. Joselito F. Biazon, Revenue Attorney II of the BIR, signed
the Joint Stipulation, together with the counsel of Toshiba, Atty. Patricia B. Bisda. Considering the
presumption of regularity in the performance of official duty,[51] Atty. Biazon is presumed to have read,
studied, and understood the contents of the Joint Stipulation before he signed the same. It rests on the
CIR to present evidence to the contrary.

Yet, the Court observes that the CIR himself never alleged in his Motion for Reconsideration of the CTA
Decision dated October 16, 2000, nor in his Petition for Review before the Court of Appeals, that Atty.
Biazon committed a mistake in signing the Joint Stipulation. Since the CIR did not make such an
allegation, neither did he present any proof in support thereof. The CIR began to aver the existence of a
palpable mistake only after the Court of Appeals made such a declaration in its Decision dated August
29, 2002.

Despite the absence of allegation and evidence by the CIR, the Court of Appeals, on its own, concluded
that the admissions of the CIR in the Joint Stipulation were due to a palpable mistake based on the
following deduction -

Scrutinizing the Answer filed by [the CIR], we rule that the Joint Stipulation of Facts and Issues signed by
[the CIR] was made through palpable mistake. Quoting paragraph 4 of its Answer, [the CIR] states:

"4. He ADMITS the allegations contained in paragraph 5 of the petition only insofar as the cited
provisions of Tax Code is concerned, but SPECIFICALLY DENIES the rest of the allegations therein for
being mere opinions, arguments or gratuitous assertions on the part of [Toshiba] and/or because they
are mere erroneous conclusions or interpretations of the quoted law involved, the truth of the matter
being those stated hereunder

x x x x"

And paragraph 5 of the petition for review filed by [Toshiba] before the CTA states:

"5. Petitioner is subject to zero percent (0%) value-added tax on its export sales in accordance with then
Section 100(a)(2)(A) of the Tax Code x x x.

x x x x"
As we see it, nothing in said Answer did [the CIR] admit that the export sales of [Toshiba] were indeed
zero-rated transactions. At the least, what was admitted only by [the CIR] concerning paragraph 4 of his
Answer, is the fact that the provisions of the Tax Code, as cited by [Toshiba] in its petition for review
filed before the CTA were correct.[52]

The Court of Appeals provided no explanation as to why the admissions of the CIR in his Answer in CTA
Case No. 5762 deserved more weight and credence than those he made in the Joint Stipulation. The
appellate court failed to appreciate that the CIR, through counsel, Atty. Biazon, also signed the Joint
Stipulation; and that absent evidence to the contrary, Atty. Biazon is presumed to have signed the Joint
Stipulation willingly and knowingly, in the regular performance of his official duties. Additionally, the
Joint Stipulation[53] of Toshiba and the CIR was a more recent pleading than the Answer[54] of the CIR.
It was submitted by the parties after the pre-trial conference held by the CTA, and subsequently
approved by the tax court. If there was any discrepancy between the admissions of the CIR in his Answer
and in the Joint Stipulation, the more logical and reasonable explanation would be that the CIR changed
his mind or conceded some points to Toshiba during the pre-trial conference which immediately
preceded the execution of the Joint Stipulation. To automatically construe that the discrepancy was the
result of a palpable mistake is a wide leap which this Court is not prepared to take without substantial
basis.

The judicial admissions of the CIR

in the Joint Stipulation are not

intrinsically false, wrong, or illegal,

and are consistent with the ruling on

the VAT treatment of PEZA-

registered enterprises in the

previous Toshiba case.

There is no basis for believing that to bind the CIR to his judicial admissions in the Joint Stipulation - that
Toshiba was a VAT-registered entity and its export sales were zero-rated VAT transactions - would result
in "falsehood, unfairness and injustice." The judicial admissions of the CIR are not intrinsically false,
wrong, or illegal. On the contrary, they are consistent with the ruling of this Court in a previous case
involving the same parties, Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.)
Inc.[55] (Toshiba case), explaining the VAT treatment of PEZA-registered enterprises.
In the Toshiba case, Toshiba sought the refund of its unutilized input VAT on its purchase of capital
goods and services for the first and second quarters of 1996, based on Section 106(b) of the Tax Code of
1977, as amended.[56] In the Petition at bar, Toshiba is claiming refund of its unutilized input VAT on its
local purchase of goods and services which are attributable to its export sales for the first and second
quarters of 1997, pursuant to Section 106(a), in relation to Section 100(a)(1)(A)(i) of the Tax Code of
1977, as amended, which read -

SEC. 106. Refunds or tax credits of creditable input tax. - (a) Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated, may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax
has not been applied against output tax: Provided, however, That in the case of zero-rated sales under
Section 100(a)(2)(A)(i),(ii) and (b) and Section 102(b)(1) and (2), the acceptable foreign currency
exchange proceeds thereof has been duly accounted for in accordance with the regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties of services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume sales.

SEC. 100. Value-added tax on sale of goods or properties. - (a) Rate and base of tax. - x x x

xxxx

(2) The following sales by VAT-registered persons shall be subject to 0%:

(A) Export sales. - The term "export sales" means:

(i) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipnas (BSP).
Despite the difference in the legal bases for the claims for credit/refund in the Toshiba case and the case
at bar, the CIR raised the very same defense or objection in both - that Toshiba and its transactions were
VAT-exempt. Hence, the ruling of the Court in the former case is relevant to the present case.

At the outset, the Court establishes that there is a basic distinction in the VAT-exemption of a person
and the VAT-exemption of a transaction -

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-
exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),
this Court already made such distinction -

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax
status - VAT-exempt or not - of the party to the transaction...

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from VAT x x x.[57]

In effect, the CIR is opposing the claim for credit/refund of input VAT of Toshiba on two grounds: (1) that
Toshiba was a VAT-exempt entity; and (2) that its export sales were VAT-exempt transactions.

It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered enterprises, such as
Toshiba, are VAT-exempt and no VAT can be passed on to them. The Court explained in the Toshiba case
that -

PEZA-registered enterprise, which would necessarily be located within ECOZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent
(5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather,
because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign
territory.
xxxx

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, the BIR
issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to
the present Petition is Section 3 thereof, which reads -

SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier from the Customs Territory, to a
PEZA Registered Enterprise. -

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all
taxes, except real property tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). - This shall be treated as indirect export hence, considered subject
to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation
to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. - This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence,
subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC
rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). - This shall be treated as indirect export hence, considered subject
to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation
to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. - This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from
the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or
type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent
(0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered
supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said
enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively
subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916
and the "Cross Border Doctrine" of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the
benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and
shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt

entity.x x x.[58]

The Court, nevertheless, noted in the Toshiba case that the rule which considers any sale by a supplier
from the Customs Territory to a PEZA-registered enterprise as export sale, which should not be
burdened by output VAT, was only clearly established on October 15, 1999, upon the issuance by the
BIR of RMC No. 74-99. Prior to October 15, 1999, whether a PEZA-registered enterprise was exempt or
subject to VAT depended on the type of fiscal incentives availed of by the said enterprise.[59] The old
rule, then followed by the BIR, and recognized and affirmed by the CTA, the Court of Appeals, and this
Court, was described as follows -
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax
holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in
lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-
registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered
pioneer and non-pioneer enterprises for six-year and four-year periods, respectively. Those availing of
this incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten
percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the
five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No.
7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the
income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent
(10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of
goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter's type or
class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise
as a VAT-exempt entity.[60]

To recall, Toshiba is herein claiming the refund of unutilized input VAT payments on its local purchases
of goods and services attributable to its export sales for the first and second quarters of 1997. Such
export sales took place before October 15, 1999, when the old rule on the VAT treatment of PEZA-
registered enterprises still applied. Under this old rule, it was not only possible, but even acceptable, for
Toshiba, availing itself of the income tax holiday option under Section 23 of Republic Act No. 7916, in
relation to Section 39 of the Omnibus Investments Code of 1987, to be subject to VAT, both indirectly
(as purchaser to whom the seller shifts the VAT burden) and directly (as seller whose sales were subject
to VAT, either at ten percent [10%] or zero percent [0%]).
A VAT-registered seller of goods and/or services who made zero-rated sales can claim tax credit or
refund of the input VAT paid on its purchases of goods, properties, or services relative to such zero-
rated sales, in accordance with Section 4.102-2 of Revenue Regulations No. 7-95, which provides -

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

The BIR, as late as July 15, 2003, when it issued RMC No. 42-2003, accepted applications for
credit/refund of input VAT on purchases prior to RMC No. 74-99, filed by PEZA-registered enterprises
which availed themselves of the income tax holiday. The BIR answered Question Q-5(1) of RMC No. 42-
2003 in this wise -

Q-5:Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms
automatically qualify as zero-rated without seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly
billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT
invoices/receipts?

xxxx

A-5(1):If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the
said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases. However, if
the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:

The taxpayer-claimant is VAT-registered;

Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the
purchaser prior to the implementation of RMC No. 74-99; and

The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared
the sales to the PEZA-registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-
registered companies, regardless of the type or class of PEZA-registration, should be denied. (Emphases
ours.)

Consequently, the CIR cannot herein insist that all PEZA-registered enterprises are VAT-exempt in every
instance. RMC No. 42-2003 contains an express acknowledgement by the BIR that prior to RMC No. 74-
99, there were PEZA-registered enterprises liable for VAT and entitled to credit/refund of input VAT paid
under certain conditions.

This Court already rejected in the Toshiba case the argument that sale transactions of a PEZA-registered
enterprise were VAT-exempt under Section 103(q) of the Tax Code of 1977, as amended, ratiocinating
that -

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-
exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may
not claim tax credit/refund of the input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes that transactions covered by special laws may be
exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66 are
not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor
of Rep. Act No. 7916, as amended, under which the EPZA evolved into the PEZA. Consequently, the
exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended,
extends likewise to Rep. Act No. 7916, as amended.[61] (Emphasis ours.)
In light of the judicial admissions of Toshiba,

the CTA correctly confined itself to the other

factual issues submitted for resolution by the

parties.

In accord with the admitted facts - that Toshiba was a VAT-registered entity and that its export sales
were zero-rated transactions - the stated issues in the Joint Stipulation were limited to other factual
matters, particularly, on the compliance by Toshiba with the rest of the requirements for credit/refund
of input VAT on zero-rated transactions. Thus, during trial, Toshiba concentrated on presenting evidence
to establish that it incurred P3,875,139.65 of input VAT for the first and second quarters of 1997 which
were directly attributable to its export sales; that said amount of input VAT were not carried over to the
succeeding quarters; that said amount of input VAT has not been applied or offset against any output
VAT liability; and that said amount of input VAT was properly substantiated by official receipts and
invoices.

After what truly appears to be an exhaustive review of the evidence presented by Toshiba, the CTA
made the following findings -

(1) The amended quarterly VAT returns of Toshiba for 1997 showed that it made no other sales, except
zero-rated export sales, for the entire year, in the sum of P2,083,305,000.00 for the first quarter and
P5,411,372,000.00 for the second quarter. That being the case, all input VAT allegedly incurred by
Toshiba for the first two quarters of 1997, in the amount of P3,875,139.65, was directly attributable to
its zero-rated sales for the same period.

(2) Toshiba did carry-over the P3,875,139.65 input VAT it reportedly incurred during the first two
quarters of 1997 to succeeding quarters, until the first quarter of 1999. Despite the carry-over of the
subject input VAT of P3,875,139.65, the claim of Toshiba was not affected because it later on deducted
the said amount as "VAT Refund/TCC Claimed" from its total available input VAT of P6,841,468.17 for
the first quarter of 1999.

(3) Still, the CTA could not allow the credit/refund of the total input VAT of P3,875,139.65 being claimed
by Toshiba because not all of said amount was actually incurred by the company and duly substantiated
by invoices and official receipts. From the P3,875,139.65 claim, the CTA deducted the amounts of (a)
P189,692.92, which was in excess of the P3,685,446.23 input VAT Toshiba originally claimed in its
application for credit/refund filed with the DOF One-Stop Shop; (b) P396,882.58, which SGV & Co., the
commissioned CPA, disallowed for being improperly substantiated, i.e., supported only by provisional
acknowledgement receipts, or by documents other than official receipts, or not supported by TIN or TIN
VAT or by any document at all; (c) P1,887,545.65, which the CTA itself verified as not being
substantiated in accordance with Section 4.104-5[62] of Revenue Regulations No. 7-95, in relation to
Sections 108[63] and 238[64] of the Tax Code of 1977, as amended; and (d) P15,736.42, which Toshiba
already applied to its output VAT liability for the fourth quarter of 1998.

(4) Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT payments attributable
to its zero-rated sales in the amounts of P1,158,016.82 and P227,265.26, for the first and second
quarters of 1997, respectively, or in the total amount of P1,385,282.08.

Since the aforementioned findings of fact of the CTA are borne by substantial evidence on record,
unrefuted by the CIR, and untouched by the Court of Appeals, they are given utmost respect by this
Court.

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

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

WHEREFORE, the assailed Decision dated August 29, 2002 and the Resolution dated February 19, 2003
of the Court of Appeals in CA-G.R. SP No. 63047 are REVERSED and SET ASIDE, and the Decision dated
October 16, 2000 of the Court of Tax Appeals in CTA Case No. 5762 is REINSTATED. Respondent
Commissioner of Internal Revenue is ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of petitioner Toshiba Information Equipment (Phils.), Inc. in the amount of
P1,385,282.08, representing the latter's unutilized input VAT payments for the first and second quarters
of 1997. No pronouncement as to costs.

SO ORDERED.

[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

VAT Zero-rated

Sales Domestic

Purchases Input

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. -

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

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

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

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

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

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the BSP. x x x.'
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of
which reads as follows:

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

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

'Section 106. Refunds or tax credits of input tax. -

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

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

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

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

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

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

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

'Section 229. Recovery of tax erroneously or illegally collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.'
"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision7 in
favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section
108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the
decretal portion of which reads as follows:

'WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance
with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of
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 jurisdiction60 to
impose the VAT.61 Performed in the Philippines, such service is necessarily subject to its jurisdiction,62
for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero rate.64
The place of payment is immaterial;65 much less is the place where the output of the service will be
further or ultimately used.

Statutory Construction or Interpretation Unnecessary

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

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

No Qualifications Under RR 5-87

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

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

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 νιr†υαl lαω lιbrαrÿ

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 effect85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT Ruling
No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors' acts or rulings, the BIR commissioner may render a different construction to a statute89
only if the new interpretation is in congruence with the law. Otherwise, no amount of interpretation can
ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

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

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

"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. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed exempt
transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between
exempt entities and exempt transactions has little significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27,
2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision
reads as follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the
duties of his office, including, among others, the duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration

Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT
refund.

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic
Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As [respondent’s] business is
not subject to VAT, the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital
goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.’

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented
the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April
1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those
under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was,
therefore, considered exempt only from the payment of income tax when it opted for the income tax
holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other national internal revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR
7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly
filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT invoices or official
receipts, and were not yet offset against any output VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999."6

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the
fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment,
machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored,
broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.13 Even so,
respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and licenses.14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors’ taxes, wharfage dues, taxes and duties on imported capital equipment
and spare parts, export taxes, duties, imposts and fees,16 local taxes and licenses, and real property
taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary
-- extends20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.22 Banking and finance shall also be liberalized
under minimum Bangko Sentral regulation with the establishment of foreign currency depository units
of local commercial banks and offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It
is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is
entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade
or business29 as they pass along the production and distribution chain, the tax being limited only to the
value added30 to such goods, properties or services by the seller, transferor or lessor.31 It is an indirect
tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services.32 As such, it should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on consumption.33 In either
case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method.35 Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.36 Under the present method that relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40
passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes
that the excess has to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters.42 Should the input taxes result from zero-rated
or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the
output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal revenue
taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.47 The tax rate
is set at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions charges no output tax,49 but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate.52 Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero
output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted
by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But
in an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or
credit for input taxes paid.58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax
status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but
may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or
non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed
on by the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on
one person, the burden may be passed on to another. Therefore, if a special law merely exempts a party
as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64
depending again on the application of the destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless
the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,68
because the ecozone within which it is registered is managed and operated by the PEZA as a separate
customs territory.69 This means that in such zone is created the legal fiction of foreign territory.70
Under the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue
(BIR),72 no VAT shall be imposed to form part of the cost of goods destined for consumption outside of
the territorial border of the taxing authority. If exports of goods and services from the Philippines to a
foreign country are free of the VAT,73 then the same rule holds for such exports from the national
territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.74 An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.75
This legal fiction is necessary to give meaningful effect to the policies of the special law creating the
zone.76 If respondent is located in an export processing zone77 within that ecozone, sales to the export
processing zone, even without being actually exported, shall in fact be viewed as constructively exported
under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would indeed
be subject to a zero rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax
on consumption, for which the direct liability is imposed on one person but the indirect burden is passed
on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales
nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex
non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments
operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview
of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone under
RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited
indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real
property taxes that presently are imposed on land owned by developers.82 This similar and repeated
prohibition is an unambiguous ratification of the law’s intent in not imposing local or national taxes on
business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to
x x x internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA)
that was later amended by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments and
creating more employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if
brought to the ecozone’s restricted area87 for manufacturing by registered export enterprises,88 of
which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.89

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products;91 on required supplies
and spare part for consigned equipment;92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.93
In addition, they are given credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for the manufacture of their
products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to
ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in
favor of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,99 and for locally produced raw materials, capital equipment and spare
parts used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar
exporters within the ecozone.101 Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the
taxpayer103 and liberally in favor of the taxing authority.104
Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear
the burden of proving the factual basis of their claims;106 and of showing, by words too plain to be
mistaken, that the legislature intended to exempt them.107 In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed.
In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.108 Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws109 will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle.110 Revenue
Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered supplier’s sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration -- is
legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country x x x through the establishment,
among others, of special economic zones x x x that shall effectively attract legitimate and productive
foreign investments."113
Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions of
the country[,] and result in increased volume and value of exports for the economy."114 Fiscal
incentives that are cost-efficient and simple to administer shall be devised and extended to significant
projects "to compensate for market imperfections, to reward performance contributing to economic
development,"115 and "to stimulate the establishment and assist initial operations of the
enterprise."116

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out
earlier in RA 7227 -- of converting into alternative productive uses118 the former military reservations
and their extensions,119 as well as of providing them incentives120 to enhance the benefits that would
be derived from them121 in promoting economic and social development.122

Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort"123 in order to win international markets. By providing many export and tax incentives,124 the
State is able to drive home the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved."125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market."126 After all, international competitiveness requires economic and
tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,128 as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive.129 Tax credits for domestic
inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development."130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent
did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in
the day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will
use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not considered used in the VAT business, and no VAT refund
or credit is due.134 This is a non sequitur. By the VAT’s very nature as a tax on consumption, the capital
goods and services respondent has purchased are subject to the VAT, although at zero rate. Registration
does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,135
petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments not adequately
and seriously brought below cannot be raised for the first time on appeal."136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating140
cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such regulations is
not "within the statutory authority x x x granted by the legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.142 The courts will not countenance one that overrides
the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty.145 Respondent’s registration carries with it the
presumption that, in the absence of contradictory evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed146 by
both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for
their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature,
but by the taxpayer’s negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and
national taxes imposable upon business establishments within the ecozone cannot outrightly determine
a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded
or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex,
in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for
being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and
have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA
7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x
x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the
special laws cited above is broad enough to cover even the enforcement of internal revenue laws,
including prescription.154

Summary

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

SO ORDERED.
G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007
Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October
26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition for review of
respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency
assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony for Value Added
Tax (VAT) but upheld the deficiency assessment for expanded withholding tax (EWT) in the amount of
₱1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of ₱1,269,
593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sony’s books of accounts and other accounting records regarding
revenue taxes for "the period 1997 and unverified prior years." On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony protested.
Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter of demand
and the details of discrepancies.4 Said details of the deficiency taxes and penalties for late remittance of
internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due P 7,958,700.00

Add: Penalties

Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41

Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due P 1,416,976.90

Add: Penalties

Interest up to 3-31-2000 P 550,485.82

Compromise 25,000.00 575,485.82

Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 359,177.80

Interest up to 3-31-2000 87,580.34

Compromise 16,000.00 462,758.14

Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 1,729,690.71

Interest up to 3-31-2000 508,783.07

Compromise 50,000.00 2,288,473.78

Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax Due P

Add: Penalties

25 % Surcharge P 8,865.34

Interest up to 3-31-2000 58.29

Compromise 2,000.00 10,923.60

Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000.
Sony submitted relevant documents in support of its protest on the 16th of that same month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting
documents to the CIR, Sony filed a petition for review before the CTA.7

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sony’s
motor vehicles and on professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of
Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on
rental expense since it found that the total rental deposit of ₱10,523,821.99 was incurred from January
to March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise
penalties, the CTA-First Division also upheld the penalties for the late payment of VAT on royalties, for
late remittance of final withholding tax on royalty as of December 1997 and for the late remittance of
EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as
the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL
and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However, the
deficiency assessments for expanded withholding tax and penalties for late remittance of internal
revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in
the amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue taxes in
the sum of ₱1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20

3. EWT of Petitioner's Branches 8,923.63

Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the
1997 Tax Code.

SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following grounds in support
thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the
deficiency VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission expense in the
amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax assessment
with respect to the 5% withholding tax on rental deposit in the amount of ₱10,523,821.99 should be
cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final withholding
tax on royalties covering the period January to March 1998 was filed on time.10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the
CIR filed a petition for review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit
in the amount of ₱10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period January to
March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s
petition on May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it raised
before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE
AMOUNT OF PHP11,141,014.41.

II

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

PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE
PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently
filed a manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008,
the Court resolved to give due course to the petition and to decide the case on the basis of the pleadings
filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should
be understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that the CIR relies
on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided,
however, That failure to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the
CIR acting through its revenue officers went beyond the scope of their authority because the deficiency
VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal
year which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation. Thus, if CIR wanted or
intended the investigation to include the year 1998, it should have done so by including it in the LOA or
issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September
20, 1990, the pertinent portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of
issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the
L/A.16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the
CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit because
the same was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that
should have been realized from the advertising expense of the latter.18 It is evident under Section
11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer Antonio
Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified that
advertising companies issued invoices in the name of Sony and the latter paid for the same.21
Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is
another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus,
taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy
equivalent to the latter’s advertising expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit
further that our client is not subject to VAT on the subsidy income as this was not derived from the sale
of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income
tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject to the
10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sony’s advertising expense for it was but an assistance or aid in view of Sony’s dire or
adverse economic conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses."

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

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

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a
dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered
for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT.
The case, however, is not applicable to the present case. In that case, COMASERCO rendered service to
its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was
paid the cost or expense that it incurred although without profit. This is not true in the present case.
Sony did not render any service to SIS at all. The services rendered by the advertising companies, paid
for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount
equivalent to the latter’s advertising expense but never received any goods, properties or service from
Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR insists
that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent
(5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue regulation provides
that the 10% rate is applied when the recipient of the commission income is a natural person. According
to the CIR, Sony’s schedule of Selling, General and Administrative expenses shows the commission
expense as "commission/dealer salesman incentive," emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate
and commercial brokers and agents of professional entertainers – five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division,
held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not
justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is composed of
"Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which
was the applicable rule during the subject period of examination and assessment as specified in the LOA.
Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot
be applied in the present case. Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate
was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in
the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the
appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to March
1998, is not valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i)
as of December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with
the CTA-First Division when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)
(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from
January to March of 1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment of
final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty
payments when the royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is when does the royalty
become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments
were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing
quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective
semi-annual period and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE
shall pay the royalty hereunder to the LICENSOR concurrently with the furnishing of the above
statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which
ends in June 30 and December 31. However, the CTA-First Division found that there was accrual of
royalty by the end of December 1997 as well as by the end of June 1998. Given this, the FWTs should
have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was
correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from January to
March 1998 was seasonably filed. Although the royalty from January to March 1998 was well within the
semi-annual period ending June 30, which meant that the royalty may be payable until August 1998
pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from
its accrual at the end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet
late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

G.R. No. 193301 March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well
as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in
CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos.
7227, 7287, and 7317. The CTA First Division denied 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

(2003) Date of Filing

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
Case No. Period

Covered

(2003) Date Filing

Original

Return Amended

Return Administrative

Return Judicial Claim

7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005

7287 2nd Quarter 22 July 2003 1 April 2004 13 April 2005 7 July 2005

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

7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 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 reconsideration32 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 43 (Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA

Case No. Period

covered by

VAT Sales in

2003 and

amountClose of

quarter

when sales

were

made Last day

for filing

application

of tax

refund/tax

credit

certificate

with the

CIR Actual date of

filing

application for

tax refund/

credit with the

CIR

(administrative
claim)44 Last day for

filing case

with CTA45 Actual Date

of filing case

with CTA

(judicial

claim)

7227 1st Quarter,

₱3,160,984.69 31 March

2003 31 March

2005 13 April 2005 12 September

2005 22 April 2005

7287 2nd Quarter,

₱1,562,085.33 30 June

2003 30 June

2005 13 April 2005 12 September

2005 7 July 2005

7317 3rd and 4th

Quarters,

₱3,521,129.50 30

September

2003 30

September

2005 13 April 2005 12 September

2005 9 September
2005

31

December

2003 2 January

2006

(31

December

2005 being

a Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

CTA

Case

No. Period

covered by

VAT Sales in

2003 and

amountClose of

quarter

when sales

were

made Last day

for filing

application

of tax
refund/tax

credit

certificate

with the

CIR Actual date of

filing

application for

tax refund/

credit with the

CIR

(administrative

claim)46 Last day for

filing case

with CTA47 Actual Date

of filing case

with CTA

(judicial

claim)

7227 1st Quarter,

₱3,893,566.14 31 March

2003 31 March

2005 4 April 2005 1 September

2005 22 April 2005

7287 2nd Quarter,

₱2,351,000.83 30 June
2003 30 June

2005 4 April 2005 1 September

2005 7 July 2005

7317 3rd

and 4th

Quarters,

₱7,940,727.83 30

September

2003 30

September

2005 4 April 2005 1 September

2005 9 September

2005

31

December

2003 2 January

2006

(31

December

2005 being

a Saturday)

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 estoppel54 in favor of taxpayers. BIR
Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the
120-day period 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 Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR

Administrative

Claim Judicial Claim Action on Claim

1st Quarter, 2003 Filed late -- Deny, pursuant to

Section 112(A) of the

1997 Tax Code

2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to

BIR Ruling No. DA-489-03

3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to

Section 112(C) of the

1997 Tax Code

4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to

Section 112(C) of the

1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

Administrative

Claim Judicial Claim Action on Claim

1st Quarter, 2003 Filed late -- Deny, pursuant to

Section 112(A) of the

1997 Tax Code

2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to

BIR Ruling No. DA-489-03

3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to

Section 112(C) of the

1997 Tax Code

4th Quarter, 2003 Filed on time Filed late Grant, pursuant to

Section 112(C) of the

1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

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

(1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate.
The 120-day period may extend beyond the two-year period from the filing of the 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. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

PARDO, J.:

What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1
reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of the
Commissioner of Internal Revenue ruling that Commonwealth Management and Services Corporation, is
liable for value added tax for services to clients during taxable year 1988.

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life
Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife and its other affiliates.1âwphi1.nêt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent
COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:

Taxable sale/receipt P1,679,155.00

============

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE

P351,831.01

============ 3

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of
deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review
contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including
functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred
that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO
was established to ensure operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988.
COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency
value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner
is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of
the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to
Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be
included in the payment as there was no compromise agreement entered into between petitioner and
respondent with respect to the value-added tax deficiency.5

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the
Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the
Court of Tax Appeals, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the
questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for
the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for
lack of legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same
parties,7 where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services
rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO
was not engaged in business of providing services to Philamlife and its affiliates. In the same manner,
the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the
business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on
certiorari assailing the decision of the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on
September 26, 1996, COMASERCO complied with the resolution.8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay
VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different
things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for
a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the
service. It is immaterial whether profit is derived from rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in
1988, provides that:
Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who, imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is
carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-
oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the
articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any
profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes
of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending
among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National
Internal Revenue Code of 1997, took effect. The amended law provides that:

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

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

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business.
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods
or property, and on the performance of services, even in the absence of profit attributable thereto. The
term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions
even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the
course of trade or business, sells, barters or exchanges goods and services, was already liable to pay
VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity
is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes
"the supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12
emphasizing that a domestic corporation that provided technical, research, management and technical
assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without
any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such
corporation was organized without any intention realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service for
a fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions
are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be
merely implied therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by
the Commissioner, the performance of all kinds of services for others for a fee, remuneration or
consideration is considered as sale of services subject to VAT. As the government agency charged with
the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any
showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy
and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax
Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of
tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042,
declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and
percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case,
which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or
exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-
G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case
No. 4853.

No costs.

SO ORDERED.
April 5, 2017

G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2,
2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No.
1224, affirming with modification the Decision4 dated June 5, 2014 and the Resolution5 dated
September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard
Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal Revenue (CIR) the deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per
annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal
Revenue Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical
insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical services
provided by duly licensed physicians, specialists and other professional technical staff participating in
the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.7

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment
System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth
Quarterly VAT Return on January 25, 2007.8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the
CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued
recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January 4,
2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable
year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties. 11

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any
deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of
Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued that since MEDICARD. does
not actually provide medical and/or hospital services, but merely arranges for the same, its services are
not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of
medical and/or hospital services by hospitals and/or clinics but include actual and direct rendition of
medical and laboratory services; in fact, its 2006 audited balance sheet shows that it owns x-ray and
laboratory facilities which it used in providing medical and laboratory services to its members; (2) out of
the ₱l .9 Billion membership fees, ₱319 Million was received from clients that are registered with the
Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the processing fees
amounting to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which
represent advances for professional fees due from clients which were paid by MEDICARD while the
remainder was already previously subjected to VAT; (4) the professional fees in the amount of Pl 1
Million should also be excluded because it represents the amount of medical services actually and
directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to
pay for the VAT, the 12% VAT rate should not be applied on the entire amount but only for the period
when the 12% VAT rate was already in effect, i.e., on February 1, 2006. It should not also be held liable
for surcharge and deficiency interest because it did not pass on the VAT to its members.14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo
Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also submitted additional
supporting documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009,
denying MEDICARD's protest, to wit:

IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency
[VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes immediately.
Should payment be made later, adjustment has to be made to impose interest until date of payment.
This is olir final decision. If you disagree, you may take an appeal to the [CTA] within the period provided
by law, otherwise, said assessment shall become final, executory and demandable. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its
position before the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's
deficiency VAT assessment covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD]
covering taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is
ordered to pay [CIR] the amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%)
surcharge imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱l78,538,566.68

Add: 25% Surcharge 44,634,641.67

Total ₱223.173.208.35

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl
78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of
the NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of
₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of
₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of
Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the
validity of the assessment on the ground of lack of LOA since the assessment issued against MEDICARD
contained the requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it in
fact availed of the remedies provided by law without questioning the nullity of the assessment; (4) the
amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics cannot be
excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the
act of earmarking or allocation is by itself an act of ownership and management over the funds by
MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of these
clinics and laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no
evidence that MEDICARD segregated the amounts pertaining to this at the time it received the premium
from its members; and (6) MEDICARD was not able to substantiate the amount pertaining to its January
2006 income and therefore has no basis to impose a 10% VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
elevated the matter to the CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as
the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA Division in all
other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly,
[MEDICARD] is ordered to pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% surcharge
imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90

Total ₱220,234.609.48

In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58
computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of
1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48
(representing basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full
payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended."

SO ORDERED.22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was
denied.23 Hence, MEDICARD now seeks recourse to this Court via a petition for review on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE MEDICAL
SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA is
premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power
that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the
NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –

(A) Examination of Return and Determination of Tax Due.- After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examinationof any taxpayer and the assessment of the correct amount of tax: Provided,
however, That failure to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer.

x x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly
authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be
undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed
through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do
with the LOA. These are simply methods of examining the taxpayer in order to arrive at .the correct
amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives,
other tax agents may not validly conduct any of these kinds of examinations without prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue (BIR)
promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient
centralized Data Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of
Listing for Enforcement System (RELIEF System).26 This system can detect tax leaks by matching the
data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party sources.
Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales
and purchases can be generated to uncover under declared income and over claimed purchases of
Goods and services.

Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF
System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD) under the
Information Systems Group (ISG) is responsible for: (1) coming up with the List of Taxpayers with
discrepancies within the threshold amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and to the Audit Information, Tax
Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for
transmitting the LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers District
Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of these
investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy
would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit
approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid the
assessment of the correct amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic
Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant
to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of
data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees
subject to Final or Creditable Withholding Taxes.

Under this policy, even without conducting a detailed examination of taxpayer's books and records, if
the computerized/manual matching of sales and purchases/expenses appears to reveal discrepancies,
the same shall be communicated to the concerned taxpayer through the issuance of LN. The LN shall
serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned
taxpayer. Thus, under the RELIEF System, a revenue officer may begin an examination of the taxpayer
even prior to the issuance of an LN or even in the absence of an LOA with the aid of a
computerized/manual matching of taxpayers': documents/records. Accordingly, under the RELIEF
System, the presumption that the tax returns are in accordance with law and are presumed correct since
these are filed under the penalty of perjury27 are easily rebutted and the taxpayer becomes instantly
burdened to explain a purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an
LOA before any investigation or examination of the taxpayer may be conducted. As provided in the RMO
No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the
same presupposes that the revenue officer who issued the same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO
No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handing
assessments against taxpayers'· issued LNs by reconciling various revenue issuances which conflict with
the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and collection of deficiency
taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the
concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR within

One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject
taxpayer shall no longer be entitled to the abatement of interest and penalties after the lapse of the
sixty (60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty
(120)-day period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of
[LOA) to replace the LN. The head of the concerned investigating office shall submit a summary list of
LNs for conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the OACIR-LTS I
ORD for the preparation of the corresponding LAs with the notation "This LA cancels LN_________ No. "

xxxx

V. PROCEDURES

xxxx
B. At the Regional Office/Large Taxpayers Service

xxxx

7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of
LNs for conversion to LAs, to the concerned investigating offices for the encoding of the required
information x x x and for service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from
issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x.
xxxx

16. Effect the service of the above LAs to the concerned taxpayers.28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against
MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also
not converted into an LOA contrary to the above quoted provision. Surprisingly, the CIR did not even
dispute the applicability of the above provision of RMO 32-2005 in the present case which is clear and
unequivocal on the necessity of an LOA for the· assessment proceeding to be valid. Hence, the CTA's
disregard of MEDICARD's right to due process warrant the reversal of the assailed decision and
resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.30
(Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required under the law even if the same was issued by the
CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts
per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's
Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said
program, the BIR may avail of administrative and criminal .remedies, particularly closure, criminal
action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005
requires the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply
swept under the rug, as the CIR would have it. In fact Revenue Memorandum Circular No. 40-2003
considers an LN as a notice of audit or investigation only for the purpose of disqualifying the taxpayer
from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue
officer is specifically required under the NIRC before an examination of a taxpayer may be had while an
LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is
found based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue officer only a period of 10days from
receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due process
demands, as recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue
officer should have properly secured an LOA before proceeding with the further examination and
assessment of the petitioner. Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the
financial books or records being physically kept by MEDICARD was examined. To begin with, Section 6 of
the NIRC requires an authority from the CIR or from his duly authorized representatives before an
examination "of a taxpayer" may be made. The requirement of authorization is therefore not dependent
on whether the taxpayer may be required to physically open his books and financial records but only on
whether a taxpayer is being subject to examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier
and faster. The ease by which the BIR's revenue generating objectives is achieved is no excuse however
for its non-compliance with the statutory requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA is equally needed even under the
BIR's RELIEF System because the rationale of requirement is the same whether or not the CIR conducts a
physical examination of the taxpayer's records: to prevent undue harassment of a taxpayer and level the
playing field between the government' s vast resources for tax assessment, collection and enforcement,
on one hand, and the solitary taxpayer's dual need to prosecute its business while at the same time
responding to the BIR exercise of its statutory powers. The balance between these is achieved by
ensuring that any examination of the taxpayer by the BIR' s revenue officers is properly authorized in the
first place by those to whom the discretion to exercise the power of examination is given by the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside the point because the
issue of their lack of authority was only brought up during the trial of the case. What is crucial is whether
the proceedings that led to the issuance of VAT deficiency assessment against MEDICARD had the prior
approval and authorization from the CIR or her duly authorized representatives. Not having authority to
examine MEDICARD in the first place, the assessment issued by the CIR is inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds
merit in MEDICARD's substantive arguments.
The amounts earmarked and

eventually paid by MEDICARD to

the medical service providers do not

form part of gross receipts.for VAT

purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that
the gross receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent
actually received from members undiminished by any amount paid or payable to the owners/operators
of hospitals, clinics and medical and dental practitioners. MEDICARD explains that its business as an
HMO involves two different although interrelated contracts. One is between a corporate client and
MEDICARD, with the corporate client's employees being considered as MEDICARD members; and the
other is between the health care institutions/healthcare professionals and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare
professionals for the coverage of MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less fixed membership fee. Under its
contract with its corporate clients, MEDICARD expressly provides that 20% of the membership fees per
individual, regardless of the amount involved, already includes the VAT of 10%/20% excluding the
remaining 80o/o because MED ICARD would earmark this latter portion for medical utilization of its
members. Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from medical
services which it actually and directly rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed
care services that are needed by plan holders/members for fixed prepaid membership fees and for a
specified period of time, then MEDICARD is principally engaged in the sale of services. Its VAT base and
corresponding liability is, thus, determined under Section 108(A)32 of the Tax Code, as amended by
Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in
securities whose gross receipts is the amount actually received as contract price without allowing any
deduction from the gross receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this
RR, an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee
actually or constructively received during the taxable period for the services performed or to be
performed for another person, excluding the value-added tax. The compensation for their services
representing their service fee, is presumed to be the total amount received as enrollment fee from their
members plus other charges received.

Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as payments for services rendered,
and advance payments actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of
gross receipts in general.35

According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's
gross receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to
MEDICARD. What applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 16-
2005 and not the modified definition of gross receipts in general under the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation for their
services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the amount it
received as membership fee does NOT actually compensate it but some other person, which in this case
are the medical service providers themselves. It is a well-settled principle of legal hermeneutics that
words of a statute will be interpreted in their natural, plain and ordinary acceptation and signification,
unless it is evident that the legislature intended a technical or special legal meaning to those words. The
Court cannot read the word "presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under
the NIRC does not contain any specific definition.36 Therefore, absent a statutory definition, this Court
has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts is
understood as comprising the entire receipts without any deduction.37 Congress, under Section 108,
could have simply left the term gross receipts similarly undefined and its interpretation subjected to
ordinary acceptation,. Instead of doing so, Congress limited the scope of the term gross receipts for VAT
purposes only to the amount that the taxpayer received for the services it performed or to the amount
it received as advance payment for the services it will render in the future for another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered
are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the
purchaser of healthcare services (its members) and the healthcare providers (the doctors, hospitals and
clinics) for a fee. By enrolling membership with MED ICARD, its members will be able to avail of the pre-
arranged medical services from its accredited healthcare providers without the necessary protocol of
posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics, especially
during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical,
hospital and laboratory services, which depends upon its member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical services
from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the former,
MEDICARD members obviously knew that beyond the agreement to pre-arrange the healthcare needs of
its ·members, MEDICARD would not actually be providing the actual healthcare service. Thus, based on
industry practice, MEDICARD informs its would-be member beforehand that 80% of the amount would
be earmarked for medical utilization and only the remaining 20% comprises its service fee. In the latter
case, MEDICARD's sale of its services is exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that
would extend the definition of gross receipts even to amounts that do not only pertain to the services to
be performed: by another person, other than the taxpayer, but even to amounts that were indisputably
utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute
shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a
construction which renders every word operative is preferred over that which makes some words idle
and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat, that is, we choose
the interpretation which gives effect to the whole of the statute – it’s every word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court adopted the
principal object and purpose object in determining whether the MEDICARD therein is engaged in the
business of insurance and therefore liable for documentary stamp tax. The Court held therein that an
HMO engaged in preventive, diagnostic and curative medical services is not engaged in the business of
an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job
done and paid for; not, except incidentally to these features, the indemnification for cost after .the
services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in this way for the
rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost
when or after it is rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an insurance company is that
HMOs undertake to provide or arrange for the provision of medical services through participating
physicians while insurance companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the value added by the
performance of the service by the taxpayer. It is, thus, this service and the value charged thereof by the
taxpayer that is taxable under the NIRC.

To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT.40 But
the Court's task however is not to weigh these policy considerations but to determine if these
considerations in favor of taxation can even be implied from the statute where the CIR purports to
derive her authority. This Court rules that they cannot because the language of the NIRC is pretty
straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of
taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes
are to be construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly
and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain
meaning of the tax laws. 41 (Citation omitted and emphasis and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the
authority should have been reasonably founded from the language of the statute. That language is
wanting in this case. In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts,
however, will not uphold these authorities' interpretations when dearly absurd, erroneous or
improper.42 The CIR's interpretation of gross receipts in the present case is patently erroneous for lack
of both textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and
management over the funds, the Court does not agree.1âwphi1 On the contrary, it is MEDICARD's act of
earmarking or allocating 80% of the amount it received as membership fee at the time of payment that
weakens the ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD
unequivocally recognizes that its possession of the funds is not in the concept of owner but as a mere
administrator of the same. For this reason, at most, MEDICARD's right in relation to these amounts is a
mere inchoate owner which would ripen into actual ownership if, and only if, there is underutilization of
the membership fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to pay from the
amounts it had allocated as an administrator once its members avail of the medical services of
MEDICARD's healthcare providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD
earmarked, corresponding to 80% of its enrollment fees, and paid to the medical service providers
should form part of its gross receipt for VAT purposes, after having paid the VAT on the amount
comprising the 20%. It is significant to note in this regard that MEDICARD established that upon receipt
of payment of membership fee it actually issued two official receipts, one pertaining to the VAT able
portion, representing compensation for its services, and the other represents the non-vatable portion
pertaining to the amount earmarked for medical utilization.: Therefore, the absence of an actual and
physical segregation of the amounts pertaining to two different kinds · of fees cannot arbitrarily
disqualify MEDICARD from rebutting the presumption under the law and from proving that indeed
services were rendered by its healthcare providers for which it paid the amount it sought to be excluded
from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and violation of
the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the computation of
MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to discuss the rest of the parties'
arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the
CTA en banc grounded as it is on due process violation. The Court likewise rules that for purposes of
determining the VAT liability of an HMO, the amounts earmarked and actually spent for medical
utilization of its members should not be included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The
Decision dated September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax
Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of gross receipts under
Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National Internal
Revenue Code, as amended by Republic Act No. 9337, for purposes of determining its Value-Added Tax
liability, is hereby declared to EXCLUDE the eighty percent (80%) of the amount of the contract price
earmarked as fiduciary funds for the medical utilization of its members. Further, the Value-Added Tax
deficiency assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for
having been issued without a Letter of Authority by the Commissioner of Internal Revenue or his duly
authorized representatives.

SO ORDERED.
G.R. No. 166829 April 19 2010

TFS, INCORPORATED, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

DEL CASTILLO, J.:

Only in highly meritorious cases, as in the instant case, may the rules for perfecting an appeal be
brushed aside.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the
November 18, 20041 Resolution of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 29 which
dismissed petitioner’s Petition for Review for having been filed out of time. Also assailed is the January
24, 20052 Resolution denying the motion for reconsideration.

Factual Antecedents
Petitioner TFS, Incorporated is a duly organized domestic corporation engaged in the pawnshop
business. On January 15, 2002, petitioner received a Preliminary Assessment Notice (PAN)3 for
deficiency value added tax (VAT), expanded withholding tax (EWT), and compromise penalty in the
amounts of ₱11,764,108.74, ₱183,898.02 and ₱25,000.00, respectively, for the taxable year 1998.
Insisting that there was no basis for the issuance of PAN, petitioner through a letter4 dated January 28,
2002 requested the Bureau of Internal Revenue (BIR) to withdraw and set aside the assessments.

In a letter-reply5 dated February 7, 2002, respondent Commissioner of Internal Revenue (CIR) informed
petitioner that a Final Assessment Notice (FAN)6 was issued on January 25, 2002, and that petitioner
had until February 22, 2002 within which to file a protest letter.

On February 20, 2002, petitioner protested the FAN in a letter7 dated February 19, 2002.

There being no action taken by the CIR, petitioner filed a Petition for Review8 with the CTA on
September 11, 2002, docketed as CTA Case No. 6535.

During trial, petitioner offered to compromise and to settle the assessment for deficiency EWT with the
BIR. Hence, on September 24, 2003, it filed a Manifestation and Motion withdrawing its appeal on the
deficiency EWT, leaving only the issue of VAT on pawnshops to be threshed out. Since no opposition was
made by the CIR to the Motion, the same was granted by the CTA on November 4, 2003.

Ruling of the Court of the Tax Appeals

On April 29, 2004, the CTA rendered a Decision9 upholding the assessment issued against petitioner in
the amount of ₱11,905,696.32, representing deficiency VAT for the year 1998, inclusive of 25%
surcharge and 20% deficiency interest, plus 20% delinquency interest from February 25, 2002 until full
payment, pursuant to Sections 248 and 249(B) of the National Internal Revenue Code of 1997 (NIRC).
The CTA ruled that pawnshops are subject to VAT under Section 108(A) of the NIRC as they are engaged
in the sale of services for a fee, remuneration or consideration.10
Aggrieved, petitioner moved for reconsideration11 but the motion was denied by the CTA in its
Resolution dated July 20, 2004,12 which was received by petitioner on July 30, 2004.

Ruling of the Court of Appeals

On August 16, 2004, petitioner filed before the Court of Appeals (CA) a Motion for Extension of Time to
File Petition for Review.13 On August 24, 2004, it filed a Petition for Review14 but it was dismissed by
the CA in its Resolution15 dated August 31, 2004, for lack of jurisdiction in view of the enactment of
Republic Act No. 9282 (RA 9282).16

Ruling of the Court of Tax Appeals En Banc

Realizing its error, petitioner filed a Petition for Review17 with the CTA En Banc on September 16, 2004.
The petition, however, was dismissed for having been filed out of time per Resolution dated November
18, 2004. Petitioner filed a Motion for Reconsideration but it was denied in a Resolution dated January
24, 2005.

Hence, this petition.

Issues

In its Memorandum,18 petitioner interposes the following issues:

WHETHER THE HONORABLE COURT OF TAX APPEALS EN BANC SHOULD HAVE GIVEN DUE COURSE TO
THE PETITION FOR REVIEW AND NOT STRICTLY APPLIED THE TECHNICAL RULES OF PROCEDURE TO THE
DETRIMENT OF JUSTICE.

WHETHER OR NOT PETITIONER IS SUBJECT TO THE 10% VAT.19

Petitioner’s Arguments

Petitioner admits that it failed to timely file its Petition for Review with the proper court (CTA). However,
it attributes the procedural lapse to the inadvertence or honest oversight of its counsel, who believed
that at the time the petition was filed on August 24, 2004, the CA still had jurisdiction since the rules and
regulations to implement the newly enacted RA 9282 had not yet been issued and the membership of
the CTA En Banc was not complete. In view of these circumstances, petitioner implores us to reverse the
dismissal of its petition and consider the timely filing of its petition with the CA, which previously
exercised jurisdiction over appeals from decisions/resolutions of the CTA, as substantial compliance with
the then recently enacted RA 9282.

Petitioner also insists that the substantive merit of its case outweighs the procedural infirmity it
committed. It claims that the deficiency VAT assessment issued by the BIR has no legal basis because
pawnshops are not subject to VAT as they are not included in the enumeration of services under Section
108(A) of the NIRC.

Respondent’s Arguments

The CIR, on the other hand, maintains that since the petition was filed with the CTA beyond the
reglementary period, the Decision had already attained finality and can no longer be opened for review.
As to the issue of VAT on pawnshops, he opines that petitioner’s liability is a matter of law; and in the
absence of any provision providing for a tax exemption, petitioner’s pawnshop business is subject to
VAT.

Our Ruling

The petition is meritorious.

Jurisdiction to review decisions or resolutions issued by the Divisions of the CTA is no longer with the CA
but with the CTA En Banc. This rule is embodied in Section 11 of RA 9282, which provides that:
SECTION 11. Section 18 of the same Act is hereby amended as follows:

SEC. 18. Appeal to the Court of Tax Appeals En Banc. – No civil proceeding involving matters arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been previously filed with
the CTA and disposed of in accordance with the provisions of this Act.

A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or
new trial, may file a petition for review with the CTA en banc. (Emphasis supplied)

Procedural rules may be relaxed in the interest of substantial justice

It is settled that an appeal must be perfected within the reglementary period provided by law;
otherwise, the decision becomes final and executory.20 However, as in all cases, there are exceptions to
the strict application of the rules for perfecting an appeal.21

We are aware of our rulings in Mactan Cebu International Airport Authority v. Mangubat22 and in
Alfonso v. Sps. Andres,23 wherein we excused the late filing of the notices of appeal because at the time
the said notices of appeal were filed, the new rules24 applicable therein had just been recently issued.
We noted that judges and lawyers need time to familiarize themselves with recent rules.

However, in Cuevas v. Bais Steel Corporation25 we found that the relaxation of rules was unwarranted
because the delay incurred therein was inexcusable. The subject SC Circular 39-98 therein took effect on
September 1, 1998, but the petitioners therein filed their petition for certiorari five months after the
circular took effect.

In the instant case, RA 9282 took effect on April 23, 2004, while petitioner

filed its Petition for Review on Certiorari with the CA on August 24, 2004, or four months after the
effectivity of the law. By then, petitioner’s counsel should have been aware of and familiar with the
changes introduced by RA 9282. Thus, we find petitioner’s argument on the newness of RA 9282 a bit of
a stretch.

Petitioner likewise cannot validly claim that its erroneous filing of the petition with the CA was justified
by the absence of the CTA rules and regulations and the incomplete membership of the CTA En Banc as
these did not defer the effectivity26 and implementation of RA 9282. In fact, under Section 2 of RA
9282,27 the presence of four justices already constitutes a quorum for En Banc sessions and the
affirmative votes of four members of the CTA En Banc are sufficient to render judgment.28 Thus, to us,
the petitioner’s excuse of "inadvertence or honest oversight of counsel" deserves scant consideration.

However, we will overlook this procedural lapse in the interest of substantial justice. Although a client is
bound by the acts of his counsel, including the latter’s mistakes and negligence, a departure from this
rule is warranted where such mistake or neglect would result in serious injustice to the client.29
Procedural rules may thus be relaxed for persuasive reasons to relieve a litigant of an injustice not
commensurate with his failure to comply with the prescribed procedure.30 Such is the situation in this
case.

Imposition of VAT on pawnshops for the tax years 1996 to 2002 was deferred

Petitioner disputes the assessment made by the BIR for VAT deficiency in the amount of ₱11,905,696.32
for taxable year 1998 on the ground that pawnshops are not included in the coverage of VAT.

We agree.

In First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue,31 we ruled that:

x x x 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. (Emphasis in the original text)1avvphi1
Guided by the foregoing, petitioner is not liable for VAT for the year 1998. Consequently, the VAT
deficiency assessment issued by the BIR against petitioner has no legal basis and must therefore be
cancelled. In the same vein, the imposition of surcharge and interest must be deleted.32

In fine, although strict compliance with the rules for perfecting an appeal is indispensable for the
prevention of needless delays and for the orderly and expeditious dispatch of judicial business, strong
compelling reasons such as serving the ends of justice and preventing a grave miscarriage may
nevertheless warrant the suspension of the rules.33 In the instant case, we are constrained to disregard
procedural rules because we cannot in conscience allow the government to collect deficiency VAT from
petitioner considering that the government has no right at all to collect or to receive the same. Besides,
dismissing this case on a mere technicality would lead to the unjust enrichment of the government at
the expense of petitioner, which we cannot permit. Technicalities should never be used as a shield to
perpetrate or commit an injustice.

WHEREFORE, the Petition is GRANTED. The assailed November 18, 2004 Resolution of the Court of Tax
Appeals En Banc in C.T.A. EB No. 29 which dismissed petitioner’s Petition for Review for having been
filed out of time, and the January 24, 2005 Resolution which denied the motion for reconsideration, are
hereby REVERSED and SET ASIDE. The assessment for deficiency Value Added Tax for the taxable year
1998, including surcharges, deficiency interest and delinquency interest, are hereby CANCELLED and SET
ASIDE.

SO ORDERED.
G.R. No. 183505 February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION, Respondents.

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead to
absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of
the origin and history of the law,1 the deliberations during the enactment,2 as well as prior laws on the
same subject matter3 to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA)
No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the
Court of Tax Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First
Asia) are domestic corporations duly organized and existing under the laws of the Republic of the
Philippines. Both are engaged in the business of operating cinema houses, among others.7
CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment
Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of
₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated December
15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT
deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No.
7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia protested
the PAN in a letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was
protested by First Asia in a letter dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay
the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable
year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN through a letter dated April 22,
2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested
the same in a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the
amount of ₱35,840,895.78 for taxable year 2000.21

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case
was docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of
₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter
dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First
Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the taxable
year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia
protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the
latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the
amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002 and 2003,
respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No.
7272.26

Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and
First Asia.27

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA
Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority
shareholder of First Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for
decision on the sole issue of whether gross receipts derived from admission tickets by cinema/theater
operators or proprietors are subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for
Review. Resorting to the language used and the legislative history of the law, it ruled that the activity of
showing cinematographic films is not a service covered by VAT under the National Internal Revenue
Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise
known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint
Resolution Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the
Theater and Local Film Industry Consistent with the State’s Policy to Have a Viable, Sustainable and
Competitive Theater and Film Industry as One of its Partners in National Development,"30 the CTA First
Division held that the House of Representatives resolved that there should only be one business tax
applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and
provinces under the LGC of 1991. Further, it held that consistent with the State’s policy to have a viable,
sustainable and competitive theater and film industry, the national government should be precluded
from imposing its own business tax in addition to that already imposed and collected by local
government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No.
28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force
and effect because it failed to comply with the procedural due process for tax issuances under RMC No.
20-86.31 Thus, it disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent’s
Decisions denying petitioners’ protests against deficiency value-added taxes are hereby REVERSED.
Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02
are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution
dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En
Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s Motion for
Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of
what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures,
films or movies by cinema operators or proprietors is not among the enumerated activities
contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/
theater operators or proprietors from admission tickets in showing motion pictures, film or movie are
not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is
instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001,
the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure
to comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses
from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE
OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT UNDER
SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF RULES
OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN, STILL
THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS
PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’ SERVICES FROM THE
VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject
to the amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA erred
in applying the rules on statutory construction and in using extrinsic aids in interpreting Section 108
because the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by
cinema operators or proprietors to the paying public, being a sale of service, is subject to VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows
that the gross receipts of proprietors or operators of cinemas/theaters derived from public admission
are not among the services subject to VAT. Respondents insist that gross receipts from cinema/theater
admission tickets were never intended to be subject to any tax imposed by the national government.
According to them, the absence of gross receipts from cinema/theater admission tickets from the list of
services which are subject to the national amusement tax under Section 125 of the NIRC of 1997
reinforces this legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the
deficiency assessments were based is an unpublished administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land, air and water relative to their transport of goods or cargoes; services of
franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. The
phrase "sale or exchange of services" shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like property or right;

xxxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television
time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or
exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services," and
"shall likewise include," indicate that the enumeration is by way of example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs."
This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out
by the CTA En Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in
public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a
contract by which one owning such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price, referred to as rent
(Black’s Law Dictionary, 6th ed., p. 889). x x x40
Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether
such activity falls under the phrase "similar services." The intent of the legislature must therefore be
ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of
amusement, including cockpits, race tracks, and cabaret.42 In the case of theaters or cinematographs,
the taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such
theaters or cinematographs before the gross receipts were divided between the proprietors, lessees, or
operators of the theaters or cinematographs and the distributors of the cinematographic films. Section
1143 of the Local Tax Code,44 however, amended this provision by transferring the power to impose
amusement tax45 on admission from theaters, cinematographs, concert halls, circuses and other places
of amusements exclusively to the local government. Thus, when the NIRC of 197746 was enacted, the
national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day
and night clubs, Jai-Alai and race tracks.47

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of 1977
by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage
tax on certain services. It imposed VAT on sales of services under Section 102 thereof, which provides:

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

xxxx

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

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. — If the tax is billed as a
separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed separately or
is billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts
(including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from
the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that
the power to impose amusement tax on gross receipts derived from admission tickets was exclusive
with the local government units and that only the gross receipts of amusement places derived from
sources other than from admission tickets were subject to amusement tax under the NIRC of 1977, as
amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local governments
to the exclusion of the national government.
xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value added tax law
under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax Code.
Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of
amusement rests exclusively on the local government, to the exclusion of the national government.
Since the Bureau of Internal Revenue is an agency of the national government, then it follows that it has
no legal mandate to levy amusement tax on admission receipts in the said places of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National Internal
Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement
taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4,
1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources other than
from admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the Tax
Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts derived
from admission tickets shall be levied and collected by the city government pursuant to Section 23 of
Presidential Decree No. 231, as amended x x x" or by the provincial government, pursuant to Section 11
of P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to
impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%)
of the gross receipts from admission fees under Section 140 thereof.50 In the case of theaters or
cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid
to the local government before the gross receipts are divided between said proprietors, lessees, or
operators and the distributors of the cinematographic films. However, the provision in the Local Tax
Code expressly excluding the national government from collecting tax from the proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses and other places of amusements was no
longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration.
Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 199751 was signed
into law. Several amendments52 were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic
films are subject to VAT. While persons subject to amusement tax53 under the NIRC of 1997 are exempt
from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or
proprietors has always been considered as a form of entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to the local
government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors,
lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax
on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC
from the coverage of VAT.1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to
impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and
other places of amusements.
(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax
under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax.
This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely
because the VAT law was intended to replace the percentage tax on certain services. The mere fact that
they are taxed by the local government unit and not by the national government is immaterial. The Local
Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat cinema/theater
houses as a separate class. No distinction must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or

proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax imposed
by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as
persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of
1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly
or lead to absurd results.56 Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to
maintain the general public's trust and confidence in the Government this power must be used justly
and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax
under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code of 1939, computed on the amount paid for admission. With the enactment of the Local Tax Code
under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross
receipts from admission of persons to cinema/theater and other places of amusement had, thereafter,
been transferred to the provincial government, to the exclusion of the national or municipal
government (Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive
power of the provincial government to impose amusement tax, had also been repealed and/or deleted
by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into
law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory
prohibition on the national government to impose business tax on gross receipts from admission of
persons to places of amusement, led the way to the valid imposition of the VAT pursuant to Section 102
(now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which
was implemented beginning January 1, 1996.58 (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the
gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal
of the prohibition under the Local Tax Code did not grant nor restore to the national government the
power to impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the
coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor
can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously.59 As it is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the
gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that
RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with,
the law they seek to apply and implement.60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an
exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against
the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him.61 The
reason is obvious: it is both illogical and impractical to determine who are exempted without first
determining who are covered by the provision.62 Thus, unless a statute imposes a tax clearly, expressly
and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be
presumed.63 In fact, in case of doubt, tax laws must be construed strictly against the government and in
favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing
motion pictures, films or movies are not subject to value-added tax under Section 108 of the National
Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for
reconsideration are AFFIRMED.

SO ORDERED.

G.R. No. 193007 July 19, 2011

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

vs.

THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of
Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National
Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand, claims
that she served as Assistant Secretary of the Department of Trade and Industry and consultant of the
Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s tax," not a sale
of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT
was never factored into the formula for computing toll fees, its imposition would violate the non-
impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation
of the VAT. The Court required the government, represented by respondents Cesar V. Purisima,
Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue,
to comment on the petition within 10 days from notice.2 Later, the Court issued another resolution
treating the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including
tollway operations, except where the law provides otherwise; that the Court should seek the meaning
and intent of the law from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause cannot limit the State’s
sovereign taxing power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing
toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights
of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on
top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on
motorists using the tollways.

In their reply6 to the government’s comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the
BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow
account. But this would be illegal since only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional
input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be
implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the
Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax
on services; b) will impair the tollway operators’ right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and cannot be implemented.

The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than
one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The
government has sought reconsideration of the Court’s resolution,7 however, arguing that petitioners’
allegations clearly made out a case for declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule
65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain,
speedy, and adequate remedy in the ordinary course of law against the BIR action in the form of an
appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for prohibition if the case
has far-reaching implications and raises questions that need to be resolved for the public good.8 The
Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not
only on the more than half a million motorists who use the tollways everyday, but more so on the
government’s effort to raise revenue for funding various projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could
cause more mischief both to the tax-paying public and the government. A belated declaration of nullity
of the BIR action would make any attempt to refund to the motorists what they paid an administrative
nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample
power to waive such technical requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of locus standi which is a mere
procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and
collected, according to Section 108, on the gross receipts derived from the sale or exchange of services
as well as from the use or lease of properties. The third paragraph of Section 108 defines "sale or
exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code and
non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines
for a fee, including those specified in the list. The enumeration of affected services is not exclusive.11 By
qualifying "services" with the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to illustrate how pervasive and
broad is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that
can be imagined as a form of "service" rendered for a fee should be deemed included unless some
provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render. Essentially,
tollway operators construct, maintain, and operate expressways, also called tollways, at the operators’
expense. Tollways serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving.
In consideration for constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the
tollway facilities over which the operator enjoys private proprietary rights12 that its contract and the
law recognize. In this sense, the tollway operator is no different from the following service providers
under Section 108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and
skills.

And not only do tollway operators come under the broad term "all kinds of services," they also come
under the specific class described in Section 108 as "all other franchise grantees" who are subject to
VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than ₱10 million and gas
and water utilities) that Section 11913 spares from the payment of VAT. The word "franchise" broadly
covers government grants of a special right to do an act or series of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under
Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the
"franchise grantees" it speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between franchises granted by Congress and
franchises granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute
as much a legislative franchise as though the grant had been made by Congress itself.15 The term
"franchise" has been broadly construed as referring, not only to authorizations that Congress directly
issues in the form of a special law, but also to those granted by administrative agencies to which the
power to grant franchises has been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise grantees." The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the Philippine National Construction Company,
the former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers
under P.D. 1112.17 The franchise in this case is evidenced by a "Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators excludes such
services from the term "sale of services" under Section 108 of the Code. But, again, nothing in Section
108 supports this contention. The reverse is true. In specifically including by way of example electric
utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section
108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or service is a
franchise.19

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately determined by the language
of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first
be sought "in the words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and without resorting
to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount to
taxing a tax.21 Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The
term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the Philippines.

x x x The operation by the government of a tollway does not change the character of the road as one for
public use. Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road through the
toll fees they pay upon using the road. The tollway system is even a more efficient and equitable manner
of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as "one
intended for public use." Even if the government collects toll fees, the road is still "intended for public
use" if anyone can use the road under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed user’s
tax. This means taxing those among the public who actually use a public facility instead of taxing all the
public including those who never use the particular public facility. A user’s tax is more equitable – a
principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City could
sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national government, the Court held that the
City could not proceed with the auction sale. MIAA forms part of the national government although not
integrated in the department framework."24 Thus, its airport lands and buildings are properties of
public dominion beyond the commerce of man under Article 420(1)25 of the Civil Code and could not be
sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a
rule that tollway fees are user’s tax, but to make the point that airport lands and buildings are
properties of public dominion and that the collection of terminal fees for their use does not make them
private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it spends for the roadways. This is not the
case here. What the government seeks to tax here are fees collected from tollways that are constructed,
maintained, and operated by private tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for expressways.26 Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A
tax is imposed under the taxing power of the government principally for the purpose of raising revenues
to fund public expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of
the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for
the use of public facilities, therefore, they are not government exactions that can be properly treated as
a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as
an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of
the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but
merely the burden of the VAT.29

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to
be a tax30 and simply becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the seller of services, who in this case is
the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll
fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one
has to pay in order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf
of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the
alleged diminution in return of investments that may result from the VAT imposition. She has no interest
at all in the profits to be earned under the TOAs. The interest in and right to recover investments solely
belongs to the private tollway investors.

Besides, her allegation that the private investors’ rate of recovery will be adversely affected by imposing
VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation
in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The
Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order
to claim input VAT, the name, address and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT – by
rounding off the toll rate and putting any excess collection in an escrow account – is also illegal, while
the alternative of giving "change" to thousands of motorists in order to meet the exact toll rate would
be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively
feasible.33

Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system
should be capable of being effectively administered and enforced with the least inconvenience to the
taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired."34 Thus, even if the imposition
of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,35 the facts pertaining to the matter are not
sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on
tollway operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on
the matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section
111(A)36 of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning
inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with
tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll
fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional
input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the
2% transitional input VAT belongs to the tollway operators who have not questioned the circular’s
validity. They are thus the ones who have a right to challenge the circular in a direct and proper action
brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT
law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code
clearly states that services of all other franchise grantees are subject to VAT, except as may be provided
under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to
franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions
under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege,
then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be mistaken.37 But as the law is written,
no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law
as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative
of Congress. The Court’s role is to merely uphold this legislative policy, as reflected first and foremost in
the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no discretion on the matter
but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion in
matters pertaining to the implementation and execution of tax laws. Consequently, the executive is
more properly suited to deal with the immediate and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s
temporary restraining order dated August 13, 2010.

SO ORDERED
G.R. No. 226556, July 03, 2019

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, PETITIONER, v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the Decision2 promulgated on 17 May 2016 as well as the Resolution3
promulgated on 12 August 2016 by the Court of Tax Appeals En Banc (CTA EB) in CTA EB Case No. 1282.
The CTA EB affirmed the Decision4 dated 2 December 2014 and Resolution5 dated 25 February 2015 of
the Third Division of the Court of Tax Appeals (CTA Third Division) in CTA Case No. 8475. The CTA Third
Division found petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) liable to
pay the amount of P9,566,062,571.44 as deficiency value-added tax (VAT) for the taxable year 2008,
inclusive of the deficiency interest and delinquency interest.

The Facts

PSALM, a government-owned and controlled corporation created under Republic Act No. (RA) 9136 or
the Electric Power Industry Reform Act of 2001 (EPIRA),6 is mandated to manage the orderly sale,
disposition, and privatization of the National Power Corporation (NPC) generation assets, real estate and
other disposable assets, and Independent Power Producer contracts with the objective of liquidating all
NPC financial obligations and stranded contract costs in an optimal manner.7
On 9 June 2011, the Bureau of Internal Revenue (BIR) issued a Final Assessment Notice (FAN) covered by
Assessment No. VT-08-000728 alleging that, for taxable year ending 31 December 2008, PSALM is liable
to pay a deficiency VAT amounting to P10,103,158,715.06, inclusive of penalties and interests,
computed as follows:cralawred

Taxable Sales per VAT Returns

Add: Adjustments

Proceeds from Sales of Generating Asset

P53,859,322,483.00

Proceeds from Lease of Naga Complex

172,096,188.00

Collection of Income

9,183,364.00

Collection of receivables

1,148,257.00

54,041,750,292.00

Total Proceeds to be subjected to VAT

P54,041,750,292.00

Output Tax

P6,485,010,035.04

Less: Creditable Input Tax

Input Tax Carried Over from Previous Quarter

P30,364,192.07

Input Tax Claimed per VAT Return

14,932,013.06

Total Input Tax per VAT Return

45,296,205.13

Less: Excess Input Tax Carried Over to Succeeding Period

45,296,205.13

Value Added Tax

P6,485,010,035.34

Less: VAT Payments

________________

Deficiency Value Added Tax

P6,485,010,035.34

Add:

Increments
Interest

P3,618,098,680.02

Penalty

50,000.00

3,618,148,680.02

Total Amount Due

P10,103,158,715.06

On 7 July 2011, PSALM filed its administrative protest against the FAN, alleging that the privatization of
NPC assets is an original mandate of PSALM and not subject to VAT. On 5 September 2011, PSALM filed
its supplemental protest reiterating its substantive defenses.

On 19 March 2012, respondent Commissioner of Internal Revenue (CIR) issued its Final Decision on
Disputed Assessment,9 which denied PSALM's protest for lack of factual and legal bases. The CIR held
that the sale of electricity is subject to VAT under RA 933710 and the real properties sold by PSALM are
regarded as real properties used in trade or business.

Thus, on 18 April 2012, PSALM filed a petition for review before the CTA.

The Ruling of the CTA Third Division

In a Decision dated 2 December 2014, the CTA Third Division partially granted PSALM's petition, allowing
PSALM to claim input tax credits, and holding that PSALM is not liable to pay the compromise penalty of
P50,000.00.
However, the CTA Third Division ruled that PSALM is liable to pay the deficiency VAT, because the
enactment of RA 9337 superseded BIR Ruling No. 020-2002, on which PSALM relied for its VAT
exemption. The CTA Third Division found that the sale of generating assets of PSALM - the Masinloc,
Ambuklao-Binga and Pantabangan power plants - fall under "all kinds of goods and properties" subject
to VAT under Section 106 of the National Internal Revenue Code of 1997 (NIRC). The CTA Third Division
thereafter modified the computation of the penalty interest and computed it from the last day
prescribed by law for filing a return. Thus, the CTA Third Division computed PSALM's liability as
follows:cralawred

Output Tax

P6,485,010,035.04

Less: Credible Input Tax

Input tax carried over from previous Quarter

P30,364,192.07

Input tax claimed per VAT Return

14,932,013.06

45,296,205.13

Value Added Tax

P6,439,713,829.91

Less: VAT Payments

Deficiency Value Added Tax

P6,439,713,829.91
Add:

Increments

Interest (01-25-2009 to 06-30-2011)

P3,126,348,741.53

Compromise Penalty

P3,126,348,741.53

Total Deficiency VAT

P9,566,062,571.44

Thus, the dispositive portion of its Decision reads:cralawred

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the assessments issued by respondent against petitioner covering taxable year 2008 for
deficiency value-added tax are UPHELD but in the MODIFIED AMOUNT of NINE BILLION FIVE HUNDRED
SIXTY SIX MILLION SIXTY TWO THOUSAND FIVE HUNDRED SEVENTY ONE and 44/100 PESOS
(P9,566,062,571.44), inclusive of twenty percent (20%) interest imposed upon Section 249(A) of the Tax
Code, as amended.

In addition, petitioner is hereby ORDERED TO PAY:cralawred

a)

Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of P6,439,713,829.91
computed from June 30, 2011 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997;
b)

Delinquency interest at the rate of 20% per annum on the basic deficiency VAT of P6,439,713,829.91
[computed from] June 30, 2011 until full payment thereof pursuant to Section 249(C)(3) of the NIRC of
1997, as amended; an

c)

Delinquency interest at the rate of 20% per annum on the deficiency interest which have accrued as
afore-stated in (a) computed from June 30, 2011 until full payment thereof pursuant to Section 249(C)
(3) of the NIRC of 1997, as amended.

SO ORDERED.11

chanRoblesvirtualLaw1ibrary

PSALM filed a motion for partial reconsideration, which was denied for lack of merit by the CTA Third
Division in its 25 February 2015 Resolution. Hence, PSALM appealed to the CTA EB.

The Ruling of the CTA En Banc

In a Decision dated 17 May 2016, the CTA EB affirmed the decision of the CTA Third Division and held
that PSALM is subject to VAT for its sale of generating assets, lease of Naga Complex, and collection of
income and receivables, because these were done in the course of trade or business, and RA 9337
placed the electric power industry under the VAT system.

Thus, the dispositive portion of the CTA EB decision reads:cralawred

WHEREFORE premises considered, the petition is DENIED for lack of merit. The Decision of the Third
Division of this Court in CTA Case No. 8475, promulgated on December 2, 2014 and its Resolution,
promulgated on February 25, 2015, are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.12
chanRoblesvirtualLaw1ibrary

In a Dissenting Opinion, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) opined that the
assessment issued by the CIR against PSALM should be cancelled, insofar as it relates to the proceeds
from sales of generating assets and from collection of income and receivables, because: (1) PSALM
relied in good faith on BIR Ruling No. 020-02 dated 13 May 2002 declaring that the disposition or sale of
assets as a consequence of PSALM's mandate is not subject to VAT; and (2) the collection of receivables
is not in the nature of sale, barter, exchange, lease of goods or properties, performance of service, and
importation of goods, so as to fall under a transaction subject to VAT under Section 105 of the NIRC.

However, Justice Del Rosario opined that the lease of Naga Complex should be excluded from the
coverage of BIR Ruling No. 020-02, absent any showing that the property involved is among those
transferred from NPC to PSALM. Also, he opined that the deficiency interest may not be imposed on the
deficiency VAT assessed against PSALM, because deficiency interest may be imposed only on income
tax, donor's tax and estate tax, under the NIRC.

In a Concurring and Dissenting Opinion, Associate Justice Erlinda P. Uy concurred with the majority
opinion that PSALM is liable to pay VAT, but dissented as to the imposition of the deficiency interest,
reasoning out that deficiency interest should be imposed only in cases of deficiency income tax, donor's
tax and estate tax.

On 12 August 2016, the CTA EB denied the motion for reconsideration filed by PSALM, due to lack of
merit. Hence, PSALM filed the present petition before the Court.

The Issues

PSALM raises the following issues for resolution:cralawred

WHETHER PSALM'S PRIVATIZATION ACTIVITIES ARE SUBJECT TO VAT[;]

WHETHER PSALM IS LIABLE FOR DEFICIENCY VAT FOR TRANSACTIONS INCIDENTAL TO ITS
PRIVATIZATION ACTIVITIES[;] [and]

WHETHER PSALM IS LIABLE FOR DEFICIENCY VAT FOR RECEIVABLES NOT ARISING FROM SALE OF GOODS
OR SERVICES[.]13

The Ruling of the Court

We find merit in the petition.

The relevant provisions of the NIRC, as amended, state:cralawred

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

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act
7716.

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.

xxxx
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:cralawred

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 1/2%).

The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire another domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities; telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under section 119 of this Code,
and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity,
and bonding companies; and similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. (Emphasis supplied)
The issue of whether the sale of power plants by PSALM is subject to VAT and the arguments of both
parties in this case have been passed upon and settled in G.R. No. 198146 (Power Sector Assets and
Liabilities Management Corporation v. Commissioner on Internal Revenue),14 where the Court
ruled:cralawred

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition,
and privatization of the NPC generation assets, real estate and other disposable assets, and IPP's
contracts with the objective of liquidating all NPC's financial obligations and stranded contract costs in
an optimal manner.

PSALM asserts that the privatization of NPC's assets, such as the sale of the Pantabangan-Masiway and
Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the
course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020-02, that PSALM's sale of
assets is not conducted in pursuit of any commercial or profitable activity as to fall within the ambit of a
VAT-able transaction under Sections 105 and 106 of the NIRC. The pertinent portion of the ruling
adverted to states:cralawred

2. Privatization of assets by PSALM is not subject to VAT

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods, is
collected from any person, who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, which tax shall be paid by the seller or transferor.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial
activity, including transactions incidental thereto.

Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure the orderly
sale or disposition of the property and thereafter to liquidate the outstanding loans and obligations of
NPC, utilizing the proceeds from sales and other property contributed to it, including the proceeds from
the Universal Charge, and not conducted in pursuit of any commercial or profitable activity, including
transactions incidental thereto, the same will be considered an isolated transaction, which will therefore
not be subject to VAT. (BIR Ruling No. 113-98 dated July 23, 1998)
On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13 of
Republic Act No. 6395 (RA 6395) was expressly repealed by Section 24 of Republic Act No. 9337 (RA
9337), which reads:cralawred

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:cralawred

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power Corporation
(NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sale of generated
power by generation companies; and (C) All other laws, acts, decrees, executive orders, issuances and
rules and regulations or parts thereof which are contrary to and inconsistent with any provisions of this
Act are hereby repealed, amended or modified accordingly.

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No. 020-
02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR avers
that prior to the sale, NPC still owned the power plants and not PSALM, which is just considered as the
trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-interest of its power
plants should be subject to the 10% VAT beginning 1 November 2005 and 12% VAT beginning 1 February
2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a
successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. Under its charter, NPC is
mandated to "undertake the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on
a nationwide basis." With the passage of the EPIRA law which restructured the electric power industry
into generation, transmission, distribution, and supply sectors, the NPC is now primarily mandated to
perform missionary electrification function through the Small Power Utilities Group (SPUG) and is
responsible for providing power generation and associated power delivery systems in areas that are not
connected to the transmission system. On the other hand, PSALM, a government-owned and -controlled
corporation, was created under the EPIRA law to manage the orderly sale and privatization of NPC's
assets with the objective of liquidating all of NPC's financial obligations in an optimal manner. Clearly,
NPC and PSALM have different functions. Since PSALM is not a successor-in-interest of NPC, the repeal
by RA 9337 of NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is
not "in the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not
subject to VAT. The sale of the power plants is not in pursuit of a commercial or economic activity but a
governmental function mandated by law to privatize NPC generation assets. PSALM was created
primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal manner. The
purpose and objective of PSALM are explicitly stated in Section 50 of the EPIRA law, x x x.

xxxx

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by PSALM is
not "in the course of trade or business" but purely for the specific purpose of privatizing NPC assets in
order to liquidate all NPC financial obligations. PSALM is tasked to sell and privatize the NPC assets
within the term of its existence. The EPIRA law even requires PSALM to submit a plan for the
endorsement by the Joint Congressional Power Commission and the approval of the President of the
total privatization of the NPC assets and IPP contracts. Section 47 of the EPIRA law provides:cralawred

SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real estate, and other
disposable assets as well as IPP contracts of NPC shall be privatized in accordance with this Act. Within
six (6) months from the effectivity of this Act, the PSALM Corp. shall submit a plan for the endorsement
by the Joint Congressional Power Commission and the approval of the President of the Philippines, on
the total privatization of the generation assets, real estate, other disposable assets as well as existing IPP
contracts of NPC and thereafter, implement the same, in accordance with the following guidelines,
except as provided for in Paragraph (f) herein:cralawred

(a) The privatization value to the National Government of the NPC generation assets, real estate, other
disposable assets as well as IPP contracts shall be optimized;

(b) The participation by Filipino citizens and corporations in the purchase of NPC assets shall be
encouraged.
In the case of foreign investors, at least seventy-five percent (75%) of the funds used to acquire NPC-
generation assets and IPP contracts shall be inwardly remitted and registered with the Bangko Sentral ng
Pilipinas;

(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related assets and assigned
liabilities, if any, shall be grouped in a manner which shall promote the viability of the resulting
generation companies (gencos), ensure economic efficiency, encourage competition, foster reasonable
electricity rates and create market appeal to optimize returns to the government from the sale and
disposition of such assets in a manner consistent with the objectives of this Act. In the grouping of the
generation assets and IPP contracts of NPC, the following criteria shall be considered:cralawred

(1) A sufficient scale of operations and balance sheet strength to promote the financial viability of the
restructured units;

(2) Broad geographical groupings to ensure efficiency of operations but without the formation of
regional companies or consolidation of market power;

(3) Portfolio of plants and IPP contracts to achieve management and operational synergy without
dominating any part of the market or the load curve; and

(4) Such other factors as may be deemed beneficial to the best interest of the National Government
while ensuring attractiveness to potential investors.

(d) All assets of NPC shall be sold in open and transparent manner through public bidding, and the same
shall apply to the disposition of IPP contracts;

(e) In cases of transfer of possession, control, operation or privatization of multi-purpose hydro facilities,
safeguards shall be prescribed to ensure that the national government may direct water usage in cases
of shortage to protect potable water, irrigation, and all other requirements imbued with public interest;
(f) The Agus and Pulangi complexes in Mindanao shall be excluded from among the generation
companies that will be initially privatized. Their ownership shall be transferred to the PSALM Corp. and
both shall continue to be operated by the NPC. Said complexes may be privatized not earlier than ten
(10) years from the effectivity of this Act, and, except for Agus III, shall not be subject to Build-Operate-
Transfer (B-O-T), Build-Rehabilitate-Operate- Transfer (B-R-O-T) and other variations thereof pursuant to
Republic Act No. 6957, as amended by Republic Act No. 7718. The privatization of Agus and Pulangi
complexes shall be left to the discretion of PSALM Corp. in consultation with Congress;

(g) The steamfield assets and generating plants of each geothermal complex shall not be sold separately.
They shall be combined and each geothermal complex shall be sold as one package through public
bidding. The geothermal complexes covered by this requirement include, but are not limited to, Tiwi-
Makban, Leyte A and B (Tongonan), Palinpinon, and Mt. Apo;

(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall be transferred to
the PSALM Corporation;

(i) Not later than three (3) years from the effectivity of this Act, and in no case later than the initial
implementation of open access, at least seventy percent (70%) of the total capacity of generating assets
of NPC and of the total capacity of the power plants under contract with NPC located in Luzon and
Visayas shall have been privatized: Provided, That any unsold capacity shall be privatized not later than
eight (8) years from the effectivity of this Act; and

(j) NPC may generate and sell electricity only from the undisposed generating assets and IPP contracts of
PSALM Corp. and shall not incur any new obligations to purchase power through bilateral contracts with
generation companies or other suppliers.

Thus, it is very clear that the sale of the power plants was an exercise of a governmental function
mandated by law for the primary purpose of privatizing NPC assets in accordance with the guidelines
imposed by the EPIRA law.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay), the Court
ruled that the sale of the vessels of the National Development Company (NDC) to Magsaysay Lines, Inc.
is not subject to VAT since it was not in the course of trade or business, as it was involuntary and made
pursuant to the government's policy of privatization. The Court cited the CTA's ruling that the phrase
"course of business" or "doing business" connotes regularity of activity. Thus, since the sale of the
vessels was an isolated transaction, made pursuant to the government's privatization policy, and which
transaction could no longer be repeated or carried on with regularity, such sale was not in the course of
trade or business and was not subject to VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made pursuant
to PSALM's mandate to privatize NPC's assets, and was not undertaken in the course of trade or
business. In selling the power plants, PSALM was merely exercising a governmental function for which it
was created under the EPIRA law.15 (Boldfacing and underscoring supplied)

Applying our ruling in G.R. No. 198146 involving the same parties and similar issues, the sale of the
generating assets - the Masinloc, Ambuklao-Binga and Pantabangan power plants - in the present case is
likewise not subject to VAT, since the sale was pursuant to the mandate of PSALM under the EPIRA to
privatize NPC assets. The sale of the power plants is not in pursuit of a commercial or economic activity
but a governmental function mandated by law to privatize NPC generation assets.16 The sale of the
power plants is clearly not the same as the sale of electricity by generation companies, transmission,
and distribution companies, which is subject to VAT under Section 108 of the NIRC. Thus, we do not find
any merit in the arguments raised by the CIR.

We likewise do not find PSALM liable to pay VAT on the lease of Naga Complex; collection of income
from participation fee, site visit fee, plant CDs, photocopying charges and data room access fee; and
collection of receivables from employees for the excess utilization of allowed mobile phone services,
inventory variance receivable from custodian, refund from a successor-generation company of the
insurance premiums paid by PSALM and interest received from mandatory dollar deposit.

Under the EPIRA, PSALM, as the conservator of NPC assets, operates and maintains NPC assets and
manages its liabilities in trust for the national government, until the NPC assets could be sold or
disposed of.17 Thus, during its corporate life, PSALM has powers relating to the management of its
personnel and leasing of its properties as may be necessary to discharge its mandate. Section 51 of the
EPIRA law provides:cralawred

SECTION 51. Powers. — The Corporation shall, in the performance of its functions and for the
attainment of its objective, have the following powers:cralawred
(a) To formulate and implement a program for the sale and privatization of the NPC assets and IPP
contracts and the liquidation of NPC debts and stranded contract costs, such liquidation to be
completed within the term of existence of the PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets transferred to it; to sell or
dispose of the same at such price and under such terms and conditions as it may deem necessary or
proper, subject to applicable laws, rules and regulations;

(c) To take title to and possession of the NPC IPP contracts and to appoint, after public bidding in
transparent and open manner, qualified independent entities who shall act as the IPP Administration in
accordance with this Act;

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form
the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the universal charge;

(f) To adopt rules and regulations as may be necessary or proper for the orderly conduct of its business
or operations;

(g) To sue and be sued in its name;

(h) To appoint or hire, transfer, remove and fix the compensation of its personnel; Provided, however,
That the Corporation shall hire its own personnel only if absolutely necessary, and as far as practicable,
shall avail itself of the services of personnel detailed from other government agencies;

(i) To own, hold, acquire, or lease real and personal properties as may be necessary or required in the
discharge of its functions;
(j) To borrow money and incur such liabilities, including the issuance of bonds, securities or other
evidences of indebtedness utilizing its assets as collateral and/or through the guarantees of the National
Government: Provided, however, That all such debts or borrowings shall have been paid off before the
end of its corporate life;

(k) To restructure existing loans of the NPC;

(l) To collect, administer, and apply NPC's portion of the universal charge; and

(m) To structure the sale, privatization or disposition of NPC assets and IPP contracts and/or their energy
output based on such terms and conditions which shall optimize the value and sale prices of said assets.
(Emphasis supplied)

Since the lease of Naga Complex and collection of income and receivables are within PSALM's powers
necessary to discharge its mandate under the law and likewise undertaken in the exercise of PSALM's
governmental function, we do not find these activities subject to VAT. To reiterate, VAT is ultimately a
tax on consumption, and it is levied only on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or business.18

Accordingly, the CTA Third Division and CTA EB erred in finding PSALM liable for deficiency VAT in the
amount of P9,566,062,571.44. Since PSALM has no VAT liability in this case, there is no necessity to rule
upon the issue of deficiency interest and delinquency interest.

WHEREFORE, we GRANT the petition. The Decision of the Court of Tax Appeals in CTA Case No. 8475,
dated 2 December 2014, which found petitioner Power Sector Assets and Liabilities Management
Corporation liable to pay the amount of P9,566,062,571.44 as deficiency value-added tax for the taxable
year 2008, inclusive of the deficiency interest and delinquency interest, is REVERSED and SET ASIDE.
Assessment No. VT-08-00072 is hereby ordered CANCELLED.

SO ORDERED.
August 8, 2017

G.R. No. 198146

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 27 September 2010 Decision2 and the 3 August 2011 Resolution3 of
the Court of Appeals in CA-G.R. SP No. 108156. The Court of Appeals nullified the Decisions dated 13
March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case No. 2007- 3 for lack of
jurisdiction.

The Facts

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-
owned and controlled corporation created under Republic Act No. 9136 (RA 9136), also known as the
Electric Power Industry Reform Act of 2001 (EPIRA).4 Section 50 of RA 9136 states that the principal
purpose of PSALM is to manage the orderly sale, disposition, and privatization of the National Power
Corporation (NPC) generation assets, real estate and other disposable assets, and Independent Power
Producer (IPP) contracts with the objective of liquidating all NPC financial obligations and stranded
contract costs in an optimal manner.

PSALM conducted public biddings for the privatization of the Pantabangan-Masiway Hydroelectric
Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant) on 8
September 2006 and 14 December 2006, respectively. First Gen Hydropower Corporation with its $129
Million bid and SN Aboitiz Power Corporation with its $530 Million bid were the winning bidders for the
PantabanganMasiway Plant and Magat Plant, respectively.

On 28 August 2007, the NPC received a letter5 dated 14 August 2007 from the Bureau of Internal
Revenue (BIR) demanding immediate payment of ₱3,813,080,4726 deficiency value-added tax (VAT) for
the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to
PSALM.
On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA),7 wherein
they agreed that:

A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00, representing
basic VAT as shown in the BIR letter dated August 14, 2007, upon execution of this Memorandum of
Agreement (MOA).

B) This remittance shall be without prejudice to the outcome of the resolution of the Issues before the
appropriate courts or body.

C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues by the appropriate
courts or body.

D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter, except when the case
is elevated by the BIR before an appellate court.

E) Nothing contained in this MOA shall be claimed or construed to be an admission against interest as to
any party or evidence of any liability or wrongdoing whatsoever nor an abandonment of any position
taken by NPC/PSALM in connection with the Issues.

F) Each Party to this MOA hereto expressly represents that the authorized signatory hereto has the legal
authority to bind [the] party to all the terms of this MOA.

G) Any resolution by the appropriate courts or body in favor of the BIR, other than a decision by the
Supreme Court, shall not constitute as precedent and sufficient legal basis as to the taxability of
NPC/PSALM's transactions pursuant to the privatization of NPC's assets as mandated by the EPIRA Law.

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the Department of
Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an application for
refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to immediately
process and approve the application, and release the tax refund/TCC within fifteen (15) working days
from issuance of the DOJ ruling that is favorable to NPC/PSALM.

I) Either party has the right to appeal any adverse decision against it before any appropriate court or
body.

J) In the event of failure by the BIR to fulfill the undertaking referred to in (H) above, NPC/PSALM shall
assign to DOF its right to the refund of the subject remittance, and the DOF shall offset such amount
against any liability of NPC/PSALM to the National Government pursuant to the objectives of the EPIRA
on the application of the privatization proceeds.8

In compliance with the MOA, PSALM remitted under protest to the BIR the amount of ₱3, 813, 080, 472,
representing the total basic VAT due.

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication
of the dispute with the BIR to resolve the issue of whether the sale of the power plants should be
subject to VAT. The case was docketed as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of PSALM, thus:

In cases involving purely question[s] of law, such as in the instant case, between and among the
government-owned and controlled corporation and government bureau, the issue is best settled in this
Department. In the final analysis, there is but one party in interest, the Government itself in this
litigation.

xxxx

The instant petition is an original petition involving only [a] question of law on whether or not the sale of
the Pantabangan-Masiway and Magat Power Plants to private entities under the mandate of the EPIRA
is subject to VAT. It is to be stressed that this is not an appeal from the decision of the Commissioner of
Internal Revenue involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, or other matters arising under the National Internal Revenue Code or other law.

xxxx

Moreover, it must be noted that respondent already invoked this Office's jurisdiction over it by praying
in respondent's Motion for Extension of Time to File Comment (On Petitioner's Petition dated 21
September 2007) and later, Omnibus Motion To Lift Order dated 22 October 2007 and To Admit
Attached Comment. The Court has held that the filing of motions seeking affirmative relief, such as, to
admit answer, for additional time to answer, for reconsideration of a default judgment, and to lift order
of default with motion for reconsideration, are considered voluntary submission to the jurisdiction of
the court. Having sought this Office to grant extension of time to file answer or comment to the instant
petition, thereby submitting to the jurisdiction of this Court [sic], respondent cannot now repudiate the
very same authority it sought.

xxxx

When petitioner was created under Section 49 of R.A. No. 9136, for the principal purpose to manage the
orderly sale, disposition, and privatization of NPC generation assets, real estate and other disposable
assets, IPP contracts with the objective of liquidating all NPC financial obligations and stranded contract
costs in an optimal manner, there was, by operation of law, the transfer of ownership of NPC assets.
Such transfer of ownership was not carried out in the ordinary course of transfer which must be
accorded with the required elements present for a valid transfer, but in this case, in accordance with the
mandate of the law, that is, EPIRA. Thus, respondent cannot assert that it was NPC who was the actual
seller of the Pantabangan-Masiway :md Magat Power Plants, because at the time of selling the aforesaid
power plants, the owner then was already the petitioner and not the NPC. Consequently, petitioner
cannot also be considered a successor-in-· interest of NPC.

Since it was petitioner who sold the Pantabangan-Masiway and Magat Power Plants and not the NPC,
through a competitive and public bidding to the private entities, Section 24(A) of R.A. No. 9337 cannot
be applied to the instant case. Neither the grant of exemption and revocation of the tax exemption
accorded to the NPC, be also affected to petitioner.

xxxx
Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not in the regular
conduct or pursuit of a commercial or an economic activity, but was effected by the mandate of the
EPIRA upon petitioner to direct the orderly sale, disposition, and privatization of NPC generation assets,
real estate and other disposable assets, and IPP contracts, and afterward, to liquidate the outstanding
obligations of the NPC.

xxxx

Verily, to subject the sale of generation assets in accordance with a privatization plan submitted to and
approved by the President, which is a one time sale, to VAT would run counter to the purpose of
obtaining optimal proceeds since potential bidders would necessarily have to take into account such
extra cost of VAT.

WHEREFORE, premises considered, the imposition by respondent Bureau of lnternal Revenue of

deficiency Value-Added Tax in the amount of ₱3,813,080,472.00 on the privatization sale of the
Pantabangan Masiway and Magat Power Plants, done in accordance with the mandate of the Electric
Power Industry Reform Act of 2001, is hereby declared NULL and VOID. Respondent is directed to refund
the amount of ₱3,813,080,472.00 remitted under protest by petitioner to respondent.9

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute involved
tax laws administered by the BIR and therefore within the jurisdiction of the Court of Tax Appeals (CTA).
Furthermore, the BIR stated that the sale of the subject power plants by PSALM to private entities is in
the course of trade or business, as contemplated under Section 105 of the National Internal Revenue
Code (NIRC) of 1997, which covers incidental transactions. Thus, the sale is subject to VAT. On 14
January 2009, the DOJ denied BIR's Motion for Reconsideration.10

On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue) filed with the Court of
Appeals a petition for certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction. In a
Resolution dated 23 April 2009, the Court of Appeals dismissed the petition for failure to attach the
relevant pleadings and documents.12 Upon motion for reconsideration, the Court of Appeals reinstated
the petition in its Resolution dated 10 July 2009.13
The Ruling of the Court of Appeals

The Court of Appeals held that the petition filed by PSALM with the DOJ was really a protest against the
assessment of deficiency VAT, which under Section 20414 of the NIRC of 1997 is within the authority of
the Commissioner of Internal Revenue (CIR) to resolve. In fact, PSALM's objective in filing the petition
was to recover the ₱3,813,080,472 VAT which was allegedly assessed erroneously and which PSALM
paid under protest to the BIR.

Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated that
the parties in effect agreed to consider a DOJ ruling favorable to PSALM as the latter's application for
refund.

Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act No. 8424 (RA 8424)17
and Section 718 of Republic Act No. 9282 (RA 9282),19 the Court of Appeals ruled that the CIR is the
proper body to resolve cases involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other
laws administered by the BIR. The Court of Appeals stressed that jurisdiction is conferred by law or by
the Constitution; the parties, such as in this case, cannot agree or stipulate on it by conferring
jurisdiction in a body that has none. Jurisdiction over the person can be waived but not the jurisdiction
over the subject matter which is neither subject to agreement nor conferred by consent of the parties.
The Court of Appeals held that the DOJ Secretary erred in ruling that the CIR is estopped from assailing
the jurisdiction of the DOJ after having agreed to submit to its jurisdiction. As a general rule, estoppel
does not confer jurisdiction over a cause of action to a tribunal where none, by law, exists.

In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion
amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. The dispositive
portion of the Court of Appeals' 27 September 2010 Decision reads:

WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly: (1) the [D]ecision dated
March 13, 2008, and the Decision dated January 14, 2009 both issued by the public respondent
Secretary of Justice in [OSJ Case No.] 2007-3 are declared NULL and VOID for having been issued without
jurisdiction.

No costs.
SO ORDERED.20

PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August 2011 Resolution.
Hence, this petition.

The Issues

Petitioner PSALM raises the following issues:

I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE COURSE TO THE PETITION FOR
CERTIORARI IN CA-G.R. SP NO. 108156?

II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN ASSUMING JURISDICTION
AND SETTLING THE DISPUTE BY AND BETWEEN THE BIR AND PSALM?

III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND JURISPRUDENCE IN
RENDERING JUDGMENT THAT THERE SHOULD BE·NO VAT ON THE PRIVATIZATION, SALE OR DISPOSAL
OF GENERATION ASSETS?

IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21

The Ruling of the Court

We find the petition meritorious.

I. Whether the Secretary of Justice has jurisdiction over the case.

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No. 2007-3
which involves the resolution of whether the sale of the Pantabangan-Masiway Plant and Magat Plant is
subject to VAT.

We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the
Constitution or by law, and not by the parties to an action.22 Jurisdiction cannot be conferred by
consent or acquiescence of the parties23 or by erroneous belief of the court, quasi-judicial office or
government agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with
jurisdiction over this case. This case involves a dispute between PSALM and NPC, which are both wholly
government owned corporations, and the BIR, a government office, over the imposition of VAT on the
sale of the two power plants. There is no question that original jurisdiction is with the CIR, who issues
the preliminary and the final tax assessments. However, if the government entity disputes the tax
assessment, the dispute is already between the BIR (represented by the CIR) and another government
entity, in this case, the petitioner PSALM. Under Presidential Decree No. 24224 (PD 242), all disputes
and claims solely between government agencies and offices, including government-owned or controlled·
corporations, shall be administratively settled or adjudicated by the Secretary of Justice, the Solicitor
General, or the Government Corporate Counsel, depending on the issues and government agencies
involved. As regards cases involving only questions of law, it is the Secretary of Justice who has
jurisdiction. Sections 1, 2, and 3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and controversies solely
between or among the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies, arising from the interpretation and application
of statutes, contracts or agreements, shall henceforth be administratively settled or adjudicated as
provided hereinafter: Provided, That, this shall not apply to cases already pending in court at the time of
the effectivity of this decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and settled or
adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser of all government
owned or controlled corporations and entities, in consonance with Section 83 of the Revised
Administrative Code. His ruling or determination of the question in each case shall be conclusive and
binding upon all the parties concerned.
Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be submitted to
and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims [or] controversies between or among the
departments, bureaus, offices and other agencies of the National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims or controversies between or
among the government-owned or controlled corporations or entities being served by the Office of the
Government Corporate Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do not fall
under the categories mentioned in paragraphs (a) and (b). (Emphasis supplied)

The use of the word "shall" in a statute connotes a mandatory order or an imperative obligation.25 Its
use rendered the provisions mandatory and not merely permissive, and unless PD 242 is declared
unconstitutional, its provisions must be followed. The use of the word "shall" means that administrative
settlement or adjudication of disputes and claims between government agencies and offices, including
government-owned or controlled corporations, is not merely permissive but mandatory and imperative.
Thus, under PD 242, it is mandatory that disputes and claims "solely" between government agencies and
offices, including government-owned or controlled corporations, involving only questions of law, be
submitted to and settled or adjudicated by the Secretary of Justice.

The law is clear and covers "all disputes, claims and controversies solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government, including
constitutional offices or agencies arising from the interpretation and application of statutes, contracts or
agreements." When the law says "all disputes, claims and controversies solely" among government
agencies, the law means all, without exception. Only those cases already pending in court at the time of
the effectivity of PD 242 are not covered by the law.

The purpose of PD 242 is to provide for a speedy and efficient administrative settlement or adjudication
of disputes between government offices or agencies under the Executive branch, as well as to filter
cases to lessen the clogged dockets of the courts. As explained by the Court in Philippine Veterans
Investment Development Corp. (PHIVIDEC) v. Judge Velez:26

Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not diminish the
jurisdiction of [the] courts but only prescribes an administrative procedure for the settlement of certain
types of disputes between or among departments, bureaus, offices, agencies, and instrumentalities of
the National Government, including government-owned or controlled corporations, so that they need
not always repair to the courts for the settlement of controversies arising from the interpretation and
application of statutes, contracts or agreements. The procedure is not much different, and no less
desirable, than the arbitration procedures provided in Republic Act No. 876 (Arbitration Law) and in
Section 26, R.A. 6715 (The Labor Code). It is an alternative to, or a substitute for, traditional litigation in
court with the added advantage of avoiding the delays, vexations and expense of court proceedings. Or,
as P.D. No. 242 itself explains, its purpose is "the elimination of needless clogging of court dockets to
prevent the waste of time and energies not only of the government lawyers but also of the courts, and
eliminates expenses incurred in the filing and prosecution of judicial actions."27

PD 242 is only applicable to disputes, claims, and controversies solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government, including
government-owned or controlled corporations, and where no private party is involved. In other words,
PD 242 will only apply when all the parties involved are purely government offices and government-
owned or controlled corporations.28 Since this case is a dispute between PSALM arid NPC, both
government owned and controlled corporations, and the BIR, a National Government office, PD 242
clearly applies and the Secretary of Justice has jurisdiction over this case. In fact, the MOA executed by
the BIR, NPC, and PSALM explicitly provides that "[a] ruling from the Department of Justice (DOJ) that is
favorable to NPC/PSALM shall be tantamount to the filing of an application for refund (in cash)/tax
credit certificate (TCC), at the option of NPC/PSALM."29 Such provision indicates that the BIR and
petitioner PSALM and the NPC acknowledged that the Secretary of Justice indeed has jurisdiction to
resolve their dispute.

This case is different from the case of Philippine National Oil Company v. Court of Appeals,30 (PNOC v.
CA) which involves not only the BIR (a government bureau) and the PNOC and PNB (both government-
owned or controlled corporations), but also respondent Tirso Savellano, a private citizen. Clearly, PD 242
is not applicable to the case of PNOCv.CA. Even the ponencia in PNOC v. CA stated that the dispute in
that case is not covered by PD 242, thus:
Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the present
dispute would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly provides that only
disputes, claims and controversies solely between or among departments, bureaus, offices, agencies,
and instrumentalities of the National Government, including constitutional offices or agencies, as well as
government-owned and controlled corporations, shall be administratively settled or adjudicated. While
the BIR is obviously a government bureau, and both PNOC and PNB are government-owned and
controlled corporations, respondent Savellano is a private. citizen. His standing in the controversy could
not be lightly brushed aside. It was private respondent Savellano who gave the BIR the information that
resulted in the investigation of PNOC and PNB; who requested the BIR Commissioner to reconsider the
compromise agreement in question; and who initiated the CTA Case No. 4249 by filing a Petition for
Review.31 (Emphasis supplied)

In contrast, since this case is a dispute solely between PSALM and NPC, both government-owned and
controlled corporations, and the BIR, a National Government office, PD 242 clearly applies and the
Secretary of Justice has jurisdiction over this case.

It is only proper that intra-governmental disputes be settled administratively since the opposing
government offices, agencies and instrumentalities are all under the President's executive control and
supervision. Section 17, Article VII of the Constitution states unequivocally that: "The President shall
have control of all the executive departments, bureaus and offices. He shall ensure that the laws be
faithfully executed." In Carpio v. Executive Secretary,32 the Court expounded on the President's control
over all the executive departments, bureaus and offices, thus:

This presidential power of control over the executive branch of government extends over all executive
officers from Cabinet Secretary to the lowliest clerk and has been held by us, in the landmark case of
Mondano vs. Silvosa, to mean "the power of [the President] to alter or modify or nullify or set aside
what a subordinate officer had done in the performance of his duties and to substitute the judgment of
the former with that of the latter." It is said to be at the very "heart of the meaning of Chief Executive."

Equally well accepted, as a corollary rule to the control powers of the President, is the "Doctrine of
Qualified Political Agency." As the President cannot be expected to exercise his control powers all at the
same time and in person, he will have to delegate some of them to his Cabinet members.

Under this doctrine, which recognizes the establishment of a single executive, "all executive and
administrative organizations are adjuncts of the Executive Department, the heads of the various
executive departments are assistants and agents of the Chief Executive, and, except in cases where the
Chief Executive is required by the Constitution or law to act in person on the exigencies of the situation
demand that he act personally, the multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive departments, and the acts of the Secretaries of
such departments, performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive presumptively the acts of the Chief Executive."

Thus, and in short, "the President's power of control is directly exercised by him over the members of
the Cabinet who, in turn, and by his authority, control the bureaus and other offices under their
respective jurisdictions in the executive department. "33

This power of control vested by the Constitution in the President cannot be diminished by law. As held
in Rufino v. Endriga,34 Congress cannot by law deprive the President of his power of control, thus:

The Legislature cannot validly enact a law· that puts a government office in the Executive branch outside
the control of the President in the guise of insulating that office from politics or making it independent.
If the office is part of the Executive branch, it must remain subject to the control of the President.
Otherwise, the Legislature can deprive the President of his constitutional power of control over "all the
executive x x x offices." If the Legislature can do this with the Executive branch, then the Legislature can
also deal a similar blow to the Judicial branch by enacting a law putting decisions of certain lower courts
beyond the review power of the Supreme Court. This will destroy the system of checks and balances
finely structured in the 1987 Constitution among the Executive, Legislative, and Judicial branches.35
(Emphasis supplied)

Clearly, the President's constitutional power of control over all the executive departments, bureaus and
offices cannot be curtailed or diminished by law. "Since the Constitution has given the President the
power of control, with all its awesome implications, it is the Constitution alone which can curtail such
power."36 This. constitutional power of control of the President cannot be diminished by the CTA. Thus,
if two executive offices or agencies cannot agree, it is only proper and logical that the President, as the
sole Executive who under the Constitution has control over both offices or agencies in dispute, should
resolve the dispute instead of the courts. The judiciary should not intrude in this executive function of
determining which is correct between the opposing government offices or agencies, which are both
under the sole control of the President. Under his constitutional power of control, the President decides
the dispute between the two executive offices. The judiciary cannot substitute its decision over that of
the President. Only after the President has decided or settled the dispute can the courts' jurisdiction be
invoked. Until such time, the judiciary should not interfere since the issue is not yet ripe for judicial
adjudication. Otherwise, the judiciary would infringe on the President's exercise of his constitutional
power of control over all the executive departments, bureaus, and offices.

Furthermore, under the doctrine of exhaustion of administrative remedies, it is mandated that where a
remedy before an administrative body is provided by statute, relief must be sought by exhausting this
remedy prior to bringing an action in court in order to give the administrative body every opportunity to
decide a matter that comes within its jurisdiction.37 A litigant cannot go to court without first pursuing
his administrative remedies; otherwise, his action is premature and his case is not ripe for judicial
determination.38 PD 242 (now Chapter 14, Book IV of Executive Order No. 292), provides for such
administrative remedy. Thus, only after the President has decided the dispute between government
offices and agencies can the losing party resort to the courts, if it so desires. Otherwise, a resort to the
courts would be premature for failure to exhaust administrative remedies. Non-observance of the
doctrine of exhaustion of administrative remedies would result in lack of cause of action,39 which is one
of the grounds for the dismissal of a complaint.

The rationale of the doctrine of exhaustion. of administrative remedies was aptly explained by the Court
in Universal Robina Corp. (Corn Division) v. Laguna Lake Development Authority:40

The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The thrust
of the rule is that courts must allow administrative agencies to carry out their functions and discharge
their responsibilities within the specialized areas of their respective competence. The rationale for this
doctrine is obvious. It entails lesser expenses and provides for the speedier resolution of the
controversies. Comity and convenience also impel courts of justice to shy away from a dispute until the
system of administrative redress has been completed.41

In requiring parties to exhaust administrative remedies before pursuing action in a court, the doctrine
prevents overworked courts from considering issues when remedies are available through
administrative channels.42 Furthermore, the doctrine endorses a more economical and less formal
means of resolving disputes,43 and promotes efficiency since disputes and claims are generally resolved
more quickly and economically through administrative proceedings rather than through court
litigations.44

The Court of Appeals ruled that under the 1997 NIRC, the dispute between the parties is within the
authority of the CIR to resolve. Section 4 of the 1997 NIRC reads:
SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds in internal revenue taxes, fees or other charges.
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)

The first paragraph of Section 4 of the 1997 NIRC provides that the power of the CIR to interpret the
NIRC provisions and other tax laws is subject to review by the Secretary of Finance, who is the alter ego
of the President. Thus, the constitutional power of control of the President over all the executive
departments, bureaus, and offices45 is still preserved. The President's power of control, which cannot
be limited or withdrawn by Congress, means the power of the President to alter, modify, nullify, or set
aside the judgment or action of a subordinate in the performance of his duties.46

The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive appellate jurisdiction of
the CTA as regards the CIR's decisions on matters involving disputed assessments, refunds in internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising
under NIRC, is in conflict with PD 242. Under PD 242, all disputes and claims solely between government
agencies and offices, including government-owned or controlled corporations, shall be administratively
settled or adjudicated by the Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved.

To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should be adopted:
(1) As regards private entities and the BIR, the power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the NIRC or other laws administered by the. BIR is vested in the CIR subject to the exclusive
appellate jurisdiction of the CTA, in accordance with Section 4 of the NIRC; and (2) Where the disputing
parties are all public entities (covers disputes between the BIR and other government entities), the case
shall be governed by PD 242.
Furthermore, it should be noted that the 1997 NIRC is a general law governing the imposition of national
internal revenue taxes, fees, and charges.47 On the other hand, PD 242 is a special law that applies only
to disputes involving solely government offices, agencies, or instrumentalities. The difference between a
special law and a general law was clarified in Vinzons-Chato v. Fortune Tobacco Corporation:48

A general statute is one which embraces a class of subjects or places and does not omit any subject or
place naturally belonging to such class. A special statute, as the term is generally understood, is one
which relates to particular persons or things of a class or to a particular portion or section of the state
only.

A general law and a special law on the same subject are statutes in pari materia and should, accordingly,
be read together and harmonized, if possible, with a view to giving effect to both. The rule is that where
there are two acts, one of which is special and particular and the other general which, if standing alone,
would include the same matter and thus conflict with the special act, the special law must prevail since
it evinces the legislative intent more clearly than that of a general statute and must not be taken as
intended to affect the more particular and specific provisions of the earlier act, unless it is absolutely
necessary so to construe it in order to give its words any meaning at all.

The circumstance that the special law is passed before or after the general act does not change the
principle. Where the special law is later, it will be regarded as an exception to, or a qualification of, the
prior general act; and where the general act is later, the special statute will be construed as remaining
an exception to its terms, unless repealed expressly or by necessary implication.49

Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a special law, will still
prevail and is treated as an exception to the terms of the 1997 NIRC with regard solely to
intragovernmental disputes. PD 242 is a special law while the 1997 NIRC is a general law, insofar as
disputes solely between or among government agencies are concerned. Necessarily, such disputes must
be resolved under PD 242 and not under the NIRC, precisely because PD 242 specifically mandates the
settlement of such disputes in accordance with PD 242. PD 242 is a valid law prescribing the procedure
for administrative settlement or adjudication of disputes among government offices, agencies, and
instrumentalities under the executive control and supervision of the President.50

Even the BIR, through its authorized representative, then OIC-Commissioner of Internal Revenue Lilian
B. Hefti, acknowledged in the MOA executed by the BIR, NPC, and PSALM, that the Secretary of Justice
has jurisdiction to resolve its dispute with petitioner PSALM and the NPC. This is clear from the provision
in the MOA which states:

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the Department of
Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an application for
refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to immediately
process and approve the application, and release the tax refund/TCC within fifteen (15) working days
from issuance of the DOJ ruling that is favorable to NPC/PSALM. (Emphasis supplied)

PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO 292), otherwise known
as the Administrative Code of 1987, which took effect on 24 November 1989.51 The pertinent provisions
read:

Chapter 14- Controversies Among Government

Offices and Corporations

SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government, including
government-owned or controlled corporations, such as those arising from the interpretation and
application of statutes, contracts or agreements, shall be administratively settled or adjudicated in the
manner provided in this Chapter. This Chapter shall, however, not apply to disputes involving the
Congress, the Supreme Court, the Constitutional Commissions, and local governments.

SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the National
Government and as ex officio legal adviser of all government-owned or controlled corporations. His
ruling or decision thereon shall be conclusive and binding on all the parties concerned.

SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed questions of law and of
fact or only factual issues shall be submitted to and settled or adjudicated by:
(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus, offices
and other agencies of the National Government as well as government-owned or controlled
corporations or entities of whom he is the principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).

SEC. 69. Arbitration. - The determination of factual issues may be referred to an arbitration panel
composed of one representative each of the parties involved and presided over by a representative of
the Secretary of Justice or the Solicitor General, as the case may be.

SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor General, when
approved by the Secretary of Justice, shall be final and binding upon the parties involved. Appeals may,
however, be taken to the President where the amount of the claim or the value of the property exceeds
one million pesos. The decision of the President shall be final.

SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the rules and regulations
necessary to carry out the provisions of this Chapter.

Since the amount involved in this case is more than one million pesos, the DOJ Secretary's decision may
be appealed to the Office of the President in accordance with Section 70, Chapter 14, Book IV of EO 292
and Section 552 of PD 242. If the appeal to the Office of the President is denied, the aggrieved party can
still appeal to the Court of Appeals under Section 1, Rule 43 of the 1997 Rules of Civil Procedure.53
However, in order not to further delay the disposition of this case, the Court resolves to decide the
substantive issue raised in the petition.54

II. Whether the sale of the power plants is subject to VAT.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by
petitioner PSALM to private entities is subject to VAT, the Court must determine whether the sale is "in
the course of trade or business" as contemplated under Section 105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports .goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act
7716.

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

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

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition,
and privatization of the NPC generation assets, real estate and other disposable assets, and IPP
contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway and
Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the
course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020- 02, that PSALM' s sale of
assets is not conducted in pursuit of any commercial or profitable activity as to fall within the ambit of a
VAT-able transaction under Sections 105 and 106 of the NIRC. The pertinent portion of the ruling
adverted to states:

2. Privatization of assets by PSALM is not subject to VAT

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods, is
collected from any person, who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, which tax shall be paid by the seller or transferor.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial
activity, including transactions incidental thereto.

Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure the orderly
sale or disposition of' the property and thereafter to liquidate the outstanding loans and obligations of
NPC, utilizing the proceeds from sales and other property contributed to it, including the proceeds from
the Universal Charge, and not conducted in pursuit of any commercial or profitable activity, including
transactions incidental thereto, the same will be considered an isolated ,transaction, which will
therefore not be subject to VAT. (BIR Ruling No. 113-98 dated July 23, 1998)55 (Emphasis supplied)

On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13 of
Republic Act No. 639556 (RA 6395) was expressly repealed by Section 24 of Republic Act No. 933757 (RA
9337), which reads:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power Corporation
(NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sale of generated
power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof
which are contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or
modified accordingly.
As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No. 020-
02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR avers
that prior to the sale, NPC still owned the power plants and not PSALM, which is just considered as the
trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-interest of its power
plants should be subject to the 10% VAT beginning 1 November 2005 and 12% VAT beginning 1 February
2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a
successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. Under its charter, NPC is
mandated to "undertake the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on
a nationwide basis."58 With the passage of the EPIRA law which restructured the electric power industry
into generation, transmission, distribution, and supply sectors, the NPC is now primarily mandated to
perform missionary electrification function through the Small Power Utilities Group (SPUG) and is
responsible for providing power generation and associated power delivery systems in areas that are not
connected to the transmission system.59 On the other hand, PSALM, a government-owned and
controlled corporation, was created under the EPIRA law to manage the orderly sale and privatization of
NPC assets with the objective of liquidating all of NPC's financial obligations in an optimal manner.
Clearly, NPC and PSALM have different functions. Since PSALM is not a successor-in-interest of NPC, the
repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is
not "in the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not
subject to VAT. The sale of the power plants is not in pursuit of a commercial or economic activity but a
governmental function mandated by law to privatize NPC generation assets. PSALM was created
primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal manner. The
purpose and objective of PSALM are explicitly stated in Section 50 of the EPIRA law, thus:

SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal purpose of the PSALM
Corp. is to manage the orderly sale, disposition, and privatization of NPC generation assets, real estate
and other disposable assets, and IPP contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in an optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.
The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of this Act, unless
otherwise provided by law, and all assets held by it, all moneys and properties belonging to it, and all its
liabilities outstanding upon the expiration of its term of existence shall revert to and be assumed by the
National Government. (Emphasis supplied)

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by PSALM is
not "in the course of trade or business" but purely for the specific purpose of privatizing NPC assets in
order to liquidate all NPC financial obligations. PSALM is tasked to sell and privatize the NPC assets
within the term of its existence.60 The EPIRA law even requires PSALM to submit a plan for the
endorsement by the Joint Congressional Power Commission and the approval of the President of the
total privatization of the NPC assets and IPP contracts. Section 47 of the EPIRA law provides:

SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real estate, and other
disposable assets as well as IPP contracts of NPC shall be privatized in accordance with this Act. Within
six (6) months from the effectivity of this Act, the PSALM Corp. shall submit a plan for the endorsement
by the Joint Congressional Power Commission and the approval of the President of the Philippines, on
the total privatization of the generation assets, real estate, other disposable assets as well as existing IPP
contracts of NPC and thereafter, implement the same, in accordance with the following guidelines,
except as provided for in Paragraph (f) herein:

(a) The privatization value to the National Government of the NPC generation assets, real estate, other
disposable assets as well as IPP contracts shall be optimized;

(b) The participation by Filipino citizens and corporations in the purchase of NPC assets shall be
encouraged. In the case of foreign investors, at least seventy-five percent (75%) of the funds used to
acquire NPC-generation assets and IPP contracts shall be inwardly remitted and registered with the
Bangko Sentral ng Pilipinas;

(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related assets and assigned
liabilities, if any, shall be grouped in a manner which shall promote the viability of the resulting
generation companies (gencos), ensure economic efficiency, encourage competition, foster reasonable
electricity rates and create market appeal to optimize returns to the government from the sale and
disposition of such assets in a manner consistent with the objectives of this Act. In the grouping of the
generation assets and IPP contracts of NPC, the following criteria shall be considered:

(1) A sufficient scale of operations and balance sheet strength to promote the financial viability of the
restructured units;

(2) Broad geographical groupings to ensure efficiency of operations but without the formation of
regional companies or consolidation of market power;

(3) Portfolio of plants and IPP contracts to achieve management and operational synergy without
dominating any part of the market or the load curve; and

(4) Such other factors as may be deemed beneficial to the best interest of the National Government
while ensuring attractiveness to potential investors.

(d) All assets of NPC shall be sold in open and transparent manner through public bidding, and the same
shall apply to the disposition of IPP contracts;

(e) In cases of transfer of possession, control, operation or privatization of multi-purpose hydro facilities,
safeguards shall be prescribed to ensure that the national government may direct water usage in cases
of shortage to protect potable water, irrigation, and all other requirements imbued with public interest;

(f) The Agus and Pulangi complexes in Mindanao shall be excluded from an1ong the generation
companies that will be initially privatized. Their ownership shall be transferred to the PSALM Corp. and
both shall continue to be operated by the NPC. Said complexes may be privatized not earlier than ten
(10) years from the effectivity of this Act, and, except for Agus Ill, shall not be subject to BuildOperate-
Transfer (B-0-T), Build-Rehabilitate-OperateTransfer (B-R-0-T) and other variations thereof pursuant to
Republic Act No. 6957. as amended by Republic Act No. 7718. The privatization of Agus and Pulangi
complexes hall be left to the discretion of PSALM Corp. in consultation with Congress;
(g) The steamfield assets and generating plants of each geothermal complex shall not be sold separately.
They shall be combined and each geothermal complex shall be sold as one package through public
bidding. The geothermal complexes covered by this requirement include, but are not limited to, Tiwi-
Makban, Leyte A and B (Tongonan), Palinpinon, and Mt. Apo;

(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall be transferred to
the PSALM Corporation;

(i) Not later than three (3) years from the effectivity of this Act, and in no case later than the initial
implementation of open access, at least seventy percent (70%) of the total capacity of generating assets
of NPC and of the total capacity of the power plants under contract with NPC located in Luzon and
Visayas spall have been privatized: Provided, That any unsold capacity shall be privatized not later than
eight (8) years from the effectivity of this Act; and

(j) NPC may generate and sell electricity only from the undisposed generating assets and IPP contracts of
PSALM Corp. and shall not incur any new obligations to purchase power through bilateral contracts with
generation companies or other suppliers.

Thus, it is very clear that the sale of the power plants was an exercise of a governmental function
mandated by law for the primary purpose of privatizing NPC assets in accordance with the guidelines
imposed by the EPIRA law.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay),61 the Court
ruled that the sale of the vessels of the National Development Company (NDC) to Magsaysay Lines, Inc.
is not subject to VAT since it was not in the course of trade or business, as it was involuntary and made
pursuant to the government's policy of privatization. The Court cited the CT A ruling that the phrase
"course of business" or "doing business" connotes regularity of activity. Thus, since the sale of the
vessels was an isolated transaction, made pursuant to the government's privatization policy, and which
transaction could no longer be repeated or carried on with regularity, such sale was not in the course of
trade or business and was not subject to VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made pursuant
to PSALM' s mandate to privatize NPC assets, and was not undertaken in the course of trade or business.
In selling the power plants, PSALM was merely exercising a governmental function for which it was
created under the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not
applicable in this case since it was decided under the 1986 NIRC. The CIR maintains that under Section
105 of the 1997 NIRC, which amended Section 9962 of the 1986 NIRC, the phrase "in the course of trade
or business" was expanded, and now covers incidental transactions. Since NPC still owns the power
plants and PSALM may only be considered as trustee of the NPC assets, the sale of the power plants is
considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's
ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law. The
pertinent provisions read:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is hereby
created a government-owned and -controlled corporation to be known as the "Power Sector Assets and
Liabilities Management Corporation," hereinafter referred to as "PSALM Corp.," which shall take
ownership of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other
disposable assets. All outstanding obligations of the NPC arising from loans, issuances of bonds,
securities and other instruments of indebtedness shall be transferred to and assumed by the PSALM
Corp. within one hundred eighty (180) days from the approval of this Act.

SEC 51. Powers. - The Corporation shall, in the performance of its functions and for the attainment of its
objectives, have the following powers:

(a) To formulate and implement a program for the sale and privatization of the NPC assets and IPP
contracts and the liquidation of the NPC debts and stranded costs, such liquidation to be completed
within the term of existence of the PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets transferred to it; to sell or
dispose of the same at such price and under such terms and conditions as it may deem necessary or
proper, subject to applicable laws, rules and regulations;
xxxx

SEC. 55. Property of PSALM Corp. -The following funds, assets, contributions and other property shall
constitute the property of PSALM Corp.:

(a) The generation assets, real estate, IPP contracts, other disposable assets of NPC, proceeds from the
sale or disposition of such assets and residual assets from B-0-T, R-0-T, and other variations thereof;

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPC's transferred liabilities: Provided,
however, That all borrowings shall be fully paid for by the end of the life of the PSALM Corp.;

(d) Proceeds from the universal charge allocated for stranded contract costs and the stranded debts of
the NPC;

(e) Net profit of NPC;

(f) Net profit of TRANSCO;

(g) Official assistance, grants, and donations from external sources; and

(h) Other sources of funds as may be determined by PSALM Corp. necessary for the above-mentioned
purposes. (Emphasis supplied)

Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and other
disposable assets of the NPC was transferred to PSALM. Clearly, PSALM is not a mere trustee of the NPC
assets but is the owner thereof. Precisely, PSALM, as the owner of the NPC assets, is the government
entity tasked under the EPIRA law to privatize such NPC assets.
In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue
(Mindanao 11),63 which was decided under the 1997 NIRC, the Court held that the sale of a fully
depreciated vehicle that had been used in Mindanao II's business was subject to VAT, even if such sale
may be considered isolated. The Court ruled that it does not follow that an isolated transaction cannot
be an incidental transaction for VAT purposes. The Court then cited Section 105 of the 1997 NIRC which
shows that a transaction "in the course of trade or business" includes "transactions incidental thereto."
Thus, the Court held that the sale of the vehicle is an incidental transaction made in the course of
Mindanao II's business which should be subject to VAT.

The CIR alleges that the sale made by NPC and/or its successors-in-interest of the power plants is an
incidental transaction which should be subject to VAT. This is erroneous. As previously discussed, the
power plants are already owned by PSALM, not NPC. Under the EPIRA law, the ownership of these
power plants was transferred to PSALM for sale, disposition, and privatization in order to liquidate all
NPC financial obligations. Unlike the Mindanao II case, the power plants in this case were not previously
used in PSALM's business. The power plants, which were previously owned by NPC were transferred to
PSALM for the specific purpose of privatizing such assets. The sale of the power plants cannot be
considered as an incidental transaction made in the course of NPC's or PSALM's business. Therefore, the
sale of the power plants should not be subject to VAT.

Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of
Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR to hold PSALM liable for deficiency VAT
in the amount of ₱3,813,080,472 for the sale of the Pantabangan-Masiway and Magat Power Plants. The
₱3,813,080,472 deficiency VAT remitted by PSALM under protest should therefore be refunded to
PSALM.

However, to give effect to Section 70, Chapter 14, Book IV of the Administrative Code of 1987 on
appeals from decisions of the Secretary of Justice, the BIR is given an opportunity to appeal the
Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice to the Office of the
President within 10 days from finality of this Decision.64

WHEREFORE, we GRANT the petition. We SETASIDE the 27 September 2010 Decision and the 3 August
2011 Resolution of the Court of Appeals in CA-G.R. SP No. 108156. The Decisions dated 13 March 2008
and 14 January 2009 of the Secretary of Justice in OSJ Case No. 2007- 3 are REINSTATED. No costs.
SO ORDERED.

G.R. No. 190506, June 13, 2016

CORAL BAY NICKEL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

BERSAMIN, J.:

This appeal is brought by a taxpayer whose claim for the refund or credit pertaining to its alleged
unutilized input tax for the third and fourth quarters of the year 2002 amounting to P50,124,086.75 had
been denied by the Commissioner of Internal Revenue. The Court of Tax Appeals (CTA) En Banc and in
Division denied its appeal.

We sustain the denial of the appeal.

Antecedents

The petitioner, a domestic corporation engaged in the manufacture of nickel and/or cobalt mixed
sulphide, is a VAT entity registered with the Bureau of Internal Revenue (BIR). It is also registered with
the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Rio Tuba Export
Processing Zone under PEZA Certificate of Registration dated December 27, 2002.1chanrobleslaw

On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring unutilized input tax from its
domestic purchases of capital goods, other than capital goods and services, for its third and fourth
quarters of 2002 totalling P50,124,086.75. On June 14, 2004,3 it filed with Revenue District Office No. 36
in Palawan its Application for Tax Credits/Refund (BIR Form 1914) together with supporting documents.

Due to the alleged inaction of the respondent, the petitioner elevated its claim to the CTA on July 8,
2004 by petition for review, praying for the refund of the aforesaid input VAT (CTA Case No.
7022).4chanrobleslaw

After trial on the merits, the CTA in Division promulgated its decision on March 10, 20085 denying the
petitioner's claim for refund on the ground that the petitioner was not entitled to the refund of alleged
unutilized input VAT following Section 106(A)(2)(a)(5) of the National Internal Revenue Code (NIRC) of
1997, as amended, in relation to Article 77(2) of the Omnibus Investment Code and conformably with
the Cross Border Doctrine. In support of its ruling, the CTA in Division cited Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils) Inc. (Toshiba)6 and Revenue Memorandum Circular
("RMC") No. 42-03.7chanrobleslaw

After the CTA in Division denied its Motion for Reconsideration8 on July 2, 2008,9 the petitioner
elevated the matter to the CTA En Banc (CTA EB Case No. 403), which also denied the petition through
the assailed decision promulgated on May 29, 2009.10chanrobleslaw

The CTA En Banc denied the petitioner's Motion for Reconsideration through the resolution dated
December 10, 2009.11chanrobleslaw

Hence, this appeal, whereby the petitioner contends that Toshiba is not applicable inasmuch as the
unutilized input VAT subject of its claim w(as incurred from May 1, 2002 to December 31, 2002 as a VAT-
registered taxpayer, not as a PEZA-registered enterprise; that during the period subject of its claim, it
was not yet registered with PEZA because it was only on December 27, 2002 that its Certificate of
Registration was issued;12 that until then, it could not have refused the payment of VAT on its
purchases because it could not present any valid proof of zero-rating to its VAT-registered suppliers; and
that it complied with all the procedural and substantive requirements under the law and regulations for
its entitlement to the refund.13chanrobleslaw

Issue

Was the petitioner, an entity located within an ECOZONE, entitled to the refund of its unutilized input
taxes incurred before it became a PEZA registered entity?

Ruling of the Court

The appeal is bereft of merit.

We first explain why we have given due course to the petition for review on certiorari despite the
petitioner's premature filing of its judiqial claim in the CTA.

The petitioner filed with the BIR on June 10, 2004 its application for tax refund or credit representing the
unutilized input tax for the third and fourth quarters of 2002. Barely 28 days later, it brought its appeal
in the CTA contending that there was inaction on the part of the petitioner despite its not having waited
for the lapse of the 120-day period mandated by Section 112 (D) of the 1997 NTRC. At the time of the
petitioner's appeal, however, the applicable rule was that provided under BIR Ruling No. DA-489-03,14
issued on December 10, 2003, to wit:ChanRoblesVirtualawlibrary

It appears, therefore, that it is not necessary for the Commissioner of Internal Revenue to first act
unfavorably on the claim for refund before the Court of Tax Appeals could validly take cognizance of the
case. This is so because of the positive mandate of Section 230 of the Tax Code and also by virtue of the
doctrine that the delay of the Commissioner in rendering his decision does not extend the reglementary
period prescribed by statute.

Incidentally, the taxpayer could not be faulted for taking advantage of the full two-year period set by
law for filing his claim for refund [with the Commissioner of Internal Revenue]. Indeed, no provision in
the tax code requires that the claim for refund be fxled at the earliest instance in order to give the
Commissioner an opportunity to rule on it and the court to review the ruling of the Commissioner of
Internal Revenue on appeal. xxx

As pronounced in Silicon Philippines Inc. vs. Commissioner of Internal Revenue,15 the exception to the
mandatory and jurisdictional compliance with the 120+30 day-period is when the claim for the tax
refund or credit was filed in the period between December 10, 2003 and October 5, 2010 during which
BIR Ruling No. DA-489-03 was still in effect. Accordingly, the premature filing of the judicial claim was
allowed, giving to the CTA jurisdiction over the appeal.

As to the main issue, we sustain the assailed decision of the CTA En Banc.

The petitioner's insistence, that Toshiba is not applicable because Toshiba Information Equipment (Phils)
Inc., the taxpayer involved thereat, was a PEZA-registered entity during the time subject of the claim for
tax refund or credit, is unwarranted. The most significant difference between Toshiba and this case is
that Revenue Memorandum Circular No. 74-9916 was not yet in effect at the time Toshiba Information
Equipment (Phils) Inc. brought its claim for refund. Regardless of the distinction, however, Toshiba
actually discussed the VAT implication of PEZA-registered enterprises and ECOZONE-located enterprises
in its entirety, which renders Toshiba applicable to the petitioner's case.

Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered enterprises was based on their
choice of fiscal incentives, namely: (1) if the PEZA-registered enterprise chose the 5% preferential tax on
its gross income in lieu of all taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-
exempt; and (2) if the PEZA-registered enterprise availed itself of the income tax holiday under
Executive Order No. 226, as amended, it was subject to VAT at 10%17 (now, 12%). Based on this old
rule, Toshiba allowed the claim for refund or credit on the part of Toshiba Information Equipment (Phils)
Inc.

This is not true with the petitioner. With the issuance of RMC 74-99, the distinction under the old rule
was disregarded and the new circular took into consideration the two important principles of the
Philippine VAT system: the Cross Border Doctrine and the Destination Principle. Thus, Toshiba
opined:ChanRoblesVirtualawlibrary

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court, cannot be lightly disregarded considering the great number of PEZA-
registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax
holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.

xxxx
This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the
five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No.
7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the
income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent
(10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of
goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the tatter's type or
class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise
as a VAT-exempt entity.18 (underscoring and Emphasis supplied)

Furthermore, Section 8 of Republic Act No. 7916 mandates that PEZA shall manage and operate the
ECOZONE as a separate customs territory. The provision thereby establishes the fiction that an
ECOZONE is a foreign tenitory separate and distinct from the customs territory. Accordingly, the sales
made by suppliers from a customs territory to a purchaser located within an ECOZONE will be
considered as exportations. Following the Philippine VAT system's adherence to the Cross Border
Doctrine and Destination Principle, the VAT implications are that "no VAT shall be imposed to form part
of the cost of goods destined for consumption outside of the territorial border of the taxing authority"19
Thus, Toshiba has discussed that:ChanRoblesVirtualawlibrary

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within
ECQZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended,
which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes
the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a
Special Economic Zone has been described as —

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or
all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.
The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign
territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE
shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from
the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the
Customs Territory.20 (underscoring and emphasis are supplied)

The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan.21 Its plant site
was specifically located inside the Rio Tuba Export Processing Zone — a special economic zone
(ECOZONE) created by Proclamation No. 304, Series of 2002, in relation to Republic Act No. 7916. As
such, the purchases of goods and services by the petitioner that were destined for consumption within
the ECOZONE should be free of VAT; hence, no input VAT should then be paid on such purchases,
rendering the petitioner not entitled to claim a tax refund or credit. Verily, if the petitioner had paid the
input VAT, the CTA was correct in holding that the petitioner's proper recourse was not against the
Government but against the seller who had shifted to it the output VAT following RMC No. 42-03,22
which provides:ChanRoblesVirtualawlibrary

In case the supplier alleges that it reported such sale as a taxable sale, the substantiation of remittance
of the output taxes of the seller (input taxes of the exporter-buyer) can only be established upon the
thorough audit of the suppliers' VAT returns and corresponding books and records. It is, therefore,
imperative that the processing office recommends to the concerned BIR Office the audit of the records
of the seller.

In the meantime, the claim for input tax credit by the exporter-buyer should be denied without
prejudice to the claimant's right to seek reimbursement of the VAT paid, if any, from its supplier.

We should also take into consideration the nature of VAT as an indirect tax. Although the seller is
statutorily liable for the payment of VAT, the amount of the tax is allowed to be shifted or passed on to
the buyejr.23 However, reporting and remittance of the VAT paid to the BIR remained to be the
seller/supplier's obligation. Hence, the proper party to seek the tax refund or credit should be the
suppliers, not the petitioner.

In view of the foregoing considerations, the Court must uphold the rejection of the appeal of the
petitioner. This Court has repeatedly poirited out that a claim for tax refund or credit is similar to a tax
exemption and should be strictly construed against the taxpayer. The burden of proof to show that he is
ultimately entitled to the grant of such tax refund or credit rests on the taxpayer.24 Sadly, the petitioner
has not discharged its burden.

WHEREFORE, the Court AFFIRMS the decision promulgated on May 29, 2009 in CTA EB Case No. 403;
and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.

[G.R. NO. 149073 : February 16, 2005]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CEBU TOYO CORPORATION, Respondent.

DECISION

QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed the
Resolutions dated May 31, 20002 and August 2, 2000,3 of the Court of Tax Appeals (CTA) ordering the
Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue a tax credit
certificate in favor of Cebu Toyo Corporation in the sum of P2,158,714.46, representing the unutilized
input value-added tax (VAT) payments.

The facts, as culled from the records, are as follows:

Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and
various optical components used in television sets, cameras, compact discs and other similar devices. Its
principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a
subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws of Japan.
Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA),
pursuant to the provisions of Presidential Decree No. 66.4 It is also registered with the Bureau of
Internal Revenue (BIR) as a VAT taxpayer.5

As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based
Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises
doing business in the MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added
Tax (VAT) at 0% rate under Section 106(A)(2)(a)6 of the National Internal Revenue Code, as amended,
respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total
input VAT of P4,462,412.63.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax
Credit and Duty Drawback Center of the Department of Finance, an application for tax credit/refund of
VAT paid for the period April 1, 1996 to December 31, 1997 amounting to P4,439,827.21 representing
excess VAT input payments.

Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June
26, 1998, it filed a Petition for Review with the CTA to toll the running of the two-year prescriptive
period pursuant to Section 2307 of the Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at
the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input
taxes on its purchases of goods and services related to such zero-rated activities are available as tax
credits or refunds.

The petitioner's position is that respondent was not entitled to a refund or tax credit since: (1) it failed
to show that the tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed
to have been made in accordance with law; and (3) claims for refund are strictly construed against the
claimant as these partake of the nature of tax exemption.

Initially, the CTA denied the petition for insufficiency of evidence.8 The tax court sustained respondent's
argument that it was a VAT-registered entity. It also found that the petition was timely, as it was filed
within the prescription period. The CTA also ruled that the respondent's sales to Toyo Lens Corporation
and to certain establishments in the Mactan Export Processing Zone were export sales subject to VAT at
0% rate. It found that the input VAT covered by respondent's claim was not applied against any output
VAT. However, the tax court decreed that the petition should nonetheless be denied because of the
respondent's failure to present documentary evidence to show that there were foreign currency
exchange proceeds from its export sales. The CTA also observed that respondent failed to submit the
approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation
and the certification of constructive inward remittance.

Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1) proof
of its inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP
approval on its Agreement of Offsetting nor do they require certification on the amount constructively
remitted; (3) it was not legally required to prove foreign currency payments on the remaining sales to
MEPZ enterprises; and (4) it had complied with the substantiation requirements under Section 106(A)(2)
(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input tax.

On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted.
Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion
of which shall now read as follows:

WHEREFORE, finding the Petition for Review partially meritorious, respondent is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of
P2,158,714.46 representing unutilized input tax payments.

SO ORDERED.9

In granting partial reconsideration, the tax court found that there was no need for BSP approval of the
Agreement of Offsetting since the same may be categorized as an inter-company open account offset
arrangement. Hence, the respondent need not present proof of foreign currency exchange proceeds
from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of the Tax Code. However, the CTA
stressed that respondent must still prove that there was an actual offsetting of accounts to prove that
constructive foreign currency exchange proceeds were inwardly remitted as required under Section
106(A)(2)(a).

The CTA found that only the amount of Y274,043,858.00 covering respondent's sales to Toyo Lens
Corporation and purchases from said mother company for the period August 7, 1996 to August 26, 1997
were actually offset against respondent's related accounts receivable and accounts payable as shown by
the Agreement for Offsetting dated August 30, 1997. Resort to the respondent's Accounts Receivable
and Accounts Payable subsidiary ledgers corroborated the amount. The tax court also found that out of
the total export sales for the period April 1, 1996 to December 31, 1997 amounting to Y700,654,606.15,
respondent's sales to MEPZ enterprises amounted only to Y136,473,908.05 of said total. Thus, allocating
the input taxes supported by receipts to the export sales, the CTA determined that the refund/credit
amounted to only P2,158,714.46,11 computed as follows:

Total Input Taxes Claimed by respondent

P4,439,827.21

Less: Exceptions made by SGV

a.) 1996 P651,256.17

b.) 1997 104,129.13 755,385.30

Validly Supported Input Taxes

P3,684,441.91

Allocation:

Verified Zero-Rated Sales

a.) Toyo Lens Corporation Y274,043,858.00

b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05

Divided by Total Zero-Rated Sales

Y700,654,606.15

Quotient

0.5859

Multiply by Allowable Input Tax

P3,684,441.91

Amount Refundable

P2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that respondent
was not entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant
to Section 2413 of Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus, since
respondent was not subject to VAT, the Commissioner contended that the capital goods it purchased
must be deemed not used in VAT taxable business and therefore it was not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95.16

Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1) that
respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to
Sec. 24 of Rep. Act No. 7916; and (2) since respondent's business is not subject to VAT, the capital goods
it purchased are considered not used in a VAT taxable business and therefore is not entitled to a refund
of input taxes.17

The respondent opposed the Commissioner's Motion for Reconsideration and prayed that the CTA
resolution be modified so as to grant it the entire amount of tax refund or credit it was seeking.

On August 2, 2000, the Court of Tax Appeals denied the petitioner's motion for reconsideration. It held
that the grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916
was not applicable since respondent has availed of the income tax holiday incentive under Executive
Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section 2318 of Rep. Act No. 7916.
The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an exemption from
payment of income taxes for 4 or 6 years depending on whether the registration was as a pioneer or as a
non-pioneer enterprise, but subject to other national taxes including VAT.

The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R. SP
No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and
reiterating its claim that respondent is not entitled to a refund of input taxes since it is VAT-exempt.

On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondent's favor, thus:

WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions
dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.

SO ORDERED.19

The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The
appellate court held as untenable herein petitioner's argument that respondent is not entitled to a
refund because it is VAT-exempt since the evidence showed that it is a VAT-registered enterprise subject
to VAT at the rate of 0%. It agreed with the ruling of the tax court that respondent had two options
under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income tax holiday under E.O. No. 226
and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under P.D. No. 66 and
enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then the 0% VAT
rate would be applicable to it and any unutilized input VAT should be refunded to respondent upon
proper application with and substantiation by the BIR.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Hence, the instant Petition for Review now before us, with herein petitioner alleging that:

I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN
ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF
REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716.

II. SINCE RESPONDENT'S BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO REFUND OF INPUT
TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95.20

In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the
Court of Tax Appeals resolution granting a refund in the amount of P2,158,714.46 representing
unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997.

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local
taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 10921 of the NIRC. Thus, they
contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it
previously paid as provided under Section 4.103-122 of Revenue Regulations No. 7-95, notwithstanding
its registration as a VAT taxpayer. For petitioner claims that said registration was erroneous and did not
confer upon the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from
August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence,
according to respondent, its export sales are not exempt from VAT, contrary to petitioner's claim, but its
export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report
certified by an independent Certified Public Accountant that the input taxes it incurred from April 1,
1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any
output tax against which said input taxes may be offset, it had the option to file a claim for refund/tax
credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition bereft of
merit.

Petitioner's contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had
two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions
of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal
revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D.
No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals
and the Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years
starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax
Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added tax either at the rate of
ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit
for the value-added tax paid on purchases and leases of goods, properties or services.23

An exemption means that the sale of goods, properties or services and the use or lease of properties is
not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of
goods, properties or services that are VAT-exempt, is not entitled to any input tax on such purchases
despite the issuance of a VAT invoice or receipt.24

Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then
proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be
recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at
the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added
tax at 0% if made by a VAT-registered person.25 Under the value-added tax system, 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 purchase of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund.26 ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the
transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure
that goods are provided free of VAT. While the zero rating and the exemption are computationally the
same, they actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted
transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as
tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register
while registration is optional for VAT-exempt persons.

In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT
taxpayer per Certificate of Registration of the BIR.27 Further, the records show that the respondent is
subject to VAT as it availed of the income tax holiday under E.O. No. 226. Perforce, respondent is subject
to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which the Court of
Tax Appeals computed at P2,158,714.46, but which we find after recomputation'should be
P2,158,714.52.

The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals which,
by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has
accordingly developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority.28 In this case, we find no cogent reason to deviate from this well-entrenched
principle. Thus, we are persuaded that indeed the Court of Appeals committed no reversible error in
affirming the assailed ruling of the Court of Tax Appeals.

WHEREFORE, the petition is DENIED for lack of merit.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

The assailed Decision dated July 6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED
with very slight modification. Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a
TAX CREDIT CERTIFICATE in favor of respondent in the amount of P2,158,714.52 representing unutilized
input tax payments. No pronouncement as to costs.

SO ORDERED.

CIR vs. Seagate Technology (Philippines), GR No. 153866, 11 February 2005;

G.R. No. 201326, February 08, 2017

SITEL PHILIPPINES CORPORATION (FORMERLY CLIENTLOGIC PHILS., INC.), Petitioner, v. COMMISSIONER

OF INTERNAL REVENUE, Respondent.

DECISION

CAGUIOA, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by petitioner Sitel
Philippines Corporation (Sitel) against the Commissioner of Internal Revenue (CIR) seeks to reverse and
set aside the Decision dated November 11, 20112 and Resolution dated March 28, 20123 of the Court of
Tax Appeals (CTA) En Banc in CTA EB No. 644, which denied Sitel's claim for refund of unutilized input
value-added tax (VAT) for the first to fourth quarters of taxable year 2004 for being prematurely filed.

Facts

Sitel, a corporation organized and extsting under the laws of the Philippines, is engaged in the business
of providing call center services from the Philippines to domestic and offshore businesses. It is registered
with the Bureau of Internal Revenue (BIR) as a VAT taxpayer, as well as with the Board of Investments
on pioneer status as a new information technology service firm in the field of call center.4

For the period from January 1, 2004 to December 31, 2004, Sitel filed with the BIR its Quarterly VAT
Returns as follows:chanRoblesvirtualLawlibrary

Period Covered

Date Filed

1st Quarter 2004

26 April 2004

2nd Quarter 2004

26 July 2004

3rd Quarter 2004

25 October 2004

4th Quarter 2004

25 January 20055

Sitel's Amended Quarterly VAT Returns for the first to fourth quarters of 2004 declared as
follows:chanRoblesvirtualLawlibrary

Taxable Sales

(A)

Zero-Rated Sales

(B)

Total Sales
(C=A+B)

Input Tax for the [Quarter]

(D)

Input Tax from Capital Goods

(E)

Input Tax from Regular Transactions

(F+D-E)

Input Tax Allocated to Taxable Sales

[G=(A/C) x (F)]

Input Tax Allocated to Zero-Rated Sales

[H=(B/C) x (F)]

509,799.74

180,450,030.29

180,957,830.03

3,842,714.21

2,422,090.40

1,400,623.81

3,930.40

1,396,693.41

0
142,664,271.00

142,664,271.00

3,554,922.94

2,846,225.66

708,696.58

708,696.58

517,736.36

205,021,590.46

205,539,326.82

9,568,047.25

7,629,734.40

1,938,312.85

4,882.45

1,933,430.40

334,384,766.48

334,384,766.48

6,137,028.74

3,005,573.11

3,313,455.63

3,313,455.63

1,025,536.10

862,520,658.23
863,546,194.33

23,102,712.44

15,923,623.57

7,179,088.87

8,812.85

7,170,276.026

On March 28, 2006, Sitel filed separate formal claims for refund or issuance of tax credit with the One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance for its
unutilized input VAT arising from domestic purchases of goods and services attributed to zero-rated
transactions and purchases/importations of capital goods for the 1st, 2nd, 3rd and 4th quarters of 2004
in the aggregate amount of P23,093,899.59.7

On March 30, 2006, Sitel filed a judicial claim for refund or tax credit via a petition for review before the
CTA, docketed as CTA Case No. 7423.

Ruling of the CTA Division

On October 21, 2009, the CTA Division rendered a Decision8 partially granting Sitel's claim for VAT
refund or tax credit, the dispositive portion of which reads as follows:chanRoblesvirtualLawlibrary

In view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Petitioner is
entitled to the instant claim in the reduced amount of P11,155,276.59 computed as
follows:chanRoblesvirtualLawlibrary

Amount of Input VAT Claim

P 23,093,899.59

Less: Input VAT Claim on Zero-Rated Sales

7,170,276.02

Input VAT Claim on Capital Goods Purchases

P 15,923,623.57

Less: Not Properly Substantiated Input VAT Claim on Capital Goods Purchases
 Per ICPA Report (P15,923,623.57 less P13,824,129.14)

2,099,494.43

Per this Court's further verification

2,668,852.55

Refundable Input VAT on Capital Goods Purchases

P 11,155,276.59

Accordingly, respondent is ORDERED to REFUND OR ISSUE A TAX CREDIT CERTIFICATE in the reduced
amount of P11,155,276.59 representing unutilized input VAT arising from petitioner's domestic
purchases of goods and services which are attributable to zero-rated transactions and
purchases/importations of capital goods for the taxable year 2004.

SO ORDERED.9

The CTA Division denied Sitel's P7,170,276.02 claim for unutilized input VAT attributable to its zero-rated
sales for the four quarters of 2004. Relying upon the rulings of this Court in Commissioner of Internal
Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.10 (Burmeister), the CTA
Division found that Sitel failed to prove that the recipients of its services are doing business outside the
Philippines, as required under Section 108(B)(2) of the National Internal Revenue Code of 1997 (NIRC),
as amended.11

The CTA Division also disallowed the amount of P2,668,852.55 representing input VAT paid on capital
goods purchased for taxable year 2004 for failure to comply with the invoicing requirements under
Sections 113, 237, and 238 of the NIRC of 1997, as amended, and Section 4.108-1 of Revenue
Regulations No. 7-95 (RR 7-95).12

Aggrieved, Sitel filed a motion for partial reconsideration13 and Supplement (To Motion for
Reconsideration [of Decision dated October 21, 2009]),14 on November 11, 2009 and March 26,2010,
respectively.
Prior thereto, or on January 8, 2010, Sitel filed a Motion for Partial Execution of Judgment15 seeking the
execution pending appeal of the portion of the Decision dated October 21, 2009 granting refund in the
amount of P11,155,276.59, which portion was not made part of its motion for partial reconsideration.

On May 31, 2010, the CTA Division denied Sitel's Motion for Reconsideration and Supplement (To
Motion for Reconsideration [of Decision dated October 21, 2009]) for lack of merit.16

Undaunted, Sitel filed a Petition for Review17 with the CTA En Banc claiming that it is entitled to the
amount denied by the CTA Division.

Ruling of the CTA En Banc

In the assailed Decision, the CTA En Banc reversed and set aside the ruling of the CTA Division. Citing the
case of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.18 (Aichi), the CTA En
Banc ruled that the 120-day period for the CIR to act on the administrative claim for refund or tax credit,
under Section 112(D) of the NIRC of 1997, as amended, is mandatory and jurisdictional. Considering that
Sitel filed its judicial claim for VAT refund or credit without waiting for the lapse of the 120-day period
for the CIR to act on its administrative claim, the CTA did not acquire jurisdiction as there was no
decision or inaction to speak of.19 Thus, the CTA En Banc denied Sitel's entire refund claim on the
ground of prematurity. The dispositive portion of the CTA En Banc's Decision reads as
follows:chanRoblesvirtualLawlibrary

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review En Banc is DISMISSED.
Accordingly, the Decision of the CTA First Division dated October 21, 2009 and the Resolution issued by
the Special First Division dated May 31, 2010, are hereby reversed and set aside. Petitioner's refund
claim of P19,702,880.80 is DENIED on the ground that the judicial claim for the first to fourth quarters of
taxable year 2004 was prematurely filed.

SO ORDERED.20

Aggrieved, Sitel moved for reconsideration,21 but the same was denied by the Court En Banc for lack of
merit.22

Hence, the instant petition raising the following issues:chanRoblesvirtualLawlibrary

x x x WHETHER OR NOT THE AICHI RULING PROMULGATED ON OCTOBER 6, 2010 MAY BE APPLIED
RETROACTIVELY TO THE INSTANT CLAIM FOR REFUND OF INPUT VAT INCURRED IN 2004.

x x x WHETHER OR NOT THE CTA EN BANC CAN VALIDLY WITHDRAW AND REVOKE THE PORTION OF THE
REFUND CLAIM ALREADY GRANTED TO PETITIONER IN THE AMOUNT OF P11,155,276.59 AFTER TRIAL
ON THE MERITS, NOTWITHSTANDING THAT SUCH PORTION OF THE DECISION HAD NOT BEEN
APPEALED.

x x x WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OR TAX CREDIT OF ITS UNUTILIZED INPUT
VAT ARISING FROM PURCHASES OF GOODS AND SERVICES ATTRIBUTABLE TO ZERO-RATED SALES AND
PURCHASES/IMPORTATIONS OF CAPITAL GOODS FOR THE 1ST, 2ND, 3RD, [AND] 4TH QUARTERS OF
TAXABLE YEAR 2004 IN THE AGGREGATE AMOUNT OF P20,994,405.16.23

In the Resolution24 dated July 4, 2012, the CIR was required to comment on the instant petition. In
compliance thereto, the CIR filed its Comment25 on November 14, 2012.

On January 16, 2013, the Court issued a Resolution26 denying Sitel's petition for failure to sufficiently
show that the CTA En Banc committed reversible error in denying its refund claim on the ground of
prematurity based on prevailing jurisprudence.

Soon thereafter, however, or on February 12, 2013, the Court En Banc decided the 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
Revenue27 (San Roque). In that case, the Court recognized BIR Ruling No. DA-489-03 as an exception to
the mandatory and jurisdictional nature of the 120-day waiting period.

Invoking San Roque, Sitel filed a Motion for Reconsideration.28

In the Resolution29 dated June 17, 2013, the Court granted Sitel's motion and reinstated the instant
petition.

In the instant petition, Sitel claims that its judicial claim for refund was timely filed following the Court's
pronouncements in San Roque; thus, it was erroneous for the CTA En Banc to reverse the ruling of the
CTA Division and to dismiss its petition on the ground of prematurity. Sitel further argues that the
previously granted amount for refund of P11,155,276.59 should be reinstated and declared final and
executory, the same not being the subject of Sitel's partial appeal before the CTA En Banc, nor of any
appeal from the CIR.

Finally, Sitel contends that insofar as the denied portion of the claim is concerned, which the CTA En
Banc failed to pass upon with the dismissal of its appeal, speedy justice demands that the Court resolved
the same on the merits and Sitel be declared entitled to an additional refund in the amount of
P9,839,128.57.

The Court's Ruling

The Court finds the petition partly meritorious.

Site/'s Judicial Claim for VAT Refund was deemed timely filed pursuant to the Court's pronouncement in
San Roque.

Section 112(C) of the NIRC, as amended, provides:chanRoblesvirtualLawlibrary

SEC. 112. Refunds or Tax Credits of Input Tax. -

xxx

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

Based on the plain language of the foregoing provision, the CIR is given 120 days within which to grant
or deny a claim for refund. Upon receipt of CIR's decision or ruling denying the said claim, or upon the
expiration of the 120-day period without action from the CIR, the taxpayer has thirty (30) days within
which to file a petition for review with the CTA.

In Aichi, the Court ruled that the 120-day period granted to the CIR was mandatory and jurisdictional,
the non-observance of which was fatal to the filing of a judicial claim with the CTA. The Court further
explained that the two (2)-year prescriptive period under Section 112(A) of the NIRC pertained only to
the filing of the administrative claim with the BIR; while the judicial claim may be filed with the CTA
within thirty (30) days from the receipt of the decision of the CIR or the expiration of the 120-day period
of the CIR to act on the claim. Thus:chanRoblesvirtualLawlibrary

Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission
of the complete documents in support of the application [for tax refund/credit]," within which to grant
or deny the claim. In case of full or partial denial by the CIR, the taxpayer's recourse is to file an appeal
before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day
period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to
appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For
this reason, we find the filing of the judicial claim with the CTA premature.

Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within the two-year
prescriptive period has no legal basis.

There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two 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." The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or refund"
refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is
apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has
"120 days from the submission of complete documents in support of the application filed in accordance
with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is
made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an
appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.

xxx

In fine, the premature filing of respondent's claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.30

However, in San Roque, the Court clarified that the 120-day period does not apply to claims for refund
that were prematurely filed during the period from the issuance of BIR Ruling No. DA-489-03, on
December 10, 2003, until October 6, 2010, when Aichi was promulgated. The Court explained that BIR
Ruling No. DA-489-03, which expressly allowed the filing of judicial claims with the CTA even before the
lapse of the 120-day period, provided for a valid claim of equitable estoppel because the CIR had misled
taxpayers into prematurely filing their judicial claims before the CTA:chanRoblesvirtualLawlibrary

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not
acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There
are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific
ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific
ruling is applicable only to such particular taxpayer. The second exception is where the Commissioner,
through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into
filing prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to
later on question the CTA's assumption of jurisdiction over such claim since equitable estoppel has set in
as expressly authorized under Section 246 of the Tax Code.
xxx

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.31 (Emphasis supplied).

In Visayas Geothermal Power Company v. Commissioner of Internal Revenue,32 the Court came up with
an outline summarizing the pronouncements in San Roque, to wit:chanRoblesvirtualLawlibrary

For clarity and guidance, the Court deems it proper to outline the rules laid down in San Roque with
regard to claims for refund or tax credit ofunutilized creditable input VAT. They are as
follows:chanRoblesvirtualLawlibrary

1. When to file an administrative claim with the CIR:

General rule- Section 112(A) and Mirant

Within 2 years from the close of the taxable quarter when the sales were made.

Exception - Atlas

Within 2 years from the date of payment of the output VAT, if the administrative claim was filed from
June 8, 2007 (promulgation of Atlas) to September 12, 2008 (promulgation of Mirant).

2. When to file a judicial claim with the CTA:

General rule-Section 112(D); not Section 229

Within 30 days from the full or partial denial of the administrative claim by the CIR; or

Within 30 days from the expiration of the 120-day period provided to the CIR to decide on the claim.
This is mandatory and jurisdictional beginning January 1, 1998 (effectivity of 1997 NIRC).

Exception - BIR Ruling No. DA-489-03

The judicial claim need not await the expiration of the 120-day period, if such was filed from December
10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010 (promulgation of Aichi).33 (Emphasis
and underscoring supplied).

In this case, records show that Sitel filed its administrative and judicial claim for refund on March 28,
2006 and March 30, 2006, respectively, or after the issuance of BIR Ruling No. DA-489-03, but before the
date when Aichi was promulgated. Thus, even though Sitel filed its judicial claim prematurely, i.e.,
without waiting for the expiration of the 120-day mandatory period, the CTA may still take cognizance of
the case because the claim was filed within the excepted period stated in San Roque. In other words,
Sitel's judicial claim was deemed timely filed and should have not been dismissed by the CTA En Banc.
Consequently, the October 21, 2009 Decision34 of the CTA Division partially granting Sitel's judicial claim
for refund in the reduced amount of P11,155,276.59, which is not subject of the instant appeal, should
be reinstated. In this regard, since the CIR did not appeal said decision to the CTA En Banc, the same is
now considered final and beyond this Court's review.

Sitel now questions the following portions of its refund claim which the CTA Division denied: (1)
P7,170,276.02, representing unutilized input VAT on purchases of goods and services attributable to
zero-rated sales, which was denied because Sitel failed to prove that the call services it rendered for the
year 2004 were made to non-resident foreign clients doing business outside the Philippines; and (2)
P2,668,852.55 representing input VAT on purchases of capital goods, because these are supported by
invoices and official receipts with pre-printed TIN-V instead of TIN-VAT, as required under Section 4.108-
1 of RR 7-95.

Sitel claims that testimonial and documentary evidence sufficiently established that its clients were non-
resident foreign corporations not doing business in Philippines. It also asserts that the input VAT on its
purchases of capital goods were duly substantiated because the supporting official receipts substantially
complied with the invoicing requirements provided by the rules.
In other words, Sitel wants the Court to review factual findings of the CTA Division, reexamine the
evidence and determine on the basis thereof whether it should be refunded the additional amount of
P9,839,128.57. This, however, cannot be done in the instant case for settled is the rule that this Court is
not a trier of facts and does not normally embark in the evaluation of evidence adduced during trial.35 It
is not this Court's function to analyze or weigh all over again the evidence already considered in the
proceedings below, the Court's jurisdiction being limited to reviewing only errors of law that may have
been committed by the lower court.36

Furthermore, the Court accords findings and conclusions of the CTA with the highest respect.37 As a
specialized court dedicated exclusively to the resolution of tax problems, the CTA has accordingly
developed an expertise on the subject of taxation.38 Thus, its decisions are presumed valid in every
aspect and will not be overturned on appeal, unless the Court finds that the questioned decision is not
supported by substantial evidence or there has been an abuse or improvident exercise of authority on
the part of the tax court.39

Upon careful review of the instant case, and directly addressing the issues raised by Sitel, the Court finds
no cogent reason to reverse or modify the findings of the CTA Division.

The Court expounds.

Sitel failed to prove that the recipients of its call services are foreign corporations doing business outside
the Philippines.

Sitel's claim for refund is anchored on Section 112(A)40 of the NIRC, which allows the refund or credit of
input VAT attributable to zero-rated or effectively zero-rated sales. In relation thereto, Sitel points to
Section 108(B)(2) of the NIRC [formerly Section 102(b)(2) of the NIRC of 1977, as amended] as legal basis
for treating its sale of services as zero-rated or effectively zero-rated. Section 108(B)(2)
reads:chanRoblesvirtualLawlibrary

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

xxx
(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:

xxx

(2) Services other than those mentioned in the preceding paragraph 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
Bangko Sentral ng Pilipinas (BSP); (Emphasis supplied)

In Burmeister, the Court clarified that an essential condition to qualify for zero-rating under the
aforequoted provision is that the service-recipient must be doing business outside the Philippines, to
wit:chanRoblesvirtualLawlibrary

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. x x x

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.

xxx

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) [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."41

Foilowing Burmeister, the Court, in Accenture, Inc. v. Commissioner of Internal Revenue,42 (Accenture),
emphasized that a taxpayer claiming for a VAT refund or credit under Section 108(B) has the burden to
prove not only that the recipient of the service is a foreign corporation, but also that said corporation is
doing business outside the Philippines. For failure to discharge this burden, the Court denied
Accenture's claim for refund.

We rule that the recipient of the service must be doing business outside the Philippines for the
transaction to qualify for zero-rating under Section 108(B) of the Tax Code.

xxx

The evidence presented by Accenture may have established that its clients are foreign. This fact does
not automatically mean, however, that these clients were doing business outside the Philippines. After
all, the Tax Code itself has provisions for a foreign corporation engaged in business within the
Philippines and vice versa, to wit:chanRoblesvirtualLawlibrary

SEC. 22. Definitions. - When used in this Title:

xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or
business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines. (Emphasis in the original)

Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the
service be proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident
foreign corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
We ruled thus in Commissioner of Internal Revenue v. British Overseas Airways
Corporation:chanRoblesvirtualLawlibrary

x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"

business. Each case must be judged in the light of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business organization.
"In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character."

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.

Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients
were foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence
was presented by Accenture to prove the fact that the foreign clients to whom petitioner rendered its
services were clients doing business outside the Philippines.

As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements,
Memo Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture
merely substantiated the existence of sales, receipt of foreign currency payments, and inward
remittance of the proceeds of such sales duly accounted for in accordance with BSP rules, all of these
were devoid of any evidence that the clients were doing business outside of the Philippines.43
(Emphasis supplied; citations omitted)

In the same vein, Sitel fell short of proving that the recipients of its call services were foreign
corporations doing business outside the Philippines. As correctly pointed out by the CTA Division, while
Sitel's documentary evidence, which includes Certifications issued by the Securities and Exchange
Commission and Agreements between Sitel and its foreign clients, may have established that Sitel
rendered services to foreign corporations in 2004 and received payments therefor through inward
remittances, said documents failed to specifically prove that such foreign clients were doing business
outside the Philippines or have a continuity of commercial dealings outside the Philippines.

Thus, the Court finds no reason to reverse the ruling of the CTA Division denying the refund of
P7,170,276.02, allegedly representing Sitel's input VAT attributable to zero-rated sales.

Sitel failed to strictly comply with invoicing requirements for VAT refund.

The CTA Division also did not err when it denied the amount of P2,668,852.55, allegedly representing
input taxes claimed on Sitel's domestic purchases of goods and services which are supported by
invoices/receipts with pre-printed TIN-V. In Western Mindanao Power Corp. v. Commissioner of Internal
Revenue,44 the Court ruled that in a claim for tax refund or tax credit, the applicant must prove not only
entitlement to the grant of the claim under substantive law, he must also show satisfaction of all the
documentary and evidentiary requirements for an administrative claim for a refund or tax credit and
compliance with the invoicing and accounting requirements mandated by the NIRC, as well as by
revenue regulations implementing them. The NIRC requires that the creditable input VAT should be
evidenced by a VAT invoice or official receipt,45 which may only be considered as such when the TIN-
VAT is printed thereon, as required by Section 4.108-1 of RR 7-95.

The Court's pronouncement in Kepco Philippines Corp. v. Commissioner of Internal Revenue46 is

instructive:chanRoblesvirtualLawlibrary

Furthermore, Kepco insists that Section 4.108-1 of Revenue Regulation 07-95 does not require the word
"TIN-VAT" to be imprinted on a VAT-registered person's supporting invoices and official receipts and so
there is no reason for the denial of its P4,720,725.63 claim of input tax.

In this regard, Internal Revenue Regulation 7-95 (Consolidated Value-Added Tax Regulations) is clear.
Section 4.108-1 thereof reads:chanRoblesvirtualLawlibrary

Only VAT registered persons are required to print their TIN followed by the word "VAT" in their invoice
or receipts and this shall be considered as a "VAT" Invoice. All purchases covered by invoices other than
'VAT Invoice' shall not give rise to any input tax.

Contrary to Kepco's allegation, the regulation specifically requires the VAT registered person to imprint
TIN-VAT on its invoices or receipts. Thus, the Court agrees with the CTA when it wrote: "[T]o be
considered a 'VAT invoice,' the TIN-VAT must be printed, and not merely stamped. Consequently,
purchases supported by invoices or official receipts, wherein the TIN-VAT is not printed thereon, shall
not give rise to any input VAT. Likewise, input VAT on purchases supported by invoices or official
receipts which are NON-VAT are disallowed because these invoices or official receipts are not
considered as 'VAT Invoices."47

In the same vein, considering that the subject invoice/official receipts are not imprinted with the
taxpayer's TIN followed by the word VAT, these would not be considered as VAT invoices/official
receipts and would not give rise to any creditable input VAT in favor of Sitel.

At this juncture, it bears to emphasize that "[t]ax refunds or tax credits just like tax exemptions are
strictly construed against taxpayers, the latter having the burden to prove strict compliance with the
conditions for the grant of the tax refund or credit."48

WHEREFORE, premises considered, the instant petition for review is GRANTED IN PART. The Decision
dated November 11, 2011 and Resolution dated March 28, 2012 of the CTA En Banc in CTA EB No. 644
are hereby REVERSED and SET ASIDE. Accordingly, the October 21, 2009 Decision of the CTA First
Division in CTA Case No. 7423 is hereby REINSTATED.

Respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT CERTIFICATE,
in favor of the petitioner in the amount of P11,155,276.59, representing unutilized input VAT arising
from purchases/importations of capital goods for taxable year 2004.

SO ORDERED.

G.R. No. 222436, July 23, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. EURO-PHILIPPINES AIRLINE SERVICES, INC.,

Respondent.

DECISION
REYES, JR., J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, seeking to set aside the
Decision2 dated July 14, 2015 and Resolution3 dated December 22, 2015 of the Court of Tax Appeals
(CTA) En Banc in case CTA EB Case No. 1106 affirming the Decision of the CTA Special First Division which
cancelled and withdrew the assessments for deficiency value-added tax, as well as interest and
surcharges.

THE ANTECEDENTS

Respondent Euro-Philippines Airline Services, Inc. (Euro-Phil) is an exclusive passenger sales agent of
British Airways, PLC, an off-line international airline in the Philippines to service the latter's passengers in
the Philippines.4

Euro-Phil received a Formal Assessment Notice (FAN)5 dated September 13, 2010 from petitioner
Commissioner of Internal Revenue (CIR) on 14 September 2010 in the aggregate amount of
P4,271,228,20.00 consisting of assessment of Value Added Tax (VAT), among others, for the taxable year
ending March 31, 2007 with Details of Discrepancies.6

On 29 September 2010, Euro-Phil filed a final protest on CIR.7

Following the lapse of the 180-day period within which to resolve the protest, Euro-Phil filed a petition
for review before the Court of Tax Appeals Special First Division (CTA-First Division) praying, among
others, for the cancellation of the FAN issued by CIR for deficiency VAT. Euro-Phil argued therein that
the receipts that are supposedly subject to 12% VAT actually pertained to "services rendered to persons
engaged exclusively in international air transport" hence, zero-rated.8

The CTA- Special First Division rendered a Decision9 on 25 July 2013 finding Euro-Phil is rendering
services to persons engaged in international air transport operations and, as such, is zero-rated under
Section 108 of the NIRC of 1997. The said decision disposed thus:10

WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. The assessments for deficiency
value-added tax and documentary stamp tax, as well as the interests and surcharges, for the taxable
year ending March 31, 2007 are hereby CANCELLED and WITHDRAWN for lack of legal basis.

xxxx

SO ORDERED."11

CIR filed a Motion for Partial Reconsideration of the said Decision covering only the value-added tax that
was denied therein. Such motion was denied for lack of merit in a Resolution dated 18 November
2013.12

CIR then appealed before the CTA En Banc alleging that CTA Special First Division erred in not holding
that Euro-Phil's services is subject to 12% VAT.13

The CTA En Banc rendered a Decision14 denying the petition and sustaining the CTA Special First
Division with which CTA Presiding Justice Roman G. Del Rosario (Justice Del Rosario) concurred with
Dissenting Opinion.15 The said decision disposed thus:

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED. Accordingly, the
Decision and the Resolution, dated July 25, 2013 and November 18, 2013, respectively, are hereby
AFFIRMED.
SO ORDERED.16

CIR moved for reconsideration of the said decision insisting that the presentation of VAT official receipts
with the words "zero-rated" imprinted thereon is indispensable to cancel the value-added tax (VAT)
assessment against Euro-Phil.17 However, it was denied in a Resolution18 dated December 22, 2015
with a dissenting opinion19 from CTA Presiding Justice (Justice del Rosario), to quote as follows,
pertinent to the issue of VAT:

In the case at bar, respondent is assessed for deficiency VAT for services it rendered as passenger sales
agent of British Airways PLC. Respondent invokes that services rendered by VAT-registered persons to
persons engaged in international air transport operations is subject to zero percent (0%) rate, pursuant
to Section 108 of the National Internal Revenue Code (NIRC) of 1997, as amended.

To reiterate, it is not enough for respondent to invoke Section 108 of the NIRC of 1997, as amended.
Respondent has likewise the burden to show compliance with the invoicing requirements laid down in
Section 113 of the NIRC of 1997, as amended, to be entitled to zero rating. Needless to say, unless
appropriately refuted, tax assessments by tax examiners are presumed correct and made in good faith.

In fine, the issue of compliance with Section 113 of the NIRC of 1997, as amended, is vital in the
disposition of the present controversy which the Court should consider, lest an indispensable
requirement for the availment of VAT zero-rating is blatantly ignored.

For all the foregoing, I VOTE to grant petitioner's Motion for Reconsideration and UPHOLD the VAT
assessment."20

Hence, this petition with CIR adopting Justice Del Rosario's dissent and that Euro-Phil had to comply with
the invoicing requirements to be entitled to zero rating of VAT.21 CIR also takes exception to the
doctrine of "issues cannot be raised the first time on appeal."

The Issues
Whether or not the issue of non-compliance of the invoicing requirements by Euro-Phil must be
recognized despite being raised only on appeal; and

Whether or not the Court of Tax Appeals En Banc erred in finding that the transaction sale made by
respondent is entitled to the benefit of zero-rated VAT despite its failure to comply with invoicing
requirements as mandated by law.

Our Ruling

The petition is denied.

The CTA En Banc did not commit any reversible error.

Euro-Phil contends that CIR raised new matters in its Petition for Review with the CTA En Banc and does
it again in this Petition for Review which should not be allowed by this Court.

We agree.

In the case of Aguinaldo Industries Corporation (Fishing Nets Division) vs. Commissioner of Internal
Revenue and the Court of Tax Appeals,22 this doctrine was explained by this Court as follows:

To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level would be to sanction a procedure whereby the
court – which is supposed to review administrative determinations would not review, but determine and
decide for the first time, a question not raised at the administrative forum. This cannot be permitted, for
the same reason that underlies the requirement of prior exhaustion of administrative remedies to give
administrative authorities the prior opportunity to decide controversies within its competence, and in
much the same way that, on the judicial level, issues not raised in the lower court cannot be raised for
the first time on appeal.23

Here, it is not disputed that CIR raised the issue that the alleged failure to present VAT official receipts
with the imprinted words "zero rated" adopting the dissent of Justice Del Rosario, only at the latter
stage of the appeal on Motion for Reconsideration of the CTA En Banc's decision. Accordingly, with the
doctrine that issues may not be raised for the first time on appeal, CIR should not be allowed by this
Court to raise this matter.

Moreover, while the issue arose from the dissent of Justice Del Rosario, the law is clear on the matter.
Section 108 of the NIRC of 1997 imposes zero percent (0%) value-added tax on services performed in the
Philippines by VAT-registered persons to persons engaged in international air transport operations, as it
thus provides:

Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –

(A) x x x x

(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) x x x x

xxxx

(4) Services rendered to persons engaged in international shipping or International air-transport

operations, including leases of property for use thereof;

xxxx

Here, there is no dispute that Euro-Phil is VAT registered. Next, it is also not disputed that the services
rendered by Euro-Phil was to a person engaged in international air-transport operations. Thus, by
application, Section 108 of the NIRC of 1997 subjects the services of Euro-Phil to British Airways PLC, to
the rate of zero percent VAT.
While CIR contends that the dissenting opinion of Justice del Rosario that Euro-Phil's failure to present
and offer any proof to show that it has complied with the invoicing requirements, deems its sale of
services to British Airways PLC subject to 12% VAT, it does not negate the established fact that British
Airways PLC is engaged in international air-transport operations.

Moreover, as dictated by Section 113 of the NIRC of 1997, on the said provisions on the "Consequences
of Issuing Erroneous VAT Invoice of VAT Official Receipt,24 nowhere therein is a presumption created by
law that the non-imprintment of the word "zero rated" deems the transaction subject to 12 % VAT. In
addition, Section 4. 113-4 of Revenue Regulations 16-2005,25 Consolidated Value-Added Tax
Regulations of 2005, also does not state that the non-imprintment of the word "zero rated" deems the
transaction subject to 12 %VAT. Thus, in this case, failure to comply with invoicing requirements as
mandated by law does not deem the transaction subject to 12% VAT.

In view of the foregoing considerations, the Court finds that the CTA En Banc did not commit any
reversible error.

WHEREFORE, the Petition for Review is DENIED. The Decision26 dated July 14, 2015 and Resolution27
dated December 22,2015 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 1106 is
AFFIRMED.

SO ORDERED.

G.R. No. 158885 October 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680

FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE. Respondents.

RESOLUTION

LEONARDO-DE CASTRO, J.:

Before us is respondents’ Motion for Reconsideration of our Decision dated April 2, 2009 which granted
the consolidated petitions of petitioner Fort Bonifacio Development Corporation, the dispositive portion
of which reads:

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the
Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting
from petitioner the amount of ₱28,413,783.00 representing the transitional input tax credit due it for
the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of ₱347,741,695.74 paid
as output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available
to petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No
pronouncement as to costs.

The Motion for Reconsideration raises the following arguments:

SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY REPUBLIC
ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT OF REAL
PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS
INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN
SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX
CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT TO VAT FOR THE FIRST TIME.

II

SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE REGULATIONS
NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON REAL
PROPERTIES.

III

REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.

The instant motion for reconsideration lacks merit.

The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It
amended several provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise
accommodated the potential burdens of the shift to the VAT system by allowing newly VAT-registered
persons to avail of a transitional input tax credit as provided for in Section 105 of the Old NIRC. Section
105 as amended by EO 273 reads:

Sec. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed
by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods,
materials and supplies, whichever is higher, which shall be creditable against the output tax.

RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first
time value-added-tax on sale of real properties. The amendment reads:
Sec. 100. Value-added-tax on sale of goods or properties. — (a) Rate and base of tax. — There shall be
levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added
tax equivalent to 10% of the gross selling price or gross value in money of the goods, or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.1avvph!1

(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business; xxx

The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the
enactment of RA 7716. Section 105 however was amended with the passage of the new National
Internal Revenue Code of 1997 (New NIRC), also officially known as Republic Act (RA) 8424. The
provisions on the transitional input tax credit are now embodied in Section 111(A) of the New NIRC,
which reads:

Section 111. Transitional/Presumptive Input Tax Credits. –

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the
value of such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax. [Emphasis ours.]

The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporation’s
(FBDC) presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation
7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section 4.105-1 of RR
7-95 provides:

Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers who became VAT-registered
persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of ₱500,000.00 or
who voluntarily register even if their turnover does not exceed ₱500,000.00 shall be entitled to a
presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods
purchased for resale in their present condition; (b) materials purchased for further processing, but
which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d)
goods in process and supplies, all of which are for sale or for use in the course of the taxpayer’s trade or
business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on
or after the effectivity of EO 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is
higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person.

In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-
95 for being in conflict with the law. It held that the CIR had no power to limit the meaning and coverage
of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification to
make such limitation. This it did when it restricted the application of Section 105 in the case of real
estate dealers only to improvements on the real property belonging to their beginning inventory.

A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is
the cardinal rule in statutory construction that a statute’s clauses and phrases must not be taken as
detached and isolated expressions, but the whole and every part thereof must be considered in fixing
the meaning of any of its parts in order to produce a harmonious whole. Every part of the statute must
be interpreted with reference to the context, i.e., that every part of the statute must be considered
together with other parts of the statute and kept subservient to the general intent of the whole
enactment.1

In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe
the constituent parts together; ascertain the legislative intent from the whole act; consider each and
every provision thereof in the light of the general purpose of the statute; and endeavor to make every
part effective, harmonious and sensible.2

The statutory definition of the term "goods or properties" leaves no room for doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – xxx.

(1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business; xxx.

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

Sec. 105. Transitional Input tax Credits. – A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent
to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax.

The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held
primarily for sale to costumers or held for lease in the ordinary course of business." Having been defined
in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could not have a
different meaning. This has been explained in the Decision dated April 2, 2009, thus:

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood in the business sense, refers to the product which the
VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real
properties themselves which constitute their "goods." Such real properties are the operating assets of
the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business." Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By
limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened the
definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue
regulation itself has provided.

Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on
or after the effectivity of EO 273 (January 1, 1988).

As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot contravene the
law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term
"goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of
Finance. The rules and regulations that administrative agencies promulgate, which are the product of a
delegated legislative power to create new and additional legal provisions that have the effect of law,
should be within the scope of the statutory authority granted by the legislature to the objects and
purposes of the law, and should not be in contradiction to, but in conformity with, the standards
prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is
intended to implement. Any rule that is not consistent with the statute itself is null and void. 4

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of
the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act
of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or
administrative ruling, the basic law prevails.5

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax
credit under Section 105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically
a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following
paragraph:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on
or after the effectivity of E.O. 273 (January 1, 1988).

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by
RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real
properties as goods is concerned. The failure to add a specific repealing clause would not necessarily
indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted paragraph was
deleted created an irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and
RR 7-95.

We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio.

At the outset, it must be stressed that FBDC sought the refund of the total amount of ₱347,741,695.74
which it had itself paid in cash to the BIR. It is argued that the transitional input tax credit applies only
when taxes were previously paid on the properties in the beginning inventory and that there should be a
law imposing the tax presumed to have been paid. The thesis is anchored on the argument that without
any VAT or other input business tax imposed by law on the real properties at the time of the sale, the 8%
transitional input tax cannot be presumed to have been paid.

The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax
credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of "eight
percent (8%) of the value of such inventory" followed by the clause "or the actual value-added tax paid
on such goods, materials and supplies," the implication is clear that under the first clause, "eight percent
(8%) of the value of such inventory," the law does not contemplate the payment of any prior tax on such
inventory. This is distinguished from the second clause, "the actual value-added tax paid on the goods,
materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed.
Had the intention of the law been to limit the amount to the actual VAT paid, there would have been no
need to explicitly allow a claim based on 8% of the value of such inventory.
The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was
paid, whether or not it was actually paid, requires a transaction where a tax has been imposed by law, is
utterly without basis in law. The rationale behind the provisions of Section 105 was aptly elucidated in
the Decision sought to be reconsidered, thus:

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as
output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by
affording the opportunity to offset the losses incurred through the remittance of the output VAT at a
stage when the person is yet unable to credit input VAT payments.

As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were previously paid on the properties in the
beginning inventory and there is a law imposing the tax which is presumed to have been paid, is to
impose conditions or requisites to the application of the transitional tax input credit which are not found
in the law. The courts must not read into the law what is not there. To do so will violate the principle of
separation of powers which prohibits this Court from engaging in judicial legislation.6

WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of
merit.

SO ORDERED.
G.R. No. 173425 September 4, 2012

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

DECISION

DEL CASTILLO, J.:

Courts cannot limit the application or coverage of a law, nor can it impose conditions not provided
therein. To do so constitutes judicial legislation.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the July 7, 2006
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 61436, the dispositive portion of which reads.

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Decision dated October 12,
2000 of the Court of Tax Appeals in CTA Case No. 5735, denying petitioner’s claim for refund in the
amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-
Seven Centavos (₱ 359,652,009.47), is hereby AFFIRMED.
SO ORDERED.2

Factual Antecedents

Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered domestic corporation
engaged in the development and sale of real property.3 The Bases Conversion Development Authority
(BCDA), a wholly owned government corporation created under Republic Act (RA) No. 7227,4 owns 45%
of petitioner’s issued and outstanding capital stock; while the Bonifacio Land Corporation, a consortium
of private domestic corporations, owns the remaining 55%.5

On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40,6 dated December 8, 1992,
petitioner purchased from the national government a portion of the Fort Bonifacio reservation, now
known as the Fort Bonifacio Global City (Global City).7

On January 1, 1996, RA 77168 restructured the Value-Added Tax (VAT) system by amending certain
provisions of the old National Internal Revenue Code (NIRC). RA 7716 extended the coverage of VAT to
real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business.9

On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue (BIR) Revenue District
No. 44, Taguig and Pateros, an inventory of all its real properties, the book value of which aggregated ₱
71,227,503,200.10 Based on this value, petitioner claimed that it is entitled to a transitional input tax
credit of ₱ 5,698,200,256,11 pursuant to Section 10512 of the old NIRC.

In October 1996, petitioner started selling Global City lots to interested buyers.13

For the first quarter of 1997, petitioner generated a total amount of ₱ 3,685,356,539.50 from its sales
and lease of lots, on which the output VAT payable was ₱ 368,535,653.95.14 Petitioner paid the output
VAT by making cash payments to the BIR totalling ₱ 359,652,009.47 and crediting its unutilized input tax
credit on purchases of goods and services of ₱ 8,883,644.48.15
Realizing that its transitional input tax credit was not applied in computing its output VAT for the first
quarter of 1997, petitioner on November 17, 1998 filed with the BIR a claim for refund of the amount of
₱ 359,652,009.47 erroneously paid as output VAT for the said period.16

Ruling of the Court of Tax Appeals

On February 24, 1999, due to the inaction of the respondent Commissioner of Internal Revenue (CIR),
petitioner elevated the matter to the Court of Tax Appeals (CTA) via a Petition for Review.17

In opposing the claim for refund, respondents interposed the following special and affirmative defenses:

xxxx

8. Under Revenue Regulations No. 7-95, implementing Section 105 of the Tax Code as amended by E.O.
273, the basis of the presumptive input tax, in the case of real estate dealers, is the improvements, such
as buildings, roads, drainage systems, and other similar structures, constructed on or after January 1,
1988.

9. Petitioner, by submitting its inventory listing of real properties only on September 19, 1996, failed to
comply with the aforesaid revenue regulations mandating that for purposes of availing the presumptive
input tax credits under its Transitory Provisions, "an inventory as of December 31, 1995, of such goods
or properties and improvements showing the quantity, description, and amount should be filed with the
RDO no later than January 31, 1996. x x x"18

On October 12, 2000, the CTA denied petitioner’s claim for refund. According to the CTA, "the benefit of
transitional input tax credit comes with the condition that business taxes should have been paid first."19
In this case, since petitioner acquired the Global City property under a VAT-free sale transaction, it
cannot avail of the transitional input tax credit.20 The CTA likewise pointed out that under Revenue
Regulations No. (RR) 7-95, implementing Section 105 of the old NIRC, the 8% transitional input tax credit
should be based on the value of the improvements on land such as buildings, roads, drainage system
and other similar structures, constructed on or after January 1, 1998, and not on the book value of the
real property.21 Thus, the CTA disposed of the case in this manner:
WHEREFORE, in view of all the foregoing, the claim for refund representing alleged overpaid value-
added tax covering the first quarter of 1997 is hereby DENIED for lack of merit.

SO ORDERED.22

Ruling of the Court of Appeals

Aggrieved, petitioner filed a Petition for Review23 under Rule 43 of the Rules of Court before the CA.

On July 7, 2006, the CA affirmed the decision of the CTA. The CA agreed that petitioner is not entitled to
the 8% transitional input tax credit since it did not pay any VAT when it purchased the Global City
property.24 The CA opined that transitional input tax credit is allowed only when business taxes have
been paid and passed-on as part of the purchase price.25 In arriving at this conclusion, the CA relied
heavily on the historical background of transitional input tax credit.26 As to the validity of RR 7-95,
which limited the 8% transitional input tax to the value of the improvements on the land, the CA said
that it is entitled to great weight as it was issued pursuant to Section 24527 of the old NIRC.28

Issues

Hence, the instant petition with the principal issue of whether petitioner is entitled to a refund of ₱
359,652,009.47 erroneously paid as output VAT for the first quarter of 1997, the resolution of which
depends on:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue Regulations
No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit which may be claimed
under Section 105 of the National Internal Revenue Code to the "improvements" on real properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the National
Internal Revenue Code.
3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue, and
declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals, were in
violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105 of
the National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax by petitioner on its land before
it may claim the input tax credit granted by Section 105 of the National Internal Revenue Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose of the
transitional/presumptive input tax provided for in Section 105 of the National Internal Revenue Code.

3.05.g. Whether the economic and social objectives in the acquisition of the subject property by
petitioner from the Government should be taken into consideration.29

Petitioner’s Arguments

Petitioner claims that it is entitled to recover the amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the first quarter of 1997 since its transitional input tax credit of ₱ 5,698,200,256 is more
than sufficient to cover its output VAT liability for the said period.30

Petitioner assails the pronouncement of the CA that prior payment of taxes is required to avail of the 8%
transitional input tax credit.31 Petitioner contends that there is nothing in Section 105 of the old NIRC to
support such conclusion.32

Petitioner further argues that RR 7-95, which limited the 8% transitional input tax credit to the value of
the improvements on the land, is invalid because it goes against the express provision of Section 105 of
the old NIRC, in relation to Section 10033 of the same Code, as amended by RA 7716.34
Respondents’ Arguments

Respondents, on the other hand, maintain that petitioner is not entitled to a transitional input tax credit
because no taxes were paid in the acquisition of the Global City property.35 Respondents assert that
prior payment of taxes is inherent in the nature of a transitional input tax.36 Regarding RR 7-95,
respondents insist that it is valid because it was issued by the Secretary of Finance, who is mandated by
law to promulgate all needful rules and regulations for the implementation of Section 105 of the old
NIRC.37

Our Ruling

The petition is meritorious.

The issues before us are no longer new or novel as these have been resolved in the related case of Fort
Bonifacio Development Corporation v. Commissioner of Internal Revenue.38

Prior payment of taxes is not required

for a taxpayer to avail of the 8%

transitional input tax credit

Section 105 of the old NIRC reads:

SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent
to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax. (Emphasis supplied.)
Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision to indicate
that prior payment of taxes is necessary for the availment of the 8% transitional input tax credit.
Obviously, all that is required is for the taxpayer to file a beginning inventory with the BIR.

To require prior payment of taxes, as proposed in the Dissent is not only tantamount to judicial
legislation but would also render nugatory the provision in Section 105 of the old NIRC that the
transitional input tax credit shall be "8% of the value of [the beginning] inventory or the actual [VAT]
paid on such goods, materials and supplies, whichever is higher" because the actual VAT (now 12%) paid
on the goods, materials, and supplies would always be higher than the 8% (now 2%) of the beginning
inventory which, following the view of Justice Carpio, would have to exclude all goods, materials, and
supplies where no taxes were paid. Clearly, limiting the value of the beginning inventory only to goods,
materials, and supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it
would have specifically stated that the beginning inventory excludes goods, materials, and supplies
where no taxes were paid. As retired Justice Consuelo Ynares-Santiago has pointed out in her Concurring
Opinion in the earlier case of Fort Bonifacio:

If the intent of the law were to limit the input tax to cases where actual VAT was paid, it could have
simply said that the tax base shall be the actual value-added tax paid. Instead, the law as framed
contemplates a situation where a transitional input tax credit is claimed even if there was no actual
payment of VAT in the underlying transaction. In such cases, the tax base used shall be the value of the
beginning inventory of goods, materials and supplies.39

Moreover, prior payment of taxes is not required to avail of the transitional input tax credit because it is
not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund. Tax refund is defined
as the money that a taxpayer overpaid and is thus returned by the taxing authority.40 Tax credit, on the
other hand, is an amount subtracted directly from one’s total tax liability.41 It is any amount given to a
taxpayer as a subsidy, a refund, or an incentive to encourage investment. Thus, unlike a tax refund, prior
payment of taxes is not a prerequisite to avail of a tax credit. In fact, in Commissioner of Internal
Revenue v. Central Luzon Drug Corp.,42 we declared that prior payment of taxes is not required in order
to avail of a tax credit.43 Pertinent portions of the Decision read:

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On
the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even
though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision
for donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s tax due. The tax
credits in both instances allude to the prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax) - registered person engaging in transactions -- whether or
not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not
directly attributable to either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-registered
person in the course of trade or business; or the transitional input tax determined in accordance with
Section 111(A). The latter type may in fact be an amount equivalent to only eight percent of the value of
a VAT-registered person’s beginning inventory of goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said items. Clearly from this provision, the tax
credit refers to an input tax that is either due only or given a value by mere comparison with the VAT
actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the
purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel
and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price of public
works contracts entered into with the government, again, no prior tax payments are needed for the use
of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable input
taxes merely due -- again not necessarily paid to -- the government and attributable to such sales, to the
extent that the input taxes have not been applied against output taxes. Where a taxpayer is engaged in
zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable
input taxes due that are not directly and entirely attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for
VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of
taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed,
even though no prior tax payments are not required. Specifically, in this provision, the imposition of a
final withholding tax rate on cash and/or property dividends received by a nonresident foreign
corporation from a domestic corporation is subjected to the condition that a foreign tax credit will be
given by the domiciliary country in an amount equivalent to taxes that are merely deemed paid.
Although true, this provision actually refers to the tax credit as a condition only for the imposition of a
lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our government
but the domiciliary country that credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the
income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid
-- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5)
provides that for such taxes incurred but not paid, a tax credit may be allowed, subject to the condition
precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by
petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of
any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that
grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income
that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the former
is merely allowed as a credit against the tax levied in the latter. Apparently, payment is made to the
state of source, not the state of residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by
Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of export. In order to avail of such credits under
the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require
prior tax payments by private establishments concerned. However, we do not agree with its finding that
the carry-over of tax credits under the said special law to succeeding taxable periods, and even their
application against internal revenue taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or use, not the
existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss in
its financial statements is no different from another that presents a net income. Both are entitled to the
tax credit provided for under RA 7432, since the law itself accords that unconditional benefit. However,
for the losing establishment to immediately apply such credit, where no tax is due, will be an
improvident usance.44

In this case, when petitioner realized that its transitional input tax credit was not applied in computing
its output VAT for the 1st quarter of 1997, it filed a claim for refund to recover the output VAT it
erroneously or excessively paid for the 1st quarter of 1997. In filing a claim for tax refund, petitioner is
simply applying its transitional input tax credit against the output VAT it has paid. Hence, it is merely
availing of the tax credit incentive given by law to first time VAT taxpayers. As we have said in the earlier
case of Fort Bonifacio, the provision on transitional input tax credit was enacted to benefit first time VAT
taxpayers by mitigating the impact of VAT on the taxpayer.45 Thus, contrary to the view of Justice
Carpio, the granting of a transitional input tax credit in favor of petitioner, which would be paid out of
the general fund of the government, would be an appropriation authorized by law, specifically Section
105 of the old NIRC.

The history of the transitional input tax credit likewise does not support the ruling of the CTA and CA. In
our Decision dated April 2, 2009, in the related case of Fort Bonifacio, we explained that:

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the
absence of any relationship between such tax credit and the long-abolished sales taxes.

Obviously then, the purpose behind the transitional input tax credit is not confined to the transition
from sales tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its possible meaning to the shift
from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one undergoes
from not being a VAT-registered person to becoming a VAT-registered person. Such transition does not
take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could also occur
when one decides to start a business. Section 105 states that the transitional input tax credits become
available either to (1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-
registered. The clear language of the law entitles new trades or businesses to avail of the tax credit once
they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New
NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences
operations. If we view the matter from the perspective of a starting entrepreneur, greater clarity
emerges on the continued utility of the transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax
credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods, materials
and supplies in its beginning inventory. Consequently, as the CTA held below, if the new enterprise has
not paid VAT in its purchases of such goods, materials and supplies, then it should not be able to claim
the tax credit. However, it is not always true that the acquisition of such goods, materials and supplies
entail the payment of taxes on the part of the new business. In fact, this could occur as a matter of
course by virtue of the operation of various provisions of the NIRC, and not only on account of a
specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired from a
person in the course of trade or business, the transaction would not be subject to VAT under Section
105. The sale would be subject to capital gains taxes under Section 24 (D), but since capital gains is a tax
on passive income it is the seller, not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition would not be subject to VAT
but to donor’s tax under Section 98 instead. It is the donor who would be liable to pay the donor’s tax,
and the donation would be exempt if the donor’s total net gifts during the calendar year does not
exceed ₱ 100,000.00.

If the goods or properties are acquired through testate or intestate succession, the transfer would not
be subject to VAT but liable instead for estate tax under Title III of the New NIRC. If the net estate does
not exceed ₱ 200,000.00, no estate tax would be assessed.

The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession, from the
beginning inventory on which the transitional input tax credit is based. This prospect all but highlights
the ultimate absurdity of the respondents’ position. Again, nothing in the Old NIRC (or even the New
NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any other taxes on the
goods, materials and supplies as a pre-requisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as
output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer's income by
affording the opportunity to offset the losses incurred through the remittance of the output VAT at a
stage when the person is yet unable to credit input VAT payments.

There is another point that weighs against the CTA’s interpretation. Under Section 105 of the Old NIRC,
the rate of the transitional input tax credit is "8% of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher." If indeed the transitional
input tax credit is premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on "8% of the value of such inventory" should the same prove
higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented with
ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the rate
of the transitional input tax credit.46

In view of the foregoing, we find petitioner entitled to the 8% transitional input tax credit provided in
Section 105 of the old NIRC. The fact that it acquired the Global City property under a tax-free
transaction makes no difference as prior payment of taxes is not a pre-requisite.

Section 4.105-1 of RR 7-95 is

inconsistent with Section 105 of the old

NIRC

As regards Section 4.105-147 of RR 7-95 which limited the 8% transitional input tax credit to the value of
the improvements on the land, the same contravenes the provision of Section 105 of the old NIRC, in
relation to Section 100 of the same Code, as amended by RA 7716, which defines "goods or properties,"
to wit:
SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – There shall be
levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added
tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term "goods or properties" shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business; x x x

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled that
Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of the
improvement of the real properties, is a nullity.48 Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the
law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term
"goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of
Finance. The rules and regulations that administrative agencies promulgate, which are the product of a
delegated legislative power to create new and additional legal provisions that have the effect of law,
should be within the scope of the statutory authority granted by the legislature to the objects and
purposes of the law, and should not be in contradiction to, but in conformity with, the standards
prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the
enabling law.1âwphi1 An implementing rule or regulation cannot modify, expand, or subtract from the
law it is intended to implement. Any rule that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of
the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act
of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or
administrative ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax
credit under Section 105 is a nullity.49

As we see it then, the 8% transitional input tax credit should not be limited to the value of the
improvements on the real properties but should include the value of the real properties as well.

In this case, since petitioner is entitled to a transitional input tax credit of ₱ 5,698,200,256, which is
more than sufficient to cover its output VAT liability for the first quarter of 1997, a refund of the amount
of ₱ 359,652,009.47 erroneously paid as output VAT for the said quarter is in order.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006 of the Court of
Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE. Respondent Commissioner of Internal
Revenue is ordered to refund to petitioner Fort Bonifacio Development Corporation the amount of ₱
359,652,009.47 paid as output VAT for the first quarter of 1997 in light of the transitional input tax
credit available to petitioner for the said quarter, or in the alternative, to issue a tax credit certificate
corresponding to such amount.

SO ORDERED.

G.R. NO. 151135 : July 2, 2004]

CONTEX CORPORATION, Petitioner, v. HON. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823,
which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA)
.The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit
certificate for said amount.Petitioner also assails the appellate courts Resolution,3 dated December 19,
2001, denying the motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and
garments and other hospital supplies for export.Petitioners place of business is at the Subic Bay Freeport
Zone (SBFZ) .It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay
Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm,
petitioner is exempt from all local and national internal revenue taxes except for the preferential tax
provided for in Section 12 (c)5 of Rep. Act No. 7227.Petitioner also registered with the Bureau of Internal
Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business.The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6 ςrνll

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep.
Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid.Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this
time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4.The second
letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter
to the Court of Tax Appeals, in a Petition for Review docketed as CTA Case No. 5895.Petitioner stressed
that Section 112(A)7 if read in relation to Section 106(A) (2) (a)8 of the National Internal Revenue Code,
as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any
way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for
refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a
tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 20410
and 22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED.Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT
CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12 ςrνll

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A) (2) (a) and 112(A) of
the Tax Code.The tax court stressed that these provisions apply only to those entities registered as VAT
taxpayers whose sales are zero-rated.Petitioner does not fall under this category, since it is a non-VAT
taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO
Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT,
pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the
Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all that
petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being
barred by the two-year prescriptive period under Section 229 of the Tax Code.The tax court also limited
the refund only to the input VAT paid by the petitioner on the supplies and materials directly used by
the petitioner in the manufacture of its goods.It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the
petitioners Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision
by the Court of Appeals.Respondent maintained that the exemption of Contex Corp. under Rep. Act No.
7227 was limited only to direct taxes and not to indirect taxes such as the input component of the
VAT.The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on
by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers
and not Contex.

Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor,
thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE.Contexs
claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13 ςrνll

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No.
7227 and its implementing rules covers only the VAT imposable under Section 107 of the [Tax Code],
which is a direct liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs of the goods.14 This
was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section
10715 of the Tax Code specifically imposes the VAT on importations.The appellate court applied the
principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed
out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered
enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be
directly liable.It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in
connection with their importation of raw materials, capital, and equipment as well as the sale of their
goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was
denied.

Hence, the instant petition raising as issues for our resolution the following:ςηαñrοblεš νιr†υαl lαω
lιbrαrÿ

A.WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC
BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.

B.WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR
THE YEARS 1997 AND 1998.16 ςrνll

Simply stated, we shall resolve now the issues concerning:(1) the correctness of the finding of the Court
of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a
purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw
materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal
basis.It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no
local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern
the case.Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and
categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption
from the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly liable.Hence, SBFZ locators are not relieved from the indirect taxes
that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax.As such, the amount of tax paid on
the goods, properties or services bought, transferred, or leased may be shifted or passed on by the
seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income
tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an indirect tax,
such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the
same.The VAT, thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax.As earlier pointed out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden.In adding or including the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax.What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly
and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily
the person who ultimately bears the burden of the same tax.It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof, ultimately bears
the burden of the tax.19 ςrνll

Exemptions from VAT are granted by express provision of the Tax Code or special laws.Under VAT, the
transaction can have preferential treatment in the following ways:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) VAT Exemption.An exemption means that the sale of goods or properties and/or services and the use
or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on
VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at
the point of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT.On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any
input tax on such purchase despite the issuance of a VAT invoice or receipt.21 ςrνll
(b) Zero-rated Sales.These are sales by VAT-registered persons which are subject to 0% rate, meaning
the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is
a taxable transaction for VAT purposes, shall not result in any output tax.However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations.22 ςrνll

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm.In contrast, exemption
only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total
taxes paid by the exempt firms business or non-retail customers.It is for this reason that a sharp
distinction must be made between zero-rating and exemption in designating a value-added tax.23 ςrνll

Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts
them from all national and local internal revenue taxes, including VAT and Section 4 (A) (a) of BIR
Revenue Regulations No. 1-95.24 ςrνll

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by
the respondent.In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25
issued by the BIR.As such, it is exempt from VAT on all its sales and importations of goods and services.

Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT
Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it
by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper
party to claim such VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-Added Tax
Regulations provide:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 4.100-2.Zero-rated Sales.A zero-rated sale by a VAT-registered person, which is a taxable

transaction for VAT purposes, shall not result in any output tax.However, the input tax on his purchases
of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund
in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

(a) Export Sales

Export Sales shall mean

.. .

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known
as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and Development Act of 1992.

.. .

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered
and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international
agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to
which the Philippines is a signatory effectively subject such sales to zero-rate.
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT credit
with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the
petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT
taxpayer and thus, is exempt from VAT.As an exempt VAT taxpayer, it is not allowed any tax credit on
VAT (input tax) previously paid.In fine, even if we are to assume that exemption from the burden of VAT
on petitioners purchases did exist, petitioner is still not entitled to any tax credit or refund on the input
tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a
seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its
purchases of raw materials and supplies.

WHEREFORE, the petition is DENIEDfor lack of merit.The Decision dated September 3, 2001, of the Court
of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED.No
pronouncement as to costs.

SO ORDERED.
[G.R. NO. 154028. July 29, 2005]

PHILIPPINE GEOTHERMAL, INC., Petitioners, v. THE COMMISSIONER OF INTERNAL REVENUE,

Respondents.

DECISION

QUISUMBING, J.:

The present Petition for Review on Certiorari assails the September 14, 2001 Decision1 and June 14,
2002 Resolution2 of the Court of Appeals in CA-G.R. SP No. 54730, which affirmed the April 21, 1999
Decision3 of the Court of Tax Appeals in C.T.A. Case No. 5541.

The facts of the case as found by the Court of Appeals and Court of Tax Appeals are as follows:

Petitioner is a resident foreign corporation licensed by the Securities and Exchange Commission (SEC) to
engage in the exploration, development and exploitation of geothermal energy and resources in the
Philippines. In September 1971, it entered into a service contract with the National Power Corporation
(NPC) to supply steam to the latter.

From September 1995 to February 1996, petitioner billed NPC, Value Added Tax (VAT) computed at ten
percent of the service fee charged on the supply of steam. NPC did not pay the VAT. To avoid any
possible tax deficiency, petitioner remitted VAT equivalent to 1/11 of the fees received from NPC or
P39,328,775.41, broken down as follows:

Exhibit
Period covered

Payment Date

VAT Paid

7/95 to 9/95

10/18/95

P 8,977,117.26

10/95 to 12/95

1/18/96

11,248,194.31

M
11/95

12/13/95

8,243,090.27

1/96

2/19/96

5,213,400.45

2/96

3/18/96

5,646,973.12

P 39,328,775.41
Petitioner filed an administrative claim for refund with the Bureau of Internal Revenue on July 10, 1996.
According to petitioner, the sale of steam to NPC is a VAT-exempt transaction under Sec. 103 of the Tax
Code.4 Petitioner claimed that Fiscal Incentives Review Board (FIRB) Resolution No. 17-87, approved by
President Aquino pursuant to Executive Order No. 93,5 expressly exempted NPC from VAT.

Since respondent failed to act on the claim, on July 2, 1997, petitioner filed a petition to toll the running
of the two-year prescriptive period before the Court of Tax Appeals.

Respondent, in his Answer,6 averred:

...

4. The claim of petitioner Philippine Geothermal Incorporated (PGI for short) for Value-Added Tax
refund has no legal basis.

...

6. Fiscal Incentives Review Board (FIRB) Resolution 17-87 specifically restored the tax and duty
exemption privileges of the NPC, including those pertaining to its domestic purchases of petroleum and
petroleum products granted under the terms and conditions of Commonwealth Act 120 as amended,
effective March 10, 1987.

However, the restoration of the tax and duty exemption privileges does not apply to importations of fuel
oil (crude equivalents) and coal, commercially-funded importations (i.e. importations which include but
are not limited to those foreign-based private financial institutions, etc.) and interest income derived
from any source. Such exemption also does not include purchases of goods and services. Hence, any
contracting services of NPC is not qualified for zero-rated VAT (VAT Ruling 250-89, October, 1989).
7. It is clear from the aforecited FIRB resolution that the tax exemption privilege granted to NPC does
not include purchases of goods and services, such as the supply of steam to NPC.

...

10. The subject taxes have been paid and collected in accordance with law and regulation.

11. In a claim for refund, it is incumbent upon petitioner to show that it is indubitably entitled thereto.
Petitioner's failure to establish the same is fatal to its claim for refund.

12. .The present case is no exception to the basic rule that claims for refund are construed strictly
against claimant for the same partake of the nature of exemption from taxation.

Simply put, the sole issue in this case is whether petitioner's supply of steam to NPC is a VAT-exempt
transaction.

FIRB Resolution No. 17-87 dated June 24, 1987, on which petitioner anchors its claim for tax exemption,
provides as follows:

BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum
products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating the National
Power Corporation, defining its powers, objectives and functions, and for other purposes), as amended,
are restored effective March 10, 1987, subject to the following conditions:

1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1 Importation of fuel oil (crude equivalent) and coal;

1.2 Commercially-funded importations (i.e., importations which include but are not limited to those
financed by the NPC's own internal funds, domestic borrowings from any source whatsoever, borrowing
from foreign-based private financial institutions, etc.); andcralawlibrary

1.3 Interest income derived from any source.7

This Supreme Court has confirmed this exemption. In Maceda v. Macaraig, Jr.,8 this Court ruled that
Republic Act No. 3589 exempts the NPC from all taxes, duties, fees, imposts, charges, and restrictions of
the Republic of the Philippines, and its provinces, cities and municipalities. This exemption is broad
enough to include both direct and indirect taxes the NPC may be required to pay. To limit the exemption
granted the NPC to direct taxes, notwithstanding the general and broad language of the statute, will be
to thwart the legislative intention in giving exemption from all forms of taxes and impositions, without
distinguishing between those that are direct and those that are not.

A chronological review of the NPC laws will show that it has been the lawmakers' intention that the NPC
is to be completely tax exempt from all forms of taxes - both direct and indirect.10

The ruling dated March 15, 1996, issued to petitioner by Assistant Commissioner Alicia P. Clemeno of
the Bureau of Internal Revenue, likewise confirms this exemption:

In view of the foregoing, this Office is of the opinion as it hereby holds, that the supply of steam by your
client, Philippine Geothermal, Inc. (PGI) to National Power Corporation NPC/NAPOCOR to be used in
generating electricity is exempt from the value-added tax. (BIR Ruling No. 078-95 dated April 26,
1995)11
On April 21, 1999, the CTA ruled that the supply of steam to NPC by petitioner being a VAT-exempt
transaction, neither petitioner nor NPC is liable to pay VAT. Petitioner, therefore, may rightfully claim for
a refund of the value-added tax paid. The CTA held,

WHEREFORE, in the light of the foregoing, RESPONDENT is hereby ORDERED to REFUND or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE to PETITIONER the sum of P9,012,310.26 representing
erroneously paid value added tax.

SO ORDERED.12

According to the CTA, based on the evidence presented by petitioner, out of the refund claim of
P39,328,775.41, only P9,012,310.2613 or that pertaining to output tax paid for September 1995 and the
interest on late payment on peso cash call, were not paid by NPC. As to the rest of petitioner's claim, it
appears that the official receipts petitioner issued to NPC included the VAT payable shown in the
Summary of Payments Received from NPC for each production period.

Petitioner raised the matter before the Court of Appeals praying that the respondent be ordered to
refund the sum of P39,328,775.41 or issue a tax credit certificate representing erroneous payments of
VAT from September 1995 to February 1996.

The Court of Appeals denied the petition and affirmed the assailed decision of the Court of Tax Appeals.

Hence this appeal. Petitioner assigns the following errors to the appellate court:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING IN TOTO THE DECISION OF THE
COURT OF TAX APPEALS, BECAUSE:

A). THE DECISION OF THE COURT OF TAX APPEALS WAS BASED ON A MISAPPREHENSION OF FACTS,
NAMELY, THAT THE NPC PAID P30,316,465.15 AS VAT;
B). THE PETITIONER HAD ESTABLISHED BY UNDISPUTABLE EVIDENCE THAT IT PAID THE VAT ON THE
SUPPLY OF STEAM TO NPC; ACCORDINGLY, IT IS ENTITLED TO THE REIMBURSEMENT OF THE FULL
AMOUNT OF VAT ERRONEOUSLY PAID.14

The CTA Decision stated categorically that the supply of steam to NPC is exempt from VAT. However, it
only granted a partial VAT refund of P9,012,310.26, believing that only this amount was not reimbursed
by NPC. The CTA ruled that petitioner was no longer entitled to a refund of the remaining balance of
P30,316,465.15, since it appears that the official receipts petitioner issued to NPC included the VAT
payable shown in the Summary of Payments Received from NPC for each production period.

We disagree with the CTA. In this case, the only issue is the amount of refund to be granted based on
the amount of tax erroneously paid. Tax refunds are in the nature of tax exemptions, and are to be
construed strictissimi juris against the entity claiming the same.15 Thus, the burden of proof rests upon
the taxpayer to establish by sufficient and competent evidence, its entitlement to a claim for refund. In
the Bureau of Internal Revenue's Ruling dated March 15, 1996, that the supply of steam by petitioner to
NPC is exempt from VAT, petitioner has indubitably established its basis for claiming a refund.

That NPC may have reimbursed petitioner the 10% VAT is not a ground for the denial of the claim for
refund. The CTA overlooked the fact that it was petitioner who paid the VAT out of its own service fee.
The erroneous payments of the VAT were only discontinued when the BIR issued its Ruling No. DA-111-
96 in favor of petitioner on March 15, 1996. By then, petitioner had already remitted a sizeable amount
of P39,328,775.41 to the Government. The only recourse of petitioner is the complete restitution of the
erroneous payments of taxes.

The amount of refund should have been based on the VAT Returns filed by the taxpayer. Whether NPC
had reimbursed petitioner is not the concern of the CTA. It is solely a matter between petitioner and
NPC.16 For indirect taxes like VAT, the proper party to question or seek a refund of the tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when
he shifts the burden thereof to another.17

Petitioner has the legal personality to apply for a refund since it is the one who made the erroneous VAT
payments and who will suffer financially by paying in good faith what it had believed to be its potential
VAT liability.
Under the principle of solutio indebiti,18 the government has to restore to petitioner the sums
representing erroneous payments of taxes.19 It is of no moment whether NPC had already reimbursed
petitioner or not because in this case, there should have been no VAT paid at all.

The Summary of Payments and Official Receipts issued by a supplier is not a reliable basis for
determining the VAT payments of said supplier. The CTA grossly misappreciated the evidence and
erroneously concluded in this case that NPC paid the VAT. The CTA should have relied on the VAT
Returns filed by the taxpayer to determine the actual amount remitted to the BIR for the purpose of
ascertaining the refund due. The presentation of the VAT Returns is considered sufficient to ascertain
the amount of the refund. Thus, upon finding that the supply of steam to NPC is exempt from VAT, the
CTA should have ordered respondent to reimburse petitioner the full amount of P39,328,775.41 as
erroneously paid VAT.

WHEREFORE, the petition is hereby GRANTED. Respondent is ORDERED to refund or in the alternative,
issue a Tax Credit Certificate to petitioner in the sum of P39,328,775.41 as erroneously paid VAT.

SO ORDERED.
[G.R. NO. 180345 : November 25, 2009]

SAN ROQUE POWER CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San
Roque Power Corporation assails the Decision1 of the Court of Tax Appeals (CTA) En Banc dated 20
September 2007 in CTA EB No. 248, affirming the Decision2 dated 23 March 2006 of the CTA Second
Division in CTA Case No. 6916, which dismissed the claim of petitioner for the refund and/or issuance of
a tax credit certificate in the amount of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven
Thousand Six Hundred Twenty Pesos and 18/100 (P249,397,620.18) allegedly representing unutilized
input Value Added Tax (VAT) for the period covering January to December 2002.

Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the
assessment and collection of all national internal revenue taxes, fees, and charges, including the Value
Added Tax (VAT), imposed by Section 1083 of the National Internal Revenue Code (NIRC) of 1997.
Moreover, it is empowered to grant refunds or issue tax credit certificates in accordance with Section
112 of the NIRC of 1997 for unutilized input VAT paid on zero-rated or effectively zero-rated sales and
purchases of capital goods, to wit:

SEC. 112. Refunds or Tax Credits of Input Tax. -

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

(B) Capital Goods'A VAT-registered person may apply for the issuance of a tax credit certificate or refund
of input taxes paid on capital goods imported or locally purchased, to the extent the such input taxes
have not been applied against output taxes. The application may be made only within two (2) years after
the close of the taxable quarter when the importation or purchase was made.

On the other hand, petitioner is a domestic corporation organized under the corporate laws of the
Republic of the Philippines. On 14 October 1997, it was incorporated for the sole purpose of building
and operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an indivisible
project consisting of the power station, the dam, spillway, and other related facilities.4 It is registered
with the Board of Investments (BOI) on a preferred pioneer status to engage in the design, construction,
erection, assembly, as well as own, commission, and operate electric power-generating plants and
related activities, for which it was issued the Certificate of Registration No. 97-356 dated 11 February
1998.5 As a seller of services, petitioner is registered with the BIR as a VAT taxpayer under Certificate of
Registration No. OCN-98-006-007394.6

On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National
Power Corporation (NPC) to develop the hydro potential of the Lower Agno River, and to be able to
generate additional power and energy for the Luzon Power Grid, by developing and operating the San
Roque Multipurpose Project. The PPA provides that petitioner shall be responsible for the design,
construction, installation, completion and testing and commissioning of the Power Station and it shall
operate and maintain the same, subject to the instructions of the NPC. During the cooperation period of
25 years commencing from the completion date of the Power Station, the NPC shall purchase all the
electricity generated by the Power Plant.7
Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for and
was granted five Certificates of Zero Rate by the BIR, through the Chief Regulatory Operations
Monitoring Division, now the Audit Information, Tax Exemption & Incentive Division. Based on these
certificates, the zero-rated status of petitioner commenced on 27 September 1998 and continued
throughout the year 2002.8

For the period January to December 2002, petitioner filed with the respondent its Monthly VAT
Declarations and Quarterly VAT Returns. Its Quarterly VAT Returns showed excess input VAT payments
on account of its importation and domestic purchases of goods and services, as follows9 :

Period Covered

Date Filed

Particulars

Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 20, 2002

Tax Due for the Quarter (Box 13C)

P 26,247.27

Input Tax carried over from previous qtr (22B)

296,124,429.21

Input VAT on Domestic Purchases for the Qtr

(22D)

95,003,348.91

Input VAT on Importation of Goods for the Qtr

(22F)

20,758,668.00

Total Available Input tax (23)

411,886,446.12

VAT Refund/TCC Claimed (24A)

173,909,435.66

Net Creditable Input Tax (25)

237,977,010.46

VAT payable (Excess Input Tax) (26)

(237,950,763.19)

Tax Payable (overpayment) (28)

(237,950,763.19)

2nd Quarter

(April 1, 2002 to

June 30, 2002)

July 24, 2002

Tax Due for the Quarter (Box 13C)

P blank

Input Tax carried over from previous qtr (22B)

237,950,763.19

Input VAT on Domestic Purchases for the Qtr

(22D)

65,206,499.83

Input VAT on Importation of Goods for the Qtr

(22F)

18,485,758.00

Total Available Input tax (23)

321,643,021.02

VAT Refund/TCC Claimed (24A)

237,950,763.19

Net Creditable Input Tax (25)

83,692,257.83

VAT payable (Excess Input Tax) (26)

(83,692,257.83)

Tax Payable (overpayment) (28)

(83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002

Tax Due for the Quarter (Box 13C)

P blank

Input Tax carried over from previous qtr (22B)

199,428,027.47

Input VAT on Domestic Purchases for the Qtr

(22D)

28,924,020.79

Input VAT on Importation of Goods for the Qtr

(22F)

1,465,875.00

Total Available Input tax (23)

229,817,923.26

VAT Refund/TCC Claimed (24A)

Blank

Net Creditable Input Tax (25)

229,817,923.26

VAT payable (Excess Input Tax) (26)

(229,817,923.26)

Tax Payable (overpayment) (28)

(229,817,923.26)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003

Tax Due for the Quarter (Box 13C)

P 34,996.36

Input Tax carried over from previous qtr (22B)

114,082,153.62

Input VAT on Domestic Purchases for the Qtr

(22D)

18,166,330.54

Input VAT on Importation of Goods for the Qtr

(22F)

2,308,837.00

Total Available Input tax (23)

134,557,321.16

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

50,865,063.33

VAT payable (Excess Input Tax) (26)

(50,830,066.97)

Tax Payable (overpayment) (28)

(50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the BIR
four separate administrative claims for refund of Unutilized Input VAT paid for the period January to
March 2002, April to June 2002, July to September 2002, and October to December 2002, respectively.
In these letters addressed to the BIR, Carlos Echevarria (Echevarria), the Vice President and Director of
Finance of petitioner, explained that petitioner's sale of power to NPC are subject to VAT at zero percent
rate, in accordance with Section 108(B)(3) of the NIRC.10 Petitioner sought to recover the total amount
of P250,258,094.25, representing its unutilized excess VAT on its importation of capital and other
taxable goods and services for the year 2002, broken down as follows11 :

Qtr

Involved
Output Tax

Input Tax

Domestic Purchases

Importations

Excess Input Tax

(A)

(B)

(C)

(D) = (B) + (C) '(A)

1st

P 26,247.27

P95,003,348.91
P20,758,668.00

P115,735,769.84

2nd

65,206,499.83

18,485,758.00

83,692,257.83

3rd

28,924,020.79

1,465,875.00

30,389,895.79
4th

34,996.36

18,166,330.54

2,308,837.00

20,440,171.18

P61,243.63

P207,300,200.07

P43,019,138.00

P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on Domestic
Purchases during the first quarter of 2002; (2) Input VAT on Domestic Purchases for the fourth quarter
of 2002; and (3) Input VAT on Importation of Goods for the fourth quarter of 2002. The amendments
read as follows12 :

Period Covered

Date Filed
Particulars

Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C)

P 26,247.27

Input Tax carried over from previous qtr (22B)

297,719,296.25

Input VAT on Domestic Purchases for the Qtr

(22D)
95,126,981.69

(22F)

20,758,668.00

Total Available Input tax (23)

413,604,945.94

VAT Refund/TCC Claimed (24A)

175,544,002.27

Net Creditable Input Tax (25)

175,544,002.27

VAT payable (Excess Input Tax) (26)

(238,060,943.67)

Tax Payable (overpayment) (28)

(238,034,696.40)

2nd Quarter

(April 1, 2002 to

June 30, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C)

P blank

Input Tax carried over from previous qtr (22B)

238,034,696.40

Input VAT on Domestic Purchases for the Qtr

(22D)

65,206,499.83
Input VAT on Importation of Goods for the Qtr

(22F)

18,485,758.00

Total Available Input tax (23)

321,643,021.02

VAT Refund/TCC Claimed (24A)

237,950,763.19

Net Creditable Input Tax (25)

83,692,257.83

VAT payable (Excess Input Tax) (26)

(83,692,257.83)

Tax Payable (overpayment) (28)

(83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002

Tax Due for the Quarter (Box 13C)

P blank

Input Tax carried over from previous qtr (22B)

83,692,257.83

Input VAT on Domestic Purchases for the Qtr

(22D)

28,924,020.79
Input VAT on Importation of Goods for the Qtr

(22F)

1,465,875.00

Total Available Input tax (23)

114,082,153.62

VAT Refund/TCC Claimed (24A)

Blank

Net Creditable Input Tax (25)

114,082,153.62

VAT payable (Excess Input Tax) (26)

(114,082,153.62)

Tax Payable (overpayment) (28)

(114,082,153.62)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003

Tax Due for the Quarter (Box 13C)

P 34,996.36

Input Tax carried over from previous qtr (22B)

114,082,153.62

Input VAT on Domestic Purchases for the Qtr

(22D)

17,918,056.50
Input VAT on Importation of Goods for the Qtr

(22F)

1,573,004.00

Total Available Input tax (23)

133,573,214.12

VAT Refund/TCC Claimed (24A)

83,692,257.83

Net Creditable Input Tax (25)

49,880,956.29

VAT payable (Excess Input Tax) (26)

(49,845,959.93)

Tax Payable (overpayment) (28)

(49,845,959.93)

On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims for tax
refund or credit for the first and fourth quarter of 2002, respectively. Petitioner sought to recover a total
amount of P249,397,620.18 representing its unutilized excess VAT on its importation and domestic
purchases of goods and services for the year 2002, broken down as follows13 :

Qtr

Involved

Date Filed

Output Tax

Input Tax

Domestic Purchases

Importations

Excess Input Tax

(A)
(B)

(C)

(D) = (B) + (C) '(A)

1st

30-May-03

P 26,247.27

P95,126,981.69

P20,758,668.00

P115,859,402.42

2nd

25-Oct-02

-
65,206,499.83

18,185,758.00

83,692,257.83

3rd

27-Feb-03

28,924,920.79

1,465,875,00

30,389,895.79

4th

31-Jul-03

34,996.36

17,918,056.50
1,573,004.00

19,456,064.14

P61,243.63

P207,175,558.81

P42,283,305.00

P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the latter
to file on 5 April 2004, with the CTA in Division, a Petition for Review, docketed as CTA Case No. 6916
before it could be barred by the two-year prescriptive period within which to file its claim. Petitioner
sought the refund of the amount of P249,397,620.18 representing its unutilized excess VAT on its
importation and local purchases of various goods and services for the year 2002.14

During the proceedings before the CTA Second Division, petitioner presented the following documents,
among other pieces of evidence: (1) Petitioner's Amended Quarterly VAT return for the 4th Quarter of
2002 marked as Exhibit "A," showing the amount of P42,500,000.00 paid by NTC to petitioner for all the
electricity produced during test runs; (2) the special audit report, prepared by the CPA firm of
Punongbayan and Araullo through a partner, Angel A. Aguilar (Aguilar), and the attached schedules,
marked as Exhibits "J-2" to "J-21"; (3) Sales Invoices and Official Receipts and related documents issued
to petitioner for the year 2002, marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited Financial
Statements of Petitioner for the year 2002, with comparative figures for 2001, marked as Exhibit "K";
and (5) the Affidavit of Echevarria dated 9 February 2005, marked as Exhibit "L".15
During the hearings, the parties jointly stipulated on the issues involved:

1. Whether or not petitioner's sales are subject to value-added taxes at effectively zero percent (0%)
rate;

2. Whether or not petitioner incurred input taxes which are attributable to its effectively zero-rated
transactions;

3. Whether or not petitioner's importation and purchases of capital goods and related services are
within the scope and meaning of "capital goods" under Revenue Regulations No. 7-95;

4. Whether or not petitioner's input taxes are sufficiently substantiated with VAT invoices or official
receipts;

5. Whether or not the VAT input taxes being claimed for refund/tax credit by petitioner (had) been
credited or utilized against any output taxes or (had) been carried forward to the succeeding quarter or
quarters; andcralawlibrary

6. Whether or not petitioner is entitled to a refund of VAT input taxes it paid from January 1, 2002 to
December 31, 2002 in the total amount of Two Hundred Forty Nine Million Three Hundred Ninety Seven
Thousand Six Hundred Twenty and 18/100 Pesos (P249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount of
P249,397,620.18 representing its unutilized input VAT paid on importation and purchases of capital and
other taxable goods and services from January 1 to December 31, 2002.

After a hearing on the merits, the CTA Second Division rendered a Decision16 dated 23 March 2006
denying petitioner's claim for tax refund or credit. The CTA noted that petitioner based its claim on
creditable input VAT paid, which is attributable to (1) zero-rated or effectively zero-rated sale, as
provided under Section 112(A) of the NIRC, and (2) purchases of capital goods, in accordance with
Section 112(B) of the NIRC. The court ruled that in order for petitioner to be entitled to the refund or
issuance of a tax credit certificate on the basis of Section 112(A) of the NIRC, it must establish that it had
incurred zero-rated sales or effectively zero-rated sales for the taxable year 2002. Since records show
that petitioner did not make any zero-rated or effectively-zero rated sales for the taxable year 2002, the
CTA reasoned that petitioner's claim must be denied. Parenthetically, the court declared that the claim
for tax refund or credit based on Section 112(B) of the NIRC requires petitioner to prove that it paid
input VAT on capital goods purchased, based on the definition of capital goods provided under Section
4.112-1(b) of Revenue Regulations No. 7-95 i.e., goods or properties which have an estimated useful life
of greater than one year, are treated as depreciable assets under Section 34(F) of the NIRC, and are used
directly or indirectly in the production or sale of taxable goods and services. The CTA found that the
evidence offered by petitioner the suppliers' invoices and official receipts and Import Entries and
Internal Revenue Declarations and the audit report of the Court-commissioned Independent Certified
Public Accountant (CPA) are insufficient to prove that the importations and domestic purchases were
classified as capital goods and properties entered as part of the "Property, Plant and Equipment"
account of the petitioner. The dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.17

Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for
Reconsideration which was denied by the CTA Second Division in a Resolution dated 4 January 2007.18

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En Banc
promulgated its Decision19 on 20 September 2007 denying petitioner's appeal. The CTA En Banc
reiterated the ruling of the Division that petitioner's claim based on Section 112(A) of the NIRC should
be denied since it did not present any records of any zero-rated or effectively zero-rated transactions. It
clarified that since petitioner failed to prove that any sale of its electricity had transpired, petitioner may
base its claim only on Section 112(B) of the NIRC, the provision governing the purchase of capital goods.
The court noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo, dealt
specifically with the unutilized input taxes paid or incurred by petitioner on its local and foreign
purchases of goods and services attributable to its zero-rated sales, and not to purchases of capital
goods. It decided that petitioner failed to prove that the purchases evidenced by the invoices and
receipts, which petitioner presented, were classified as capital goods which formed part of its "Property,
Plant and Equipment," especially since petitioner failed to present its books of account. The dispositive
part of the said Decision reads:
WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed
Decision and Resolution are hereby AFFIRMED.20

The CTA En Banc denied petitioner's Motion for Reconsideration in a Resolution dated 22 October
2007.21

Hence, the present Petition for Review where the petitioner raises the following errors allegedly
committed by the CTA En banc:

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN FAILING OR REFUSING TO
APPRECIATE THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE PETITIONER,
THUS DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND

II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF
ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT
ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED
SALES, CONTRARY TO PROVISIONS OF LAW.22

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit in the amount of
P249,397,620.18 for creditable input tax attributable to zero-rated or effectively zero-rated sales
pursuant to Section 112(A) of the NIRC or for input taxes paid on capital goods as provided under
Section 112(B) of the NIRC.
To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties. It is
an accepted doctrine that this Court is not a trier of facts. It is not its function to review, examine and
evaluate or weigh the probative value of the evidence presented. However, this rule does not apply
where the judgment is premised on a misapprehension of facts, or when the appellate court failed to
notice certain relevant facts which if considered would justify a different conclusion.23

After reviewing the records, this Court finds that petitioner's claim for refund or credit is justified under
Section 112(A) of the NIRC which states that:

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.

To claim refund or tax credit under Section 112(A), petitioner must comply with the following criteria:
(1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively zero-rated
sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input taxes; (5) the input
taxes have not been applied against output taxes during and in the succeeding quarters; (6) the input
taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales under
Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange
proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) where there
are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately
allocated on the basis of sales volume; and (9) the claim is filed within two years after the close of the
taxable quarter when such sales were made.24
Based on the evidence presented, petitioner complied with the abovementioned requirements. Firstly,
petitioner had adequately proved that it is a VAT registered taxpayer when it presented Certificate of
Registration No. OCN-98-006-007394, which it attached to its Petition for Review dated 29 March 2004
filed before the CTA in Division. Secondly, it is unquestioned that petitioner is engaged in providing
electricity for NPC, an activity which is subject to zero rate, under Section 108(B)(3) of the NIRC. Thirdly,
petitioner offered as evidence suppliers' VAT invoices or official receipts, as well as Import Entries and
Internal Revenue Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were examined in the audit
conducted by Aguilar, the Court-commissioned Independent CPA. Significantly, Aguilar noted in his audit
report (Exhibit "J-2") that of the P249,397,620.18 claimed by petitioner, he identified items with
incomplete documentation and errors in computation with a total amount of P3,266,009.78. Based on
these findings, the remaining input VAT of P246,131,610.40 was properly documented and recorded in
the books. The said report reads:

In performing the procedures referred under the Procedures Performed section of this report, no
matters came to our attention that cause us to believe that the amount of input VAT applied for as tax
credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31, 2002
should be adjusted except for input VAT claimed with incomplete documentation, those with various
and other exceptions on the supporting documents and those with errors in computation totaling
P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit Procedures Performed
sections of this report. We have also ascertained that the input VAT claimed are properly recorded in
the books and, except as specifically identified in the Findings and Results of the Agreed-Upon Audit
Procedures Performed sections of this report, are properly supported by original and appropriate
suppliers' VAT invoices and/or official receipts.25

Fourthly, the input taxes claimed, which consisted of local purchases and importations made in 2002,
are not transitional input taxes, which Section 111 of the NIRC defines as input taxes allowed on the
beginning inventory of goods, materials and supplies.26 Fifthly, the audit report of Aguilar affirms that
the input VAT being claimed for tax refund or credit is net of the input VAT that was already offset
against output VAT amounting to P26,247.27 for the first quarter of 2002 and P34,996.36 for the fourth
quarter of 2002,27 as reflected in the Quarterly VAT Returns.28

The main dispute in this case is whether or not petitioner's claim complied with the sixth requirement
the existence of zero-rated or effectively zero-rated sales, to which creditable input taxes may be
attributed. The CTA in Division and en banc denied petitioner's claim solely on this ground. The tax
courts based this conclusion on the audited report, marked as Exhibit "J-2," stating that petitioner made
no sale of electricity to NPC in 2002.29 Moreover, the affidavit of Echevarria (Exhibit "L"), petitioner's
Vice President and Director for Finance, contained an admission that no commercial sale of electricity
had been made in favor of NPC in 2002 since the project was still under construction at that time.30
However, upon closer examination of the records, it appears that on 2002, petitioner carried out a
"sale" of electricity to NPC. The fourth quarter return for the year 2002, which petitioner filed, reported
a zero-rated sale in the amount of P42,500,000.00.31 In the Affidavit of Echevarria dated 9 February
2005 (Exhibit "L"), which was uncontroverted by respondent, the affiant stated that although no
commercial sale was made in 2002, petitioner produced and transferred electricity to NPC during the
testing period in exchange for the amount of P42,500,000.00, to wit:32

A: San Roque Power Corporation has had no sale yet during 2002. The P42,500,000.00 which was paid to
us by Napocor was something similar to a more cost recovery scheme. The pre-agreed amount would be
about equal to our costs for producing the electricity during the testing period and we just reflected this
in our 4th quarter return as a zero-rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was not a commercial
sale. In granting the tax benefit to VAT-registered zero-rated or effectively zero-rated taxpayers, Section
112(A) of the NIRC does not limit the definition of "sale" to commercial transactions in the normal
course of business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition of the
VAT, does not limit the term "sale" to commercial sales, rather it extends the term to transactions that
are "deemed" sale, which are thus enumerated:

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

xxx

(B) Transactions Deemed Sale. The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended
for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods
were consigned; andcralawlibrary

(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of
such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the law that
when the term "sale" is made to include certain transactions for the purpose of imposing a tax, these
same transactions should be included in the term "sale" when considering the availability of an
exemption or tax benefit from the same revenue measures. It is undisputed that during the fourth
quarter of 2002, petitioner transferred to NPC all the electricity that was produced during the trial
period. The fact that it was not transferred through a commercial sale or in the normal course of
business does not deflect from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange proceeds is inapplicable where
petitioner's zero-rated sale of electricity to NPC did not involve foreign exchange and consisted only of a
single transaction wherein NPC paid petitioner P42,500,000.00 in exchange for the electricity
transferred to it by petitioner. Similarly, the eighth requirement is inapplicable to this case, where the
only sale transaction consisted of an effectively zero-rated sale and there are no exempt or taxable sales
that transpired, which will require the proportionate allocation of the creditable input tax paid.

The last requirement determines that the claim should be filed within two years after the close of the
taxable quarter when such sales were made. The sale of electricity to NPC was reported at the fourth
quarter of 2002, which closed on 31 December 2002. Petitioner had until 30 December 2004 to file its
claim for refund or credit. For the period January to March 2002, petitioner filed an amended request
for refund or tax credit on 30 May 2003; for the period July 2002 to September 2002, on 27 February
2003; and for the period October 2002 to December 2002, on 31 July 2003.33 In these three quarters,
petitioners seasonably filed its requests for refund and tax credit. However, for the period April 2002 to
May 2002, the claim was filed prematurely on 25 October 2002, before the last quarter had closed on 31
December 2002.34
Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it was
able to accumulate excess input taxes on various importations and local purchases in the amount of
P246,131,610.40, which were attributable to a transfer of electricity in favor of NPC. The fact that it had
filed its claim for refund or credit during the quarter when the transfer of electricity had taken place,
instead of at the close of the said quarter does not make petitioner any less entitled to its claim. Given
the special circumstances of this case, wherein petitioner was incorporated for the sole purpose of
constructing or operating a power plant that will transfer all the electricity it generates to NPC, there is
no danger that petitioner would try to fraudulently claim input tax paid on purchases that will be
attributed to sale transactions that are not zero-rated. Substantial justice, equity and fair play are on the
side of the petitioner. Technicalities and legalisms, however, exalted, should not be misused by the
government to keep money not belonging to it, thereby enriching itself at the expense of its law abiding
citizens.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms,
however exalted, should not be misused by the government to keep money not belonging to it, thereby
enriching itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided
in Art. 2154, Civil Code, the BIR received something "when there [was] no right to demand it," and thus,
it has the obligation to return it. Heavily militating against respondent Commissioner is the ancient
principle that no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple
justice requires the speedy refund of the wrongly held taxes.35

It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable to pay
the tax, such as petitioner, but to relieve certain exempt entities, such as the NPC, from the burden of
indirect tax so as to encourage the development of particular industries. Before, as well as after, the
adoption of the VAT, certain special laws were enacted for the benefit of various entities and
international agreements were entered into by the Philippines with foreign governments and
institutions exempting sale of goods or supply of services from indirect taxes at the level of their
suppliers. Effective zero-rating was intended to relieve the exempt entity from being burdened with the
indirect tax which is or which will be shifted to it had there been no exemption. In this case, petitioner is
being exempted from paying VAT on its purchases to relieve NPC of the burden of additional costs that
petitioner may shift to NPC by adding to the cost of the electricity sold to the latter.36

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is the
lawmakers' intention that NPC be made completely exempt from all taxes, both direct and indirect:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
Other Charges by Government and Governmental Instrumentalities. - The corporation shall be non-
profit and shall devote all its returns from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section 1 of this Act, the
corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities, and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of
foreign goods, required for its operations and projects; andcralawlibrary

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on
all petroleum products used by the corporation in the generation, transmission, utilization, and sale of
electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad
language of the statute will be to thwart the legislative intention in giving exemption from all forms of
taxes and impositions, without distinguishing between those that are direct and those that are not.37

Congress granted NPC a comprehensive tax exemption because of the significant public interest
involved. This is enunciated in Section 1 of Republic Act No. 6395:

Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power from
all sources to meet the needs of industrial development and dispersal and the needs of rural
electrification are primary objectives of the nation which shall be pursued coordinately and supported
by all instrumentalities and agencies of government, including its financial institutions.

The ability of the NPC to provide sufficient and affordable electricity throughout the country greatly
affects our industrial and rural development. Erroneously and unjustly depriving industries that generate
electrical power of tax benefits that the law clearly grants will have an immediate effect on consumers
of electricity and long term effects on our economy.

In the same breath, we cannot lose sight of the fact that it is the declared policy of the State, expressed
in Section 2 of Republic Act No. 9136, otherwise known as the EPIRA Law, "to ensure and accelerate the
total electrification of the country;" "to enhance the inflow of private capital and broaden the ownership
base of the power generation, transmission and distribution sectors;" and "to promote the utilization of
indigenous and new and renewable energy resources in power generation in order to reduce
dependence on imported energy." Further, Section 6 provides that "pursuant to the objective of
lowering electricity rates to end-users, sales of generated power by generation companies shall be
value-added tax zero-rated.

Section 75 of said law succinctly declares that "this Act shall, unless the context indicates otherwise, be
construed in favor of the establishment, promotion, preservation of competition and power
empowerment so that the widest participation of the people, whether directly or indirectly is ensured."

The objectives as set forth in the EPIRA Law can only be achieved if government were to allow petitioner
and others similarly situated to obtain the input tax credits available under the law. Denying petitioner
such credits would go against the declared policies of the EPIRA Law.ςrαlαω

The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes a sovereign
commitment of Government to taxpayers that the latter can avail themselves of certain tax reliefs and
incentives in the course of their business activities here. Such a commitment is particularly vital to
foreign investors who have been enticed to invest heavily in our country's infrastructure, and who have
done so on the firm assurance that certain tax reliefs and incentives can be availed of in order to enable
them to achieve their projected returns on these very long-term and heavily funded investments. While
the government's ability to keep its commitment is put in doubt, credit rating turns to worse; the costs
of borrowing becomes higher and the harder it will be to attract foreign investors. The country's earnest
efforts to move forward will all be put to naught.
Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC
or on the basis of effectively zero-rated sales in the amount of P246,131,610.40, there is no more need
to establish its right to make the same claim under Section 112(B) of the NIRC or on the basis of
purchase of capital goods.

Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the
nature of a tax exemption, should be construed strictissimi juris against the taxpayer.38 However, when
the claim for refund has clear legal basis and is sufficiently supported by evidence, as in the present
case, then the Court shall not hesitate to grant the same.39

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax Appeals En
Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision dated 23 March 2006 of
the CTA Second Division in CTA Case No. 6916, is REVERSED. Respondent Commissioner of Internal
Revenue is ordered to refund, or in the alternative, to issue a tax credit certificate to petitioner San
Roque Power Corporation in the amount of Two Hundred Forty-Six Million One Hundred Thirty-One
Thousand Six Hundred Ten Pesos and 40/100 (P246,131,610.40), representing unutilized input VAT for
the period 1 January 2002 to 31 December 2002. No costs.

SO ORDERED.
G.R. No. 184823 October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

AICHI FORGING COMPANY OF ASIA, INC., Respondent.

DECISION

DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege,
or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes
erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a
refund but also his compliance with the procedural due process as non-observance of the prescriptive
periods within which to file the administrative and the judicial claims would result in the denial of his
claim.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30,
2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of
steel and its by-products.3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added
Tax (VAT) entity4 and its products, "close impression die steel forgings" and "tool and dies," are
registered with the Board of Investments (BOI) as a pioneer status.5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1,
2002 to September 30, 2002 in the total amount of ₱3,891,123.82 with the petitioner Commissioner of
Internal Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same
input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the
CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of ₱131,791,399.00,8 which was paid pursuant
to Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC);9 that for
the said period, it incurred and paid input VAT amounting to ₱3,912,088.14 from purchases and
importation attributable to its zero-rated sales;10 and that in its application for refund/credit filed with
the DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the amount
of ₱3,891,123.82.11

In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to wit:

4. Petitioner’s alleged claim for refund is subject to administrative investigation by the Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A) (2) (a), and
108(B) (1) of the Tax Code of 1997;
7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in Section 229
of the Tax Code;

8. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to the claim for refund; and

9. Claims for refund are construed strictly against the claimant for the same partake of the nature of
exemption from taxation.13

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondent’s claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the
NIRC of 1997, as amended, provides:

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: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer
is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (3)
the claim must be filed within two years after the close of the taxable quarter when such sales were
made; and (4) the creditable input tax due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been applied against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.
With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales
which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on September
30, 2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two
(2) year prescriptive period from the close of the taxable quarter when the sales were made, which is
from September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and claims of
petitioner that are baseless and have not been satisfactorily substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit
certificate representing unutilized excess input VAT payments for the period July 1, 2002 to September
30, 2002, which are attributable to its zero-rated sales for the same period, but in the reduced amount
of ₱3,239,119.25, computed as follows:

Amount of Claimed Input VAT ₱ 3,891,123.82

Less:

Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT ₱ 3,850,103.45

Less:

Output VAT Due 610,984.20

Excess Creditable Input VAT ₱ 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED. Accordingly,
respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner
[in] the reduced amount of THREE MILLION TWO HUNDRED THIRTY NINE THOUSAND ONE HUNDRED
NINETEEN AND 25/100 PESOS (₱3,239,119.25), representing the unutilized input VAT incurred for the
months of July to September 2002.

SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial Reconsideration,15
insisting that the administrative and the judicial claims were filed beyond the two-year period to claim a
tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He reasoned that since the
year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was
beyond the two-year period, which expired on September 29, 2004.16 He cited as basis Article 13 of the
Civil Code,17 which provides that when the law speaks of a year, it is equivalent to 365 days. In addition,
petitioner argued that the simultaneous filing of the administrative and the judicial claims contravenes
Sections 112 and 229 of the NIRC.18 According to the petitioner, a prior filing of an administrative claim
is a "condition precedent"19 before a judicial claim can be filed. He explained that the rationale of such
requirement rests not only on the doctrine of exhaustion of administrative remedies but also on the fact
that the CTA is an appellate body which exercises the power of judicial review over administrative
actions of the BIR. 20

The Second Division of the CTA, however, denied petitioner’s Motion for Partial Reconsideration for lack
of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year
period, the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by law
and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further
contends that respondent's filing of the administrative and judicial [claims] effectively eliminates the
authority of the honorable Court to exercise jurisdiction over the judicial claim.
We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each taxable
quarter within which to file a quarterly return of the amount of his gross sales or receipts. In the case at
bar, the taxable quarter involved was for the period of July 1, 2002 to September 30, 2002. Applying
Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to file its quarterly
return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly Return on
October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its VAT
Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's administrative and
judicial claims for refund filed on September 30, 2004 were filed on time because AICHI has until
October 20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous
filing of an administrative claim for refund prior to the judicial claim. This should not be the case as the
law does not prohibit the simultaneous filing of the administrative and judicial claims for refund. What is
controlling is that both claims for refund must be filed within the two-year prescriptive period.
In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled out
in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second Division.
What the instant petition seeks is for the Court En Banc to view and appreciate the evidence in their
own perspective of things, which unfortunately had already been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of
merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second
Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs. Commissioner
of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondent’s judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided in
Sections 112(A) and 229 of

the NIRC.24

Petitioner’s Arguments

Petitioner maintains that respondent’s administrative and judicial claims for tax refund/credit were filed
in violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the Civil
Code,26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September
30, 2004 was beyond the two-year period, which expired on September 29, 2004.27
Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance
requirements in the payment of VAT.28 He asserts that it is Section 112, paragraph (A), of the same
Code that should apply because it specifically provides for the period within which a claim for tax
refund/ credit should be made.29

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim
with the CTA were filed on the same day.30 He opines that the simultaneous filing of the administrative
and the judicial claims contravenes Section 229 of the NIRC, which requires the prior filing of an
administrative claim.31 He insists that such procedural requirement is based on the doctrine of
exhaustion of administrative remedies and the fact that the CTA is an appellate body exercising judicial
review over administrative actions of the CIR.32

Respondent’s Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the
period July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied with
all the requirements provided by law.33 Respondent likewise defends the CTA En Banc in applying
Section 114(A) of the NIRC in computing the prescriptive period for the claim for tax refund/credit.
Respondent believes that Section 112(A) of the NIRC must be read together with Section 114(A) of the
same Code.34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it
first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center of the DOF before it filed a judicial claim with the CTA.35 To prove this, respondent points out
that its Claimant Information Sheet No. 4970236 and BIR Form No. 1914 for the third quarter of 2002,37
which were filed with the DOF, were attached as Annexes "M" and "N," respectively, to the Petition for
Review filed with the CTA.38 Respondent further contends that the non-observance of the 120-day
period given to the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal because
what is important is that both claims are filed within the two-year prescriptive period.39 In support
thereof, respondent cites Commissioner of Internal Revenue v. Victorias Milling Co., Inc.40 where it was
ruled that "[i]f, however, the [CIR] takes time in deciding the claim, and the period of two years is about
to end, the suit or proceeding must be started in the [CTA] before the end of the two-year period
without awaiting the decision of the [CIR]."41 Lastly, respondent argues that even if the period had
already lapsed, it may be suspended for reasons of equity considering that it is not a jurisdictional
requirement.42
Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the
sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:

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. (Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which
read:

SEC. 114. Return and Payment of Value-Added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and
pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration:
Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.

xxxx

SEC. 229. Recovery of tax erroneously or illegally collected. –

No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum
has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without 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. (Emphasis supplied.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not from the
close of the taxable quarter when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,44 where we
ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the two-year
period for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the NIRC
are inapplicable as "both provisions apply only to instances of erroneous payment or illegal collection of
internal revenue taxes."45 We explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed
within two years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit
it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from the close of
the taxable quarter when the sales were made and not from the time the input VAT was paid nor from
the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year
after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the
pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it may, and
given that the last creditable input VAT due for the period covering the progress billing of September 6,
1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable
input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be
precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on December
10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for
the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the
filing of a claim therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may –

xxxx
(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 the payment of the tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or refund.

xxxx

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

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

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of
the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only
to instances of erroneous payment or illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted
or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The
fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated
or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a
refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle
does not enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to
the other actions which refer to erroneous payment of taxes.46 (Emphasis supplied.)

In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229 of
the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized input
VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT.
Thus, the two-year period should be reckoned from the close of the taxable quarter when the sales were
made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely
filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and taking
into account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to
file a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on
September 29, 2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between the
Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987,
which states that a year is composed of 12 calendar months, it is the latter that must prevail following
the legal maxim, Lex posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987
deal with the same subject matter – the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of
1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative
Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we
hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law,
governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14, 1998)
consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month April 15, 1998 to May 14, 1998

2nd calendar month May 15, 1998 to June 14, 1998

3rd calendar month June 15, 1998 to July 14, 1998

4th calendar month July 15, 1998 to August 14, 1998

5th calendar month August 15, 1998 to September 14, 1998

6th calendar month September 15, 1998 to October 14, 1998

7th calendar month October 15, 1998 to November 14, 1998

8th calendar month November 15, 1998 to December 14, 1998

9th calendar month December 15, 1998 to January 14, 1999

10th calendar month January 15, 1999 to February 14, 1999

11th calendar month February 15, 1999 to March 14, 1999

12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999

14th calendar month May 15, 1999 to June 14, 1999

15th calendar month June 15, 1999 to July 14, 1999

16th calendar month July 15, 1999 to August 14, 1999

17th calendar month August 15, 1999 to September 14, 1999

18th calendar month September 15, 1999 to October 14, 1999

19th calendar month October 15, 1999 to November 14, 1999

20th calendar month November 15, 1999 to December 14, 1999

21st calendar month December 15, 1999 to January 14, 2000

22nd calendar month January 15, 2000 to February 14, 2000

23rd calendar month February 15, 2000 to March 14, 2000

24th calendar month March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the
24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within
the reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period
July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent’s administrative
claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondent’s claim for tax refund/credit for having been filed in violation of
Section 112(D) of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax. –

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.
(Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission
of the complete documents in support of the application [for tax refund/credit]," within which to grant
or deny the claim. In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal
before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day
period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to
appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For
this reason, we find the filing of the judicial claim with the CTA premature.

Respondent’s assertion that the non-observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within the two-year
prescriptive period52 has no legal basis.
There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two 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." The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or refund"
refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is
apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has
"120 days from the submission of complete documents in support of the application filed in accordance
with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is
made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an
appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306, now
Section 229 of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits of
input VAT, such as the instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October 6,
2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The Court of Tax
Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed.

SO ORDERED.
G.R. No. 187485 February 12, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

SAN ROQUE POWER CORPORATION, Respondent.

X----------------------------X
G.R. No. 196113

TAGANITO MINING CORPORATION, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Cases

G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March 2009 as well
as the Resolution3 promulgated on 24 April 2009 by the Court of Tax Appeals En Banc (CTA EB) in CTA EB
No. 408. The CTA EB affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008
Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second Division) in CTA Case No.
6647. The CTA Second Division ordered the Commissioner of Internal Revenue (Commissioner) to refund
or issue a tax credit for P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized
input value-added tax (VAT) on purchases of capital goods and services for the taxable year 2001.
G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December 2010 as
well as the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB No. 624. In its Decision,
the CTA EB reversed the 8 January 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA
Second Division and granted the CIR’s petition for review in CTA Case No. 7574. The CTA EB dismissed,
for having been prematurely filed, Taganito Mining Corporation’s (Taganito) judicial claim for
P8,365,664.38 tax refund or credit.

G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December 2010 as
well as the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB No. 569. The CTA EB
affirmed the 20 July 2009 Decision as well as the 10 November 2009 Resolution of the CTA Second
Division in CTA Case No. 7687. The CTA Second Division denied, due to prescription, Philex Mining
Corporation’s (Philex) judicial claim for P23,956,732.44 tax refund or credit.

On 3 August 2011, the Second Division of this Court resolved14 to consolidate G.R. No. 197156 with G.R.
No. 196113, which were pending in the same Division, and with G.R. No. 187485, which was assigned to
the Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156 and 196113 to the Court
En Banc, where G.R. No. 187485, the lower-numbered case, was assigned.

G.R. No. 187485

CIR v. San Roque Power Corporation

The Facts

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

[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to act upon
and approve claims for refund or tax credit, with office at the Bureau of Internal Revenue ("BIR")
National Office Building, Diliman, Quezon City.

[San Roque] is a domestic corporation duly organized and existing under and by virtue of the laws of the
Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan. It was incorporated in
October 1997 to design, construct, erect, assemble, own, commission and operate power-generating
plants and related facilities pursuant to and under contract with the Government of the Republic of the
Philippines, or any subdivision, instrumentality or agency thereof, or any governmentowned or
controlled corporation, or other entity engaged in the development, supply, or distribution of energy.

As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-017-501. It is
likewise registered with the Board of Investments ("BOI") on a preferred pioneer status, to engage in the
design, construction, erection, assembly, as well as to own, commission, and operate electric power-
generating plants and related activities, for which it was issued Certificate of Registration No. 97-356 on
February 11, 1998.

On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with the National
Power Corporation ("NPC") to develop hydro-potential of the Lower Agno River and generate additional
power and energy for the Luzon Power Grid, by building the San Roque Multi-Purpose Project located in
San Manuel, Pangasinan. The PPA provides, among others, that [San Roque] shall be responsible for the
design, construction, installation, completion, testing and commissioning of the Power Station and shall
operate and maintain the same, subject to NPC instructions. During the cooperation period of twenty-
five (25) years commencing from the completion date of the Power Station, NPC will take and pay for all
electricity available from the Power Station.

On the construction and development of the San Roque Multi- Purpose Project which comprises of the
dam, spillway and power plant, [San Roque] allegedly incurred, excess input VAT in the amount of
₱559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the same
year. [San Roque] duly filed with the BIR separate claims for refund, in the total amount of
₱559,709,337.54, representing unutilized input taxes as declared in its VAT returns for taxable year
2001.

However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year 2001 since
it increased its unutilized input VAT to the amount of ₱560,200,283.14. Consequently, [San Roque] filed
with the BIR on even date, separate amended claims for refund in the aggregate amount of
₱560,200,283.14.

[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for Review with the
Court [of Tax Appeals] in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for decision.15

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division initially denied San Roque’s claim. In its Decision16 dated 8 March 2006, it cited
the following as bases for the denial of San Roque’s claim: lack of recorded zero-rated or effectively
zero-rated sales; failure to submit documents specifically identifying the purchased goods/services
related to the claimed input VAT which were included in its Property, Plant and Equipment account; and
failure to prove that the related construction costs were capitalized in its books of account and
subjected to depreciation.

The CTA Second Division required San Roque to show that it complied with the following requirements
of Section 112(B) of Republic Act No. 8424 (RA 8424)17 to be entitled to a tax refund or credit of input
VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-registered entity; (2) its
input taxes claimed were paid on capital goods duly supported by VAT invoices and/or official receipts;
(3) it did not offset or apply the claimed input VAT payments on capital goods against any output VAT
liability; and (4) its claim for refund was filed within the two-year prescriptive period both in the
administrative and judicial levels.

The CTA Second Division found that San Roque complied with the first, third, and fourth requirements,
thus:

The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint Stipulation
of Facts, Records, p. 157). It was also established that the instant claim of ₱560,200,823.14 is already net
of the ₱11,509.09 output tax declared by [San Roque] in its amended VAT return for the first quarter of
2001. Moreover, the entire amount of ₱560,200,823.14 was deducted by [San Roque] from the total
available input tax reflected in its amended VAT returns for the last two quarters of 2001 and first two
quarters of 2002 (Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of
₱560,200,823.14 did not form part of the excess input taxes of ₱83,692,257.83, as of the second quarter
of 2002 that was to be carried-over to the succeeding quarters. Further, [San Roque’s] claim for
refund/tax credit certificate of excess input VAT was filed within the two-year prescriptive period
reckoned from the dates of filing of the corresponding quarterly VAT returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on April 25,
2001, July 25, 2001, October 23, 2001 and January 24, 2002, respectively (Exhibits "H, J, L, and N").
These returns were all subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the
other hand, [San Roque] originally filed its separate claims for refund on July 10, 2001, October 10, 2001,
February 21, 2002, and May 9, 2002 for the first, second, third, and fourth quarters of 2001,
respectively, (Exhibits "EE, FF, GG, and HH") and subsequently filed amended claims for all quarters on
March 28, 2003 (Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for Review was filed on April 10,
2003. Counting from the respective dates when [San Roque] originally filed its VAT returns for the first,
second, third and fourth quarters of 2001, the administrative claims for refund (original and amended)
and the Petition for Review fall within the two-year prescriptive period.18

San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29 November 2007
Amended Decision,19 the CTA Second Division found legal basis to partially grant San Roque’s claim. The
CTA Second Division ordered the Commissioner to refund or issue a tax credit in favor of San Roque in
the amount of ₱483,797,599.65, which represents San Roque’s unutilized input VAT on its purchases of
capital goods and services for the taxable year 2001. The CTA based the adjustment in the amount on
the findings of the independent certified public accountant. The following reasons were cited for the
disallowed claims: erroneous computation; failure to ascertain whether the related purchases are in the
nature of capital goods; and the purchases pertain to capital goods. Moreover, the reduction of claims
was based on the following: the difference between San Roque’s claim and that appearing on its books;
the official receipts covering the claimed input VAT on purchases of local services are not within the
period of the claim; and the amount of VAT cannot be determined from the submitted official receipts
and invoices. The CTA Second Division denied San Roque’s claim for refund or tax credit of its unutilized
input VAT attributable to its zero-rated or effectively zero-rated sales because San Roque had no record
of such sales for the four quarters of 2001.

The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision reads:

WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY
GRANTED and this Court’s Decision promulgated on March 8, 2006 in the instant case is hereby
MODIFIED.

Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT
CERTIFICATE in favor of [San Roque] in the reduced amount of Four Hundred Eighty Three Million Seven
Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos
(₱483,797,599.65) representing unutilized input VAT on purchases of capital goods and services for the
taxable year 2001.

SO ORDERED.20

The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA Second
Division issued a Resolution dated 11 July 2008 which denied the CIR’s motion for lack of merit.

The Court of Tax Appeals’ Ruling: En Banc

The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San Roque’s
claim for refund or tax credit in its entirety as well as for the setting aside of the 29 November 2007
Amended Decision and the 11 July 2008 Resolution in CTA Case No. 6647.

The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision and resolution.

The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue Memorandum
Circular No. 49-03,22 as its bases for ruling that San Roque’s judicial claim was not prematurely filed.
The pertinent portions of the Decision state:

More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this wise:

It is true that Section 112(D) of the abovementioned provision applies to the present case. However,
what the petitioner failed to consider is Section 112(A) of the same provision. The respondent is also
covered by the two (2) year prescriptive period. We have repeatedly held that the claim for refund with
the BIR and the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period.

Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and Development
Corporation vs. Commissioner of Internal Revenue that the two-year prescriptive period for filing a claim
for input tax is reckoned from the date of the filing of the quarterly VAT return and payment of the tax
due. If the said period is about to expire but the BIR has not yet acted on the application for refund, the
taxpayer may interpose a petition for review with this Court within the two year period.

In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now
Commissioner) takes time in deciding the claim, and the period of two years is about to end, the suit or
proceeding must be started in the Court of Tax Appeals before the end of the two-year period without
awaiting the decision of the Collector.

Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue vs. The
Honorable Court of Tax Appeals and Planters Products, Inc., the Supreme Court held that the taxpayer
need not wait indefinitely for a decision or ruling which may or may not be forthcoming and which he
has no legal right to expect. It is disheartening enough to a taxpayer to keep him waiting for an
indefinite period of time for a ruling or decision of the Collector (now Commissioner) of Internal
Revenue on his claim for refund. It would make matters more exasperating for the taxpayer if we were
to close the doors of the courts of justice for such a relief until after the Collector (now Commissioner) of
Internal Revenue, would have, at his personal convenience, given his go signal.

This Court ruled in several cases that once the petition is filed, the Court has already acquired
jurisdiction over the claims and the Court is not bound to wait indefinitely for no reason for whatever
action respondent (herein petitioner) may take. At stake are claims for refund and unlike disputed
assessments, no decision of respondent (herein petitioner) is required before one can go to this Court.
(Emphasis supplied and citations omitted)

Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-03 dated
August 18, 2003, that [the CIR] knows that claims for VAT refund or tax credit filed with the Court [of Tax
Appeals] can proceed simultaneously with the ones filed with the BIR and that taxpayers need not wait
for the lapse of the subject 120-day period, to wit:

In response to [the] request of selected taxpayers for adoption of procedures in handling refund cases
that are aligned to the statutory requirements that refund cases should be elevated to the Court of Tax
Appeals before the lapse of the period prescribed by law, certain provisions of RMC No. 42-2003 are
hereby amended and new provisions are added thereto.

In consonance therewith, the following amendments are being introduced to RMC No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows:

In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals involving a
claim for refund/TCC that is pending at the administrative agency (Bureau of Internal Revenue or OSS-
DOF), the administrative agency and the tax court may act on the case separately. While the case is
pending in the tax court and at the same time is still under process by the administrative agency, the
litigation lawyer of the BIR, upon receipt of the summons from the tax court, shall request from the
head of the investigating/processing office for the docket containing certified true copies of all the
documents pertinent to the claim. The docket shall be presented to the court as evidence for the BIR in
its defense on the tax credit/refund case filed by the taxpayer. In the meantime, the
investigating/processing office of the administrative agency shall continue processing the refund/TCC
case until such time that a final decision has been reached by either the CTA or the administrative
agency.

If the CTA is able to release its decision ahead of the evaluation of the administrative agency, the latter
shall cease from processing the claim. On the other hand, if the administrative agency is able to process
the claim of the taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof, the
concerned taxpayer must file a motion to withdraw the claim with the CTA.23 (Emphasis supplied)

G.R. No. 196113

Taganito Mining Corporation v. CIR

The Facts

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

Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under and by virtue
of the laws of the Philippines, with principal office at 4th Floor, Solid Mills Building, De La Rosa St.,
Lega[s]pi Village, Makati City. It is duly registered with the Securities and Exchange Commission with
Certificate of Registration No. 138682 issued on March 4, 1987 with the following primary purpose:
To carry on the business, for itself and for others, of mining lode and/or placer mining, developing,
exploiting, extracting, milling, concentrating, converting, smelting, treating, refining, preparing for
market, manufacturing, buying, selling, exchanging, shipping, transporting, and otherwise producing and
dealing in nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all
kinds of ores, metals and their by-products and which by-products thereof of every kind and description
and by whatsoever process the same can be or may hereafter be produced, and generally and without
limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in lands, mines, and mineral
rights and claims and to conduct all business appertaining thereto, to purchase, locate, lease or
otherwise acquire, mining claims and rights, timber rights, water rights, concessions and mines,
buildings, dwellings, plants machinery, spare parts, tools and other properties whatsoever which this
corporation may from time to time find to be to its advantage to mine lands, and to explore, work,
exercise, develop or turn to account the same, and to acquire, develop and utilize water rights in such
manner as may be authorized or permitted by law; to purchase, hire, make, construct or otherwise,
acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work and operate private roads,
barges, vessels, aircraft and vehicles, private telegraph and telephone lines, and other communication
media, as may be needed by the corporation for its own purpose, and to purchase, import, construct,
machine, fabricate, or otherwise acquire, and maintain and operate bridges, piers, wharves, wells,
reservoirs, plumes, watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens,
crushing works, gasworks, electric lights and power plants and compressed air plants, chemical works of
all kinds, concentrators, smelters, smelting plants, and refineries, matting plants, warehouses,
workshops, factories, dwelling houses, stores, hotels or other buildings, engines, machinery, spare parts,
tools, implements and other works, conveniences and properties of any description in connection with
or which may be directly or indirectly conducive to any of the objects of the corporation, and to
contribute to, subsidize or otherwise aid or take part in any operations;

and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN
8RC0000017494. Likewise, [Taganito] is registered with the Board of Investments (BOI) as an exporter of
beneficiated nickel silicate and chromite ores, with BOI Certificate of Registration No. EP-88-306.

Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with
authority to exercise the functions of the said office, including inter alia, the power to decide refunds of
internal revenue taxes, fees and other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code (NIRC) or other laws administered by Bureau of
Internal Revenue (BIR) under Section 4 of the NIRC. He holds office at the BIR National Office Building,
Diliman, Quezon City.
[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period January 1,
2005 to December 31, 2005. For easy reference, a summary of the filing dates of the original and
amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as follows:

Exhibit(s) QuarterNature of

the Return Mode of filing Filing Date

L to L-4 1st Original Electronic April 15, 2005

M to M-3 Amended Electronic July 20, 2005

N to N-4 Amended Electronic October 18, 2006

Q to Q-3 2nd Original Electronic July 20, 2005

R to R-4Amended Electronic October 18, 2006

U to U-4 3rd Original Electronic October 19, 2005

V to V-4Amended Electronic October 18, 2006

Y to Y-4 4th Original Electronic January 20, 2006

Z to Z-4 Amended Electronic October 18, 2006

As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated sales
amounting to P1,446,854,034.68; input VAT on its domestic purchases and importations of goods (other
than capital goods) and services amounting to P2,314,730.43; and input VAT on its domestic purchases
and importations of capital goods amounting to P6,050,933.95, the details of which are summarized as
follows:

Period

Covered Zero-Rated Sales Input VAT on

Domestic

Purchases and

Importations

of Goods and

Services Input VAT on

Domestic

Purchases and

Importations

of Capital

Goods Total Input VAT

01/01/05 -

03/31/05 P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78

04/01/05 -

06/30/05 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90

07/01/05 -

09/30/05 480,784,287.30 144,887.67 - 144,887.67

10/01/05 -

12/31/05 350,212,345.02 473,598.03 - 473,598.03

TOTAL P1,446,854,034.68 P2,314,730.43 P6,050,933.95 P8,365,664.38

On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers Audit and
Investigation Division II (LTAID II), a letter dated November 13, 2006 claiming a tax credit/refund of its
supposed input VAT amounting to ₱8,365,664.38 for the period covering January 1, 2004 to December
31, 2004. On the same date, [Taganito] likewise filed an Application for Tax Credits/Refunds for the
period covering January 1, 2005 to December 31, 2005 for the same amount.

On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the CIR], to
correct the period of the above claim for tax credit/refund in the said amount of ₱8,365,664.38 as
actually referring to the period covering January 1, 2005 to December 31, 2005.

As the statutory period within which to file a claim for refund for said input VAT is about to lapse
without action on the part of the [CIR], [Taganito] filed the instant Petition for Review on February 17,
2007.

In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:
4. [Taganito’s] alleged claim for refund is subject to administrative investigation/examination by the
Bureau of Internal Revenue (BIR);

5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged unutilized input VAT on domestic
purchases of goods and services and on importation of capital goods for the period January 1, 2005 to
December 31, 2005 is not properly documented;

6. [Taganito] must prove that it has complied with the provisions of Sections 112 (A) and (D) and 229 of
the National Internal Revenue Code of 1997 (1997 Tax Code) on the prescriptive period for claiming tax
refund/credit;

7. Proof of compliance with the prescribed checklist of requirements to be submitted involving claim for
VAT refund pursuant to Revenue Memorandum Order No. 53-98, otherwise there would be no sufficient
compliance with the filing of administrative claim for refund, the administrative claim thereof being
mere proforma, which is a condition sine qua non prior to the filing of judicial claim in accordance with
the provision of Section 229 of the 1997 Tax Code. Further, Section 112 (D) of the Tax Code, as
amended, requires the submission of complete documents in support of the application filed with the
BIR before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies
as provided for in the law. Hence, [Taganito’s] failure to submit proof of compliance with the above-
stated requirements warrants immediate dismissal of the petition for review.

8. [Taganito] must prove that it has complied with the invoicing requirements mentioned in Sections 110
and 113 of the 1997 Tax Code, as amended, in relation to provisions of Revenue Regulations No. 7-95.

9. In an action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund,
and failure to sustain the burden is fatal to the claim for refund/credit (Asiatic Petroleum Co. vs. Llanes,
49 Phil. 466 cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670);

10. Claims for refund are construed strictly against the claimant for the same partake the nature of
exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they
are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA
1211).
SPECIAL AND AFFIRMATIVE DEFENSES

11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for failure on
the part of [Taganito] to comply with the provision of Section 112 (D) of the 1997 Tax Code which
provides, thus:

Section 112. Refunds or Tax Credits of Input Tax. –

xxx xxx xxx

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

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

12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal Revenue
on November 14, 2006. Subsequently on February 14, 2007, the instant petition was filed. Obviously the
120 days given to the Commissioner to decide on the claim has not yet lapsed when the petition was
filed. The petition was prematurely filed, hence it must be dismissed for lack of jurisdiction.

During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at proving its
supposed entitlement to the refund in the amount of ₱8,365,664.38, representing input taxes for the
period covering January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not to
present evidence. Thus, in the Resolution promulgated on January 22, 2009, this case was submitted for
decision as of such date, considering [Taganito’s] "Memorandum" filed on January 19, 2009 and [the
CIR’s] "Memorandum" filed on December 19, 2008.24

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division partially granted Taganito’s claim. In its Decision25 dated 8 January 2010, the
CTA Second Division found that Taganito complied with the requirements of Section 112(A) of RA 8424,
as amended, to be entitled to a tax refund or credit of input VAT attributable to zero-rated or effectively
zero-rated sales.26

The pertinent portions of the CTA Second Division’s Decision read:

Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006, which was
amended on November 29, 2006, and the Petition for Review filed with this Court on February 14, 2007
are well within the two-year prescriptive period, reckoned from March 31, 2005, June 30, 2005,
September 30, 2005, and December 31, 2005, respectively, the close of each taxable quarter covering
the period January 1, 2005 to December 31, 2005.

In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount of
₱8,249,883.33 representing unutilized input VAT for the four taxable quarters of 2005.

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the amount of EIGHT MILLION TWO
HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND THIRTY THREE
CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable to zero-rated sales from
January 1, 2005 to December 31, 2005.

SO ORDERED.27

The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito, in turn, filed
a Comment/Opposition on the Motion for Partial Reconsideration on 15 February 2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The CTA Second
Division ruled that the legislature did not intend that Section 112 (Refunds or Tax Credits of Input Tax)
should be read in isolation from Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice
versa. The CTA Second Division applied the mandatory statute of limitations in seeking judicial recourse
prescribed under Section 229 to claims for refund or tax credit under Section 112.

The Court of Tax Appeals’ Ruling: En Banc

On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing the 8 January
2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and praying that Taganito’s entire
claim for refund be denied.

In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and reversed and
set aside the challenged decision and resolution.

The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the reckoning of
the two-year prescriptive period for filing a claim for tax refund or credit over input VAT to be the close
of the taxable quarter when the sales were made. The CTA EB also relied on this Court’s rulings in the
cases of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi)30 and
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant).31 Both Aichi and Mirant
ruled that the two-year prescriptive period to file a refund for input VAT arising from zero-rated sales
should be reckoned from the close of the taxable quarter when the sales were made. Aichi further
emphasized that the failure to await the decision of the Commissioner or the lapse of 120-day period
prescribed in Section 112(D) amounts to a premature filing.

The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which was well
within the period prescribed under Section 112(A) and (B) of the 1997 Tax Code. However, the CTA EB
found that Taganito’s judicial claim was prematurely filed. Taganito filed its Petition for Review before
the CTA Second Division on 14 February 2007. The judicial claim was filed after the lapse of only 92 days
from the filing of its administrative claim before the CIR, in violation of the 120-day period prescribed in
Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:

WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated January 8,
2010 and Resolution dated April 7, 2010 of the Special Second Division of this Court are hereby
REVERSED and SET ASIDE. Another one is hereby entered DISMISSING the Petition for Review filed in
CTA Case No. 7574 for having been prematurely filed.

SO ORDERED.32

In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim before the
CTA. Justice Bautista read Section 112(C) of the 1997 Tax Code (Period within which Refund or Tax Credit
of Input Taxes shall be Made) in conjunction with Section 229 (Recovery of Tax Erroneously or Illegally
Collected). Justice Bautista also relied on this Court’s ruling in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue (Atlas),34 which stated that refundable
or creditable input VAT and illegally or erroneously collected national internal revenue tax are the same,
insofar as both are monetary amounts which are currently in the hands of the government but must
rightfully be returned to the taxpayer. Justice Bautista concluded:

Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund or tax
credit of excess or unutilized input tax with this Court, either within 30 days from receipt of the denial of
its claim, or after the lapse of the 120-day period in the event of inaction by the Commissioner, provided
that both administrative and judicial remedies must be undertaken within the 2-year period.35

Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed an
Opposition on 26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in a Resolution36
dated 14 March 2011. The CTA EB did not see any justifiable reason to depart from this Court’s rulings in
Aichi and Mirant.

G.R. No. 197156

Philex Mining Corporation v. CIR

The Facts
The CTA EB’s narration of the pertinent facts is as follows:

[Philex] is a corporation duly organized and existing under the laws of the Republic of the Philippines,
which is principally engaged in the mining business, which includes the exploration and operation of
mine properties and commercial production and marketing of mine products, with office address at 27
Philex Building, Fairlaine St., Kapitolyo, Pasig City.

[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the government
entity tasked with the duties/functions of assessing and collecting all national internal revenue taxes,
fees, and charges, and enforcement of all forfeitures, penalties and fines connected therewith, including
the execution of judgments in all cases decided in its favor by [the Court of Tax Appeals] and the
ordinary courts, where she can be served with court processes at the BIR Head Office, BIR Road, Quezon
City.

On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable year 2005 and
Amended VAT Return for the same quarter on December 1, 2005.

On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of ₱23,956,732.44 with
the One Stop Shop Center of the Department of Finance. However, due to [the CIR’s] failure to act on
such claim, on October 17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as amended,
[Philex] filed a Petition for Review, docketed as C.T.A. Case No. 7687.

In [her] Answer, respondent CIR alleged the following special and affirmative defenses:

4. Claims for refund are strictly construed against the taxpayer as the same partake the nature of an
exemption;

5. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the
part of [Philex] to prove the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the amount being refunded.37

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to prescription.
The CTA Second Division ruled that the two-year prescriptive period specified in Section 112(A) of RA
8424, as amended, applies not only to the filing of the administrative claim with the BIR, but also to the
filing of the judicial claim with the CTA. Since Philex’s claim covered the 3rd quarter of 2005, its
administrative claim filed on 20 March 2006 was timely filed, while its judicial claim filed on 17 October
2007 was filed late and therefore barred by prescription.

On 10 November 2009, the CTA Second Division denied Philex’s Motion for Reconsideration.

The Court of Tax Appeals’ Ruling: En Banc

Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009 Decision
and the 10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687.

The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed the CTA
Second Division’s Decision and Resolution.

The pertinent portions of the Decision read:

In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed within the
two-year prescriptive period; however, as to its judicial claim for refund/credit, records show that on
March 20, 2006, [Philex] applied the administrative claim for refund of unutilized input VAT in the
amount of ₱23,956,732.44 with the One Stop Shop Center of the Department of Finance, per
Application No. 52490. From March 20, 2006, which is also presumably the date [Philex] submitted
supporting documents, together with the aforesaid application for refund, the CIR has 120 days, or until
July 18, 2006, within which to decide the claim. Within 30 days from the lapse of the 120-day period, or
from July 19, 2006 until August 17, 2006, [Philex] should have elevated its claim for refund to the CTA.
However, [Philex] filed its Petition for Review only on October 17, 2007, which is 426 days way beyond
the 30- day period prescribed by law.

Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the Petition for
Review in CTA Case No. 7687 should have been dismissed on the ground that the Petition for Review
was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA in
Division; and not due to prescription.

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE, and
accordingly, DISMISSED. The assailed Decision dated July 20, 2009, dismissing the Petition for Review in
CTA Case No. 7687 due to prescription, and Resolution dated November 10, 2009 denying [Philex’s]
Motion for Reconsideration are hereby AFFIRMED, with modification that the dismissal is based on the
ground that the Petition for Review in CTA Case No. 7687 was filed way beyond the 30-day prescribed
period to appeal.

SO ORDERED.39

G.R. No. 187485

CIR v. San Roque Power Corporation

The Commissioner raised the following grounds in the Petition for Review:

I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund was not
prematurely filed.

II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court of Tax Appeals
(Second Division) granting [San Roque’s] claim for refund of alleged unutilized input VAT on its
purchases of capital goods and services for the taxable year 2001 in the amount of P483,797,599.65. 40

G.R. No. 196113

Taganito Mining Corporation v. CIR

Taganito raised the following grounds in its Petition for Review:

I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of discretion
tantamount to lack or excess of jurisdiction in erroneously applying the Aichi doctrine in violation of
[Taganito’s] right to due process.

II. The Court of Tax Appeals committed serious error and acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in erroneously interpreting the provisions of Section 112
(D).41

G.R. No. 197156

Philex Mining Corporation v. CIR

Philex raised the following grounds in its Petition for Review:

I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is that the petition
was filed with the CTA within the period set by prevailing court rulings at the time it was filed.

II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition in this instant
case.42

The Court’s Ruling

For ready reference, the following are the provisions of the Tax Code applicable to the present cases:

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

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

xxxx

Section 110(B):

Sec. 110. Tax Credits. —

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters: [Provided, That the input tax inclusive
of input VAT carried over from the previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT:]43 Provided, however, That any input tax attributable
to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other
internal revenue taxes, subject to the provisions of Section 112.

Section 112:44

Sec. 112. Refunds or Tax Credits of Input Tax. —

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

(B) Capital Goods.- A VAT — registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input
taxes have not been applied against output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the importation or purchase was made.

(C) Cancellation of VAT Registration. — A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be used in payment of his other internal
revenue taxes

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

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

(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by the Commissioner or by
his duly authorized representative without the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, that refunds under this paragraph shall be subject to post audit by the
Commission on Audit.
Section 229:

Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or
of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

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

(All emphases supplied)

I. Application of the 120+30 Day Periods

a. G.R. No. 187485 - CIR v. San Roque Power Corporation

On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the Commissioner
on 28 March 2003, San Roque filed a Petition for Review with the CTA docketed as CTA Case No. 6647.
From this we gather two crucial facts: first, San Roque did not wait for the 120-day period to lapse
before filing its judicial claim; second, San Roque filed its judicial claim more than four (4) years before
the Atlas45 doctrine, which was promulgated by the Court on 8 June 2007.

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

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies and renders the petition premature and thus without
a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition.
Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles.46

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes."47 When a
taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as
a court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly
provides that if the Commissioner fails to decide within "a specific period" required by law, such
"inaction shall be deemed a denial"48 of the application for tax refund or credit. It is the Commissioner’s
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a
petition for review.49

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with
the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself authorizes [its] validity."
There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his
own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions which are against the law or which infringe
upon the rights of others."50 For violating a mandatory provision of law in filing its petition with the
CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition with
the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day
period just because the Commissioner merely asserts that the case was prematurely filed with the CTA
and does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has
undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or excessively
collected from him, does not entitle him as a matter of right to a tax refund or credit. Strict compliance
with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is
essential and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just
like tax exemptions, are strictly construed against the taxpayer.51 The burden is on the taxpayer to
show that he has strictly complied with the conditions for the grant of the tax refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because
the Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of
the taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and
non-adherence to exhaustion of administrative remedies bar a taxpayer’s claim for tax 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+3052 day periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited by the Court
in Atlas as the applicable provision of the law did not yet provide for the 30-day period for the taxpayer
to appeal to the CTA from the decision or inaction of the Commissioner.53 Thus, the Atlas doctrine
cannot be invoked by anyone to disregard compliance with the 30-day mandatory and jurisdictional
period. Also, the difference between the Atlas doctrine on one hand, and the Mirant54 doctrine on the
other hand, is a mere 20 days. The Atlas doctrine counts the two-year prescriptive period from the date
of payment of the output VAT, which means within 20 days after the close of the taxable quarter. The
output VAT at that time must be paid at the time of filing of the quarterly tax returns, which were to be
filed "within 20 days following the end of each quarter."

Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the
administrative claims filed with the Commissioner, and the petitions for review filed with the CTA, were
all filed within two years from the date of payment of the output VAT, following Section 229:

Period Covered Date of Filing Return

& Payment of Tax Date of Filing

Administrative Claim Date of Filing

Petition With CTA

2nd Quarter, 1990

Close of Quarter

30 June 1990 20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990

Close of Quarter

30 September 1990 18 October 1990 21 November 1990 9 October 1992

4th Quarter, 1990

Close of Quarter

31 December 1990 20 January 1991 19 February 1991 14 January 1993

Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th day
after the close of the taxable quarter. Had the twoyear prescriptive period been counted from the "close
of the taxable quarter" as expressly stated in the law, the tax refund claims of Atlas would have already
prescribed. In contrast, the Mirant doctrine counts the two-year prescriptive period from the "close of
the taxable quarter when the sales were made" as expressly stated in the law, which means the last day
of the taxable quarter. The 20-day difference55 between the Atlas doctrine and the later Mirant
doctrine is not material to San Roque’s claim for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because what is
at issue in the present case is San Roque’s non-compliance with the 120-day mandatory and
jurisdictional period, which is counted from the date it filed its administrative claim with the
Commissioner. The 120-day period may extend beyond the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period. However, San Roque’s fatal mistake
is that it did not wait for the Commissioner to decide within the 120-day period, a mandatory period
whether the Atlas or the Mirant doctrine is applied.

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods
were already in the law. Section 112(C)56 expressly grants the Commissioner 120 days within which to
decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant
a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents." Following the verba legis doctrine, this law
must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply
file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day
mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot
blame anyone but itself.

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

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

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

b. G.R. No. 196113 - Taganito Mining Corporation v. CIR

Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120-day
period to lapse. Also, like San Roque, Taganito filed its judicial claim before the promulgation of the Atlas
doctrine. Taganito filed a Petition for Review on 14 February 2007 with the CTA. This is almost four
months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is similarly situated as San
Roque - both cannot claim being misled, misguided, or confused by the Atlas doctrine.

However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December 2003, which expressly
ruled that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek
judicial relief with the CTA by way of Petition for Review." Taganito filed its judicial claim after the
issuance of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine. Thus, as will be
explained later, Taganito is deemed to have filed its judicial claim with the CTA on time.

c. G.R. No. 197156 – Philex Mining Corporation v. CIR

Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable year 2005; (2)
filed on 20 March 2006 its administrative claim for refund or credit; (3) filed on 17 October 2007 its
Petition for Review with the CTA. The close of the third taxable quarter in 2005 is 30 September 2005,
which is the reckoning date in computing the two-year prescriptive period under Section 112(A).

Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period.
Even if the two-year prescriptive period is computed from the date of payment of the output VAT under
Section 229, Philex still filed its administrative claim on time. Thus, the Atlas doctrine is immaterial in
this case. The Commissioner had until 17 July 2006, the last day of the 120-day period, to decide Philex’s
claim. Since the Commissioner did not act on Philex’s claim on or before 17 July 2006, Philex had until 17
August 2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that 17 August
2006 was indeed the last day for Philex to file its judicial claim. However, Philex filed its Petition for
Review with the CTA only on 17 October 2007, or four hundred twenty-six (426) days after the last day
of filing. In short, Philex was late by one year and 61 days in filing its judicial claim. As the CTA EB
correctly found:

Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus, the Petition for
Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the Petition for Review
was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA
Division; x x x58 (Emphasis supplied)

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did
not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the
CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the
expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event,
whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will
have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the
date of payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter
when the sales attributable to the input VAT were made following the Mirant and Aichi doctrines,
Philex’s judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the
Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed a
denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial
claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a
denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The
exercise of such statutory privilege requires strict compliance with the conditions attached by the
statute for its exercise.59 Philex failed to comply with the statutory conditions and must thus bear the
consequences.

II. Prescriptive Periods under Section 112(A) and (C)

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

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

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

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days60), then the taxpayer must file his administrative claim for refund or credit
within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer file
his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes
utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the
two-year prescriptive period.

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

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on
time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner
decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to
file his judicial claim with the CTA. This is not only the plain meaning but also the only logical
interpretation of Section 112(A) and (C).

III. "Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229 because at the time the
input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and
legally paid by, a VAT-registered seller61 of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax liability is true even if the
seller passes on the input VAT to the buyer as part of the purchase price. The second VAT-registered
person, who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his
own output VAT.62 If the input VAT is in fact "excessively" collected as understood under Section 229,
then it is the first VAT-registered person - the taxpayer who is legally liable and who is deemed to have
legally paid for the input VAT - who can ask for a tax refund or credit under Section 229 as an ordinary
refund or credit outside of the VAT System. In such event, the second VAT-registered taxpayer will have
no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input
VAT is not "excessively" collected as understood under Section 229. At the time of payment of the input
VAT the amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally
due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere
existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT
available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is
more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund
or credit of the input VAT as "excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date
of payment of the tax "erroneously, x x x illegally, x x x excessively or in any manner wrongfully
collected." The prescriptive period is reckoned from the date the person liable for the tax pays the tax.
Thus, if the input VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays
more than what is legally due, the taxpayer must file a judicial claim for refund within two years from his
date of payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The
person to whom the tax is passed on as part of the purchase price has no personality to file the judicial
claim under Section 229.63

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess"
input VAT is two years from the close of the taxable quarter when the sale was made by the person
legally liable to pay the output VAT. This prescriptive period has no relation to the date of payment of
the "excess" input VAT. The "excess" input VAT may have been paid for more than two years but this
does not bar the filing of a judicial claim for "excess" VAT under Section 112(A), which has a different
reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT
is not the person who legally paid the input VAT. Such person seeking the VAT refund or credit does not
claim that the input VAT was "excessively" collected from him, or that he paid an input VAT that is more
than what is legally due. He is not the taxpayer who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain
of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value
added by the taxpayer, but on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for
his goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that
he adds to the goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like
companies generating power through renewable sources of energy.64 Thus, a non zero-rated VAT-
registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund or credit
of his unused input VAT under the VAT System. Even if the taxpayer has sales but his input VAT exceeds
his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT under the VAT System.
He can only carry-over and apply his "excess" input VAT against his future output VAT. If such "excess"
input VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for
such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such refund
or credit. Such "excess" input VAT is not an "excessively" collected tax under Section 229. The "excess"
input VAT is a correctly and properly collected tax. However, such "excess" input VAT can be applied
against the output VAT because the VAT is a tax imposed only on the value added by the taxpayer. If the
input VAT is in fact "excessively" collected under Section 229, then it is the person legally liable to pay
the input VAT, not the person to whom the tax was passed on as part of the purchase price and claiming
credit for the input VAT under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under
Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT under
Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere
payment of a tax beyond what is legally due can be claimed as a refund or credit. There is no
requirement under Section 229 for an output VAT or subsequent sale of goods, properties, or services
using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is
"erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." In short, there must
be a wrongful payment because what is paid, or part of it, is not legally due. As the Court held in Mirant,
Section 229 should "apply only to instances of erroneous payment or illegal collection of internal
revenue taxes." Erroneous or wrongful payment includes excessive payment because they all refer to
payment of taxes not legally due. Under the VAT System, there is no claim or issue that the "excess"
input VAT is "excessively or in any manner wrongfully collected." In fact, if the "excess" input VAT is an
"excessively" collected tax under Section 229, then the taxpayer claiming to apply such "excessively"
collected input VAT to offset his output VAT may have no legal basis to make such offsetting. The person
legally liable to pay the input VAT can claim a refund or credit for such "excessively" collected tax, and
thus there will no longer be any "excess" input VAT. This will upend the present VAT System as we know
it.

IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-
year prescriptive period under Section 229, should be effective only from its promulgation on 8 June
2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the
Atlas doctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be
governed by Section 112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas
doctrine, adopted the verba legis rule, thus applying Section 112(A) in computing the two-year
prescriptive period in claiming refund or credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the
application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day
periods was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day
periods are mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and
unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue the tax
credit within one hundred twenty (120) days from the date of submission of complete documents," the
law clearly gives the Commissioner 120 days within which to decide the taxpayer’s claim. Resort to the
courts prior to the expiration of the 120-day period is a patent violation of the doctrine of exhaustion of
administrative remedies, a ground for dismissing the judicial suit due to prematurity. Philippine
jurisprudence is awash with cases affirming and reiterating the doctrine of exhaustion of administrative
remedies.65 Such doctrine is basic and elementary.

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day
periods optional just because the law uses the word "may." The word "may" simply means that the
taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt of the
decision, or within 30 days from the expiration of the 120-day period. Certainly, by no stretch of the
imagination can the word "may" be construed as making the 120+30 day periods optional, allowing the
taxpayer to file a judicial claim one day after filing the administrative claim with the Commissioner.

The old rule66 that the taxpayer may file the judicial claim, without waiting for the Commissioner’s
decision if the two-year prescriptive period is about to expire, cannot apply because that rule was
adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do
away with the old rule, so that under the VAT System the taxpayer will always have 30 days to file the
judicial claim even if the Commissioner acts only on the 120th day, or does not act at all during the 120-
day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a
judicial claim for refund or credit of input VAT without waiting for the Commissioner to decide until the
expiration of the 120-day period.

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the
effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on
10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.

V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not wait for the
120-day period to expire before filing a judicial claim with the CTA. RMC 49-03 merely authorizes the BIR
to continue processing the administrative claim even after the taxpayer has filed its judicial claim,
without saying that the taxpayer can file its judicial claim before the expiration of the 120-day period.
RMC 49-03 states: "In cases where the taxpayer has filed a ‘Petition for Review’ with the Court of Tax
Appeals involving a claim for refund/TCC that is pending at the administrative agency (either the Bureau
of Internal Revenue or the One- Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance), the administrative agency and the court may act on the case separately." Thus,
if the taxpayer files its judicial claim before the expiration of the 120-day period, the BIR will
nevertheless continue to act on the administrative claim because such premature filing cannot divest
the Commissioner of his statutory power and jurisdiction to decide the administrative claim within the
120-day period.

On the other hand, if the taxpayer files its judicial claim after the 120- day period, the Commissioner can
still continue to evaluate the administrative claim. There is nothing new in this because even after the
expiration of the 120-day period, the Commissioner should still evaluate internally the administrative
claim for purposes of opposing the taxpayer’s judicial claim, or even for purposes of determining if the
BIR should actually concede to the taxpayer’s judicial claim. The internal administrative evaluation of the
taxpayer’s claim must necessarily continue to enable the BIR to oppose intelligently the judicial claim or,
if the facts and the law warrant otherwise, for the BIR to concede to the judicial claim, resulting in the
termination of the judicial proceedings.

What is important, as far as the present cases are concerned, is that the mere filing by a taxpayer of a
judicial claim with the CTA before the expiration of the 120-day period cannot operate to divest the
Commissioner of his jurisdiction to decide an administrative claim within the 120-day mandatory period,
unless the Commissioner has clearly given cause for equitable estoppel to apply as expressly recognized
in Section 246 of the Tax Code.67

VI. BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the Tax
Code. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse
of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review."
Prior to this ruling, the BIR held, as shown by its position in the Court of Appeals,68 that the expiration
of the 120-day period is mandatory and jurisdictional before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not
acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There
are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific
ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific
ruling is applicable only to such particular taxpayer. The second exception is where the Commissioner,
through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into
filing prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to
later on question the CTA’s assumption of jurisdiction over such claim since equitable estoppel has set in
as expressly authorized under Section 246 of the Tax Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the Commissioner
the power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. — The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in
good faith should not be made to suffer for adhering to general interpretative rules of the Commissioner
interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the
Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a
BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR
regulation or ruling prior to its reversal. Section 246 provides as follows:

Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith. (Emphasis supplied)

Thus, a general interpretative rule issued by the Commissioner may be relied upon by taxpayers from
the time the rule is issued up to its reversal by the Commissioner or this Court. Section 246 is not limited
to a reversal only by the Commissioner because this Section expressly states, "Any revocation,
modification or reversal" without specifying who made the revocation, modification or reversal. Hence,
a reversal by this Court is covered under Section 246.

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

a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi69 is proof that
the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law.
The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated,
being made to return the tax refund or credit they received or could have received under Atlas prior to
its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued by the
Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. As held by this Court in CIR v. Philippine Health Care Providers, Inc.:70

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

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.1âwphi1 in the later cases
of Commissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal Revenue v. Mega
Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc., and
Commissioner of Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have no
retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this
case.

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

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

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

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

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is
admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that the
120-day period was mandatory and jurisdictional, which is the correct interpretation of the law; third,
prior to its issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial claim
prematurely; and fourth, a claim for tax refund or credit, like a claim for tax exemption, is strictly
construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim
prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
To repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time
San Roque filed its judicial claim, the law as applied and administered by the BIR was that the
Commissioner had 120 days to act on administrative claims. This was in fact the position of the BIR prior
to the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling
No. DA-489-03 or RMC 49-03, whether in this Court, the CTA, or before the Commissioner.

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

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very late
filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-
exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot
claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely
but filed it long after the lapse of the 30-day period following the expiration of the 120-day period. In
fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.

VII. Existing Jurisprudence

There is no basis whatsoever to the claim that in five cases this Court had already made a ruling that the
filing dates of the administrative and judicial claims are inconsequential, as long as they are within the
two-year prescriptive period. The effect of the claim of the dissenting opinions is that San Roque’s
failure to wait for the 120-day mandatory period to lapse is inconsequential, thus allowing San Roque to
claim the tax refund or credit. However, the five cases cited by the dissenting opinions do not support
even remotely the claim that this Court had already made such a ruling. None of these five cases
mention, cite, discuss, rule or even hint that compliance with the 120-day mandatory period is
inconsequential as long as the administrative and judicial claims are filed within the two-year
prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output VAT was
actually passed on to Toshiba that it could claim as input VAT subject to tax credit or refund. The
Commissioner argued that "although Toshiba may be a VAT-registered taxpayer, it is not engaged in a
VAT-taxable business." The Commissioner cited Section 4.106-1 of Revenue Regulations No. 75 that
"refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are
used in VAT-taxable business." In the words of the Court, "Ultimately, however, the issue still to be
resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of its input VAT
on its purchases of capital goods and services, to which this Court answers in the affirmative." Nowhere
in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period.

In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in the instant
case are (1) whether the absence of the BIR authority to print or the absence of the TIN-V in petitioner’s
export sales invoices operates to forfeit its entitlement to a tax refund/credit of its unutilized input VAT
attributable to its zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its sales
invoices automatically invalidates its claim for a tax credit certification." Again, nowhere in this case did
the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period.

In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA First
Division, conceding that petitioner’s transactions fall under the classification of zero-rated sales,
nevertheless denied petitioner’s claim ‘for lack of substantiation,’ x x x." The Court quoted the ruling of
the First Division that "valid VAT official receipts, and not mere sale invoices, should have been
submitted" by petitioner to substantiate its claim. The Court further stated: "x x x the CTA En Banc, x x x
affirmed x x x the CTA First Division," and "petitioner’s motion for reconsideration having been denied x
x x, the present petition for review was filed." Clearly, the sole issue in this case is whether petitioner
complied with the substantiation requirements in claiming for tax refund or credit. Again, nowhere in
this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims
are inconsequential, as long as they are within the two-year prescriptive period.

In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this manner:
"Simply put, the sole issue the petition raises is whether or not the CTA erred in granting respondent
Ironcon’s application for refund of its excess creditable VAT withheld." The Commissioner argued that
"since the NIRC does not specifically grant taxpayers the option to refund excess creditable VAT
withheld, it follows that such refund cannot be allowed." Thus, this case is solely about whether the
taxpayer has the right under the NIRC to ask for a cash refund of excess creditable VAT withheld. Again,
nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and
judicial claims are inconsequential, as long as they are within the two-year prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject to VAT.
Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court explained:

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local
taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they
contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it
previously paid as provided under Section 4.103-1 of Revenue Regulations No. 7-95, notwithstanding its
registration as a VAT taxpayer. For petitioner claims that said registration was erroneous and did not
confer upon the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from
August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence,
according to respondent, its export sales are not exempt from VAT, contrary to petitioner’s claim, but its
export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report
certified by an independent Certified Public Accountant that the input taxes it incurred from April 1,
1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any
output tax against which said input taxes may be offset, it had the option to file a claim for refund/tax
credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of
merit.

Petitioner’s contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had
two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions
of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal
revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D.
No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals
and the Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years
starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax
Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or subject to VAT at 0%
tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund or credit of its input VAT. Again,
nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and
judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother to wait
for the Resolution of its (administrative) claim by the CIR" before filing its judicial claim with the CTA,
this issue was not raised before the Court. Certainly, this statement of the Court is not a binding
precedent that the taxpayer need not wait for the 120-day period to lapse.

Any issue, whether raised or not by the parties, but not passed upon by the Court, does not have any
value as precedent. As this Court has explained as early as 1926:

It is contended, however, that the question before us was answered and resolved against the contention
of the appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no question was raised nor
was it even suggested that said section 216 did not apply to a public officer. That question was not
discussed nor referred to by any of the parties interested in that case. It has been frequently decided
that the fact that a statute has been accepted as valid, and invoked and applied for many years in cases
where its validity was not raised or passed on, does not prevent a court from later passing on its validity,
where that question is squarely and properly raised and presented. Where a question passes the Court
sub silentio, the case in which the question was so passed is not binding on the Court (McGirr vs.
Hamilton and Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs. Noriega and
Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs.
Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in the case of McGirr vs.
Hamilton and Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra, can have no binding
force in the interpretation of the question presented here.76 (Emphasis supplied)

In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not even
raised as an issue by any of the parties. The Court never passed upon this issue. Thus, Cebu Toyo does
not constitute binding precedent on the nature of the 120-day period.

There is also the claim that there are numerous CTA decisions allegedly supporting the argument that
the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and
do not bind this Court or the public. That is why CTA decisions are appealable to this Court, which may
affirm, reverse or modify the CTA decisions as the facts and the law may warrant. Only decisions of this
Court constitute binding precedents, forming part of the Philippine legal system.77 As held by this Court
in The Philippine Veterans Affairs Office v. Segundo:78

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or the
Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their own
right because they interpret what the laws say or mean. Unlike rulings of the lower courts, which bind
the parties to specific cases alone, our judgments are universal in their scope and application, and
equally mandatory in character. Let it be warned that to defy our decisions is to court contempt.
(Emphasis supplied)

The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils., Inc.:79

The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil Code, to wit:

ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the
legal system of the Philippines.

It enjoins adherence to judicial precedents. It requires our courts to follow a rule already established in a
final decision of the Supreme Court. That decision becomes a judicial precedent to be followed in
subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that
once a question of law has been examined and decided, it should be deemed settled and closed to
further argument. (Emphasis supplied)

VIII. Revenue Regulations No. 7-95 Effective 1 January 1996

Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if the
taxpayer files the judicial claim "after" the lapse of the 60-day period, a period with which San Roque
failed to comply. Under Section 4.106-2(c), the 60-day period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation can never prevail over a later
contrary law, more so in this case where the later law was enacted precisely to amend the prior
administrative regulation and the law it implements.

The laws and regulation involved are as follows:

1977 Tax Code, as amended by Republic Act No. 7716 (1994)

Sec. 106. Refunds or tax credits of creditable input tax. —

(a) x x x x

(d) Period within which refund or tax credit of input tax shall be made - In proper cases, the
Commissioner shall grant a refund or issue the tax credit for creditable input taxes within sixty (60) days
from the date of submission of complete documents in support of the application filed in accordance
with subparagraphs (a) and (b) hereof. In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from receipt of the decision denying
the claim or after the expiration of the sixty-day period, appeal the decision or the unacted claim with
the Court of Tax Appeals.

Revenue Regulations No. 7-95 (1996)

Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x x x

xxxx

(c) Period within which refund or tax credit of input taxes shall be made. — In proper cases, the
Commissioner shall grant a tax credit/refund for creditable input taxes within sixty (60) days from the
date of submission of complete documents in support of the application filed in accordance with
subparagraphs (a) and (b) above.

In case of full or partial denial of the claim for tax credit/refund as decided by the Commissioner of
Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the
receipt of said denial, otherwise the decision will become final. However, if no action on the claim for
tax credit/refund has been taken by the Commissioner of Internal Revenue after the sixty (60) day
period from the date of submission of the application but before the lapse of the two (2) year period
from the date of filing of the VAT return for the taxable quarter, the taxpayer may appeal to the Court of
Tax Appeals.

xxxx

1997 Tax Code

Section 112. Refunds or Tax Credits of Input Tax —

(A) x x x

xxxx

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

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA 7716, the
Commissioner has a 60-day period to act on the administrative claim. This 60-day period is mandatory
and jurisdictional.

Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day period is no
longer mandatory and jurisdictional? The obvious answer is no.

Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the Commissioner fails
to act on the administrative claim, the taxpayer may file the judicial claim even "before the lapse of the
two (2) year period." Thus, under Section 4.106-2(c) the 60-day period is still mandatory and
jurisdictional.

Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely implemented it,
for two reasons. First, Section 4.106-2(c) still expressly requires compliance with the 60-day period. This
cannot be disputed.1âwphi1

Second, under the novel amendment introduced by RA 7716, mere inaction by the Commissioner during
the 60-day period is deemed a denial of the claim. Thus, Section 4.106-2(c) states that "if no action on
the claim for tax refund/credit has been taken by the Commissioner after the sixty (60) day period," the
taxpayer "may" already file the judicial claim even long before the lapse of the two-year prescriptive
period. Prior to the amendment by RA 7716, the taxpayer had to wait until the two-year prescriptive
period was about to expire if the Commissioner did not act on the claim.80 With the amendment by RA
7716, the taxpayer need not wait until the two-year prescriptive period is about to expire before filing
the judicial claim because mere inaction by the Commissioner during the 60-day period is deemed a
denial of the claim. This is the meaning of the phrase "but before the lapse of the two (2) year period" in
Section 4.106-2(c). As Section 4.106- 2(c) reiterates that the judicial claim can be filed only "after the
sixty (60) day period," this period remains mandatory and jurisdictional. Clearly, Section 4.106-2(c) did
not amend Section 106(d) but merely faithfully implemented it.

Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No. 7-95, an
administrative issuance, amended Section 106(d) of the Tax Code to make the period given to the
Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated the original intent
and provision of Section 106(d) by extending the 60-day period to 120 days and re-adopting the original
wordings of Section 106(d). Thus, Section 4.106-2(c), a mere administrative issuance, becomes
inconsistent with Section 112(D), a later law. Obviously, the later law prevails over a prior inconsistent
administrative issuance.

Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the Commissioner has
120 days to act on an administrative claim. The taxpayer can file the judicial claim (1) only within thirty
days after the Commissioner partially or fully denies the claim within the 120- day period, or (2) only
within thirty days from the expiration of the 120- day period if the Commissioner does not act within the
120-day period.

There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998, or more than five
years before San Roque filed its administrative claim on 28 March 2003, the law has been clear: the 120-
day period is mandatory and jurisdictional. San Roque’s claim, having been filed administratively on 28
March 2003, is governed by the 1997 Tax Code, not the 1977 Tax Code. Since San Roque filed its judicial
claim before the expiration of the 120-day mandatory and jurisdictional period, San Roque’s claim
cannot prosper.

San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer can only
file the judicial claim "after" the lapse of the 60-day period from the filing of the administrative claim.
San Roque filed its judicial claim just 13 days after filing its administrative claim. To recall, San Roque
filed its judicial claim on 10 April 2003, a mere 13 days after it filed its administrative claim.

Even if, contrary to all principles of statutory construction as well as plain common sense, we
gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot
recover any refund or credit because San Roque did not wait for the 60-day period to lapse, contrary to
the express requirement in Section 4.106-2(c). In short, San Roque does not even comply with Section
4.106-2(c). A claim for tax refund or credit is strictly construed against the taxpayer, who must prove
that his claim clearly complies with all the conditions for granting the tax refund or credit. San Roque did
not comply with the express condition for such statutory grant.

A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to improve its tax
efficiency collection for the longest time with minimal success. Consequently, the Philippines has
suffered the economic adversities arising from poor tax collections, forcing the government to continue
borrowing to fund the budget deficits. This Court cannot turn a blind eye to this economic malaise by
being unduly liberal to taxpayers who do not comply with statutory requirements for tax refunds or
credits. The tax refund claims in the present cases are not a pittance. Many other companies stand to
gain if this Court were to rule otherwise. The dissenting opinions will turn on its head the well-settled
doctrine that tax refunds are strictly construed against the taxpayer.

WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal Revenue in G.R.
No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San Roque Power Corporation;
(2) GRANTS the petition of Taganito Mining Corporation in G.R. No. 196113 for a tax refund or credit of
P8,365,664.38; and (3) DENIES the petition of Philex Mining Corporation in G.R. No. 197156 for a tax
refund or credit of P23,956,732.44.

SO ORDERED

JULY 23, 2018

G.R. No. 203249

SAN ROQUE POWER CORPORATION, Petitioner

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

MARTIRES, J.:
The application of the 120-day and 30-day periods provided in Section 112 (D) [later renumbered as
Section 112 (C)] of the National Internal Revenue Code (NIRC) is at the heart of the present case.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), 1 the Court
considered whether the simultaneous filing of both the administrative claim (before the Bureau of
Internal Revenue [BIR]) and judicial claim (before the Court of Tax Appeals [CTA]) for refund/credit of
input VAT under the cited law is permissible. In that case, the respondent asserted that the non-
observance of the 120-day period is not fatal to the filing of a judicial claim as long as both the
administrative and the judicial claims are filed within the two-year prescriptive period. We held that the
premature filing of respondent's claim for refund/credit before the CTA warrants a dismissal inasmuch
as no jurisdiction was acquired by that court.

In the case before us, San Roque Power Corporation (petitioner) brought its judicial claims before the CT
A prior to the promulgation of the Aichi ruling. Yet, the lower court (CTA En Banc) dismissed the
petitioner's judicial claims on the ground of prematurity, a decision that happily coincided with the
Court's ruling in Aichi. In its petition, San Roque Power Corporation rues the retroactive application of
Aichi to taxpayers who merely relied on the alleged prevailing rule of procedure antecedent to Aichi that
allowed the filing of judicial claims before the expiration of the 120-day period.

We hold that there is no established precedence prior to Aichi that permits the simultaneous filing of
administrative and judicial claims for refund/credit under Section 112 of the NIRC. Nonetheless, we
concede that the CT A has jurisdiction over the claims in this case in view of our pronouncement in
Commissioner of Internal Revenue v. San Roque Power Corporation (San Roque).2 In said case, the
Court, while upholding Aichi, recognized an exception to the mandatory and jurisdictional character of
the 120-day period: taxpayers who relied on BIR Ruling DA-489-03, issued on 10 December 2003, until
its reversal in Aichi on 6 October 2010, are shielded from the vice of prematurity. The said ruling
expressly stated that "a taxpayer-claimant need not wait for the lapse of the 120-day period before it
could seek judicial relief with the CT A by way of a Petition for Review."

THE FACTS

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the 4 April 2012
Decision3 of the CTA En Banc in CT A EB No. 657. The CTA En Banc dismissed the petitioner's judicial
claims on the ground of prematurity, thus, setting aside the CTA Second Division's partial grant of the
refund claims in the consolidated CTA Case Nos. 7424 and 7492. In the subsequent 17 August 2012
Resolution4 of the CTA En Banc, the court a quo denied the petitioner's motion for reconsideration.

The Antecedents

San Roque Power Corporation is a VAT-registered taxpayer which was granted by the BIR a zero-rating
on its sales of electricity to National Power Corporation (NPC) effective 14 January 2004, up to 31
December 2004.5

On 22 December 2005 and 27 February 2006, the petitioner filed two separate administrative claims for
refund of its alleged unutilized input tax for the period 1 January 2004 up to 31 March 2004, and 1 April
2004 up to 31 December 2004, respectively.6

Due to the inaction of respondent CIR, the petitioner filed petitions for review before the CTA (raffled to
the Second Division): (1) on 30 March 2006, for its unutilized input VAT for the period 1 January 2004 to
31 March 2004, amounting to ₱17,017,648.31, docketed as CTA Case No. 7424; and (2) on 20 June 2006,
for the unutilized input VAT for the period 1 April 2004 to 31 December 2004, amounting to
₱14,959,061.57, docketed as CTA Case No. 7492.

The Ruling of the CTA Division

During trial, the petitioner presented documentary and testimonial evidence to prove its claim. On the
other hand, respondent CIR was deemed to have waived its right to present evidence due to its failure
to appear in the two scheduled hearings on the presentation of evidence for the defense. In due course,
the CTA Division partially granted the refund claim of the petitioner in the total amount of
₱29,931,505.18 disposing as follows:

WHEREFORE, premises considered, the instant Petitions for Review are hereby PARTIALLY GRANTED.
Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or TO ISSUE
A TAX CREDIT CERTIFICATE in the reduced amount of TWENTY-NINE MILLION NINE HUNDRED THIRTY-
ONE THOUSAND FIVE HUNDRED FIVE PESOS AND 18/100 (₱29,931,505.18) in favor of petitioner,
representing unutilized input VAT attributable effectively zero-rated sales of electricity to NPC for the
four quarters of 2004.
SO ORDERED.7

The CIR moved for reconsideration but to no avail. Thus, on 4 August 2010, the CIR filed a petition for
review with the CTA En Banc.

The Petition for Review before

the CTA En Banc

Among other issues, the CIR questioned the claimant's judicial recourse to the CT A as inconsistent with
the procedure prescribed in Section 112 (D) of the NIRC. The CIR asserted that the petitions for review
filed with the CT A were premature, and thus, should be dismissed.

The Ruling of the CTA En Banc

The CTA En Banc sided with the CIR in ruling that the judicial claims of the petitioner were prematurely
filed in violation of the 120-day and 30- day periods prescribed in Section 112 (D) of the NIRC. The court
held that by reason of prematurity of its petitions for review, San Roque Power Corporation failed to
exhaust administrative remedies which is fatal to its invocation of the court's power of review. The
dispositive portion of the CTA En Bane's assailed decision reads:

WHEREFORE, the Petition for Review filed by petitioner Commissioner of Internal Revenue is hereby
GRANTED. Accordingly, the Petition for Review filed by respondent on March 30, 2006 docketed as CTA
Case No. 7424, as well as the Petition for Review filed on June 20, 2006 docketed as CTA Case No. 7492
are hereby DISMISSED on ground of prematurity.

SO ORDERED.8

The Present Petition for Review

The petitioner argues that at the time it filed the petitions for review before the CTA on 30 March 2006
and 20 June 2006, no ruling yet was laid down by the Supreme Court concerning the 120-day and 30-day
periods provided in Section 112 of the NIRC. Instead, taxpayers such as the petitioner were guided only
by the rulings of the CTA9 which consistently adopted the interpretation that a claimant is not bound by
the 120-day and 30-day periods but by the two-year prescriptive period as provided in Section 112 (A) of
the NIRC. Such CTA decisions, according to the petitioner, are recognized interpretations of Philippines'
tax laws.

The petitioner also assets that the CT A En Banc erred in applying retroactively the Aichi ruling as regards
the 120-day and 30-day periods under Section 112 of the NIRC for the following reasons: (1) the Aichi
ruling laid down a new rule of procedure which cannot be given retroactive effect without impairing
vested rights; (2) a judicial ruling oven-uling a previous one cannot be applied retroactively before its
abandonment; and (3) a judicial decision which declares an otherwise permissible act as impermissible
violates the ex post facto rule under the Constitution.

THE COURT'S RULING

We grant the petition.

I.

No retroactive application of

the Aichi ruling

At the outset, it bears stressing that while Aichi was already firmly established at the time the CTA En
Banc promulgated the assailed decision, nowhere do we find in such assailed decision, however, that
the court a quo cited or mentioned the Aichi case as basis for dismissing the subject petitions for review.
As we see it, the CTA En Banc merely relied on Section 112 (D) of the NIRC, which provides -

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:

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.
(emphases supplied)

- correctly interpreting the 120-day and 30-day periods prescribed therein as mandatory and
jurisdictional. Thus, it cannot appropriately be insisted that the CTA En Bane's imputed error may be
traced to a misplaced invocation of Aichi.

Be that as it may, the petitioner cannot find solace in the various CTA decisions that allegedly dispense
with the timeliness of the judicial claim for as long as it is within the two-year prescriptive period. Such
legal posturing has already been passed upon.

Thus, in San Roque, 10 a case involving the same parties and substantially the same factual antecedents
as in the present petition, we rejected the claim that the CTA decisions may be relied upon as binding
precedents. We said –
There is also the claim that there are numerous CTA decisions allegedly supporting the argument that
the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and
do not bind this Court or the public. That is why CTA decisions are appealable to this Court, which may
affirm, reverse or modify the CT A decisions as the facts and the law may warrant. Only decisions of this
Court constitute binding precedents, forming part of the Philippine legal system. As held by this Court in
The Philippine Veterans Affairs Office v. Segundo:

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or the
Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their own
right because they interpret what the laws say or mean. Unlike rulings of the lower courts, which bind
the parties to specific cases alone, our judgments are universal in their scope and application, and
equally mandatory in character. Let it be warned that to defy our decisions is to court contempt. 11
(emphasis supplied)

We further held in said case that Article 8 of the Civil Code12 enjoins adherence to judicial precedents.
The law requires courts to follow a rule already established in a final decision of the Supreme Court.
Contrary to the petitioner's view, the decisions of the CTA are not given the same level of recognition.

Concerning the 120-day period in Section 112 (D) of the NIRC, there was no jurisprudential rule prior to
Aichi interpreting such provision as permitting the premature filing of a judicial claim before the
expiration of the 120-day period. The alleged CTA decisions that entertained the judicial claims despite
their prematurity are not to be relied upon because they are not final decisions of the Supreme Court
worthy of according binding precedence. That Aichi was yet to be promulgated at that time did not
mean that the premature filing of a petition for review before the CTA was a permissible act.

It was only in Aichi that this Court directly tackled the 120-day period in Section 112 (D) of the NIRC and
declared it to be mandatory and jurisdictional. In particular, Aichi brushed aside the contention that the
nonobservance of the 120-day period is not fatal to the filing of a judicial claim as long as both the
administrative and judicial claims are filed within the two-year prescriptive period provided in Section
112 (A) of the NIRC.

The mandatory and jurisdictional nature of the 120-day period first expressed in Aichi, however, is not a
new rule of procedure to be followed in pursuit of a refund claim of unutilized creditable input VAT
attributable to zero-rated sales. As suggested above, the pronouncement in Aichi regarding the
mandatory and jurisdictional nature of the 120-day period was the Court's interpretation of Section 112
(D) of the NIRC. It is that law, Section 112 (D) of the NIRC, that laid the rule of procedure for maintaining
a refund claim of unutilized creditable input VAT attributable to zero-rated sales. In said provision, the
Commissioner has 120 days to act on an administrative claim.

Hence, from the effectivity of the 1997 NIRC on 1 January 1998, the procedure has always been definite:
the 120-day period is mandatory and jurisdictional. Accordingly, a taxpayer can file a judicial claim (1)
only within thirty days after the Commissioner partially or fully denies the claim within the 120-day
period, or (2) only within thirty days from the expiration of the 120- day period if the Commissioner
does not act within such period. 13 This is the rule of procedure beginning 1 January 1998 as interpreted
in Aichi.

Given all the foregoing, it is indubitable that, subject to our discussion below on the reason why the
present petition should nonetheless be granted, the petitioner's arguments have no leg to stand on –

(1) The Aichi ruling laid down a new rule of procedure which cannot be given retroactive effect without
impairing vested rights. Section 112 (D) of the NIRC, not the Aichi ruling, lays down the rule of procedure
governing refund claims of unutilized creditable input VAT attributable to zero-rated sales; Aichi is
merely an interpretation of an existing law; there is no vested right to speak of respecting a wrong
construction of the law 14 (permitting a premature filing of judicial claim);

(2) A judicial ruling overruling a previous one cannot be applied retroactively before its abandonment.

There was no established doctrine abandoned or overturned by Aichi; the petitioner merely harps on
CTA decisions that cannot be relied on as binding precedents; and

(3) A judicial decision which declares an otherwise permissible act as impermissible violates the ex post
facto rule under the Constitution –

Prior to Aichi, there was no law or jurisprudence permitting the premature filing of a judicial claim of
creditable input VAT; Aichi did not declare as impermissible that which was previously recognized by law
or jurisprudence as a permissible act; it is, therefore, inconsequential to consider the ex postfacto
provision of the Constitution.
To reiterate, the 120-day and 30-day periods, as held in the case of Aichi, are mandatory and
jurisdictional. Thus, noncompliance with the mandatory 120+ 30-day period renders the petition before
the CTA void. The ruling in said case as to the mandatory and jurisdictional character of said periods was
reiterated in San Roque and a host of succeeding similar cases.

Significantly, a taxpayer can file a judicial claim only within thirty (30) days from the expiration of the
120-day period if the Commissioner does not act within the 120-day period. The taxpayer cannot file
such judicial claim prior to the lapse of the 120-day period, unless the CIR partially or wholly denies the
claim within such period. The taxpayer-claimant must strictly comply with the mandatory period by filing
an appeal to the CTA within thirty days from such inaction; otherwise, the court cannot validly acquire
jurisdiction over it.

In this case, the petitioner timely filed its administrative claims for refund/credit of its unutilized input
VAT for the first quarter of 2004, and for the second to fourth quarters of the same year, on 22
December 2005 and 27 February 2006, respectively, or within the two-year prescriptive period. Counted
from such dates of submission of the claims (with supporting documents), the CIR had 120 days, or until
13 April 2006, with respect to the first administrative claim, and until 27 June 2006, on the second
administrative claim, to decide.

However, the petitioner, without waiting for the full expiration of the 120-day periods and without any
decision by the CIR, immediately filed its petitions for review with the CT A on 30 March 2006, or a mere
ninety-eight (98) days for the first administrative claim; and on 20 June 2006, or only one hundred
thirteen (113) days for the second administrative claim, from the submission of the said claims. In other
words, the judicial claims of the petitioner were prematurely filed as correctly found by the CTA En Banc.

II.

Ordinarily, a prematurely filed appeal is to be dismissed for lack of jurisdiction in line with our ruling in
Aichi. But, as stated in the premises, we shall accord to the CTA jurisdiction over the claims in this case
due to our ruling in San Roque.

BIR Ruling No. DA-489-03

constitutes an exception to

the mandatory and

jurisdictional nature of the

120+30-day period.

In the consolidated cases of San Roque, the Court en bane recognized an exception to the mandatory
and jurisdictional nature of the 120+30-day period.1âwphi1 It was noted that BIR Ruling No. DA-489-03,
which expressly stated-

[A] 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.

- is a general interpretative rule issued by the CIR pursuant to its power under Section 4 of the NIRC,
hence, applicable to all taxpayers. Thus, taxpayers can rely on this ruling from the time of its issuance on
10 December 2003. The conclusion is impelled by the principle of equitable estoppel enshrined in
Section 246 15 of the NIRC which decrees that a BIR regulation or ruling cannot adversely prejudice a
taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal.

Then, in Taganito Mining Corporation v. CIR, 16 the Court further clarified the doctrines in Aichi and San
Roque explaining that during the window period from 10 December 2003, upon the issuance of BIR
Ruling No. DA-489-03 up to 6 October 2010, or date of promulgation of Aichi, taxpayers need not
observe the stringent 120-day period. 17

In other words, the 120+ 30-day period is generally mandatory and jurisdictional from the effectivity of
the 1997 NIRC on 1 January 1998, up to the present. By way of an exception, judicial claims filed during
the window period from 10 December 2003 to 6 October 2010, need not wait for the exhaustion of the
120-day period. The exception in San Roque has been applied consistently in numerous decisions of this
Court.

In this case, the two judicial claims filed by the petitioner fell within the window period, thus, the CTA
can take cognizance over them.
The petitioner is similarly situated as Taganito Mining Corporation (Taganito) in the consolidated cases
of San Roque. In that case, Taganito prematurely filed on 14 February 2007 its petition for review with
the CT A, or within the window period from I 0 December 2003, with the issuance of BIR Ruling DA-489-
03 and 6 October 2010, when Aichi was promulgated. The Court considered Taganito to have filed its
administrative claim time. Similarly, the judicial claims in this case were filed on 30 March 2006 and 20
June 2006, or within the said window period. Consequently, the exception to the mandatory and
jurisdictional character of the 120-day and 30-day periods is applicable.

What this means is that the CTA can validly take cognizance over the two judicial claims filed in this case.
The CTA Division, in fact, did this, which eventually led to the partial grant of the refund claims in favor
of the petitioner. In reversing the CTA Division for lack of jurisdiction, the CTA En Banc failed to consider
BIR Ruling No. DA-489-03.

III.

It is imperative, however, to point out that the petitioner did not actually invoke BIR Ruling No. DA-489-
03 in all its pleadings to justify the timeliness of its judicial claims with the CTA. To recall, the petitioner
vociferously insisted on the propriety of its judicial claims in view of the prevailing interpretations of the
CTA prior to Aichi that allowed premature filing of petitions for review before the CTA. This apparently
also explains the silence on the end of the CTA En Banc regarding such BIR ruling in disposing of the
matter on jurisdiction.

Hence, whether the petitioner can benefit from BIR Ruling DA-489- 03 even if it did not invoke it is a
question worthy of consideration.

The beneficiaries of BIR

Ruling No. DA-489-03 include

those who did not specifically

invoke it.
We resolve to apply the exception recognized in San Roque, which we quote, viz:

x x x 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. 18 (emphasis supplied)

As previously stated, San Roque has been consistently applied in a long line of cases that recognized the
exception to the mandatory and jurisdictional nature of the 120+30-day period. To limit the application
of BIR Ruling No. DA-489-03 only to those who invoked it specifically would unduly strain the
pronouncements in San Roque. To provide jurisprudential stability, it is best to apply the benefit of BIR
Ruling No. DA-489-03 to all taxpayers who filed their judicial claims within the window period from 10
December 2003 until 6 October 2010.

We said the same in Commissioner of Internal Revenue v. Air Liquide Philippines, Inc., 19 thus –

The Court agrees with ALPI in its survey of cases which shows that BIR Ruling No. DA-489-03 was applied
even though the taxpayer did not specifically invoke the same. As long as the judicial claim was filed
between December I 0, 2003 and October 6, 2010, then the taxpayer would not be required to wait for
the lapse of 120-day period. This doctrine has been consistently upheld in the recent decisions of the
Court. On the other hand, in Nippon Express v. CIR, Applied Food Ingredients v. CIR and Silicon
Philippines v. CIR, the taxpayer did not benefit from 13IR Ruling No. DA-489-03 because they filed their
precipitate judicial claim before December 10, 2003.

Indeed, BIR Ruling No. DA-489-03 is a general interpretative law and it applies to each and every
taxpayer. To subscribe to the contention of the CIR would alter the Court's ruling in San Roque. It will
lead to an unreasonable classification of the beneficiaries of BIR Ruling No. DA- 489-03 and further
complicate the doctrine. ALPI cannot be faulted for not specifically invoking BIR Ruling No. DA-489-03 as
the rules for its application were not definite until the San Roque case was promulgated.

In the furtherance of the doctrinal pronouncements in San Roque, the better approach would be to
apply BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claim for VAT refund within the
period of exception from December 10, 2003 to October 6, 2010. 20 (citations omitted)
Moreover, in Procter and Gamble Asia Pte Ltd. v. Commissioner of internal Revenue, 21 we considered
as insignificant the failure of a taxpayer to invoke BIR Ruling No. DA-489-03 before the CT A. Our reason
was that the said ruling is an official act emanating from the BIR. We can take judicial notice of such
issuance and its consistent application in past rulings of the Court relating to the timeliness of judicial
claims which makes it even more mandatory in taking cognizance of the same.

All told, the CTA has jurisdiction over the judicial claims filed by the petitioner in this case. The CTA En
Banc, thus, erred in setting aside the decision of the CT A Division on the ground of lack of jurisdiction.
Consequently, the decision of the CTA Division partially granting the claim for refund/credit in favor of
the petitioner must be reinstated.

WHEREFORE, the petition is GRANTED. The 4 April 2012 Decision and 1 7 August 2012 Resolution of the
Court of Tax Appeals En Banc in CTA EB No. 657 are REVERSED and SET ASIDE. The 8 January 2010
Decision and 28 June 2010 Resolution of the CT A Former Second Division in CTA Cases Nos. 7424 and
7492 are hereby REINSTATED.

The public respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or, in the
alternative, TO ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the total sum of Twenty-
Nine Million Nine Hundred Thirty-One Thousand Five Hundred Five Pesos and 18/100 Centavos
(₱29,931,505.18) representing unutilized input VAT attributable to zero-rated sales to the NPC for the
four taxable quarters of 2004.

SO ORDERED
[G.R. NO. 172129, September 12, 2008]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. MIRANT PAGBILAO CORPORATION (FORMERLY

SOUTHERN ENERGY QUEZON, INC.), Respondent.

DECISION

VELASCO JR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the
Decision1 dated December 22, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 78280 which
modified the March 18, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 6133 entitled
Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.) v. Commissioner of Internal
Revenue and ordered the Bureau of Internal Revenue (BIR) to refund or issue a tax credit certificate
(TCC) in favor of respondent Mirant Pagbilao Corporation (MPC) in the amount representing its
unutilized input value added tax (VAT) for the second quarter of 1998. Also assailed is the CA's
Resolution3 of March 31, 2006 denying petitioner's motion for reconsideration.

The Facts

MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation,
is a domestic firm engaged in the generation of power which it sells to the National Power Corporation
(NPC). For the construction of the electrical and mechanical equipment portion of its Pagbilao, Quezon
plant, which appears to have been undertaken from 1993 to 1996, MPC secured the services of
Mitsubishi Corporation (Mitsubishi) of Japan.

Under Section 134 of Republic Act No. (RA) 6395, the NPC's revised charter, NPC is exempt from all
taxes. In Maceda v. Macaraig,5 the Court construed the exemption as covering both direct and indirect
taxes.
In the light of the NPC's tax exempt status, MPC, on the belief that its sale of power generation services
to NPC is, pursuant to Sec. 108(B)(3) of the Tax Code,6 zero-rated for VAT purposes, filed on December
1, 1997 with Revenue District Office (RDO) No. 60 in Lucena City an Application for Effective Zero Rating.
The application covered the construction and operation of its Pagbilao power station under a Build,
Operate, and Transfer scheme.

Not getting any response from the BIR district office, MPC refiled its application in the form of a "request
for ruling" with the VAT Review Committee at the BIR national office on January 28, 1999. On May 13,
1999, the Commissioner of Internal Revenue issued VAT Ruling No. 052-99, stating that "the supply of
electricity by Hopewell Phil. to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to
Section 108 (B) (3) of the National Internal Revenue Code of 1997."

It must be noted at this juncture that consistent with its belief to be zero-rated, MPC opted not to pay
the VAT component of the progress billings from Mitsubishi for the period covering April 1993 to
September 1996--for the E & M Equipment Erection Portion of MPC's contract with Mitsubishi. This
prompted Mitsubishi to advance the VAT component as this serves as its output VAT which is essential
for the determination of its VAT payment. Apparently, it was only on April 14, 1998 that MPC paid
Mitsubishi the VAT component for the progress billings from April 1993 to September 1996, and for
which Mitsubishi issued Official Receipt (OR) No. 0189 in the aggregate amount of PhP 135,993,570.

On August 25, 1998, MPC, while awaiting approval of its application aforestated, filed its quarterly VAT
return for the second quarter of 1998 where it reflected an input VAT of PhP 148,003,047.62, which
included PhP 135,993,570 supported by OR No. 0189. Pursuant to the procedure prescribed in Revenue
Regulations No. 7-95, MPC filed on December 20, 1999 an administrative claim for refund of unutilized
input VAT in the amount of PhP 148,003,047.62.

Since the BIR Commissioner failed to act on its claim for refund and obviously to forestall the running of
the two-year prescriptive period under Sec. 229 of the National Internal Revenue Code (NIRC), MPC
went to the CTA via a petition for review, docketed as CTA Case No. 6133.
Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co. Ltd. v. CIR,7 asserted that MPC's
claim for refund cannot be granted for this main reason: MPC's sale of electricity to NPC is not zero-
rated for its failure to secure an approved application for zero-rating.

Before the CTA, among the issues stipulated by the parties for resolution were, in gist, the following:

Whether or not [MPC] has unapplied or unutilized creditable input VAT for the 2nd quarter of 1998
attributable to zero-rated sales to NPC which are proper subject for refund pursuant to relevant
provisions of the NIRC;

Whether the creditable input VAT of MPC for said period, if any, is substantiated by documents; and

Whether the unutilized creditable input VAT for said quarter, if any, was applied against any of the VAT
output tax of MPC in the subsequent quarter.

To provide support to the CTA in verifying and analyzing documents and figures and entries contained
therein, the Sycip Gorres & Velayo (SGV), an independent auditing firm, was commissioned.

The Ruling of the CTA

On the basis of its affirmative resolution of the first issue, the CTA, by its Decision dated March 18, 2003,
granted MPC's claim for input VAT refund or credit, but only for the amount of PhP 10,766,939.48. The
fallo of the CTA's decision reads:

In view of all the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is
hereby ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the
petitioner its unutilized input VAT payments directly attributable to its effectively zero-rated sales for
the second quarter of 1998 in the reduced amount of P10,766,939.48, computed as follows:

Claimed Input VAT

P148,003,047.62
Less: Disallowances

a.)

As summarized by SGV & Co. in its initial report (Exh. P)

I.

Input Taxes on Purchases of Services:

1.

Supported by documents other than VAT Ors

P 10,629.46

2.

Supported by photocopied VAT OR

879.09

II.

Input Taxes on Purchases of Goods:

1.

Supported by documents other than VAT invoices

165,795.70
2.

Supported by Invoices with TIN only

1,781.82

3.

Supported by photocopied VAT invoices

3,153.62

III.

Input Taxes on Importation of Goods:

1.
Supported by photocopied documents

[IEDs and/or Bureau of Customs

(BOC) Ors]

716,250.00

2.

Supported by broker's computations

91,601.00

990,090.69
b.)

Input taxes without supporting documents as

summarized in Annex A of SGV & Co.'s

supplementary report (CTA records, page 134)

252,447.45
c.)

Claimed input taxes on purchases of services from

Mitsubishi Corp. for being substantiated by dubious OR

135,996,570.008

Refundable Input

P10,766,939.48

SO ORDERED.9

Explaining the disallowance of over PhP 137 million claimed input VAT, the CTA stated that most of
MPC's purchases upon which it anchored its claims for refund or tax credit have not been amply
substantiated by pertinent documents, such as but not limited to VAT ORs, invoices, and other
supporting documents. Wrote the CTA:
We agree with the above SGV findings that out of the remaining taxes of P136,246,017.45, the amount
of P252,477.45 was not supported by any document and should therefore be outrightly disallowed.

As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less P252,477.45 ) on purchases of

services from Mitsubishi Corporation, Japan, the same is found to be of doubtful veracity. While it is true
that said amount is substantiated by a VAT official receipt with Serial No. 0189 dated April 14, 1998 x x x,
it must be observed, however, that said VAT allegedly paid pertains to the services which were rendered
for the period 1993 to 1996. x x x

The Ruling of the CA

Aggrieved, MPC appealed the CTA's Decision to the CA via a petition for review under Rule 43, docketed
as CA-G.R. SP No. 78280. On December 22, 2005, the CA rendered its assailed decision modifying that of
the CTA decision by granting most of MPC's claims for tax refund or credit. And in a Resolution of March
31, 2006, the CA denied the BIR Commissioner's motion for reconsideration. The decretal portion of the
CA decision reads:

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed Decision of the Court
of Tax Appeals dated March 18, 2003 is hereby MODIFIED. Accordingly, respondent Commissioner of
Internal Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner Mirant
Pagbilao Corporation its unutilized input VAT payments directly attributable to its effectively zero-rated
sales for the second quarter of 1998 in the total amount of P146,760,509.48.

SO ORDERED.10

The CA agreed with the CTA on MPC's entitlement to (1) a zero-rating for VAT purposes for its sales and
services to tax-exempt NPC; and (2) a refund or tax credit for its unutilized input VAT for the second
quarter of 1998. Their disagreement, however, centered on the issue of proper documentation,
particularly the evidentiary value of OR No. 0189.

The CA upheld the disallowance of PhP 1,242,538.14 representing zero-rated input VAT claims
supported only by photocopies of VAT OR/Invoice, documents other than VAT Invoice/OR, and mere
broker's computations. But the CA allowed MPC's refund claim of PhP 135,993,570 representing input
VAT payments for purchases of goods and/or services from Mitsubishi supported by OR No. 0189. The
appellate court ratiocinated that the CTA erred in disallowing said claim since the OR from Mitsubishi
was the best evidence for the payment of input VAT by MPC to Mitsubishi as required under Sec. 110(A)
(1)(b) of the NIRC. The CA ruled that the legal requirement of a VAT Invoice/OR to substantiate
creditable input VAT was complied with through OR No. 0189 which must be viewed as conclusive proof
of the payment of input VAT. To the CA, OR No. 0189 represented an undisputable acknowledgment and
receipt by Mitsubishi of the input VAT payment of MPC.

The CA brushed aside the CTA's ruling and disquisition casting doubt on the veracity and genuineness of
the Mitsubishi-issued OR No. 0189. It reasoned that the issuance date of the said receipt, April 14, 1998,
must be taken conclusively to represent the input VAT payments made by MPC to Mitsubishi as MPC
had no real control on the issuance of the OR. The CA held that the use of a different exchange rate
reflected in the OR is of no consequence as what the OR undeniably attests and acknowledges was
Mitsubishi's receipt of MPC's input VAT payment.

The Issue

Hence, the instant petition on the sole issue of "whether or not respondent [MPC] is entitled to the
refund of its input VAT payments made from 1993 to 1996 amounting to [PhP] 146,760,509.48"11

The Court's Ruling

As a preliminary matter, it should be stressed that the BIR Commissioner, while making reference to the
figure PhP 146,760,509.48, joins the CA and the CTA on their disposition on the propriety of the refund
of or the issuance of a TCC for the amount of PhP 10,766,939.48. In fine, the BIR Commissioner trains his
sight and focuses his arguments on the core issue of whether or not MPC is entitled to a refund for PhP
135,993,570 (PhP 146,760,509.48 - PhP 10,766,939.48 = PhP 135,993,570) it allegedly paid as creditable
input VAT for services and goods purchased from Mitsubishi during the 1993 to 1996 stretch.

The divergent factual findings and rulings of the CTA and CA impel us to evaluate the evidence adduced
below, particularly the April 14, 1998 OR 0189 in the amount of PhP 135,996,570 [for US$ 5,190,000 at
US$1: PhP 26.203 rate of exchange]. Verily, a claim for tax refund may be based on a statute granting tax
exemption, or, as Commissioner of Internal Revenue v. Fortune Tobacco Corporation12 would have it,
the result of legislative grace. In such case, the claim is to be construed strictissimi juris against the
taxpayer,13 meaning that the claim cannot be made to rest on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under the exempting statute. On the other
hand, a tax refund may be, as usually it is, predicated on tax refund provisions allowing a refund of
erroneous or excess payment of tax. The return of what was erroneously paid is founded on the
principle of solutio indebiti, a basic postulate that no one should unjustly enrich himself at the expense
of another. The caveat against unjust enrichment covers the government.14 And as decisional law
teaches, a claim for tax refund proper, as here, necessitates only the preponderance-of-evidence
threshold like in any ordinary civil case.15

We apply the foregoing elementary principles in our evaluation on whether OR 0189, in the backdrop of
the factual antecedents surrounding its issuance, sufficiently proves the alleged unutilized input VAT
claimed by MPC.

The Court can review issues of fact where there are

divergent findings by the trial and appellate courts

As a matter of sound practice, the Court refrains from reviewing the factual determinations of the CA or
reevaluate the evidence upon which its decision is founded. One exception to this rule is when the CA
and the trial court diametrically differ in their findings,16 as here. In such a case, it is incumbent upon
the Court to review and determine if the CA might have overlooked, misunderstood, or misinterpreted
certain facts or circumstances of weight, which, if properly considered, would justify a different
conclusion.17 In the instant case, the CTA, unlike the CA, doubted the veracity of OR No. 0189 and did
not appreciate the same to support MPC's claim for tax refund or credit.

Petitioner BIR Commissioner, echoing the CTA's stand, argues against the sufficiency of OR No. 0189 to
prove unutilized input VAT payment by MPC. He states in this regard that the BIR can require additional
evidence to prove and ascertain payment of creditable input VAT, or that the claim for refund or tax
credit was filed within the prescriptive period, or had not previously been refunded to the taxpayer.

To bolster his position on the dubious character of OR No. 0189, or its insufficiency to prove input VAT
payment by MPC, petitioner proffers the following arguments:
(1) The input tax covered by OR No. 0189 pertains to purchases by MPC from Mitsubishi covering the
period from 1993 to 1996; however, MPC's claim for tax refund or credit was filed on December 20,
1999, clearly way beyond the two-year prescriptive period set in Sec. 112 of the NIRC;

(2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi (Manila) when the invoices which
the VAT were originally billed came from the Mitsubishi's head office in Japan;

(3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203: USD 1 or the exchange rate
prevailing in 1993 to 1996, when, on April 14, 1998, the date OR No. 0189 was issued, the exchange rate
was already PhP 38.01 to a US dollar;

(4) OR No. 0189 does not show or include payment of accrued interest which Mitsubishi was charging
and demanded from MPC for having advanced a considerable amount of VAT. The demand, per records,
is embodied in the May 12, 1995 letter of Mitsubishi to MPC;

(5) MPC failed to present to the CTA its VAT returns for the second and third quarters of 1995, when the
bulk of the VAT payment covered by OR No. 0189--specifically PhP 109,329,135.17 of the total amount
of PhP 135,993,570--was billed by Mitsubishi, when such return is necessary to ascertain that the total
amount covered by the receipt or a large portion thereof was not previously refunded or credited; and

(6) No other documents proving said input VAT payment were presented except OR No. 0189 which,
considering the fact that OR No. 0188 was likewise issued by Mitsubishi and presented before the CTA
but admittedly for payments made by MPC on progress billings covering service purchases from 1993 to
1996, does not clearly show if such input VAT payment was also paid for the period 1993 to 1996 and
would be beyond the two-year prescriptive period.

The petition is partly meritorious.

Belated payment by MPC of its obligation for creditable input VAT

As no less found by the CTA, citing the SGV's report, the payments covered by OR No. 0189 were for
goods and service purchases made by MPC through the progress billings from Mitsubishi for the period
covering April 1993 to September 1996--for the E & M Equipment Erection Portion of MPC's contract
with Mitsubishi.18 It is likewise undisputed that said payments did not include payments for the
creditable input VAT of MPC. This fact is shown by the May 12, 1995 letter19 from Mitsubishi where, as
earlier indicated, it apprised MPC of the advances Mitsubishi made for the VAT payments, i.e., MPC's
creditable input VAT, and for which it was holding MPC accountable for interest therefor.

In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996 transactions adverted to,
immediately pay the corresponding input VAT. OR No. 0189 issued on April 14, 1998 clearly reflects the
belated payment of input VAT corresponding to the payment of the progress billings from Mitsubishi for
the period covering April 7, 1993 to September 6, 1996. SGV found that OR No. 0189 in the amount of
PhP 135,993,570 (USD 5,190,000) was duly supported by bank statement evidencing payment to
Mitsubishi (Japan).20 Undoubtedly, OR No. 0189 proves payment by MPC of its creditable input VAT
relative to its purchases from Mitsubishi.

OR No. 0189 by itself sufficiently proves payment of VAT

The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189 constituted sufficient proof of
payment of creditable input VAT for the progress billings from Mitsubishi for the period covering April 7,
1993 to September 6, 1996. Sec. 110(A)(1)(B) of the NIRC pertinently provides:

Section 110. Tax Credits. -

A. Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113
hereof on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

xxxx
(b) Purchase of services on which a value-added tax has been actually paid. (Emphasis ours.)

Without necessarily saying that the BIR is precluded from requiring additional evidence to prove that
input tax had indeed paid or, in fine, that the taxpayer is indeed entitled to a tax refund or credit for
input VAT, we agree with the CA's above disposition. As the Court distinctly notes, the law considers a
duly-executed VAT invoice or OR referred to in the above provision as sufficient evidence to support a
claim for input tax credit. And any doubt as to what OR No. 0189 was for or tended to prove should
reasonably be put to rest by the SGV report on which the CTA notably placed much reliance. The SGV
report stated that "[OR] No. 0189 dated April 14, 1998 is for the payment of the VAT on the progress
billings" from Mitsubishi Japan "for the period April 7, 1993 to September 6, 1996 for the E & M
Equipment Erection Portion of the Company's contract with Mitsubishi Corporation (Japan)"21

VAT presumably paid on April 14, 1998

While available records do not clearly indicate when MPC actually paid the creditable input VAT
amounting to PhP 135,993,570 (USD 5,190,000) for the aforesaid 1993 to 1996 service purchases, the
presumption is that payment was made on the date appearing on OR No. 0189, i.e., April 14, 1998. In
fact, said creditable input VAT was reflected in MPC's VAT return for the second quarter of 1998.

The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides collaborating proof of the
belated payment of the creditable input VAT angle. To reiterate, Mitsubishi, via said letter, apprised
MPC of the VAT component of the service purchases MPC made and reminded MPC that Mitsubishi had
advanced VAT payments to which Mitsubishi was entitled and from which it was demanding interest
payment. Given the scenario depicted in said letter, it is understandable why Mitsubishi, in its effort to
recover the amount it advanced, used the PhP 26.203: USD 1 exchange formula in OR No. 0189 for USD
5,190,000.

No showing of interest payment not fatal to claim for refund

Contrary to petitioner's posture, the matter of nonpayment by MPC of the interests demanded by
Mitsubishi is not an argument against the fact of payment by MPC of its creditable input VAT or of the
authenticity or genuineness of OR No. 0189; for at the end of the day, the matter of interest payment
was between Mitsubishi and MPC and may very well be covered by another receipt. But the more
important consideration is the fact that MPC, as confirmed by the SGV, paid its obligation to Mitsubishi,
and the latter issued to MPC OR No. 0189, for the VAT component of its 1993 to 1996 service purchases.
The next question is, whether or not MPC is entitled to a refund or a TCC for the alleged unutilized input
VAT of PhP 135,993,570 covered by OR No. 0189 which sufficiently proves payment of the input VAT.

We answer the query in the negative.

Claim for refund or tax credit filed out of time

The claim for refund or tax credit for the creditable input VAT payment made by MPC embodied in OR
No. 0189 was filed beyond the period provided by law for such claim. Sec. 112(A) of the NIRC pertinently
reads:

(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: x x x. (Emphasis ours.)

The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not
otherwise used for any internal revenue tax due the taxpayer must be claimed within two years
reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the
input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously
applied the aforequoted Sec. 112(A), "[P]rescriptive period commences from the close of the taxable
quarter when the sales were made and not from the time the input VAT was paid nor from the time the
official receipt was issued"22 Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the
pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the
pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it may, and
given that the last creditable input VAT due for the period covering the progress billing of September 6,
1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable
input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be
precise, on September 30, 1998. Consequently, MPC's claim for refund or tax credit filed on December
10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for
the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the
filing of a claim therefor. Secs. 204(C) and 229 respectively provide:

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

xxxx

(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 the payment of the tax or penalty: Provided, however, That a return filed showing an
overpayment shall be considered as a written claim for credit or refund.

xxxx

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

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

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of
the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only
to instances of erroneous payment or illegal collection of internal revenue taxes.
MPC's creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted
or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The
fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated
or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a
refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle
does not enter the equation.

In Commissioner of Internal Revenue v. Seagate Technology (Philippines), the Court explained the
nature of the VAT and the entitlement to tax refund or credit of a zero-rated taxpayer:

Viewed broadly, the VAT is a uniform tax x x x levied on every importation of goods, whether or not in
the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade or business as they pass along the
production and distribution chain, the tax being limited only to the value added to such goods,
properties or services by the seller, transferor or lessor. It is an indirect tax that may be shifted or passed
on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be
understood not in the context of the person or entity that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on consumption. In either case, though, the same conclusion
is arrived at.

The law that originally imposed the VAT in the country, as well as the subsequent amendments of that
law, has been drawn from the tax credit method. Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe x x x. Under the present
method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed
on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the
excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal revenue taxes.
xxxx

Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is
set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.23 (Emphasis added.)

Considering the foregoing discussion, it is clear that Sec. 112(A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to
the other actions which refer to erroneous payment of taxes.

As a final consideration, the Court wishes to remind the BIR and other tax agencies of their duty to treat
claims for refunds and tax credits with proper attention and urgency. Had RDO No. 60 and, later, the BIR
proper acted, instead of sitting, on MPC's underlying application for effective zero rating, the matter of
addressing MPC's right, or lack of it, to tax credit or refund could have plausibly been addressed at their
level and perchance freed the taxpayer and the government from the rigors of a tedious litigation.

The all too familiar complaint is that the government acts with dispatch when it comes to tax collection,
but pays little, if any, attention to tax claims for refund or exemption. It is high time our tax collectors
prove the cynics wrong.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated December 22, 2005 and the
Resolution dated March 31, 2006 of the CA in CA-G.R. SP No. 78280 are AFFIRMED with the
MODIFICATION that the claim of respondent MPC for tax refund or credit to the extent of PhP
135,993,570, representing its input VAT payments for service purchases from Mitsubishi Corporation of
Japan for the construction of a portion of its Pagbilao, Quezon power station, is DENIED on the ground
that the claim had prescribed. Accordingly, petitioner Commissioner of Internal Revenue is ordered to
refund or, in the alternative, issue a tax credit certificate in favor of MPC, its unutilized input VAT
payments directly attributable to its effectively zero-rated sales for the second quarter in the total
amount of PhP 10,766,939.48.

No pronouncement as to costs.
SO ORDERED.

G.R. Nos. 141104 & 148763 June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner Atlas
Consolidated Mining and Development Corporation (petitioner corporation) for the refund/credit of the
input Value Added Tax (VAT) on its purchases of capital goods and on its zero-rated sales in the taxable
quarters of the years 1990 and 1992, the denial of which by the Court of Tax Appeals (CTA), was
affirmed by the Court of Appeals.
Petitioner corporation is engaged in the business of mining, production, and sale of various mineral
products, such as gold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was initially
issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register anew with the
appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR) when it moved its
principal place of business, and it was re-issued VAT Registration No. 32-0-004622, dated 15 August
1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992.2 It alleged that it
likewise filed with the BIR the corresponding application for the refund/credit of its input VAT on its
purchases of capital goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its
application for refund/credit remained unresolved by the BIR, petitioner corporation filed on 20 April
1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a "zero-
rated VAT person," it prayed that the CTA order herein respondent Commissioner of Internal Revenue
(respondent Commissioner) to refund/credit petitioner corporation with the amount of P26,030,460.00,
representing the input VAT it had paid for the first quarter of 1992. The respondent Commissioner
opposed and sought the dismissal of the petition for review of petitioner corporation for failure to state
a cause of action. After due trial, the CTA promulgated its Decision4 on 24 November 1997 with the
following disposition –

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the ground of
prescription, insufficiency of evidence and failure to comply with Section 230 of the Tax Code, as
amended. Accordingly, the petition at bar is hereby DISMISSED for lack of merit.

The CTA denied the motion for reconsideration of petitioner corporation in a Resolution5 dated 15 April
1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in its
Decision,6 dated 6 July 1999, dismissed the appeal of petitioner corporation, finding no reversible error
in the CTA Decision, dated 24 November 1997. The subsequent motion for reconsideration of petitioner
corporation was also denied by the Court of Appeals in its Resolution,7 dated 14 December 1999.
Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under Rule
45 of the Revised Rules of Court, assigning the following errors committed by the Court of Appeals –

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE REGULATIONS NO. 2-88
THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST
CONSIST OF EXPORTS FOR ZERO-RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO SUBMIT SUFFICIENT
EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL
DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED BEYOND THE
PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE FILING
OF THE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-OPENING OF THE CASE FOR
PETITIONER TO PRESENT ADDITIONAL EVIDENCE.8

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except
that it relates to the claims of petitioner corporation for refund/credit of input VAT on its purchases of
capital goods and on its zero-rated sales made in the last three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of
1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate
applications to the BIR for the refund/credit of the input VAT paid on its purchases of capital goods and
on its zero-rated sales, the details of which are presented as follows –

Date of Application

Period Covered

Amount Applied For

21 August 1990

2nd Quarter, 1990

P 54,014,722.04

21 November 1990

3rd Quarter, 1990

75,304,774.77
19 February 1991

4th Quarter, 1990

43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the CTA
the following petitions for review –

Date Filed

Period Covered

CTA Case No.

20 July 1992

2nd Quarter, 1990

4831

9 October 1992

3rd Quarter, 1990

4859
14 January 1993

4th Quarter, 1990

4944

which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions
and prayed for the dismissal thereof. The CTA ruled in favor of respondent Commissioner and in its
Decision,9 dated 30 October 1997, dismissed the Petitions mainly on the ground that the prescriptive
periods for filing the same had expired. In a Resolution,10 dated 15 January 1998, the CTA denied the
motion for reconsideration of petitioner corporation since the latter presented no new matter not
already discussed in the court's prior Decision. In the same Resolution, the CTA also denied the
alternative prayer of petitioner corporation for a new trial since it did not fall under any of the grounds
cited under Section 1, Rule 37 of the Revised Rules of Court, and it was not supported by affidavits of
merits required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R. SP
No. 46718. On 15 September 2000, the Court of Appeals rendered its Decision,11 finding that although
petitioner corporation timely filed its Petitions for Review with the CTA, it still failed to substantiate its
claims for the refund/credit of its input VAT for the last three quarters of 1990. In its Resolution,12
dated 27 June 2001, the appellate court denied the motion for reconsideration of petitioner
corporation, finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763, raising the following issues –

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S CLAIM IS BARRED
UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70%
THRESHOLD FOR ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE
INSTANT CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO BASIS TO GRANT
PETITIONER'S MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were
consolidated pursuant to a Resolution, dated 4 September 2006, issued by this Court. The ruling of this
Court in these cases hinges on how it will resolve the following key issues: (1) prescription of the claims
of petitioner corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating of
its sales, the burden of proving that the buyer companies were not just BOI-registered but also exporting
70% of their total annual production; (3) sufficiency of evidence presented by petitioner corporation to
establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for granting the
motion of petitioner corporation for re-opening of its cases or holding of new trial before the CTA so it
could be given the opportunity to present the required evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales
made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as amended,
which provided that –

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by paragraph (a)
above, whose sales are zero-rated may, within two years after the close of the quarter when such sales
were made, apply for the issuance of a tax credit certificate or refund of the input taxes attributable to
such sales to the extent that such input tax has not been applied against output tax.
xxxx

(e) Period within which refund of input taxes may be made by the Commissioner. – The Commissioner
shall refund input taxes within 60 days from the date the application for refund was filed with him or his
duly authorized representative. No refund of input taxes shall be allowed unless the VAT-registered
person files an application for refund within the period prescribed in paragraphs (a), (b) and (c) as the
case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application
for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter
when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from
the close of the quarter when the zero-rated sales were made, but from the date of filing of the
quarterly VAT return and payment of the tax due 20 days thereafter, in accordance with Section 110(b)
of the Tax Code of 1977, as amended, quoted as follows –

SEC. 110. Return and payment of value-added tax. – x x x.

(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid within 20
days following the end of each quarter specifically prescribed for a VAT-registered person under
regulations to be promulgated by the Secretary of Finance: Provided, however, That any person whose
registration is cancelled in accordance with paragraph (e) of Section 107 shall file a return within 20 days
from the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for
recovery of corporate income tax erroneously or illegally paid under Section 23013 of the Tax Code of
1977, as amended, was to be counted from the filing of the final adjustment return. This Court already
set out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for such a rule, thus –

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the
respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer
opting to ask for a refund must show in its final adjustment return the income it received from all
sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of
Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year on
April 15, 1982. In our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v.
Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which
to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax
return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for
refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the respondent
Commissioner who failed to take any action thereon and considering further that the non-resolution of
its claim for refund with the said Commissioner prompted ACCRAIN to reiterate its claim before the
Court of Tax Appeals through a petition for review on April 13, 1984, the respondent appellate court
manifestly committed a reversible error in affirming the holding of the tax court that ACCRAIN's claim
for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with
respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return
is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses
in its business operations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability,
if any, fell due upon its filing of its final adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded
on the same matter –

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is warranted
under the circumstances to lay down a categorical pronouncement on the question as to when the two-
year prescriptive period in cases of quarterly corporate income tax commences to run. A full-blown
decision in this regard is rendered more imperative in the light of the reversal by the Court of Tax
Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in relation
to the other provisions of the Tax Code in order to give effect the legislative intent and to avoid an
application of the law which may lead to inconvenience and absurdity. In the case of People vs. Rivera
(59 Phil. 236 [1933]), this Court stated that statutes should receive a sensible construction, such as will
give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion.
INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM.
Where there is ambiguity, such interpretation as will avoid inconvenience and absurdity is to be
adopted. Furthermore, courts must give effect to the general legislative intent that can be discovered
from or is unraveled by the four corners of the statute, and in order to discover said intent, the whole
statute, and not only a particular provision thereof, should be considered. (Manila Lodge No. 761, et al.
vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause of the statute must be
expounded by reference to each other in order to arrive at the effect contemplated by the legislature.
The intention of the legislator must be ascertained from the whole text of the law and every part of the
act is to be taken into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino,
47 Phil. 249, cited in Aboitiz Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now Section
230) of the National Internal Revenue Code but also the other provisions of the Tax Code, particularly
Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now
Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on keeping
of books of accounts. All these provisions of the Tax Code should be harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68) and
implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered
mere installments of the annual tax due. These quarterly tax payments which are computed based on
the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should
be treated as advances or portions of the annual income tax due, to be adjusted at the end of the
calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the filing of
adjustment returns and final payment of income tax. Consequently, the two-year prescriptive period
provided in Section 292 (now Section 230) of the Tax Code should be computed from the time of filing
the Adjustment Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that
when a tax is paid in installments, the prescriptive period of two years provided in Section 306 (Section
292) of the National Internal Revenue Code should be counted from the date of the final payment. This
ruling is reiterated in Commissioner of Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]),
wherein this Court stated that where the tax account was paid on installment, the computation of the
two-year prescriptive period under Section 306 (Section 292) of the Tax Code, should be from the date
of the last installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year
prescriptive period should be counted from the filing of the Adjustment Return on April 15,1982, TMX
Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period for
claims for refund of illegally or erroneously collected income tax may also apply to the Petitions at bar
involving the same prescriptive period for claims for refund/credit of input VAT on zero-rated sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but
is eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and paid on
a purely quarterly basis without need for a final adjustment at the end of the taxable year. However, it is
also equally true that until and unless the VAT-registered taxpayer prepares and submits to the BIR its
quarterly VAT return, there is no way of knowing with certainty just how much input VAT16 the taxpayer
may apply against its output VAT;17 how much output VAT it is due to pay for the quarter or how much
excess input VAT it may carry-over to the following quarter; or how much of its input VAT it may claim as
refund/credit. It should be recalled that not only may a VAT-registered taxpayer directly apply against
his output VAT due the input VAT it had paid on its importation or local purchases of goods and services
during the quarter; the taxpayer is also given the option to either (1) carry over any excess input VAT to
the succeeding quarters for application against its future output VAT liabilities, or (2) file an application
for refund or issuance of a tax credit certificate covering the amount of such input VAT.18 Hence, even
in the absence of a final adjustment return, the determination of any output VAT payable necessarily
requires that the VAT-registered taxpayer make adjustments in its VAT return every quarter, taking into
consideration the input VAT which are creditable for the present quarter or had been carried over from
the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it
does have refundable or creditable input VAT, and the same has not been applied against its output VAT
liabilities – information which are supposed to be reflected in the taxpayer's VAT returns. Thus, an
application for refund/credit must be accompanied by copies of the taxpayer's VAT return/s for the
taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally or
erroneously collected, its refund/credit is a privilege extended to qualified and registered taxpayers by
the very VAT system adopted by the Legislature. Such input VAT, the same as any illegally or erroneously
collected national internal revenue tax, consists of monetary amounts which are currently in the hands
of the government but must rightfully be returned to the taxpayer. Therefore, whether claiming
refund/credit of illegally or erroneously collected national internal revenue tax, or input VAT, the
taxpayer must be given equal opportunity for filing and pursuing its claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period
for filing a claim for refund/credit of input VAT on zero-rated sales from the date of filing of the return
and payment of the tax due which, according to the law then existing, should be made within 20 days
from the end of each quarter. Having established thus, the relevant dates in the instant cases are
summarized and reproduced below –

Period Covered

Date of Filing (Return w/ BIR)

Date of Filing (Application w/ BIR)

Date of Filing (Case w/ CTA)

2nd Quarter, 1990

20 July 1990

21 August 1990

20 July 1992

3rd Quarter, 1990

18 October 1990

21 November 1990

9 October 1992

4th Quarter, 1990

20 January 1991

19 February 1991

14 January 1993

1st Quarter, 1992

20 April 1992

--

20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for
refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within the
prescriptive period.
However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT on
its zero-rated sales for the first quarter of 1992. Even though it may seem that petitioner corporation
filed in time its judicial claim with the CTA, there is no showing that it had previously filed an
administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended, explicitly
provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an
application for refund with respondent Commissioner within the two-year prescriptive period. The
application of petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was
not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla, Manager-Finance and
Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly received the
same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102, made the following
observations –

This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of VAT Paid
(BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the petitioner on account of the fact
that it does not bear the BIR stamp showing the date when such application was filed together with the
signature or initial of the receiving officer of respondent's Bureau. Worse still, it does not show the date
of application and the signature of a certain Ma. Paz R. Semilla indicated in the form who appears to be
petitioner's authorized filer.

A review of the records reveal that the original of the aforecited application was lost during the time
petitioner transferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt was made to prove
that petitioner exerted efforts to recover the original copy, but to no avail. Despite this, however, We
observe that petitioner completely failed to establish the missing dates and signatures abovementioned.
On this score, said application has no probative value in demonstrating the fact of its filing within two
years after the [filing of the VAT return for the quarter] when petitioner's sales of goods were made as
prescribed under Section 106(b) of the Tax Code. We believe thus that petitioner failed to file an
application for refund in due form and within the legal period set by law at the administrative level.
Hence, the case at bar has failed to satisfy the requirement on the prior filing of an application for
refund with the respondent before the commencement of a judicial claim for refund, as prescribed
under Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not
granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation timely
filed its administrative claim for refund of its input VAT for the first quarter of 1992, but also whether
petitioner corporation actually filed such administrative claim in the first place. For failing to prove that
it had earlier filed with the BIR an application for refund/credit of its input VAT for the first quarter of
1992, within the period prescribed by law, then the case instituted by petitioner corporation with the
CTA for the refund/credit of the very same tax cannot prosper.
Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross selling
price or gross value in money of goods sold, bartered or exchanged. Yet, the same provision subjected
the following sales made by VAT-registered persons to 0% VAT –

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such sales to zero-rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported, or foreign currency denominated sales.
"Foreign currency denominated sales", means sales to nonresidents of goods assembled or
manufactured in the Philippines, for delivery to residents in the Philippines and paid for in convertible
foreign currency remitted through the banking system in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT
purposes, although the VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or
services taxed at 0% shall not result in any output VAT, while the input VAT on its purchases of goods or
services related to such zero-rated sale shall be available as tax credit or refund.20

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said
regulations imposed additional requirements, not found in the law itself, for the zero-rating of its sales
to Philippine Smelting and Refining Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS),
both of which are registered not only with the BOI, but also with the then Export Processing Zone
Authority (EPZA).21

The contentious provisions of Revenue Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw materials to
export-oriented BOI-registered enterprises whose export sales, under rules and regulations of the Board
of Investments, exceed seventy percent (70%) of total annual production, shall be subject to zero-rate
under the following conditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for zero-rating for each and
every separate buyer, in accordance with Section 8(d) of Revenue Regulations No. 5-87. The application
should be accompanied with a favorable recommendation from the Board of Investments."

"(2) The raw materials sold are to be used exclusively by the buyer in the manufacture, processing or
repacking of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice. The exporter
(buyer) can no longer claim from the Bureau of Internal Revenue or any other government office tax
credits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign buyer for
delivery to a resident local export-oriented BOI-registered enterprise to be used in manufacturing,
processing or repacking of the said buyer's goods and paid for in foreign currency, inwardly remitted in
accordance with Central Bank rules and regulations shall be subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that
Section 2 of Revenue Regulations No. 2-88 should be applied in the cases at bar; and to be entitled to
the zero-rating of its sales to PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller,
must be able to prove not only that PASAR and PHILPHOS are BOI-registered corporations, but also that
more than 70% of the total annual production of these corporations are actually exported. Revenue
Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-oriented
corporations registered with it.

While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds that
its application must be limited and placed in the proper context. Note that Section 2 of Revenue
Regulations No. 2-88 referred only to the zero-rated sales of raw materials to export-oriented BOI-
registered enterprises whose export sales, under BOI rules and regulations, should exceed seventy
percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the sales
made by petitioner corporation to PASAR and PHILPHOS. At the onset, it must be emphasized that
PASAR and PHILPHOS, in addition to being registered with the BOI, were also registered with the EPZA
and located within an export-processing zone. Petitioner corporation does not claim that its sales to
PASAR and PHILPHOS are zero-rated on the basis that said sales were made to export-oriented BOI-
registered corporations, but rather, on the basis that the sales were made to EPZA-registered
enterprises operating within export processing zones. Although sales to export-oriented BOI-registered
enterprises and sales to EPZA-registered enterprises located within export processing zones were both
deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as amended, shall be subject
to 0% VAT distinction must be made between these two types of sales because each may have different
substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and
shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of ownership of
the goods so exported, or foreign currency denominated sales." Executive Order No. 226, otherwise
known as the Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990 and 1992),
governed enterprises registered with both the BOI and EPZA, provided a more comprehensive definition
of export sales, as quoted below:

"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from invoices, bills of
lading, inward letters of credit, landing certificates, and other commercial documents, of export
products exported directly by a registered export producer or the net selling price of export product sold
by a registered export producer or to an export trader that subsequently exports the same: Provided,
That sales of export products to another producer or to an export trader shall only be deemed export
sales when actually exported by the latter, as evidenced by landing certificates of similar commercial
documents: Provided, further, That without actual exportation the following shall be considered
constructively exported for purposes of this provision: (1) sales to bonded manufacturing warehouses of
export-oriented manufacturers; (2) sales to export processing zones; (3) sales to registered export
traders operating bonded trading warehouses supplying raw materials used in the manufacture of
export products under guidelines to be set by the Board in consultation with the Bureau of Internal
Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions and other
agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or
repacked products whether paid for in foreign currency or not: Provided, further, That export sales of
registered export trader may include commission income; and Provided, finally, That exportation of
goods on consignment shall not be deemed export sales until the export products consigned are in fact
sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad
and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal
Export Program of the government and paid for in convertible foreign currency inwardly remitted
through the Philippine banking systems shall also be considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the sales
of export products to another producer or to an export trader, provided that the export products are
actually exported. For purposes of VAT zero-rating, such producer or export trader must be registered
with the BOI and is required to actually export more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation specifically
identified by the said provision are sales to export processing zones. Sales to export processing zones
are subjected to special tax treatment. Article 77 of the same Code establishes the tax treatment of
goods or merchandise brought into the export processing zones. Of particular relevance herein is
paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise from the
customs territory and subsequently brought into the zone, shall be considered as export sales and the
exporter thereof shall be entitled to the benefits allowed by law for such transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the
Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres. According
to the Destination Principle,22 goods and services are taxed only in the country where these are
consumed. In connection with the said principle, the Cross Border Doctrine23 mandates that no VAT
shall be imposed to form part of the cost of the goods destined for consumption outside the territorial
border of the taxing authority. Hence, actual export of goods and services from the Philippines to a
foreign country must be free of VAT, while those destined for use or consumption within the Philippines
shall be imposed with 10% VAT.24 Export processing zones25 are to be managed as a separate customs
territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as
foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside
the export processing zones are already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are export sales, which, under
the Tax Code of 1977, as amended, were subject to 0% VAT. It is on this ground that petitioner
corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-
oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises operating within
export processing zones is actually supported by subsequent development in tax laws and regulations. In
Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as amended,26 the BIR defined with
more precision what are zero-rated export sales –

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported paid for in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable
year shall be considered an export-oriented enterprise upon accreditation as such under the provisions
of the Export Development Act (R.A. 7844) and its implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known
as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and Development Act of 1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are
subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which applied
to zero-rated export sales to export-oriented BOI-registered enterprises, should not be applied to the
applications for refund/credit of input VAT filed by petitioner corporation since it based its applications
on the zero-rating of export sales to enterprises registered with the EPZA and located within export
processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual
bases of its claim for tax credit or refund, but once it has submitted all the required documents, it is the
function of the BIR to assess these documents with purposeful dispatch.28 It therefore falls upon herein
petitioner corporation to first establish that its sales qualify for VAT zero-rating under the existing laws
(legal basis), and then to present sufficient evidence that said sales were actually made and resulted in
refundable or creditable input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover only
input VAT on its purportedly zero-rated sales to PASAR and PHILPHOS; however, a more thorough
perusal of its applications, VAT returns, pleadings, and other records of these cases would reveal that it
is also claiming refund/credit of its input VAT on purchases of capital goods and sales of gold to the
Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient
legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the Tax
Code of 1977, as amended, allowed the refund/credit of input VAT on export sales to enterprises
operating within export processing zones and registered with the EPZA, since such export sales were
deemed to be effectively zero-rated sales.29 The fact that PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating inside an export processing zone and duly registered with
EPZA, was never raised as an issue herein. Moreover, the same fact was already judicially recognized in
the case Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal Revenue.30
Section 106(c) of the same Code likewise permitted a VAT-registered taxpayer to apply for refund/credit
of the input VAT paid on capital goods imported or locally purchased to the extent that such input VAT
has not been applied against its output VAT. Meanwhile, the effective zero-rating of sales of gold to the
CBP from 1989 to 199131 was already affirmed by this Court in Commissioner of Internal Revenue v.
Benguet Corporation,32 wherein it ruled that –

At the time when the subject transactions were consummated, the prevailing BIR regulations relied
upon by respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted
Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the
Central Bank shall be considered export and therefore shall be subject to the export and premium
duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular
No. 960 which states that all sales of gold to the Central Bank are considered constructive exports. x x x.

This Court now comes to the question of whether petitioner corporation has sufficiently established the
factual bases for its applications for refund/credit of input VAT. It is in this regard that petitioner
corporation has failed, both in the administrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue
regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the
applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said
applications must have been in accordance with Revenue Regulations No. 3-88, amending Section 16 of
Revenue Regulations No. 5-87, which provided as follows –

SECTION 16. Refunds or tax credits of input tax. –

xxxx

(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax Paid (BIR Form
No. 2552) shall be filed with the Revenue District Office of the city or municipality where the principal
place of business of the applicant is located or directly with the Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted
together with the application. The original copy of the said invoice/receipt, however, shall be presented
for cancellation prior to the issuance of the Tax Credit Certificate or refund. In addition, the following
documents shall be attached whenever applicable:

xxxx

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the sale of goods or services
were delivered, date of delivery, amount of consideration, and description of goods or services
delivered.

"iii) evidence of actual receipt of goods or services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase price, amount of value-
added tax paid and description of the capital equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import entry document for internal
revenue tax purposes and the confirmation receipt issued by the Bureau of Customs for the payment of
the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies, a
statement therefrom showing the amount and description of sale of goods and services, name of
persons or entities (except in case of exports) to whom the goods or services were sold, and date of
transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of the
value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction during the
period covered by the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and services,
and the VAT paid (inputs) on purchases of goods and services cannot be directly attributed to any of the
aforementioned transactions, the following formula shall be used to determine the creditable or
refundable input tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

Total Amount of Input Taxes

Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR,
and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file a
Petition for Review before the CTA. If the taxpayer's claim is supported by voluminous documents, such
as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be governed by
CTA Circular No. 1-95, as amended, reproduced in full below –

In the interest of speedy administration of justice, the Court hereby promulgates the following rules
governing the presentation of voluminous documents and/or long accounts, such as receipts, invoices
and vouchers, as evidence to establish certain facts pursuant to Section 3(c), Rule 130 of the Rules of
Court and the doctrine enunciated in Compania Maritima vs. Allied Free Workers Union (77 SCRA 24), as
well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after motion and
approval by the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers, dates and amounts
covered by the invoices or receipts and the amount/s of tax paid; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness of the contents of the summary
after making an examination, evaluation and audit of the voluminous receipts and invoices. The name of
the accountant or partner of the firm in charge must be stated in the motion so that he/she can be
commissioned by the Court to conduct the audit and, thereafter, testify in Court relative to such
summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for marking,
identification and comparison with the originals thereof need not be done before the Court or Clerk of
Court anymore after the introduction of the summary and CPA certification. It is enough that the
receipts, invoices, vouchers or other documents covering the said accounts or payments to be
introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order
to be made accessible to the adverse party who desires to check and verify the correctness of the
summary and CPA certification. Likewise, the originals of the voluminous receipts, invoices or accounts
must be ready for verification and comparison in case doubt on the authenticity thereof is raised during
the hearing or resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when the said
Circular was issued, then petitioner corporation must have complied therewith during the course of the
trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of
therein respondent, Manila Mining Corporation, for refund of the input VAT on its supposed zero-rated
sales of gold to the CBP because it was unable to substantiate its claim. In the same case, this Court
emphasized the importance of complying with the substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales, to wit –
For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT
registered entity and that it filed its claims within the prescriptive period. It must substantiate the input
VAT paid by purchase invoices or official receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the requirements in
claiming tax credits/refunds.

xxxx

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before it are litigated
de novo, party litigants should prove every minute aspect of their cases. No evidentiary value can be
given the purchase invoices or receipts submitted to the BIR as the rules on documentary evidence
require that these documents must be formally offered before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not
ipso fact mean that [the seller] is entitled to the amount of refund sought as it is required by law to
present evidence showing the input taxes it paid during the year in question. What is being claimed in
the instant petition is the refund of the input taxes paid by the herein petitioner on its purchase of
goods and services. Hence, it is necessary for the Petitioner to show proof that it had indeed paid the
input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not
adduce in evidence the sales invoice, receipts or other documents showing the input value added tax on
the purchase of goods and services.

xxx

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the
Court of Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial
de novo) where the parties must present their evidence accordingly if they desire the Court to take such
evidence into consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and
client or customer.

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount
or quantity of goods sold and their selling price, and taken collectively are the best means to prove the
input VAT payments.36

Although the foregoing decision focused only on the proof required for the applicant for refund/credit
to establish the input VAT payments it had made on its purchases from suppliers, Revenue Regulations
No. 3-88 also required it to present evidence proving actual zero-rated VAT sales to qualified buyers,
such as (1) photocopy of the approved application for zero-rate if filing for the first time; (2) sales invoice
or receipt showing the name of the person or entity to whom the goods or services were delivered, date
of delivery, amount of consideration, and description of goods or services delivered; and (3) the
evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the certification by the
independent certified public accountant (CPA), thus –

Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers' invoices or receipts which were examined,
evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular
No. 10-97 should substantiate its claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either
expressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified
by an independent CPA, suffice as evidence of input VAT payments.

xxxx

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-
consuming procedure of presenting, identifying and marking of documents before the Court. It does not
relieve respondent of its imperative task of pre-marking photocopies of sales receipts and invoices and
submitting the same to the court after the independent CPA shall have examined and compared them
with the originals. Without presenting these pre-marked documents as evidence – from which the
summary and schedules were based, the court cannot verify the authenticity and veracity of the
independent auditor's conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to
confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation, No. 5-87, all purchases
covered by invoices other than a VAT invoice shall not be entitled to a refund of input VAT.

xxxx

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends
in themselves but are primarily intended as tools in the administration of justice, the presentation of the
purchase receipts and/or invoices is not mere procedural technicality which may be disregarded
considering that it is the only means by which the CTA may ascertain and verify the truth of the
respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input VAT
refund for the first semester of 1991. Except for the summary and schedules of input VAT payments
prepared by respondent itself, no other evidence was adduced in support of its claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed the
services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a
certification that:
We have examined the information shown below concerning the input tax payments made by the
Makati Office of Manila Mining Corporation for the period from July 1 to December 31, 1991. Our
examination included inspection of the pertinent suppliers' invoices and official receipts and such other
auditing procedures as we considered necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary" and not
auditing procedures which are in accordance with generally accepted auditing principles and standards,
and that the examination was made on "input tax payments by the Manila Mining Corporation," without
specifying that the said input tax payments are attributable to the sales of gold to the Central Bank, this
Court cannot rely thereon and regard it as sufficient proof of the respondent's input VAT payments for
the second semester.37

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-rated
sales in the first quarter of 1992, this Court already found that the petitioner corporation failed to
comply with Section 106(b) of the Tax Code of 1977, as amended, imposing the two-year prescriptive
period for the filing of the application for refund/credit thereof. This bars the grant of the application for
refund/credit, whether administratively or judicially, by express mandate of Section 106(e) of the same
Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT
on its zero-rated sales in the first quarter of 1992 was actually and timely filed, petitioner corporation
still failed to present together with its application the required supporting documents, whether before
the BIR or the CTA. As the Court of Appeals ruled –

In actions involving claims for refund of taxes assessed and collected, the burden of proof rests on the
taxpayer. As clearly discussed in the CTA's decision, petitioner failed to substantiate its claim for tax
refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue Regulations No. 2-
88 in determining compliance with the documentary requirements for a successful refund or issuance of
tax credit. Unmentioned is the applicable and specific amendment later introduced by Revenue
Regulations No. 3-88 dated April 7, 1988 (issued barely after two months from the promulgation of
Revenue Regulations No. 2-88 on February 15, 1988), which amended Section 16 of Revenue
Regulations No. 5-87 on refunds or tax credits of input tax. x x x.

xxxx

"A thorough examination of the evidence submitted by the petitioner before this court reveals outright
the failure to satisfy documentary requirements laid down under the above-cited regulations.
Specifically, petitioner was not able to present the following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment locally purchased; and

"f) photocopy of import entry document and confirmation receipt on imported capital equipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the actual amount or
quantity of goods sold and their selling price. Without them, this Court cannot verify the correctness of
petitioner's claim inasmuch as the regulations require that the input taxes being sought for refund
should be limited to the portion that is directly and entirely attributable to the particular zero-rated
transaction. In this instance, the best evidence of such transaction are the said sales invoices or receipts.

"Also, even if sales invoices are produced, there is the further need to submit evidence that such goods
were actually received by the buyer, in this case, by CBP, Philp[h]os and PASAR.
xxxx

"Lastly, this Court cannot determine whether there were actual local and imported purchase of capital
goods as well as domestic purchase of non-capital goods without the required purchase invoice or
receipt, as the case may be, and confirmation receipts.

"There is, thus, the imperative need to submit before this Court the original or attested photocopies of
petitioner's invoices or receipts, confirmation receipts and import entry documents in order that a full
ascertainment of the claimed amount may be achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing documents
abovementioned. Cases filed before this Court are litigated de novo. This means that party litigants
should endeavor to prove at the first instance every minute aspect of their cases strictly in accordance
with the Rules of Court, most especially on documentary evidence." (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign
authority, and should be construed in strictissimi juris against the person or entity claiming the
exemption. The taxpayer who claims for exemption must justify his claim by the clearest grant of organic
or statute law and should not be permitted to stand on vague implications (Asiatic Petroleum Co. v.
Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Reagan v.
Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617;
Davao Light and Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-destructive", as
it finds comfort in the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the Company. We
make no presentation regarding the sufficiency of these procedures for such purpose. We did not
compare the total of the input tax claimed each quarter against the pertinent VAT returns and books of
accounts. The above procedures do not constitute an audit made in accordance with generally accepted
auditing standards. Accordingly, we do not express an opinion on the company's claim for input VAT
refund or credit. Had we performed additional procedures, or had we made an audit in accordance with
generally accepted auditing standards, other matters might have come to our attention that we would
have accordingly reported on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent auditor. Indeed,
SGV expressed that it "did not compare the total of the input tax claimed each quarter against the VAT
returns and books of accounts."38

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on its
zero-rated sales in the second, third, and fourth quarters of 1990, the appellate court likewise found
that petitioner corporation failed to sufficiently establish its claims. Already disregarding the
declarations made by the Court of Appeals on its erroneous application of Revenue Regulations No. 2-
88, quoted hereunder is the rest of the findings of the appellate court after evaluating the evidence
submitted in accordance with the requirements under Revenue Regulations No. 3-88 –

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to Sec. 245 of
the National Internal Revenue Code, which recognized his power to "promulgate all needful rules and
regulations for the effective enforcement of the provisions of this Code." Thus, it is incumbent upon a
taxpayer intending to file a claim for refund of input VATs or the issuance of a tax credit certificate with
the BIR x x x to prove sales to such buyers as required by Revenue Regulations No. 3-98. Logically, the
same evidence should be presented in support of an action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing sales of
gold, copper concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS], respectively, and the dates
and amounts of the same, nor any evidence of actual receipt by the said buyers of the mineral products.
It merely presented receipts of purchases from suppliers on which input VATs were allegedly paid. Thus,
the Court of Tax Appeals correctly denied the claims for refund of input VATs or the issuance of tax
credit certificates of petitioner [corporation]. Significantly, in the resolution, dated 7 June 2000, this
Court directed the parties to file memoranda discussing, among others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties,
including the petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of
the Court of Tax Appeals on this point.39

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is
the general rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals,
by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, is limited to
reviewing or revising errors of law; findings of fact of the latter are conclusive.40 This Court is not a trier
of facts. It is not its function to review, examine and evaluate or weigh the probative value of the
evidence presented.41

The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on
a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or
falsehood of alleged facts."42

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales
in the amount it had declared in its returns; whether all the input VAT subject of its applications for
refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied the
input VAT against its output VAT liabilities, are all questions of fact which could only be answered after
reviewing, examining, evaluating, or weighing the probative value of the evidence it presented, and
which this Court does not have the jurisdiction to do in the present Petitions for Review on Certiorari
under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact
under particular circumstances,43 none of these exist in the instant cases. The Court of Appeals, in both
cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of petitioner
corporation, and the records bear out this finding. Petitioner corporation itself cannot dispute its non-
compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA Circular No. 1-95,
as amended. It concentrated its arguments on its assertion that the substantiation requirements under
Revenue Regulations No. 2-88 should not have applied to it, while being conspicuously silent on the
evidentiary requirements mandated by other relevant regulations.

Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening of
its cases or holding of new trial before the CTA for the reception of additional evidence, may be granted.
Petitioner corporation prays that the Court exercise its discretion on the matter in its favor, consistent
with the policy that rules of procedure be liberally construed in pursuance of substantive justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered in
accordance with Section 1, Rule 37 of the revised Rules of Court, which provides –

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within the period
for taking an appeal, the aggrieved party may move the trial court to set aside the judgment or final
order and grant a new trial for one or more of the following causes materially affecting the substantial
rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded
against and by reason of which such aggrieved party has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and
produced at the trial, and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the grounds that
the damages awarded are excessive, that the evidence is insufficient to justify the decision or final order,
or that the decision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases
and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to adduce the
necessary evidence should be construed as excusable negligence or mistake which should constitute
basis for such re-opening of trial as for a new trial, as counsel was of the belief that such evidence was
rendered unnecessary by the presentation of unrebutted evidence indicating that respondent
[Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-rated." 44 The CTA
denied such motion on the ground that it was not accompanied by an affidavit of merit as required by
Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed the denial of the motion,
but apart from this technical defect, it also found that there was no justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases
and/or holding of new trial based on the technicality that said motion was unaccompanied by an
affidavit of merit, this Court rules in favor of the petitioner corporation. The facts which should
otherwise be set forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial compliance with the formal
requirements of the law, provided, of course, that the movant, or other individual with personal
knowledge of the facts, take oath as to the truth thereof, in effect converting the entire motion for new
trial into an affidavit.45 The motion of petitioner corporation was prepared and verified by its counsel,
and since the ground for the motion was premised on said counsel's excusable negligence or mistake,
then the obvious conclusion is that he had personal knowledge of the facts relating to such negligence
or mistake. Hence, it can be said that the motion of petitioner corporation for the re-opening of its cases
and/or holding of new trial was in substantial compliance with the formal requirements of the revised
Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the
re-opening of its cases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA in
another case, CTA Case No. 5296, involving the claim of petitioner corporation for refund/credit of input
VAT for the third quarter of 1993. The said Resolution allowed the re-opening of CTA Case No. 5296,
earlier dismissed by the CTA, to give the petitioner corporation the opportunity to present the missing
export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court,47 may
likewise be extended to the CTA. When the denial of the motion rests upon the discretion of a lower
court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof.48

That the CTA granted the motion for re-opening of one case for the presentation of additional evidence
and, yet, deny a similar motion in another case filed by the same party, does not necessarily
demonstrate grave abuse of discretion or arbitrariness on the part of the CTA. Although the cases
involve identical parties, the causes of action and the evidence to support the same can very well be
different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No. 5296, petitioner
corporation was claiming refund/credit of the input VAT on its zero-rated sales, consisting of actual
export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into account the
presentation by petitioner corporation of inward remittances of its export sales for the quarter involved,
its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its sales to the
said foreign corporation, and its application for refund. In contrast, the present Petitions involve the
claims of petitioner corporation for refund/credit of the input VAT on its purchases of capital goods and
on its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR and PHILPHOS for the
second, third, and fourth quarters of 1990 and first quarter of 1992. There being a difference as to the
bases of the claims of petitioner corporation for refund/credit of input VAT in CTA Case No. 5926 and in
the Petitions at bar, then, there are resulting variances as to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by petitioner
corporation, emphasizes that the decision of the CTA to allow petitioner corporation to present
evidence "is applicable pro hac vice or in this occasion only as it is the finding of [the CTA] that petitioner
[corporation] has established a few of the aforementioned material points regarding the possible
existence of the export documents together with the prior and succeeding returns for the quarters
involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by its
ruling in CTA Case No. 5296, when these cases do not involve the exact same circumstances that
compelled it to grant the motion of petitioner corporation for re-opening of CTA Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the required documents was
due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute
excusable negligence or mistake which would warrant the re-opening of the cases and/or holding of
new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and
generally imputable to the party because if it is imputable to the counsel, it is binding on the client. To
follow a contrary rule and allow a party to disown his counsel's conduct would render proceedings
indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing the counsel. What
the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not ask
for the reversal of the court's ruling.49

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action of
his counsel in the conduct of his case and he cannot therefore complain that the result of the litigation
might have been otherwise had his counsel proceeded differently. It has been held time and again that
blunders and mistakes made in the conduct of the proceedings in the trial court as a result of the
ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If such
were to be admitted as valid reasons for re-opening cases, there would never be an end to litigation so
long as a new counsel could be employed to allege and show that the prior counsel had not been
sufficiently diligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could not
have guarded against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988, had
been in effect more than two years prior to the filing by petitioner corporation of its earliest application
for refund/credit of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95 was issued only
on 25 January 1995, after petitioner corporation had filed its Petitions before the CTA, but still during
the pendency of the cases of petitioner corporation before the tax court. The counsel of petitioner
corporation does not allege ignorance of the foregoing administrative regulation and tax court circular,
only that he no longer deemed it necessary to present the documents required therein because of the
presentation of alleged unrebutted evidence of the zero-rated sales of petitioner corporation. It was a
judgment call made by the counsel as to which evidence to present in support of his client's cause, later
proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the
required documentary evidence was due to the excusable mistake of its counsel, a ground under Section
1, Rule 37 of the revised Rules of Court for the grant of a new trial. "Mistake," as it is referred to in the
said rule, must be a mistake of fact, not of law, which relates to the case.52 In the present case, the
supposed mistake made by the counsel of petitioner corporation is one of law, for it was grounded on
his interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as
amended, did not apply to his client's cases and that there was no need to comply with the
documentary requirements set forth therein. And although the counsel of petitioner corporation
advocated an erroneous legal position, the effects thereof, which did not amount to a deprivation of his
client's right to be heard, must bind petitioner corporation. The question is not whether petitioner
corporation succeeded in establishing its interests, but whether it had the opportunity to present its
side.53

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the
ground of mistake must show that ordinary prudence could not have guarded against it. A new trial is
not a refuge for the obstinate.54 Ordinary prudence in these cases would have dictated the
presentation of all available evidence that would have supported the claims for refund/credit of input
VAT of petitioner corporation. Without sound legal basis, counsel for petitioner corporation concluded
that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its
client's claims. The obstinacy of petitioner corporation and its counsel is demonstrated in their failure,
nay, refusal, to comply with the appropriate administrative regulations and tax court circular in pursuing
the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even though these were
separately instituted in a span of more than two years. It is also evident in the failure of petitioner
corporation to address the issue and to present additional evidence despite being given the opportunity
to do so by the Court of Appeals. As pointed out by the appellate court, in its Decision, dated 15
September 2000, in CA-G.R. SP No. 46718 –
x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file memoranda
discussing, among others, the submission of proof for "its [petitioner's] sales of gold, copper
concentrates, and pyrite to buyers." Nevertheless, the parties, including the petitioner, failed to address
this issue, thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this point.55

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period
for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the
quarterly VAT return, and that sales to EPZA-registered enterprises operating within economic
processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-88, it
still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital
goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the first
quarter of 1992, for not being established and substantiated by appropriate and sufficient evidence.
Petitioner corporation is also not entitled to the re-opening of its cases and/or holding of new trial since
the non-presentation of the required documentary evidence before the BIR and the CTA by its counsel
does not constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of the revised
Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the
Decisions, dated 6 July 1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos. 47607
and 46718, respectively, are hereby AFFIRMED. Costs against petitioner.
G.R. No. 212735, December 05, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEGROS CONSOLIDATED FARMERS MULTI-

PURPOSE COOPERATIVE, Respondent.

DECISION

TIJAM, J.:

Assailed in this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court are the Decision2
dated March 5, 2014 and the Resolution3 dated May 27, 2014 of the Court of Tax Appeals (CTA) En Banc
in CTA EB Case No. 992, declaring respondent Negros Consolidated Farmers Multi-Purpose Cooperative
(COFA) as exempt from the Value-added tax (VAT) and hence, entitled to refund of the VAT it paid in
advance.

The Antecedents

COFA is a multi-purpose agricultural cooperative organized under Republic Act (RA) No. 6938.4

As its usual course, COFA's farmer-members deliver the sugarcane produce to be milled and processed
in COFA's name with the sugar mill/refinery.5 Before the refined sugar is released by the sugar mill,
however, an Authorization Allowing the Release of Refined Sugar (AARRS) from the Bureau of Internal
Revenue (BIR) is required from COFA. For several instances, upon COFA's application, the BIR issued the
AARRS without requiring COFA to pay advance VAT pursuant to COFA's tax exemption under Section 616
of RA 6938 and Section 109(r) (now under Section 109[L])7 of RA No. 84248, as amended by RA No.
9337.9 As such, COFA was issued Certificates of Tax Exemption dated May 24, 1999 and April 23, 2003
by the BIR.10
However, beginning February 3, 2009, the BIR, through the Regional Director of Region 12-Bacolod City,
required as a condition for the issuance of the AARRS the payment of "advance VAT" on the premise
that COFA, as an agricultural cooperative, does not fall under the term "producer." According to the BIR,
a "producer" is one who tills the land it owns or leases, or who incurs cost for agricultural production of
the sugarcane to be refined by the sugar refinery.11

As bases for the required payment of advance VAT, the Regional Director pointed to Sections 3 and 4 of
Revenue Regulations (RR) No. 13-2008,12 which, in part, respectively provide:

Sec. 3. Requirement to pay in Advance VAT Sale of Refined Sugar. - In general, the advance VAT on the
sale of refined sugar provided for under Sec. 8 hereof, shall be paid in advance by the owner/seller
before the refined sugar is withdrawn from any sugar refinery/mill. x x x

xxxx

Sec. 4. Exemption from the Payment of the Advance VAT. - x x x

xxxx

A cooperative is said to be the producer of the sugar if it is the tiller of the land it owns, or leases, incurs
cost of agricultural production of the sugar and produces the sugar cane to be refined.

xxxx

COFA was thus, constrained to pay advance VAT under protest13 and to seek the legal opinion of the
BIR Legal Division, as to whether COFA is considered the producer of the sugar product of its members.
In a Ruling dated January 11, 2008, the BIR14 stated that the sales of sugar produce by COFA to its
members and non-members are exempt from VAT pursuant to Section 109(L) of RA 9337, as
implemented by Revenue Regulations (RR) No; 4-2007. The Ruling, in part, provides:

Thus, COFA and its members['] respective roles in the operation of the Cooperative cannot be treated as
separate and distinct from each other. Notwithstanding that COFA is not the owner of the land and the
actual tiller of the land, it is considered as the actual producer of the members' sugarcane production
because it primarily provided the various production inputs (fertilizers), capital, technology transfer and
farm management. In short, COFA has direct participation in the sugarcane production of its farmers-
member.15

Thus, pursuant to Section 22916 of RA. 8424, as amended, COFA lodged with petitioner Commissioner of
Internal Revenue (CIR) an administrative claim for refund in the amount of P11,172,570.00 for the
advance VAT it paid on the 109,535 LKG bags of refined sugar computed at P102.00 VAT per bag for the
period covering February 3, 2009 to July 22, 2009. Because of the CIR's inaction, COFA filed a petition for
review17 before the CTA Division pursuant to Rule 8, Section 3(a)18 of the Revised Rules of the CTA, but
this time seeking the refund of the amount of P7,290,960.00 representing 71,480 LKG bags of refined
sugar at P102.00 VAT per bag for the period covering May 12, 2009 to July 22, 2009.19

In its Answer, the CIR raised as sole point COFA's alleged failure to comply with the requisites for
recovery of tax erroneously or illegally collected as spelled under Section 229 of RA 8424, specifically,
the lack of a prior claim for refund or credit with the CIR.20

Trial on the merits thereafter ensued where only COFA presented evidence through its Tax Consultant,
Jose V. Ramos. The CIR, on the other hand, waived the presentation of evidence. However, in its
Memorandum,21 the CIR additionally argued that COFA is not entitled to refund as it failed to present
certain documents22 required under Sections 3 and 4 of RR No. 13-2008.23

On December 12, 2012, the CTA Division rendered its Decision24 finding COFA to be exempt from VAT
and thus, ordered the refund of the advance VAT it erroneously paid. The CIR Division reasoned that
COFA's Certificates of Tax Exemption dated May 24, 1999 and April 23, 2003 and the BIR Ruling dated
January 11, 2008, which had not been revoked or nullified, affirmed COFA's status as a tax-exempt
agricultural cooperative. It further held that based on said uncontroverted25 evidence, COFA is
"considered as the actual producer of the members' sugarcane production because it primarily provided
the various production inputs (fertilizers), capital, technology transfer and farm management."26 The
CIR Division likewise held that COFA substantiated its claim for refund in the amount of P7,290,960.00
representing advance VAT on the 71,480 LKG bags of refined sugar from May 12, 2009 to July 22, 2009,
by submitting in evidence the Summary of VAT Payments Under Protest with the related BIR Certificates
of Advance Payment ofVAT and Revenue Official Receipts.27

In disposal, the CIR Division pronounced:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, [CIR] is hereby ORDERED
TO REFUND in favor of [COFA] the amount of SEVEN MILLION TWO HUNDRED NINETY THOUSAND NINE
HUNDRED SIXTY PESOS (P7,290,960.00), representing erroneously paid advance VAT for the period
covering May 12, 2009 to July 22, 2009.

SO ORDERED.28

The CIR's motion for reconsideration met similar denial in the CTA Division's Resolution29 dated March
5, 2013, thus prompting a petition for review before the CTA En Banc.

The CIR maintained its argument that COFA failed to present evidence to prove that the refined sugar
withdrawn from the sugar mills were actually produced by COFA through its registered members as
required under RA 8424, as amended. The CIR argues that COFA's failure to present the quedan of the
raw sugar issued by sugar mills in COFA's name is fatal to its claim for refund as it cannot be determined
whether its registered members are the actual producers of the refined sugar before it was transferred
in COFA's name and before COFA sells it to its members and non-members.30

Further, the CIR pointed to COFA's failure to present documentary evidence to prove that it is indeed
the principal provider of the various production inputs (fertilizers), capital, technology transfers and
farm management, as well as documentary evidence to show that COFA has sales transactions with its
members and non-members. The CIR reiterated its argument that COFA failed to present the documents
required for the administrative and judicial claim for refund in accordance with RR No. 13-2008.

COFA countered that the instant case involves advance VAT assessed on its withdrawal of sugar from
the refinery/mill, and not on its sale of sugar to members or non-members. Thus, COFA argued that the
payment in advance of VAT for the withdrawal of sugar from the refinery/mill was without basis.
In its presently assailed Decision, the CTA En Banc affirmed COFA's status as an agricultural cooperative
entitled to VAT exemption. By evidence consisting of COFA's Certificate of Registration dated October
19, 2009 and Certificate of Good Standing dated May 19, 2010, as well as the CIR's admission in its
Answer, pre-trial brief and stipulation of facts, it was established that COFA is an agricultural
cooperative. According to the CTA En Banc, COFA, at the time of the subject transactions, was a
cooperative in good standing as indicated in the Certification of Good Standing issued and renewed by
the CDA on May 19, 2010.

As such, the CTA En Banc held that pursuant to Section 109(L) of RA 8424, as amended, transactions
such as sales by agricultural cooperatives duly registered with the CDA to their members, as well as sales
of their produce, whether in its original state or processed fom1, to nonmembers, are exempt from VAT.
Citing Article 61 of RA 6938, as amended by RA 9520, the CTA En Banc held that cooperatives were
exempt from VAT for sales or transactions with members. As well, the CTA En Banc held that COFA was
exempt from VAT for transactions with non-members, provided that the goods subject of the
transaction were produced by the members of the cooperative; that the processed goods were sold in
the name and for the account of the cooperative; and, that at least 25% of the net income of the
cooperatives was returned to the members in the form of interest and/or patronage refunds.

The CIR's motion for reconsideration was denied by the CTA En Banc in its Resolution dated May 27,
2014, thus, giving rise to the present petition.

The Issue

The issue to be resolved is whether or not COFA, at the time of the subject transactions, i.e., from May
12, 2009 to July 22, 2009, is VAT-exempt and therefore entitled to a tax refund for the advance VAT it
paid.

The Ruling of the Court

We deny the petition.

COFA is a VAT-exempt agricultural cooperative. Exemption from the payment of VAT on sales made by
the agricultural cooperatives to members or to non-members necessarily includes exemption from the
payment of "advance VAT" upon the withdrawal of the refined sugar from the sugar mill.

VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto, so much so that even a non-stock, non-profit organization or government entity, is
liable to pay VAT on the sale of goods or services.31 Section 105 of RA 8424, as amended, provides:

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

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

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 non-stock, non-profit 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 course of trade or business.

There are, however, certain transactions exempt from VAT32 such as the sale of agricultural products in
their original state, including those which underwent simple processes of preparation or preservation
for the market, such as raw cane sugar. Thus, Section 7 of RA 9337 amending Section 109 of RA 8424
provides:

Section 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

"Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:
"A) Sale or importation of agricultural and marine food products in their original state, livestock and
poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding
stock and genetic materials therefor.

"Products classified under this paragraph shall be considered in their original state even if they have
undergone the simple processes of preparation or preservation for the market, such as freezing, drying,
salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt, and copra shall be considered in their original state; (Emphasis ours)

x x x x"

While the sale of raw sugar, by express provision of law, is exempt from VAT, the sale of refined sugar,
on the other hand, is not so exempted as refined sugar already underwent several refining processes
and as such, is no longer considered to be in its original state. However, if the sale of the sugar, whether
raw or refined, was made by an agricultural cooperative to its members or non-members, such
transaction is still VAT-exempt. Section 7 of RA 9337 amending Section 109 (L) of RA 8424, the law
applicable at the time material to the claimed tax refund, further reads:

Section 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

"SEC. 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:

xxxx

"(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to
their members as well as sale of their produce, whether in its original state or processed form, to non-
members; their importation of direct farm inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/or processing of their produce;"
(Emphasis ours)

Relatedly, Article 61 of RA 6938, as amended by RA 9520, provides:

ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members and non-
members shall not be subjected to tax on their transaction with members. In relation to this, the
transactions of members with the cooperative shall not be subject to any taxes and fees, including but
not limited to final taxes on members' deposits and documentary tax. Notwithstanding the provisions of
any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the
following tax exemptions:

(1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million
pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of
whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or
compensating taxes on their importation of machineries, equipment and spare parts used by them and
which are not available locally as certified by the Department of Trade and Industry (DTI). All tax free
importations shall not be sold nor the beneficial ownership thereof be transferred to any person until
after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to
pay twice the amount of the imposed tax and/or duties.

(2) Cooperatives with accumulated reserves and divided net savings of more than Ten million pesos
(P10,000,000.00) shall fee (sic) the following taxes at the full-rate:

(a) Income Tax - x x x;

(b) Value-Added Tax - On transactions with nonmembers: Provided, however, That cooperatives duly
registered with the Authority; are exempt from the payment of value-added tax; subject to Section 109,
subsections L, M and N of Republic Act No. 9337, the National Internal Revenue Code, as amended:
Provided, That the exempt transaction under Section 109 (L) shall include sales made by cooperatives
duly registered with the Authority organized and operated by its member to undertake the production
and processing of raw materials or of goods produced by its members into finished or process products
for sale by the cooperative to its members and non-members: Provided, further, That any processed
product or its derivative arising from the raw materials produced by its members, sold in then (sic) name
and for the account of the cooperative: Provided, finally, That at least twenty-five per centum (25%) of
the net income of the cooperatives is returned to the members in the form of interest and/or patronage
refunds;

xxxx

Thus, by express provisions of the law under Section 109 (L) of RA 8424, as amended by RA 9337, and
Article 61 of RA 6938 as amended by RA 9520, the sale itself by agricultural cooperatives duly registered
with the CDA to their members as well as the sale of their produce, whether in its original state or
processed form, to non-members are exempt from VAT.
In the interim, or on September 19, 2008, the BIR issued RR No. 13-2008 consolidating the regulations
on the advance payment of VAT or "advance VAT" on the sale of refined sugar.33 Generally, the advance
VAT on the sale of the refined sugar is required to be paid in advance by the owner/seller before the
refined sugar is withdrawn from the sugar refinery/mill. The "sugar owners" refer to those persons
having legal title over the refined sugar and may include, among others, the cooperatives.34

By way of exception, withdrawal of refined sugar is exempted from advance VAT upon the concurrence
of certain conditions which ultimately relate to a two-pronged criteria: first, the character of the
cooperative seeking the exemption; and second, the kind of customers to whom the sale is made.

As to the character of the cooperative, Section 4 of RR No. 13-2008 in part, provides:

Sec. 4. Exemption from the Payment of the Advance VAT. - Notwithstanding the provisions of the
foregoing Section, the following withdrawals shall be exempt from the payment of the advance VAT:

(a) Withdrawal of Refined Sugar by Duly Accredited and Registered Agricultural Producer Cooperative of
Good Standing. - In the event the refined sugar is owned and withdrawn from the Sugar Refinery/Mill by
an agricultural cooperative of good standing duly accredited and registered with the Cooperative
Development Authority (CDA), which cooperative is the agricultural producer of the sugar cane that was
refined into refined sugar, the withdrawal is not subject to the payment of advance VAT. x x x

Thus, for an agricultural cooperative to be exempted from the payment of advance VAT on refined
sugar, it must be (a) a cooperative in good standing duly accredited and registered with the CDA; and (b)
the producer of the sugar. Section 4 of RR No. 13-2008 defines when a cooperative is considered in good
standing and when it is said to be the producer of the sugar in this manner:

A cooperative shall be considered in good standing if it is a holder of a "Certificate of Good Standing"

issued by the CDA. x x x

A cooperative is said to be the producer of the sugar if it is the tiller of the land it owns, or leases, incurs
cost of agricultural production of the sugar and produces the sugar cane to be refined.

As to the kind of customers to whom the sale is made, Section 4 of RR No. 13-2008 differentiates the
treatment between the sale of a refined sugar to members and non-members as follows:

Sale of sugar in its original form is always exempt from VAT regardless of who the seller is pursuant to
Sec. 109 (A) of the Tax Code. On the other hand, sale of sugar, in its processed form, by a cooperative is
exempt from VAT if the sale is made to members of the cooperative. Whereas, if the sale of sugar in its
processed form is made by the cooperative to non-members, said sale is exempt from VAT only if the
cooperative is an agricultural producer of the sugar cane that has been converted into refined sugar as
herein defined and discussed.

Nevertheless, RR No. 13-2008 makes it clear that the withdrawal of refined sugar by the agricultural
cooperative for sale to its members is not subject to advance VAT, while sale to non-members of refined
sugar is not subject to advance VAT only if the cooperative is the agricultural producer of the sugar cane.
Thus, it appears that the requirement as to the character of the cooperative being the producer of the
sugar is relevant only when the sale of the refined sugar is likewise made to non-members.

The foregoing requisites for the application of the VAT-exemption for sales by agricultural cooperatives
to apply were likewise identified by the Court in Commissioner of Internal Revenue v. United Cadiz Sugar
Farmers Association Multi-Purpose Cooperative,35 thus:

First, the seller must be an agricultural cooperative duly registered with the CDA. An agricultural
cooperative is "duly registered" when it has been issued a certificate of registration by the CDA. This
certificate is conclusive evidence of its registration.

Second, the cooperative must sell either:

1) exclusively to its members; or

2) to both members and non-members, its produce, whether in its original state or processed form.

The second requisite differentiates cooperatives according to its customers. If the cooperative transacts
only with members, all its sales are VAT-exempt, regardless of what it sells. On the other hand, if it
transacts with both members and non-members, the product sold must be the cooperative's own
produce in order to be VAT-exempt. x x x36

Having laid down the requisites when an agricultural cooperative is considered exempt from the
payment of advance VAT for the withdrawal of the refined sugar from the sugar refinery/mill, the next
task is to measure whether, indeed, COFA met the foregoing requirements.

We find no reason to disturb the CTA En Banc's finding that COFA is a cooperative in good standing as
indicated in the Certification of Good Standing previously issued and subsequently renewed by the CDA.
It was likewise established that COFA was duly accredited and registered with the CDA as evidenced by
the issuance of the CDA Certificate of Registration. There is no showing that the CIR disputed the
authenticity of said documents or that said certifications had previously been revoked. Consequently,
such must be regarded as conclusive proof of COFA's good standing and due registration with the
CDA.37

Similarly, COFA is considered the producer of the sugar as found by the CTA Division and affirmed by the
CTA En Banc. That COFA is regarded as the producer of the sugar is affirmed no other than the BIR itself
when it issued its Ruling38 on the matter, the pertinent portions of which are herein quoted:

xxxx

As a multi-purpose cooperative, COFA is an agricultural co-producer of the sugarcane produced by all its
cooperative members. Being a juridical person, it is legally impossible for the cooperative to do the
actual tillage of the land but the cooperative and all its members altogether carry out the sugar farming
activities during the agricultural crop year. The cooperative members have consistently provided the
sugar farms/plantations and the tillage while COFA, in its capacity as co-producer, has provided the
following services to its members as its co-producers x x x.

xxxx

Moreover, being the exclusive marketing arm of the harvested sugarcane from the various farms of its
members, the cooperative does not: engage in the purchase of sugarcane produced by non-members.
As such, the sugarcane produced by the cooperative members will be harvested, hauled, delivered and
milled to the sugarmill in the name of COFA. The sugarmill issues the quedan of the raw sugar in the
name of COFA pursuant to the membership agreement that the cooperative will be solely and
exclusively tasked to market the sugar, molasses and other derivative products. Thereafter, COFA turns
over to its members the net proceeds of the sale of the sugarcane produce. When COFA further decides
to process the produced raw sugar of its members into refined sugar, the sugarmill issues refined sugar
quedan in the name of COFA.

xxxx

The farmer-members of COFA joined together to form the COFA with the objective of producing and
selling of sugar as its products. The members thereof made their respective equitable contributions
required to achieve their objectives. Consequently, the proceeds of the sale thereof are intended to be
shared among them in accordance with cooperative principles.

x x x x39

The above BIR ruling operates as an equitable estoppel precluding the CIR from unilaterally revoking its
pronouncement and thereby depriving the cooperative of the tax exemption provided by law.40

Having established that COFA is a cooperative in good standing and duly registered with the CDA and)s
the-producer of the sugar, its sale then of refined sugar whether sold to members or non-members,
following the express provisions of Section 109(L) of RA 8424, as amended, is exempt from VAT. As a
logical and necessary consequence then of its established VAT exemption, COFA is likewise exempted
from the payment of advance VAT required under RR No. 13-2008.

The CIR, however, breeds confusion when it argues that the VAT exemption given to cooperatives under
the laws pertain only to the sale of the sugar but not to the withdrawal of the sugar from the refinery.
The CIR is grossly mistaken. To recall, VAT is a transaction tax - it is imposed on sales, barters, exchanges
of goods or property, and on the performance of services. The withdrawal from the sugar refinery by the
cooperative is not the incident which gives rise to the imposition of VAT, but the subsequent sale of the
sugar. If at all, the withdrawal of the refined sugar gives rise to the obligation to pay the VAT on the
would-be sale. In other words, the advance VAT which is imposed upon the withdrawal of the refined
sugar is the very same VAT which would be imposed on the sale of refined sugar following its withdrawal
from the refinery, hence, the term "advance." It is therefore erroneous to treat the withdrawal of the
refined sugar as a tax incident different from or in addition to the sale itself.

Finally, as regards the CIR's contention that COFA failed to submit complete documentary requirements
fatal to its claim for tax refund, suffice it to say, that COFA was a previous recipient and holder of
certificates of tax exemption issued by the BIR, and following the Court's pronouncement in United
Cadiz Sugar Farmers Association Multi-Purpose Cooperative, the issuance of the certificate of tax
exemption presupposes that the cooperative submitted to the BIR the complete documentary
requirements. In the same manner, COFA's entitlement to tax exemption cannot be made dependent
upon the submission of the monthly VAT declarations and quarterly VAT returns, as the CIR suggests.
Here, it was established that COFA satisfied the requirements under Section 109(L) of RA 8424, as
amended, to enjoy the exemption from VAT on its sale of refined sugar; its exemption from the payment
of advance VAT for the withdrawal it made from May 12, 2009 to July 22, 2009 follows, as a matter of
course.
WHEREFORE, the petition is DENIED. The Decision dated March 5, 2014 and the Resolution dated May
27, 2014 of the Court of Tax Appeals En Banc in CTA EB Case No. 992, declaring respondent Negros
Consolidated Farmers Multi-Purpose Cooperative exempt from Value-added tax (VAT) and hence,
entitled to refund of the VAT it paid in advance in the amount of SEVEN MILLION TWO HUNDRED
NINETY THOUSAND NINE HUNDRED SIXTY PESOS (P7,290,960.00) for the withdrawal of the refined sugar
it made from May 12, 2009 to July 22, 2009 are AFFIRMED.

SO ORDERED.