BEFORE VAT CASES
FIRST DIVISION a deduction from gross sales in compliance with RR 2-94 instead of treating it as a
G.R. No. 159610             June 12, 2008
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CENTRAL LUZON DRUG CORPORATION, respondent.
DECISION
CARPIO, J.:
The Case
This petition for review on certiorari 1 assails the 13 August 2003 Decision2 of the
Court of Appeals in CA-G.R. SP No. 70480. The Court of Appeals dismissed the appeal
filed by the Commissioner of Internal Revenue (petitioner) questioning the 15 April
2002 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 6054 ordering
petitioner to issue, in favor of Central Luzon Drug Corporation (respondent), a tax
credit certificate in the amount of P2,376,805.63, arising from the alleged erroneous
interpretation of the term "tax credit" used in Section 4(a) of Republic Act No. (RA)
7432.4
The Facts
Respondent is a domestic corporation engaged in the retail of medicines and other
pharmaceutical products.5 In 1997, it operated eight drugstores under the business
name and style "Mercury Drug."6
Pursuant to the provisions of RA 7432 and Revenue Regulations No. (RR) 2-947 issued
by the Bureau of Internal Revenue (BIR), respondent granted 20% sales discount to
qualified senior citizens on their purchases of medicines covering the calendar year
1997. The sales discount granted to senior citizens totaled P2,798,508.00.
On 15 April 1998, respondent filed its 1997 Corporate Annual Income Tax Return
reflecting a nil income tax liability due to net loss incurred from business operations
of P2,405,140.00.8 Respondent filed its 1997 Income Tax Return under protest.9
On 19 March 1999, respondent filed with the petitioner a claim for refund or credit of
overpaid income tax for the taxable year 1997 in the amount
of P2,660,829.00.10 Respondent alleged that the overpaid tax was the result of the
wrongful implementation of RA 7432. Respondent treated the 20% sales discount as
1
tax credit as provided under Section 4(a) of RA 7432.
On 6 April 2000, respondent filed a Petition for Review with the CTA in order to toll
the running of the two-year statutory period within which to file a judicial claim.
Respondent reasoned that RR 2-94, which is a mere implementing administrative
regulation, cannot modify, alter or amend the clear mandate of RA 7432.
Consequently, Section 2(i) of RR 2-94 is without force and effect for being
inconsistent with the law it seeks to implement.11
In his Answer, petitioner stated that the construction given to a statute by a
specialized administrative agency like the BIR is entitled to great respect and should
be accorded great weight. When RA 7432 allowed senior citizens' discounts to be
claimed as tax credit, it was silent as to the mechanics of availing the same. For
clarification, the BIR issued RR 2-94 and defined the term "tax credit" as a
deduction from the establishment's gross income and not from its tax liability in
order to avoid an absurdity that is not intended by the law. 12
The Ruling of the Court of Tax Appeals
On 15 April 2002, the CTA rendered a Decision ordering petitioner to issue a tax
credit certificate in the amount of P2,376,805.63 in favor of respondent.
The CTA stated that in a number of analogous cases, it has consistently ruled that
the 20% senior citizens' discount should be treated as tax credit instead of a mere
deduction from gross income.13 In quoting its previous decisions, the CTA ruled that
RR 2-94 engraved a new meaning to the phrase "tax credit" as deductible from
gross income which is a deviation from the plain intendment of the law. An
administrative regulation must not contravene but should conform to the standards
that the law prescribes.14
The CTA also ruled that respondent has properly substantiated its claim for tax
credit by documentary evidence. However, based on the examination conducted by
the commissioned independent certified public accountant (CPA), there were some
material discrepancies due to missing cash slips, lack of senior citizen's ID number,
failure to include the cash slips in the summary report and vice versa. Therefore,
between the Summary Report presented by respondent and the audited amount
presented by the independent CPA, the CTA deemed it proper to consider the lesser
of two amounts.
The re-computation of the overpaid income tax15 for the year 1997 is as follows:
Sales, Net P176,742,607.00
BEFORE VAT CASES
Add: 20% Sales Discount to Senior Citizens 2,798,508.00 The Court of Appeals found no legal basis to support petitioner's opinion that actual
payment by the taxpayer or actual receipt by the government of the tax sought to
Sales, Gross P179,541,115.00
be credited or refunded is a condition sine qua non for the availment of tax credit
Less: Cost of Sales as enunciated in Section 22920 of the Tax Code. The Court of Appeals stressed that
Merchandise inventory, beg. P 20,905,489.00 Section 229 of the Tax Code pertains to illegally collected or erroneously paid taxes
while RA 7432 is a special law which uses the method of tax credit in the context of
Purchases 168,762,950.00
just compensation. Further, RA 7432 does not require prior tax payment as a
Merchandise inventory, end -27,281,439.00 162,387,000.00 condition for claiming the cost of the sales discount as tax credit.
Gross Profit P 17,154,115.00
Add: Miscellaneous income 402,124.00 Hence, this petition.
Total Income P 17,556,239.00
The Issues
Less: Operating expenses 16,913,699.00
Net Income P 642,540.00
Petitioner raises two issues21 in this Petition:
Less: Income subjected to final tax (Interest Income16) 249,172.00
Net Taxable Income P 393,368.00 1. Whether the appellate court erred in holding that respondent may claim the 20%
Income Tax Due (35%) P 137,679.00 senior citizens' sales discount as a tax credit deductible from future income tax
Less: Tax Credit (Cost of 20% discount as adjusted17) 2,514,484.63 liabilities instead of a mere deduction from gross income or gross sales; and
Income Tax Payable (P 2,376,805.63)
2. Whether the appellate court erred in holding that respondent is entitled to a
Income Tax Actually Paid             0.00
refund.
Income Tax Refundable (P 2,376,805.63)
The Ruling of the Court
Aggrieved by the CTA's decision, petitioner elevated the case before the Court of
Appeals. The petition lacks merit.

The Ruling of the Appellate Court
On 13 August 2003, the Court of Appeals affirmed the CTA's decision in toto.
The Court of Appeals disagreed with petitioner's contention that the CTA's decision
applied a literal interpretation of the law. It reasoned that under the verba legis rule,
if the statute is clear, plain, and free from ambiguity, it must be given its literal
meaning and applied without interpretation. This principle rests on the presumption
that the words used by the legislature in a statute correctly express its intent and
preclude the court from construing it differently.18
The issues presented are not novel. In two similar cases involving the same parties
where respondent lodged its claim for tax credit on the senior citizens' discount
granted in 199522 and 1996,23 this Court has squarely ruled that the 20% senior
citizens' discount required by RA 7432 may be claimed as a tax credit and not
merely a tax deduction from gross sales or gross income. Under RA 7432, Congress
granted the tax credit benefit to all covered establishments without conditions. The
net loss incurred in a taxable year does not preclude the grant of tax credit because
by its nature, the tax credit may still be deducted from a future, not a present, tax
liability. However, the senior citizens' discount granted as a tax credit cannot be
refunded.

The Court of Appeals distinguished "tax credit" as an amount subtracted from a RA 7432 expressly allows private establishments
taxpayer's total tax liability to arrive at the tax due while a "tax deduction" reduces to claim the amount of discounts they grant to senior citizens
the taxpayer's taxable income upon which the tax liability is computed. "A credit as tax credit.
differs from deduction in that the former is subtracted from tax while the latter is
subtracted from income before the tax is computed."19 Section 4(a) of RA 7432 states:

2
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SECTION 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to
the following:
a) the grant of twenty percent (20%) discount from all establishments relative
to the utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax
credit; (Emphasis supplied)
However, RR 2-94 interpreted the tax credit provision of RA 7432 in this wise:
Sec. 2. DEFINITIONS. - For purposes of these regulations:
xxx
i. Tax Credit - refers to the amount representing 20% discount granted to a
qualified senior citizen by all establishments relative to their utilization of
transportation services, hotels and similar lodging establishments, restaurants,
drugstores, recreation centers, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and amusement, which discount
shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes. (Emphasis supplied).
xxx
Sec. 4. Recording/Bookkeeping Requirement for Private Establishments
xxx
The amount of 20% discount shall be deducted from the gross income for
income tax purposes and from gross sales of the business enterprise concerned for
purposes of the VAT and other percentage taxes. (Emphasis supplied)
Tax credit is defined as a peso-for-peso reduction from a taxpayer's tax liability. It is a
direct subtraction from the tax payable to the government. On the other hand, RR 2-
94 treated the amount of senior citizens' discount as a tax deduction which is only a
subtraction from gross income resulting to a lower taxable income. RR 2-94 treats the
senior citizens' discount in the same manner as the allowable deductions provided in
Section 34, Chapter VII of the National Internal Revenue Code. RR 2-94 affords
merely a fractional reduction in the taxes payable to the government depending on
the applicable tax rate.
3
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,24 the Court
ruled that petitioner's definition in RR 2-94 of a tax credit is clearly erroneous. To
deny the tax credit, despite the plain mandate of the law, is indefensible.
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, the Court declared, "When the law says that the cost of the discount
may be claimed as a tax credit, it means that the amount- when claimed ― shall be
treated as a reduction from any tax liability, plain and simple." The Court further
stated that the law cannot be amended by a mere regulation because
"administrative agencies in issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot engraft additional
requirements not contemplated by the legislature." Hence, there being a dichotomy
in the law and the revenue regulation, the definition provided in Section 2(i) of RR
2-94 cannot be given effect.
The tax credit may still be deducted
from a future, not a present, tax liability.
In the petition filed before this Court, petitioner alleged that respondent incurred a
net loss from its business operations in 1997; hence, it did not pay any income tax.
Since no tax payment was made, it follows that no tax credit can also be claimed
because tax credits are usually applied against a tax liability.25
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,26 the Court
stressed that prior payment of tax liability is not a pre-condition before a taxable
entity can avail of the tax credit. The Court declared, "Where there is no tax liability
or where a private establishment reports a net loss for the period, the tax credit can
be availed of and carried over to the next taxable year." 27 It is irrefutable that under
RA 7432, Congress has granted the tax credit benefit to all covered establishments
without conditions. Therefore, neither a tax liability nor a prior tax payment is
required for the existence or grant of a tax credit. 28 The applicable law on this point
is clear and without any qualifications.29
Hence, respondent is entitled to claim the amount of P2,376,805.63 as tax credit
despite incurring net loss from business operations for the taxable year 1997.
The senior citizens' discount may be claimed
as a tax credit and not a refund.
Section 4(a) of RA 7432 expressly provides that private establishments may claim
the cost as a tax credit. A tax credit can only be utilized as payment for future
internal revenue tax liabilities of the taxpayer while a tax refund, issued as a check
or a warrant, can be encashed. A tax refund can be availed of immediately while a
tax credit can only be utilized if the taxpayer has existing or future tax liabilities.
BEFORE VAT CASES
If the words of the law are clear, plain, and free of ambiguity, it must be given its WHEREFORE, we DENY the petition. We AFFIRM the assailed Decision of the
literal meaning and applied without any interpretation. Hence, the senior citizens' Court of Appeals dated 13 August 2003 in CA-G.R. SP No. 70480.
discount may be claimed as a tax credit and not as a refund.30
No pronouncement as to costs.
RA 9257 now specifically provides that all covered establishments
may claim the senior citizens' discount as tax deduction. SO ORDERED.

On 26 February 2004, RA 9257, otherwise known as the "Expanded Senior Citizens

Act of 2003," was signed into law and became effective on 21 March 2004.31

RA 9257 has amended RA 7432. Section 4(a) of RA 9257 reads:

"Sec. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:

(a) the grant of twenty percent (20%) discount from all establishments relative

to the utilization of services in hotels and similar lodging establishments, restaurants
and recreation centers, and purchase of medicines in all establishments for the
exclusive use or enjoyment of senior citizens, including funeral and burial services for
the death of senior citizens;

xxx

The establishment may claim the discounts granted under (a), (f), (g) and
(h) as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended." (Emphasis supplied)

Contrary to the provision in RA 7432 where the senior citizens' discount granted by all
covered establishments can be claimed as tax credit, RA 9257 now specifically
provides that this discount should be treated as tax deduction.

With the effectivity of RA 9257 on 21 March 2004, there is now a new tax treatment
for senior citizens' discount granted by all covered establishments. This discount
should be considered as a deductible expense from gross income and no longer as tax
credit.32 The present case, however, covers the taxable year 1997 and is thus
governed by the old law, RA 7432.

4
BEFORE VAT CASES
members situated in the Philippines and payment to service establishments in the
Philippines.
G.R. No. 152609               June 29, 2005
"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR),
COMMISSIONER OF INTERNAL REVENUE, Petitioner, Revenue District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer
vs. effective March 1988 and was issued VAT Registration Certificate No. 088445
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE bearing VAT Registration No. 32A-3-004868. For the period January 1, 1997 to
BRANCH), Respondent. December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as
follows:
DECISION
Exhibit Period Covered Date Filed
PANGANIBAN, J.:
D 1997 1st Qtr. April 18, 1997

As a general rule, the value-added tax (VAT) system uses the destination principle. F 2nd Qtr. July 21, 1997
However, our VAT law itself provides for a clear exception, under which the supply of
G 3rd Qtr. October 2, 1997
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 H 4th Qtr. January 20, 1998
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 "On March 23, 1999, however, [respondent] amended the aforesaid returns and
zero-rated. Petitioner’s Revenue Regulations that alter or revoke the above declared the following:
requirements are ultra vires and invalid.
Exh Taxable Output Zero-rated Domestic Input
The Case 1997 Sales VAT Sales Purchases VAT

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the I 1st qtr ₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
February 28, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 62727. The J 2nd
assailed Decision disposed as follows: 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
qtr

"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of K 3rd

51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
merit. The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in qtr
toto."3 L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

The Facts
Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43
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
"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 ₱3,751,067.04, which amount was
arrived at after deducting from its total input VAT paid of ₱3,763,060.43 its applied
output VAT liabilities only for the third and fourth quarters of 1997 amounting to
₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis therefor,
Section 110 (B) of the 1997 Tax Code, to state:

5
BEFORE VAT CASES
‘Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the
input tax exceeds the output tax, the excess shall be carried over to the succeeding
quarter or quarters. Any input tax attributable to the purchase of capital goods or to
zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of Section 112.’
"There being no immediate action on the part of the [petitioner], [respondent’s]
petition was filed on April 15, 1999.
"In support of its Petition for Review, the following arguments were raised by
[respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid for in
acceptable foreign currency inwardly remitted to the Philippines and accounted for in
accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to
[VAT] at zero percent (0%). According to [respondent], being a VAT-registered entity,
it is subject to the VAT imposed under Title IV of the Tax Code, to wit:
‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of
tax. - There shall be levied, assessed and collected, a value-added tax equivalent to
10% percent of gross receipts derived by any person engaged in the sale of services.
The phrase "sale of services" means the performance of all kinds of services for
others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors: stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors
of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; and similar services regardless of whether o[r] not the
performance thereof calls for the exercise or use of the physical or mental
faculties: Provided That the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding subparagraph, the
consideration is paid for in acceptable foreign currency which is remitted inwardly to
the Philippines and accounted for in accordance with the rules and regulations of the
BSP. x x x.’
6
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;
BEFORE VAT CASES
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.’
In affirming the CTA, the CA held that respondent’s services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More
particularly, its "services were not of the same class or of the same nature as
project studies, information, or engineering and architectural designs" for non-
resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the
Philippines." The consideration in both types of service, however, was paid for in
acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was
unwarranted. By requiring that respondent’s services be consumed abroad in order
to be zero-rated, petitioner went beyond the sphere of interpretation and into that
of legislation. Even granting that it is valid, the ruling cannot be given retroactive
effect, for it will be harsh and oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed reversible error in holding that
respondent is entitled to the refund of the amount of ₱3,352,406.59 allegedly
representing excess input VAT for the year 1997."10
The Court’s Ruling
The Petition is unmeritorious.

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta Sole Issue:
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 Entitlement to Tax Refund
Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of which
reads as follows:
Section 102 of the Tax Code11 provides:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious
"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a)
and in accordance with law. Accordingly, [petitioner] is
Rate and base of tax. -- There shall be levied, assessed and collected, a value-
hereby ORDERED to REFUND to [respondent] the amount of ₱3,352,406.59
added tax equivalent to ten percent (10%) of gross receipts derived from the sale
representing the latter’s excess input VAT paid for the year 1997.’"8
or exchange of services x x x.

Ruling of the Court of Appeals

7
BEFORE VAT CASES
"The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by x x x persons engaged in milling,
processing, manufacturing or repacking goods for others; x x x services of banks,
non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
xxxxxxxxx
‘(3) The supply of x x x commercial knowledge or information;
‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as
a means of enabling the application or enjoyment of x x x any such knowledge or
information as is mentioned in subparagraph (3);
xxxxxxxxx
‘(6) The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any x x x commercial undertaking,
venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts’ means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including
the amount charged for materials supplied with the services and deposits and
advanced payments actually or constructively received during the taxable quarter for
the services performed or to be performed for another person, excluding value-added
tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate[:]
‘(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
8
‘(2) Services other than those mentioned in the preceding subparagraph, the
consideration for which is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the [BSP];’"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph quoted above, services performed
by VAT-registered persons in the Philippines (other than the processing,
manufacturing or repacking of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with
BSP rules and regulations. Certainly, the service it renders in the Philippines is not
in the same category as "processing, manufacturing or repacking of goods" and
should, therefore, be zero-rated. In reply to a query of respondent, the BIR opined
in VAT Ruling No. 080-89 that the income respondent earned from its parent
company’s regional operating centers (ROCs) was automatically zero-rated effective
January 1, 1988.12
Service has been defined as "the art of doing something useful for a person or
company for a fee"13 or "useful labor or work rendered or to be rendered by one
person to another."14 For facilitating in the Philippines the collection and payment of
receivables belonging to its Hong Kong-based foreign client, and getting paid for it
in duly accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent
should, therefore, be levied upon the supply of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards. 16 Under the credit card system, the credit
card company extends credit accommodations to its card holders for the purchase
of goods and services from its member establishments, to be reimbursed by them
later on upon proper billing. Given the complexities of present-day business
transactions, the components of this system can certainly function as separate
billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-
banks in particular, refers to "any card x x x or other credit device existing for the
BEFORE VAT CASES
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
9
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 services 47 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.
BEFORE VAT CASES
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
10
destination principle, as petitioner asserts, such service is subject to VAT at the rate
of 10 percent.
Respondent’s Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that
is, for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the [BSP]."57 Thus, for the supply of service to be zero-
rated as an exception, the law merely requires that first, the service be performed
in the Philippines; second, the service fall under any of the categories in Section
102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are
met by respondent. Its facilitation service is performed in the Philippines. It falls
under the second category found in Section 102(b) of the Tax Code, because it is a
service other than "processing, manufacturing or repacking of goods" as mentioned
in the provision. Undisputed is the fact that such service meets the statutory
condition that it be paid in acceptable foreign currency duly accounted for in
accordance with BSP rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioner’s stand, for the cost of respondent’s service to be zero-
rated, it need not be tacked in as part of the cost of goods exported. 58 The law
neither imposes such requirement nor associates services with exported goods. It
simply states that the services performed by VAT-registered persons in the
Philippines -- services other than the processing, manufacturing or repacking of
goods for persons doing business outside this country -- if paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations of
the BSP, are zero-rated. The service rendered by respondent is clearly different
from the product that arises from the rendition of such service. The activity that
creates the income must not be confused with the main business in the course of
which that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax
situs of a zero-rated service. Under this criterion, the place where the service is
rendered determines the jurisdiction60 to impose the VAT.61 Performed in the
Philippines, such service is necessarily subject to its jurisdiction,62 for the State
necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
BEFORE VAT CASES
rate.64 The place of payment is immaterial;65 much less is the place where the output
of the service will be further or ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear.
Therefore, no statutory construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is provided for. Rewriting the law
is a forbidden ground that only Congress may tread upon.
The Court may not construe a statute that is free from doubt.66 "[W]here the law
speaks in clear and categorical language, there is no room for interpretation. There is
only room for application."67 The Court has no choice but to "see to it that its
mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero
rating of services other than the processing, manufacturing or repacking of goods --
in general and without qualifications -- when paid for by the person to whom such
services are rendered in acceptable foreign currency inwardly remitted and duly
accounted for in accordance with the BSP (then Central Bank) regulations. Section 8
of RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable
transaction for value-added tax purposes. A sale by a VAT-registered person of goods
and/or services taxed at zero rate shall not result in any output tax. The input tax on
his purchases of goods or services related to such zero-rated sale shall be available as
tax credit or refundable in accordance with Section 16 of these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following services rendered by VAT-
registered persons are zero-rated:
‘(1) Services in connection with the processing, manufacturing or repacking of goods
for persons doing business outside the Philippines, where such goods are actually
shipped out of the Philippines to said persons or their assignees and the services are
paid for in acceptable foreign currency inwardly remitted and duly accounted for
under the regulations of the Central Bank of the Philippines.
xxxxxxxxx
11
‘(3) Services performed in the Philippines other than those mentioned in
subparagraph (1) above which are paid for by the person or entity to whom the
service is rendered in acceptable foreign currency inwardly remitted and duly
accounted for in accordance with Central Bank regulations. Where the contract
involves payment in both foreign and local currency, only the service corresponding
to that paid in foreign currency shall enjoy zero-rating. The portion paid for in local
currency shall be subject to VAT at the rate of 10%.’"
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT Regulations," 69 reiterates the
above-quoted provision and further presents as examples only the services
performed in the Philippines by VAT-registered hotels and other service
establishments. Again, the condition remains that these services must be paid in
acceptable foreign currency inwardly remitted and accounted for in accordance with
the rules and regulations of the BSP. The term "other service establishments" is
obviously broad enough to cover respondent’s facilitation service. Section 4.102-2 of
RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT
registered person, which is a taxable transaction for VAT purposes, shall not result
in any output tax. However, the input tax on his purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
‘(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP;
‘(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;’"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
BEFORE VAT CASES
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."
12
Third, and most important, the statutory provision upon which this regulation is
based is by itself not restrictive. The scope of the word "services" in Section 102(b)
(2) of the Tax Code is broad; it is not susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at
the administrative level,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
BEFORE VAT CASES
with the law. Otherwise, no amount of interpretation can ever revoke, repeal or
modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on
the part of the legislators not to impose the condition of being "consumed abroad" in
order for services performed in the Philippines by a VAT-registered person to be zero-
rated. We quote the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the moment. Will the
Gentleman kindly explain to me - I am referring to the lower part of the first
paragraph with the ‘Provided’. Section 102. ‘Provided that the following services
performed in the Philippines by VAT registered persons shall be subject to zero
percent.’ There are three here. What is the difference between the three here which
is subject to zero percent and Section 103 which is exempt transactions, to being
with?
"Senator Herrera: Mr. President, in the case of processing and manufacturing or
repacking goods for persons doing business outside the Philippines which are
subsequently exported, and where the services are paid for in acceptable foreign
currencies inwardly remitted, this is considered as subject to 0%. But if these
conditions are not complied with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated
and the other one that he indicated are exempted from the very beginning. These
three enumerations under Section 102 are zero-rated provided that these conditions
indicated in these three paragraphs are also complied with. If they are not complied
with, then they are not entitled to the zero ratings. Just like in the export of minerals,
if these are not exported, then they cannot qualify under this provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can leave this. Under
the proviso, it is required that the following services be performed in the Philippines.
"Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons doing
business outside the Philippines. Meaning to say, we ship the goods to them in
Chicago or Washington and they send the payment inwardly to the Philippines in
foreign currency, and that is, of course, zero-rated.lawphil.net
"Now, when we say ‘services other than those mentioned in the preceding
subsection[,’] may I have some examples of these?
13
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in the same Section
102. The first paragraph is when one manufactures or packages something here
and he sends it abroad and they pay him, that is covered. That is clear to me. The
second paragraph says ‘Services other than those mentioned in the preceding
subparagraph, the consideration of which is paid for in acceptable foreign
currency…’
"One example I could immediately think of -- I do not know why this comes to my
mind tonight -- is for tourism or escort services. For example, the services of the
tour operator or tour escort -- just a good name for all kinds of activities -- is made
here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is
made from outside and remitted into the country.
"Senator Herrera: What is important here is that these services are paid in
acceptable foreign currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include
$50 for the services of a woman or a tourist guide, it is zero-rated when it is
remitted here.
"Senator Herrera: I guess it can be interpreted that way, although this tourist
guide should also be considered as among the professionals. If they earn more than
₱200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are
subject to VAT, and I am talking of all services. Do big contractual engineers in
Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-registered person. When he
performs services in the Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the
particular provisions on zero rating of services under Section 102(b) of the Tax
Code, the principle of legislative approval of administrative interpretation by
reenactment clearly obtains. This principle means that "the reenactment of a
BEFORE VAT CASES
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.

14
BEFORE VAT CASES
G.R. No. 157594               March 9, 2010
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
petitioner Toshiba Information Equipment (Philippines), Inc. (Toshiba) seeks the
reversal and setting aside of (1) the Decision2 dated August 29, 2002 of the Court of
Appeals in CA-G.R. SP No. 63047, which found that Toshiba was not entitled to the
credit/refund of its unutilized input Value-Added Tax (VAT) payments attributable to
its export sales, because it was a tax-exempt entity and its export sales were VAT-
exempt transactions; and (2) the Resolution3 dated February 19, 2003 of the
appellate court in the same case, which denied the Motion for Reconsideration of
Toshiba. The herein assailed judgment of the Court of Appeals reversed and set aside
the Decision4 dated October 16, 2000 of the Court of Tax Appeals (CTA) in CTA Case
No. 5762 granting the claim for credit/refund of Toshiba in the amount of
₱1,385,282.08.
Toshiba is a domestic corporation principally engaged in the business of
manufacturing and exporting of electric machinery, equipment systems, accessories,
parts, components, materials and goods of all kinds, including those relating to office
automation and information technology and all types of computer hardware and
software, such as but not limited to HDD-CD-ROM and personal computer printed
circuit board.5 It is registered with the Philippine Economic Zone Authority (PEZA) as
an Economic Zone (ECOZONE) export enterprise in the Laguna Technopark, Inc., as
evidenced by Certificate of Registration No. 95-99 dated September 27, 1995. 6 It is
also registered with Regional District Office No. 57 of the Bureau of Internal Revenue
(BIR) in San Pedro, Laguna, as a VAT-taxpayer with Taxpayer Identification No. (TIN)
004-739-137.7
In its VAT returns for the first and second quarters of 1997, 8 filed on April 14, 1997
and July 21, 1997, respectively, Toshiba declared input VAT payments on its domestic
15
purchases of taxable goods and services in the aggregate sum of
₱3,875,139.65,9 with no zero-rated sales. Toshiba subsequently submitted to the
BIR on July 23, 1997 its amended VAT returns for the first and second quarters of
1997,10 reporting the same amount of input VAT payments but, this time, with zero-
rated sales totaling ₱7,494,677,000.00.11
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/refund12 of its unutilized input VAT payments for
the first half of 1997 in the total amount of ₱3,685,446.73.13
The next day, on March 31, 1999, Toshiba likewise filed with the CTA a Petition for
Review14 to toll the running of the two-year prescriptive period under Section 230 of
the Tax Code of 1977,15 as amended.16 In said Petition, docketed as CTA Case No.
5762, Toshiba prayed that –
[A]fter due hearing, judgment be rendered ordering [herein respondent
Commissioner of Internal Revenue (CIR)] to refund or issue to [Toshiba] a tax
refund/tax credit certificate in the amount of P3,875,139.65 representing unutilized
input taxes paid on its purchase of taxable goods and services for the period
January 1 to June 30, 1997.17
The Commissioner of Internal Revenue (CIR) opposed the claim for tax
refund/credit of Toshiba, setting up the following special and affirmative defenses in
his Answer18 –
5. [Toshiba’s] alleged claim for refund/tax credit is subject to administrative
routinary investigation/examination by [CIR’s] Bureau;
6. [Toshiba] failed miserably to show that the total amount of ₱3,875,139.65
claimed as VAT input taxes, were erroneously or illegally collected, or that the same
are properly documented;
7. Taxes paid and collected are presumed to have been made in accordance with
law; hence, not refundable;
8. In an action for tax refund, the burden is on the taxpayer to establish its right to
refund, and failure to sustain the burden is fatal to the claim for refund;
9. It is incumbent upon [Toshiba] to show that it has complied with the provisions
of Section 204 in relation to Section 229 of the Tax Code;
BEFORE VAT CASES
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.
With both parties waiving the right to submit their respective memoranda, the CTA
rendered its Decision in CTA Case No. 5762 on October 16, 2000 favoring Toshiba.
According to the CTA, the CIR himself admitted that the export sales of Toshiba
were subject to zero percent (0%) VAT based on Section 100(a)(2)(A)(i) of the Tax
Code of 1977, as amended. Toshiba could then claim tax credit or refund of input
VAT paid on its purchases of goods, properties, or services, directly attributable to
such zero-rated sales, in accordance with Section 4.102-2 of Revenue Regulations
No. 7-95. The CTA, though, reduced the amount to be credited or refunded to
Toshiba to ₱1,385,292.02.

The dispositive portion of the October 16, 2000 Decision of the CTA fully reads –
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.
WHEREFORE, [Toshiba’s] claim for refund of unutilized input VAT
payments is hereby GRANTED but in a reduced amount of
3. [Toshiba] filed its quarterly VAT returns for the first two quarters of 1997 within
₱1,385,282.08 computed as follows:
the legally prescribed period.

xxxx 1st Quarter 2nd Quarter Total

Amount of claimed input

7. [Toshiba] is subject to zero percent (0%) value-added tax on its export sales. taxes filed with the DOF One P3,268,682.34 P416,764.39 P3,685,446.73
Stop Shop Center
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 Less: 1) Input taxes not
properly
In the same pleading, Toshiba and the CIR jointly submitted the following issues for
determination by the CTA – ₱ 242,491.45 ₱154,391.13 ₱ 396,882.58
supported by VAT invoices
Whether or not [Toshiba] has incurred input taxes in the amount of ₱3,875,139.65 for and official receipts
the period January 1 to June 30, 1997 which are directly attributable to its export a. Per SGV’s verification
sales[.] (Exh. I)

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[.]
b. Per this court’s further ₱1,852,437.65 ₱ 35,108.00 ₱1,887,545.65
verification (Annex A)
Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997
₱189,499.13 ₱2,300,164.65
have not been offset against any output tax[.]
Amount Refundable ₱1,158,016.82 ₱227,265.26 ₱1,385,282.08
Whether or not input taxes incurred by [Toshiba] for the first two quarters of 1997
are properly substantiated by official receipts and invoices.23
Respondent Commissioner of Internal Revenue is ORDERED to REFUND to
[Toshiba] or in the alternative, ISSUE a TAX CREDIT CERTIFICATE in the amount of
During the trial before the CTA, Toshiba presented documentary evidence in support ₱1,385,282.08 representing unutilized input taxes paid by [Toshiba] on its
of its claim for tax credit/refund, while the CIR did not present any evidence at all. purchases of taxable goods and services for the period January 1 to June 30,
1997.24

16
BEFORE VAT CASES
Both Toshiba and the CIR sought reconsideration of the foregoing CTA Decision.
Toshiba asserted in its Motion for Reconsideration25 that it had presented proper
substantiation for the ₱1,887,545.65 input VAT disallowed by the CTA.
The CIR, on the other hand, argued in his Motion for Reconsideration26 that Toshiba
was not entitled to the credit/refund of its input VAT payments because as a PEZA-
registered ECOZONE export enterprise, Toshiba was not subject to VAT. The CIR
invoked the following statutory and regulatory provisions –
Section 24 of Republic Act No. 791627
SECTION 24. Exemption from Taxes Under the National Internal Revenue Code. –
Any provision of existing laws, rules and regulations to the contrary notwithstanding,
no taxes, local and national, shall be imposed on business establishments operating
within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income
earned by all businesses and enterprises within the ECOZONE shall be remitted to the
national government. x x x.
Section 103(q) of the Tax Code of 1977, as amended
Sec. 103. Exempt transactions. – The following shall be exempt from the value-added
tax:
xxxx
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, and 1950, and non-electric cooperatives
under Republic Act No. 6938, or international agreements to which the Philippines is a
signatory.
Section 4.103-1 of Revenue Regulations No. 7-95
SEC. 4.103-1. Exemptions. – (A) In general. – An exemption means that the sale of
goods or properties and/or services and the use or lease of properties is not subject
to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax)
previously paid.
The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. On the
other hand, a VAT-registered purchaser of VAT-exempt goods, properties or services
which are exempt from VAT is not entitled to any input tax on such purchase despite
the issuance of a VAT invoice or receipt.
17
The CIR contended that under Section 24 of Republic Act No. 7916, a special law,
all businesses and establishments within the ECOZONE were to remit to the
government five percent (5%) of their gross income earned within the zone, in lieu
of all taxes, including VAT. This placed Toshiba within the ambit of Section 103(q)
of the Tax Code of 1977, as amended, which exempted from VAT the transactions
that were exempted under special laws. Following Section 4.103-1(A) of Revenue
Regulations No. 7-95, the VAT-exemption of Toshiba meant that its sale of goods
was not subject to output VAT and Toshiba as seller was not allowed any tax credit
on the input VAT it had previously paid.
On January 17, 2001, the CTA issued a Resolution28 denying both Motions for
Reconsideration of Toshiba and the CIR.
The CTA took note that the pieces of evidence referred to by Toshiba in its Motion
for Reconsideration were insufficient substantiation, being mere schedules of input
VAT payments it had purportedly paid for the first and second quarters of 1997.
While the CTA gives credence to the report of its commissioned certified public
accountant (CPA), it does not render its decision based on the findings of the said
CPA alone. The CTA has its own CPA and the tax court itself conducts an
investigation/examination of the documents presented. The CTA stood by its earlier
disallowance of the amount of ₱1,887,545.65 as tax credit/refund because it was
not supported by VAT invoices and/or official receipts.1avvphi1
The CTA refused to consider the argument that Toshiba was not entitled to a tax
credit/refund under Section 24 of Republic Act No. 7916 because it was only raised
by the CIR for the first time in his Motion for Reconsideration. Also, contrary to the
assertions of the CIR, the CTA held that Section 23, and not Section 24, of Republic
Act No. 7916, applied to Toshiba. According to Section 23 of Republic Act No. 7916
–
SECTION 23. Fiscal Incentives. – Business establishments operating within the
ECOZONES shall be entitled to the fiscal incentives as provided for under
Presidential Decree No. 66, the law creating the Export Processing Zone Authority,
or those provided under Book VI of Executive Order No. 226, otherwise known as
the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the
benefits provided for in the Export Development Act of 1994.
Among the fiscal incentives granted to PEZA-registered enterprises by the Omnibus
Investments Code of 1987 was the income tax holiday, to wit –
BEFORE VAT CASES
Art. 39. Incentives to Registered Enterprises. – All registered enterprises shall be
granted the following incentives to the extent engaged in a preferred area of
investment:
(a) Income Tax Holiday. —
(1) For six (6) years from commercial operation for pioneer firms and four (4) years
for non-pioneer firms, new registered firms shall be fully exempt from income taxes
levied by the national government. Subject to such guidelines as may be prescribed
by the Board, the income tax exemption will be extended for another year in each of
the following cases:
(i) The project meets the prescribed ratio of capital equipment to number of workers
set by the Board;
(ii) Utilization of indigenous raw materials at rates set by the Board;
(iii) The net foreign exchange savings or earnings amount to at least US$500,000.00
annually during the first three (3) years of operation.
The preceding paragraph notwithstanding, no registered pioneer firm may avail of this
incentive for a period exceeding eight (8) years.
(2) For a period of three (3) years from commercial operation, registered expanding
firms shall be entitled to an exemption from income taxes levied by the National
Government proportionate to their expansion under such terms and conditions as the
Board may determine: Provided, however, That during the period within which this
incentive is availed of by the expanding firm it shall not be entitled to additional
deduction for incremental labor expense.
(3) The provision of Article 7(14) notwithstanding, registered firms shall not be
entitled to any extension of this incentive.
The CTA pointed out that Toshiba availed itself of the income tax holiday under the
Omnibus Investments Code of 1987, so Toshiba was exempt only from income tax
but not from other taxes such as VAT. As a result, Toshiba was liable for output VAT
on its export sales, but at zero percent (0%) rate, and entitled to the credit/refund of
the input VAT paid on its purchases of goods and services relative to such zero-rated
export sales.
Unsatisfied, the CIR filed a Petition for Review29 with the Court of Appeals, docketed
as CA-G.R. SP No. 63047.
18
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 Reconsideration31 of the aforementioned Decision,
anchored on the following arguments: (a) the CIR never raised as an issue before
the CTA that Toshiba was tax-exempt under Section 24 of Republic Act No. 7916;
(b) Section 24 of Republic Act No. 7916, subjecting the gross income earned by a
PEZA-registered enterprise within the ECOZONE to a preferential rate of five
percent (5%), in lieu of all taxes, did not apply to Toshiba, which availed itself of
the income tax holiday under Section 23 of the same statute; (c) the conclusion of
BEFORE VAT CASES
the CTA that the export sales of Toshiba were zero-rated was supported by be set aside and further prays that a new one be rendered AFFIRMING AND
substantial evidence, other than the admission of the CIR in the Joint Stipulation of UPHOLDING the Decision of the CTA promulgated on October 16, 2000 in CTA Case
Facts and Issues; and (d) the judgment of the CTA granting the refund of the input No. 5762.
VAT payments was supported by substantial evidence and should not have been set
aside by the Court of Appeals. Other reliefs, which the Honorable Court may deem just and equitable under the
circumstances, are likewise prayed for.33
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 The Petition is impressed with merit.
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
The CIR did not timely raise before the CTA the issues on the VAT-exemptions of
it was incorrect for Toshiba to say that the issue of the applicability of Section 24 of
Toshiba and its export sales.
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. 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)
Hence, Toshiba filed the instant Petition for Review with the following assignment of
of the Tax Code of 1977, as amended, the CIR is deemed to have waived the same.
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,
During the pendency of CTA Case No. 5762, the proceedings before the CTA were
governed by the Rules of the Court of Tax Appeals, 34 while the Rules of Court were
applied suppletorily.35
Rule 9, Section 1 of the Rules of Court provides:
SECTION 1. Defenses and objections not pleaded. – Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived.
However, when it appears from the pleadings or the evidence on record that the
court has no jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the action is barred
by a prior judgment or by statute of limitations, the court shall dismiss the claim.
The CIR did not argue straight away in his Answer in CTA Case No. 5762 that
Toshiba had no right to the credit/refund of its input VAT payments because the
latter was VAT-exempt and its export sales were VAT-exempt transactions. The Pre-
Trial Brief36 of the CIR was equally bereft of such allegations or arguments. The CIR
passed up the opportunity to prove the supposed VAT-exemptions of Toshiba and
its export sales when the CIR chose not to present any evidence at all during the
trial before the CTA.37 He missed another opportunity to present the said issues
before the CTA when he waived the submission of a Memorandum.38 The CIR had
waited until the CTA already rendered its Decision dated October 16, 2000 in CTA
Case No. 5762, which granted the claim for credit/refund of Toshiba, before
asserting in his Motion for Reconsideration that Toshiba was VAT-exempt and its
export sales were VAT-exempt transactions.

19
BEFORE VAT CASES
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:
20
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
BEFORE VAT CASES
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
21
interpretations of the quoted law involved, the truth of the matter being those
stated hereunder
x x x x"
And paragraph 5 of the petition for review filed by [Toshiba] before the CTA states:
"5. Petitioner is subject to zero percent (0%) value-added tax on its export sales in
accordance with then Section 100(a)(2)(A) of the Tax Code x x x.
x x x x"
As we see it, nothing in said Answer did [the CIR] admit that the export sales of
[Toshiba] were indeed zero-rated transactions. At the least, what was admitted only
by [the CIR] concerning paragraph 4 of his Answer, is the fact that the provisions of
the Tax Code, as cited by [Toshiba] in its petition for review filed before the CTA
were correct.52
The Court of Appeals provided no explanation as to why the admissions of the CIR
in his Answer in CTA Case No. 5762 deserved more weight and credence than those
he made in the Joint Stipulation. The appellate court failed to appreciate that the
CIR, through counsel, Atty. Biazon, also signed the Joint Stipulation; and that
absent evidence to the contrary, Atty. Biazon is presumed to have signed the Joint
Stipulation willingly and knowingly, in the regular performance of his official duties.
Additionally, the Joint Stipulation53 of Toshiba and the CIR was a more recent
pleading than the Answer54 of the CIR. It was submitted by the parties after the
pre-trial conference held by the CTA, and subsequently approved by the tax court.
If there was any discrepancy between the admissions of the CIR in his Answer and
in the Joint Stipulation, the more logical and reasonable explanation would be that
the CIR changed his mind or conceded some points to Toshiba during the pre-trial
conference which immediately preceded the execution of the Joint Stipulation. To
automatically construe that the discrepancy was the result of a palpable mistake is
a wide leap which this Court is not prepared to take without substantial basis.
The judicial admissions of the CIR in the Joint Stipulation are not intrinsically false,
wrong, or illegal, and are consistent with the ruling on the VAT treatment of PEZA-
registered enterprises in the previous Toshiba case.
There is no basis for believing that to bind the CIR to his judicial admissions in the
Joint Stipulation – that Toshiba was a VAT-registered entity and its export sales
were zero-rated VAT transactions – would result in "falsehood, unfairness and
injustice." The judicial admissions of the CIR are not intrinsically false, wrong, or
illegal. On the contrary, they are consistent with the ruling of this Court in a
previous case involving the same parties, Commissioner of Internal Revenue v.
BEFORE VAT CASES
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.
–xxx
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
22
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
BEFORE VAT CASES
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.
23
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.
BEFORE VAT CASES
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.
24
1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants
who were allegedly billed VAT by their suppliers before and during the effectivity of
the RMC by issuing VAT invoices/receipts?
xxxx
A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of
all other taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for
the VAT paid on purchases. However, if the taxpayer is availing of the income tax
holiday, it can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable,
with shifted VAT to the purchaser prior to the implementation of RMC No. 74-99;
and
c. The supplier issues a sworn statement under penalties of perjury that it shifted
the VAT and declared the sales to the PEZA-registered purchaser as taxable sales in
its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for
input VAT by PEZA-registered companies, regardless of the type or class of PEZA-
registration, should be denied. (Emphases ours.)
Consequently, the CIR cannot herein insist that all PEZA-registered enterprises are
VAT-exempt in every instance. RMC No. 42-2003 contains an express
acknowledgement by the BIR that prior to RMC No. 74-99, there were PEZA-
registered enterprises liable for VAT and entitled to credit/refund of input VAT paid
under certain conditions.
This Court already rejected in the Toshiba case the argument that sale transactions
of a PEZA-registered enterprise were VAT-exempt under Section 103(q) of the Tax
Code of 1977, as amended, ratiocinating that –
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR,
relates to VAT-exempt transactions. These are transactions exempted from VAT by
special laws or international agreements to which the Philippines is a signatory.
Since such transactions are not subject to VAT, the sellers cannot pass on any
output VAT to the purchasers of goods, properties, or services, and they may not
claim tax credit/refund of the input VAT they had paid thereon.
BEFORE VAT CASES
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of
respondent Toshiba because although the said section recognizes that transactions
covered by special laws may be exempt from VAT, the very same section provides
that those falling under Presidential Decree No. 66 are not. Presidential Decree No.
66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act
No. 7916, as amended, under which the EPZA evolved into the PEZA. Consequently,
the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of
1977, as amended, extends likewise to Rep. Act No. 7916, as amended. 61 (Emphasis
ours.)
In light of the judicial admissions of Toshiba, the CTA correctly confined itself to the
other factual issues submitted for resolution by the parties.
In accord with the admitted facts – that Toshiba was a VAT-registered entity and that
its export sales were zero-rated transactions – the stated issues in the Joint
Stipulation were limited to other factual matters, particularly, on the compliance by
Toshiba with the rest of the requirements for credit/refund of input VAT on zero-rated
transactions. Thus, during trial, Toshiba concentrated on presenting evidence to
establish that it incurred ₱3,875,139.65 of input VAT for the first and second quarters
of 1997 which were directly attributable to its export sales; that said amount of input
VAT were not carried over to the succeeding quarters; that said amount of input VAT
has not been applied or offset against any output VAT liability; and that said amount
of input VAT was properly substantiated by official receipts and invoices.
After what truly appears to be an exhaustive review of the evidence presented by
Toshiba, the CTA made the following findings –
(1) The amended quarterly VAT returns of Toshiba for 1997 showed that it made no
other sales, except zero-rated export sales, for the entire year, in the sum of
₱2,083,305,000.00 for the first quarter and ₱5,411,372,000.00 for the second
quarter. That being the case, all input VAT allegedly incurred by Toshiba for the first
two quarters of 1997, in the amount of ₱3,875,139.65, was directly attributable to its
zero-rated sales for the same period.
(2) Toshiba did carry-over the ₱3,875,139.65 input VAT it reportedly incurred during
the first two quarters of 1997 to succeeding quarters, until the first quarter of 1999.
Despite the carry-over of the subject input VAT of ₱3,875,139.65, the claim of
Toshiba was not affected because it later on deducted the said amount as "VAT
Refund/TCC Claimed" from its total available input VAT of ₱6,841,468.17 for the first
quarter of 1999.
(3) Still, the CTA could not allow the credit/refund of the total input VAT of
₱3,875,139.65 being claimed by Toshiba because not all of said amount was actually
incurred by the company and duly substantiated by invoices and official receipts.
25
From the ₱3,875,139.65 claim, the CTA deducted the amounts of (a) ₱189,692.92,
which was in excess of the ₱3,685,446.23 input VAT Toshiba originally claimed in its
application for credit/refund filed with the DOF One-Stop Shop; (b) ₱396,882.58,
which SGV & Co., the commissioned CPA, disallowed for being improperly
substantiated, i.e., supported only by provisional acknowledgement receipts, or by
documents other than official receipts, or not supported by TIN or TIN VAT or by
any document at all; (c) ₱1,887,545.65, which the CTA itself verified as not being
substantiated in accordance with Section 4.104-562 of Revenue Regulations No. 7-
95, in relation to Sections 10863 and 23864 of the Tax Code of 1977, as amended;
and (d) ₱15,736.42, which Toshiba already applied to its output VAT liability for the
fourth quarter of 1998.
(4) Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT
payments attributable to its zero-rated sales in the amounts of ₱1,158,016.82 and
₱227,265.26, for the first and second quarters of 1997, respectively, or in the total
amount of ₱1,385,282.08.
Since the aforementioned findings of fact of the CTA are borne by substantial
evidence on record, unrefuted by the CIR, and untouched by the Court of Appeals,
they are given utmost respect by this Court.
The Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its functions, is dedicated exclusively to the resolution of tax
problems and has accordingly developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority. 65 In Barcelon, Roxas
Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal
Revenue,66 this Court more explicitly pronounced –
Jurisprudence has consistently shown that this Court accords the findings of fact by
the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R.
No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the
Court of Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an
expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be
disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the Tax Court. In the absence of any
clear and convincing proof to the contrary, this Court must presume that the CTA
rendered a decision which is valid in every respect.
WHEREFORE, the assailed Decision dated August 29, 2002 and the 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
BEFORE VAT CASES
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 ₱1,385,282.08, representing the latter’s unutilized input VAT
payments for the first and second quarters of 1997. No pronouncement as to costs.
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
26
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 –
I
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
BEFORE VAT CASES
THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO
20 July 1992 2nd Quarter, 1990 4831
SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT
INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.
9 October 1992 3rd Quarter, 1990 4859

III 14 January 1993 4th Quarter, 1990 4944

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
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.

21 November 1990 3rd Quarter, 1990 75,304,774.77 WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88 AND
19 February 1991 4th Quarter, 1990 43,829,766.10 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.
When the BIR failed to act on its applications for refund/credit, petitioner corporation
filed with the CTA the following petitions for review – B.

Date Filed Period Covered CTA Case No. WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS
NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.

27
BEFORE VAT CASES
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
28
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
BEFORE VAT CASES
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
29
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
BEFORE VAT CASES
(2) file an application for refund or issuance of a tax credit certificate covering the
1st Quarter, 20 April 1992 -- 20 April 1994
amount of such input VAT.18 Hence, even in the absence of a final adjustment return,
1992
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 The above table readily shows that the administrative and judicial claims of
carried over from the previous quarters. 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.
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 However, the same cannot be said for the claim of petitioner corporation for refund
been applied against its output VAT liabilities – information which are supposed to be of its input VAT on its zero-rated sales for the first quarter of 1992. Even though it
reflected in the taxpayer's VAT returns. Thus, an application for refund/credit must be may seem that petitioner corporation filed in time its judicial claim with the CTA,
accompanied by copies of the taxpayer's VAT return/s for the taxable quarter/s there is no showing that it had previously filed an administrative claim with the BIR.
concerned. 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
Lastly, although the taxpayer's refundable or creditable input VAT may not be application for refund with respondent Commissioner within the two-year
considered as illegally or erroneously collected, its refund/credit is a privilege prescriptive period. The application of petitioner corporation for refund/credit of its
extended to qualified and registered taxpayers by the very VAT system adopted by input VAT for the first quarter of 1992 was not only unsigned by its supposed
the Legislature. Such input VAT, the same as any illegally or erroneously collected authorized representative, Ma. Paz R. Semilla, Manager-Finance and Treasury, but it
national internal revenue tax, consists of monetary amounts which are currently in the was not dated, stamped, and initialed by the BIR official who purportedly received
hands of the government but must rightfully be returned to the taxpayer. Therefore, the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No.
whether claiming refund/credit of illegally or erroneously collected national internal 5102, made the following observations –
revenue tax, or input VAT, the taxpayer must be given equal opportunity for filing and
pursuing its claim. 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
For the foregoing reasons, it is more practical and reasonable to count the two-year evidence by the petitioner on account of the fact that it does not bear the BIR
prescriptive period for filing a claim for refund/credit of input VAT on zero-rated sales stamp showing the date when such application was filed together with the signature
from the date of filing of the return and payment of the tax due which, according to or initial of the receiving officer of respondent's Bureau. Worse still, it does not
the law then existing, should be made within 20 days from the end of each quarter. show the date of application and the signature of a certain Ma. Paz R. Semilla
Having established thus, the relevant dates in the instant cases are summarized and indicated in the form who appears to be petitioner's authorized filer.
reproduced below –
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,
Period Covered Date of Date of Date of
1994). Attempt was made to prove that petitioner exerted efforts to recover the
Filing (Return Filing (Application w/ Filing (Case w/
original copy, but to no avail. Despite this, however, We observe that petitioner
w/ BIR) BIR) CTA)
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
2nd Quarter, 20 July 1990 21 August 1990 20 July 1992
filing within two years after the [filing of the VAT return for the quarter] when
1990
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
3rd Quarter, 18 October 21 November 1990 9 October 1992
due form and within the legal period set by law at the administrative level. Hence,
1990 1990
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
4th Quarter, 20 January 19 February 1991 14 January 1993
claim for refund, as prescribed under Section 230 of the Tax Code. This fact
1990 1991
constitutes another one of the many reasons for not granting petitioner's judicial
claim.

30
BEFORE VAT CASES
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 –
31
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
BEFORE VAT CASES
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.)
32
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 Doctrine 23 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 –
BEFORE VAT CASES
(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
33
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.
BEFORE VAT CASES
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.
34
"ii) with respect to capital equipment imported, the photo copy of import entry
document for internal revenue tax purposes and the confirmation receipt issued by
the Bureau of Customs for the payment of the value-added tax.
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by certain government
agencies, a statement therefrom showing the amount and description of sale of
goods and services, name of persons or entities (except in case of exports) to
whom the goods or services were sold, and date of transaction shall also be
submitted.
In all cases, the amount of refund or tax credit that may be granted shall be limited
to the amount of the value-added tax (VAT) paid directly and entirely attributable to
the zero-rated transaction during the period covered by the application for credit or
refund.
Where the applicant is engaged in zero-rated and other taxable and exempt sales of
goods and services, and the VAT paid (inputs) on purchases of goods and services
cannot be directly attributed to any of the aforementioned transactions, the
following formula shall be used to determine the creditable or refundable input tax
for zero-rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
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:
BEFORE VAT CASES
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.
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

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
CTA when the said Circular was issued, then petitioner corporation must have
categorically that the Court of Tax Appeals shall be a court of record and as
complied therewith during the course of the trial of the said cases. 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)
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
A "sales or commercial invoice" is a written account of goods sold or services
input VAT on its supposed zero-rated sales of gold to the CBP because it was unable
rendered indicating the prices charged therefor or a list by whatever name it is
to substantiate its claim. In the same case, this Court emphasized the importance of
known which is used in the ordinary course of business evidencing sale and transfer
complying with the substantiation requirements for claiming refund/credit of input
or agreement to sell or transfer goods and services.
VAT on zero-rated sales, to wit –

A "receipt" on the other hand is a written acknowledgment of the fact of payment in

For a judicial claim for refund to prosper, however, respondent must not only prove
money or other settlement between seller and buyer of goods, debtor or creditor, or
that it is a VAT registered entity and that it filed its claims within the prescriptive
person rendering services and client or customer.
period. It must substantiate the input VAT paid by purchase invoices or official
receipts.
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
This respondent failed to do.
collectively are the best means to prove the input VAT payments.36

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.

35
BEFORE VAT CASES
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
36
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 –
BEFORE VAT CASES
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.
37
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."
BEFORE VAT CASES
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
38
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
BEFORE VAT CASES
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.
39
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.
BEFORE VAT CASES
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
40
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
BEFORE VAT CASES
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.

41
BEFORE VAT CASES
G.R. No. 146984             July 28, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF
THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT
COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development
Company (NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code)
then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court
of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on
a more unequivocal rationale than that utilized by the rulings under review. The fact
that the sale was not in the course of the trade or business of NDC is sufficient in
itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of
its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. 1 The vessels
were constructed for the NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels
were transferred and leased, on a bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay "a value added tax of 10% on the value of the vessels."3 On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag
42
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).4 The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay
Lines.
On 28 September 1988, the implementing Contract of Sale was executed between
NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on
the other. Paragraph 11.02 of the contract stipulated that "[v]alue-added tax, if
any, shall be for the account of the PURCHASER."5 Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this time, a formal request for a ruling
on whether or not the sale of the vessels was subject to VAT had already been filed
with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the
parties agreed that should no favorable ruling be received from the BIR, NDC was
authorized to draw on the Letter of Credit upon written demand the amount needed
for the payment of the VAT on the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No.
568-88 dated 14 December 1988 from the BIR, holding that the sale of the vessels
was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-
registered enterprise, and thus its "transactions incident to its normal VAT
registered activity of leasing out personal property including sale of its own assets
that are movable, tangible objects which are appropriable or transferable are
subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as
well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar ruling
on the sale of the same vessels in response to an inquiry from the Chairman of the
Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT
Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At
this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with
the CTA, followed by a Supplemental Petition for Review on 14 July 1989. They
prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as
the refund of the VAT payment made amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the
transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code.
The CIR also squarely defended the VAT rulings holding the sale of the vessels
liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No.
5-87), which provided that "[VAT] is imposed on any sale or transactions ‘deemed
sale’ of taxable goods (including capital goods, irrespective of the date of
BEFORE VAT CASES
acquisition)." The CIR argued that the sale of the vessels were among those
transactions "deemed sale," as enumerated in Section 4 of R.R. No. 5-87. It seems
that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified
"change of ownership of business" as a circumstance that gave rise to a transaction
"deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted
the petition.9 The CTA ruled that the sale of a vessel was an "isolated transaction,"
not done in the ordinary course of NDC’s business, and was thus not subject to VAT,
which under Section 99 of the Tax Code, was applied only to sales in the course of
trade or business. The CTA further held that the sale of the vessels could not be
"deemed sale," and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax
Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt
should be resolved in favor of private respondents since Section 99 of the Tax Code
which implemented VAT is not an exemption provision, but a classification provision
which warranted the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March
1997, rendered a Decision reversing the CTA. 11 While the appellate court agreed that
the sale was an isolated transaction, not made in the course of NDC’s regular trade or
business, it nonetheless found that the transaction fell within the classification of
those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with
the NMC shares brought about a change of ownership in NMC. The Court of Appeals
also applied the principle governing tax exemptions that such should be strictly
construed against the taxpayer, and liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a
Resolution dated 5 February 2001.13 This time, the appellate court ruled that the
"change of ownership of business" as contemplated in R.R. No. 5-87 must be a
consequence of the "retirement from or cessation of business" by the owner of the
goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of transactions "deemed sale" was a
classification statute, and not an exemption statute, thus warranting the resolution of
any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already
been adequately discussed and refuted in the rulings assailed before us. Evidently,
the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is
sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code
and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
43
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately
a tax on consumption, even though it is assessed on many levels of transactions on
the basis of a fixed percentage.15 It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is passed on to the end
users by the providers of these goods or services16 who in turn may credit their own
VAT liability (or input VAT) from the VAT payments they receive from the final
consumer (or output VAT).17 The final purchase by the end consumer represents
the final link in a production chain that itself involves several transactions and
several acts of consumption. The VAT system assures fiscal adequacy through the
collection of taxes on every level of consumption,18 yet assuages the manufacturers
or providers of goods and services by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally the end consumer shoulders the
entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the taxpayer’s role or link in the production chain. Hence,
as affirmed by Section 99 of the Tax Code and its subsequent incarnations, 19 the tax
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. These transactions
outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods
or services do not occur within the course of trade or business, the providers of
such goods or services would hardly, if at all, have the opportunity to appropriately
credit any VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of
NDC was appreciated by both the CTA and the Court of Appeals, the latter doing so
even in its first decision which it eventually reconsidered.20 We cite with approval
the CTA’s explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30,
1955 (97 Phil. 992), the term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts normally incident
thereof; while "doing business" conveys the idea of business being done, not
from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business"
is what is usually done in the management of trade or business. [Idmi v. Weeks &
Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of
business" or "doing business" connotes regularity of activity. In the instant case, the
sale was an isolated transaction. The sale which was involuntary and made
BEFORE VAT CASES
pursuant to the declared policy of Government for privatization could no longer be
repeated or carried on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR
does not dispute before this Court, 24 should have definitively settled the matter. Any
sale, barter or exchange of goods or services not in the course of trade or
business is not subject to VAT.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point by the
CTA and the Court of Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed
sale those involving "change of ownership of business." However, Section 4(E) of
R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of
ownership" is only an attending circumstance to "retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of such retirement or
cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the
"change of ownership of business" as only a "circumstance" that attends those
transactions "deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-
87 now relied upon by the CIR, is captioned "Value-added tax on sale of goods," and
it expressly states that "[t]here shall be levied, assessed and collected on every sale,
barter or exchange of goods, a value added tax x x x." Section 100 should be read in
light of Section 99, which lays down the general rule on which persons are liable for
VAT in the first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers
VAT in the law. Before any portion of Section 100, or the rest of the law for that
matter, may be applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for VAT in the first place
under Section 99.

It would have been a different matter if Section 100 purported to define the phrase
"in the course of trade or business" as expressed in Section 99. If that were so,
reference to Section 100 would have been necessary as a means of ascertaining
whether the sale of the vessels was "in the course of trade or business," and thus
subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87
elaborate on is not the meaning of "in the course of trade or business," but instead
the identification of the transactions which may be deemed as sale. It would become
necessary to ascertain whether under those two provisions the transaction may be
deemed a sale, only if it is settled that the transaction occurred in the course of trade
or business in the first place. If the transaction transpired outside the course of trade
or business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in
question was not made in the course of trade or business of the seller, NDC that is,
the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how
the said sale may hew to those transactions deemed sale as defined under Section
100.

44
BEFORE VAT CASES
G.R. No. 226449, July 28, 2020 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. FEDERATION
OF GOLF CLUBS OF THE PHILIPPINES, INC., (FEDGOLF), RESPONDENT.
DECISION
REYES, J. JR., J.:
Assailed in this Petition for Review on Certiorari1 are the Decision2 dated April 29,
2016 and Resolution3 dated August 10, 2016 of the Regional Trial Court (RTC) of
Makati City, Branch 66, which declared invalid Revenue Memorandum Circular (RMC)
No. 35-2012 (Clarifying the Taxability of Clubs Organized and Operated Exclusively for
Pleasure, Recreation, and Other Non-Profit Purposes) issued by the Commissioner of
the Bureau of Internal Revenue (CIR).
The Relevant Antecedents
A petition for declaratory relief, questioning the validity of RMC No. 35-2012 issued by
the CIR, was filed by Federation of Golf Clubs of the Philippines, Inc. (FEDGOLF).4
RMC No. 35-2012 was issued to clarify the taxability of clubs which are organized and
operated exclusively for pleasure, recreation, and other non-profit purposes
(recreational clubs). Said RMC subjects the income of recreational clubs from
whatever source, including but not limited to membership fees, assessment
dues, rental income, and service fees, to income tax; and the gross receipts of such
clubs including but not limited to membership fees, assessment dues, rental income,
and service fees to value-added tax (VAT).
5 liable for income tax as Section 3013 of NIRC provides income tax exemption for
In its Petition,  FEDGOLF, among others, alleged that the implementation of the RMC
has adverse consequences to it and its members considering that prior to the
issuance of the same, membership fees, dues, and assessments received by it and its
member golf clubs had not been subjected to income tax and VAT.6
45
Thus, on October 22, 2012, FEDGOLF filed a motion for review and clarification of
RMC No. 35-2012, praying for the review of said interpretation to exempt
organizations under Section 30 of the 1997 National Internal Revenue Code (NIRC);
and to exempt the funds they receive, such as monthly dues, membership dues,
and special and necessary assessments from income tax and VAT.7
However, such motion remained unacted upon.8
Despite the filing of its petition, FEDGOLF alleged that it has been paying taxes
under the assailed RMC under protest.9
In its Answer,10 the CIR asserted that the RTC was bereft of jurisdiction over the
case as it was the Court of Tax Appeals which has jurisdiction over the decisions of
the CIR or other matters arising under the NIRC or other laws; and that assuming
the RTC has jurisdiction over the case, a recreational club is not among the tax-
exempt organizations under Section 30 of the 1997 NIRC.
In its Reply,11 FEDGOLF insisted on the jurisdiction of the RTC as the allegations in
the petition clearly established that the case was one for declaratory relief.
FEDGOLF likewise stood by its interpretation of the 1997 NIRC as to its exemption
from paying income tax and VAT on membership dues and assessments as the
latter were considered as contributions to capital, and not income.
In the assailed Decision12 dated April 29, 2016, the RTC granted the petition. On the
issue of jurisdiction, the RTC maintained that all the requisites for a petition for
declaratory relief were present in the case; hence being an action incapable of
pecuniary estimation, it properly took cognizance of it.
On the propriety of the issuance of RMC No. 35-2012, the RTC declared the same
invalid as the CIR exceeded its authority when it effectively imposed tax upon
petitioner - a matter within the sole prerogative of the Legislature.
Assuming the validity of CIR's exercise of power to enact said RMC, the RTC
nevertheless declared that due process should have been afforded to recreational
clubs before its effectivity, considering that said RMC is a legislative rule, creating
additional burden upon recreational clubs.
Assuming further that said RMC is valid, the RTC held that petitioner cannot be held
non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic or cultural purposes. Likewise, VAT on
membership dues, assessment fees, and the like of recreational clubs shall not be
imposed as Section 105 of NIRC delineates the imposition of VAT only on sale,
barter, exchange, lease, rendering of service or importation of goods. In such
BEFORE VAT CASES
context, membership dues and the like cannot be considered as payment for the
purchase of goods and services. Instead, they are "capital contributions" to defray
administrative costs and maintenance expenses of the recreational clubs.
The dispositive portion reads:
WHEREFORE, premises considered, the instant Petition for Declaratory Relief is
hereby GRANTED. Accordingly, RMC No. 35-2012 is hereby declared NULL and
VOID.
SO ORDERED.14
In the Resolution15 dated August 10, 2016, the RTC denied CIR's motion for
reconsideration.
Challenging the ruling of the RTC, CIR filed this instant petition.
The Issues
Procedurally, the CIR asserts that FEDGOLF failed to exhaust administrative remedies
in filing the petition before the RTC instead of filing the same before the Secretary of
Department of Finance; and that the RTC erroneously took cognizance of the petition
for declaratory relief, considering FEDGOLF's failure to show that no breach of
violation of RMC No. 35-2012 was committed.
Substantively, the CIR insists on the validity of RMC No. 35-2012 as it stemmed from
the CIR's exercise of delegated rule-making power.
The Court's Ruling
Notably, the issues in this case were dealt with in the 2019 case of Association of
Non-Profit Clubs, Inc. (ANPC) v. Bureau of Internal Revenue.16
Preliminarily, the CIR issued RMC No. 35-2012 as a result of the apparent
inconsistency among BIR rulings, exempting recreational clubs from income tax and
VAT, despite the express and clear mandate of the 1997 NIRC on their taxability.
Thus, to establish uniform interpretation of the 1997 NIRC, RMC No. 35-2012 clarified
the taxability of recreational clubs and categorically subjected their income and gross
receipts, including but not limited to membership fees, assessment dues, rental
income, service fees to both income tax and VAT, respectively, thus:
46
a. Income tax
Clubs which are organized and operated exclusively for pleasure,
recreation, and other non-profit purposes are subject to income
tax under the National Internal Revenue Code of 1997, as
amended. According to the doctrine of casus omissus pro omisso
habendus est, a person object or thing omitted from an
enumeration must be held to have been omitted intentionally.
The provision in the National Internal Revenue Code of 1977
which granted income tax exemption to such recreational clubs
was omitted in the current list of tax exempt corporations under
National Internal Revenue Code of 1997, as amended. Hence, the
income of recreational clubs from whatever source, including but
not limited to membership fees, assessment dues, rental income,
and service fees are subject to income tax.
b. Value-added tax
Section 105 of the National Internal Revenue Code of 1997, 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.
xxxx
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. (Emphasis ommitted)
The above provision is clear — even a non-stock, non-profit organization or
government entity is liable to pay VAT on the sale of goods or services.
xxxx
Clearly, the gross receipts of recreational clubs including but not limited to
membership fees, assessment dues, rental income, and service fees are subject to
VAT.17 (Emphases supplied)
BEFORE VAT CASES
The CIR, in issuing RMC No. 35-2012, maintained the taxability of the recreational
clubs' income because unlike the 1977 NIRC which expressly included recreational
clubs, 18 the 1997 NIRC deleted these organizations in the lists of clubs exempted
from income taxation:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized
principally for profit;
(B) Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution; (I)
Government educational institution;
47
(J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.
With the deletion of recreational clubs from the exemption, the CIR interpreted that
their income of whatever source, including, but not limited to membership fees,
assessment dues, rental income and service fees are subject to tax.
In the imposition of VAT, the CIR maintained that gross receipts of recreational
clubs, including, but not limited to membership fees, assessment dues, rental
income and service fees are subject to VAT considering that Section 10519 of the
1997 NIRC provides for the liability of non-stock, nonprofit organization or
government entity to VAT on the sale of goods and services.
In ANPC, petitioner likewise questioned the validity of RMC No. 35-2012 in a
petition for declaratory relief before the RTC. In subjecting membership fees,
assessment fees and the like to income tax and VAT, RMC No. 35-2012 was alleged
to be invalid, confiscatory, oppressive, and in violation of its right to due process.
Respondent, on the other hand, asserted that petitioner failed to exhaust
administrative remedies in filing such petition before the RTC; and stood firm on the
validity of the issuance of RMC No. 35-2012.
The trial court denied the petition for declaratory relief and upheld the validity of
RMC No. 35-2012 as the issuance thereof is in line with the power of the CIR to
interpret laws.
The disposition of the trial court was assailed in a petition for review
on certiorari filed before the Court.1awp++i1
BEFORE VAT CASES
Giving due course to the petition, the Court held that while the issuance of RMC No.
35-2012, being an interpretative rule, is subject to the review of the Secretary of
Finance following Section 420 of the NIRC, a purely legal issue allows the relaxation of
the doctrine of exhaustion of administrative remedies.
In a precise disposition, the Court in the ANPC case resolved that membership fees,
assessment dues, and the like are neither income nor part of gross receipts of
recreational clubs; hence, they are not taxable insofar as income tax and VAT are
concerned.
As to income tax, the Court declared that the interpretation contained in RMC No. 35-
2012 was erroneous inasmuch as it effectively eradicated the distinction between
"income" and "capital" when it classified membership dues, assessment fees, and the
like as "income" and therefore subject to income tax.
Income is defined as "an amount of money coming to a person or corporation within
a specified time, whether as payment for services, interest or profit from
investment"21 while capital is the "fund" or "wealth".22 Based on the foregoing, the
Court considered membership fees and the like as "capital", as they are intended for
the upkeep of the facilities and operations of the recreational clubs, and not to
generate revenue.
Thus, it is only the recreational club's income which should be subject to taxation, as
"the State cannot impose tax on capital as it constitutes an unconstitutional
confiscation of property."23 Thus, membership fees, assessment dues, and other fees
of similar nature are not subject to income tax.
The Court categorically determined:
In fine, for as Ions as these membership fees, assessment dues, and the like are
treated as collections by recreational clubs from their members as inherent
consequence of their membership, and are, by nature, intended for the maintenance,
preservation, and upkeep of the clubs' general operations and facilities, then these
fees cannot be classified as "the income of recreational clubs from whatever source"
that are "subject to income tax". Instead, they only form part of capital from which no
income tax may be collected or imposed. (Citation omitted).
As to VAT, the Court interpreted that RMC No. 35-2012 erroneously included the
gross receipts of recreational clubs on membership fees, assessment dues, and the
like as subject to VAT because Section 105 of the 1997 N1RC specified the taxability
of only those which deal with the "sale, barter or exchange of good or properties, or
sale of service." In collecting such fees from their members, recreational clubs are not
selling any kind of service, in the same way that the members are not procuring
service from them. Thus, "there could be no sale, barter or exchange of goods or
48
properties, or sale of a service to speak of, which would then be subject to VAT
under the 1997 NIRC".
The Court thus declared that the interpretation of the CIR as embodied in RMC No.
35-2012 was invalid only insofar as the inclusion of fees, which by nature are
devoted to the maintenance and upkeep of recreational clubs, within the coverage
of income tax and VAT for the CIR exceeded its rule-making authority in such
respect. In its fallo, the Court pronounced:
WHEREFORE, the petition is GRANTED. The Decision dated July 1, 2016 and
Order dated November 7, 2016 of the Regional Trial Court of Makati City, Branch
134 in Special Civil Case No. 14-985, are hereby SET ASIDE. The
Court DECLARES that membership fees, assessment dues, and fees of similar
nature collected by clubs which are organized and operated exclusively for pleasure,
recreation, and other nonprofit purposes do not constitute as: (a) "the income of
recreational clubs of whatever source" that are "subject to income tax'" and (b) part
of the "gross receipts of recreational clubs" that are "subject to [Value Added Tax]."
Accordingly, Revenue Memorandum Circular No. 35-2012 should be interpreted in
accordance with this Decision.
SO ORDERED.
Preliminarily, we recognize our ruling in Bureau of Internal Revenue v. First E-Bank
Tower Condominium Corporation,24 citing Department of Transportation v.
Philippine Petroleum Sea Transport Association25 and Diaz v. Secretary of
Finance26 which declared that although a petition for declaratory relief was improper
when assailing government issuances, yet when the issues have "far-reaching
implications and raises questions that need to be resolved for the public good; or if
the assailed act or acts of executive officials are alleged to have usurped legislative
authority", then a petition for declaratory relief may be treated as a petition for
prohibition.
In this case, the validity or invalidity of RMC No. 35-2012 would affect all
recreational clubs in the Philippines in their liability to pay both income tax and VAT.
Moreover, the BIR, in issuing the same, usurped the power of the legislature. In
fact, the ANPC case discussed that the "sweeping" inclusion of membership dues,
assessment fees and the like in the category of "income" and "sale, barter,
exchange of goods or properties or sale of service" in income tax and VAT
respectively, the BIR exceeded its rule-making authority.
Considering the ruling of the Court in ANPC, which resolved the validity of RMC No.
35-2012, the doctrine of stare decisis finds application.
BEFORE VAT CASES
The principle of stare decisis et non quieta movera ("to adhere to precedents and not
to unsettle things which are established") is a bar to any attempt to re-litigate the
same issue where the same questions relating to the same event have been put
forward by parties similarly situated as in a previous case litigated and decided by a
competent court.27 In other words, it denies the examination and relitigation of issues
where the same had already been decided upon, as judicial decisions form part of our
legal system.28

As such doctrine is grounded upon the stability of judicial decisions, any attempt to
abandon any judicial pronouncement requires strong and compelling reasons
therefor.29

Clearly, the issues in this case mirror that of the issues in ANPC. In the absence of a
compelling reason warranting the disturbance of the Court's ruling, the decision
stands. While the provisions of the 1997 NIRC was amended by Republic Act (RA) No.
10963 (The TRAIN Law), the latter neither changed the definition of "income" insofar
as income taxation is concerned nor the coverage of VAT. The rationale of the Court
in ANPC is thus ad rem. On this note, the resolution of the Court as to the proper
inteipretation of the RMC No. 35-2012 and its validity must be upheld. Corollary, the
RTC, in declaring the invalidity of the RMC No. 35-2012 in its entirety, is improper.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated April 29, 2016

and Resolution dated August 10, 2016 of the Regional Trial Court of Makati City,
Branch 66 are REVERSED and SET ASIDE insofar as it declared Revenue
Memorandum Circular No. 35-2012 invalid in its entirety.

Accordingly, the interpretation of the Bureau of Internal Revenue in Revenue

Memorandum Circular No. 35-2012 REMAINS INVALID insofar as it subjected
membership dues, assessment fees, and those of similar nature collected by clubs
which are organized and operated exclusively for pleasure, recreation, and other non-
profit purposes to income tax and Value Added Tax.

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