G.R. No.

151135

July 2, 2004

CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
As an SBMA-registered firm, Contex is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Cpntex also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under a Certificate of Registration Contex purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto Contex the 10% VAT on the purchased items, which led the Contex to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively Acting on the belief that it was exempt from all national and local taxes, including VAT, Contex filed two applications with RDO for tax refund or tax credit of the VAT it paid. Revenue District Officer DENIED. Regional Director NO RESPONSE. CTA PARTIAL GRANT. CTA ruled that Contex misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. These provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Contex does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration. Nonetheless, the CTA held that the Contex is exempt from the imposition of input VAT on its purchases of supplies and materials. It pointed out that under Bases Conversion and Development Act of 1992 (RA 7227), all that Contex is required to pay as a SBFZ-registered enterprise is a 5% preferential tax. The CTA also disallowed all refunds of input VAT paid prior to June 29, 1997 for being barred by the twoyear prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid on the supplies and materials directly used in manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the Contex s Makati and Pasay City offices. CA REVERSED. CIR maintained that the exemption of Contex under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex. Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods."

21 (b) Zero-rated Sales. As such. . The VAT. an indirect tax. 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. and it will actually increase. properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. The person making the exempt sale of goods. the amount of tax paid on the goods.e. although not directly and legally liable for the payment thereof. forms a substantial portion of consumer expenditures. properties or services bought. meaning the tax burden is not passed on to the purchaser. 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. Unlike a direct tax. or leased may be shifted or passed on by the seller. such as the income tax. transferor. Under VAT. transferred. the seller remains the person primarily and legally liable for the payment of the tax. rather than reduce the total taxes paid by the exempt firm¶s business or non-retail customers. These are sales by VAT-registered persons which are subject to 0% rate. properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. As earlier pointed out. at the point of the sale. A zero-rated sale by a VAT-registered person. activity or firm. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. is a tax on consumption of goods. or lessor to the buyer. but the tax burden. exemption only removes the VAT at the exempt stage. It is the final purchaser or consumer of such goods or services who. or certain transactions involving the same. the input tax on his purchases of goods. the amount of tax paid may be shifted or passed on by the seller to the buyer. a seller who is directly and legally liable for payment of an indirect tax. In contrast. thus. the transaction can have preferential treatment in the following ways: (a) VAT Exemption.. barter or exchange of the goods or properties). all VAT is removed from the zero-rated goods. in indirect taxation. shall not result in any output tax. such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. ultimately bears the burden of the tax Exemptions from VAT are granted by express provision of the Tax Code or special laws. What is transferred in such instances is not the liability for the tax. which primarily taxes an individual¶s ability to pay based on his income or net wealth. such as the VAT. However. services.SC . there is a need to distinguish between the liability for the tax and the burden of the tax.22 Under Zero-rating.20 This is a case wherein the VAT is removed at the exempt stage (i. transferee or lessee. In adding or including the VAT due to the selling price. Stated differently.DENIED VAT is an indirect tax. which is a taxable transaction for VAT purposes. Further.

. which basically exempts them from all national and local internal revenue taxes. is exempt from VAT. including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. it is exempt from VAT on all its sales and importations of goods and services. As an exempt VAT taxpayer. In fact. petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. if any. Contex¶s supplier may claim an Input VAT credit with no corresponding Output VAT liability. Rather.23 Apropos. 7227. Contex rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. 7227 is limited to the VAT on which it is directly liable as a seller and hence. the Contex¶s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep.It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax. on its purchases of raw materials and supplies. it cannot claim any refund or exemption for any input VAT it paid. the Contex is not the proper party to claim such VAT refund. As such. we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner¶s VAT exemption under Rep. Accordingly. it is the Contex¶s suppliers who are the proper parties to claim the tax credit and accordingly refund the Contex of the VAT erroneously passed on to the latter. no Output VAT may be passed on to the petitioner. While it is true that the Contex should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier. Act No. Act No. In fine. even if we are to assume that exemption from the burden of VAT on petitioner¶s purchases did exist. Contex is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR.24 On this point. it is not allowed any tax credit on VAT (input tax) previously paid. 1-95. Contex is registered as a NON-VAT taxpayer and thus. Since the transaction is deemed a zero-rated sale. Congruently.

INC.247. 150154. involves goods or services which. and by virtue of which its taxable transactions become exempt from VAT« . properties. An exempt transaction.128. are specifically listed in and expressly exempted from the VAT under the Tax Code. Sales of goods.94. August 9.761. To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund Toshiba.542. It alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT. is a person or entity granted VAT exemption under the Tax Code. CTA ordered CIR to refund.007 and P5.R. Respondent. Toshiba filed with (DOF) applications for tax credit/refund of its unutilized input VAT. to issue a tax credit certificate to Toshiba in the amount of P16.303. 2005 COMMISSIONER OF INTERNAL REVENUE. filed with the CTA a Petition for Review. vs. without regard to the tax status ± VAT-exempt or not ± of the party to the transaction« An exempt party. or a total of P18.44.118. a special law or an international agreement to which the Philippines is a signatory.8 respectively.G. by their nature. and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).). on the other hand. ISSUE: is Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services? YES SC An ECOZONE enterprise is a VAT-exempt entity. reporting input VAT in the amount of P13.. on the one hand.188. CA AFFIRMED. It would seem that CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities.045. or in the alternative. No. TOSHIBA INFORMATION EQUIPMENT (PHILS. Petitioners.94. Toshiba registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise and it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a withholding agent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996.

CIR. In zero-rated transactions.e. Sales of goods. 74-99. as a PEZA-registered enterprise. This cannot apply to transactions of Toshiba because although the transactions covered by special laws may be exempt from VAT. The VAT treatment of sales to it. properties. bases its argument on VAT-exempt transactions. the sellers cannot pass on any output VAT to the purchasers of goods. those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT. This Court agrees. however. is a VATexempt entity that could not have engaged in a VAT-taxable business. No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. that respondent Toshiba. 226. varies depending on whether the supplier from the Customs Territory is VAT-registered or not. and they may not claim tax credit/refund of the input VAT they had paid thereon. As a result. who is directly and legally liable for the VAT. sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. however. It . sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. this Court still believes. Zero-rating of export sales primarily intends to benefit the exporter (i. Meanwhile. Since such transactions are not subject to VAT. Since Toshiba opted to avail itself of the income tax holiday under Exec. they shall be subject to VAT at zero percent (0%). shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. and when the old rule was accepted and implemented by no less than the BIR itself. that PEZA-registered enterprises. that it is entitled to a credit/refund of its input VAT. which would necessarily be located within ECOZONES. Even conceding. while. as amended. then it was deemed subject to the ten percent (10%) VAT. and at the same time. The sale of capital goods by suppliers from the Customs Territory to Toshiba took place way before the issuance of RMC No. according to which. making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. the supplier from the Customs Territory). properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely.. or services. those falling under Presidential Decree No. 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. Order No. given the particular circumstances of the present case. the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise. 66 (EPZA) are not. If such sales are made by a VATregistered supplier. are VAT-exempt entities because ECOZONES are foreign territory. sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. The Philippine VAT system adheres to the Cross Border Doctrine. however. Hence.

a letter-protest objecting to the finding of deficiency VAT COMASERCO filed with the Court of Tax Appeals a petition for review contesting the Commissioner's assessment.851. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates. reimbursement-of-cost-only" basis. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION.R. this Court gives due respect to and adopts herein the CTA¶s findings that the suppliers of capital goods from the Customs Territory did pass on output VAT to Toshiba and the amount of input VAT which Toshiba could claim as credit/refund. Accordingly. It was not engaged in the business of providing services to Philamlife and its affiliates. vs. where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. COMASERCO was not engaged in business of providing services . COMASERCO averred that since it was not engaged in business. CA reversed. thus not engaged in business. In fact.00. 1988 indicated a net loss in its operations in the amount of P6.01. respondents. CA anchored its decision on the ratiocination in another tax case involving the same parties. thus. CTA favored CIR. petitioner. COMASERCO asserted that the services it rendered to Philamlife were on a "no-profit. BIR issued an assessment to COMASERCO for deficiency value-added tax (VAT) amounting to P351. COMASERCO's annual corporate income tax return ending December 31. 125355 March 30. it was not liable to pay VAT. for taxable year 1988. COMASERCO filed with the BIR. No.was very likely therefore that suppliers from the Customs Territory had passed on output VAT to Toshiba. G. COMASERCO stressed that it was not profit-motivated. it did not generate profit but suffered a net loss in taxable year 1988. 2000 COMMISSIONER OF INTERNAL REVENUE. incurred input VAT. and not in the sale of services.077. and the latter.

ISSUE: Is COMASERCO was engaged in the sale of services. research. for a fee or consideration. even a non-stock. The issue in CA-G. and on the performance of services. any income or profit generated by the entity in the conduct of its activities was subject to income tax. . VAT is a tax on the value added by the performance of the service. was subject to VAT on services rendered. which involves COMASERCO's liability for VAT. non-profit. without any intention of realizing profit. 34042. to "engage in business" and to "engage in the sale of services" are two different things. remuneration or consideration. In fact. declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes.R. No. VAT is a tax on transactions. is liable to pay VAT on the sale of goods or services. organization or government entity. No. exchange of goods or property. binds CIR. even in the absence of profit attributable thereto." It includes "the supply of technical advice. are subject to VAT. management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis.R. and thus liable to pay VAT? YES. barter. So COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services." BIR Ruling: a domestic corporation that provided technical. "sale of services" as the "performance of all kinds of services for others for a fee. industrial or commercial undertaking or project. It is immaterial whether profit is derived from rendering the service.to Philamlife and its affiliates. assistance or services rendered in connection with technical management or administration of any scientific. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profitoriented. imposed at every stage of the distribution process on the sale. There is no merit to COMARSERCO s contention that the Court of Appeals' decision in CA-G. The services rendered by COMASERCO to Philamlife and its affiliates. even if such corporation was organized without any intention realizing profit. 34042 is different from the present case.

as the transaction did not fall under the enumeration of transactions deemed sale. SC: Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments. the transaction fell within the classification of those "deemed sale" since the sale of the vessels together with the NMC shares brought about a change of ownership in NMC. While sale was an isolated transaction. the "change of ownership of business" must be a consequence of the "retirement from or cessation of business" by the owner of the goods. 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). The NDC decided to sell in one lot its NMC shares and five (5) of its ships.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. INC." and thus subject to VAT. if any. petitioner. not made in the course of NDC s regular trade or business. The CTA ruled that the sale of a vessel was an "isolated transaction. holding that the sale of the vessels was subject to the 10% VAT. CA reversed at first. shall be for the account of the PURCHASER.15 It is the end user of consumer goods or services which ultimately shoulders the tax. the sale of the vessels could not be "deemed sale." not done in the ordinary course of NDC s business.. VAT is ultimately a tax on consumption. MAGSAYSAY LINES. BALIWAG NAVIGATION. respondents. CA reconsidered. 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. vs. INC. NDC decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). 5-87 are ultimately irrelevant. The VAT system .R. and was thus not subject to VAT. 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. 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.. BIR. contract stipulated that "[v]alue-added tax. The NMC shares and the vessels were offered for public bidding. followed by a Supplemental Petition for Review.COMMISSIONER OF INTERNAL REVENUE. No. Magsaysay Lines) offered to buy the shares and the vessels. The ruling cited the fact that NDC was a VAT-registered enterprise. FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY. tangible objects which are appropriable or transferable are subject to the 10% [VAT] MAGLINES filed an Appeal and Petition for Refund with the CTA. and the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R. even though it is assessed on many levels of transactions on the basis of a fixed percentage.

COURT OF TAX APPEALS. as affirmed by Section 99 of the Tax Code and its subsequent incarnations.933. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. if at all. As the sales of goods or services do not occur within the course of trade or business.00 as gross receipts tax on its income from interests on loan investments.354.82 from the P12. 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. petitioner. COURT OF APPEALS. CBC paid P12. respondents. in the course of trade or business. "Course of business" is what is usually done in the management of trade or business. [G.933. but all the time. Its assessment bears direct relevance to the taxpayer¶s role or link in the production chain. In a case. services. barter or exchange of goods or services not in the course of trade or business is not subject to VAT. Yet VAT is not a singular-minded tax on every transactional level. commissions. June 10. 2003] CHINA BANKING CORPORATION. Hence.assures fiscal adequacy through the collection of taxes on every level of consumption.623. but means conducting. 146749. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. foreign exchange profits and other operating earnings during the second quarter of 1994. vs. barter or exchange of goods or services by persons who engage in such activities. while "doing business" conveys the idea of business being done.19 the tax is levied only on the sale. "carrying on business" does not mean the performance of a single disconnected act.354.18 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. "course of business" or "doing business" connotes regularity of activity.140.00 gross receipts tax that CBC paid. the providers of such goods or services would hardly. NDC s sale was an isolated transaction. These transactions outside the course of trade or business may invariably contribute to the production chain.R. CTA ruled that the 20% final withholding tax on a bank s passive interest income does not form part of its taxable gross receipts. Any sale. and COMMISSIONER OF INTERNAL REVENUE. So CBC filed with CIR a formal claim for tax refund or credit of P1. collection charges. not from time to time. No. but they do so only as a matter of accident or incident. CBC also . prosecuting and continuing business by performing progressively all the acts normally incident thereof.

unless the law itself makes an exception. CA affirmed. should no longer form part of its gross receipts for the purpose of computing the GRT.623. if deductions are made from gross receipts. then the amount of the creditable withholding tax should also be excluded from taxable gross receipts. issues: Whether the 20% final withholding tax on interest income should form part of CBC¶s gross receipts in computing the gross receipts tax on banks. to net receipts. CBC argued that it was not liable for the gross receipts tax . the term gross receipts means all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer. CIR argued that the final withholding tax on a bank¶s interest income forms part of its gross receipts in computing the gross receipts tax. Deducting any amount from the gross receipts changes the result. CBC s argument will create tax exemptions where none exist. By its nature. The term gross receipts means the entire income or receipt.amounting to P1. CTA granted CBC a partial refund of P123. was devised to maintain simplicity in tax collection and to assure a steady source of state revenue even during periods of economic slowdown. This is the same treatment given to the bank s interest income that is subject to the final withholding tax.filed a petition for review with the CTA.778.on the sums withheld by the Bangko Sentral ng Pilipinas as final withholding tax on CBC s passive interest income. The final tax. term gross receipts means the entire receipts without any deduction. and the meaning.82 . exemptions or exclusions complicate the tax system and lessen the tax collection. If the amount of the final withholding tax is excluded from taxable gross receipts. it will be considered as net receipts. Such a policy frowns upon erosion of the tax base.140. Citing Asian Bank.73 since the evidence of CBC was sufficient only to support the payment of the gross receipts tax on its medium term investments. Deductions. The gross receipts tax. YES SC: the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBC s gross receipts in computing the gross receipts tax on banks. CTA ruled in favor of CBC and held that the 20% final withholding tax on interest income does not form part of CBC s taxable gross receipts. otherwise. Section 121 expressly states that dividends shall form part of the bank s gross receipts for purposes of the gross receipts tax on banks. a gross receipts . without any deduction. For that matter. any withholding tax should be excluded from taxable gross receipts because such withholding would qualify as earmarking by regulation. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts. not having been received by CBC but instead went to the coffers of the government. gross receipts should be interpreted as the whole amount received as interests without deductions. as opposed to the income tax.

What is being taxed is still the interest income. being originally owned by CBC as part of its interest income. he can transfer its ownership to the government in payment of his tax liability. Consequently. The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. then that amount manifestly forms part of the taxpayer¶s gross receipts. but on the amount of the interest income withheld as the final tax. should form part of its taxable gross receipts. the entire amount of the interest income is taxable and not only the net interest income. Since the amount of the tax withheld constitutes income earned by the taxpayer. unless the law clearly provides otherwise. The government subsequently becomes the owner of the money constituting the final tax when CBC pays the final withholding tax to extinguish its obligation to the government. exemption or exclusion. The gross receipts tax falls not on the final withholding tax. Thus. This is the consideration for the transfer of ownership of the money from CBC to the government.tax applies to the entire receipts without any deduction. . CBC owns the interest income which is the source of payment of the final withholding tax. the amount constituting the final tax. Because the amount withheld belongs to the taxpayer. The law imposes the gross receipts tax on that portion of the interest income that the depository bank withholds and remits to the government.