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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 forP168,000,000.00. The bid was made by Magsaysay
Lines, purportedly for a new company still to be formed composed of itself,
Baliwag 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
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 CIRs 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 NDCs 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 NDCs 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 2001.13This 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.

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 taxpayers role or link in the production chain. Hence,
as affirmed by Section 99 of the Tax Code and its subsequent incarnations,19the 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 CTAs 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 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.

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.

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.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE
TECHNOLOGY (PHILIPPINES), respondent.

DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic


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

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,


seeking to set aside the May 27, 2002 Decision [2] of the Court of Appeals (CA) in
CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

WHEREFORE, foregoing premises considered, the petition for review


is DENIED for lack of merit.[3]

The Facts

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

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

1. [Respondent] is a resident foreign corporation duly registered with the


Securities and Exchange Commission to do business in the Philippines,
with principal office address at the new Cebu Township One, Special
Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed
and empowered to perform the duties of his office, including, among
others, the duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority
(PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to engage in the manufacture of
recording components primarily used in computers for export. Such
registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced
by VAT Registration Certification No. 97-083-000600-V issued on 2
April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed
by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for Review),
was filed on 4 October 1999 with Revenue District Office No. 83,
Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on
[respondents] claim for VAT refund.

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

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

1. [Respondents] alleged claim for tax refund/credit is subject to


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

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

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount ofP12,122,922.66. This sum represented the unutilized but substantiated
input VAT paid on capital goods purchased for the period covering April 1, 1998 to
June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential Decree
No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the
income tax holiday in lieu of the 5 percent preferential tax on gross income
earned. As a VAT-registered entity, though, it was still subject to the payment of
other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on
the capital goods it purchased, respondent correctly filed the administrative and
judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT
invoices or official receipts, and were not yet offset against any output VAT
liability.
Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit


Certificate in the amount of P12,122,922.66 representing alleged unutilized input
VAT paid on capital goods purchased for the period April 1, 1998 to June 30,
1999.[6]

The Courts Ruling

The Petition is unmeritorious.

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

No doubt, as a PEZA-registered enterprise within a special economic zone,


[7]
respondent is entitled to the fiscal incentives and benefits [8] provided for in either
PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges, benefits, advantages
or exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the


contrary, respondent shall not be subject to internal revenue laws and regulations
for raw materials, supplies, articles, equipment, machineries, spare parts and wares,
except those prohibited by law, brought into the zone to be stored, broken up,
repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.
[13]
Even so, respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption from
export taxes, local taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations
applies if EO 226[15] is chosen. Under this law, respondent shall further be entitled
to an income tax holiday; additional deduction for labor expense; simplification of
customs procedure; unrestricted use of consigned equipment; access to a bonded
manufacturing warehouse system; privileges for foreign nationals employed; tax
credits on domestic capital equipment, as well as for taxes and duties on raw
materials; and exemption from contractors taxes, wharfage dues, taxes and duties
on imported capital equipment and spare parts, export taxes, duties, imposts and
fees,[16] local taxes and licenses, and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and
duty-free importation of raw materials, capital and equipment [18] -- is, ipso facto,
also accorded to the zone[19] under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends[20] to that zone the provision stating that no local or national taxes shall be
imposed therein.[21] No exchange control policy shall be applied; and free markets
for foreign exchange, gold, securities and future shall be allowed and maintained.
[22]
Banking and finance shall also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also enjoys
preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys
preferential tax treatment.[27] It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered
person,[28] however, is entitled to their credits.

Nature of the VAT and


the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to
10 percent levied on every importation of goods, whether or not in the course of
trade or business, or imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade or business [29] as
they pass along the production and distribution chain, the tax being limited only to
the value added[30] to such goods, properties or services by the seller, transferor or
lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. [32] As such, it should be
understood not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on consumption. [33]
In either case, though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit method.
[35]
Such method adopted the mechanics and self-enforcement features of the VAT as
first implemented and practiced in Europe and subsequently adopted in New
Zealand and Canada.[36] Under the present method that relies on invoices, an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT
paid on its purchases, inputs and imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are
equal to the input taxes[40] passed on by the suppliers, no payment is required. It is
when the output taxes exceed the input taxes that the excess has to be paid. [41] If,
however, the input taxes exceed the output taxes, the excess shall be carried over to
the succeeding quarter or quarters.[42] Should the input taxes result from zero-rated
or effectively zero-rated transactions or from the acquisition of capital goods, [43]any
excess over the output taxes shall instead be refunded [44] to the taxpayer or
credited[45] against other internal revenue taxes.[46]

Zero-Rated and Effectively


Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ
from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.[47] The tax rate is set at zero. [48] When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax,[49] but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or
supply of services[51] to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
such transactions to a zero rate. [52] Again, as applied to the tax base, such rate does
not yield any tax chargeable against the purchaser. The seller who charges zero
output tax on such transactions can also claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.

Zero Rating and


Exemption

In terms of the VAT computation, zero rating and exemption are the same, but
the extent of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic
zero rating[54] is primarily intended to be enjoyed by the seller who is directly and
legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export sales.
[55]
Effective zero rating, on the contrary, is intended to benefit the purchaser who,
not being directly and legally liable for the payment of the VAT, will ultimately
bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the
burden of the tax.[56] But in an exemption there is only partial relief,[57] because the
purchaser is not allowed any tax refund of or credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by
their nature, are specifically listed in and expressly exempted from the VAT under
the Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party
to the transaction.[60] Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to
which the Philippines is a signatory, and by virtue of which its taxable transactions
become exempt from the VAT.[61] Such party is also not subject to the VAT, but may
be allowed a tax refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which
may be shifted or passed on by the seller to the purchaser of the goods, properties
or services.[62] While the liability is imposed on one person, the burden may be
passed on to another. Therefore, if a special law merely exempts a party as a seller
from its direct liability for payment of the VAT, but does not relieve the same party
as a purchaser from its indirect burden of the VAT shifted to it by its VAT-
registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered into by respondent are
not VAT-exempt.
Special laws may certainly exempt transactions from the VAT. [63] However, the
Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor
of RA 7916 -- the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are
subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard
rate of 10 percent,[64] depending again on the application of the destination
principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a
foreign country -- for use or consumption outside the Philippines, these shall be
subject to 0 percent.[66] If entered into with a purchaser for use or consumption in
the Philippines, then these shall be subject to 10 percent, [67] unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall also be zero-
rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be
applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects
such transactions to a zero rate,[68] because the ecozone within which it is registered
is managed and operated by the PEZA as a separate customs territory.[69] This
means that in such zone is created the legal fiction of foreign territory. [70] Under
the cross-border principle[71] of the VAT system being enforced by the Bureau of
Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a foreign
country are free of the VAT, [73] then the same rule holds for such exports from the
national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-
registered entity are considered exports to a foreign country; conversely, sales by a
PEZA-registered entity to a VAT-registered person in the customs territory are
deemed imports from a foreign country.[74] An ecozone -- indubitably a
geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.[75] This legal fiction is necessary to give meaningful effect to the policies of
the special law creating the zone.[76] If respondent is located in an export processing
zone[77] within that ecozone, sales to the export processing zone, even without
being actually exported, shall in fact be viewed as constructively exported under
EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent
would indeed be subject to a zero rate.[80]

Tax Exemptions
Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is


exempt from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very
nature of the VAT as a tax on consumption, for which the direct liability is imposed
on one person but the indirect burden is passed on to another. Respondent, as an
exempt entity, can neither be directly charged for the VAT on its sales nor
indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law
does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following
reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on
business establishments operating within the ecozone.[81] Since this law does not
exclude the VAT from the prohibition, it is deemed included. Exceptio firmat
regulam in casibus non exceptis. An exception confirms the rule in cases not
excepted; that is, a thing not being excepted must be regarded as coming within the
purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the same
entity -- a patent circumvention of the law. That no VAT shall be imposed directly
upon business establishments operating within the ecozone under RA 7916 also
means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited
directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition
applied, except for real property taxes that presently are imposed on land owned by
developers.[82] This similar and repeated prohibition is an unambiguous ratification
of the laws intent in not imposing local or national taxes on business enterprises
within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the
like shall not be subject to x x x internal revenue laws and regulations under PD
66[83] -- the original charter of PEZA (then EPZA) that was later amended by RA
7916.[84] No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the
reduced tax collection ultimately redounds to the benefit of the national economy
by enticing more business investments and creating more employment
opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x [86] if brought to the ecozones
restricted area[87] for manufacturing by registered export enterprises, [88] of which
respondent is one. These rules also apply to all enterprises registered with the
EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national internal
revenue taxes on imported capital equipment reasonably needed and exclusively
used for the manufacture of their products;[91] on required supplies and spare part
for consigned equipment;[92] and on foreign and domestic merchandise, raw
materials, equipment and the like -- except those prohibited by law -- brought into
the zone for manufacturing.[93] In addition, they are given credits for the value of
the national internal revenue taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the manufacture of their products,[94] as
well as for the value of such taxes imposed on domestic raw materials and supplies
that are used in the manufacture of their export products and that form part thereof.
[95]
Sixth, the exemption from local and national taxes granted under RA
7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials
primarily used in the production of export goods, [99] and for locally produced raw
materials, capital equipment and spare parts used by exporters of non-traditional
products[100] -- shall also be continuously enjoyed by similar exporters within the
ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.

Tax Refund as
Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi


juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions. [105] Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of their
claims;[106]and of showing, by words too plain to be mistaken, that the legislature
intended to exempt them.[107] In the present case, all the cited legal provisions are
teeming with life with respect to the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the VAT.
The non-taxability of transactions that are otherwise taxable is merely a necessary
incident to the tax exemption conferred by law upon it as an entity, not upon the
transactions themselves.[108] Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following
considerations:
First, the contemporaneous construction of our tax laws by BIR authorities
who are called upon to execute or administer such laws [109] will have to be
adopted. Their prior tax issuances have held inconsistent positions brought about
by their probable failure to comprehend and fully appreciate the nature of the VAT
as a tax on consumption and the application of the destination principle.
[110]
Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and
correctly provides that any VAT-registered suppliers sale of goods, property or
services from the customs territory to any registered enterprise operating in the
ecozone -- regardless of the class or type of the latters PEZA registration -- is
legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well
as the establishment of export processing zones, seeks to encourage and promote
foreign commerce as a means of x x x strengthening our export trade and foreign
exchange position, of hastening industrialization, of reducing domestic
unemployment, and of accelerating the development of the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and
integrating the special economic zones, the government shall actively encourage,
promote, induce and accelerate a sound and balanced industrial, economic and
social development of the country x x x through the establishment, among others,
of special economic zones x x x that shall effectively attract legitimate and
productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry
x x x which shall x x x meet the tests of international competitiveness[,] accelerate
development of less developed regions of the country[,] and result in increased
volume and value of exports for the economy.[114] Fiscal incentives that are cost-
efficient and simple to administer shall be devised and extended to significant
projects to compensate for market imperfections, to reward performance
contributing to economic development,[115] and to stimulate the establishment and
assist initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments
policy -- spelled out earlier in RA 7227 -- of converting into alternative productive
uses[118] the former military reservations and their extensions, [119] as well as of
providing them incentives[120] to enhance the benefits that would be derived from
them[121] in promoting economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export
development into a national effort[123] in order to win international markets. By
providing many export and tax incentives,[124] the State is able to drive home the
point that exporting is indeed the key to national survival and the means through
which the economic goals of increased employment and enhanced incomes can
most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x
x increase economic activity; and x x x create a robust environment for business to
enable firms to compete better in the regional as well as the global
market.[126] After all, international competitiveness requires economic and tax
incentives to lower the cost of goods produced for export. State actions that affect
global competition need to be specific and selective in the pricing of particular
goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and adopting
measures to help make these competitive.[129] Tax credits for domestic inputs
strengthen backward linkages. Rightly so, the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable
economic development.[130]

VAT Registration, Not Application


for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law. [131] Petitioner


alleges that respondent did register for VAT purposes with the appropriate Revenue
District Office. However, it is now too late in the day for petitioner to challenge
the VAT-registered status of respondent, given the latters prior representation
before the lower courts and the mode of appeal taken by petitioner before this
Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in
exempting from internal revenue laws and regulations the equipment -- including
capital goods -- that registered enterprises will use, directly or indirectly, in
manufacturing.[132] EO 226 even reiterates this privilege among the incentives it
gives to such enterprises.[133] Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently,
the capital goods and services respondent has purchased are not considered used in
the VAT business, and no VAT refund or credit is due.[134] This is a non sequitur. By
the VATs very nature as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having
failed to present evidence to support its contentions against the income tax
holidayprivilege of respondent,[135] petitioner is deemed to have conceded. It is a
cardinal rule that issues and arguments not adequately and seriously brought
below cannot be raised for the first time on appeal.[136] This is a matter of
procedure[137] and a question of fairness.[138] Failure to assert within a
reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for
effective zero rating[140] cannot prevail over the clear VAT nature of respondents
transactions. The scope of such regulations is not within the statutory authority x
x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the
law; the former cannot purport to do any more than interpret the latter. [142] The
courts will not countenance one that overrides the statute it seeks to apply and
implement.[143]
Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayers transactions to be considered effectively
zero-rated. An effectively zero-rated transaction does not and cannot become
exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to
those officials or agents who, without fluid consideration, are bent on denying a
valid application. Moreover, the State can never be estopped by the omissions,
mistakes or errors of its officials or agents.[144]
Second, grantia argumenti that such an application is required by law, there is
still the presumption of regularity in the performance of official duty.
[145]
Respondents registration carries with it the presumption that, in the absence of
contradictory evidence, an application for effective zero rating was also filed and
approval thereof given. Besides, it is also presumed that the law has been
obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we
have tackled exempt respondent not only from internal revenue laws but also from
theregulations issued pursuant thereto. Leniency in the implementation of the VAT
in ecozones is an imperative, precisely to spur economic growth in the country and
attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,[147] is sufficient for the effective zero rating of the transactions of a
taxpayer. The nature of its business and transactions can easily be perused from, as
already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its
mere failure to apply for their effective zero rating. Otherwise, their VAT
exemption would be determined, not by their nature, but by the taxpayers
negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.
Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero


VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the
fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for the
income tax holiday regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under
the PEZA law,[148] for EO 226[149] also has provisions to contend with. These two
regimes are in fact incompatible and cannot be availed of simultaneously by the
same entity. While EO 226 merely exempts it from income taxes, the PEZA law
exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only
from the payment of income tax for a certain number of years, depending on its
registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the
aforesaid 5 percent of gross income earned in lieu of local and national taxes
imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously
collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax
regime in RA 7916, Section 24 thereof does not preclude the VAT. One can,
therefore, counterargue that such provision merely exempts respondent from taxes
imposed on business. To repeat, the VAT is a tax imposed on consumption, not on
business. Although respondent as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in excess of the zero rate that is
imposable may certainly be refunded or credited.

Compliance with All Requisites


for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the
present case from Contex, in which this Court held that the petitioner therein was
registered as a non-VAT taxpayer.[151] Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes.
Although enterprises registered with the BOI after December 31, 1994 would no
longer enjoy the tax credit incentives on domestic capital equipment -- as provided
for under Article 39(d), Title III, Book I of EO 226 [152] -- starting January 1, 1996,
respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax
credits. This fact was revealed by the sponsorship speeches in Congress during the
second reading of House Bill No. 14295, which later became RA 7916, as shown
below:

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

xxx xxx xxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and


creating an environment conducive for investors, the bill offers incentives such as
the exemption from local and national taxes, x x x tax credits for locally sourced
inputs x x x.[153]

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

Summary

To summarize, special laws expressly grant preferential tax treatment to


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

CONTEX CORPORATION, petitioner,


vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in
CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated October
13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the
Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to
issue a tax credit certificate for said amount. Petitioner also assails the appellate
courts Resolution,3 dated December 19, 2001, denying the motion for
reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing


hospital textiles and garments and other hospital supplies for export. Petitioners
place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered
with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No.
7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a
non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-
000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies
and materials necessary in the conduct of its manufacturing business. The suppliers
of these goods shifted unto petitioner the 10% VAT on the purchased items, which
led the petitioner to pay input taxes in the amounts of P539,411.88
and P504,057.49 for 1997 and 1998, respectively.6

Acting on the belief that it was exempt from all national and local taxes, including
VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax
refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer
of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax
refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of
BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax
credit certificate in the amount of P1,108,307.72, representing erroneously paid
input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner
then elevated the matter to the Court of Tax Appeals, in a petition for review
docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)7 if read in
relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as
amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply
the rule that claims for refund are strictly construed against the taxpayer. Since
petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 20410 and
22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or
in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of
Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)
(2)(a) and 112(A) of the Tax Code. The tax court stressed that these provisions
apply only to those entities registered as VAT taxpayers whose sales are zero-rated.
Petitioner does not fall under this category, since it is a non-VAT taxpayer as
evidenced by the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport
Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the
CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of
input VAT on its purchases of supplies and materials. It pointed out that under
Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations
of the Bases Conversion and Development Act of 1992, all that petitioner is
required to pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to
June 29, 1997 for being barred by the two-year prescriptive period under Section
229 of the Tax Code. The tax court also limited the refund only to the input VAT
paid by the petitioner on the supplies and materials directly used by the petitioner
in the manufacture of its goods. It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the petitioners Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for
review of the CTA decision by the Court of Appeals. Respondent maintained that
the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct
taxes and not to indirect taxes such as the input component of the VAT. The
Commissioner pointed out that from its very nature, the value-added tax is a
burden passed on by a VAT registered person to the end users; hence, the direct
liability for the tax lies with the suppliers and not Contex.

Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No.
62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED AND SET ASIDE. Contexs claim for refund of erroneously
paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties
and taxes on the importation of raw materials, capital, and equipment of SBFZ-
registered enterprises under Rep. Act No. 7227 and its implementing rules covers
only "the VAT imposable under Section 107 of the [Tax Code], which is a direct
liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs
of the goods."14 This was because the exemption granted by Rep. Act No. 7227
relates to the act of importation and Section 10715 of the Tax Code specifically
imposes the VAT on importations. The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No. 7227, the exemption
of SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable. It then stated that
apparently, the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered enterprise may be liable
for and only in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but
the motion was denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND


NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC
ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY


HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR
REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND
RAW MATERIALS FOR THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1) the correctness of
the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act
No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the
petitioner to a tax refund on its purchases of supplies and raw materials for 1997
and 1998.

On the first issue, petitioner argues that the appellate courts restrictive
interpretation of petitioners VAT exemption as limited to those covered by Section
107 of the Tax Code is erroneous and devoid of legal basis. It contends that the
provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local
and national taxes shall be imposed upon SBFZ-registered firms and hence, said
law should govern the case. Petitioner calls our attention to regulations issued by
both the SBMA and BIR clearly and categorically providing that the tax exemption
provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT
on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227
does grant tax exemptions, such grant is not all-encompassing but is limited only to
those taxes for which a SBFZ-registered business may be directly liable. Hence,
SBFZ locators are not relieved from the indirect taxes that may be shifted to them
by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the
amount of tax paid on the goods, properties or services bought, transferred, or
leased may be shifted or passed on by the seller, transferor, or lessor to the buyer,
transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily
taxes an individuals ability to pay based on his income or net wealth, an indirect
tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of
consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for
the tax and the burden of the tax. As earlier pointed out, the amount of tax paid
may be shifted or passed on by the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax burden. In adding or including
the VAT due to the selling price, the seller remains the person primarily and legally
liable for the payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.18 Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as the
VAT on goods or services is not necessarily the person who ultimately bears the
burden of the same tax. It is the final purchaser or consumer of such goods or
services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special
laws. Under VAT, the transaction can have preferential treatment in the following
ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties
and/or services and the use or lease of properties is not subject to VAT
(output tax) and the seller is not allowed any tax credit on VAT (input tax)
previously paid.20 This is a case wherein the VAT is removed at the exempt
stage (i.e., at the point of the sale, barter or exchange of the goods or
properties).

The person making the exempt sale of goods, properties or services shall not
bill any output tax to his customers because the said transaction is not
subject to VAT. On the other hand, a VAT-registered purchaser of VAT-
exempt goods/properties or services which are exempt from VAT is not
entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are
subject to 0% rate, meaning the tax burden is not passed on to the purchaser.
A zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output tax. However, the input tax
on his purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with these
regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm.
In contrast, exemption only removes the VAT at the exempt stage, and it will
actually increase, rather than reduce the total taxes paid by the exempt firms
business or non-retail customers. It is for this reason that a sharp distinction must
be made between zero-rating and exemption in designating a value-added tax.23

Apropos, the petitioners claim to VAT exemption in the instant case for its
purchases of supplies and raw materials is founded mainly on Section 12 (b) and
(c) of Rep. Act No. 7227, which basically exempts them from all national and local
internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue
Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is
not controverted by the respondent. In fact, petitioner is registered as a NON-VAT
taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt
from VAT on all its sales and importations of goods and services.

Petitioners claim, however, for exemption from VAT for its purchases of supplies
and raw materials is incongruous with its claim that it is VAT-Exempt, for only
VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on
the Input VAT erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the
part of the supplier, the petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the


"Consolidated Value-Added Tax Regulations" provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person,


which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or
refund in accordance with these regulations.

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

(a) Export Sales

"Export Sales" shall mean

...

(5) Those considered export sales under Articles 23 and 77 of


Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act
No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

...
(c) Sales to persons or entities whose exemption under special laws, e.g.
R.A. No. 7227 duly registered and accredited enterprises with Subic Bay
Metropolitan Authority (SBMA) and Clark Development Authority (CDA),
R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or
international agreements, e.g. Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc. to which the Philippines is
a signatory effectively subject such sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioners supplier may claim
an Input VAT credit with no corresponding Output VAT liability. Congruently, no
Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt
VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid.
In fine, even if we are to assume that exemption from the burden of VAT on
petitioners purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioners suppliers who are the proper parties to claim the tax
credit and accordingly refund the petitioner of the VAT erroneously passed on to
the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error
of law in holding that petitioners VAT exemption under Rep. Act No. 7227 is
limited to the VAT on which it is directly liable as a seller and hence, it cannot
claim any refund or exemption for any input VAT it paid, if any, on its purchases of
raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated
September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as
its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to
costs.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. COURT OF
APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, Respondents.

DECISION

PARDO, J.:

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

Commonwealth Management and Services Corporation (COMASERCO, for


brevity), is a corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the latter to perform collection, consultative and other
technical services, including functioning as an internal auditor, of Philamlife and
its other affiliates.

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

"Taxable sale/receipt P1,679,155.00

===========

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63


Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01" 3

===========

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

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting
to the latters finding of deficiency VAT. On August 20, 1992, the Commissioner of
Internal Revenue sent a collection letter to COMASERCO demanding payment of
the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a
petition for review contesting the Commissioners assessment. COMASERCO
asserted that the services it rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical assistance, including functioning as an
internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged in the business of providing services to Philamlife
and its affiliates. COMASERCO was established to ensure operational orderliness
and administrative efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not engaged
in business. In fact, it did not generate profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was not engaged in business, it was not
liable to pay VAT.chanroblesvirtuallawlibrary

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

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


petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with
slight modifications. Accordingly, petitioner is ordered to pay respondent
Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the
25% surcharge and interest plus 20% interest from January 24, 1992 until fully
paid pursuant to Section 248 and 249 of the Tax Code.
"The compromise penalty of P16,000.00 imposed by the respondent in her
assessment letter shall not be included in the payment as there was no compromise
agreement entered into between petitioner and respondent with respect to the
value-added tax deficiency." 5

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

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

"WHEREFORE, in view of the foregoing, judgment is hereby rendered


REVERSING and SETTING ASIDE the questioned Decision promulgated on 22
June 1995. The assessment for deficiency value-added tax for the taxable year
1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis." 6

The Court of Appeals anchored its decision on the ratiocination in another tax case
involving the same parties, 7 where it was held that COMASERCO was not liable
to pay fixed and contractors tax for services rendered to Philamlife and its
affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was not
engaged in business of providing services to Philamlife and its affiliates. In the
same manner, the Court of Appeals held that COMASERCO was not liable to pay
VAT for it was not engaged in the business of selling services.

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

On August 7, 1996, we required respondent COMASERCO to file comment on the


petition, and on September 26, 1996, COMASERCO complied with the resolution.
8

We give due course to the petition.

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

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

We agree with the Commissioner.

Section 99 of the National Internal Revenue Code of 1986, as amended by


Executive Order (E.O.) No. 273 in 1988, provides that:jgc:chanrobles.com.ph

"SECTION 99. Persons liable. Any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 100 to 102 of this Code." 9

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

We disagree.

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

"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 and 108 of this Code.

"The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
This rule shall likewise apply to existing sale or lease of goods, properties or
services at the time of the effectivity of Republic Act No. 7716.
"The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members of their guests), or government
entity.

"The rule of regularity, to the contrary notwithstanding, services as defined in this


Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business."cralaw virtua1aw
library

Contrary to COMASERCOs contention the above provision clarifies that even a


non-stock, non-profit organization or government entity, is liable to pay VAT on the
sale of goods or services. VAT is a tax on transactions, imposed at every stage of
the distribution process on the sale, barter, exchange of goods or property, and on
the performance of services, even in the absence of profit attributable thereto. The
term "in the course of trade or business" requires the regular conduct or pursuit of a
commercial or an economic activity, regardless of whether or not the entity is
profit-oriented.

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

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

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling


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

Hence, it is immaterial whether the primary purpose of a corporation indicates that


it receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for
VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.

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

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

There is no merit to respondents contention that the Court of Appeals decision in


CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and
not liable for the payment of fixed and percentage taxes, binds petitioner. The issue
in CA-G.R. No. 34042 is different from the present case, which involves
COMASERCOs liability for VAT. As heretofore stated, every person who sells,
barters, or exchanges goods and services, in the course of trade or business, as
defined by law, is subject to VAT.chanrobles virtual lawlibrary
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of
the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES
the decision of the Court of Tax Appeals in C.T.A. Case No. 4853.

No costs.

SO ORDERED.

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on
10 March 2010 as well as the Resolution3promulgated on 28 July 2010 by the
Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En
Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First
Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division denied
Mindanao II Geothermal Partnerships (Mindanao II) claims for refund or tax
credit for the first and second quarters of taxable year 2003 for being filed out of
time (CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered
the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II
unutilized input value-added tax (VAT) for the third and fourth quarters of taxable
year 2003 (CTA Case No. 7317).

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

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

G.R. No. 193301


Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227,
7287, and 7317, which were consolidated as CTA EB No. 513. CTA Case Nos.
7227, 7287, and 7317 claim a tax refund or credit of Mindanao IIs alleged excess
or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit ofP3,160,984.69 for the first quarter of
2003. In CTA Case No. 7287, Mindanao II claims a tax refund or credit
ofP1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao
II claims a tax refund or credit ofP3,521,129.50 for the third and fourth quarters of
2003.

The CTA First Divisions narration of the pertinent facts is as follows:


xxxx

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

xxxx

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

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

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

CTA Case No. Period Date of Filing


Covered
Original Amended
(2003)
Return Return
7227 1st Quarter April 23, 2003 July 3, 2002
(sic),
April 1, 2004 &
October 22,
2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204

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

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

The Court of Tax Appeals Ruling: Division

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

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

2. That input taxes were incurred or paid;

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

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

5. That the claim for refund was filed within the two-year prescriptive
period.13
With respect to the fifth requirement, the CTA First Division tabulated the dates of
filing of Mindanao IIs return as well as its administrative and judicial claims, and
concluded that Mindanao IIs administrative and judicial claims were timely filed
in compliance with this Courts ruling in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue (Atlas).14 The
CTA First Division declared that the two-year prescriptive period for filing a VAT
refund claim should not be counted from the close of the quarter but from the date
of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.

CTA Period Date Filing


Case Covered
Original Amended Administrative Judicial
No. (2003)
Return Return Return Claim
7227 1st 23 April 1 April 13 April 2005 22 April
Quarter 2003 2004 2005
7287 2nd 22 July 1 April 13 April 2005 7 July
Quarter 2003 2004 2005
7317 3rd 25 Oct. 1 April 13 April 2005 9 Sept.
Quarter 2003 2004 2005
7317 4th 26 Jan. 1 April 13 April 2005 9 Sept.
Quarter 2004 2004 200515

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

The CTA First Division found that Mindanao II is entitled to a refund in the
modified amount of P7,703,957.79, after disallowing P522,059.91 from input
VAT16 and deducting P18,181.82 from Mindanao IIs sale of a fully
depreciatedP200,000.00 Nissan Patrol. The input taxes amounting to P522,059.91
were disallowed for failure to meet invoicing requirements, while the input VAT on
the sale of the Nissan Patrol was reduced by P18,181.82 because the output VAT
for the sale was not included in the VAT declarations.

The dispositive portion of the CTA First Divisions 22 September 2008 Decision
reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN
HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND
79/100 PESOS (P7,703,957.79) representing its unutilized input VAT for the four
(4) quarters of the taxable year 2003.

SO ORDERED.17

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

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

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

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

The CTA First Division modified its 22 September 2008 Decision to read as
follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified
amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (P2,980,887.77) representing
its unutilized input VAT for the third and fourth quarters of the taxable year 2003.

SO ORDERED.21

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

The Court of Tax Appeals Ruling: En Banc

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

The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for


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

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit
Mindanao IIs Motion for Reconsideration.26 The CTA En Banc highlighted the
following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of
unutilized input VAT must be filed within two (2) years after the close of the
taxable quarter when such sales were made.

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

3. The words of the law are clear, plain, and free from ambiguity; hence, it
must be given its literal meaning and applied without any interpretation.27

G.R. No. 194637


Mindanao I v. CIR

The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case
Nos. 476 and 483. Both CTA EB cases consolidate three cases from the CTA
Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228,
7286, and 7318 claim a tax refund or credit of Mindanao Is accumulated
unutilized and/or excess input taxes due to VAT zero-rated sales. In CTA Case No.
7228, Mindanao I claims a tax refund or credit of P3,893,566.14 for the first
quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit
of P2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao
I claims a tax refund or credit of P7,940,727.83 for the third and fourth quarters of
2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions


narration of the pertinent facts is as follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer


(BOT) with the Philippine National Oil Corporation Energy Development
Corporation (PNOC-EDC) for the finance, design, construction, testing,
commissioning, operation, maintenance and repair of a 47-megawatt geothermal
power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver
steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into
electric capacity and energy for PNOC-EDC and shall subsequently supply and
deliver the same to the National Power Corporation (NPC), for and in behalf of
PNOC-EDC.
Mindanao Is 47-megawatt geothermal power plant project has been accredited by
the Department of Energy (DOE) as a Private Sector Generation Facility, pursuant
to the provision of Executive Order No. 215, wherein Certificate of Accreditation
No. 95-037 was issued.

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

xxxx

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

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

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for
the issuance of tax credit certificate on its alleged unutilized or excess input taxes
for taxable year 2003, in the accumulated amount of P14,185, 294.80.

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

The Court of Tax Appeals Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA
Case Nos. 7228, 7286, and 7318. The CTA Second Division found that (1)
pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount of
substantiated excess input VAT because a portion was not reported in its quarterly
VAT returns; (2) out of theP14,185,294.80 excess input VAT applied for refund,
only P11,657,447.14 can be considered substantiated excess input VAT due to
disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second Divisions further verification, and additional
disallowances per the CTA Second Divisions further verification;

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

The dispositive portion of the CTA Second Divisions 24 October 2008 Decision
reads:

WHEREFORE, premises considered, the consolidated Petitions for Review are


hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO
ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND
ONE HUNDRED SEVENTY SEVEN PESOS AND 53/100 (P10,523,177.53)
representing Mindanao Is unutilized input VAT for the four quarters of the taxable
year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for


Clarification31 on 11 November 2008. It claimed that the CTA Second Division
should not have allocated proportionately Mindanao Is unutilized creditable input
taxes for the taxable year 2003, because the proportionate allocation of the amount
of creditable taxes in Section 112(A) applies only when the creditable input taxes
due cannot be directly and entirely attributed to any of the zero-rated or effectively
zero-rated sales. Mindanao I claims that its unreported collection is directly
attributable to its VAT zero-rated sales. The CTA Second Division denied
Mindanao Is motion and maintained the proportionate allocation because there
was a portion of the gross receipts that was undeclared in Mindanao Is gross
receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It
claimed that Mindanao I failed to exhaust administrative remedies before it filed its
petition for review. The CTA Second Division denied the CIRs motion, and cited
Atlas33 as the basis for ruling that it is more practical and reasonable to count the
two-year prescriptive period for filing a claim for refund or credit of input VAT on
zero-rated sales from the date of filing of the return and payment of the tax due.

The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution
reads:

WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration


and Mindanao Is Motion for Partial Reconsideration with Motion for Clarification
are hereby DENIED for lack of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

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

The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby


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

SO ORDERED.36

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

The pertinent portions of the CTA En Bancs 24 November 2010 Amended


Decision read:

C.T.A. Case No. 7228:

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

(2) On April 4, 2005, Mindanao I applied for an administrative claim for


refund of unutilized input VAT for the first quarter of taxable year 2003 with
the BIR, which is beyond the two-year prescriptive period mentioned above.

C.T.A. Case No. 7286:

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

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

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund


of unutilized input VAT for the second quarter of taxable year 2003 with the
BIR, which is within the two-year prescriptive period, provided under
Section 112 (A) of the NIRC of 1997, as amended;

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

(4) Within 30 days from the lapse of the 120-day period or from August 3,
2005 to September 1, 2005, Mindanao I should have elevated its claim for
refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with
this Court, docketed as CTA Case No. 7286, even before the 120-day period
for the CIR to decide the claim for refund had lapsed on August 2, 2005. The
Petition for Review was, therefore, prematurely filed and there was failure to
exhaust administrative remedies;

xxxx

C.T.A. Case No. 7318:

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

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund


of unutilized input VAT for the third and fourth quarters of taxable year 2003
with the BIR, which is well within the two-year prescriptive period,
provided under Section 112(A) of the NIRC of 1997, as amended;

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

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

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

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

In recapitulation:

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


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

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

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

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

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

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues


Motion for Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial
Reconsideration is hereby DENIED for lack of merit.

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

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in


CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I
Geothermal Partnership for the first, second, third and fourth quarters of 2003 is
hereby DENIED.

SO ORDERED.39

The Issues

G.R. No. 193301


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

I. The Honorable Court of Tax Appeals erred in holding that the claim of
Mindanao II for the 1st and 2nd quarters of year 2003 has already prescribed
pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of
the law as to the reckoning date of the two year prescriptive period for
filing claims for VAT refund.

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

C. The ruling of the Mirant case, which uses the close of the taxable
quarter when the sales were made as the reckoning date in counting
the two-year prescriptive period cannot be applied retroactively in the
case of Mindanao II.

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of
the 1997 Tax Code, as amended in that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to the VAT zero-
rated operation of Mindanao II.

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

A. The amount of P2,090.16 was brought about by the timing


difference in the recording of the foreign currency deposit transaction.

B. The amount of P2,752.00 arose from the out-of-pocket expenses


reimbursed to SGV & Company which is substantially suppoerted
[sic] by an official receipt.

C. The amount of P487,355.93 was unapplied and/or was not included


in Mindanao IIs claim for refund or tax credit for the year 2004
subject matter of CTA Case No. 7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in


the present case.40

G.R. No. 194637


Mindanao I v. CIR

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


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

A. The recent ruling in the Commissioner of Internal Revenue vs.


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

B. The Atlas case promulgated by the Third Division of this


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

II. Likewise, the recent ruling of this Honorable Court in Commissioner of


Internal Revenue vs. Aichi Forging Company of Asia, Inc., cannot be
applied retroactively to Mindanao I in the present case.41

In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R.


Nos. 193301 and 194637 to avoid conflicting rulings in related cases.

The Courts Ruling

Determination of Prescriptive Period

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

Mindanao IIs unutilized input VAT tax credit for the first and second quarters of
2003, in the amounts of P3,160,984.69 andP1,562,085.33, respectively, are
covered by G.R. No. 193301, while Mindanao Is unutilized input VAT tax credit
for the first, second, third, and fourth quarters of 2003, in the amounts
of P3,893,566.14, P2,351,000.83, and P7,940,727.83, respectively, are covered by
G.R. No. 194637.

Section 112 of the 1997 Tax Code


The pertinent sections of the 1997 Tax Code, the law applicable at the time of
Mindanao IIs and Mindanao Is administrative and judicial claims, provide:

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

xxxx

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

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

x x x x 43 (Underscoring supplied)

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

CTA Period Close of Last day Actual date of Last day Actual
Cas covered by quarter for filing filing for Date
e VAT Sales in when applicatio application for filing case of filing
No. 2003 and sales n tax refund/ with case
45
amount were of tax credit with the CTA with CTA
made refund/tax CIR (judicial
credit (administrativ claim)
certificate e
with the claim)44
CIR
722 1st Quarter, 31 March 31 March 13 April 2005 12 22 April
7 P3,160,984.6 2003 2005 Septembe 2005
9 r
2005
728 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July
7 P1,562,085.3 2003 2005 Septembe 2005
3 r
2005
731 3rd and 4th 30 30 13 April 2005 12 9
7 Quarters, Septembe September Septembe Septembe
P3,521,129.5 r 2005 r r
0 2003 2005 2005
31 2 January
December 2006
2003 (31
December
2005
being
a
Saturday)

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

CTA Period Close of Last day Actual date of Last day Actual
Cas covered by quarter for filing filing for Date
e VAT Sales in when applicatio application for filing case of filing
No. 2003 and sales n tax refund/ with case
amount were of tax credit with the CTA47 with CTA
made refund/tax CIR (judicial
credit (administrativ claim)
certificate e
with the claim)46
CIR
722 1st Quarter, 31 March 31 March 4 April 2005 1 22 April
7 P3,893,566.1 2003 2005 Septembe 2005
4 r
2005
728 2nd Quarter, 30 June 30 June 4 April 2005 1 7 July
7 P2,351,000.8 2003 2005 Septembe 2005
3 r
2005
731 3rd 30 30 4 April 2005 1 9
7 and 4th Septembe September Septembe Septembe
Quarters, r 2005 r r
P7,940,727.8 2003 2005 2005
3
31 2 January
December 2006
2003 (31
December
2005
being
a
Saturday)

When Mindanao II and Mindanao I filed their respective administrative and


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

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

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

The charter of the CTA expressly provides that its jurisdiction is to review on
appeal "decisions of the Commissioner of Internal Revenue in cases involving x x
x refunds of internal revenue taxes." When a taxpayer prematurely files a judicial
claim for tax refund or credit with the CTA without waiting for the decision of the
Commissioner, there is no "decision" of the Commissioner to review and thus the
CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the Commissioner fails to decide
within "a specific period" required by law, such "inaction shall be deemed a denial"
of the application for tax refund or credit. It is the Commissioners decision, or
inaction "deemed a denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the
CTA has no jurisdiction over a petition for review.

San Roques failure to comply with the 120-day mandatory period renders its
petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity." San Roques void petition for review
cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself
authorizes its validity." There is no law authorizing the petitions validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory


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

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

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

This Court cannot disregard mandatory and jurisdictional conditions mandated by


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

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

Prescriptive Period for


the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II


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

We rule on Mindanao I and IIs administrative claims for the first, second, third,
and fourth quarters of 2003 as follows:

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

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

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

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

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

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

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

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

x x x the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis
doctrine, this law should be applied exactly as worded since it is clear, plain, and
unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision
of the Commissioner to the CTA within 30 days from receipt of the
Commissioners decision, or if the Commissioner does not act on the taxpayers
claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.

xxxx

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

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

Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in accordance with
Subsection A" means that the application in Section 112(A) is the administrative
claim that the Commissioner must decide within the 120-day period. In short, the
two-year prescriptive period in Section 112(A) refers to the period within which
the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the
judicial claim with the CTA but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase within two years x x x apply for the
issuance of a tax credit or refund refers to applications for refund/credit with the
CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year
prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th
day, the Commissioner, with his 120-day period, will have until the 731st day to
decide the claim. If the Commissioner decides only on the 731st day, or does not
decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The
30-day period granted by law to the taxpayer to file an appeal before the CTA
becomes utterly useless, even if the taxpayer complied with the law by filing his
administrative claim within the two-year prescriptive period.

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

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

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

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

G.R. No. 193301


Mindanao II v. CIR

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

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

However, pursuant to San Roques recognition of the effect of BIR Ruling


No. DA-489-03, we rule that Mindanao IIs judicial claim for the second
quarter of 2003 qualifies under the exception to the strict application of the
120+30 day periods.

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

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

G.R. No. 194637


Mindanao I v. CIR

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

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

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

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

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

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

Notwithstanding a strict construction of any claim for tax exemption or refund, the
Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes
equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03 expressly
states that the "taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review."
This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law. The abandonment of the
Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive
periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers
similarly situated, being made to return the tax refund or credit they received or
could have received under Atlas prior to its abandonment. This Court is applying
Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

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

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a


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

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

xxxx

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

Summary of Administrative and Judicial Claims

G.R. No. 193301


Mindanao II v. CIR

Administrative Judicial Claim Action on Claim


Claim
1st Quarter, Filed late -- Deny, pursuant to
2003 Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-489-
03
3rd Quarter, Filed on time Filed on time Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code
4th Quarter, Filed on time Filed on time Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code

G.R. No. 194637


Mindanao I v. CIR

Administrative Judicial Claim Action on Claim


Claim
1st Quarter, Filed late -- Deny, pursuant to
2003 Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-489-
03
3rd Quarter, Filed on time Filed late Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code
4th Quarter, Filed on time Filed late Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

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

(1) An administrative claim must be filed with the CIR within two years
after the close of the taxable quarter when the zero-rated or effectively zero-
rated sales were made.

(2) The CIR has 120 days from the date of submission of complete
documents in support of the administrative claim within which to decide
whether to grant a refund or issue a tax credit certificate. The 120-day period
may extend beyond the two-year period from the filing of the administrative
claim if the claim is filed in the later part of the two-year period. If the 120-
day period expires without any decision from the CIR, then the
administrative claim may be considered to be denied by inaction.

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

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

"Incidental" Transaction

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

Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business,
sells barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 to 108 of this Code.

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

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

The rule of regularity, to the contrary notwithstanding, services as defined in this


Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis
supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.


(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial)56 to justify
its position. Magsaysay, decided under the NIRC of 1986, involved the sale of
vessels of the National Development Company (NDC) to Magsaysay Lines, Inc.
We ruled that the sale of vessels was not in the course of NDCs trade or business
as it was involuntary and made pursuant to the Governments policy for
privatization. Magsaysay, in quoting from the CTAs decision, imputed upon
Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "to engage is to embark in a business or to
employ oneself therein."57

Mindanao IIs sale of the Nissan Patrol is said to be an isolated


transaction.1wphi1 However, it does not follow that an isolated transaction cannot
be an incidental transaction for purposes of VAT liability. Indeed, a reading of
Section 105 of the 1997 Tax Code would show that a transaction "in the course of
trade or business" includes "transactions incidental thereto."

Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into


electricity and to deliver the electricity to NPC. In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the
Nissan Patrol was part of Mindanao IIs property, plant, and equipment. Therefore,
the sale of the Nissan Patrol is an incidental transaction made in the course of
Mindanao IIs business which should be liable for VAT.

Substantiation Requirements

Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09


is improper as it has substantially complied with the substantiation requirements of
Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented
by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60

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

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court


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

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

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, seeking to reverse the
Decision1 dated February 18, 2005 and Resolution dated May 9, 2005 of the Court
of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449.

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

The Philippine Health Care Providers, Inc., herein respondent, is a corporation


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

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

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

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

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

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary


Assessment Notice for deficiency in its payment of the VAT and documentary
stamp taxes (DST) for taxable years 1996 and 1997.

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

On January 27, 2000, petitioner CIR sent respondent a letter demanding payment
of "deficiency VAT" in the amount ofP100,505,030.26 and DST in the amount
of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and
1997. Attached to the demand letter were four (4) assessment notices.

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

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

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

WHEREFORE, in view of the foregoing, the instant Petition for Review is


PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY the deficiency
VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20,
1998 until paid for the 1997 VAT deficiency.1awphi1.nt Accordingly, VAT Ruling
No. 231-88 is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.
SO ORDERED.

Respondent filed a motion for partial reconsideration of the above judgment


concerning its liability to pay the deficiency VAT.

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

WHEREFORE, in view of the foregoing, the instant Motion for Partial


Reconsideration is GRANTED. Accordingly, the VAT assessment issued by herein
respondent against petitioner for the taxable years 1996 and 1997 is hereby
WITHDRAWN and SET ASIDE.

SO ORDERED.

The CTA held:

Moreover, this court adheres to its conclusion that petitioner is a service


contractor subject to VAT since it does not actually render medical service but
merely acts as a conduit between the members and petitioner's accredited and
recognized hospitals and clinics.

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

Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal


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

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT


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

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

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

Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate
court in its Resolution4 dated May 9, 2005.

Hence, the instant petition for review on certiorari raising these two issues: (1)
whether respondent's services are subject to VAT; and (2) whether VAT Ruling No.
231-88 exempting respondent from payment of VAT has retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT


liabilities for taxable years 1996 and 1997.

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

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

The phrase "sale or exchange of service" means the performance of all kinds of
services in the Philippines for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors x x x.
Section 1036 of the same Code specifies the exempt transactions from the provision
of Section 102, thus:

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

xxx

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

xxx

The import of the above provision is plain. It requires no interpretation. It


contemplates the exemption from VAT of taxpayers engaged in the performance of
medical, dental, hospital, and veterinary services. In Commissioner of
International Revenue v. Seagate Technology (Philippines),7 we defined an exempt
transaction as one involving goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT, under the Tax Code,
without regard to the tax status of the party in the transaction. In Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this
definition.

In its letter to the BIR requesting confirmation of its VAT-exempt status,


respondent described its services as follows:

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

From the foregoing, the CTA made the following conclusions:


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

b) It merely "provides and arranges for the provision of pre-need health


care services to its members for a fixed prepaid fee for a specified period
of time."

c) It then "contracts the services of physicians, medical and dental


practitioners, clinics and hospitals to perform such services to its
enrolled members;" and

d) Respondent "also enters into contract with clinics, hospitals, medical


professionals and then negotiates with them regarding payment
schemes, financing and other procedures in the delivery of health
services."

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

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

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

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

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

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

According to the Court of Appeals, respondent's failure to describe itself as a


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

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

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

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

More recently, in Commissioner of Internal Revenue v. Benguet


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

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

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


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

DECISION
DEL CASTILLO, J.:

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

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

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are domestic corporations duly organized
and existing under the laws of the Republic of the Philippines. Both are engaged in
the business of operating cinema houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on
cinema ticket sales in the amount of P119,276,047.40 for taxable year 2000.8 In
response, SM Prime filed a letter-protest dated December 15, 2003.9

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

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered
it to pay the VAT deficiency for taxable year 2000 in the amount
of P124,035,874.12.11

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

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount
of P35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.14

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

On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount ofP35,823,680.93 for VAT deficiency for
taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the
CTA, docketed as CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema
ticket sales for taxable year 2000 in the amount of P35,840,895.78. First Asia
protested the PAN through a letter dated April 22, 2004.18

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

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the
VAT deficiency in the amount ofP35,840,895.78 for taxable year 2000.21

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

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the
total amount of P32,802,912.21 was issued against First Asia by the BIR. In
response, First Asia filed a protest-letter dated November 11, 2004. The BIR then
sent a Formal Letter of Demand, which was protested by First Asia on December
14, 2004.23

Re: Assessment Notice No. 003-03


A PAN for VAT deficiency on cinema ticket sales in the total amount
of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First
Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal
Letter of Demand was thereafter issued by the BIR to First Asia, which the latter
protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts ofP33,610,202.91 and P28,590,826.50 for VAT
deficiency for taxable years 2002 and 2003, respectively.25

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

Consolidated Petitions

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

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

Upon submission of the parties respective memoranda, the consolidated cases


were submitted for decision on the sole issue of whether gross receipts derived
from admission tickets by cinema/theater operators or proprietors are subject to
VAT.29

Ruling of the CTA First Division

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

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the


Petitions for Review. Respondents Decisions denying petitioners protests against
deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment
Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02
are ORDERED cancelled and set aside.

SO ORDERED.32

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

Ruling of the CTA En Banc

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

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

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

(1) In not finding/holding that the gross receipts derived by operators/proprietors of


cinema houses from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA


OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF
SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE


EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC
OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF


LAW AND THE APPLICATION OF RULES OF STATUTORY
CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF


CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE
HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND
PROMULGATED DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW


EXEMPTING RESPONDENTS SERVICES FROM THE VAT IMPOSED
UNDER SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER


ISSUES TO BE TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF


SECTION 108 OF THE NIRC.

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

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

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


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

Petitioners Arguments

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

Respondents Arguments

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

Our Ruling

The petition is bereft of merit.

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

Section 108 of the NIRC of the 1997 reads:

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

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and
other domestic common carriers by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of telephone and telegraph, radio
and television broadcasting and all other franchise grantees except those under
Section 119 of this Code; services of banks, non-bank financial intermediaries and
finance companies; and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and
similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. The phrase "sale or exchange of
services" shall likewise include:

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

xxxx

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

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

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of
the "sale or exchange of services" subject to VAT is not exhaustive. The words,
"including," "similar services," and "shall likewise include," indicate that the
enumeration is by way of example only.39
Among those included in the enumeration is the "lease of motion picture films,
films, tapes and discs." This, however, is not the same as the showing or exhibition
of motion pictures or films. As pointed out by the CTA En Banc:

"Exhibition" in Blacks Law Dictionary is defined as "To show or display. x x x To


produce anything in public so that it may be taken into possession" (6th ed., p.
573). While the word "lease" is defined as "a contract by which one owning such
property grants to another the right to possess, use and enjoy it on specified period
of time in exchange for periodic payment of a stipulated price, referred to as rent
(Blacks Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon
the court to the determine whether such activity falls under the phrase "similar
services." The intent of the legislature must therefore be ascertained.

The legislature never intended operators

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

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

On January 1, 1988, the VAT Law48 was promulgated. It amended certain


provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax
on original and subsequent sales tax and percentage tax on certain services. It
imposed VAT on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax.
There shall be levied, assessed and collected, a value-added tax equivalent to 10%
percent of gross receipts derived by any person engaged in the sale of services. The
phrase "sale of services" means the performance of all kinds of services for others
for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental faculties:
Provided That the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing


business outside the Philippines which goods are subsequently exported, x x
x

xxxx

"Gross receipts" means the total amount of money or its equivalent


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

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

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

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

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

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

xxxx

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

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

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

On October 10, 1991, the LGC of 1991 was passed into law. The local government
retained the power to impose amusement tax on proprietors, lessees, or operators
of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross receipts
from admission fees under Section 140 thereof.50 In the case of theaters or cinemas,
the tax shall first be deducted and withheld by their proprietors, lessees, or
operators and paid to the local government before the gross receipts are divided
between said proprietors, lessees, or operators and the distributors of the
cinematographic films. However, the provision in the Local Tax Code expressly
excluding the national government from collecting tax from the proprietors,
lessees, or operators of theaters, cinematographs, concert halls, circuses and other
places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several
amendments52 were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to amusement
tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54

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

(1) Historically, the activity of showing motion pictures, films or movies by


cinema/theater operators or proprietors has always been considered as a
form of entertainment subject to amusement tax.

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

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

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

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

(6) When the VAT law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT.1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of
amusements.

(8) Amendments to the VAT law have been consistent in exempting persons
subject to amusement tax under the NIRC from the coverage of VAT.

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


coverage of VAT.

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

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


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

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

The power of taxation is sometimes called also the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg." And, in order to maintain the general
public's trust and confidence in the Government this power must be used justly and
not treacherously.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against


respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was then subject to


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

We disagree.

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

Revenue Memorandum Circular No. 28-2001 is invalid


Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No.
28-2001 which imposes VAT on the gross receipts from admission to cinema
houses must be struck down. We cannot overemphasize that RMCs must not
override, supplant, or modify the law, but must remain consistent and in harmony
with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax issuances as prescribed under
RMC No. 20-86.

Rule on tax exemption does not apply

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

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

SO ORDERED.
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

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

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

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

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

On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice.2Later, the Court issued
another resolution treating the petition as one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the governments
comment.4 The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and intent of the law
from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and
circulars.5

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

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

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

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by


including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to


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

The Courts Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Courts resolution,7 however, arguing that petitioners
allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions for prohibition since
the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it
sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a
plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need
to be resolved for the public good.8 The Court has also held that a petition for
prohibition is a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists who
use the tollways everyday, but more so on the governments effort to raise revenue
for funding various projects and for reducing budgetary deficits.

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

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

B. On the Substantive Issues:

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

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

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

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

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

1. Lessors of property, whether personal or real;


2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension


houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes,


including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; and

7. Common carriers by air and sea relative to their transport of passengers,


goods or cargoes from one place in the Philippines to another place in the
Philippines.

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

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

Tollway operators are franchise grantees and they do not belong to exceptions (the
low-income radio and/or television broadcasting companies with gross annual
incomes of less than P10 million and gas and water utilities) that Section
11913spares from the payment of VAT. The word "franchise" broadly covers
government grants of a special right to do an act or series of acts of public
concern.14

Petitioners of course contend that tollway operators cannot be considered


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

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

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

Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal
Revenue,20"statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The congressional will is
ultimately determined by the language of the law that the lawmakers voted on.
Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll
fees is tantamount to taxing a tax.21Actually, petitioners base this argument on the
following discussion in Manila International Airport Authority (MIAA) v. Court of
Appeals:22

No one can dispute that properties of public dominion mentioned in Article 420 of
the Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed
by the State," are owned by the State. The term "ports" includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by
the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and
Buildings are properties of public dominion and thus owned by the State or the
Republic of the Philippines.

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

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

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

Petitioners assume that what the Court said above, equating terminal fees to a
"users tax" must also pertain to tollway fees. But the main issue in the MIAA case
was whether or not Paraaque City could sell airport lands and buildings under
MIAA administration at public auction to satisfy unpaid real estate taxes. Since
local governments have no power to tax the national government, the Court held
that the City could not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department framework."24 Thus,
its airport lands and buildings are properties of public dominion beyond the
commerce of man under Article 420(1)25 of the Civil Code and could not be sold at
public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are users tax, but to make the point
that airport lands and buildings are properties of public dominion and that the
collection of terminal fees for their use does not make them private properties.
Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a users


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

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

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to


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

Thus, the seller remains directly and legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT paid by the former is added to the
selling price. Once shifted, the VAT ceases to be a tax30 and simply becomes part of
the cost that the buyer must pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but
on the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any
person who, in the course of trade or business, sells or renders services for a fee. In
other words, the seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.

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

Three. Petitioner Timbol has no personality to invoke the non-impairment of


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

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

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

Administrative feasibility is one of the canons of a sound tax system. It simply


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

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

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

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

Conclusion

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

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

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

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

WHEREFORE, the Court DENIES respondents Secretary of Finance and


Commissioner of Internal Revenues motion for reconsideration of its August 24,
2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F.
Timbols petition for lack of merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.
SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

PHILIPPINE AMUSEMENT AND GAMING CORPORATION


(PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by
HON. JOSE MARIO BUAG, in his official capacity as COMMISSIONER
OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under
the authority of Respondent. Public and Private Respondents.

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and


Prohibition1 with prayer for the issuance of a Temporary Restraining Order and/or
Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement
and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section
1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the
National Internal Revenue Code of 1997, by excluding petitioner from exemption
from corporate income tax for being repugnant to Sections 1 and 10 of Article III
of the Constitution. Petitioner further seeks to prohibit the implementation of
Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being
contrary to law.

The undisputed facts follow.


PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on
January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B3 (supplementing
P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type
of tax, except a franchise tax of five percent (5%) of the gross revenue.4 Thereafter,
on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D.
No. 18696 was issued. Section 13 thereof reads as follows:

Sec. 13. Exemptions. x x x

(1) Customs Duties, taxes and other imposts on importations. - All


importations of equipment, vehicles, automobiles, boats, ships, barges,
aircraft and such other gambling paraphernalia, including accessories or
related facilities, for the sole and exclusive use of the casinos, the proper and
efficient management and administration thereof and such other clubs,
recreation or amusement places to be established under and by virtue of this
Franchise shall be exempt from the payment of duties, taxes and other
imposts, including all kinds of fees, levies, or charges of any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any


corporation having existing contractual arrangements with the Corporation,
for the sole and exclusive use of the casino or to be used to service the
operations and requirements of the casino, shall likewise be totally exempt
from the payment of all customs duties, taxes and other imposts, including
all kinds of fees, levies, assessments or charges of any kind or nature,
whether National or Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or
form, income or otherwise, as well as fees, charges, or levies of whatever
nature, whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five
percent (5%)of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or description, levied,
established, or collected by any municipal, provincial or national
government authority.
(b) Others: The exemption herein granted for earnings derived from
the operations conducted under the franchise, specifically from the
payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation
or other remuneration from the Corporation as a result of essential
facilities furnished and/or technical services rendered to
the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the


Corporation or operator in pursuance of this provision shall be free of any
tax.

(3) Dividend Income. Notwithstanding any provision of law to the


contrary, in the event the Corporation should declare a cash dividend income
corresponding to the participation of the private sector shall, as an incentive
to the beneficiaries, be subject only to a final flat income rate of ten percent
(10%) of the regular income tax rates. The dividend income shall not in such
case be considered as part of the beneficiaries' taxable income; provided,
however, that such dividend income shall be totally exempted from income
or other form of taxes if invested within six (6) months from the date the
dividend income is received in the following:

(a) operation of the casino(s) or investments in any affiliate activity


that will ultimately redound to the benefit of the Corporation; or any
other corporation with whom the Corporation has any existing
arrangements in connection with or related to the operations of the
casino(s);

(b) Government bonds, securities, treasury notes, or government


debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it
was later restored by Letter of Instruction No. 1430, which was issued in
September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal
Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that
government-owned and controlled corporations (GOCCs) shall pay corporate
income tax, except petitioner PAGCOR, the Government Service and Insurance
Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities.


- The provisions of existing special general laws to the contrary notwithstanding,
all corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS),
the Social Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed by this Section upon corporations or
associations engaged in similar business, industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the
National Internal Revenue Code of 1997 were amended. The particular amendment
that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section
27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from
the enumeration of GOCCs that are exempt from payment of corporate income tax,
thus:

(c) Government-owned or Controlled Corporations, Agencies or


Instrumentalities. - The provisions of existing special general laws to the contrary
notwithstanding, all corporations, agencies, or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office
(PCSO), shall pay such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in similar business,
industry, or activity.

Different groups came to this Court via petitions for certiorari and
prohibition11 assailing the validity and constitutionality of R.A. No. 9337, in
particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods
and properties; Section 5, which imposes a 10% VAT on importation of
goods; and Section 6, which imposes a 10% VAT on sale of services and use
or lease of properties, all contain a uniform proviso authorizing the
President, upon the recommendation of the Secretary of Finance, to raise the
VAT rate to 12%. The said provisions were alleged to be violative of Section
28 (2), Article VI of the Constitution, which section vests in Congress the
exclusive authority to fix the rate of taxes, and of Section 1, Article III of the
Constitution on due process, as well as of Section 26 (2), Article VI of the
Constitution, which section provides for the "no amendment rule" upon the
last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of


the Constitution, or the guarantee of equal protection of the laws, and
Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner
it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337.12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16--
2005,13 specifically identifying PAGCOR as one of the franchisees subject to 10%
VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as
amended by R.A. No. 9337. The said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.

xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the
Tax Code, regardless of how their franchisees may have been granted, shall be
subject to the 10% VAT imposed under Sec.108 of the Tax Code. This includes,
among others, the Philippine Amusement and Gaming Corporation (PAGCOR),
and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:


I

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB


INITIO FOR BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE]
EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB


INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE]
EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS


NULL AND VOID AB INITIOFOR BEING BEYOND THE SCOPE OF THE
BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION
IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS
PETITIONERS LICENSEES OR FRANCHISEES WHEN THE BASIC LAW,
AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT
IMPOSE VAT ON PETITIONER OR ON PETITIONERS LICENSEES OR
FRANCHISEES.14

The BIR, in its Comment15 dated December 29, 2006, counters:

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH
VALID AND CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD
BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT
TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND


SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND


CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of
Comment,16 concurred with the arguments of the petitioner. It added that although
the State is free to select the subjects of taxation and that the inequity resulting
from singling out a particular class for taxation or exemption is not an infringement
of the constitutional limitation, a tax law must operate with the same force and
effect to all persons, firms and corporations placed in a similar situation.
Furthermore, according to the OSG, public respondent BIR exceeded its statutory
authority when it enacted RR No. 16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income
tax and VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the
petition partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1977, petitioner is no longer exempt from corporate
income tax as it has been effectively omitted from the list of GOCCs that are
exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of
the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of the laws.

In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of
equal protection, thus:

Equal protection requires that all persons or things similarly situated should be
treated alike, both as to rights conferred and responsibilities imposed. Similar
subjects, in other words, should not be treated differently, so as to give undue favor
to some and unjustly discriminate against others. The guarantee means that no
person or class of persons shall be denied the same protection of laws which is
enjoyed by other persons or other classes in like circumstances. The "equal
protection of the laws is a pledge of the protection of equal laws." It limits
governmental discrimination. The equal protection clause extends to artificial
persons but only insofar as their property is concerned.

xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the
classification is reasonable, the law may operate only on some and not all of the
people without violating the equal protection clause. The classification must, as an
indispensable requisite, not be arbitrary. To be valid, it must conform to the
following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one
of the five GOCCs exempted from payment of corporate income tax as shown in
R.A. No. 8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities.


- The provisions of existing special or general laws to the contrary
notwithstanding, all corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or activity.19

A perusal of the legislative records of the Bicameral Conference Meeting of the


Committee on Ways on Means dated October 27, 1997 would show that the
exemption of PAGCOR from the payment of corporate income tax was due to the
acquiescence of the Committee on Ways on Means to the request of PAGCOR that
it be exempt from such tax.20 The records of the Bicameral Conference Meeting
reveal:

HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto
winnings.

CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?


CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on ---
Whether on a universal basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request
ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in


an amount that would reflect the VAT and other sales taxes---

CHAIRMAN ENRILE. No, were talking of this measure only. We will not ---
(discontinued)

HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming
that when we release the money into the hands of the public, they will not use that
to --- for wallpaper. They will spend that eh, Mr. Chairman. So when they spend
that---

CHAIRMAN ENRILE. Theres a VAT.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there
a quantification? Is there an approximation?

CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect,
it is not circulating in the economy which is unrealistic.

CHAIRMAN ENRILE. It does, it does, because this is taken and spent by


government, somebody receives it in the form of wages and supplies and other
services and other goods. They are not being taken from the public and stored in a
vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra
income for the taxpayers.

HON. ROXAS. Precisely, so they will be spending it.21

The discussion above bears out that under R.A. No. 8424, the exemption of
PAGCOR from paying corporate income tax was not based on a classification
showing substantial distinctions which make for real differences, but to reiterate,
the exemption was granted upon the request of PAGCOR that it be exempt from
the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are exempt
from paying corporate income tax. The records of the Bicameral Conference
Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent
that PAGCOR be subject to the payment of corporate income tax, thus:

THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the


amendment.

SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even
considering this VAT bill is we want to show the world who our creditors, that we
are increasing official revenues that go to the national budget. Unfortunately today,
Pagcor is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7
billion after paying some small taxes that they are subjected to. Of the 9.7 billion,
they claim they remitted to national government seven billion. Pagkatapos, there
are other specific remittances like to the Philippine Sports Commission, etc., as
mandated by various laws, and then about 400 million to the President's Social
Fund. But all in all, their net profit today should be about 12 billion. That's why I
am questioning this two billion. Because while essentially they claim that the
money goes to government, and I will accept that just for the sake of
argument. It does not pass through the appropriation process. And I think
that at least if we can capture 35 percent or 32 percent through the budgetary
process, first, it is reflected in our official income of government which is
applied to the national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and defining where the
money is spent and not through a board of directors that has absolutely no
accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmea.

SEN. OSMEA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would
not want to put my friends from the Department of Finance in a difficult position,
but may we know your comments on this knowing that as Senator Osmea just
mentioned, he said, "I accept that that a lot of it is going to spending for basic
services," you know, going to most, I think, supposedly a lot or most of it should
go to government spending, social services and the like. What is your comment on
this? This is going to affect a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN. OSMEA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator,
because you may have your own pre-judgment on this and I don't blame you. I
don't blame you. And I know you have your own research. But will this not affect a
lot, the disbursements on social services and other?

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also.
Wouldn't it be easier for you to explain to, say, foreign creditors, how do you
explain to them that if there is a fiscal gap some of our richest corporations has
[been] spared [from] taxation by the government which is one rich source of
revenues. Now, why do you save, why do you spare certain government
corporations on that, like Pagcor? So, would it be easier for you to make an
argument if everything was exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before
we call Congressman Teves?

MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will
then enter as an official revenue although when dividends declare it also goes
in as other income. (sic)
xxxx

REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income
tax. Now, we are talking here on value-added tax. Do you mean to say we are
going to amend it from income tax to value-added tax, as far as Pagcor is
concerned?

THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with
regard to the exemption from income tax of Pagcor.

xxxx

REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the
functions of Pagcor that are VATable? What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor
income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor
with, is it the . . .

REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft
their contract, which basis?

THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version


does not discuss a VAT on Pagcor but it just takes away their exemption from
non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of proof rests
upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed.24 As a rule, tax exemptions are construed strongly against
the claimant.25 Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provision.26

In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended
Section 27 (c) of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as shown by the discussions
in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate
income tax; hence, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax. It is a basic precept of statutory construction that
the express mention of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius.27 Thus, the
express mention of the GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR must be regarded as
coming within the purview of the general rule that GOCCs shall pay corporate
income tax, expressed in the maxim: exceptio firmat regulam in casibus non
exceptis.28

PAGCOR cannot find support in the equal protection clause of the Constitution, as
the legislative records of the Bicameral Conference Meeting dated October 27,
1997, of the Committee on Ways and Means, show that PAGCORs exemption
from payment of corporate income tax, as provided in Section 27 (c) of R.A. No.
8424, or the National Internal Revenue Code of 1997, was not made pursuant to a
valid classification based on substantial distinctions and the other requirements of a
reasonable classification by legislative bodies, so that the law may operate only on
some, and not all, without violating the equal protection clause. The legislative
records show that the basis of the grant of exemption to PAGCOR from corporate
income tax was PAGCORs own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab
initio for violating the non-impairment clause of the Constitution. Petitioner avers
that laws form part of, and is read into, the contract even without the parties
expressly saying so. Petitioner states that the private parties/investors transacting
with it considered the tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to transact/invest with it. Petitioner
argues that the withdrawal of its exemption from corporate income tax by R.A. No.
9337 has the effect of changing the main consideration and inducement for the
transactions of private parties with it; thus, the amendatory provision is violative of
the non-impairment clause of the Constitution.

Petitioners contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the


Constitution, which provides that no law impairing the obligation of contracts shall
be passed. The non-impairment clause is limited in application to laws that
derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties.29 There is impairment if a subsequent law
changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of
the rights of the parties.30

As regards franchises, Section 11, Article XII of the Constitution31 provides that no
franchise or right shall be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the Congress when the common good so
requires.32

In Manila Electric Company v. Province of Laguna,33 the Court held that a


franchise partakes the nature of a grant, which is beyond the purview of the non-
impairment clause of the Constitution.34 The pertinent portion of the case states:

While the Court has, not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement
for carrying on the franchise, these exemptions, nevertheless, are far from being
strictly contractual in nature. Contractual tax exemptions, in the real sense of the
term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered into by them under
enabling laws in which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly, tax exemptions of
this kind may not be revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax exemptions
granted under franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the Constitution. Indeed,
Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in
the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation
of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the
common good so requires.35

In this case, PAGCOR was granted a franchise to operate and maintain gambling
casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e.,
basketball, football, lotteries, etc., whether on land or sea, within the territorial
jurisdiction of the Republic of the Philippines.36 Under Section 11, Article XII of
the Constitution, PAGCORs franchise is subject to amendment, alteration or
repeal by Congress such as the amendment under Section 1 of R.A. No. 9377.
Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of
R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income
tax, which may affect any benefits to PAGCORs transactions with private parties,
is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337.
Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT.
R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressed above by this
Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT
pursuant to Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to
read as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2)
hereof, the following transactions shall be exempt from the value-added tax:

xxxx

(k) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except Presidential Decree No.
529.37

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D.
No. 1869, is a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A.


No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as
amended, is hereby further amended to read as follows:

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

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

xxxx

(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;

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
the supply of such services to zero percent (0%) rate;

x x x x38

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to


Section 108 of R.A. No. 8424 by imposing VAT on other services not previously
covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero
percent rate services performed by VAT-registered persons to persons or entities
whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to 0%
rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has
been thoroughly and extensively discussed in Commissioner of Internal Revenue
v. Acesite (Philippines) Hotel Corporation.39 Acesite was the owner and operator of
the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotels premises to
PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income
and sale of food and beverages to PAGCOR from January 1996 to April 1997.
Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount
assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its
tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the
sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the
Commissioner of Internal Revenue, fearing the legal consequences of its non-
payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on
the ground that its transaction with PAGCOR was subject to zero rate as it was
rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were
both exempt from paying VAT, thus:

xxxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form,
income or otherwise, as well as fees, charges or levies of whatever nature, whether
National or Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the earnings
of the Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the National Government
and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established or collected by any municipal, provincial,
or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the
operations conducted under the franchise specifically from the payment of any tax,
income or otherwise, as well as any form of charges, fees or levies, shall inure to
the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct
tax liability and not to indirect taxes, like the VAT.
We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption
to taxes with no distinction on whether the taxes are direct or indirect. We are one
with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as
follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does not
specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from taxes persons
or entities contracting with PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it
goes one step further by granting tax exempt status to persons dealing with
PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is
not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is
effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis
supplied.)

Indeed, by extending the exemption to entities or individuals dealing with


PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or individuals
dealing with PAGCOR in casino operations, it is exempting PAGCOR from
being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties,
or services sold or leased, in which case it is computed as 1/11 of such value, or
charged as an additional 10% to the value. Verily, the seller or lessor has the option
to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross
sales and rentals. Be that as it may, the use of either method, and in particular, the
first method, does not denigrate the fact that PAGCOR is exempt from an indirect
tax, like VAT.

VAT exemption extends to Acesite


Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There
shall be levied, assessed and collected, a value-added tax equivalent to 10% of
gross receipts derived by any person engaged in the sale of services x x x;
Provided, that the following services performed in the Philippines by VAT
registered persons shall be subject to 0%.

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and
the extension of such exemption to entities or individuals dealing with PAGCOR in
casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption
of the World Health Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the
rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractor's tax may be shifted to
the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to
entities or individuals dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.40

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case
of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section
was retained as Section 108 (B) (3) in R.A. No. 8424,41 it is still applicable to this
case, since the provision relied upon has been retained in R.A. No.
9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law and a rule or
regulation issued to implement said law, the basic law prevails, because the said
rule or regulation cannot go beyond the terms and provisions of the basic law.43RR
No. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since
PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the
said regulatory provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act


No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1997,
by excluding petitioner Philippine Amusement and Gaming Corporation from the
enumeration of government-owned and controlled corporations exempted from
corporate income tax is valid and constitutional, while BIR Revenue Regulations
No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being
contrary to the National Internal Revenue Code of 1997, as amended by Republic
Act No. 9337.

No costs.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE
BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

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

The Case

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

"WHEREFORE, premises considered, the petition is hereby DISMISSED for


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

The Facts

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

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


corporation duly organized and existing under and by virtue of the laws of the State
of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE
Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a
servicing unit of American Express International, Inc. - Hongkong Branch (Amex-
HK) and is engaged primarily to facilitate the collections of Amex-HK receivables
from card members situated in the Philippines and payment to service
establishments in the Philippines.
"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office No.
47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT
Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For the period January 1,
1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as follows:

Exhibit Period Covered Date Filed


D 1997 1st Qtr. April 18, 1997
F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
"On March 23, 1999, however, [respondent] amended the aforesaid returns and
declared the following:

Exh Taxable Output Zero-rated Domestic Input


1997 Sales VAT Sales Purchases VAT
I 1st
P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23
qtr
J
2nd 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
qtr
K
3rd 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
qtr
L 4th
67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
qtr

Total P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

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

Section 110. Tax Credits. -

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], [respondents]
petition was filed on April 15, 1999.

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

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

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

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the
consideration is paid for in acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in accordance with the rules
and regulations of the BSP. x x x.

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

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

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

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

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except


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

Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction


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

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

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


Revenue;

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

9. Moreover, [respondent] must prove that it has complied with the governing rules
with reference to tax recovery or refund, which are found in Sections 204(c) and
229 of the Tax Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or
Credit Taxes. - The Commissioner may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed


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

Section 229. Recovery of tax erroneously or illegally collected.- No suit or


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

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

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta
rendered a decision7 in favor of the herein respondent holding that its services are
subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and
Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of which
reads as follows:

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

Ruling of the Court of Appeals


In affirming the CTA, the CA held that respondents 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 respondents services be consumed abroad in order
to be zero-rated, petitioner went beyond the sphere of interpretation and into that of
legislation. Even granting that it is valid, the ruling cannot be given retroactive
effect, for it will be harsh and oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

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

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a)
Rate and base of tax. -- There shall be levied, assessed and collected, a value-added
tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services x x x.
"The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by x x x persons engaged in milling,
processing, manufacturing or repacking goods for others; x x x services of banks,
non-bank financial intermediaries and finance companies; x x x and similar
services regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of services'
shall likewise include:

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);
(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 companys regional operating centers (ROCs) was automatically zero-rated
effective January 1, 1988.12

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

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards.16 Under the credit card system, the credit
card company extends credit accommodations to its card holders for the purchase
of goods and services from its member establishments, to be reimbursed by them
later on upon proper billing. Given the complexities of present-day business
transactions, the components of this system can certainly function as separate
billable services.
Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-
banks in particular, refers to "any card x x x or other credit device existing for the
purpose of obtaining x x x goods x x x or services x x x on credit;"19 and is being
used "usually on a revolving basis."20 This means that the consumer-credit
arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the
outstanding balance does not exceed a specified limit."21 The card holder is,
therefore, given "the power to obtain present control of goods or service on a
promise to pay for them in the future."22

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

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

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

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

Branch and Home Office

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

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

Contrary to petitioners 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 companys subsequent redemption of these drafts and
billings of credit card holders is also attributable to respondent, then with greater
reason should the service rendered by respondent be zero-rated under our VAT
system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered
person40 that gets paid in acceptable foreign currency accounted for in accordance
with BSP rules and regulations.

VAT Requirements for the Supply of Service

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


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

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

First, respondent regularly renders in the Philippines the service of


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

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


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

Third, for this service, respondent definitely receives consideration in


foreign currency that is accounted for in conformity with law.

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


international agreements.

Services Subject to Zero VAT

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

Confusion in zero rating arises because petitioner equates the performance of a


particular type of service with theconsumption of its output abroad. In the present
case, the facilitation of the collection of receivables is different from theutilization
or consumption of the outcome of such service. While the facilitation is done in the
Philippines, the consumptionis 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 consumptioncontemplated by law, contrary to petitioners
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 performers 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 Respondents facilitation service has no physical existence, yet takes
place upon rendition, and therefore upon consumption, in the Philippines. Under
the destination principle, as petitioner asserts, such service is subject to VAT at the
rate of 10 percent.

Respondents 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 petitioners stand, for the cost of respondents service to be


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

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax
situs of a zero-rated service. Under this criterion, the place where the service is
rendered determines the jurisdiction60 to impose the VAT.61 Performed in the
Philippines, such service is necessarily subject to its jurisdiction,62 for the State
necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65 much less is the place where the
output of the service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

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

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

No Qualifications Under RR 5-87

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

"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable


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

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

(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 respondents 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

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

Third, and most important, the statutory provision upon which this
regulation is based is by itself not restrictive. The scope of the word
"services" in Section 102(b)(2) of the Tax Code is broad; it is not susceptible
of narrow interpretation.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
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?

"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 P200,000, 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 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 formers 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 respondents refund is in order.

WHEREFORE, the Petition is hereby DENIED, and the assailed


Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


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

DECISION

CARPIO, J.:
The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court
of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the
Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal
Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of
Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

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

[Respondent] is a domestic corporation duly organized and existing under and by


virtue of the laws of the Philippines with principal address located at Daruma
Building, Jose P. Laurel Avenue, Lanang, Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain


Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as
its coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual


operation and maintenance of NAPOCORs two power barges as well as the
performance of other duties and acts which necessarily have to be done in the
Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of


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

In order to ascertain the tax implications of the above transactions, [respondent]


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

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

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

Qtr Ex Date Zero-Rated VAT Input


. h. Filed Sales Tax

04-18- P 33,019,65 P608,953.4


1st E
96 1.07 8
2n 07-16- 37,108,863.3
F 756,802.66
d 96 3
10-14- 34,196,372.3
3rd G 930,279.14
96 5
01-20- 42,992,302.8 1,065,138.8
4th H
97 7 6

P147,317,18 P3,361,174.
Totals
9.62 14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program


(VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated
February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96
provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are


hereby amended to read as follows:

Section 4.102-2(b)(2) "Services other than processing, manufacturing or


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

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected


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

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

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

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed


a claim for the issuance of a tax credit certificate with Revenue District No. 113 of
the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996
due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4

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

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated:

[Respondents] sale of services to the Consortium [was] paid for in acceptable


foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These
were established by various BPI Credit Memos showing remittances in Danish
Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further certified by the
Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for
sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the
account of [respondent]. Clearly, [respondents] sale of services to the Consortium
is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

xxxx

The zero-rating of [respondents] sale of services to the Consortium was even


confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995,
and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.

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

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

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

Hence, this petition.

The Court of Appeals Ruling

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

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

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

The Court of Appeals further held that assuming petitioners interpretation of


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

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for
services which were performed in the Philippines to enjoy zero-rating, these must
comply only with two requisites, to wit: (1) payment in acceptable foreign
currency and (2) accounted for in accordance with the rules of the BSP. Section
108(b)(2) of the Tax Code does not provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioners argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the destination principle
underlies and is the basis of the VAT laws, then petitioners proper remedy would
be to recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner
could not resort to administrative legislation, as what [he] had done in this case."15

The Issue

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

The Ruling of the Court

We deny the petition.

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

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

(b) Transactions subject to zero-rate. The following services performed in the


Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing


business outside the Philippineswhich goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);

(2) Services other than those mentioned in the preceding sub-paragraph,


the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero rate;

(4) Services rendered to vessels engaged exclusively in international


shipping; and

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


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

In insisting that its services should be zero-rated, respondent claims that it


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

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Section 102(b)(2) is that
the recipient of such services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of Section 102(b), this
is clearly provided in the first paragraph of Section 102(b) where the listed services
must be "for other persons doing business outside the Philippines." The phrase "for
other persons doing business outside the Philippines" not only refers to the services
enumerated in the first paragraph of Section 102(b), but also pertains to the general
term "services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must likewise
be performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and
recipient of the "other services" are both doing business in the Philippines, the
payment of foreign currency is irrelevant. Otherwise, those subject to the regular
VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment
in foreign currency inwardly remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of services doing business in the
Philippines is to make the payment of the regular VAT under Section 102(a)
dependent on the generosity of the taxpayer. The provider of services can choose to
pay the regular VAT or avoid it by stipulating payment in foreign currency
inwardly remitted by the payer-recipient. Such interpretation removes Section
102(a) as a tax measure in the Tax Code, an interpretation this Court cannot
sanction. A tax is a mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under


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

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

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

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

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the


present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are "[s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP."

In this case, the payer-recipient of respondents services is the Consortium which is


a joint-venture doing business in the Philippines. While the Consortiums principal
members are non-resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which
states that the contract between the Consortium and NAPOCOR is for a 15-year
term, thus:

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

Considering this length of time, the Consortiums operation and maintenance of


NAPOCORs power barges cannot be classified as a single or isolated transaction.
The Consortium does not fall under Section 102(b)(2) which requires that the
recipient of the services must be a person doing business outside the Philippines.
Therefore, respondents services to the Consortium, not being supplied to a person
doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains


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

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

Respondents reliance on the ruling in American Express26 is misplaced. That case


involved a recipient of services, specifically American Express International, Inc.
(Hongkong Branch), doing business outside the Philippines. There, the Court
stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-


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

In contrast, this case involves a recipient of services the Consortium which is


doing business in the Philippines. Hence, American Express services were subject
to 0% VAT, while respondents services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT
Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it
held that the services being rendered by BWSCMI is subject to VAT at zero percent
(0%)." Respondents reliance on these BIR rulings binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for
refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95. However, such revocation cannot be given retroactive effect
since it will prejudice respondent. Changing respondents status will deprive
respondent of a refund of a substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the
Commissioner of Internal Revenue shall not be given retroactive application if the
revocation will prejudice the taxpayer. Further, there is no showing of the existence
of any of the exceptions enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.

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

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

THE COMMISIONER OF INTERNAL REVENUE, Petitioner,


vs.
ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.

DECISION

VELASCO, JR., J.:

The Case
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of
Court, assailing the November 17, 2000 Decision2 of the Court of Appeals (CA) in
CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision3 of the Court
of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite (Philippines) Hotel
Corporation v. The Commissioner of Internal Revenue for Refund of VAT
Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along
United Nations Avenue in Manila. It leases 6,768.53 square meters of the hotels
premises to the Philippine Amusement and Gaming Corporation [hereafter,
PAGCOR] for casino operations. It also caters food and beverages to PAGCORs
casino patrons through the hotels restaurant outlets. For the period January (sic) 96
to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR during said period. Acesite
tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed
to PAGCOR but the latter refused to pay the taxes on account of its tax exempt
status.1awphi1.net

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT
while the latter paid the VAT to the Commissioner of Internal Revenue [hereafter,
CIR] as it feared the legal consequences of non-payment of the tax. However,
Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was
subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998,
Acesite filed an administrative claim for refund with the CIR but the latter failed to
resolve the same. Thus on 29 May 1998, Acesite filed a petition with the Court of
Tax Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102
(b)(3) [now 106(A)(C)] insofar as its gross income from rentals and sales to
PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts
of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of
food and services and gross rentals, respectively from PAGCOR shall, as a matter
of course, be refunded to the petitioner for having been inadvertently remitted to
the respondent.

Thus, taking into consideration the prescribed portion of Petitioners claim for
refund of P98,743.40, and considering further the principle of solutio indebiti
which requires the return of what has been delivered through mistake, Respondent
must refund to the Petitioner the amount of P30,054,148.64 computed as follows:

Total amount per 30,152,892.0


claim 2
Less Prescribed amount (Exhs A,
X, & X-20)
P
January
2,199.9
1996
4
February 26,205.
1996 04
March 70,338. 98,743.40
1996 42

P30,054,148.
64
vvvvvvvvvv
vvvv

WHEREFORE, in view of all the foregoing, the instant Petition for Review is
partially GRANTED. The Respondent is hereby ORDERED to REFUND to the
petitioner the amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE
HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS
(P30,054,148.64) immediately.

SO ORDERED.4

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding
that PAGCOR was not only exempt from direct taxes but was also exempt from
indirect taxes like the VAT and consequently, the transactions between respondent
Acesite and PAGCOR were "effectively zero-rated" because they involved the
rendition of services to an entity exempt from indirect taxes. Thus, the CA affirmed
the CTAs determination by ruling that respondent Acesite was entitled to a refund
of PhP 30,054,148.64 from petitioner.
The Issues

Hence, we have the instant petition with the following issues: (1) whether
PAGCORs tax exemption privilege includes the indirect tax of VAT to entitle
Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT
rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the
Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCORs tax exemption privilege includes
the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate, we answer
in the affirmative. We will however discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form,
income or otherwise, as well as fees, charges or levies of whatever nature,
whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five (5%)
percent of the gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable quarterly to the
National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by
any municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings derived from the
operations conducted under the franchise specifically from the payment of
any tax, income or otherwise, as well as any form of charges, fees or
levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s)
authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the Corporation
or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCORs direct
tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption
to taxes with no distinction on whether the taxes are direct or indirect. We are one
with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as
follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does not
specifically mention PAGCORs exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from indirect taxes. In
fact, it goes one step further by granting tax exempt status to persons dealing
with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424.
(Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with


PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or individuals
dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties,
or services sold or leased, in which case it is computed as 1/11 of such value, or
charged as an additional 10% to the value. Verily, the seller or lessor has the option
to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross
sales and rentals. Be that as it may, the use of either method, and in particular, the
first method, does not denigrate the fact that PAGCOR is exempt from an indirect
tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services (a) Rate and base of tax There
shall be levied, assessed and collected, a value-added tax equivalent to 10% of
gross receipts derived by any person engaged in the sale of services x x x;
Provided, that the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.

xxxx

(3) Services rendered to persons or entities whose exemption under special


laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and
the extension of such exemption to entities or individuals dealing with PAGCOR in
casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax exemption
of the World Health Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the
rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractors tax may be
shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the
exemption to entities or individuals dealing with PAGCOR in casino operations, is
clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments


of the VAT pertaining to the effectively zero-rate transactions between Acesite and
PAGCOR. Verily, Acesite has clearly shown that it paid the subject taxes under a
mistake of fact, that is, when it was not aware that the transactions it had with
PAGCOR were zero-rated at the time it made the payments. In UST Cooperative
Store v. City of Manila,6 we explained that "there is erroneous payment of taxes
when a taxpayer pays under a mistake of fact, as for the instance in a case where he
is not aware of an existing exemption in his favor at the time the payment was
made."7 Such payment is held to be not voluntary and, therefore, can be recovered
or refunded.8

Moreover, it must be noted that aside from not raising the issue of Acesites
compliance with pertinent Revenue Regulations on exemptions during the
proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as
it paid the VAT under a mistake of fact. Hence, petitioners argument on this point
is utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the
pertinent laws governing this principle are found in Arts. 2142 and 2154 of the
Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly enriched or
benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that is to
say, on the mistaken supposition of the existence of a specific fact, where it would
not have been known that the fact was otherwise, it may be recovered. The ground
upon which the right of recovery rests is that money paid through misapprehension
of facts belongs in equity and in good conscience to the person who paid it.9
The Government comes within the scope of solutio indebiti principle as elucidated
in Commissioner of Internal Revenue v. Firemans Fund Insurance Company,
where we held that: "Enshrined in the basic legal principles is the time-honored
doctrine that no person shall unjustly enrich himself at the expense of another. It
goes without saying that the Government is not exempted from the application of
this doctrine."10

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge such burden
convincingly.11 In the instant case, respondent Acesite had discharged this burden
as found by the CTA and the CA. Indeed, the records show that Acesite proved its
actual VAT payments subject to refund, as attested to by an independent Certified
Public Accountant who was duly commissioned by the CTA. On the other hand,
petitioner never disputed nor contested respondents testimonial and documentary
evidence. In fact, petitioner never presented any evidence on its behalf.

One final word. The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR
and this duty demands that the BIR should refund without any unreasonable delay
what it has erroneously collected.12

WHEREFORE, the petition is DENIED for lack of merit and the November 17,
2000 Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

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

The Case

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

"WHEREFORE, foregoing premises considered, the petition for review


is DENIED for lack of merit."3

The Facts

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

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

1. [Respondent] is a resident foreign corporation duly registered with the Securities


and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA)


and has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree
No. 66, as amended, to engage in the manufacture of recording components
primarily used in computers for export. Such registration was made on 6 June
1997;

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


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

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

6. An administrative claim for refund of VAT input taxes in the amount


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

7. No final action has been received by [respondent] from [petitioner] on


[respondents] claim for VAT refund.

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

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

1. [Respondents] alleged claim for tax refund/credit is subject to administrative


routinary investigation/examination by [petitioners] Bureau;

2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme
Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim
for tax credit/refund."

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

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone


Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations
No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.

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

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

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance
of a tax credit certificate (TCC) in favor of respondent in the reduced amount
of P12,122,922.66. This sum represented the unutilized but substantiated input
VAT paid on capital goods purchased for the period covering April 1, 1998 to June
30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal
incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus
Investment Code of 1987), not of those under both Presidential Decree No. (PD)
66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the
income tax holiday in lieu of the 5 percent preferential tax on gross income earned.
As a VAT-registered entity, though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.

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

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit


Certificate in the amount of P12,122,922.66 representing alleged unutilized input
VAT paid on capital goods purchased for the period April 1, 1998 to June 30,
1999."6

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:

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


Input VAT

No doubt, as a PEZA-registered enterprise within a special economic


zone,7 respondent is entitled to the fiscal incentives and benefits8 provided for in
either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws


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

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

A privilege available to respondent under the provision in RA 7227 on tax and


duty-free importation of raw materials, capital and equipment18 -- is, ipso facto,
also accorded to the zone19 under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends20 to that zone the provision stating that no local or national taxes shall be
imposed therein.21 No exchange control policy shall be applied; and free markets
for foreign exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency depository
units of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax
credits24 for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also enjoys
preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys


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

Nature of the VAT and the Tax Credit Method

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

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

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

Zero-Rated and Effectively Zero-Rated Transactions

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

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

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply


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

Zero Rating and Exemption

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

Applying the destination principle53 to the exportation of goods, automatic zero


rating54 is primarily intended to be enjoyed by the seller who is directly and legally
liable for the VAT, making such seller internationally competitive by allowing the
refund or credit of input taxes that are attributable to export sales.55 Effective zero
rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the
tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the
burden of the tax.56 But in an exemption there is only partial relief,57 because the
purchaser is not allowed any tax refund of or credit for input taxes paid.58

Exempt Transaction >and Exempt Party

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

An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the
Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller is
not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from the VAT.61 Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration
as a VAT or non-VAT taxpayer.

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

Special laws may certainly exempt transactions from the VAT.63 However, the Tax
Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA
7916 -- the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are
subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard
rate of 10 percent,64 depending again on the application of the destination
principle.65

If respondent enters into such sales transactions with a purchaser -- usually in a


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

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

Sales made by a VAT-registered person in the customs territory to a PEZA-


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

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is


exempt from internal revenue laws and regulations.

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

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

First, RA 7916 states that "no taxes, local and national, shall be imposed on
business establishments operating within the ecozone."81 Since this law does not
exclude the VAT from the prohibition, it is deemed included. Exceptio firmat
regulam in casibus non exceptis. An exception confirms the rule in cases not
excepted; that is, a thing not being excepted must be regarded as coming within the
purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction,
it may still be passed on and, therefore, indirectly imposed on the same entity -- a
patent circumvention of the law. That no VAT shall be imposed directly upon
business establishments operating within the ecozone under RA 7916 also means
that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When anything is prohibited directly, it is
also prohibited indirectly.

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

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

Although this exemption puts the government at an initial disadvantage, the


reduced tax collection ultimately redounds to the benefit of the national economy
by enticing more business investments and creating more employment
opportunities.85

Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x"86 if brought to the ecozones restricted
area87 for manufacturing by registered export enterprises,88 of which respondent is
one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.89

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

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

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

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi


juris102 against the taxpayer103 and liberally in favor of the taxing authority.104

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

Respondent, which as an entity is exempt, is different from its transactions which


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

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

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

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

RA 7916, as amended by RA 8748, declared that by creating the PEZA and


integrating the special economic zones, "the government shall actively encourage,
promote, induce and accelerate a sound and balanced industrial, economic and
social development of the country x x x through the establishment, among others,
of special economic zones x x x that shall effectively attract legitimate and
productive foreign investments."113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x


x which shall x x x meet the tests of international competitiveness[,] accelerate
development of less developed regions of the country[,] and result in increased
volume and value of exports for the economy."114 Fiscal incentives that are cost-
efficient and simple to administer shall be devised and extended to significant
projects "to compensate for market imperfections, to reward performance
contributing to economic development,"115 and "to stimulate the establishment and
assist initial operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916117 was the governments


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

Finally, under RA 7844, the State declares the need "to evolve export development
into a national effort"123 in order to win international markets. By providing many
export and tax incentives,124 the State is able to drive home the point that exporting
is indeed "the key to national survival and the means through which the economic
goals of increased employment and enhanced incomes can most expeditiously be
achieved."125
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x
increase economic activity; and x x x create a robust environment for business to
enable firms to compete better in the regional as well as the global market."126After
all, international competitiveness requires economic and tax incentives to lower the
cost of goods produced for export. State actions that affect global competition need
to be specific and selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of


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

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT
Refund

Registration is an indispensable requirement under our VAT law.131 Petitioner


alleges that respondent did register for VAT purposes with the appropriate Revenue
District Office. However, it is now too late in the day for petitioner to challenge the
VAT-registered status of respondent, given the latters prior representation before
the lower courts and the mode of appeal taken by petitioner before this Court.

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

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

The BIR regulations additionally requiring an approved prior application for


effective zero rating140 cannot prevail over the clear VAT nature of respondents
transactions. The scope of such regulations is not "within the statutory authority x
x x granted by the legislature.141

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

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

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

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

A VAT-registered status, as well as compliance with the invoicing


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

Tax Refund or Credit in Order

Having determined that respondents purchase transactions are subject to a zero


VAT rate, the tax refund or credit is in order.

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

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

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

Even if it is argued that respondent is subject to the 5 percent preferential tax


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

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites
for claiming a VAT refund or credit.150
First, respondent is a VAT-registered entity. This fact alone distinguishes the
present case from Contex, in which this Court held that the petitioner therein was
registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported
by VAT invoices and have not been offset against any output taxes. Although
enterprises registered with the BOI after December 31, 1994 would no longer
enjoy the tax credit incentives on domestic capital equipment -- as provided for
under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996,
respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax
credits. This fact was revealed by the sponsorship speeches in Congress during the
second reading of House Bill No. 14295, which later became RA 7916, as shown
below:

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

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and


creating an environment conducive for investors, the bill offers incentives such as
the exemption from local and national taxes, x x x tax credits for locally sourced
inputs x x x."153

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

Summary

To summarize, special laws expressly grant preferential tax treatment to business


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

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


pronouncement as to costs.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue (CIR) prays for the reversal of the decision of
the Court of Appeals in CA-G.R. SP No. 59106,1 affirming the order of the Court
of Tax Appeals (CTA) in CTA Case No. 5593,2 which ordered said petitioner CIR
to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44,
representing unutilized input value-added tax (VAT) payments for the first and
second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.
Respondent Toshiba was organized and established as a domestic corporation,
duly-registered with the Securities and Exchange Commission on 07 July
1995,3 with the primary purpose of engaging in the business of manufacturing and
exporting of electrical and mechanical machinery, equipment, systems, accessories,
parts, components, materials and goods of all kinds, including, without limitation,
to those relating to office automation and information technology, and all types of
computer hardware and software, such as HDD, CD-ROM and personal computer
printed circuit boards.4

On 27 September 1995, respondent Toshiba also registered with the Philippine


Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise, with
principal office in Laguna Technopark, Bian, Laguna.5 Finally, on 29 December
1995, it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer
and a withholding agent.6

Respondent Toshiba filed its VAT returns for the first and second quarters of
taxable year 1996, reporting input VAT in the amount
of P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94.
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.9 Consequently, on 27 March 1998, respondent Toshiba filed with the One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department
of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for
01 January to 31 March 1996 in the amount of P14,176,601.28,10 and for 01 April
to 30 June 1996 in the amount of P5,161,820.79,11 for a total of P19,338,422.07. To
toll the running of the two-year prescriptive period for judicially claiming a tax
credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition
for Review. It would subsequently file an Amended Petition for Review on 10
November 1998 so as to conform to the evidence presented before the CTA during
the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR
raised several Special and Affirmative Defenses, to wit

5. Assuming without admitting that petitioner filed a claim for refund/tax credit,
the same is subject to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence,
petitioner must prove that the taxes sought to be refunded were erroneously or
illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c)
and 229 of the 1997 Tax Code on the filing of a written claim for refund within two
(2) years from the date of payment of the tax.

9. Claims for refund of taxes are construed strictly against claimants, the same
being in the nature of an exemption from taxation.12

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its
Decision dated 10 March 2000, ordered petitioner CIR to refund, or in the
alternative, to issue a tax credit certificate to respondent Toshiba in the amount
ofP16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for
Reconsideration for lack of merit.15

The Court of Appeals, in its Decision dated 27 September 2001, dismissed


petitioner CIRs Petition for Review and affirmed the CTA Decision dated 10
March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned
Decision of the Court of Appeals based on the following grounds

1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax
Court the arguments relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with
the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise,
its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916
in relation to Section 103 (now 109) of the Tax Code.

3. The Court of Appeals erred in not holding that since respondents business is not
subject to VAT, the capital goods and services it purchased are considered not used
in VAT taxable business, and, therefore, it is not entitled to refund of input taxes on
such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95
and of input taxes on services pursuant to Section 4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund or
tax credit of input taxes it paid on zero-rated transactions.16

Ultimately, however, the issue still to be resolved herein shall be whether


respondent Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services, to which this Court answers in the
affirmative.

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and


services by persons from the Customs Territory to ECOZONE enterprises shall be
subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the
Tax Code of 1977, as amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax.

(b) Capital goods. A VAT-registered person may apply for the issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made.17

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-
1(b) of Revenue Regulations (RR) No. 7-95, otherwise known as the VAT
Regulations, as amended, which provides as follows

Sec. 4.106-1. Refunds or tax credits of input tax.

...

(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2)
years after the close of the taxable quarter when the importation or purchase was
made.
Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt
operations, the input tax refundable shall only be the ratable portion corresponding
to the taxable operations.

"Capital goods or properties" refer to goods or properties with estimated useful


life greater than one year and which are treated as depreciable assets under Section
29(f), used directly or indirectly in the production or sale of taxable goods or
services. (Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered


taxpayer, it is not engaged in a VAT-taxable business. According to petitioner CIR,
respondent Toshiba is actually VAT-exempt, invoking the following provision of
the Tax Code of 1977, as amended

SEC. 103. Exempt transactions. The following shall be exempt from value-added
tax.

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-electric
cooperatives under Republic Act No. 6938, or international agreements to which
the Philippines is a signatory.18

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five


percent (5%) preferential tax rate imposed under Chapter III, Section 24 of
Republic Act No. 7916, otherwise known as The Special Economic Zone Act of
1995, as amended. According to the said section, "[e]xcept for real property taxes
on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five
percent (5%) of the gross income earned by all business enterprises within the
ECOZONE shall be paid" The five percent (5%) preferential tax rate imposed on
the gross income of a PEZA-registered enterprise shall be in lieu of all national
taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is
VAT-exempt by virtue of a special law, Rep. Act No. 7916, as amended.

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),19 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

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

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions
of respondent Toshiba because although the said section recognizes that
transactions covered by special laws may be exempt from VAT, the very same
section provides that those falling under Presidential Decree No. 66 are not.
Presidential Decree No. 66, creating the Export Processing Zone Authority
(EPZA), is the precursor of Rep. Act No. 7916, as amended,20 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.

This Court agrees, however, that PEZA-registered enterprises, 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.

It is important to note herein that respondent Toshiba is located within an


ECOZONE. An ECOZONE or a Special Economic Zone has been described as

. . . [S]elected areas with highly developed or which have the potential to be


developed into agro-industrial, industrial, tourist, recreational, commercial,
banking, investment and financial centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An ECOZONE may contain any or all of
the following: industrial estates (IEs), export processing zones (EPZs), free trade
zones and tourist/recreational centers.21

The national territory of the Philippines outside of the proclaimed borders of the
ECOZONE shall be referred to as the Customs Territory.22

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall
manage and operate the ECOZONES as a separate customs territory;23 thus,
creating the fiction that the ECOZONE is a foreign territory.24 As a result, sales
made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall
be treated as an exportation from the Customs Territory. Conversely, sales made by
a supplier from the ECOZONE to a purchaser in the Customs Territory shall be
considered as an importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made
by a supplier from the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to
which, no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. Hence, actual
export of goods and services from the Philippines to a foreign country must be free
of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.25

Applying said doctrine to the sale of goods, properties, and services to and from
the ECOZONES,26 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 latters PEZA
registration, is actually qualified and thus legally entitled to the zero percent (0%)
VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus
Investments Code, while all sales of services to the said enterprises, made by VAT
registered suppliers from the Customs Territory, shall be treated effectively subject
to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions
of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

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

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it


is a VAT-exempt entity. The VAT treatment of sales to it, however, varies
depending on whether the supplier from the Customs Territory is VAT-registered or
not.
Sales of goods, properties and services by a VAT-registered supplier from the
Customs Territory to an ECOZONE enterprise shall be treated as export sales. If
such sales are made by a VAT-registered supplier, they shall be subject to VAT at
zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not
pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be
entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-
rating of export sales primarily intends to benefit the exporter (i.e., the supplier
from the Customs Territory), who is directly and legally liable for the VAT, making
it internationally competitive by allowing it to credit/refund the input VAT
attributable to its export sales.

Meanwhile, 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.

Even conceding, however, that respondent Toshiba, as a PEZA-registered


enterprise, is a VAT-exempt entity that could not have engaged in a VAT-taxable
business, this Court still believes, given the particular circumstances of the present
case, that it is entitled to a credit/refund of its input VAT.

II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the


income tax holiday under Executive Order No. 226, as amended, were deemed
subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent
Toshiba, reasoning thus

In the first place, respondent could not have paid input taxes on its purchases of
goods and services from VAT-registered suppliers because such purchases being
zero-rated, that is, no output tax was paid by the suppliers, no input tax was shifted
or passed on to respondent. The VAT is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services (Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:


"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with
these regulations."

From the foregoing, the VAT-registered person who can avail as tax credit or
refund of the input tax on his purchases of goods, services or properties is the seller
whose sale is zero-rated. Applying the foregoing provision to the case at bench, the
VAT-registered supplier, whose sale of goods and services to respondent is zero-
rated, can avail as tax credit or refund the input taxes on its (supplier) own
purchases of goods and services related to its zero-rated sale of goods and services
to respondent. On the other hand, respondent, as the buyer in such zero-rated sale
of goods and services, could not have paid input taxes for which it can claim as tax
credit or refund.27

Before anything else, this Court wishes to point out that petitioner CIR is working
on the erroneous premise that respondent Toshiba is claiming tax credit or refund
of input VAT based on Section 4.100-2,28 in relation to Section 4.106-1(a),29 of RR
No. 7-95, as amended, which allows the tax credit/refund of input VAT on zero-
rated sales of goods, properties or services. Instead, respondent Toshiba is basing
its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which
allows a VAT-registered person to apply for tax credit/refund of the input VAT on
its capital goods. While in the former, the seller of the goods, properties or services
is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the
capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshibas


application for tax credit/refund, petitioner CIR validly raised the question of
whether any output VAT was actually passed on to respondent Toshiba which it
could claim as input VAT subject to credit/refund. If the VAT-registered supplier
from the Customs Territory did not charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is subject to zero-rated VAT, then
respondent Toshiba did not pay any input VAT on its purchase of capital goods and
it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a
PEZA-registered enterprise shall be considered an export sale and subject to zero
percent (0%) VAT was clearly established only on 15 October 1999, upon the
issuance of RMC No. 74-99. Prior to the said date, however, whether or not a
PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or
liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court,30 cannot be lightly
disregarded considering the great number of PEZA-registered enterprises which
did rely on it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the
PEZA-registered enterprise the option to choose between two sets of fiscal
incentives: (a) The five percent (5%) preferential tax rate on its gross income under
Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under
Executive Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.31

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.32 Those availing of this incentive are exempt only from
income tax, but shall be subject to all other taxes, including the ten percent (10%)
VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine
essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It
relied totally on the choice of fiscal incentives of the PEZA-registered enterprise.
Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based
on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the
five percent (5%) preferential tax on its gross income, in lieu of all taxes, as
provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If
the PEZA-registered enterprise availed of the income tax holiday under Exec.
Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99, which categorically declared that all
sales of goods, properties, and services made by a VAT-registered supplier from the
Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero
percent (0%) rate, regardless of the latters type or class of PEZA registration; and,
thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a
VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent
Toshiba in the present Petition took place during the first and second quarters of
1996, way before the issuance of RMC No. 74-99, and when the old rule was
accepted and implemented by no less than the BIR itself. Since respondent Toshiba
opted to avail itself of the income tax holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the ten percent (10%) VAT. It was very
likely therefore that suppliers from the Customs Territory had passed on output
VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears
emphasis that the CTA, with the help of SGV & Co., the independent accountant it
commissioned to make a report, already thoroughly reviewed the evidence
submitted by respondent Toshiba consisting of receipts, invoices, and vouchers,
from its suppliers from the Customs Territory. Accordingly, this Court gives due
respect to and adopts herein the CTAs findings that the suppliers of capital goods
from the Customs Territory did pass on output VAT to respondent Toshiba and the
amount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-


2003, issued on 15 July 2003, the BIR answered the following question

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by


PEZA-registered firms automatically qualify as zero-rated without seeking prior
approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered


claimants who were allegedly billed VAT by their suppliers before and during the
effectivity of the RMC by issuing VAT invoices/receipts?

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.

Under RMC No. 42-2003, the DOF would still accept applications for tax
credit/refund filed by PEZA-registered enterprises, availing of the income tax
holiday, for input VAT on their purchases made prior to RMC No. 74-99.
Acceptance of applications essentially implies processing and possible approval
thereof depending on whether the given conditions are met. Respondent Toshibas
claim for tax credit/refund arose from the very same circumstances recognized by
Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and
unreasonable for petitioner CIR to oppose respondent Toshibas application for tax
credit/refund of its input VAT, when such claim had already been determined and
approved by the CTA after due hearing, and even affirmed by the Court of Appeals;
while it could accept, process, and even approve applications filed by other
similarly-situated PEZA-registered enterprises at the administrative level.

III

Findings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas


claim for tax credit/refund, challenges the allegation of said respondent that it
availed of the income tax holiday under Exec. Order No. 226, as amended, rather
than the five percent (5%) preferential tax rate under Rep. Act No. 7916, as
amended. Undoubtedly, this is a factual matter that should have been raised and
threshed out in the lower courts. Giving it credence would belie petitioner CIRs
assertion that it is raising only issues of law in its Petition that may be resolved
without need for reception of additional evidences. Once more, this Court respects
and adopts the finding of the CTA, affirmed by the Court of Appeals, that
respondent Toshiba had indeed availed of the income tax holiday under Exec.
Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the
Court of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA
Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue
a tax credit certificate to respondent Toshiba, in the amount of P16,188,045.44,
representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.