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FIRST DIVISION

COMMISSIONER OF G.R. No. 168129


INTERNAL REVENUE,
Petitioner, Present:

PUNO, C.J., Chairperson,


SANDOVAL-GUTIERREZ,
CORONA,
- versus - AZCUNA, and
GARCIA, JJ.

PHILIPPINE HEALTH Promulgated:


CARE PROVIDERS, INC.,
Respondent. April 24, 2007

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

DECISION

SANDOVAL-GUTIERREZ, J.:

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

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

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


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

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

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

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

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

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


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

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

On January 27, 2000, petitioner CIR sent respondent a letter demanding payment
of deficiency VAT in the amount of P100,505,030.26 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 respondents 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. 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 Resolution[3] dated March 23, 2003, the CTA granted respondents 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
petitioners 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
petitioners 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 petitioners 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 petitioners business. Such being
the case, this court is convinced that petitioners 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 Resolution[4] dated May 9, 2005.

Hence, the instant petition for review on certiorari raising these two issues: (1)
whether respondents 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 petitioners assessment of its VAT


liabilities for taxable years 1996 and 1997.

Section 102[5] 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 103[6] 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 Cares health care
program are entitled to preventive, diagnostic, and corrective medical
services to be dispensed by Health Cares 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 Cares health care program and pay an annual fee.
Enrollment in Health Cares 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
respondents 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, respondents 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, respondents 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
respondents 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 BIRs own issuances but later was suddenly saddled with deficiency taxes
due to its subsequent ruling changing the category of the taxpayers 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.
EN BANC

G.R. No. L-11988 April 4, 1918

JACINTO MOLINA, Plaintiff-Appellee, vs. JAMES J. RAFFERTY, Collector of Internal


Revenue, Defendant-Appellant.

Acting Attorney-General Paredes for appellant.


Araneta & Zaragoza for appellee.

FISHER, J.:

After the publication of the decision announced under the date of February 1st., 1918, 1 counsel
for appellee presented a petition for a rehearing. This petition was granted and oral argument of
the motion was permitted. Two of the members of the court, as constituted at the time of the
argument on the motion for a rehearing, were not present when the case was first submitted and
did not participate in the original decision.chanroblesvirtualawlibrarychanrobles virtual law
library

Upon the facts, as correctly stated in the original majority decision, a majority of the members of
the court as now constituted is in favor of setting aside the original decision and affirming the
judgment of the trial court.chanroblesvirtualawlibrary chanrobles virtual law library

Plaintiff contends that the fish produced by him are to be regarded as an "agricultural product"
within the meaning of that term as used in paragraph ( c) of section 41 of Act No. 2339 (now
section 1460 of the Administrative Code of 1917), in forced when the disputed tax was levied,
and that he is therefore exempt from the percentage tax on merchants' sales established by
section 40 of Act No. 2339, as amended.chanroblesvirtualawlibrary chanrobles virtual law
library

The provision upon which the plaintiff relies reads as follows:

In computing the tax above imposed transactions in the following commodities shall be
excluded: . . . ( c) Agricultural products when sold by the producer or owner of the land where
grown, whether in their original state or not. (Act No. 2339, sec. 41.)

The same exemption, with a slight change in wording, is now embodied in section 1460 of the
Administrative Code, of 1917.chanroblesvirtualawlibrary chanrobles virtual law library

The question of law presented by this appeal, as we view, is not whether fish in general
constitute an agricultural products, but whether fish produced as were those upon which the tax
in question was levied are an agricultural product.chanroblesvirtualawlibrary chanrobles virtual
law library

As stated by judged Cooley in his great work on taxation:


The underlying principle of all construction is that the intent of the legislature should be sought
in the words employed to express it, and that when found it should be made to govern, . . . . If the
words of the law seem to be of doubtful import, it may then perhaps become necessary to look
beyond them in order to ascertain what was in the legislative mind at the time the law was
enacted; what the circumstances were, under which the action was taken; what evil, if any, was
meant to be redressed; . . . . And where the law has contemporaneously been put into operation,
and in doing so a construction has necessarily been put upon it, this construction, especially if
followed for some considerable period, is entitled to great respect, as being very probably a true
expression of the legislative purpose, and is not lightly to be overruled, although it is not
conclusive. (Cooley on Taxation [Vol. 1] 3d. Ed., p. 450.)

The first inquiry, therefore, must relate to the purpose of the Legislative had in mind in
establishing the exemption contained in the clause now under consideration. It seems reasonable
to assume that it was due to the belief on the part of the law making body that by exempting
agricultural products from this tax the farming industry would be favored and the development of
the resources of the country encouraged. It is a fact, of which we take judicial cognizance, that
there are immense tracts of public land in this country, at present wholly unproductive, which
might be made fruitful by cultivation, and that large sums of money go abroad every year for the
purchase of food substances which might be grown here. Every dollar's worth of food which the
farmer produces and sells in these Islands adds directly to the wealth of the country. On the other
hand, in the process of distribution of commodities to the ultimate consumer, no direct increase
in value results solely from their transfer from one person to another in the course of commercial
transactions. It is fairly to be inferred from the statute that the object and purpose of the
Legislature was, in general terms, to levy the tax in question, significantly termed the
"merchant's tax," upon all persons engaged in making a profit upon goods produced by others,
but to exempt from the tax all persons directly producing goods from the land. In order to
accomplish this purpose the Legislature, instead of attempting an enumeration of exempted
products, has grouped them all under the general designation of "agricultural
products."chanrobles virtual law library

It seems to require no argument to demonstrate that it is just as much to the public interest to
encourage the artificial propagation and growth of fish as of corn, pork, milk or any other food
substance. If the artificial production of fish is held not to be included within the exemption of
the statute this conclusion must be based upon the inadequacy of the language used by the
Legislature to express its purpose, rather than the assumption that it was actually intended to
exclude producers of artificially grown fish from the benefits conferred upon producers of other
substances brought into the store of national wealth by the arts of husbandry and animal
industry.chanroblesvirtualawlibrary chanrobles virtual law library

While we have no doubt that the land occupied by the ponds in which the fish in question are
grown is agricultural land within the meaning of the Acts of Congress and of the Philippine
Commission under consideration in the case of Map vs. Insular Government (10 Phil. Rep., 175)
and others cited in the original majority opinion, it does not seem to us that this conclusion
solves the problem. A man might cultivate the surface of a tract of land patented to him under the
mining law, but the products of such soil would not for that reason, we apprehend, be any the
less "agricultural products." Conversely, the admission that the land upon which these fishponds
are constructed is not to be classified as mineral or forest land, does not lead of necessity to the
conclusion that everything produced upon them is for that reason alone to be deemed an
"agricultural product" within the meaning of the statute under
consideration.chanroblesvirtualawlibrary chanrobles virtual law library

"Agriculture" is an English word made upon of Latin words " ager," a field, and " cultura,"
cultivation. It is defined by Webster's New International Dictionary as meaning in its broader
sense, "The science and art of the production of plants and animal useful to man . . ."chanrobles
virtual law library

In Dillard vs. Webb (55 Ala., 468) it is held that the words "agriculture" includes "the rearing,
feeding and managing of live stock." The same view was expressed in the case of
Binzel vs. Grogan (67 Wis., 147).chanroblesvirtualawlibrary chanrobles virtual law library

Webster defines "product" to be "anything that is produced, whether as the result of generation,
growth, labor, or thought ... ," while "grow" is defined in the Century Dictionary as meaning "to
cause to grow; cultivate; produce, raise . . .."chanrobles virtual law library

While it is true that in a narrow and restricted sense agricultural products are limited to vegetable
substances directly resulting from the tillage of the soil, it is evident from the definitions quoted
that the term also includes animal which derived their sustenance from vegetable growths, and
are therefore indirectly the product of the land. Thus it has been held that "The product of the
dairy and the product of the poultry yard, while it does not come directly out of the soil is
necessarily connected with the soil . . . and is therefore farm produce. (District of
Columbia vs. Oyster, 15 D. C., 285.)chanrobles virtual law library

In the case of Mayor vs. Davis (6 Watts & Sergeant [Penn. Rep.], 269) the court said:

Swine horses, meat cattle, sheep, manure, cordwood, hay, vegetables, fruits, eggs, milk, butter,
lard . . . are strictly produce of the farm . . .

Without attempting to further multiply examples, we think it may safely be asserted that courts
and lexicographers are in accord in holding that the term "agricultural products" is not limited in
its meaning to vegetable growth, but includes everything which serves to satisfy human needs
which is grown upon the land, whether it pertain to the vegetable kingdom, or to the animal
kingdom. It is true that there is no decision which as yet has held that the fish grown in ponds are
an agricultural product, but that is no reason why we should not so hold if we find that such fish
fall within the scope of the meaning of the term. Of necessity, the products of land tend
constantly to multiply in number and variety, as population increases and new demands spring
up. In California there are farms devoted to the growth of frogs for the market. In many places in
North America foxes and other animals usually found wild are reared in confinement for their
fur. In Japan land is devoted to the culture of the silkworm and the growth of the plants
necessary for the food of those insects. Bees are everywhere kept for the wax and honey into
which the land is made to produce by those engaged in these occupations are "agricultural
products" in the same sense in which poultry, eggs, and butter have been held to be agricultural
products.chanroblesvirtualawlibrary chanrobles virtual law library
Now, if the purpose of agriculture, in the broader sense of the term, is to obtain from the land the
products to which it is best adapted and through which it will yield the greatest return upon the
expenditure of a given amount of labor and capital, can it not be said that it is just as much an
agricultural process to enclose a given area of land with dykes, flood it with water, grow aquatic
plants in it, and feed fish with the plants so produced as to fence in it and allow poultry to feed
upon the plants naturally or artificially grown upon the surface? In the last analysis the result is
the same - a given area of land produces a certain amount of food. In the one case it is the flesh
of poultry, in the other the flesh of fish. It has been agreed between the parties that an important
article of diet consumed by fish grown in a pond consists of certain marine plants which grow
from roots which affix themselves to the bottom of the pond. In a real sense, therefore, the fish
are just as truly a product of the land as are poultry or swine, living upon its vegetable growths,
aquatic or terrestrial. Thus, land may truly be said to produce fish, although it is true that the
producer is not a fisherman. Neither is one who grows foxes for their pelts a hunter. As
contended by counsel, the inquiry is not whether fish in general constitute an agricultural
product, but whether fish artificially grown and fed in confinement are to be so regarded. Honey
produced by one who devotes his land to apiculture might be so regarded, even if we were to
admit that wild honey gathered in the forest is not. Pigeons kept in domestication and fed by the
owner would fall within the definition. Wild pigeons obtained by a hunter would not. Firewood
gathered in a natural forest is not an agricultural product, but firewood cut from bacauan trees
planted for that purpose has been held to be such a product, and its producer exempt from the
merchant's tax. (Mercado vs. Collector of Internal Revenue, 32 Phil. Rep., 271.) Other
comparisons might be made, many of which will be found in the opinion in which two of the
members of the court expressed their dissent from the original majority opinion, but enough have
been given to make our position clear.chanroblesvirtualawlibrary chanrobles virtual law library

During the many hears that the statute before us has been in existence, since it first appeared,
substantially in its present form, in section 142 of Act No. 1189, passed in 1904, no attempt has
been made, until this case arose, to construe it as not applying to fish grown in ponds, and much
weight should be given to this long continued administrative interpretation. The opinion of the
Attorney-General, cited by Justice Malcolm, will be found on examination to have no bearing
upon the present inquiry, as in that case question was, not whether fish grown and fed in ponds
were agricultural products, but whether ". . . fishermen, shell and pearl gatherers . . ." were liable
to the occupation tax. There is nothing in the opinion to indicate that the word "fishermen" was
used to mean men growing fish in ponds, and it must, therefore, be assumed that it was used in
its proper grammatical sense to designate persons engaged in catching fish not artificially
produced.chanroblesvirtualawlibrary chanrobles virtual law library

The decision in the case of The United States vs. Laxa (36 Phil. Rep., 670) is not controlling, as
the reasoning upon which it is based was not concurred in by four members of the court.
Furthermore, the Laxa case might be distinguished from the one now under consideration, were
it necessary to do so, in that it has been stipulated in this case that fish cultivated in ponds subsist
largely upon aquatic plants which grow from roots which attach themselves to the bottom of the
pond, and are therefore in a real sense a product of the land, while in the Laxa case the evidence
was that they subsisted solely upon free floating algae.chanroblesvirtualawlibrary chanrobles
virtual law library
We are therefore of the opinion, and so hold, that the decision heretofore rendered herein must be
set aside, and the judgment of the lower court affirmed. So ordered.cha
EN BANC

PHILIPPINE AMUSEMENT AND G.R. No. 172087


GAMING CORPORATION
(PAGCOR), Present:
Petitioner,
CORONA, C.J.,
CARPIO,
CARPIO MORALES,
VELASCO, JR.,
- versus - NACHURA,*
LEONARDO-DE CASTRO,
BRION,*
PERALTA,
THE BUREAU OF INTERNAL BERSAMIN,
REVENUE (BIR), represented herein DEL CASTILLO,
by HON. JOSE MARIO BUAG, in his ABAD,
official capacity as COMMISSIONER VILLARAMA, JR.,
OF INTERNAL REVENUE, PEREZ,
Public Respondent, MENDOZA, and
SERENO, JJ.
JOHN DOE and JANE DOE, who are
persons acting for, in behalf, or under the Promulgated:
authority of Respondent.
Public and Private Respondents. March 15, 2011
x-----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

For resolution of this Court is the Petition


for Certiorari and Prohibition with prayer for the issuance of a Temporary
[1]

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-


[2]
A on January 1, 1977. Simultaneous to its creation, P.D. No. 1067-
B[3] (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. 1869[6] 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. 9337[10] 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
prohibition[11] 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 INITIO FOR 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 Comment[15] dated December 29, 2006, counters:

I
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 bylegislative 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 Constitution[31] 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 x[38]

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
Corporationwas 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.[42]
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.[43] RR 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.
EN BANC

G.R. No.173425 January 22, 2013

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER,
REVENUE DISTRICT NO. 44, T AGUIG and PATEROS, BUREAU OF INTERNAL
REVENUE, Respondents.

RESOLUTION

DEL CASTILLO, J.:

This resolves respondents' Motion for Reconsideration.1 Respondents raise the following
arguments: "1) Prior payment of tax is inherent in the nature and payment of the 8% transitional
input tax;2 2) Revenue Regulations No. 7-95 providing for 8% transitional input tax based on the
value of the improvements on the real properties is a valid legislative rule;3 3) For failure to
clearly prove its entitlement to the transitional input tax credit, petitioner's claim for tax refund
must fail in light of the basic doctrine that tax refund partakes of the nature of a tax exemption
which should be construed strictissimi juris against the taxpayer."4

We deny with finality the Motion for Reconsideration filed by respondents; the basic issues
presented have already been passed upon and no substantial argument has been adduced to
warrant the reconsideration sought.

In his Dissent, Justice Carpio cites four grounds as follows: "first, petitioner is not entitled to any
refund of input [Value-added tax] VAT, since the sale by the national government of the Global
City land to petitioner was not subject to any input VAT; second, the Tax Code does not allow
any cash refund of input VAT, only a tax credit; third, even for zero-rated or effectively zero-
rated VAT-registered taxpayers, the Tax Code does not allow any cash refund or credit of
transitional input tax; and fourth, the cash refund, not being supported by any prior actual tax
payment, is unconstitutional since public funds will be used to pay for the refund which is for the
exclusive benefit of petitioner, a private entity."5

At the outset, it must be pointed out that all these arguments have already been extensively
discussed and argued, not only during the deliberations but likewise in the exchange of
comments/opinions.

Nevertheless, we will discuss them again for emphasis. First argument: "Petitioner is not entitled
to any refund of input VAT since the sale by the national government of the Global City land to
petitioner was not subject to any input VAT."6

Otherwise stated, it is argued that prior payment of taxes is a prerequisite before a taxpayer could
avail of the transitional input tax credit.
This argument has long been settled. To reiterate, prior payment of taxes is not necessary before
a taxpayer could avail of the 8% transitional input tax credit. This position is solidly supported
by law and jurisprudence, viz:

First. Section 105 of the old National Internal Revenue Code (NIRC) clearly provides
that for a taxpayer to avail of the 8% transitional input tax credit, all that is required from
the taxpayer is to file a beginning inventory with the Bureau of Internal Revenue (BIR). It
was never mentioned in Section 105 that prior payment of taxes is a requirement. For
clarity and reference, Section 105 is reproduced below:

SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added
tax or any person who elects to be a VAT-registered person shall, subject to the filing of
an inventory as prescribed by regulations, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to 8% of the value of such
inventory or the actual value-added tax paid onsuch goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax. (Emphasis
supplied.)

Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of
taxes, to require it now would be tantamount to judicial legislation which, to state the
obvious, is not allowed.

Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically,
prior payment of taxes is not required before a taxpayer could avail of transitional input
tax credit. As we have declared in our September 4, 2012 Decision,7 "tax credit is not
synonymous to tax refund. Tax refund is defined as the money that a taxpayer overpaid
and is thus returned by the taxing authority. Tax credit, on the other hand, is an amount
subtracted directly from one’s total tax liability. It is any amount given to a taxpayer as a
subsidy, a refund, or an incentive to encourage investment."8

Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional
input tax credit is no longer novel. It has long been settled by jurisprudence. In fact, in the
earlier case of Fort Bonifacio Development Corporation v. Commissioner of Internal
Revenue,9 this Court had already ruled that—

x x x. If the intent of the law were to limit the input tax to cases where actual VAT was
paid, it could have simply said that the tax base shall be the actual value-added tax paid.
Instead, the law as framed contemplates a situation where a transitional input tax credit is
claimed even if there was no actual payment of VAT in the underlying transaction. In
such cases, the tax base used shall be the value of the beginning inventory of goods,
materials and supplies.10

Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug


Corp.,11 this Court had already declared that prior payment of taxes is not required in
order to avail of a tax credit.12 Pertinent portions of the Decision read:
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing
tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit‒subject to certain
limitations‒for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar
provision for donor’s taxes‒again when paid to a foreign country–in computing for the donor’s
tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made
to our government.

Under Section 110, a VAT (Value-Added Tax)-registered person engaging in transactions–


whether or not subject to the VAT–is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on
the purchase or importation of goods or services that is merely due from–not necessarily paid
by–such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered person’s beginning inventory
of goods, materials and supplies, when such amount‒as computed‒is higher than the actual VAT
paid on the said items. Clearly from this provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison with the VAT actually paid–then later
prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs–either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil–and for the
contract price of public works contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated
may, under Section 112(A), apply for the issuance of a tax credit certificate for the amount of
creditable input taxes merely due–again not necessarily paid to–the government and attributable
to such sales, to the extent that the input taxes have not been applied against output taxes. Where
a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt
sales, the amount of creditable input taxes due that are not directly and entirely attributable to
any one of these transactions shall be proportionately allocated on the basis of the volume of
sales. Indeed, in availing of such tax credit for VAT purposes, this provision–as well as the one
earlier mentioned–shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid. Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,


against the income tax imposable under Title II, the amount of income taxes merely incurred–not
necessarily paid–by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may
be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioner’s
redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation,
income that is taxed in the state of source is also taxable in the state of residence, but the tax paid
in the former is merely allowed as a credit against the tax levied in the latter. Apparently,
payment is made to the state of source, not the state of residence. No tax, therefore, has been
previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent
of the net value earned, or five or ten percent of the net local content of export. In order to avail
of such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned. However, we do not agree with
its finding that the carry-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not necessitate the
existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a
net loss in its financial statements is no different from another that presents a net income. Both
are entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.13

Second and third arguments: "The Tax Code does not allow any cash refund of input VAT, only
a tax credit;" and "even for zero-rated or effectively zero-rated VAT-registered taxpayers, the
Tax Code does not allow any cash refund or credit of transitional input tax."14
Citing Sections 110 and 112 of the Tax Code, it is argued that the Tax Code does not allow a
cash refund, only a tax credit.

This is inaccurate.

First. Section 112 of the Tax Code speaks of zero-rated or effectively zero-rated sales. Notably,
the transaction involved in this case is not zero-rated or effectively zero-rated sales.

Second. A careful reading of Section 112 of the Tax Code would show that it allows either a
cash refund or a tax credit for input VAT on zero-rated or effectively zero-rated sales. For
reference, Section 112 is herein quoted, viz:

Sec. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: x x x. (Emphasis supplied.)

Third. Contrary to the Dissent, Section 112 of the Tax Code does not prohibit cash refund or tax
credit of transitional input tax in the case of zero-rated or effectively zero-rated VAT registered
taxpayers, who do not have any output VAT. The phrase "except transitional input tax" in
Section 112 of the Tax Code was inserted to distinguish creditable input tax from transitional
input tax credit. Transitional input tax credits are input taxes on a taxpayer’s beginning inventory
of goods, materials, and supplies equivalent to 8% (then 2%) or the actual VAT paid on such
goods, materials and supplies, whichever is higher. It may only be availed of once by first-time
VAT taxpayers. Creditable input taxes, on the other hand, are input taxes of VAT taxpayers in
the course of their trade or business, which should be applied within two years after the close of
the taxable quarter when the sales were made.

Fourth. As regards Section 110, while the law only provides for a tax credit, a taxpayer who
erroneously or excessively pays his output tax is still entitled to recover the payments he made
either as a tax credit or a tax refund. In this case, since petitioner still has available transitional
input tax credit, it filed a claim for refund to recover the output VAT it erroneously or
excessively paid for the 1st quarter of 1997. Thus, there is no reason for denying its claim for tax
refund/credit.

Fifth. Significantly, the dispositive portion of our September 4, 2012 Decision15 directed the
respondent Commissioner of Internal Revenue (CIR) to either refund the amount paid as output
VAT for the 1st quarter of 1997 or to issue a tax credit certificate. We did not outrightly direct
the cash refund of the amount claimed, thus:

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006 of
the Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE. Respondent
Commissioner of Internal Revenue is ordered to refund to petitioner Fort Bonifacio Development
Corporation the amount of ₱359,652,009.47 paid as output VAT for the first quarter of 1997 in
light of the transitional input tax credit available to petitioner for the said quarter, or in the
alternative, to issue a tax credit certificate corresponding to such amount.

SO ORDERED.16

Sixth. Notably, in the earlier case of Fort Bonifacio, we likewise directed the respondent to either
refund or issue a tax credit certificate. It bears emphasis that this Decision already became final
and executory and entry of judgment was made in due course. The dispositive portion of our
Decision in said case reads:

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals
and the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1)
restrained from collecting from petitioner the amount of ₱28,413,783.00 representing the
transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to
petitioner the amount of ₱347,741,695.74 paid as output VAT for the third quarter of 1997 in
light of the persisting transitional input tax credit available to petitioner for the said quarter, or to
issue a tax credit corresponding to such amount. No pronouncement as to costs.17

Clearly, the CIR has the option to return the amount claimed either in the form of tax credit or
refund.

Fourth argument. "The cash refund, not being supported by any prior actual tax payment, is
unconstitutional since public funds will be used to pay for the refund which is for the exclusive
benefit of petitioner, a private entity."18

Otherwise stated, it is argued that the refund or issuance of tax credit certificate violates the
mandate in Section 4(2) of the Government Auditing Code of the Philippines that "Government
funds or property shall be spent or used solely for public purposes." Again, this is inaccurate. On
the contrary, the grant of a refund or issuance of tax credit certificate in this case would not
contravene the above provision. The refund or tax credit would not be unconstitutional because it
is precisely pursuant to Section 105 of the old NIRC which allows refund/tax credit.

Final Note

As earlier mentioned, the issues in this case are not novel. These same issues had been squarely
ruled upon by this Court in the earlier Fort Bonifacio case. This earlier Fort Bonifacio case
already attained finality and entry of judgment was already made in due course. To reverse our
Decision in this case would logically affect our Decision in the earlier Fort Bonifacio case. Once
again, this Court will become an easy target for charges of "flip-flopping."

ACCORDINGLY, the Motion for Reconsideration is DENIED with FINALITY, the basic issues
presented having been passed upon and no substantial argument having been adduced to warrant
the reconsideration sought. No further pleadings or motions shall be entertained in this case. Let
entry of final judgment be made in due course.
SO ORDERED.
FIRST DIVISION

G.R. No. 175707, November 19, 2014

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL


REVENUE AND REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG AND PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.

G.R. NO. 18003

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL


REVENUE AND REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG AND PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.

G.R. No. 181092

5 FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL


REVENUE AND REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG AND PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

The Court has consolidated these three petitions as they involve the same parties, similar facts and common
questions of law. This is not the first time that Fort Bonifacio Development Corporation (FBDC) has come to
this Court about these issues against the very same respondents, and the Court En Banc has resolved them
in two separate, recent cases1 that are applicable here for reasons to be discussed below.

G.R. No. 175707 is an appeal by certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure from
(a) the Decision2 dated April 22, 2003 of the Court of Appeals in CA-G.R. SP No. 61516
dismissing FBDC’s Petition for Review with regard to the Decision of the Court of Tax Appeals (CTA) dated
October 13, 2000 in CTA Case No. 5885, and from (b) the Court of Appeals Resolution3 dated November
30, 2006 denying its Motion for Reconsideration.

G.R. No. 180035 is likewise an appeal by certiorari pursuant to Rule 45 from (a) the Court of
Appeals Decision4 dated April 30, 2007 in CA-G.R. SP No. 76540 denying FBDC’s Petition for Review with
respect to the CTA Resolution5 dated March 28, 2003 in CTA Case No. 6021, and from (b) the Court of
Appeals Resolution6 dated October 8, 2007 denying its Motion for Reconsideration.

The CTA Resolution reconsidered and reversed its earlier Decision7 dated January 30, 2002 ordering
respondents in CTA Case No. 6021 to refund or issue a tax credit certificate in favor of petitioner in the
amount of P77,151,020.46, representing “VAT erroneously paid by or illegally collected from petitioner for
the first quarter of 1998, and instead denied petitioner’s Claim for Refund therefor.”8

G.R. No. 181092 is also an appeal by certiorari pursuant to Rule 45 from the Court of
Appeals Decision9 dated December 28, 2007 in CA-G.R. SP No. 61158 dismissing FBDC’s petition for
review with respect to the CTA Decision10 dated September 29, 2000 in CTA Case No. 5694. The aforesaid
CTA Decision, which the Court of Appeals affirmed, denied petitioner’s Claim for Refund in the amount of
P269,340,469.45, representing “VAT erroneously paid by or illegally collected from petitioner for the fourth
quarter of 1996.”11

The facts are not in dispute.

Petitioner FBDC (petitioner) is a domestic corporation duly registered and existing under Philippine laws. Its
issued and outstanding capital stock is owned in part by the Bases Conversion Development Authority, a
wholly-owned government corporation created by Republic Act No. 7227 for the purpose of “accelerating the
conversion of military reservations into alternative productive uses and raising funds through the sale of
portions of said military reservations in order to promote the economic and social development of the
country in general.”12 The remaining fifty-five per cent (55%) is owned by Bonifacio Land Corporation, a
consortium of private domestic corporations.13

Respondent Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue
(BIR). Respondent Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, is the chief
of the aforesaid District Office.

The parties entered into a Stipulation of Facts, Documents, and Issue14 before the CTA for each
case. It was established before the CTA that petitioner is engaged in the development and sale of real
property. It is the owner of, and is developing and selling, parcels of land within a “newtown” development
area known as the Fort Bonifacio Global City (the Global City), located within the former military camp
known as Fort Bonifacio, Taguig, Metro Manila.15 The National Government, by virtue of Republic Act No.
722716 and Executive Order No. 40,17 was the one that conveyed to petitioner these parcels of land on
February 8, 1995.

In May 1996, petitioner commenced developing the Global City, and since October 1996, had been selling
lots to interested buyers.18 At the time of acquisition, value-added tax (VAT) was not yet imposed on the
sale of real properties. Republic Act No. 7716 (the Expanded Value-Added Tax [E-VAT] Law),19which took
effect on January 1, 1996, restructured the VAT system by further amending pertinent provisions of the
National Internal Revenue Code (NIRC). Section 100 of the old NIRC was so amended by including “real
properties” in the definition of the term “goods or properties,” thereby subjecting the sale of “real
properties” to VAT. The provision, as amended, reads:

SEC. 100. Value-Added Tax on Sale of Goods or Properties. — (a) Rate and Base of Tax. — There shall be
levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax
equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term “goods or properties” shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business[.]
While prior to Republic Act No. 7716, real estate transactions were not subject to VAT, they became subject
to VAT upon the effectivity of said law. Thus, the sale of the parcels of land by petitioner became subject to
a 10% VAT, and this was later increased to 12%, pursuant to Republic Act No. 9337.20 Petitioner afterwards
became a VAT-registered taxpayer.

On September 19, 1996, in accordance with Revenue Regulations No. 7-95 (Consolidated VAT Regulations),
petitioner submitted to respondent BIR, Revenue District No. 44, Taguig and Pateros, an inventory list of its
properties as of February 29, 1996. The total book value of petitioner’s land inventory amounted to
P71,227,503,200.00.21

On the basis of Section 105 of the NIRC,22 petitioner claims a transitional or presumptive input tax
credit of 8% of P71,227,503,200.00, the total value of the real properties listed in its inventory, or a total
input tax credit of P5,698,200,256.00.23 After the value of the real properties was reduced due to a
reconveyance by petitioner to BCDA of a parcel of land, petitioner claims that it is entitled to input tax
credit in the reduced amount of P4,250,475,000.48.24

What petitioner seeks to be refunded are the actual VAT payments made by it in cash, which it claims were
either erroneously paid by or illegally collected from it.25 Each Claim for Refund is based on petitioner’s
position that it is entitled to a transitional input tax credit under Section 105 of the old NIRC, which more
than offsets the aforesaid VAT payments.

G.R. No. 175707

Petitioner’s VAT returns filed with the BIR show that for the second quarter of 1997, petitioner received the
total amount of P5,014,755,287.40 from its sales and lease of lots, on which the output VAT payable was
P501,475,528.74.26 The VAT returns likewise show that petitioner made cash payments totaling
P486,355,846.78 and utilized its input tax credit of P15,119,681.96 on purchases of goods and services.27
On February 11, 1999, petitioner filed with the BIR a claim for refund of the amount of P486,355,846.78
which it paid in cash as VAT for the second quarter of 1997.28

On May 21, 1999, petitioner filed with the CTA a petition for review29 by way of appeal, docketed as CTA
Case No. 5885, from the alleged inaction by respondents of petitioner’s claim for refund with the BIR. On
October 1, 1999, the parties submitted to the CTA a Stipulation of Facts, Documents and Issue.30 On
October 13, 2000, the CTA issued its Decision31 in CTA Case No. 5885 denying petitioner’s claim for refund
for lack of merit.

On November 23, 2000, petitioner filed with the Court of Appeals a Petition for Review of the aforesaid CTA
Decision, which was docketed as CA-G.R SP No. 61516. On April 22, 2003, the CA issued its
Decision32 dismissing the Petition for Review. On November 30, 2006, the Court of Appeals issued its
Resolution33 denying petitioner’s Motion for Reconsideration.

On December 21, 2006, this Petition for Review was filed.

Petitioner submitted its Memorandum34 on November 7, 2008 while respondents filed their “Comment”35on
May 4, 2009.36

On December 2, 2009, petitioner submitted a Supplement37 to its Memorandum dated November 6, 2008,
stating that the said case is intimately related to the cases of Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue, G.R. No. 158885, and Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue,” G.R. No. 170680, which were already decided by this Court, and which
involve the same parties and similar facts and issues.38

Except for the amounts of tax refund being claimed and the periods covered for each claim, the
facts in this case and in the other two consolidated cases below are the same. The parties
entered into similar Stipulations in the other two cases consolidated here.39

G.R. No. 180035

We quote relevant portions of the parties’ Stipulation of Facts, Documents and Issue in CTA Case No.
602140 below:

1.11. Per VAT returns filed by petitioner with the BIR, for the second quarter of 1998, petitioner
derived the total amount of P903,427,264.20 from its sales and lease of lots, on which the output
VAT payable to the Bureau of Internal Revenue was P90,342,726.42.

1.12. The VAT returns filed by petitioner likewise show that to pay said amount of
P90,342,726.42 due to the BIR, petitioner made cash payments totalling P77,151,020.46 and
utilized its regular input tax credit of P39,878,959.37 on purchases of goods and services.

1.13. On November 22, 1999, petitioner filed with the BIR a claim for refund of the amount of
P77,151,020.46 which it paid as value-added tax for the first quarter of 1998.

1.14. Earlier, on October 8, 1998 and November 17, 1998, February 11, 1999, May 11, 1999, and
September 10, 1999, based on similar grounds, petitioner filed with the BIR claims for refund of the
amounts of P269,340,469.45, P359,652,009.47, P486,355,846.78, P347,741,695.74, and P15,036,891.26,
representing value-added taxes paid by it on proceeds derived from its sales and lease of lots for the
quarters ended December 31, 1996, March 31, 1997, June 30, 1997, September 30, 1997, and December
31, 1997, respectively. After deducting these amounts of P269,340,469.45, P359,652,009.47,
P486,355,846.78, P347,741,695.74, and P15,036,891.26 from the total amount of P5,698,200,256.00
claimed by petitioner as input tax credit, the remaining input tax credit more than sufficiently covers the
amount of P77,151,020.46 subject of petitioner’s claim for refund of November 22, 1999.

1.15. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for refund
of November 22, 1999.41 (Emphases ours.)

The petition in G.R. No. 180035 “seeks to correct the unauthorized limitation of the term ‘real properties’ to
‘improvements thereon’ by Revenue Regulations 7-95 and the error of the Court of Tax Appeals and Court of
Appeals in sustaining the aforesaid Regulations.”42 This theory of petitioner is the same for all three cases
now before us.
On March 14, 2013, petitioner filed a Motion for Consolidation43 of G.R. No. 180035 with G.R. No. 175707.

Petitioner submitted its Memorandum44 on September 15, 2009 while respondents filed theirs on September
22, 2009.45

G.R. No. 181092

The facts summarized below are found in the parties’ Stipulation of Facts, Documents and Issue in CTA Case
No. 569446:

1.09. Per VAT returns filed by petitioner with the BIR, for the fourth quarter of 1996, petitioner derived
the total amount of P3,498,888,713.60 from its sales and lease of lots, on which the output VAT
payable to the Bureau of Internal Revenue was P318,080,792.14.

1.10. The VAT returns filed by petitioner likewise show that to pay said amount of P318,080,792.14 due to
the BIR, petitioner made cash payments totalling P269,340,469.45 and utilized (a) part of the total
transitional/presumptive input tax credit of P5,698,200,256.00 being claimed by it to the extent of
P28,413,783.00; and (b) its regular input tax credit of P20,326,539.69 on purchases of goods and services.

1.11. On October 8, 1998 petitioner filed with the BIR a claim for refund of the amounts of
P269,340,469.45, which it paid as value-added tax.

1.12. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for
refund.47 (Emphases ours.)

Petitioner submitted its Memorandum48 on January 18, 2010 while respondents filed theirs on October 14,
2010.49

On March 14, 2013, petitioner filed a Motion for Consolidation50 of G.R. No. 181092 with G.R. No. 175707.

On January 23, 2014, petitioner filed a Motion to Resolve51 these consolidated cases, alleging that the
parties had already filed their respective memoranda; and, more importantly, that the principal issue in
these cases, whether petitioner is entitled to the 8% transitional input tax granted in Section 105 (now
Section 111[A]) of the NIRC based on the value of its inventory of land, and as a consequence, to a refund
of the amounts it paid as VAT for the periods in question, had already been resolved by the Supreme
Court En Banc in its Decision dated April 2, 2009 in G.R. Nos. 158885 and 170680, as well as its Decision
dated September 4, 2012 in G.R. No. 173425. Petitioner further alleges that said decided cases involve the
same parties, facts, and issues as the cases now before this Court.52

THEORY OF PETITIONER

Petitioner claims that “the 10% value-added tax is based on the gross selling price or gross value in money
of the ‘goods’ sold, bartered or exchanged.”53 Petitioner likewise claims that by definition, the term “goods”
was limited to “movable, tangible objects which is appropriable or transferable” and that said term did not
originally include “real property.”54 It was previously defined as follows under Revenue Regulations No. 5-
87:

(p) “Goods” means any movable, tangible objects which is appropriable or transferrable.

Republic Act No. 7716 (E-VAT Law, January 1, 1996) expanded the coverage of the original VAT Law
(Executive Order No. 273), specifically Section 100 of the old NIRC. According to petitioner, while under
Executive Order No. 273, the term “goods” did not include real properties, Republic Act No. 7716, in
amending Section 100, explicitly included in the term “goods” “real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business.” Consequently, the sale, barter, or
exchange of real properties was made subject to a VAT equivalent to 10% (later increased to 12%, pursuant
to Republic Act No. 9337) of the gross selling price of real properties.

Among the new provisions included by Executive Order No. 273 in the NIRC was the following:

SEC. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to
8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax.

According to petitioner, the E-VAT Law, Republic Act No. 7716, did not amend Section 105. Thus, Section
105, as quoted above, remained effective even after the enactment of Republic Act No. 7716.

Previously, or on December 9, 1995, the Secretary of Finance and the Commissioner of Internal Revenue
issued Revenue Regulations No. 7-95, which included the following provisions:

SECTION 4.100-1. Value-added tax on sale of goods or properties. — VAT is imposed and collected on every
sale, barter or exchange or transactions “deemed sale” of taxable goods or properties at the rate of 10% of
the gross selling price.

“Gross selling price” means the total amount of money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties,
excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the
gross selling price. In the case of sale, barter or exchange of real property subject to VAT, gross selling price
shall mean the consideration stated in the sales document or the zonal value whichever is higher. Provided
however, in the absence of zonal value, gross selling price refers to the market value shown in the latest
declaration or the consideration whichever is higher.

“Taxable sale” refers to the sale, barter, exchange and/or lease of goods or properties, including
transactions “deemed sale” and the performance of service for a consideration, all of which are subject to
tax under Sections 100 and 102 of the Code.

Any person otherwise required to register for VAT purposes who fails to register shall also be liable to VAT
on his sale of taxable goods or properties as defined in the preceding paragraph. The sale of goods subject
to excise tax is also subject to VAT, except manufactured petroleum products (other than lubricating oil,
processed gas, grease, wax and petrolatum).

“Goods or properties” refer to all tangible and intangible objects which are capable of pecuniary
estimation and shall include:
1. Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business.

xxxx
SECTION 4.104-1. Credits for input tax. —

“Input tax” means the value-added tax due from or paid by a VAT-registered person on importation of goods
or local purchases of goods or services, including lease or use of property, from another VAT-registered
person in the course of his trade or business. It shall also include the transitional or presumptive input tax
determined in accordance with Section 105 of the Code.

xxxx

SECTION 4.105-1. Transitional input tax on beginning inventories. — Taxpayers who became VAT-registered
persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who
voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive
input tax on the inventory on hand as of December 31, 1995 on the following; (a) goods purchased for sale
in their present condition; (b) materials purchased for further processing, but which have not yet undergone
processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all
of which are for sale or for use in the course of the taxpayer's trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after effectivity of E.O. 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher,
which amount may be allowed as tax credit against the output tax of the VAT-registered person.

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8%
excluding goods that are exempt from VAT under SECTION 103. Only VAT-registered persons shall be
entitled to presumptive input tax credits.

xxxx

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits —

(i) For goods, materials or supplies not for sale but purchased for use in
business in their present condition, which are not intended for
further processing and are on hand as of December 31, 1995, a
presumptive input tax equivalent to 8% of the value of the goods or
properties shall be allowed.
(ii) For goods or properties purchased with the object of resale in their
present condition, the same presumptive input tax equivalent to 8%
of the value of the goods unused as of December 31, 1995 shall be
allowed, which amount may also be credited against the output tax
of a VAT-registered person.
(iii) For real estate dealers, the presumptive input tax of 8% of the book
value of improvements constructed on or after January 1, 1988 (the
effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraph (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods
or properties and improvements showing the quantity, description, and amount should be filed with the RDO
not later than January 31, 1996. (Emphases supplied.)

Petitioner argues that Section 4.100-1 of Revenue Regulations No. 7-95 explicitly limited the term “goods”
as regards real properties to “improvements, such as buildings, roads, drainage systems, and other similar
structures,” thereby excluding the real property itself from the coverage of the term “goods” as it is used in
Section 105 of the NIRC. This has brought about, as a consequence, the issues involved in the instant case.

Petitioner claims that the “Court of Appeals erred in not holding that Revenue Regulations No. 6-97 has
effectively repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter limited the
transitional/presumptive input tax credit which may be claimed under Section 105 of the NIRC to the
‘improvements’ on real properties.”55 Petitioner argues that the provision in Section 4.105-1 of Revenue
Regulations No. 7-95 stating that in the case of real estate dealers, the basis of the input tax credit shall be
the improvements, has been deleted by Revenue Regulations No. 6-97, dated January 2, 1997, which
amended Revenue Regulations No. 7-95. Revenue Regulations No. 6-97 was issued to implement Republic
Act No. 8241 (the law amending Republic Act No. 7716, the E-VAT Law), which took effect on January 1,
1997.

Petitioner notes that Section 4.105-1 of Revenue Regulations No. 6-97 is but a reenactment of Section
4.105-1 of Revenue Regulations No. 7-95, with the only difference being that the following paragraph in
Revenue Regulations No. 7-95 was deleted:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or
after the effectivity of E.O. 273 (January 1, 1988).

Petitioner calls this an express repeal, and with the deletion of the above paragraph, what stands and should
be applied “is the statutory definition in Section 100 of the NIRC of the term ‘goods’ in Section 105
thereof.”56

Petitioner contends that the relevant provision now states that “[t]he transitional input tax credit shall be
eight percent (8%) of the value of the beginning inventory x x x on such goods, materials and supplies.” It
no longer limits the allowable transitional input tax credit to “improvements” on the real properties. The
amendment recognizes that the basis of the 8% input tax credit should not be confined to the value of the
improvements. Petitioner further contends that the Commissioner of Internal Revenue has in fact corrected
the mistake in Revenue Regulations No. 7-95.57

Petitioner argues that Revenue Regulations No. 6-97, being beneficial to the taxpayer, should be given a
retroactive application.58 Petitioner states that the transactions involved in these consolidated cases took
place after Revenue Regulations No. 6-97 took effect, under the provisions of which the transitional input
tax credit with regard to real properties would be based on the value of the land inventory and not limited to
the value of the improvements.

Petitioner assigns another error: the Court of Appeals erred in holding that Revenue Regulations No. 7-95 is
a valid implementation of the NIRC and in according it great respect, and should have held that the same is
invalid for being contrary to the provisions of Section 105 of the NIRC.59

Petitioner contends that Revenue Regulations No. 7-95 is not valid for being contrary to the express
provisions of Section 105 of the NIRC, and in fact amends the same, for it limited the scope of Section 105
“to less than what the law provides.”60 Petitioner elaborates:

[Revenue Regulations No. 7-95] illegally constricted the provisions of the aforesaid section. It delimited the
coverage of Section 105 and practically amended it in violation of the fundamental principle that
administrative regulations are subordinate to the law. Based on the numerous authorities cited above,
Section 4.105-1 and the Transitory Provisions of Revenue Regulations No. 7-95 are invalid and ineffective
insofar as they limit the input tax credit to 8% of the value of the “improvements” on land, for being
contrary to the express provisions of Section 105, in relation to Section 100, of the NIRC, and the Court of
Appeals should have so held.61

Petitioner likewise raises the following arguments:

 The rule that the construction given by the administrative agency charged with the enforcement of
the law should be accorded great weight by the courts, does not apply here.62
 x x x Section 4.105-1 of Revenue Regulations No. 7-95 neither exclude[s] nor prohibit[s] that the
8% input tax credit may also [be] based on the taxpayer’s inventory of land.63
 The issuance of Revenue Regulations No. 7-95 by the [BIR], which changed the statutory definition
of “goods” with regard to the application of Section 105 of the NIRC, and the declaration of validity
of said regulations by the Court of Appeals and Court of Tax Appeals, was in violation of the
fundamental principle of separation of powers.64

xxxx

Insofar, therefore, as Revenue Regulation[s] No. 7-95 limited the scope of the term “goods” under Section
105, to “improvements” on real properties, contrary to the definition of “goods” in Section 100, [RR] No. 7-
95 decreed “what the law shall be”, now “how the law may be enforced”, and is, consequently, of no effect
because it constitutes undue delegation of legislative power.

xxxx

[T]he transgression by the BIR and the CTA and CA of the basic principle of separation of powers, including
the fundamental rule of non-delegation of legislative power, is clear.65

Furthermore, petitioner claims that:

SINCE THE PROVISIONS OF SECTION 105 OF THE [NIRC] IN RELATION TO SECTION 100 THEREOF, ARE
CLEAR, THERE WAS NO BASIS AND NECESSITY FOR THE BUREAU OF INTERNAL REVENUE AND THE COURT
OF APPEALS AND THE COURT OF TAX APPEALS TO INTERPRET AND CONSTRUE THE SAME.66

PETITIONER IS CLEARLY ENTITLED TO THE TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDIT GRANTED IN


SECTION 105 OF THE NIRC AND HENCE TO A REFUND OF THE VALUE-ADDED TAX PAID BY IT FOR THE
SECOND QUARTER OF 1997.67

Petitioner insists that there was no basis and necessity for the BIR, the CTA, and the Court of Appeals to
interpret and construe Sections 100 and 105 of the NIRC because “where the law speaks in clear and
categorical language, or the terms of the statute are clear and unambiguous and free from doubt, there is
no room for interpretation or construction and no interpretation or construction is called for; there is only
room for application.”68 Petitioner asserts that legislative intent is determined primarily from the language
of the statute; legislative intent has to be discovered from the four corners of the law; and thus, where no
ambiguity appears, it may be presumed conclusively that the clear and explicit terms of a statute express
the legislative intention.69

So looking at the cases now before us, petitioner avers that the Court of Appeals, the CTA, and the BIR did
not merely interpret and construe Section 105, and that they virtually amended the said section, for it is
allegedly clear from Section 105 of the old NIRC, in relation to Section 100, that “legislative intent is to the
effect that the taxpayer is entitled to the input tax credit based on the value of the beginning inventory of
land, not merely on the improvements thereon, and irrespective of any prior payment of sales tax or VAT.”70

THEORY OF RESPONDENTS

Petitioner’s claims for refund were consistently denied in the three cases now before us. Even if in one case,
G.R. No. 180035, petitioner succeeded in getting a favorable decision from the CTA, the grant of refund or
tax credit was subsequently reversed on respondents’ Motion for Reconsideration, and such denial of
petitioner’s claim was affirmed by the Court of Appeals.

Respondents’ reasons for denying petitioner’s claims are summarized in their Comment in G.R. No. 175707,
and we quote:

REASONS WHY PETITION SHOULD BE


DENIED OR DISMISSED

1. The 8% input tax credit provided for in Section 105 of the NIRC, in relation to Section 100
thereof, is based on the value of the improvements on the land.

2. The taxpayer is entitled to the input tax credit provided for in Section 105 of the NIRC only
if it has previously paid VAT or sales taxes on its inventory of land.

3. Section 4.105-1 of Revenue Regulations No. 7-95 of the BIR is valid, effective and has the
force and effect of law, which implemented Section 105 of the NIRC.71

In respondents’ Comment72 dated November 3, 2008 in G.R. No. 180035, they averred that petitioner’s
claim for the 8% transitional/presumptive input tax is “inconsistent with the purpose and intent of the law in
granting such tax refund or tax credit.”73 Respondents raise the following arguments:

1. The transitional input tax provided under Section 105 in relation to Section 100 of the Tax Code, as
amended by EO No. 273 effective January 1, 1988, is subject to certain conditions which petitioner
failed to meet.74

2. The claim for petitioner for transitional input tax is in the nature of a tax exemption which should be
strictly construed against it.75

3. Revenue Regulations No. 7-95 is valid and consistent with provisions of the NIRC.76

Moreover, respondents contend that:

“[P]etitioner is not legally entitled to any transitional input tax credit, whether it be the 8% presumptive
input tax credit or any actual input tax credit in respect of its inventory of land brought into the VAT regime
beginning January 1, 1996, in view of the following:

VAT free acquisition of the raw land. – petitioner purchased and acquired, from the Government, the
aforesaid raw land under a VAT-free sale transaction. The Government, as a vendor, was tax-exempt and
accordingly did not pass on any VAT or sales tax as part of the price paid therefor by the petitioner.

No transitory input tax on inventory of land is allowed. Section 105 of the Code, as amended by
Republic Act No. 7716, and as implemented by Section 4.105-1 of Revenue Regulations No. 7-95, expressly
provides that no transitional input tax credit shall be allowed to real estate dealers in respect of their
beginning inventory of land brought into the VAT regime beginning January 1, 1996 (supra). Likewise, the
Transitory Provisions [(a) (iii)] of Revenue Regulations No. 7-95 categorically states that “for real estate
dealers, the presumptive input tax of 8% of the book value of improvements constructed on or after January
1, 1998 (effectivity of E.O. 273) shall be allowed.” For purposes of subparagraphs (i), (ii) and (iii) above, an
inventory as of December 31, 1995 of such goods or properties and improvements showing the quantity,
description, and amount should be filed with the RDO not later than January 31, 1996. It is admitted that
petitioner filed its inventory listing of real properties on September 19, 1996 or almost nine (9) months late
in contravention [of] the requirements in Revenue Regulations No. 7-95.”77

Respondents, quoting the Civil Code,78 argue that Section 4.105-1 of Revenue Regulations No. 7-95 has the
force and effect of a law since it is not contrary to any law or the Constitution. Respondents add that
“[w]hen the administrative agency promulgates rules and regulations, it makes a new law with the force and
effect of a valid law x x x.”79

ISSUES

The main issue before us now is whether or not petitioner is entitled to a refund of the amounts of:
1) P486,355,846.78 in G.R. No. 175707, 2) P77,151,020.46 for G.R. No. 180035, and 3)
P269,340,469.45 in G.R. No. 181092, which it paid as value-added tax, or to a tax credit for said
amounts.

To resolve the issue stated above, it is also necessary to determine:

 Whether the transitional/presumptive input tax credit under Section 105 of the NIRC may be
claimed only on the “improvements” on real properties;
 Whether there must have been previous payment of sales tax or value-added tax by petitioner on
its land before it may claim the input tax credit granted by Section 105 of the NIRC;
 Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the NIRC; and
 Whether the issuance of Revenue Regulations No. 7-95 by the BIR, and declaration of validity of
said Regulations by the Court of Tax Appeals and the Court of Appeals, was in violation of the
fundamental principle of separation of powers.

THE RULINGS BELOW


G.R. No. 175707

CTA Case No. 5885 Decision (October 13, 2000) The CTA traced the history of “transitional input tax
credit” from the original VAT Law of 1988 (Executive Order No. 273) up to the Tax Reform Act of 1997 and
looked into Section 105 of the Tax Code. According to the CTA, the BIR issued Revenue Regulations No. 5-
87, specifically Section 26(b),80 to implement the provisions of Section 105. The CTA concluded from these
provisions that “the purpose of granting transitional input tax credit to be utilized as payment for output VAT
is primarily to give recognition to the sales tax component of inventories which would qualify as input tax
credit had such goods been acquired during the effectivity of the VAT Law of 1988.”81 The CTA stated that
the purpose of transitional input tax credit remained the same even after the amendments introduced by the
E-VAT Law.82 The CTA held that “the rationale in granting the transitional input tax credit also serves as its
condition for its availment as a benefit”83 and that “[i]nherent in the law is the condition of prior payment of
VAT or sales taxes.”84 The CTA excluded petitioner from availing of the transitional input tax credit provided
by law, reasoning that “to base the 8% transitional input tax on the book value of the land is to negate the
purpose of the law in granting such benefit. It would be tantamount to giving an undeserved bonus to real
estate dealers similarly situated as petitioner which the Government cannot afford to
provide.”85 Furthermore, the CTA held that respondent was correct in basing the 8% transitional input tax
credit on the value of the improvements on the land, citing Section 4.105-1 of Revenue Regulations No. 7-
95, which the CTA claims is consistent and in harmony with the law it seeks to implement. Thus, the CTA
denied petitioner’s claim for refund.86

CA-G.R. No. 61516 Decision (April 22, 2003) The Court of Appeals affirmed the CTA and ruled that
petitioner is not entitled to refund or tax credit in the amount of P486,355,846.78 and stated that “Revenue
Regulations No. 7-95 is a valid implementation of the NIRC.”87 According to the Court of Appeals:

“[P]etitioner acquired the contested property from the National Government under a VAT-free
transaction. The Government, as a vendor was outside the operation of the VAT and ergo, could not
possibly have passed on any VAT or sales tax as part of the purchase price to the petitioner as vendee.”88

x x x [T]he grant of transitional input tax credit indeed presupposes that the manufacturers, producers and
importers should have previously paid sales taxes on their inventories. They were given the benefit of
transitional input tax credits, precisely, to make up for the previously paid sales taxes which were now
abolished by the VAT Law. It bears stressing that the VAT Law took the place of privilege taxes, percentage
taxes and sales taxes on original or subsequent sale of articles. These taxes were substituted by the VAT at
the constant rate of 0% or 10%.8

3. CA-G.R. No. 61516 Resolution (November 30, 2006)

Upon petitioner’s Motion for Reconsideration, the Court of Appeals affirmed its decision, but we find the
following statement by the appellate court worthy of note:

We concede that the inventory restrictions under Revenue Regulation No. 7-95 limiting the coverage of the
inventory only to acquisition cost of the materials used in building “improvements” has already been deleted
by Revenue Regulation 6-97. This notwithstanding, we are poised to sustain our earlier ruling as regards
the refund presently claimed.90
G.R. No. 180035

CTA Case No. 6021 Decision (January 30, 2002) The CTA sustained petitioner’s position and held that
respondent erred in basing the transitional input tax credit of real estate dealers on the value of the
improvements.91 The CTA ratiocinated as follows:

This Court, in upholding the position taken by the petitioner, is convinced that Section 105 of the Tax Code
is clear in itself. Explicit therefrom is the fact that a taxpayer shall be allowed a transitional/presumptive
input tax credit based on the value of its beginning inventory of goods which is defined in Section 100 as to
encompass even real property. x x x.92

The CTA went on to point out inconsistencies it had found between the transitory provisions of Revenue
Regulations No. 7-95 and the law it sought to implement, in the following manner:

Notice that letter (a)(ii) of the x x x transitory provisions93 states that goods or properties purchased with
the object of resale in their present condition comes with the corresponding 8% presumptive input tax of
the value of the goods, which amount may also be credited against the output tax of a VAT-registered
person. It must be remembered that Section 100 as amended by Republic Act No. 7716 extends the term
“goods or properties” to real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business. This provision alone entitles Petitioner to the 8% presumptive input tax of the
value of the land (goods or properties) sold. However in letter (a)(iii) of the same Transitory Provisions,
Respondent apparently changed his (sic) course when it declared that real estate dealers are only entitled to
the 8% of the value of the improvements. This glaring inconsistency between the two provisions prove that
Revenue Regulations No. 7-95 was not a result of an intensive study and analysis and may have been
haphazardly formulated.94

The CTA held that the implementing regulation, which provides that the 8% transitional input tax shall be
based on the improvements only of the real properties, is neither valid nor effective.95 The CTA also
sustained petitioner’s argument that Revenue Regulations No. 7-95 provides no specific date as to when the
inventory list should be submitted. The relevant portion of the CTA decision reads:

The only requirement is that the presumptive input tax shall be supported by an inventory of goods as
shown in a detailed list to be submitted to the BIR. Moreover, the requirement of filing an inventory of
goods not later than January 31, 1996 in the transitory provision of the same regulation refers to the
recognition of presumptive input tax on goods or properties on hand as of December 31, 1995 of taxpayers
already liable to VAT as of that date.
Clearly, Petitioner is entitled to the presumptive input tax in the amount of P5,698,200,256.00, computed as
follows:

Book Value of Inventory x x x P71,227,503,200.00


Multiply by Presumptive
Input Tax rate 8%
Available Presumptive Input Tax P5,698,200,256.00
The failure of the Petitioner to consider the presumptive input tax in the computation of its output tax
liability for the 1st quarter of 1998 results to overpayment of the VAT for the same period.

To prove the fact of overpayment, Petitioner presented the original Monthly VAT Declaration for the month
of January 1998 showing the amount of P77,151,020.46 as the cash component of the value-added taxes
paid (Exhibits E-14 & E-14-A) which is the subject matter of the instant claim for refund.

In Petitioner’s amended quarterly VAT return for the 1st quarter of 1998 (Exhibit D-1), Petitioner deducted
the amount of P77,151,020.46 from the total available input tax to show that the amount being claimed
would no longer be available as input tax credit.

In conclusion, the Petitioner has satisfactorily proven its entitlement to the refund of value-added taxes paid
for the first quarter of taxable year 1998.

WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondents are
hereby ORDERED to REFUND or issue a TAX CREDIT CERTIFICATE in favor of the Petitioner the total
amount of P77,151,020.46 representing the erroneously paid value-added tax for the first quarter of 1998.96

CTA Case No. 6021 Resolution (March 28, 2003)


The CTA reversed its earlier ruling upon respondents’ motion for reconsideration and thus denied
petitioner’s claim for refund. The CTA reasoned and concluded as follows:

The vortex of the controversy in the instant case actually involves the question of whether or not Section
4.105-1 of Revenue Regulations No. 7-95, issued by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue, is valid and consistent with and not violative of Section 105 of the Tax
Code, in relation to Section 100 (a)(1)(A).

xxxx

We agree with the position taken by the respondents that Revenue Regulations No. 7-95 is not contrary to
the basic law which it seeks to implement. As clearly worded, Section 105 of the Tax Code provides that a
person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall
be allowed 8% transitional input tax subject to the filing of an inventory as prescribed by regulations.

Section 105, which requires the filing of an inventory for the grant of the transitional input tax, is couched in
a manner where there is a need for an implementing rule or regulation to carry its intendment. True to its
wordings, the BIR issued Revenue Regulations No. 7-95 (specifically Section 4.105-1) which succinctly
mentioned that the basis of the presumptive input tax shall be the improvements in case of real estate
dealers.97

xxxx

WHEREFORE, in view of the foregoing, the instant Motion for Reconsideration filed by respondents is
hereby GRANTED. Accordingly, petitioner’s claim for refund of the alleged overpaid Value-Added Tax in the
amount of P77,151,020.46 covering the first quarter of 1998 is hereby DENIED for lack of merit.98

3. CA-G.R. SP No. 76540 Decision (April 30, 2007)

The Court of Appeals affirmed the CTA’s Resolution denying petitioner’s claim for refund, and we quote
portions of the discussion from the Court of Appeals decision below:
To Our mind, the key to resolving the jugular issue of this controversy involves a deeper analysis on how the
much-contested transitional input tax credit has been encrypted in the country’s value-added tax (VAT)
system.

xxxx

x x x [T]he Commissioner of Internal Revenue promulgated Revenue Regulations No. 7-95 which laid
down, among others, the basis of the transitional input tax credit for real estate dealers:99

xxxx

The Regulation unmistakably allows credit for transitional input tax of any person who becomes liable to VAT
or who elects to be a VAT-registered person. More particularly, real estate dealers who were beforehand not
subject to VAT are allowed a tax credit to cushion the staggering effect of the newly imposed 10% output
VAT liability under RA No. 7716.

Bearing in mind the purpose of the transitional input tax credit under the VAT system, We find it
incongruous to grant petitioner’s claim for tax refund. We take note of the fact that petitioner acquired the
Global City lots from the National Government. The transaction was not subject to any sales or business
tax. Since the seller did not pass on any tax liability to petitioner, the latter may not claim tax
credit. Clearly then, petitioner cannot simply demand that it is entitled to the transitional input tax credit.

xxxx

Another point. Section 105 of the National Internal Revenue Code, as amended by EO No. 273, explicitly
provides that the transitional input tax credit shall be based on “the beginning inventory of goods, materials
and supplies or the actual value-added tax paid on such goods, materials and supplies, whichever is higher.”
Note that the law did not simply say – the transitional input tax credit shall be 8% of the beginning
inventory of goods, materials and supplies.

Instead, lawmakers went on to say that the creditable input tax shall be whichever is higher between the
value of the inventory and the actual VAT paid. Necessarily then, a comparison of these two figures would
have to be made. This strengthens Our view that previous payment of the VAT is indispensable to
determine the actual value of the input tax creditable against the output tax. So too, this is in consonance
with the present tax credit method adopted in this jurisdiction whereby 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.

We proceed to traverse another argument raised in this controversy. Petitioner insists that the term “goods”
which was one of the bases in computing the transitional input tax credit must be construed so as to
include real properties held primarily for sale to customers. Petitioner posits that respondent
Commissioner practically rewrote the law when it issued Revenue Regulations No. 7-95 which limited the
basis of the 8% transitional input tax credit to the value of improvements alone.

Petitioner is clearly mistaken.

The term “goods” has been defined to mean any movable or tangible objects which are appreciable or
tangible. More specifically, the word “goods” is always used to designate wares, commodities, and personal
chattels; and does not include chattels real. “Real property” on the other hand, refers to land, and generally
whatever is erected or growing upon or affixed to land. It is therefore quite absurd to equate “goods” as
being synonymous to “properties”. The vast difference between the terms “goods” and “real properties” is
so obvious that petitioner’s assertion must be struck down for being utterly baseless and specious.

Along this line, We uphold the validity of Revenue Regulations No. 7-95. The authority of the Secretary of
Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and
regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be
disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should
deserve weight and respect by the courts. Much more fundamental than either of the above, however, is
that all such issuances must not override, but must remain consistent and in harmony with, the law they
seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to
supplant nor to modify, the law. Revenue Regulations No. 7-95 is clearly not inconsistent with the prevailing
statute insofar as the provision on transitional input tax credit is concerned.100
CA-G.R. SP No. 76540 Resolution (October 8, 2007)

In this Resolution, the Court of Appeals denied petitioner’s Motion for Reconsideration of its Decision dated
April 30, 2007.

G.R. No. 181092

CTA Case No. 5694 Decision (September 29, 2000)


The CTA ruled that petitioner is not automatically entitled to the 8% transitional input tax allowed under
Section 105 of the Tax Code based solely on its inventory of real properties, and cited the rule on uniformity
in taxation duly enshrined in the Constitution.101 According to the CTA:

As defined under the above Section 104 of the Tax Code, an “input tax” means the VAT paid by a VAT-
registered person in the course of his trade or business on importation of goods or services from a VAT-
registered person; and that such tax shall include the transitional input tax determined in accordance with
Section 105 of the Tax Code, supra.102

Applying the rule on statutory construction that particular words, clauses and phrases should not be studied
as detached and isolated expressions, but the whole and every part of the statute must be considered in
fixing the meaning of any of its parts in order to produce a harmonious whole, the phrase “transitional input
tax” found in Section 105 should be understood to encompass goods, materials and supplies which are
subject to VAT, in line with the context of “input tax” as defined in Section 104, most especially that the
latter includes, and immediately precedes, the former under its statutory meaning. Petitioner’s contention
that the 8% transitional input tax is statutorily presumed to the extent that its real properties which have
not been subjected to VAT are entitled thereto, would directly contradict “input tax” as defined in Section
104 and would invariably cause disharmony.103

The CTA held that the 8% transitional input tax should not be viewed as an outright grant or presumption
without need of prior taxes having been paid. Expounding on this, the CTA said:

The simple instance in the aforesaid paragraphs of requiring the tax on the materials, supplies or goods
comprising the inventory to be currently unutilized as deferred sales tax credit before the 8% presumptive
input tax can be enjoyed readily leads to the inevitable conclusion that such 8% tax cannot be just granted
to any VAT liable person if he has no priorly paid creditable sales taxes. Legislative intent thus clearly points
to priorly paid taxes on goods, materials and supplies before a VAT-registered person can avail of the 8%
presumptive input tax.104

Anent the applicability to petitioner’s case of the requirement under Article VI, Section 28, par. 1 of the
Constitution that the rule of taxation shall be uniform and equitable, the CTA held thus:

Granting arguendo that Petitioner is statutorily presumed to be entitled to the 8% transitional input tax as
provided in Section 105, even without having previously paid any tax on its inventory of goods, Petitioner
would be placed at a more advantageous position than a similar VAT-registered person who also becomes
liable to VAT but who has actually paid VAT on his purchases of goods, materials and supplies. This is
evident from the alternative modes of acquiring the proper amount of transitional input tax under Section
105, supra. One is by getting the equivalent amount of 8% tax based on the beginning inventory of goods,
materials and supplies and the other is by the actual VAT paid on such goods, materials and supplies,
whichever is higher.

As it is supposed to work, the transitional input tax should answer for the 10% output VAT liability that a
VAT-registered person will incur once he starts business operations. While a VAT-registered person who is
allowed a transitional input tax based on his actual payment of 10% VAT on his purchases can utilize the
same to pay for his output VAT liability, a similar VAT-registered person like herein Petitioner, when allowed
the alternative 8% transitional input tax, can offset his output VAT liability equally through such 8% tax
even without having paid any previous tax. This obvious inequity that may arise could not have been the
intention and purpose of the lawmakers in granting the transitional input tax credit. x x x105

Evidently, Petitioner is not similarly situated both as to privileges and liabilities to that of a VAT-registered
person who has paid actual 10% input VAT on his purchases of goods, materials and supplies. The latter
person will not earn anything from his transitional input tax which, to emphasize, has been paid by him
because the same will just offset his 10% output VAT liability. On the other hand, herein Petitioner will
earn gratis the amount equivalent to 10% output VAT it has passed on to buyers for the simple reason that
it has never previously paid any input tax on its goods. Its gain will be facilitated by herein claim for refund
if ever granted. This is the reason why we do not see any incongruity in Section 4.105-1 of Revenue
Regulations No. 7-95 as it relates to Section 105 of the 1996 Tax Code, contrary to the contention of
Petitioner. Section 4.105-1 (supra), which bases the transitional input tax credit on the value of the
improvements, is consistent with the purpose of the law x x x.106

CA-G.R. SP No. 61158 Decision (December 28, 2007)

The Court of Appeals affirmed the CTA’s denial of petitioner’s claim for refund and upheld the validity of the
questioned Revenue Regulation issued by respondent Commissioner of Internal Revenue, reasoning as
follows:

Sec. 105 of the NIRC, as amended, provides that the allowance for the 8% input tax on the beginning
inventory of a VAT-covered entity is “subject to the filing of an inventory as prescribed by regulations.” This
means that the legislature left to the BIR the determination of what will constitute the beginning inventory
of goods, materials and supplies which will, in turn, serve as the basis for computing the 8% input tax.

While the power to tax cannot be delegated to executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them, including the power to determine the
existence of facts on which its operation depends x x x. Hence, there is no gainsaying that the CIR and the
Secretary of Finance, in limiting the application of the input tax of real estate dealers to improvements
constructed on or after January 1, 1988, merely exercised their delegated authority under Sec. 105, id., to
promulgate rules and regulations defining what should be included in the beginning inventory of a VAT-
registered entity.

xxxx

In the instant case, We find that, contrary to petitioner’s attacks against its validity, the limitation on the
beginning inventory of real estate dealers contained in Sec. 4.105-1 of RR No. 7-95 is reasonable and
consistent with the nature of the input VAT. x x x.

Based on the foregoing antecedents, it is clear why the second paragraph of Sec. 4.105-1 of RR No. 7-95
limits the transitional input taxes of real estate dealers to the value of improvements constructed on or after
January 1, 1988. Since the sale of the land was not subject to VAT or other sales taxes prior to the
effectivity of Rep. Act No. 7716, real estate dealers at that time had no input taxes to speak of. With this in
mind, the CIR correctly limited the application of the 8% transitional input tax to improvements on real
estate dealers constructed on or after January 1, 1988 when the VAT was initially implemented. This is, as
it should be, for to grant petitioner a refund or credit for input taxes it never paid would be tantamount to
unjust enrichment.

As petitioner itself observes, the input tax credit provided for by Sec. 105 of the NIRC is a mechanism used
to grant some relief from burdensome taxes. It follows, therefore, that not having been burdened by VAT or
any other sales tax on its inventory of land prior to the effectivity of Rep. Act No. 7716, petitioner is not
entitled to the relief afforded by Sec. 105, id.107

The Court of Appeals ruled that petitioner is not similarly situated as those business entities which
previously paid taxes on their inputs, and stressed that “a tax refund or credit x x x is in the nature of a tax
exemption which must be construed strictissimi juris against the taxpayer x x x.”108

THIS COURT’S RULING

As previously stated, the issues here have already been passed upon and resolved by this Court En
Banctwice, in decisions that have reached finality, and we are bound by the doctrine of stare decisis to apply
those decisions to these consolidated cases, for they involve the same facts, issues, and even parties.

Thus, we find for the petitioner.

DISCUSSION

The errors assigned by petitioner to the Court of Appeals and the arguments offered by respondents to
support the denial of petitioner’s claim for tax refund have already been dealt with thoroughly by the
Court En Banc in Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. Nos.
158885 and 170680 (Decision - April 2, 2009; Resolution - October 2, 2009); and Fort Bonifacio
Development Corporation v. Commissioner of Internal Revenue, G.R. No. 173425 (Decision - September 4,
2012; Resolution - January 22, 2013).

The Court En Banc decided on the following issues in G.R. Nos. 158885 and 170680:

1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real
properties by real estate dealers, is the 8% transitional input tax credit in Section 105 applied only
to the improvements on the real property or is it applied on the value of the entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No.
7-95 valid in limiting the 8% transitional input tax to the improvements on the real property?

Subsequently, in G.R. No. 173425, the Court resolved issues that are identical to the ones raised here by
petitioner,109 thus:

3.05.a.Whether Revenue Regulations No. 6-97 effectively repealed or


repudiated Revenue Regulations No. 7-95 insofar as the latter limited
the transitional/presumptive input tax credit which may be claimed
under Section 105 of the National Internal Revenue Code to the
“improvements” on real properties.
3.05.b.Whether Revenue Regulations No. 7-95 is a valid implementation of
Section 105 of the National Internal Revenue Code.
3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau
of Internal Revenue, and declaration of validity of said Regulations by
the Court of Tax Appeals and Court of Appeals, [were] in violation of
the fundamental principle of separation of powers.
3.05.d.Whether there is basis and necessity to interpret and construe the
provisions of Section 105 of the National Internal Revenue Code.
3.05.e.Whether there must have been previous payment of business tax
[sales tax or value-added tax]110 by petitioner on its land before it
may claim the input tax credit granted by Section 105 of the National
Internal Revenue Code.
3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely
speculated on the purpose of the transitional/presumptive input tax
provided for in Section 105 of the National Internal Revenue Code.
3.05.g.Whether the economic and social objectives in the acquisition of the
subject property by petitioner from the Government should be taken
into consideration.111
The Court’s pronouncements in the decided cases regarding these issues are discussed below. The doctrine
of stare decisis et non quieta movere, which means “to abide by, or adhere to, decided cases,”112 compels
us to apply the rulings by the Court to these consolidated cases before us. Under the doctrine of stare
decisis, “when this Court has once laid down a principle of law as applicable to a certain state of facts, it will
adhere to that principle, and apply it to all future cases, where facts are substantially the same; regardless
of whether the parties and property are the same.”113 This is to provide stability in judicial decisions, as
held by the Court in a previous case:

Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of
certainty, a conclusion reached in one case should be applied to those that follow if the facts are
substantially the same, even though the parties may be different. It proceeds from the first principle of
justice that, absent any powerful countervailing considerations, like cases ought to be decided alike.114

More importantly, we cannot depart from the legal precedents as laid down by the Court En Banc. It is
provided in the Constitution that “no doctrine or principle of law laid down by the court in a decision
rendered en banc or in division may be modified or reversed except by the court sitting en
banc.”115

What is left for this Court to do is to reiterate the rulings in the aforesaid legal precedents and apply them to
these consolidated cases.

As regards the main issue, the Court conclusively held that petitioner is entitled to the 8% transitional input
tax on its beginning inventory of land, which is granted in Section 105 (now Section 111[A]) of the NIRC,
and granted the refund of the amounts petitioner had paid as output VAT for the different tax periods in
question.116

Whether the transitional/presumptive


input tax credit under Section 105 of the
NIRC may be claimed only on the
“improvements” on real properties.

The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows:

On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods,
materials and supplies, based on which inventory the transitional input tax credit is computed. It
can be conceded that when it was drafted Section 105 could not have possibly contemplated concerns
specific to real properties, as real estate transactions were not originally subject to VAT. At the same time,
when transactions on real properties were finally made subject to VAT beginning with Rep. Act No. 7716, no
corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in
the application of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions
subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT “on every sale,
barter or exchange of goods”, without however specifying the kind of properties that fall within or under the
generic class “goods” subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT)
law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several
respects, some of which we will enumerate. First, it made every sale, barter or exchange of
“goods or properties” subject to VAT. Second, it generally defined “goods or properties” as “all
tangible and intangible objects which are capable of pecuniary estimation.” Third, it included a
non-exclusive enumeration of various objects that fall under the class “goods or properties”
subject to VAT, including “[r]eal properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business.”

From these amendments to Section 100, is there any differentiated VAT treatment on real
properties or real estate dealers that would justify the suggested limitations on the application of
the transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties “held primarily for sale to customers or
held for lease in the ordinary course of trade or business” that are subject to the VAT, and not
when the real estate transactions are engaged in by persons who do not sell or lease properties
in the ordinary course of trade or business. It is clear that those regularly engaged in the real
estate business are accorded the same treatment as the merchants of other goods or properties
available in the market. In the same way that a milliner considers hats as his goods and a
rancher considers cattle as his goods, a real estate dealer holds real property, whether or not it
contains improvements, as his goods.117 (Citations omitted, emphasis added.)

xxxx

Under Section 105, the beginning inventory of “goods” forms part of the valuation of the transitional input
tax credit. Goods, as commonly understood in the business sense, refers to the product which the VAT-
registered person offers for sale to the public. With respect to real estate dealers, it is the real properties
themselves which constitute their “goods”. Such real properties are the operating assets of the real estate
dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of “goods or properties” such “real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.”
Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the
definition of goods to “improvements” in Section 4.105-1, the BIR not only contravened the
definition of “goods” as provided in the Old NIRC, but also the definition which the same revenue
regulation itself has provided.118 (Emphasis added.)

The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that Section 105 of
the old NIRC, on the transitional input tax credit, remained intact despite the enactment of Republic Act No.
7716. Section 105 was amended by Republic Act No. 8424, and the provisions on the transitional input tax
credit are now embodied in Section 111(A) of the new NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits. —

(A) Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of [F]inance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.119

In G.R. Nos. 158885 and 170680, the Court asked, “If the plain text of Republic Act No. 7716 fails to supply
any apparent justification for limiting the beginning inventory of real estate dealers only to the
improvements on their properties, how then were the Commissioner of Internal Revenue and the courts a
quo able to justify such a view?”120 The Court then answered this question in this manner:

IV.

The fact alone that the denial of FBDC's claims is in accord with Section 4.105-1 of RR 7-95 does not, of
course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the
incongruence cannot by itself justify the denial of the claims. We need to inquire into the rationale behind
Section 4.105-1, as well as the question whether the interpretation of the law embodied therein is validated
by the law itself.

xxxx

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT
registered people would have been prejudiced by the inability to credit against the output VAT their
payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed by
a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-
registered persons to invoke a “presumptive input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on
which was not taken up or claimed as deferred sales tax credit,” and a similar presumptive input
tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the
tax on which was not taken up or claimed as deferred sales tax credit. 121 (Emphasis ours.)

Whether there must have been previous


payment of sales tax or value-added tax
by petitioner on its land before petitioner
may claim the input tax credit granted by
Section 105 (now Section 111[A]) of the
NIRC.

The Court discussed this matter lengthily in its Decision in G.R. Nos. 158885 and 170680, and we quote:

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by
the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section 25 alone would
have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the transitional input
tax credit under Section 105, thereby assuring that the tax credit would endure long after the
last goods made subject to sales tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago.
Yet Congress has reenacted the transitional input tax credit several times; that fact simply belies
the absence of any relationship between such tax credit and the long-abolished sales taxes.
Obviously then, the purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.

x x x Section 105 states that the transitional input tax credits become available either to (1) a
person who becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear
language of the law entitles new trades or businesses to avail of the tax credit once they become
VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New NIRC,
may be claimed by a newly-VAT registered person such as when a business as it commences
operations.

x x x [I]t is not always true that the acquisition of such goods, materials and supplies entail the
payment of taxes on the part of the new business. In fact, this could occur as a matter of course
by virtue of the operation of various provisions of the NIRC, and not only on account of a
specially legislated exemption.

xxxx

The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession,
from the beginning inventory on which the transitional input tax credit is based. This prospect all
but highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC
(or even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or
any other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the
beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in the acquisition of their beginning inventory
of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning,
the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as
output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer's income by
affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage
when the person is yet unable to credit input VAT payments.

There is another point that weighs against the CTA's interpretation. Under Section 105 of the Old NIRC, the
rate of the transitional input tax credit is “8% of the value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever is higher.” If indeed the transitional input tax
credit is premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on “8% of the value of such inventory” should the same
prove higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented
with ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the
rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its
properties from the national government, even claiming that to allow the transitional input tax credit is
“tantamount to giving an undeserved bonus to real estate dealers similarly situated as [FBDC] which the
Government cannot afford to provide.” Yet the tax laws in question, and all tax laws in general, are
designed to enforce uniform tax treatment to persons or classes of persons who share minimum
legislated standards. The common standard for the application of the transitional input tax
credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated
the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to
be a VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral
and accommodating in ascertaining who should be entitled to the tax credit, and it behooves the
CIR and the CTA to adopt a similarly judicious perspective.122 (Citations omitted, emphases ours.)

The Court En Banc in its Resolution in G.R. No. 173425 likewise discussed the question of prior payment of
taxes as a prerequisite before a taxpayer could avail of the transitional input tax credit. The Court found
that petitioner is entitled to the 8% transitional input tax credit, and clearly said that the fact that petitioner
acquired the Global City property under a tax-free transaction makes no difference as prior payment of
taxes is not a prerequisite.123 We quote pertinent portions of the resolution below:

This argument has long been settled. To reiterate, prior payment of taxes is not necessary before
a taxpayer could avail of the 8% transitional input tax credit.This position is solidly supported by law
and jurisprudence, viz.:

First . Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a taxpayer to
avail of the 8% transitional input tax credit, all that is required from the taxpayer is to file a beginning
inventory with the Bureau of Internal Revenue (BIR). It was never mentioned in Section 105 that prior
payment of taxes is a requirement. x x x.

xxxx

Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it
now would be tantamount to judicial legislation which, to state the obvious, is not allowed.

Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior payment of
taxes is not required before a taxpayer could avail of transitional input tax credit. As we have declared in our
September 4, 2012 Decision, “[t]ax credit is not synonymous to tax refund. Tax refund is defined as the
money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on the other hand,
is an amount subtracted directly from one's total tax liability. It is any amount given to a taxpayer as a
subsidy, a refund, or an incentive to encourage investment.”

Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax credit is
no longer novel. It has long been settled by jurisprudence. x x x.

Fifth . Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., this Court had already
declared that prior payment of taxes is not required in order to avail of a tax credit. x x x124 (Citations
omitted, emphases ours.)

The Court has thus categorically ruled that prior payment of taxes is not required for a taxpayer
to avail of the 8% transitional input tax credit provided in Section 105 of the old NIRC and that
petitioner is entitled to it, despite the fact that petitioner acquired the Global City property under
a tax-free transaction.125 The Court En Banc held:

Contrary to the view of the CTA and the CA, there is nothing in the abovequoted provision to indicate that
prior payment of taxes is necessary for the availment of the 8% transitional input tax credit. Obviously, all
that is required is for the taxpayer to file a beginning inventory with the BIR.

To require prior payment of taxes x x x is not only tantamount to judicial legislation but would also render
nugatory the provision in Section 105 of the old NIRC that the transitional input tax credit shall be “8% of
the value of [the beginning] inventory or the actual [VAT] paid on such goods, materials and supplies,
whichever is higher” because the actual VAT (now 12%) paid on the goods, materials, and supplies would
always be higher than the 8% (now 2%) of the beginning inventory which, following the view of Justice
Carpio, would have to exclude all goods, materials, and supplies where no taxes were paid. Clearly, limiting
the value of the beginning inventory only to goods, materials, and supplies, where prior taxes were paid,
was not the intention of the law. Otherwise, it would have specifically stated that the beginning inventory
excludes goods, materials, and supplies where no taxes were paid.126

Whether Revenue Regulations No. 7-95 is


a valid implementation of Section 105 of
the NIRC.

In the April 2, 2009 Decision in G.R. Nos. 158885 and 170680, the Court struck down Section 4.105-1
of Revenue Regulations No. 7-95 for being in conflict with the law.127 The decision reads in part as
follows:

[There] is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction
imposed on real estate brokers and their ability to claim the transitional input tax credit based on the value
of their real properties. In addition, the very idea of excluding the real properties itself from the beginning
inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons
engaged in the sale of goods, whether or not such “goods” take the form of real properties or more
mundane commodities.

Under Section 105, the beginning inventory of “goods” forms part of the valuation of the transitional input
tax credit. Goods, as commonly understood in the business sense, refers to the product which the VAT-
registered person offers for sale to the public. With respect to real estate dealers, it is the real properties
themselves which constitute their “goods”. Such real properties are the operating assets of the real estate
dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of “goods or properties” such “real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.”
Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the
definition of goods to “improvements” in Section 4.105-1, the BIR not only contravened the definition of
“goods” as provided in the Old NIRC, but also the definition which the same revenue regulation itself has
provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of
goods, materials and supplies upon which the transitional input VAT would be based “shall be left to
regulation by the appropriate administrative authority”. This is based on the phrase “filing of an inventory as
prescribed by regulations” found in Section 105. Nonetheless, Section 105 does include the particular
properties to be included in the inventory, namely goods, materials and supplies. It is questionable whether
the CIR has the power to actually redefine the concept of “goods”, as she did when she excluded real
properties from the class of goods which real estate companies in the business of selling real properties may
include in their inventory. The authority to prescribe regulations can pertain to more technical matters, such
as how to appraise the value of the inventory or what papers need to be filed to properly itemize the
contents of such inventory. But such authority cannot go as far as to amend Section 105 itself, which the
Commissioner had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of
the enabling statute if such rule or regulation is to be valid. In case of conflict between a statute and an
administrative order, the former must prevail. Indeed, the CIR has no power to limit the meaning and
coverage of the term “goods” in Section 105 of the Old NIRC absent statutory authority or basis
to make and justify such limitation. A contrary conclusion would mean the CIR could very well
moot the law or arrogate legislative authority unto himself by retaining sole discretion to provide
the definition and scope of the term “goods.”128 (Emphasis added.)

Furthermore, in G.R. No. 173425, the Court held:

Section 4.105-1 of RR 7-95 is


inconsistent with Section 105
of the old NIRC

As regards Section 4.105-1 of RR 7-95 which limited the 8% transitional input tax credit to the value of the
improvements on the land, the same contravenes the provision of Section 105 of the old NIRC, in relation to
Section 100 of the same Code, as amended by RA 7716, which defines “goods or properties,” to wit:

xxxx

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled
that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value
of the improvement of the real properties, is a nullity. Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law
on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term “goods” is
concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules
and regulations that administrative agencies promulgate, which are the product of a delegated legislative
power to create new and additional legal provisions that have the effect of law, should be within the scope of
the statutory authority granted by the legislature to the objects and purposes of the law, and should not be
in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling
law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to
implement. Any rule that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement
statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend
or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-
judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case
of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of “goods” as basis of transitional input tax
credit under Section 105 is a nullity.

As we see it then, the 8% transitional input tax credit should not be limited to the value of the
improvements on the real properties but should include the value of the real properties as well.129 (Citations
omitted, emphasis ours.)

Whether the issuance of Revenue


Regulations No. 7-95 by the BIR, and
declaration of validity of said Regulations
by the CTA and the Court of Appeals,
was in violation of the fundamental
principle of separation of powers.

In the Resolution dated October 2, 2009 in G.R. Nos. 158885 and 170680 the Court denied the respondents’
Motion for Reconsideration with finality and held:

[The April 2, 2009 Decision] held that the CIR had no power to limit the meaning and coverage of the
term “goods” in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such
limitation. This it did when it restricted the application of Section 105 in the case of real estate dealers only
to improvements on the real property belonging to their beginning inventory.

xxxx

The statutory definition of the term “goods or properties” leaves no room for doubt. It states: chanroblesv irt uallawl ibra ry

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

(1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include: chan roble svirtuallaw lib rary

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business; x x x.”
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

“Sec. 105. Transitional Input [T]ax Credits. — A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by
regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to
8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax.”
The term “goods or properties” by the unambiguous terms of Section 100 includes “real
properties held primarily for sale to c[u]st[o]mers or held for lease in the ordinary course of
business.” Having been defined in Section 100 of the NIRC, the term “goods” as used in Section
105 of the same code could not have a different meaning. This has been explained in the Decision
dated April 2, 2009, thus:

xxxx

Section 4.105-1 of RR 7-95 restricted the definition of “goods,” viz.:


“However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements , such as buildings, roads, drainage systems, and other similar structures, constructed on or
after the effectivity of EO 273 (January 1, 1988).”
As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot
contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the
definition of the term “goods” is concerned. This is a legislative act beyond the authority of the
CIR and the Secretary of Finance. The rules and regulations that administrative agencies
promulgate, which are the product of a delegated legislative power to create new and additional
legal provisions that have the effect of law, should be within the scope of the statutory authority
granted by the legislature to the objects and purposes of the law, and should not be in
contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling
law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to
implement. Any rule that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement
statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend
or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-
judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case
of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional


input tax credit under Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a
reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following
paragraph: chanroble svi rtual lawlib rary

“However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or
after the effectivity of E.O. 273 (January 1, 1988).”
It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-
97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as
goods is concerned. The failure to add a specific repealing clause would not necessarily indicate that there
was no intent to repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an
irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95.

xxxx

As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were previously paid on the properties in the beginning
inventory and there is a law imposing the tax which is presumed to have been paid, is to impose conditions
or requisites to the application of the transitional tax input credit which are not found in the law. The courts
must not read into the law what is not there. To do so will violate the principle of separation of powers which
prohibits this Court from engaging in judicial legislation.130 (Emphases added.)

As the Court En Banc held in G.R. No. 173425, the issues in this case are not novel. These same issues have
been squarely ruled upon by this Court in the earlier decided cases that have attained finality.131

It is now this Court’s duty to apply the previous rulings to the present case. Once a case has been
decided one way, any other case involving exactly the same point at issue, as in the present case,
should be decided in the same manner. 132

Thus, we find that petitioner is entitled to a refund of the amounts of: 1) P486,355,846.78 in G.R. No.
175707, 2) P77,151,020.46 in G.R. No. 180035, and 3) P269,340,469.45 in G.R. No. 181092,
which petitioner paid as value-added tax, or to a tax credit for said amounts.

WHEREFORE, in view of the foregoing, the consolidated petitions are hereby GRANTED. The following
are REVERSED and SET ASIDE:

1) Under G.R. No. 175707, the Decision dated April 22, 2003 of the
Court of Appeals in CA-G.R. SP No. 61516 and its
subsequent Resolution dated November 30, 2006;
2) Under G.R. No. 180035, the Decision dated April 30, 2007 of the
Court of Appeals in CA-G.R. SP No. 76540 and its
subsequent Resolution dated October 8, 2007; and
3) Under G.R. No. 181092, the Decision dated December 28,
2007 of the Court of Appeals in CA-G.R. SP No. 61158.
Respondent Commissioner of Internal Revenue is ordered to REFUND, OR, IN THE ALTERNATIVE, TO
ISSUE A TAX CREDIT CERTIFICATE to petitioner Fort Bonifacio Development Corporation, the following
amounts:

1) P486,355,846.78 paid as output value-added tax for the second


quarter of 1997 (G.R. No. 175707);
2) P77,151,020.46 paid as output value-added tax for the first
quarter of 1998 (G.R. No. 180035); and
3) P269,340,469.45 paid as output value-added tax for the fourth
quarter of 1996 (G.R. No. 181092).
SO ORDERED.
EN BANC

G.R. No. 187485 October 8, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SAN ROQUE POWER CORPORATION, Respondent.

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

G.R. No. 196113

TAGANITO MINING CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CARPIO, J.:

This Resolution resolves the Motion for Reconsideration and the Supplemental Motion for
Reconsideration filed by San Roque Power Corporation (San Roque) in G.R. No. 187485, the
Comment to the Motion for Reconsideration filed by the Commissioner of Internal Revenue
(CIR) in G.R. No. 187485, the Motion for Reconsideration filed by the CIR in G.R.No. 196113,
and the Comment to the Motion for Reconsideration filed by Taganito Mining Corporation
(Taganito) in G.R. No. 196113.

San Roque prays that the rule established in our 12 February 2013 Decision be given only a
prospective effect, arguing that "the manner by which the Bureau of Internal Revenue (BIR) and
the Court of Tax Appeals(CTA) actually treated the 120 + 30 day periods constitutes an
operative fact the effects and consequences of which cannot be erased or undone."1

The CIR, on the other hand, asserts that Taganito Mining Corporation's (Taganito) judicial claim
for tax credit or refund was prematurely filed before the CTA and should be disallowed because
BIR Ruling No. DA-489-03 was issued by a Deputy Commissioner, not by the Commissioner of
Internal Revenue.

We deny both motions.


The Doctrine of Operative Fact

The general rule is that a void law or administrative act cannot be the source of legal rights or
duties. Article 7 of the Civil Code enunciates this general rule, as well as its exception: "Laws
are repealed only by subsequent ones, and their violation or non-observance shall not be excused
by disuse, or custom or practice to the contrary. When the courts declared a law to be
inconsistent with the Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be valid only when they are not
contrary to the laws or the Constitution."

The doctrine of operative fact is an exception to the general rule, such that a judicial declaration
of invalidity may not necessarily obliterate all the effects and consequences of a void act prior to
such declaration.2 In Serrano de Agbayani v. Philippine National Bank,3 the application of the
doctrine of operative fact was discussed as follows:

The decision now on appeal reflects the orthodox view that an unconstitutional act, for that
matter an executive order or a municipal ordinance likewise suffering from that infirmity, cannot
be the source of any legal rights or duties. Nor can it justify any official act taken under it. Its
repugnancy to the fundamental law once judicially declared results in its being to all intents and
purposes a mere scrap of paper. As the new Civil Code puts it: "When the courts declare a law to
be inconsistent with the Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be valid only when they are not
contrary to the laws of the Constitution." It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or executive act contrary to its terms
cannot survive.

Such a view has support in logic and possesses the merit of simplicity. It may not however be
sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force and had to be complied with. This
is so as until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to
obedience and respect. Parties may have acted under it and may have changed their positions.
What could be more fitting than that in a subsequent litigation regard be had to what has been
done while such legislative or executive act was in operation and presumed to be valid in all
respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact
must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is
the governmental organ which has the final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed before it can exercise the power of judicial
review that may lead to a declaration of nullity. It would be to deprive the law of its quality of
fairness and justice then, if there be no recognition of what had transpired prior to such
adjudication.

In the language of an American Supreme Court decision: "The actual existence of a statute, prior
to such a determination of unconstitutionality, is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a new judicial declaration.
The effect of the subsequent ruling as to invalidity may have to be considered in various aspects,
with respect to particular relations, individual and corporate, and particular conduct, private and
official." This language has been quoted with approval in a resolution in Araneta v. Hill and the
decision in Manila Motor Co., Inc. v. Flores. An even more recent instance is the opinion of
Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and Co. (Boldfacing and
italicization supplied)

Clearly, for the operative fact doctrine to apply, there must be a "legislative or executive
measure," meaning a law or executive issuance, that is invalidated by the court. From the
passage of such law or promulgation of such executive issuance until its invalidation by the
court, the effects of the law or executive issuance, when relied upon by the public in good faith,
may have to be recognized as valid. In the present case, however, there is no such law or
executive issuance that has been invalidated by the Court except BIR Ruling No. DA-489-03.

To justify the application of the doctrine of operative fact as an exemption, San Roque asserts
that "the BIR and the CTA in actual practice did not observe and did not require refund seekers
to comply with the120+30 day periods."4This is glaring error because an administrative practice
is neither a law nor an executive issuance. Moreover, in the present case, there is even no such
administrative practice by the BIR as claimed by San Roque.

In BIR Ruling No. DA-489-03 dated 10 December 2003, the Department of Finance’s One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF-OSS) asked the BIR to rule on
the propriety of the actions taken by Lazi Bay Resources Development, Inc. (LBRDI). LBRDI
filed an administrative claim for refund for alleged input VAT for the four quarters of 1998.
Before the lapse of 120 days from the filing of its administrative claim, LBRDI also filed a
judicial claim with the CTA on 28March 2000 as well as a supplemental judicial claim on 29
September 2000.In its Memorandum dated 13 August 2002 before the BIR, the DOF-OSS
pointed out that LBRDI is "not yet on the right forum in violation of the provision of Section
112(D) of the NIRC" when it sought judicial relief before the CTA. Section 112(D) provides for
the 120+30 day periods for claiming tax refunds.

The DOF-OSS itself alerted the BIR that LBRDI did not follow the120+30 day periods. In BIR
Ruling No. DA-489-03, Deputy Commissioner Jose Mario C. Buñag ruled that "a taxpayer-
claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with
the CTA by way of Petition for Review." Deputy Commissioner Buñag, citing the 7February
2002 decision of the Court of Appeals (CA) in Commissioner of Internal Revenue v. Hitachi
Computer Products (Asia) Corporation5 (Hitachi), stated that the claim for refund with the
Commissioner could be pending simultaneously with a suit for refund filed before the CTA.

Before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003, there was no
administrative practice by the BIR that supported simultaneous filing of claims. Prior to BIR
Ruling No. DA-489-03, the BIR considered the 120+30 day periods mandatory and
jurisdictional.

Thus, prior to BIR Ruling No. DA-489-03, the BIR’s actual administrative practice was to
contest simultaneous filing of claims at the administrative and judicial levels, until the CA
declared in Hitachi that the BIR’s position was wrong. The CA’s Hitachi decision is the basis of
BIR Ruling No. DA-489-03 dated 10 December 2003 allowing simultaneous filing. From then
on taxpayers could rely in good faith on BIR Ruling No. DA-489-03 even though it was
erroneous as this Court subsequently decided in Aichi that the 120+30 day periods were
mandatory and jurisdictional.

We reiterate our pronouncements in our Decision as follows:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section112(C) expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents."
Following the verbalegis doctrine, this law must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting
for the Commissioner’s decision within the 120-daymandatory and jurisdictional period. The
CTA will have no jurisdiction because there will be no "decision" or "deemed a denial" decision
of the Commissioner for the CTA to review. In San Roque’s case, it filed its petition with the
CTA a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably,
San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.

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

xxxx

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer.1âwphi1One of the conditions for a judicial claim of refund or credit under
the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus,
strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether
before, during, or after the effectivity of the Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi
doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and
jurisdictional.6

San Roque’s argument must, therefore, fail. The doctrine of operative fact is an argument for the
application of equity and fair play. In the present case, we applied the doctrine of operative fact
when we recognized simultaneous filing during the period between 10 December 2003, when
BIR Ruling No. DA-489-03 was issued, and 6 October 2010, when this Court promulgated Aichi
declaring the 120+30 day periods mandatory and jurisdictional, thus reversing BIR Ruling No.
DA-489-03.

The doctrine of operative fact is in fact incorporated in Section 246 of the Tax Code, which
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, except in the
following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith. (Emphasis supplied)

Under Section 246, taxpayers may rely upon a rule or ruling issued by the Commissioner from
the time the rule or ruling is issued up to its reversal by the Commissioner or this Court. The
reversal is not given retroactive effect. This, in essence, is the doctrine of operative fact. There
must, however, be a rule or ruling issued by the Commissioner that is relied upon by the taxpayer
in good faith. A mere administrative practice, not formalized into a rule or ruling, will not suffice
because such a mere administrative practice may not be uniformly and consistently applied. An
administrative practice, if not formalized as a rule or ruling, will not be known to the general
public and can be availed of only by those within formal contacts with the government agency.

Since the law has already prescribed in Section 246 of the Tax Code how the doctrine of
operative fact should be applied, there can be no invocation of the doctrine of operative fact
other than what the law has specifically provided in Section 246. In the present case, the rule or
ruling subject of the operative fact doctrine is BIR Ruling No. DA-489-03 dated 10 December
2003. Prior to this date, there is no such rule or ruling calling for the application of the operative
fact doctrine in Section 246. Section246, being an exemption to statutory taxation, must be
applied strictly against the taxpayer claiming such exemption.

San Roque insists that this Court should not decide the present case in violation of the rulings of
the CTA; otherwise, there will be adverse effects on the national economy. In effect, San
Roque’s doomsday scenario is a protest against this Court’s power of appellate review. San
Roque cites cases decided by the CTA to underscore that the CTA did not treat the 120+30 day
periods as mandatory and jurisdictional. However, CTA or CA rulings are not the executive
issuances covered by Section 246 of the Tax Code, which adopts the operative fact doctrine.
CTA or CA decisions are specific rulings applicable only to the parties to the case and not to the
general public. CTA or CA decisions, unlike those of this Court, do not form part of the law of
the land. Decisions of lower courts do not have any value as precedents. Obviously, decisions of
lower courts are not binding on this Court. To hold that CTA or CA decisions, even if reversed
by this Court, should still prevail is to turn upside down our legal system and hierarchy of courts,
with adverse effects far worse than the dubious doomsday scenario San Roque has conjured.

San Roque cited cases7 in its Supplemental Motion for Reconsideration to support its position
that retroactive application of the doctrine in the present case will violate San Roque’s right to
equal protection of the law. However, San Roque itself admits that the cited cases never
mentioned the issue of premature or simultaneous filing, nor of compliance with the 120+30 day
period requirement. We reiterate that "any issue, whether raised or not by the parties, but not
passed upon by the Court, does not have any value as precedent."8 Therefore, the cases cited by
San Roque to bolster its claim against the application of the 120+30 day period requirement do
not have any value as precedents in the present case.

Authority of the Commissioner


to Delegate Power

In asking this Court to disallow Taganito’s claim for tax refund or credit, the CIR repudiates the
validity of the issuance of its own BIR Ruling No. DA-489-03. "Taganito cannot rely on the
pronouncements in BIR Ruling No. DA-489-03, being a mere issuance of a Deputy
Commissioner."9

Although Section 4 of the 1997 Tax Code provides that the "power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance," Section 7 of the same Code does
not prohibit the delegation of such power. Thus, "the Commissioner may delegate the powers
vested in him under the pertinent provisions of this Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to such limitations and restrictions
as may be imposed under rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner."

WHEREFORE, we DENY with FINALITY the Motions for Reconsideration filed by San Roque
Power Corporation in G.R. No. 187485,and the Commissioner of Internal Revenue in G.R. No.
196113.

SO ORDERED.