FIRST DIVISION

[G.R. No. 125355. March 30, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF

APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents. Court

DECISION

PARDO, J.:

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

Commonwealth Management and Services Corporation (COMASERCO, for brevity),

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

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

"Taxable sale/receipt P1,679,155.00

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3]

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

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to
the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of
Internal Revenue sent a collection letter to COMASERCO demanding payment of
the deficiency VAT.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals [4] a
petition for review contesting the Commissioner's assessment. COMASERCO
asserted that the services it rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical assistance, including functioning as an
internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred
that it was not engaged id the business of providing services to Philamlife and its
affiliates. COMASERCO was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of services.
COMASERCO stressed that it was not profit-motivated, thus not engaged in
business. In fact, it did not generate profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was not engaged in business, it was not
liable to pay VAT.

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

"WHEREFORE, the decision of the Commissioner of Internal Revenue

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

"The compromise penalty of P16,000.00 imposed by the respondent in

her assessment letter shall not be included in the payment as there
was no compromise agreement entered into between petitioner and
respondent with respect to the value-added tax deficiency."[5]

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

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

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

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

The Court of Appeals anchored its decision on the ratiocination in another tax case
involving the same parties,[7] where it was held that COMASERCO was not liable to
pay fixed and contractor's tax for services rendered to Philamlife and its affiliates.
The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in
business of providing services to Philamlife and its affiliates. In the same manner,
the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not
engaged in the business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a
petition for review on certiorari assailing the decision of the Court of Appeals.

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

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

We give due course to the petition.

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

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

We agree with the Commissioner.

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

Executive Order (E.O.) No. 273 in 1988, provides that:

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

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

We disagree.

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

"SEC. 105. Persons Liable. - Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 106 and 108 of this
Code.
 "The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of
Republic Act No.7716.

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

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

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

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

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

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

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

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

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

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

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

There is no merit to respondent's contention that the Court of Appeals' decision in

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

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

No costs.

SO ORDERED.

Davide, Jr., C.J.,(Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

 EN BANC

RENATO V. DIAZ and G.R. No. 193007

AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

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

DECISION
ABAD, J.:

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

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed

this petition for declaratory relief[1] assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR)
on the collections of tollway operators.

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

Petitioners allege that the BIR attempted during the administration of

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

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

On August 13, 2010 the Court issued a temporary restraining order

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

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

The government also argues that petitioners have no right to invoke the
non-impairment of contracts clause since they clearly have no personal interest
in existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the
States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway operators
from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this is
imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.

In their reply[6] to the governments comment, petitioners point out that

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

The case presents two procedural issues:

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

The case also presents two substantive issues:

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

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

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

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

The Courts Rulings

A. On the Procedural Issues:

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

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

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

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

B. On the Substantive Issues:

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

The phrase sale or exchange of services means the

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

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

Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. Essentially, tollway operators construct, maintain,
and operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways that meander
through populated areas and branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for
the latters use of the tollway facilities over which the operator enjoys private
proprietary rights[12]that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their
transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines.

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

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

Tollway operators are franchise grantees and they do not belong to

exceptions (the low-income radio and/or television broadcasting companies
with gross annual incomes of less than P10 million and gas and water utilities)
that Section 119[13] spares from the payment of VAT. The word franchise
broadly covers government grants of a special right to do an act or series of acts
of public concern.[14]

Petitioners of course contend that tollway operators cannot be considered

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

Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and
South Luzon Expressways. Apart from Congress, tollway franchises may also
be granted by the TRB, pursuant to the exercise of its delegated powers under
P.D. 1112.[17] The franchise in this case is evidenced by a Toll Operation
Certificate.[18]

Petitioners contend that the public nature of the services rendered by

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

Nor can petitioners cite as binding on the Court statements made by

certain lawmakers in the course of congressional deliberations of the would-be
law. As the Court said in South African Airways v. Commissioner of Internal
Revenue,[20] statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. The congressional will
is ultimately determined by the language of the law that the lawmakers voted
on. Consequently, the meaning and intention of the law must first be sought in
the words of the statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according to good and
approved usage and without resorting to forced or subtle construction.

Two. Petitioners argue that a toll fee is a users tax and to impose VAT on
toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this
argument on the following discussion in Manila International Airport Authority
(MIAA) v. Court of Appeals:[22]

No one can dispute that properties of public dominion

mentioned in Article 420 of the Civil Code, like roads, canals,
rivers, torrents, ports and bridges constructed by the State,are
owned by the State. The term ports includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a
port constructed by the State. Under Article 420 of the Civil
Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of
the Philippines.

x x x The operation by the government of a tollway does

not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or
only those among the public who actually use the road through
the toll fees they pay upon using the road. The tollway system is
even a more efficient and equitable manner of taxing the public
for the maintenance of public roads.
 The charging of fees to the public does not determine the
character of the property whether it is for public dominion or
not. Article 420 of the Civil Code defines property of public
dominion as one intended for public use. Even if the government
collects toll fees, the road is still intended for public use if anyone
can use the road under the same terms and conditions as the rest
of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and other
conditions for the use of the road do not affect the public
character of the road.

The terminal fees MIAA charges to passengers, as well as

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

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

As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are users tax, but to make the
point that airport lands and buildings are properties of public dominion and that
the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes.Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the government.
 It would of course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and maintenance of
certain roadways.The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case
here. What the government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the
government has adopted for expressways.[26] Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway operators.

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

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

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

Thus, the seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid by the
former is added to the selling price. Once shifted, the VAT ceases to be a
tax[30] and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
 Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, [31] VAT is imposed on any person who, in the course of trade or business,
sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if
toll fees were deemed as a users tax. VAT is assessed against the tollway
operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order to use the tollways.[32]

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

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

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

Four. Finally, petitioners assert that the substantiation requirements for

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

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

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

Here, it remains to be seen how the taxing authority will actually

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

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

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

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative

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

If the legislative intent was to exempt tollway operations from VAT, as

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

Lastly, the grant of tax exemption is a matter of legislative policy that is

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

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

WHEREFORE, the Court DENIES respondents Secretary of Finance

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

ROBERTO A. ABAD
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

THE COMMISIONER OF G.R. No. 147295

INTERNAL REVENUE,
Petitioner, Present:

QUISUMBING, J., Chairperson,

- versus - CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
ACESITE (PHILIPPINES)
HOTEL CORPORATION, Promulgated:
Respondent.
February 16, 2007
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari[1] under Rule 45 of the

Rules of Court, assailing the November 17, 2000 Decision[2] of the Court of
Appeals (CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000
Decision[3] of the Court of Tax Appeals (CTA) in CTA Case No. 5645
entitled Acesite (Philippines) Hotel Corporation v. The Commissioner of
Internal Revenue for Refund of VAT Payments.
 The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila

Pavilion Hotel along United Nations Avenue in Manila. It leases
6,768.53 square meters of the hotels premises to the Philippine
Amusement and Gaming Corporation [hereafter, PAGCOR] for
casino operations. It also caters food and beverages to
PAGCORs casino patrons through the hotels restaurant
outlets. For the period January (sic) 96 to April 1997, Acesite
incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR during said
period. Acesite tried to shift the said taxes to PAGCOR by
incorporating it in the amount assessed to PAGCOR but the
latter refused to pay the taxes on account of its tax exempt
status.

Thus, PAGCOR paid the amount due to Acesite minus the

P30,152,892.02 VAT while the latter paid the VAT to the
Commissioner of Internal Revenue [hereafter, CIR] as it feared
the legal consequences of non-payment of the tax. However,
Acesite belatedly arrived at the conclusion that its transaction
with PAGCOR was subject to zero rate as it was rendered to a
tax-exempt entity. On 21 May 1998, Acesite filed an
administrative claim for refund with the CIR but the latter failed
to resolve the same. Thus on 29 May 1998, Acesite filed a
petition with the Court of Tax Appeals [hereafter, CTA] which
was decided in this wise:

As earlier stated, Petitioner is subject to zero percent

tax pursuant to Section 102 (b)(3) [now 106(A)(C)]
insofar as its gross income from rentals and sales to
PAGCOR, a tax exempt entity by virtue of a special
law. Accordingly, the amounts of P21,413,026.78 and
P8,739,865.24, representing the 10% EVAT on its sales
of food and services and gross rentals, respectively from
PAGCOR shall, as a matter of course, be refunded to the
petitioner for having been inadvertently remitted to the
respondent.

Thus, taking into consideration the prescribed

portion of Petitioners claim for refund of P98,743.40,
and considering further the principle of solutio
 indebiti which requires the return of what has been
delivered through mistake, Respondent must refund to
the Petitioner the amount of P30,054,148.64 computed
as follows:

Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94
February 1996 26,205.04
March 1996 70,338.42 98,743.40
P30,054,148.64
vvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the
instant Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the
petitioner the amount of THIRTY MILLION FIFTY
FOUR THOUSAND ONE HUNDRED FORTY EIGHT
PESOS AND SIXTY FOUR CENTAVOS
(P30,054,148.64) immediately.

SO ORDERED.[4]

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the

CTA holding that PAGCOR was not only exempt from direct taxes but was also
exempt from indirect taxes like the VAT and consequently, the transactions
between respondent Acesite and PAGCOR were effectively zero-rated because
they involved the rendition of services to an entity exempt from indirect
taxes. Thus, the CA affirmed the CTAs determination by ruling that respondent
Acesite was entitled to a refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether
PAGCORs tax exemption privilege includes the indirect tax of VAT to entitle
Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%)
VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108
(B)(3) of the Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCORs tax exemption privilege

includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT
rate, we answer in the affirmative. We will however discuss both issues
together.

PAGCOR is exempt from payment of indirect taxes

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

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of

any kind or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except
a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly to
the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal,
provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings

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

Petitioner contends that the above tax exemption refers only to

PAGCORs direct tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket

exemption to taxes with no distinction on whether the taxes are direct or
indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:

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

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

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

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

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

VAT exemption extends to Acesite

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

Section 102. Value-added tax on sale of services (a) Rate and

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

xxxx

(b) Transactions subject to zero percent (0%) rated.

xxxx

(3) Services rendered to persons or entities whose exemption

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

The rationale for the exemption from indirect taxes provided for in P.D.
1869 and the extension of such exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from the 1987 case
of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,[5] where
the absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of
contractee WHO should be implemented to mean that the entity or person
exempt is the contractor itself who constructed the building owned by
contractee WHO, and such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is to exempt the
contractor so that no contractors tax may be shifted to the contractee
WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to proscribe
any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous

payments of the VAT pertaining to the effectively zero-rate transactions
between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid
the subject taxes under a mistake of fact, that is, when it was not aware that the
transactions it had with PAGCOR were zero-rated at the time it made the
payments. In UST Cooperative Store v. City of Manila,[6] we explained that
there is erroneous payment of taxes when a taxpayer pays under a mistake of
fact, as for the instance in a case where he is not aware of an existing exemption
in his favor at the time the payment was made.[7] Such payment is held to be not
voluntary and, therefore, can be recovered or refunded.[8]

Moreover, it must be noted that aside from not raising the issue of
Acesites compliance with pertinent Revenue Regulations on exemptions during
the proceedings in the CTA, it cannot be gainsaid that Acesite should have done
so as it paid the VAT under a mistake of fact. Hence, petitioners argument on
this point is utterly tenuous.
Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio

indebiti and the pertinent laws governing this principle are found in Arts. 2142
and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise
to the juridical relation of quasi-contract to the end that no one
shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to

demand it, and it was unduly delivered through mistake, the
obligation to return it arises.

When money is paid to another under the influence of a mistake of fact,

that is to say, on the mistaken supposition of the existence of a specific fact,
where it would not have been known that the fact was otherwise, it may be
recovered. The ground upon which the right of recovery rests is that money paid
through misapprehension of facts belongs in equity and in good conscience to
the person who paid it.[9]

The Government comes within the scope of solutio indebiti principle as

elucidated in Commissioner of Internal Revenue v. Firemans Fund Insurance
Company, where we held that: Enshrined in the basic legal principles is the
time-honored doctrine that no person shall unjustly enrich himself at the
expense of another. It goes without saying that the Government is not exempted
from the application of this doctrine.[10]

Action for refund strictly construed; Acesite discharged the

burden of proof

Since an action for a tax refund partakes of the nature of an exemption,

which cannot be allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who must discharge such
burden convincingly.[11] In the instant case, respondent Acesite had discharged
this burden as found by the CTA and the CA. Indeed, the records show that
Acesite proved its actual VAT payments subject to refund, as attested to by an
independent Certified Public Accountant who was duly commissioned by the
CTA. On the other hand, petitioner never disputed nor contested respondents
testimonial and documentary evidence. In fact, petitioner never presented any
evidence on its behalf.

One final word. The BIR must release the refund to respondent without
any unreasonable delay. Indeed, fair dealing is expected by our taxpayers from
the BIR and this duty demands that the BIR should refund without any
unreasonable delay what it has erroneously collected.[12]

WHEREFORE, the petition is DENIED for lack of merit and

the November 17, 2000 Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
SECOND DIVISION

KEPCO PHILIPPINES G.R. No. 179961

CORPORATION,
Petitioner, Present:

CARPIO, J., Chairperson,

NACHURA,
- versus - PERALTA,
ABAD, and
MENDOZA, JJ.

COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
January 31, 2011
X -------------------------------------------------------------------------------------- X

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure assailing the May 17, 2007 Decision[1] of the Court of Tax
Appeals En Banc (CTA), in C.T.A. E.B. No. 186 entitled KEPCO Philippines
Corporation v. Commissioner of Internal Revenue, which denied petitioners
claim for refund or issuance of tax credit certificate for the unapplied input
value-added taxes attributable to zero-rated sales of services for taxable year
1999, as well as its Resolution, dated September 28, 2007, which denied the
motion for reconsideration of the said decision.

THE FACTS

Petitioner Kepco Philippines Corporation (Kepco) is a domestic

corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines.It is a value-added tax (VAT) registered taxpayer
engaged in the production and sale of electricity as an independent power
producer. It sells its electricity to the National Power Corporation (NPC). Kepco
filed with respondent Commissioner of Internal Revenue (CIR) an application
for effective zero-rating of its sales of electricity to the NPC.

Kepco alleged that for the taxable year 1999, it incurred input VAT in the
amount of P10,527,202.54 on its domestic purchases of goods and services that
were used in its production and sale of electricity to NPC for the same period. In
its 1999 quarterly VAT returns filed with the Bureau of Internal Revenue (BIR)
on March 30, 2000, Kepco declared the said input VAT as follows:

INPUT TAX
Exhibit 1999 Carried-over from This quarter Carried over previous quarter to next quarter
A 1st qtr 100,564,209.14 4,804,974.70 105,369,183.84
B 2nd qtr 105,369,183.84 1,461,960.38 106,831,144.22
C 3rd qtr 106,831,144.22 2,563,288.00 109,394,432.22
D 4th qtr 109,394,432.22 1,696,979.46 111,091,411.68
_____________
TOTAL P10,527,202.54:[2]

Thus, on January 29, 2001, Kepco filed an administrative claim for

refund corresponding to its reported unutilized input VAT for the four quarters
of 1999 in the amount of P10,527,202.54. Thereafter, on April 24, 2001, Kepco
filed a petition for review before the CTA pursuant to Section 112(A) of the
1997 National Internal Revenue Code (NIRC), which grants refund of
unutilized input taxes attributable to zero-rated or effectively zero-rated
sales. This was docketed as CTA Case No. 6287.
On August 31, 2005, the CTA Second Division rendered a
decision[3] denying Kepcos claim for refund for failure to properly substantiate
its effectively zero-rated sales for the taxable year 1999 in the total amount
of P860,340,488.96, with the alleged input VAT of P10,527,202.54 directly
attributable thereto. The tax court held that Kepco failed to comply with the
invoicing requirements in clear violation of Section 4.108-1 of Revenue
Regulations (R.R.) No. 7-95, implementing Section 108(B)(3) in conjunction
with Section 113 of the 1997 NIRC.
 In view of the denial of its motion for reconsideration, Kepco filed an
appeal via petition for review before the CTA En Banc, on the ground that the
CTA Second Division erred in not considering the amount of P10,514,023.92 as
refundable tax credit and in failing to appreciate that it was exclusively selling
electricity to NPC, a tax exempt entity.

On May 17, 2007, the CTA En Banc dismissed the petition, reasoning out
that Kepcos failure to comply with the requirement of imprinting the words
zero-rated on its official receipts resulted in non-entitlement to the benefit of
VAT zero-rating and denial of its claim for refund of input tax. The decision
reads in part:

In sum, the Court En Banc finds no cogent justification to

disturb the findings and conclusion spelled out in the assailed
August 31, 2005 Decision and May 4, 2006 Resolution of the
CTA Second Division. What the instant petition seeks is for the
Court En Banc to view and appreciate the evidence in their own
perspective of things, which unfortunately had already been
considered and passed upon.

WHEREFORE, the instant Petition is hereby DENIED

DUE COURSE and DISMISSED for lack of merit.

SO ORDERED.[4]

Presiding Justice Ernesto D. Acosta agreed with the majority that services
rendered by a VAT-registered entity to the NPC, a tax-exempt entity, were
effectively zero-rated.He was likewise of the view that Kepcos claim could not
be granted because it presented official receipts which were not in sequence
indicating, that it might have sold electricity to entities other than NPC. But, he
strongly dissented on the outright rejection of Kepcos refund claim for failure to
comply with the imprinting requirements. His dissenting opinion states in part:

However, I dissent to the majoritys finding that

imprinting the term zero-rated as well as the BIR authority to
print or BIR Permit marker on duly registered Value Added Tax
(VAT) official receipts/invoices is necessary such that non-
 compliance would result to the outright denial of petitioners
claim.

Xxxx

Clearly, the applicable provisions of the Tax Code does

not require the word zero-rated or the other information
required by the majority in the invoice/official receipt.The
requirement of imprinting the questioned information on the
VAT invoice or receipt can be found in Section 4.108-1 of
Revenue Regulations No. 7-95 (The Implementing Rules and
Regulations of the VAT law). Then again, the said provision is
merely a regulation created for the sole and limited purpose of
implementing an otherwise very exact law.

Moreover, granting for the sake of argument that the

Revenue Regulations above cited may validly impose such
requirements, no provision allows the outright rejection of a
refund claim as penalty for a tax-payers failure to abide by the
requirements laid down in the said regulations.[5]

Kepco filed a motion for reconsideration of the decision but it was denied
for lack of merit by the CTA En Banc in its Resolution[6] dated September 28,
2007.

Hence, Kepco interposes this petition praying for the reversal and setting
aside of the May 17, 2007 CTA Decision anchored on the following

GROUNDS:

(I)

THE COURT OF TAX APPEALS EN BANC COMMITTED

SERIOUS ERROR OF LAW WHEN IT RULED THAT
PETITIONERS FAILURE TO IMPRINT THE WORDS ZERO-
RATED ON ITS VAT OFFICIAL RECEIPTS ISSUED TO NPC
 IS FATAL TO ITS CLAIM FOR REFUND OF UNUTILIZED
INPUT TAX CREDITS.

(II)

PETITIONER HAS SUFFICIENTLY PROVEN THAT IT IS

RIGHTFULLY ENTITLED TO A REFUND OR ISSUANCE OF
TAX CREDIT CERTIFICATE IN THE AMOUNT OF
PHP10,514,023.92.[7]
From the foregoing arguments, the principal issue to be resolved is
whether Kepcos failure to imprint the words zero-rated on its official receipts
issued to NPC justifies an outright denial of its claim for refund of unutilized
input tax credits.

Kepco contends that the provisions of the 1997 Tax Code, specifically
Section 113 in relation to Section 237, do not mention the mandatory
requirement of imprinting the words zero-rated to purchases covering zero-rated
transactions. The only provision which requires the imprinting of the word zero-
rated on VAT invoice or official receipt is Section 4.108-1 of R.R. No. 7-
95. Kepco argues that the condition imposed by the said administrative issuance
should not be controlling over Section 113 of the 1997 Tax Code, considering
the long-settled rule that administrative rules and regulations cannot expand the
letter and spirit of the law they seek to enforce.

Kepco further argues that there is no law or regulation which imposes

automatic denial of taxpayers refund claim for failure to comply with the
invoicing requirements. No jurisprudence sanctions the same, not even
the Atlas case,[8] cited by the CTA En Banc. According to Kepco, although it
agrees with the CTA ruling that administrative issuances, like BIR regulations,
requiring an imprinting of zero-rated on zero-rating transactions should be
strictly complied with, it opposes the outright denial of refund claim for non-
compliance thereof. It insists that such automatic denial is too harsh a penalty
and runs counter to the doctrine of solutio indebiti under Article 2154 of the
New Civil Code.

The CIR, in his Comment,[9] counters that Kepco is not entitled to a tax
refund because it was not able to substantiate the amount of P10,514,023.92
representing zero-rated transactions for failure to submit VAT official receipts
and invoices imprinted with the wordings zero-rated in violation of Section
4.108-1 of R.R. 7-95.

The petition is bereft of merit.

The pertinent laws governing the present case is Section 108(B)(3) of the NIRC
of 1997 in relation to Section 13 of Republic Act (R.A.) No. 6395 (The Revised
NPC Charter), as amended by Presidential Decree (P.D.) Nos. 380 and 938,
which provide as follows:

Sec. 108. Value-added Tax on Sale of Services and Use or

Lease of Properties.
(A) Rate and Base of Tax. x x x
(B) Transactions Subject to Zero Percent (0%)
Rate. The following services performed in
the Philippines by VAT-registered persons shall
be subject to zero percent (0%) rate:
xxx
(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;
xxx
Sec. 13. Non-profit Character of the Corporation;
Exemption from All Taxes, Duties, Fees, Imposts and Other
Charges by the Government and Government
Instrumentalities. The Corporation shall be non-profit and shall
devote all its return from its capital investment as well as
excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy
enunciated in Section One of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as
costs and service fees including filing fees, appeal bonds,
supersedeas bonds, in any court or administrative proceedings.
 Based on the afore-quoted provisions, there is no doubt that NPC is an
entity with a special charter and exempt from payment of all forms of taxes,
including VAT. As such, services rendered by any VAT-registered
person/entity, like Kepco, to NPC are effectively subject to zero percent (0%)
rate.

For the effective zero rating of such services, however, the VAT-registered
taxpayer must comply with invoicing requirements under Sections 113 and 237
of the 1997 NIRC as implemented by Section 4.108-1 of R.R. No. 7-95, thus:

Sec. 113. Invoicing and Accounting Requirements for VAT-

Registered Persons.

(A) Invoicing Requirements. A VAT-registered person shall, for

every sale, issue an invoice or receipt. In addition to the
information required under Section 237, the following
information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered

person, followed by his taxpayers identification
number; and

(2) The total amount which the purchaser pays or

is obligated to pay to the seller with the indication
that such amount includes the value-added tax.

(B) Accounting Requirements. Notwithstanding the provisions

of Section 233, all persons subject to the value-added tax under
Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which the daily
sales and purchases are
recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of
Finance.[10] (Emphasis supplied)

Sec. 237. Issuance of Receipts or Sales or Commercial

Invoices. All persons subject to an internal revenue tax shall, for
each sale or transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly
registered receipts or sales or commercial invoices, prepared at
least in duplicate, showing the date of transaction, quantity,
unit cost and description of merchandise or nature of service:
Provided, however, That in the case of sales, receipts or
transfers in the amount of One Hundred Pesos (P100.00) or
more, or regardless of amount, where the sale or transfer is
made by a person liable to value-added tax to another person
also liable to value-added tax; or where the receipt is issued to
cover payment made as rentals, commissions, compensations
or fees, receipts or invoices shall be issued which shall show the
name, business style, if any, and address of the purchaser,
customer or client; Provided, further, That where the purchaser
is a VAT-registered person, in addition to the information
herein required, the invoice or receipt shall further show the
Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of
business for a period of three (3) years from the close of the
taxable year in which such invoice or receipt was issued, while
the duplicate shall be kept and preserved by the issuer, also in
his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any

person subject to an internal revenue tax from compliance with
the provisions of this Section.[11]
Section 4.108-1. Invoicing Requirements. All VAT-
registered persons shall, for every sale or lease of goods or
properties or services, issue duly registered receipts or sales or
commercial invoices which must show:
1. The name, TIN and address of seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or
nature of service;
4. The name, TIN, business style, if any, and address of
the VAT-registered purchaser, customer or client;
5. The word "zero-rated" imprinted on the invoice
covering zero-rated sales;
6. The invoice value or consideration.
 In the case of sale of real property subject to VAT and
where the zonal or market value is higher than the actual
consideration, the VAT shall be separately indicated in the
invoice or receipt.
Only VAT-registered persons are required to print their
TIN followed by the word "VAT" in their invoices or receipts
and this shall be considered as "VAT Invoice." All purchases
covered by
invoices other than "VAT Invoice" shall not give rise to any
input tax.
If the taxable person is also engaged in exempt
operations, he should issue separate invoices or receipts for the
taxable and exempt operations. A "VAT Invoice" shall be issued
only for sales of goods, properties or services subject to VAT
imposed in Sections 100 and 102 of the code.
The invoice or receipt shall be prepared at least in
duplicate, the original to be given to the buyer and the
duplicate to be retained by the seller as part of his accounting
records. (Emphases supplied)
Also, as correctly noted by the CTA En Banc, in Kepcos approved
Application/Certificate for Zero Rate issued by the CIR on January 19, 1999,
the imprinting requirement was likewise specified, viz:

Valid only for sale of services from Jan. 19, 1999 up to December
31, 1999 unless sooner revoked.

Note: Zero-Rated Sales must be indicated in the

invoice/receipt.[12]

Indeed, it is the duty of Kepco to comply with the requirements, including

the imprinting of the words zero-rated in its VAT official receipts and invoices
in order for its sales of electricity to NPC to qualify for zero-rating.

It must be emphasized that the requirement of imprinting the word zero-

rated on the invoices or receipts under Section 4.108-1 of R.R. No. 7-95 is
mandatory as ruled by the CTA En Banc, citing Tropitek International, Inc. v.
Commissioner of Internal Revenue.[13] In Kepco Philippines Corporation v.
Commissioner of Internal Revenue,[14] the CTA En Banc explained the rationale
behind such requirement in this wise:

The imprinting of zero-rated is necessary to distinguish

sales subject to 10% VAT, those that are subject to 0% VAT
(zero-rated) and exempt sales, to enable the Bureau of Internal
Revenue to properly implement and enforce the other
provisions of the 1997 NIRC on VAT, namely:

1. Zero-rated sales [Sec. 106(A)(2) and Sec.

108(B)];
2. Exempt transactions [Sec. 109] in relation to
Sec. 112(A);
3. Tax Credits [Sec. 110]; and
4. Refunds or tax credits of input tax [Sec. 112]

xxx

Records disclose, as correctly found by the CTA that Kepco failed to

substantiate the claimed zero-rated sales of P10,514,023.92. The wordings zero-
rated sales were not imprinted on the VAT official receipts presented by Kepco
(marked as Exhibits S to S-11) for taxable year 1999, in clear violation of
Section 4.108-1 of R.R. No. 7-95 and the condition imposed under its approved
Application/Certificate for Zero-rate as well.

Kepcos claim that Section 4.108-1 of R.R. 7-95 expanded the letter and
spirit of Section 113 of 1997 Tax Code, is unavailing. Indubitably, said revenue
regulation is merely a precautionary measure to ensure the effective
implementation of the Tax Code. It was not used by the CTA to expound the
meaning of Sections 113 and 237 of the NIRC. As a matter of fact, the
provision of Section 4.108-1 of R.R. 7-95 was incorporated in Section 113
(B)(2)(c) of R.A. No. 9337,[15] which states that if the sale is subject to zero
percent (0%) value-added tax, the term zero-rated sale shall be written or
printed prominently on the invoice or receipt. This, in effect, and as correctly
concluded by the CIR, confirms the validity of the imprinting requirement on
VAT invoices or official receipts even prior to the enactment of R.A. No. 9337
under the principle of legislative approval of administrative interpretation by
reenactment.
 Quite significant is the ruling handed down in the case of Panasonic
Communications Imaging Corporation of the Philippines v. Commissioner of
Internal Revenue, [16] to wit:
Section 4.108-1 of RR 7-95 proceeds from the rule-
making authority granted to the Secretary of Finance under
Section 245 of the 1977 NIRC (Presidential Decree 1158) for the
efficient enforcement of the tax code and of course its
amendments. The requirement is reasonable and is in accord
with the efficient collection of VAT from the covered sales of
goods and services. As aptly explained by the CTAs First
Division, the appearance of the word "zero-rated" on the face of
invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT was
actually paid. If, absent such word, a successful claim for input
VAT is made, the government would be refunding money it did
not collect.
Further, the printing of the word "zero-rated" on the
invoice helps segregate sales that are subject to 10% (now 12%)
VAT from those sales that are zero-rated. Unable to submit the
proper invoices, petitioner Panasonic has been unable to
substantiate its claim for refund.

To bolster its claim for tax refund or credit, Kepco cites the case of Intel
Technology Philippines, Inc. v. Commissioner of Internal Revenue.[17] Kepcos
reliance on the said case is misplaced because the factual milieu there is quite
different from that of the case at bench. In the Intel case, the claim for tax
refund or issuance of a tax credit certificate was denied due to the taxpayers
failure to reflect or indicate in the sales invoices the BIR authority to print. The
Court held that the BIR authority to print was not one of the items required by
law or BIR regulation to be indicated or reflected in the invoices or receipts,
hence, the BIR erred in denying the claim for refund. In the present case,
however, the principal ground for the denial was the absence of the word zero-
rated on the invoices, in clear violation of the invoicing requirements under
Section 108(B)(3) of the 1997 NIRC, in conjunction with Section 4.108-1 of
R.R. No. 7-95.
Regarding Kepcos contention, that non-compliance with the requirement
of invoicing would only subject the non-complying taxpayer to penalties of fine
and imprisonment under Section 264 of the Tax Code, and not to the outright
denial of the claim for tax refund or credit, must likewise fail. Section 264
categorically provides for penalties in case of Failure or Refusal to Issue
Receipts or Sales or Commercial Invoices, Violations related to the Printing of
such Receipts or Invoices and Other Violations, but not to penalties for failure
to comply with the requirement of invoicing. As recently held in Kepco
Philippines Corporation v. Commissioner of Internal Revenue,[18] Section 264
of the 1997 NIRC was not intended to excuse the compliance of the substantive
invoicing requirement needed to justify a claim for refund on input VAT
payments.

Thus, for Kepcos failure to substantiate its effectively zero-rated sales for
the taxable year 1999, the claimed P10,527,202.54 input VAT cannot be
refunded.
Indeed, in a string of recent decisions on this matter, to wit: Panasonic
Communications Imaging Corporation of the Philippines v. Commissioner of
Internal Revenue,[19]J.R.A. Philippines, Inc. v. Commissioner of Internal
Revenue,[20] Hitachi Global Storage Technologies Philippines Corp. (formerly
Hitachi Computer Products (Asia) Corporations) v. Commissioner of Internal
Revenue,[21] and Kepco Philippines Corporation v. Commissioner of Internal
Revenue,[22] this Court has consistently held that failure to print the word zero-
rated on the invoices or receipts is fatal to a claim for refund or credit of input
VAT on zero-rated sales.

Contrary to Kepcos view, the denial of its claim for refund of input tax is
not a harsh penalty. The invoicing requirement is reasonable and must be
strictly complied with, as it is the only way to determine the veracity of its
claim.

Well-settled in this jurisdiction is the fact that actions for tax refund, as in
this case, are in the nature of a claim for exemption and the law is construed
in strictissimi jurisagainst the taxpayer. The pieces of evidence presented
entitling a taxpayer to an exemption are also strictissimi scrutinized and must be
duly proven.[23]
WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA Associate Justice

 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.

ANGELINA SANDOVAL GUTIERREZ

Associate Justice
 Republic of the Philippines
Supreme Court
Manila
SECOND DIVISION
COMMISSIONER OF INTERNAL G.R. No. 183505
REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

- versus - BRION,
DEL CASTILLO,
ABAD, and
SM PRIME HOLDINGS, INC. PEREZ, JJ.
and FIRST ASIA REALTY
DEVELOPMENT CORPORATION, Promulgated:
Respondents. February 26, 2010
x--------------------------------------------------------------
-----x

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application
of the law would lead to absurdity or injustice, legislative history is all important. In
such cases, courts may take judicial notice of the origin and history of the law,[1] the
deliberations during the enactment,[2] as well as prior laws on the same subject
matter[3] to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in
relation to Republic Act (RA) No. 9282,[4] seeks to set aside the April 30, 2008
Decision[5] and the June 24, 2008 Resolution[6] of the Court of Tax Appeals (CTA).
Factual Antecedents

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

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime
a Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on
cinema ticket sales in the amount of P119,276,047.40 for taxable year 2000.[8] In
response, SM Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand
for the alleged VAT deficiency, which the latter protested in a letter dated January 14,
2004.[10]

On September 6, 2004, the BIR denied the protest filed by SM Prime and
ordered it to pay the VAT deficiency for taxable year 2000 in the amount
of P124,035,874.12.[11]

On October 15, 2004, SM Prime filed a Petition for Review before the CTA
docketed as CTA Case No. 7079.[12]

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount
of P35,823,680.93.[13] First Asia protested the PAN in a letter dated July 9, 2002.[14]

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a letter dated December 12, 2002.[15]

On September 6, 2004, the BIR rendered a Decision denying the protest and
ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for
taxable year 1999.[16]

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before
the CTA, docketed as CTA Case No. 7085.[17]

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on
cinema ticket sales for taxable year 2000 in the amount
of P35,840,895.78. First Asia protested the PAN through a letter dated April 22,
2004.[18]

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT
deficiency.[19] First Asia protested the same in a letter dated July 9, 2004.[20]

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay
the VAT deficiency in the amount of P35,840,895.78 for taxable year 2000.[21]

This prompted First Asia to file a Petition for Review before the CTA
on December 16, 2004. The case was docketed as CTA Case No. 7111.[22]

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in
the total amount of P32,802,912.21 was issued against First Asia by the BIR. In
response, First Asia filed a protest-letter dated November 11, 2004. The BIR then sent
a Formal Letter of Demand, which was protested by First Asia on December 14,
2004.[23]

Re: Assessment Notice No. 003-03

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

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered
First Asia to pay the amounts of P33,610,202.91 and P28,590,826.50 for VAT
deficiency for taxable years 2002 and 2003, respectively.[25]

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.[26]

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

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos.

7085, 7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised
therein are identical and that SM Prime is a majority shareholder of First Asia. The
motion was granted.[28]

Upon submission of the parties respective memoranda, the consolidated cases

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

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision
granting the Petition for Review. Resorting to the language used and the legislative
history of the law, it ruled that the activity of showing cinematographic films is not a
service covered by VAT under the National Internal Revenue Code (NIRC) of 1997,
as amended, but an activity subject to amusement tax under RA 7160, otherwise
known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution
No. 13, entitled Joint Resolution Expressing the True Intent of Congress with Respect
to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with
the States Policy to Have a Viable, Sustainable and Competitive Theater and Film
Industry as One of its Partners in National Development,[30] the CTA First Division
held that the House of Representatives resolved that there should only be one business
tax applicable to theaters and movie houses, which is the 30% amusement tax
imposed by cities and provinces under the LGC of 1991. Further, it held that
consistent with the States policy to have a viable, sustainable and competitive theater
and film industry, the national government should be precluded from imposing its
own business tax in addition to that already imposed and collected by local
government units. The CTA First Division likewise found that Revenue
Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts
from admission to cinema houses, cannot be given force and effect because it failed to
comply with the procedural due process for tax issuances under RMC No. 20-
86.[31] Thus, it disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court

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

SO ORDERED.[32]

Aggrieved, the CIR moved for reconsideration which was denied by the First
Division in its Resolution dated December 14, 2006.[33]

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as
CTA EB No. 244.[35] The CTA En Banc however denied[36] the Petition for Review
and dismissed[37] as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an
exhaustive enumeration of what services are intended to be subject to VAT. And since
the showing or exhibition of motion pictures, films or movies by cinema operators or
proprietors is not among the enumerated activities contemplated in the phrase sale or
exchange of services, then gross receipts derived by cinema/ theater operators or
proprietors from admission tickets in showing motion pictures, film or movie are not
subject to VAT. It reiterated that the exhibition or showing of motion pictures, films,
or movies is instead subject to amusement tax under the LGC of 1991. As regards the
validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that
the same cannot be given force and effect for failure to comply with RMC No. 20-86.

Issue

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

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

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

(a) THE EXHIBITION OF MOVIES BY CINEMA

OPERATORS/PROPRIETORS TO THE PAYING
PUBLIC IS A SALE OF SERVICE;
 (b) UNLESS EXEMPTED BY LAW, ALL SALES OF
SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;

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

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

(d) GRANTING WITHOUT CONCEDING THAT

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

(e) THERE IS NO VALID, EXISTING PROVISION OF

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

(f) QUESTIONS ON THE WISDOM OF THE LAW

ARE NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE

PROVISION OF SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of

1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the

showing of motion pictures is merely subject to the amusement tax
imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.[38]

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

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

Respondents Arguments

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

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT

under Section 108 of the NIRC is not
exhaustive

Section 108 of the NIRC of the 1997 reads:

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

Properties.

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

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

xxxx

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

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

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

Among those included in the enumeration is the lease of motion picture films,
films, tapes and discs. This, however, is not the same as the showing or exhibition of
motion pictures or films. As pointed out by the CTA En Banc:
 Exhibition in Blacks Law Dictionary is defined as To show or display. x x
x To produce anything in public so that it may be taken into possession (6th
ed., p. 573). While the word lease is defined as a contract by which one
owning such property grants to another the right to possess, use and enjoy
it on specified period of time in exchange for periodic payment of a
stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p. 889).
x x x[40]

Since the activity of showing motion pictures, films or movies by cinema/

theater operators or proprietors is not included in the enumeration, it is incumbent
upon the court to the determine whether such activity falls under the phrase similar
services. The intent of the legislature must therefore be ascertained.

The legislature never intended operators

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

Under the NIRC of 1939,[41] the national government imposed amusement tax
on proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses, boxing exhibitions, and other places of amusement, including cockpits, race
tracks, and cabaret.[42] In the case of theaters or cinematographs, the taxes were first
deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters
or cinematographs before the gross receipts were divided between the proprietors,
lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 11[43] of the Local Tax Code,[44] however, amended
this provision by transferring the power to impose amusement tax[45] on admission
from theaters, cinematographs, concert halls, circuses and other places of amusements
exclusively to the local government. Thus, when the NIRC of 1977[46] was enacted,
the national government imposed amusement tax only on proprietors, lessees or
operators of cabarets, day and night clubs, Jai-Alai and race tracks.[47]

On January 1, 1988, the VAT Law[48] was promulgated. It amended certain

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

SECTION 102. Value-added tax on sale of services. (a) Rate and

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

(1) Processing manufacturing or repacking goods for other persons

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

xxxx

Gross receipts means the total amount of money or its equivalent

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

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

(2) Tax not billed separately or is billed erroneously in the invoice.

If the tax is not billed separately or is billed erroneously in the invoice, the
tax shall be determined by multiplying the gross receipts (including the
amount intended to cover the tax or the tax billed erroneously) by
1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however,
were exempted from the coverage of VAT.[49]

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC
8-88, which clarified that the power to impose amusement tax on gross
receipts derived from admission tickets was exclusive with the local government units
and that only the gross receipts of amusement places derived from sources other than
from admission tickets were subject to amusement tax under the NIRC of 1977, as
amended. Pertinent portions of RMC 8-88 read:
 Under the Local Tax Code (P.D. 231, as amended), the jurisdiction
to levy amusement tax on gross receipts arising from admission to places
of amusement has been transferred to the local governments to the
exclusion of the national government.

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

Considering the foregoing legal background, the provisions under

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

x x x Accordingly, only the gross receipts of the amusement

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

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

In 1994, RA 7716 restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was amended by RA
8241. Shortly thereafter, the NIRC of 1997[51] was signed into law. Several
amendments[52] were made to expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to amusement
tax[53] under the NIRC of 1997 are exempt from the coverage of VAT.[54]
Based on the foregoing, the following facts can be established:

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

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

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

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

(4) Under the NIRC of 1977, the national government imposed

amusement tax only on proprietors, lessees or operators of
cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and
subsequent sales tax and percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons
subject to amusement tax under the NIRC from the coverage of
VAT.

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

(9) Only lessors or distributors of cinematographic films are

included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already
covered by the amusement tax. This holds true even in the case of cinema/theater
operators taxed under the LGC of 1991 precisely because the VAT law was intended
to replace the percentage tax on certain services. The mere fact that they are taxed by
the local government unit and not by the national government is immaterial. The
Local Tax Code, in transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets to the local government,
did not intend to treat cinema/theater houses as a separate class. No distinction must,
therefore, be made between the places of amusement taxed by the national
government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 10%[55] VAT on
top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total
of 40% tax. Such imposition would result in injustice, as persons taxed under the
NIRC of 1997 would be in a better position than those taxed under the LGC of
1991. We need not belabor that a literal application of a law must be rejected if it will
operate unjustly or lead to absurd results.[56] Thus, we are convinced that the
legislature never intended to include cinema/theater operators or proprietors in the
coverage of VAT.

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

The power of taxation is sometimes called also the power to

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

Petitioner, in issuing the assessment notices for deficiency VAT against

respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was

then subject to amusement tax under Section 260 of Commonwealth Act
No. 466, otherwise known as the National Internal Revenue Code of 1939,
computed on the amount paid for admission. With the enactment of the
Local Tax Code under Presidential Decree (PD) No. 231, dated June 28,
1973, the power of imposing taxes on gross receipts from admission of
persons to cinema/theater and other places of amusement had, thereafter,
been transferred to the provincial government, to the exclusion of the
national or municipal government (Sections 11 & 13, Local Tax
Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed
and/or deleted by Republic Act (RA) No. 7160, otherwise known as the
Local Government Code of 1991, enacted into law on October 10,
1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the
statutory prohibition on the national government to impose business
tax on gross receipts from admission of persons to places of
amusement, led the way to the valid imposition of the VAT pursuant
to Section 102 (now Section 108) of the old Tax Code, as amended by
the Expanded VAT Law (RA No. 7716) and which was implemented
beginning January 1, 1996.[58] (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for
the imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition under the Local Tax
Code did not grant nor restore to the national government the power to impose
amusement tax on cinema/theater operators or proprietors. Neither did it expand the
coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot
be presumed nor can it be extended by implication. A law will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously.[59] As it is, the
power to impose amusement tax on cinema/theater operators or proprietors remains
with the local government.
Revenue Memorandum Circular No. 28-
2001 is invalid

Considering that there is no provision of law imposing VAT on the gross

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

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

Rule on tax exemption does not apply

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

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

SO ORDERED.
 SECOND DIVISION

COMMISSIONER OF G.R. No. 153205

INTERNAL REVENUE,
Petitioner, Present:

QUISUMBING, J.
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
BURMEISTER AND WAIN VELASCO, JR., JJ.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007

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

DECISION

CARPIO, J.:

The Case

This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August
2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).

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

[Respondent] is a domestic corporation duly organized and existing

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

It is represented that a foreign consortium

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

BWSC-Denmark established [respondent] which subcontracted the

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

NAPOCOR paid capacity and energy fees to the Consortium in a

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

In order to ascertain the tax implications of the above transactions,

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

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995,

the Certificate of Registration bearing RDO Control No. 95-113-
007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-
Added Tax Returns reflecting, among others, a total zero-rated sales
of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed
as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
----------------------------------------------------------------------------------
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14

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

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

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of

Revenue Regulations No. 7-95 are hereby amended to
read as follows:

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

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

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations,

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

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No.

003-99 from the VAT Review Committee which reconfirmed BIR
Ruling No. 023-95 insofar as it held that the services being rendered
by BWSCMI is subject to VAT at zero percent (0%).

On the strength of the aforementioned rulings, [respondent]

on April 22,1999, filed a claim for the issuance of a tax credit
certificate with Revenue District No. 113 of the BIR. [Respondent]
believed that it erroneously paid the output VAT for 1996 due to
its availment of the Voluntary Assessment Program (VAP) of the
BIR.[4]

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

The Ruling of the Court of Tax Appeals

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

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

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

xxxx

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

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

Since it is apparent that the payments for the services rendered by

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

x x x Considering the principle of solutio indebiti which requires the

return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by
[respondent]. x x x[5]

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

Hence, this petition.

The Court of Appeals Ruling

In affirming the CTA, the Court of Appeals rejected petitioners view that
since respondents services are not destined for consumption abroad, they are not
of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96[7] as subject to 0% VAT. Thus,
according to petitioner, respondents services cannot legally qualify for 0% VAT
but are subject to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT
Ruling No. 040-98, respondents services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are two
kinds of transactions or services subject to zero percent VAT under VAT Ruling
No. 040-98. These are (a) services other than repacking goods for other persons
doing business outside the Philippines which goods are subsequently exported;
and (b) services by a resident to a non-resident foreign client, such as project
studies, information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).[9]

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

The Court of Appeals further held that assuming petitioners interpretation of

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

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

The Issue

The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.[16]

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on
the ground that respondents services are subject to 0% VAT. Rather, it is based
on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-
95[17] and VAT Ruling No. 003-99,[18] which held that respondents services are
subject to 0% VAT and which respondent invoked in applying for refund of the
output VAT.

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

(b) Transactions subject to zero-rate. ― The following services

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

(1) Processing, manufacturing or repacking goods for other

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

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

paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is
a signatory effectively subjects the supply of such services
to zero rate;

(4) Services rendered to vessels engaged exclusively in

international shipping; and

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

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

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

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

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

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

currency under BSP rules, the law clearly envisions the payer-recipient of
services to be doing business outside the Philippines. Only those not doing
business in the Philippines can be required under BSP rules[20] to pay in
acceptable foreign currency for their purchase of goods or services from the
Philippines. In a domestic transaction, where the provider and recipient of
services are both doing business in the Philippines, the BSP cannot require any
party to make payment in foreign currency.

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

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

Thus, when Section 102(b)(2) speaks of [s]ervices other than those

mentioned in the preceding subparagraph, the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements for
zero-rating, including the essential condition that the recipient of services is
doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are [s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged
in business who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP.
In this case, the payer-recipient of respondents services is the Consortium which
is a joint-venture doing business in the Philippines. While the Consortiums
principal members are non-resident foreign corporations, the Consortium itself
is doing business in the Philippines. This is shown clearly in BIR Ruling No.
023-95 which states that the contract between the Consortium and NAPOCOR
is for a 15-year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification
of the tax implications of a contract between a consortium composed
of Burmeister & Wain Scandinavian Contractor A/S (BWSC), Mitsui
Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (MITSUI),
all referred to hereinafter as the Consortium, and the National Power
Corporation (NAPOCOR) for the operation and maintenance of two 100-
Megawatt power barges (Power Barges) acquired by NAPOCOR for a 15-
year term.[23] (Emphasis supplied)

Considering this length of time, the Consortiums operation and

maintenance of NAPOCORs power barges cannot be classified as a single or
isolated transaction. The Consortium does not fall under Section
102(b)(2) which requires that the recipient of the services must be a person
doing business outside the Philippines. Therefore, respondents services to the
Consortium, not being supplied to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and

maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the
Consortium, through its non-resident partners, partly in foreign currency
outwardly remitted. In turn, the Consortium pays respondent also in foreign
currency inwardly remitted and accounted for in accordance with BSP rules.
This payment scheme does not entitle respondent to 0% VAT. As the Court held
in Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch),[24] the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An essential condition
for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient
of the services is a person doing business outside the Philippines. In this case,
the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to
operate and maintain NAPOCORs two 100-megawatt power barges in
Mindanao.

The Court recognizes the rule that the VAT system generally follows the
destination principle (exports are zero-rated whereas imports are
taxed). However, as the Court stated in American Express, there is an exception
to this rule.[25] This exception refers to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business
outside the Philippines. Thus, to be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be (a) performed in the Philippines;
(b) for a person doing business outside the Philippines; and (c) paid in
acceptable foreign currency accounted for in accordance with BSP rules.

Respondents reliance on the ruling in American Express[26] is misplaced. That

case involved a recipient of services, specifically American Express
International, Inc. (HongkongBranch), doing business outside the
Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine

Branch)] is a VAT-registered person that facilitates the collection and
payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)], for
which it gets paid in acceptable foreign currency inwardly remitted
and accounted for in accordance with BSP rules and regulations.
x x x x[27] (Emphasis supplied)

In contrast, this case involves a recipient of services the Consortium which is

doing business in the Philippines. Hence, American Express services were
subject to 0% VAT, while respondents services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on

VAT Ruling No. 003-99,[28] which reconfirmed BIR Ruling No. 023-
95[29] insofar as it held that the services being rendered by BWSCMI is subject
to VAT at zero percent (0%). Respondents reliance on these BIR rulings binds
petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim
for refund effectively serves as a revocation of VAT Ruling No. 003-99 and
BIR Ruling No. 023-95. However, such revocation cannot be given retroactive
effect since it will prejudice respondent. Changing respondents status will
deprive respondent of a refund of a substantial amount representing excess
output tax.[30] Section 246 of the Tax Code provides that any revocation of a
ruling by the Commissioner of Internal Revenue shall not be given retroactive
application if the revocation will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions enumerated in Section 246 of
the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the
CTA contesting respondents claim for refund, respondents services shall be
subject to the regular 10% VAT.[31] Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.

SO ORDERED.

ANTONIO T. CARPIO