ESTATE TAX whose testimony was duly recorded as part of the records of this case.

testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's
exhibits formed part of the BIR records of the case.24

Republic of the Philippines Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the
SUPREME COURT deficiency estate tax, to wit:
Manila Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
THIRD DIVISION
Gross Conjugal Estate 38,084,015.93
G.R. No. 140944 April 30, 2008 Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. Less: Share of Surviving Spouse 5,917,007.96
FERNANDEZ, petitioner,
vs. Net Share in Conjugal Estate P 5,917,007.96
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Add: Capital/Paraphernal
Properties – P44,652,813.66
The Facts: On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will 5 was filed
and the court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Less: Capital/Paraphernal Deductions 44,652,813.66
Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). Net Taxable Estate P 50,569,821.62
Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings for the ============
Estate.

Estate Tax Due P 29,935,342.97

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR
since the assets of the estate, as well as the claims against it, had yet to be collated, determined and identified. Justice Dizon Add: 25% Surcharge for Late Filing 7,483,835.74
authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and Add: Penalties for-No notice of death 15.00
to represent the same in securing a Certificate of Tax Clearance. Atty. Gonzales wrote a letter 9 addressed to the BIR Regional
Director for San Pablo City and filed the estate tax return10 with the same BIR Regional Office, showing therein a NIL estate No CPA certificate 300.00
tax liability. Total deficiency estate tax P 37,419,493.71
============
BIR Regional Director for San Pablo City, Osmundo G. Umali issued that the taxes due on the transfer of real and personal
properties[14] of Jose had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice
exclusive of 20% interest from due date of its payment until full payment thereof
Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.15

[Sec. 283 (b), Tax Code of 1987].25

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying
its creditors.However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, issued Estate Tax
Assessment Notice No. FAS-E-87-91-003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax. Thus, the CTA disposed of the case in this wise:

Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her letter20 dated April 12, 1994, WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same.
the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount
deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate tax liability
review21 before respondent CTA. Trial on the merits ensued. of the estate of Jose P. Fernandez who died on November 7, 1987.

The CTA's Ruling: CTA denied the said petition for review and opined that the aforementioned pieces of evidence introduced SO ORDERED.26
by the BIR were admissible in evidence. The CTA ratiocinated:
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27
Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent
has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be The CA's Ruling
considered as evidence for respondent since they were properly identified during the presentation of respondent's witness,
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of
filing an estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR
Commissioner of her authority to re-examine or re-assess the said return filed on behalf of the Estate.28
On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its Resolution30 dated November 3,
1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of
Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings
of this Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax
return prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of
Jose P. Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been
issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable
claims of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double
imputation of values on the very same estate properties in the estate tax return it prepared and filed which
effectively bloated the estate's assets.31
The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no
estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de
Oñate has already been abandoned in a long line of cases in which the Court held that evidence not formally offered is without
any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is mandatory in
character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence
aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence and depriving
petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming arguendo that
the ruling in Vda. de Oñate is still applicable, BIR failed to comply with the doctrine's requisites because the documents herein
remained simply part of the BIR records and were not duly incorporated in the court records; that the BIR failed to consider that
although the actual payments made to the Estate creditors were lower than their respective claims, such were compromise
agreements reached long after the Estate's liability had been settled by the filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement of the
estate tax due should be at the time the estate tax return was filed by the judicial administrator and the issuance of said BIR
Certifications and not at the time the aforementioned Compromise Agreements were entered into with the Estate's creditors.32
On the other hand, respondent counters that the documents, being part of the records of the case and duly identified in a duly
recorded testimony are considered evidence even if the same were not formally offered; that the filing of the estate tax return
by the Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the
return and assess the estate tax; and that the factual findings of the CTA as affirmed by the CA may no longer be reviewed by
this Court via a petition for review.33
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not
formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed
against the Estate.
The Court’s Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de
novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of
evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered
before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been formally offered. The
purpose for which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous rulings in People v.
Napat-a35 and People v. Mate36 on the admission and consideration of exhibits which were not formally offered during the trial.
Although in a long line of cases many of which were decided after Vda. de Oñate, we held that courts cannot consider
evidence which has not been formally offered,37 nevertheless, petitioner cannot validly assume that the doctrine laid down
in Vda. de Oñate has already been abandoned. Recently, in Ramos v. Dizon,38this Court, applying the said doctrine, ruled that
the trial court judge therein committed no error when he admitted and considered the respondents' exhibits in the resolution of
the case, notwithstanding the fact that the same were not formally offered. Likewise, in Far East Bank & Trust Company v.
Commissioner of Internal Revenue,39 the Court made reference to said doctrine in resolving the issues therein. Indubitably, the
doctrine laid down in Vda. De Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered.
Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has
already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we
had the occasion to make a distinction between identification of documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as
an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to
formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses
to do the latter, the trial court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing
rule and allowed evidence not formally offered to be admitted and considered by the trial court provided
the following requirements are present, viz.: first, the same must have been duly identified by testimony
duly recorded and, second, the same must have been incorporated in the records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the general rule. Being an
exception, it may be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general
rule in Section 34 of Rule 132 of the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented and
marked during the trial particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct
testimony.41 He was also subjected to cross-examination and re-cross examination by petitioner.42 But Alberto’s account and
the exchanges between Alberto and petitioner did not sufficiently describe the contents of the said pieces of evidence
presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify,
inasmuch as Alberto was incompetent to answer questions relative to the working papers.43 The lead examiner never testified.
Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents themselves were not
incorporated in the records of the case.
A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant case. In the aforementioned
cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly
incorporated in the records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were
presented and marked during the pre-trial of the case thus, they have been incorporated into the
records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by
respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted
during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.44
While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure are not ends in themselves and
are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural
technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate.46 The BIR's failure to formally offer these pieces of evidence, despite CTA's directives,
is fatal to its cause.47 Such failure is aggravated by the fact that not even a single reason was advanced by the BIR to justify
such fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence48 in the hearing of February 21, 1996, but BIR's
counsel failed to appear.49 The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a
warning to BIR that such presentation would be considered waived if BIR's evidence would not be presented at the next
hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus, in its Resolution51 dated March 21,
1996, the CTA considered the BIR to have waived presentation of its evidence. In the same Resolution, the parties were
directed to file their respective memorandum. Petitioner complied but BIR failed to do so.52 In all of these proceedings, BIR
was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and
strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the
purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing
parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the
formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of
time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in
effect, would encourage needless delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider
that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several
extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost
five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of
evidence is anathema to the efficient, effective, and expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on appeal
unless it is shown that the lower courts committed gross error in the appreciation of facts.54 In this case, however, we find the
decision of the CA affirming that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an
obligation,55 condonation or remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of
the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers.
It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit
given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the
creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the
obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange
of some concession which the creditor receives.57
Verily, the second issue in this case involves the construction of Section 7958 of the National Internal Revenue Code59 (Tax
Code) which provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the
actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact
that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a
reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of 1939, and which was the first codification of Philippine tax laws.
Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.60
It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against
the estate is fixed as of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death
developments, such as where a settlement between the parties results in the reduction of the amount actually paid. 61 On one
hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the date of the decedent's
death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate was certain and enforceable on the date of
the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from
deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general
principle that post-death developments are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into
consideration and the claim should be allowed as a deduction only to the extent of the amount actually paid.64Recognizing the
dispute, the Service released Proposed Regulations in 2007 mandating that the deduction would be limited to the actual
amount paid.65
In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death
valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court
announced the date-of-death valuation principle, it was making a judgment about the nature of the federal estate
tax specifically, that it is a tax imposed on the act of transferring property by will or intestacy and, because the act
on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that time. This analysis supports broad application of
the date-of-death valuation rule.67
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court
in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be
imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the
government.69 Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. 70 Second.
Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to
be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could
have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.71 Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable
deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and the Resolution
dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.
VAT
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 158885 October 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and
PATEROS, BUREAU OF INTERNAL REVENUE. Respondents.
RESOLUTION
LEONARDO-DE CASTRO, J.:
Before us is respondents’ Motion for Reconsideration of our Decision dated April 2, 2009 which granted the consolidated
petitions of petitioner Fort Bonifacio Development Corporation, the dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of Appeals are
REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner the amount of
₱28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to
petitioner the amount of ₱347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional
input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No
pronouncement as to costs.
The Motion for Reconsideration raises the following arguments:
I. SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY
REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE
TREATMENT OF REAL PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE
TREATMENT OF TRANSACTIONS INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND,
AS SAID DISTINCTION IS FOUND IN SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS
NO. 7-95 WHICH DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES
SUBJECT TO VAT FOR THE FIRST TIME.
II. SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE
REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS
ON REAL PROPERTIES.
III. REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.
The instant motion for reconsideration lacks merit.
The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It amended several
provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise accommodated the potential burdens
of the shift to the VAT system by allowing newly VAT-registered persons to avail of a transitional input tax credit as provided
for in Section 105 of the Old NIRC. Section 105 as amended by EO 273 reads:
Sec. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added
tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first time value-added-
tax on sale of real properties. The amendment reads:
Sec. 100. Value-added-tax on sale of goods or properties. — (a) Rate and base of tax. — There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling
price or gross value in money of the goods, or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.1avvph!1
(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and
shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx
The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the enactment of RA 7716.
Section 105 however was amended with the passage of the new National Internal Revenue Code of 1997 (New NIRC), also
officially known as Republic Act (RA) 8424. The provisions on the transitional input tax credit are now embodied in Section
111(A) of the New NIRC, which reads:
Section 111. Transitional/Presumptive Input Tax Credits. –
(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-
registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of
finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent for 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax. [Emphasis ours.]
The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporation’s (FBDC) presumptive input
tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum
Circular 3-96 (RMC 3-96). Specifically, Section 4.105-1 of RR 7-95 provides:
Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers who became VAT-registered persons upon
effectivity of RA No. 7716 who have exceeded the minimum turnover of ₱500,000.00 or who voluntarily register even if their
turnover does not exceed ₱500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December
31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further
processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d)
goods in process and supplies, all of which are for sale or for use in the course of the taxpayer’s trade or business as a VAT-
registered person.
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1,
1988).
The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may
be allowed as tax credit against the output tax of the VAT-registered person.
In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-95 for being in conflict
with the law. It held that the CIR had no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old
NIRC sans statutory authority or basis and justification to make such limitation. This it did when it restricted the application of
Section 105 in the case of real estate dealers only to improvements on the real property belonging to their beginning inventory.
A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is the cardinal rule in
statutory construction that a statute’s clauses and phrases must not be taken as detached and isolated expressions, but the
whole and every part thereof must be considered in fixing the meaning of any of its parts in order to produce a harmonious
whole. Every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be
considered together with other parts of the statute and kept subservient to the general intent of the whole enactment.1
In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe the constituent parts
together; ascertain the legislative intent from the whole act; consider each and every provision thereof in the light of the
general purpose of the statute; and endeavor to make every part effective, harmonious and sensible.2
The statutory definition of the term "goods or properties" leaves no room for doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – xxx.
(1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of pecuniary estimation and
shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx.
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:
Sec. 105. Transitional Input tax Credits. – A person who becomes liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added
tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for sale to
costumers or held for lease in the ordinary course of business." Having been defined in Section 100 of the NIRC, the term
"goods" as used in Section 105 of the same code could not have a different meaning. This has been explained in the Decision
dated April 2, 2009, thus:
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit. Goods, as
commonly understood in the business sense, refers to the product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties themselves which constitute their "goods." Such real
properties are the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held primarily
for sale to customers or held for lease in the ordinary course of trade or business." Said definition was taken from the very
statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the
BIR not only contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue
regulation itself has provided.
Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1,
1988).
As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot contravene the law on which it is
based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This is a legislative
act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that administrative agencies
promulgate, which are the product of a delegated legislative power to create new and additional legal provisions that have the
effect of law, should be within the scope of the statutory authority granted by the legislature to the objects and purposes of the
law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An
implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not
consistent with the statute itself is null and void. 4

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are
without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms,
or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter
cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or
administrative ruling, the basic law prevails.5
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under Section
105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a reiteration of the
same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following paragraph:
affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is
yet unable to credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that transitional input tax credit
applies only when taxes were previously paid on the properties in the beginning inventory and there is a law imposing the tax
which is presumed to have been paid, is to impose conditions or requisites to the application of the transitional tax input credit
which are not found in the law. The courts must not read into the law what is not there. To do so will violate the principle of
separation of powers which prohibits this Court from engaging in judicial legislation.6
WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of merit.
SO ORDERED.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as
buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of E.O. 273 (January 1,
1988). Republic of the Philippines
SUPREME COURT
Manila
It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on real
properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97 which is now in consonance with
Section 100 of the NIRC, insofar as the definition of real properties as goods is concerned. The failure to add a specific THIRD DIVISION
repealing clause would not necessarily indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted
paragraph was deleted created an irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and RR 7- G.R. No. 180345 November 25, 2009
95.
SAN ROQUE POWER CORPORATION, Petitioner,
We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio. vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
At the outset, it must be stressed that FBDC sought the refund of the total amount of ₱347,741,695.74 which it had itself paid
in cash to the BIR. It is argued that the transitional input tax credit applies only when taxes were previously paid on the
properties in the beginning inventory and that there should be a law imposing the tax presumed to have been paid. The thesis DECISION
is anchored on the argument that without any VAT or other input business tax imposed by law on the real properties at the time
of the sale, the 8% transitional input tax cannot be presumed to have been paid. CHICO-NAZARIO, J.:

The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax credit is limited to the
In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San Roque Power Corporation
amount of VAT previously paid. When the aforesaid section speaks of "eight percent (8%) of the value of such inventory"
assails the Decision1 of the Court of Tax Appeals (CTA) En Banc dated 20 September 2007 in CTA EB No. 248, affirming the
followed by the clause "or the actual value-added tax paid on such goods, materials and supplies," the implication is clear that
Decision2 dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, which dismissed the claim of petitioner for
under the first clause, "eight percent (8%) of the value of such inventory," the law does not contemplate the payment of any
the refund and/or issuance of a tax credit certificate in the amount of Two Hundred Forty-Nine Million Three Hundred Ninety-
prior tax on such inventory. This is distinguished from the second clause, "the actual value-added tax paid on the goods,
Seven Thousand Six Hundred Twenty Pesos and 18/100 (₱249,397,620.18) allegedly representing unutilized input Value
materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed. Had the intention of
Added Tax (VAT) for the period covering January to December 2002.
the law been to limit the amount to the actual VAT paid, there would have been no need to explicitly allow a claim based on
8% of the value of such inventory.
Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the assessment and collection
The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was paid, whether or not it of all national internal revenue taxes, fees, and charges, including the Value Added Tax (VAT), imposed by Section 108 3 of the
was actually paid, requires a transaction where a tax has been imposed by law, is utterly without basis in law. The rationale National Internal Revenue Code (NIRC) of 1997. Moreover, it is empowered to grant refunds or issue tax credit certificates in
behind the provisions of Section 105 was aptly elucidated in the Decision sought to be reconsidered, thus: accordance with Section 112 of the NIRC of 1997 for unutilized input VAT paid on zero-rated or effectively zero-rated sales
and purchases of capital goods, to wit:
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of SEC. 112. Refunds or Tax Credits of Input Tax. -
transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or
from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
 apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108
(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where
the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
(B) Capital Goods—A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input
taxes paid on capital goods imported or locally purchased, to the extent the such input taxes have not been applied
against output taxes. The application may be made only within two (2) years after the close of the taxable quarter
when the importation or purchase was made.
On the other hand, petitioner is a domestic corporation organized under the corporate laws of the Republic of the Philippines.
On 14 October 1997, it was incorporated for the sole purpose of building and operating the San Roque Multipurpose Project in
San Manuel, Pangasinan, which is an indivisible project consisting of the power station, the dam, spillway, and other related
facilities.4 It is registered with the Board of Investments (BOI) on a preferred pioneer status to engage in the design,
construction, erection, assembly, as well as own, commission, and operate electric power-generating plants and related
activities, for which it was issued the Certificate of Registration No. 97-356 dated 11 February 1998.5 As a seller of services,
petitioner is registered with the BIR as a VAT taxpayer under Certificate of Registration No. OCN-98-006-007394.6
On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National Power Corporation (NPC)
to develop the hydro potential of the Lower Agno River, and to be able to generate additional power and energy for the Luzon
Power Grid, by developing and operating the San Roque Multipurpose Project. The PPA provides that petitioner shall be
responsible for the design, construction, installation, completion and testing and commissioning of the Power Station and it
shall operate and maintain the same, subject to the instructions of the NPC. During the cooperation period of 25 years
commencing from the completion date of the Power Station, the NPC shall purchase all the electricity generated by the Power
Plant.7
Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for and was granted five
Certificates of Zero Rate by the BIR, through the Chief Regulatory Operations Monitoring Division, now the Audit Information,
Tax Exemption & Incentive Division. Based on these certificates, the zero-rated status of petitioner commenced on 27
September 1998 and continued throughout the year 2002.8
For the period January to December 2002, petitioner filed with the respondent its Monthly VAT Declarations and Quarterly VAT
Returns. Its Quarterly VAT Returns showed excess input VAT payments on account of its importation and domestic purchases
of goods and services, as follows9 :
On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the BIR four separate
administrative claims for refund of Unutilized Input VAT paid for the period January to March 2002, April to June 2002, July to
September 2002, and October to December 2002, respectively. In these letters addressed to the BIR, Carlos Echevarria
(Echevarria), the Vice President and Director of Finance of petitioner, explained that petitioner’s sale of power to NPC are
subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the NIRC.10Petitioner sought to recover the total
amount of ₱250,258,094.25, representing its unutilized excess VAT on its importation of capital and other taxable goods and
services for the year 2002, broken down as follows11 :
Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on Domestic Purchases during the first
quarter of 2002; (2) Input VAT on Domestic Purchases for the fourth quarter of 2002; and (3) Input VAT on Importation of
Goods for the fourth quarter of 2002. The amendments read as follows12 :
On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims for tax refund or credit for the
first and fourth quarter of 2002, respectively. Petitioner sought to recover a total amount of ₱249,397,620.18 representing its
unutilized excess VAT on its importation and domestic purchases of goods and services for the year 2002, broken down as
follows13 :
Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the latter to file on 5 April 2004,
with the CTA in Division, a Petition for Review, docketed as CTA Case No. 6916 before it could be barred by the two-year
prescriptive period within which to file its claim. Petitioner sought the refund of the amount of ₱249,397,620.18 representing its
unutilized excess VAT on its importation and local purchases of various goods and services for the year 2002.14
During the proceedings before the CTA Second Division, petitioner presented the following documents, among other pieces of
evidence: (1) Petitioner’s Amended Quarterly VAT return for the 4th Quarter of 2002 marked as Exhibit "A," showing the
amount of ₱42,500,000.00 paid by NTC to petitioner for all the electricity produced during test runs; (2) the special audit
report, prepared by the CPA firm of Punongbayan and Araullo through a partner, Angel A. Aguilar (Aguilar), and the attached
schedules, marked as Exhibits "J-2" to "J-21"; (3) Sales Invoices and Official Receipts and related documents issued to
petitioner for the year 2002, marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited Financial Statements of Petitioner for the
year 2002, with comparative figures for 2001, marked as Exhibit "K"; and (5) the Affidavit of Echevarria dated 9 February 2005,
marked as Exhibit "L".15
During the hearings, the parties jointly stipulated on the issues involved:
1. Whether or not petitioner’s sales are subject to value-added taxes at effectively zero percent (0%) rate;
2. Whether or not petitioner incurred input taxes which are attributable to its effectively zero-rated transactions;
3. Whether or not petitioner’s importation and purchases of capital goods and related services are within the scope
and meaning of "capital goods" under Revenue Regulations No. 7-95;
4. Whether or not petitioner’s input taxes are sufficiently substantiated with VAT invoices or official receipts;
5. Whether or not the VAT input taxes being claimed for refund/tax credit by petitioner (had) been credited or
utilized against any output taxes or (had) been carried forward to the succeeding quarter or quarters; and
6. Whether or not petitioner is entitled to a refund of VAT input taxes it paid from January 1, 2002 to December 31,
2002 in the total amount of Two Hundred Forty Nine Million Three Hundred Ninety Seven Thousand Six Hundred
Twenty and 18/100 Pesos (₱249,397,620.18).
Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount of ₱249,397,620.18
representing its unutilized input VAT paid on importation and purchases of capital and other taxable goods and services from
January 1 to December 31, 2002.
After a hearing on the merits, the CTA Second Division rendered a Decision16 dated 23 March 2006 denying petitioner’s claim
for tax refund or credit. The CTA noted that petitioner based its claim on creditable input VAT paid, which is attributable to (1)
zero-rated or effectively zero-rated sale, as provided under Section 112(A) of the NIRC, and (2) purchases of capital goods, in
accordance with Section 112(B) of the NIRC. The court ruled that in order for petitioner to be entitled to the refund or issuance
of a tax credit certificate on the basis of Section 112(A) of the NIRC, it must establish that it had incurred zero-rated sales or
effectively zero-rated sales for the taxable year 2002. Since records show that petitioner did not make any zero-rated or
effectively-zero rated sales for the taxable year 2002, the CTA reasoned that petitioner’s claim must be denied. Parenthetically,
the court declared that the claim for tax refund or credit based on Section 112(B) of the NIRC requires petitioner to prove that it
paid input VAT on capital goods purchased, based on the definition of capital goods provided under Section 4.112-1(b) of
Revenue Regulations No. 7-95—i.e., goods or properties which have an estimated useful life of greater than one year, are
treated as depreciable assets under Section 34(F) of the NIRC, and are used directly or indirectly in the production or sale of
taxable goods and services. The CTA found that the evidence offered by petitioner—the suppliers’ invoices and official receipts
and Import Entries and Internal Revenue Declarations and the audit report of the Court-commissioned Independent Certified
Public Accountant (CPA) are insufficient to prove that the importations and domestic purchases were classified as capital
goods and properties entered as part of the "Property, Plant and Equipment" account of the petitioner. The dispositive part of
the said Decision reads:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.17
Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for Reconsideration which was denied
by the CTA Second Division in a Resolution dated 4 January 2007.18
Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En Banc promulgated its
Decision19 on 20 September 2007 denying petitioner’s appeal. The CTA En Banc reiterated the ruling of the Division that
petitioner’s claim based on Section 112(A) of the NIRC should be denied since it did not present any records of any zero-rated
or effectively zero-rated transactions. It clarified that since petitioner failed to prove that any sale of its electricity had
transpired, petitioner may base its claim only on Section 112(B) of the NIRC, the provision governing the purchase of capital
goods. The court noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo, dealt specifically with
the unutilized input taxes paid or incurred by petitioner on its local and foreign purchases of goods and services attributable to
its zero-rated sales, and not to purchases of capital goods. It decided that petitioner failed to prove that the purchases
evidenced by the invoices and receipts, which petitioner presented, were classified as capital goods which formed part of its
"Property, Plant and Equipment," especially since petitioner failed to present its books of account. The dispositive part of the
said Decision reads:
WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and
Resolution are hereby AFFIRMED.20
The CTA En Banc denied petitioner’s Motion for Reconsideration in a Resolution dated 22 October 2007.21
Hence, the present Petition for Review where the petitioner raises the following errors allegedly committed by the CTA En
banc:
I sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9) the claim is filed within two years
THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN FAILING OR REFUSING TO APPRECIATE
THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE PETITIONER, THUS DEPRIVING
PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND
II
THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY
PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT ENTITLE PETITIONER TO A
REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS
OF LAW.22
The present Petition is meritorious.
The main issue in this case is whether or not petitioner may claim a tax refund or credit in the amount of ₱249,397,620.18 for
creditable input tax attributable to zero-rated or effectively zero-rated sales pursuant to Section 112(A) of the NIRC or for input
taxes paid on capital goods as provided under Section 112(B) of the NIRC.
To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties. It is an accepted doctrine
that this Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh the probative value of the
evidence presented. However, this rule does not apply where the judgment is premised on a misapprehension of facts, or
when the appellate court failed to notice certain relevant facts which if considered would justify a different conclusion.23
After reviewing the records, this Court finds that petitioner’s claim for refund or credit is justified under Section 112(A) of the
NIRC which states that:
SEC. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or effectively zero-
rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt
sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
To claim refund or tax credit under Section 112(A), petitioner must comply with the following criteria: (1) the taxpayer is VAT
registered; (2) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the
input taxes are not transitional input taxes; (5) the input taxes have not been applied against output taxes during and in the
succeeding quarters; (6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated
sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds
have been duly accounted for in accordance with BSP rules and regulations; (8) where there are both zero-rated or effectively
zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these
after the close of the taxable quarter when such sales were made.24
Based on the evidence presented, petitioner complied with the abovementioned requirements. Firstly, petitioner had
adequately proved that it is a VAT registered taxpayer when it presented Certificate of Registration No. OCN-98-006-007394,
which it attached to its Petition for Review dated 29 March 2004 filed before the CTA in Division. Secondly, it is unquestioned
that petitioner is engaged in providing electricity for NPC, an activity which is subject to zero rate, under Section 108(B)(3) of
the NIRC. Thirdly, petitioner offered as evidence suppliers’ VAT invoices or official receipts, as well as Import Entries and
Internal Revenue Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were examined in the audit conducted by Aguilar, the
Court-commissioned Independent CPA. Significantly, Aguilar noted in his audit report (Exhibit "J-2") that of the
₱249,397,620.18 claimed by petitioner, he identified items with incomplete documentation and errors in computation with a
total amount of ₱3,266,009.78. Based on these findings, the remaining input VAT of ₱246,131,610.40 was properly
documented and recorded in the books. The said report reads:
In performing the procedures referred under the Procedures Performed section of this report, no matters came to our attention
that cause us to believe that the amount of input VAT applied for as tax credit certificate/refund of P249,397,620.18 for the
period January 1, 2002 to December 31, 2002 should be adjusted except for input VAT claimed with incomplete
documentation, those with various and other exceptions on the supporting documents and those with errors in computation
totaling P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of
this report. We have also ascertained that the input VAT claimed are properly recorded in the books and, except as specifically
identified in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly
supported by original and appropriate suppliers’ VAT invoices and/or official receipts.25
Fourthly, the input taxes claimed, which consisted of local purchases and importations made in 2002, are not transitional input
taxes, which Section 111 of the NIRC defines as input taxes allowed on the beginning inventory of goods, materials and
supplies.26 Fifthly, the audit report of Aguilar affirms that the input VAT being claimed for tax refund or credit is net of the input
VAT that was already offset against output VAT amounting to ₱26,247.27 for the first quarter of 2002 and ₱34,996.36 for the
fourth quarter of 2002,27 as reflected in the Quarterly VAT Returns.28
The main dispute in this case is whether or not petitioner’s claim complied with the sixth requirement—the existence of zero-
rated or effectively zero-rated sales, to which creditable input taxes may be attributed. The CTA in Division and en banc denied
petitioner’s claim solely on this ground. The tax courts based this conclusion on the audited report, marked as Exhibit "J-2,"
stating that petitioner made no sale of electricity to NPC in 2002.29 Moreover, the affidavit of Echevarria (Exhibit "L"),
petitioner’s Vice President and Director for Finance, contained an admission that no commercial sale of electricity had been
made in favor of NPC in 2002 since the project was still under construction at that time.30
However, upon closer examination of the records, it appears that on 2002, petitioner carried out a "sale" of electricity to NPC.
The fourth quarter return for the year 2002, which petitioner filed, reported a zero-rated sale in the amount of
₱42,500,000.00.31 In the Affidavit of Echevarria dated 9 February 2005 (Exhibit "L"), which was uncontroverted by respondent,
the affiant stated that although no commercial sale was made in 2002, petitioner produced and transferred electricity to NPC
during the testing period in exchange for the amount of ₱42,500,000.00, to wit:32
A: San Roque Power Corporation has had no sale yet during 2002. The ₱42,500,000.00 which was paid to us by Napocor was
something similar to a more cost recovery scheme. The pre-agreed amount would be about equal to our costs for producing
the electricity during the testing period and we just reflected this in our 4th quarter return as a zero-rated sale. x x x.
The Court is not unmindful of the fact that the transaction described hereinabove was not a commercial sale. In granting the
tax benefit to VAT-registered zero-rated or effectively zero-rated taxpayers, Section 112(A) of the NIRC does not limit the
definition of "sale" to commercial transactions in the normal course of business. Conspicuously, Section 106(B) of the NIRC,
which deals with the imposition of the VAT, does not limit the term "sale" to commercial sales, rather it extends the term to
transactions that are "deemed" sale, which are thus enumerated:
SEC 106. Value-Added Tax on Sale of Goods or Properties.
xxxx
(B) Transactions Deemed Sale.—The following transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or
for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were
consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such
retirement or cessation. (Our emphasis.)
After carefully examining this provision, this Court finds it an equitable construction of the law that when the term "sale" is
made to include certain transactions for the purpose of imposing a tax, these same transactions should be included in the term
"sale" when considering the availability of an exemption or tax benefit from the same revenue measures. It is undisputed that
during the fourth quarter of 2002, petitioner transferred to NPC all the electricity that was produced during the trial period. The
fact that it was not transferred through a commercial sale or in the normal course of business does not deflect from the fact
that such transaction is deemed as a sale under the law.
The seventh requirement regarding foreign currency exchange proceeds is inapplicable where petitioner’s zero-rated sale of
electricity to NPC did not involve foreign exchange and consisted only of a single transaction wherein NPC paid petitioner
₱42,500,000.00 in exchange for the electricity transferred to it by petitioner. Similarly, the eighth requirement is inapplicable to
this case, where the only sale transaction consisted of an effectively zero-rated sale and there are no exempt or taxable sales
that transpired, which will require the proportionate allocation of the creditable input tax paid.
The last requirement determines that the claim should be filed within two years after the close of the taxable quarter when such
sales were made. The sale of electricity to NPC was reported at the fourth quarter of 2002, which closed on 31 December
2002. Petitioner had until 30 December 2004 to file its claim for refund or credit. For the period January to March 2002,
petitioner filed an amended request for refund or tax credit on 30 May 2003; for the period July 2002 to September 2002, on 27
February 2003; and for the period October 2002 to December 2002, on 31 July 2003.33 In these three quarters, petitioners
seasonably filed its requests for refund and tax credit. However, for the period April 2002 to May 2002, the claim was filed
prematurely on 25 October 2002, before the last quarter had closed on 31 December 2002.34
Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it was able to accumulate
excess input taxes on various importations and local purchases in the amount of ₱246,131,610.40, which were attributable to
a transfer of electricity in favor of NPC. The fact that it had filed its claim for refund or credit during the quarter when the
transfer of electricity had taken place, instead of at the close of the said quarter does not make petitioner any less entitled to its
claim. Given the special circumstances of this case, wherein petitioner was incorporated for the sole purpose of constructing or
operating a power plant that will transfer all the electricity it generates to NPC, there is no danger that petitioner would try to
fraudulently claim input tax paid on purchases that will be attributed to sale transactions that are not zero-rated. Substantial
justice, equity and fair play are on the side of the petitioner. Technicalities and legalisms, however, exalted, should not be
misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law abiding
citizens.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not
be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding
citizens. Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received something "when there [was]
no right to demand it," and thus, it has the obligation to return it. Heavily militating against respondent Commissioner is the
ancient principle that no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple justice requires
the speedy refund of the wrongly held taxes.35
It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable to pay the tax, such as
petitioner, but to relieve certain exempt entities, such as the NPC, from the burden of indirect tax so as to encourage the
development of particular industries. Before, as well as after, the adoption of the VAT, certain special laws were enacted for
the benefit of various entities and international agreements were entered into by the Philippines with foreign governments and
institutions exempting sale of goods or supply of services from indirect taxes at the level of their suppliers. Effective zero-rating
was intended to relieve the exempt entity from being burdened with the indirect tax which is or which will be shifted to it had
there been no exemption. In this case, petitioner is being exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that petitioner may shift to NPC by adding to the cost of the electricity sold to the latter.36
Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is the lawmakers’ intention
that NPC be made completely exempt from all taxes, both direct and indirect:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by
Government and Governmental Instrumentalities. - The corporation shall be non-profit and shall devote all its returns 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 1 of this Act,
the corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its
provinces, cities, municipalities, and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of foreign
goods, required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products
used by the corporation in the generation, transmission, utilization, and sale of electric power.
To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad language of the statute will
be to thwart the legislative intention in giving exemption from all forms of taxes and impositions, without distinguishing between
those that are direct and those that are not.37
Congress granted NPC a comprehensive tax exemption because of the significant public interest involved. This is enunciated
in Section 1 of Republic Act No. 6395:
Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive development, utilization and
conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of
the Philippines through the development of power from all sources to meet the needs of industrial development and dispersal
and the needs of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by
all instrumentalities and agencies of government, including its financial institutions.
The ability of the NPC to provide sufficient and affordable electricity throughout the country greatly affects our industrial and
rural development. Erroneously and unjustly depriving industries that generate electrical power of tax benefits that the law
clearly grants will have an immediate effect on consumers of electricity and long term effects on our economy.
In the same breath, we cannot lose sight of the fact that it is the declared policy of the State, expressed in Section 2 of
Republic Act No. 9136, otherwise known as the EPIRA Law, "to ensure and accelerate the total electrification of the country;"
"to enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and
distribution sectors;" and "to promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy." Further, Section 6 provides that "pursuant to the objective of
lowering electricity rates to end-users, sales of generated power by generation companies shall be value-added tax zero-rated.
Section 75 of said law succinctly declares that "this Act shall, unless the context indicates otherwise, be construed in favor of
the establishment, promotion, preservation of competition and power empowerment so that the widest participation of the
people, whether directly or indirectly is ensured."
The objectives as set forth in the EPIRA Law can only be achieved if government were to allow petitioner and others similarly
situated to obtain the input tax credits available under the law. Denying petitioner such credits would go against the declared
policies of the EPIRA Law.1 a vv p h i 1
The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes a sovereign commitment of
Government to taxpayers that the latter can avail themselves of certain tax reliefs and incentives in the course of their business
activities here. Such a commitment is particularly vital to foreign investors who have been enticed to invest heavily in our
country’s infrastructure, and who have done so on the firm assurance that certain tax reliefs and incentives can be availed of in
order to enable them to achieve their projected returns on these very long-term and heavily funded investments. While the
government’s ability to keep its commitment is put in doubt, credit rating turns to worse; the costs of borrowing becomes higher
and the harder it will be to attract foreign investors. The country’s earnest efforts to move forward will all be put to naught.
Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC or on the basis of
effectively zero-rated sales in the amount of ₱246,131,610.40, there is no more need to establish its right to make the same
claim under Section 112(B) of the NIRC or on the basis of purchase of capital goods.
Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the nature of a tax
exemption, should be construed strictissimi juris against the taxpayer. 38 However, when the claim for refund has clear legal
basis and is sufficiently supported by evidence, as in the present case, then the Court shall not hesitate to grant the same.39
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax Appeals En Banc dated 20
September 2007 in CTA EB Case No. 248, affirming the Decision dated 23 March 2006 of the CTA Second Division in CTA
Case No. 6916, is REVERSED. Respondent Commissioner of Internal Revenue is ordered to refund, or in the alternative, to
issue a tax credit certificate to petitioner San Roque Power Corporation in the amount of Two Hundred Forty-Six Million One
Hundred Thirty-One Thousand Six Hundred Ten Pesos and 40/100 (₱246,131,610.40), representing unutilized input VAT for
the period 1 January 2002 to 31 December 2002. No costs.
SO ORDERED.
 Republic of the Philippines Petitioner appealed under Rule 43 of the Rules of Court before the Court of Appeals,3 praying only for the refund of
SUPREME COURT ₱3,455,199.54, claiming that the purchases represented thereby were used in the rehabilitation of the Malaya Power Plant
Manila Complex which should be considered as capital expense to fall within the purview of capital goods.

FIRST DIVISION The appellate court, by Decision of December 11, 2006, affirmed that of the CTA. In arriving at its decision, the appellate court
considered, among other things, the account vouchers submitted by petitioner which listed the purchases under inventory
G.R. No. 179356 December 14, 2009 accounts as follows:

KEPCO PHILIPPINES CORPORATION, Petitioner, 1) Inventory supplies/materials

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. 2) Inventory supplies/lubricants

DECISION 3) Inventory supplies/spare parts

CARPIO MORALES, J.: 4) Inventory supplies/supplies

Korea Electric Power Corporation (KEPCO) Philippines Corporation (petitioner) is an independent power producer engaged in 5) Cost/O&M Supplies
selling electricity to the National Power Corporation (NPC).
6) Cost/O&M Uniforms and Working Clothes
After its incorporation and registration with the Securities and Exchange Commission on June 15, 1995, petitioner forged a
Rehabilitation Operation Maintenance and Management Agreement with NPC for the rehabilitation and operation of Malaya 7) Cost/O&M/Supplies
Power Plant Complex in Pililia, Rizal.1
8) Cost/O&M/Repairs and Maintenance
On September 30, 1998, petitioner filed with the Commissioner of Internal Revenue (respondent) administrative claims for tax
refund in the amounts of ₱4,895,858.01 representing unutilized input Value Added Tax (VAT) payments on domestic 9) Office Supplies
purchases of goods and services for the 3rd quarter of 1996 and ₱4,084,867.25 representing creditable VAT withheld from
payments received from NPC for the months of April and June 1996. 10) Repair and Maintenance/Mechanics

Petitioner also filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA Case No. 5765, also based on 11) Repair and Maintenance/Common/General
the above-stated amounts.
12) Repair and Maintenance/Chemicals
Petitioner filed before respondent on December 28, 1998 still another claim for refund representing unutilized input VAT
payments attributable to its zero-rated sale transactions with NPC, including input VAT payments on domestic goods and Reconsideration of the appellate court’s decision having been denied by Resolution of August 17, 2007, the present petition for
services in the amount of ₱13,191,278.00 for the 4th quarter of 1996. Petitioner also filed the same claim before the CTA on review on certiorari was filed.
December 29, 1998, docketed as CTA Case No. 5704.
In the main, petitioner faults the appellate court for not considering the purchases amounting to ₱3,455,199.54 as falling under
The two petitions before the CTA for a refund in the total amount of ₱22,172,003.26 were consolidated. the definition of "capital goods."

In his report, the court-commissioned auditor, Ruben R. Rubio, concluded that the claimed amount of ₱20,550,953.93 was
properly substantiated for VAT purposes and subject of a valid refund.
By Decision of March 18, 2003, the CTA granted petitioner partial refund with respect to unutilized input VAT payment on
domestic goods and services qualifying as capital goods purchased for the 3rd and 4th quarters of 1996 in the amount of
₱8,325,350.35. All other claims were disallowed.
Petitioner filed an urgent motion for reconsideration, claiming an additional amount of ₱5,012,875.67.
By Resolution of July 8, 2003,2 the CTA denied petitioner’s motion, it holding that part of the additional amount prayed for ─
₱1,557,676.13 ─ involved purchases for the year 1997, and with respect to the remaining amount of ₱3,455,199.54, it was
not recorded under depreciable asset accounts, hence, it cannot be considered as capital goods.
The petition is bereft of merit.
Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital goods and its scope in this wise:
xxxx
(b) Capital Goods. – Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes
paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not
been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter
when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable
business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to
taxable operations.
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and which are treated
as depreciable assets under Section 29 (f) ,4 used directly or indirectly in the production or sale of taxable goods or services.
(underscoring supplied)
For petitioner’s purchases of domestic goods and services to be considered as "capital goods or properties," three requisites
must concur. First, useful life of goods or properties must exceed one year; second, said goods or properties are treated as
depreciable assets under Section 34 (f) and; third, goods or properties must be used directly or indirectly in the production or
sale of taxable goods and services.
From petitioner’s evidence, the account vouchers specifically indicate that the disallowed purchases were recorded under
inventory accounts, instead of depreciable accounts. That petitioner failed to indicate under its fixed assets or depreciable
assets account, goods and services allegedly purchased pursuant to the rehabilitation and maintenance of Malaya Power
Plant Complex, militates against its claim for refund. As correctly found by the CTA, the goods or properties must be recorded
and treated as depreciable assets under Section 34 (F) of the NIRC.
Petitioner further contends that since the disallowed items are treated as capital goods in the general ledger and accounting
records, as testified on by its senior accountant, Karen Bulos, before the CTA, this should have been given more significance
than the account vouchers which listed the items under inventory accounts.
A general ledger is a record of a business entity’s accounts which make up its financial statements. Information contained in a
general ledger is gathered from source documents such as account vouchers, purchase orders and sales invoices. In case of
variance between the source document and the general ledger, the former is preferred.
The account vouchers presented by petitioner confirm that the purchases cannot qualify as capital goods for they are held as
inventory items and not charged to any depreciable asset account. Petitioner has proffered no explanation why the disallowed
items were not listed under depreciable asset accounts.1avvphi1
It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.5 Where the taxpayer claims a refund, the CTA as a court of
record is required to conduct a formal trial (trial de novo) to prove every minute aspect of the claim.6
By the very nature of its functions, the CTA is dedicated exclusively to the resolution of tax problems and has consequently
developed an expertise on the subject. Absent a showing of abuse or reckless exercise of authority,7 the Court appreciates no
ground to disturb the appellate court’s Decision affirming that of the CTA.
IN FINE, petitioner having failed to establish that the disallowed items should be classified as capital goods, the assailed
Decision of the Court of Appeals must be upheld.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 193301 March 11, 2013
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the Resolution3
promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc
affirmed the 22 September 2008 Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the Court
of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division denied Mindanao II
Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for the first and second quarters of taxable year 2003 for
being filed out of time (CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax (VAT) for the third
and fourth quarters of taxable year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the Amended
Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its Amended Decision,
the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s petition for review in CTA Case No. 476. The CTA
En Banc denied Mindanao I Geothermal Partnership’s (Mindanao I) claims for refund or tax credit for the first (CTA Case No.
7228), second (CTA Case No. 7286), third, and fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added taxpayers
registered with the Bureau of Internal Revenue (BIR), and Block Power Production Facilities accredited by the Department of
Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively amended Republic Act
No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that sales of power by generation companies
shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax
credit of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II filed their
claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were consolidated as
CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of Mindanao II’s alleged excess or
unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit of
₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax refund or credit of ₱1,562,085.33
for the second quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund or credit of ₱3,521,129.50 for the third
and fourth quarters of 2003.
 1. There must be zero-rated or effectively zero-rated sales;
The CTA First Division’s narration of the pertinent facts is as follows:
2. That input taxes were incurred or paid;
xxxx
3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales;
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with the Philippine
National Oil Corporation – Energy Development Company (PNOC-EDC) for finance, engineering, supply, installation, testing, 4. That the input VAT payments were not applied against any output VAT liability; and
commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant, provided that PNOC-EDC shall
supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric capacity and 5. That the claim for refund was filed within the two-year prescriptive period.13
energy for PNOC-EDC and shall deliver the same to the National Power Corporation (NPC) for and in behalf of PNOC-EDC.
Mindanao II alleges that its sale of generated power and delivery of electric capacity and energy of Mindanao II to NPC for and With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s return as well as its
in behalf of PNOC-EDC is its only revenue-generating activity which is in the ambit of VAT zero-rated sales under the EPIRA administrative and judicial claims, and concluded that Mindanao II’s administrative and judicial claims were timely filed in
Law, x x x. compliance with this Court’s ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive period for filing a VAT refund claim should
xxxx not be counted from the close of the quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or
entitlement to a refund can only be determined upon the filing of the quarterly VAT return.
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation
companies from ten (10%) percent to zero (0%) percent. CTA
Case No. Period
In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates therefrom Covered
creditable input taxes. Pursuant to the provisions of the National Internal Revenue Code (NIRC), Mindanao II alleges that it can (2003) Date Filing
use its accumulated input tax credits to offset its output tax liability. Considering, however that its only revenue-generating Original
activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax credits remain unutilized. Return Amended
Return Administrative
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the EPIRA in Return Judicial Claim
computing for its VAT payable when it filed its Quarterly VAT Returns on the following dates: 7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005
7287 2nd Quarter 22 July 2003 1 April 2004 13 April 2005 7 July 2005
CTA Case No. Period Covered 7317 3rd Quarter 25 Oct. 2003 1 April 2004 13 April 2005 9 Sept. 2005
(2003) Date of Filing 7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 200515
Original Return Amended Return Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II filed its VAT
7227 1st Quarter April 23, 2003 July 3, 2002 (sic), returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July 2005, and 9 September
April 1, 2004 & 2005 were timely filed in accordance with Atlas.
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004 The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of ₱7,703,957.79, after disallowing
7317 3rd Quarter Oct. 27, 2003 April 1, 2004 ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan
7317 4th Quarter Jan. 26, 2004 April 1, 2204 Patrol. The input taxes amounting to ₱522,059.91 were disallowed for failure to meet invoicing requirements, while the input
Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity, Mindanao II filed VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82 because the output VAT for the sale was not included in the
an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue District Office at Kidapawan City on VAT declarations.
April 13, 2005 for the four quarters of 2003.
The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:
To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR. Hence, these three
petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9, WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to
2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao II, these petitions were consolidated on March 15, 2006 REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN HUNDRED THREE
as they involve the same parties and the same subject matter. The only difference lies with the taxable periods involved in THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS (₱7,703,957.79) representing its unutilized input VAT for
each petition.11 the four (4) quarters of the taxable year 2003.

The Court of Tax Appeals’ Ruling: Division SO ORDERED.17

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin requirements for VAT Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated Nissan Patrol is a one-
zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales from power generation. The CTA First Division time transaction and is not incidental to its VAT zero-rated operations. Moreover, the disallowed input taxes substantially
also stated that Mindanao II complied with five requirements to be entitled to a refund: complied with the requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and second quarters of
2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the 1997 Tax Code. The CIR further stated
that Section 229 is a general provision, and governs cases not covered by Section 112(A). The CIR countered the CTA First
Division’s 22 September 2008 decision by citing this Court’s ruling in Commisioner of Internal Revenue v. Mirant Pagbilao
Corporation (Mirant),19 which stated that unutilized input VAT payments must be claimed within two years reckoned from the
close of the taxable quarter when the relevant sales were made regardless of whether said tax was paid.
The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s motion for partial
reconsideration partly meritorious, and rendered an Amended Decision20 on 26 June 2009. The CTA First Division stated that
the claim for refund or credit with the BIR and the subsequent appeal to the CTA must be filed within the two-year period
prescribed under Section 229. The two-year prescriptive period in Section 229 was denominated as a mandatory statute of
limitations. Therefore, Mindanao II’s claims for refund for the first and second quarters of 2003 had already prescribed.
The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the Nissan Patrol is
not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted documents failed to substantiate
the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to
REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified amount of TWO
MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77)
representing its unutilized input VAT for the third and fourth quarters of the taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.
The Court of Tax Appeals’ Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s petition. The CTA
En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-year prescriptive period for filing the
application for refund or credit of input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted from
the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant cases applied different tax codes: Atlas
applied the 1977 Tax Code while Mirant applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is
incidental to Mindanao II’s VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply with the
substantiation requirements provided under Section 113(A) in relation to Section 237 of the 1997 Tax Code as implemented by
Section 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax
exemptions cannot be relaxed in the present case.
The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for lack of merit.
Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated June 26, 2009 issued by the First
Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s Motion for
Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed within two (2) years after
the close of the taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal meaning and applied without
any interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA EB cases
consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286,
and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized and/or excess input taxes due to VAT zero-rated
sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit of ₱3,893,566.14 for the first quarter of 2003. In CTA
Case No. 7286, Mindanao I claims a tax refund or credit of ₱2,351,000.83 for the second quarter of 2003. In CTA Case No.
7318, Mindanao I claims a tax refund or credit of ₱7,940,727.83 for the third and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine National Oil
Corporation – Energy Development Corporation (PNOC-EDC) for the finance, design, construction, testing, commissioning,
operation, maintenance and repair of a 47-megawatt geothermal power plant. Under the said BOT contract, PNOC-EDC shall
supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into electric capacity and energy
for PNOC-EDC and shall subsequently supply and deliver the same to the National Power Corporation (NPC), for and in behalf
of PNOC-EDC.
Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of Energy (DOE) as a
Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215, wherein Certificate of Accreditation
No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National Internal Revenue Code
(NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric Power Industry Reform Act of 2001
(EPIRA), was enacted by Congress to ordain reforms in the electric power industry, highlighting, among others, the importance
of ensuring the reliability, security and affordability of the supply of electric power to end users. Under the provisions of this
Republic Act and its implementing rules and regulations, the delivery and supply of electric energy by generation companies
became VAT zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation companies
from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the EPIRA in computing for its
VAT payable when it filed its VAT Returns, on the belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first, second, third, and
fourth quarters of taxable year 2003, which were subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit certificate on its
alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July 7, 2005, and
September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively. However, on October 10, 2005,
Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR denying its application for tax
credit/refund.28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and 7318. The CTA
Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount of substantiated
excess input VAT because a portion was not reported in its quarterly VAT returns; (2) out of the ₱14,185,294.80 excess input
VAT applied for refund, only ₱11,657,447.14 can be considered substantiated excess input VAT due to disallowances by the
Independent Certified Public Accountant, adjustment on the disallowances per the CTA Second Division’s further verification,
and additional disallowances per the CTA Second Division’s further verification;
(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over to the third quarter of
2003 is net of the claimed input VAT for the first quarter of 2003, and the same procedure was done for the second, third, and
fourth quarters of 2003; and (4) Mindanao I’s administrative claims were filed within the two-year prescriptive period reckoned
from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED. Accordingly,
the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced amount of TEN
MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY SEVEN PESOS AND 53/100
(₱10,523,177.53) representing Mindanao I’s unutilized input VAT for the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It claimed that the
CTA Second Division should not have allocated proportionately Mindanao I’s unutilized creditable input taxes for the taxable
year 2003, because the proportionate allocation of the amount of creditable taxes in Section 112(A) applies only when the
creditable input taxes due cannot be directly and entirely attributed to any of the zero-rated or effectively zero-rated sales.
Mindanao I claims that its unreported collection is directly attributable to its VAT zero-rated sales. The CTA Second Division
denied Mindanao I’s motion and maintained the proportionate allocation because there was a portion of the gross receipts that
was undeclared in Mindanao I’s gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I failed to exhaust
administrative remedies before it filed its petition for review. The CTA Second Division denied the CIR’s motion, and cited
Atlas33 as the basis for ruling that it is more practical and reasonable to count the two-year prescriptive period for filing a claim
for refund or credit of input VAT on zero-rated sales from the date of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s Motion for Partial
Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied the petitions filed
by the CIR and Mindanao I. The CTA En Banc found no new matters which have not yet been considered and passed upon by
the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit. Accordingly, the
October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second Division in CTA Case Nos. 7228, 7286,
and 7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010 Decision. In an Amended
Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIR’s claim that Section 229 of the NIRC of
1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA En Banc also ruled that the procedure prescribed under
Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed first before the CTA En Banc can act on Mindanao I’s
claim. The CTA En Banc reconsidered its 31 May 2010 Decision in light of this Court’s ruling in Commissioner of Internal
Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from March 31, 2003 or until March 31, 2005
within which to file its administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT for the first quarter of
taxable year 2003 with the BIR, which is beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second quarter of 2003. Pursuant
to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within which to file its
administrative claim for refund for the second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the second quarter of
taxable year 2003 with the BIR, which is within the two-year prescriptive period, provided under Section 112 (A) of the NIRC of
1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting documents together
with the application for refund) or until August 2, 2005, to decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005, Mindanao I should have
elevated its claim for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA Case No. 7286, even
before the 120-day period for the CIR to decide the claim for refund had lapsed on August 2, 2005. The Petition for Review
was, therefore, prematurely filed and there was failure to exhaust administrative remedies;

xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and fourth quarters of 2003.
Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I therefore, has two years from September 30, 2003
and December 31, 2003, or until September 30, 2005 and December 31, 2005, respectively, within which to file its
administrative claim for the third and fourth quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the third and fourth
quarters of taxable year 2003 with the BIR, which is well within the two-year prescriptive period, provided under Section 112(A)
of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents, together with the
aforesaid application for refund, the CIR has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September 1, 2005 Mindanao I
should have elevated its claim for refund to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9, 2005, which is 8 days
beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for Review should
have been dismissed for being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply with a condition precedent when it
failed to exhaust administrative remedies by filing its Petition for Review even before the lapse of the 120-day period for the
CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is hereby GRANTED;
Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby GRANTED and the
entire claim of Mindanao I Geothermal Partnership for the first, second, third and fourth quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and 2nd quarters of year 2003
has already prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law as to the reckoning date of the two year
prescriptive period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were made as the reckoning date
in counting the two-year prescriptive period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as amended in that the sale of
the fully depreciated Nissan Patrol is a one-time transaction and is not incidental to the VAT zero-rated operation of Mindanao
II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent Certified Public
Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax Code, as amended, for refund/tax credit.
A. The amount of ₱2,090.16 was brought about by the timing difference in the recording of the foreign currency deposit
transaction.
B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV & Company which is substantially
suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim for refund or tax credit for the
year 2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the case of Atlas
Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, which was then the controlling
ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation, which uses the end of the
taxable quarter when the sales were made as the reckoning date in counting the two-year prescriptive period, cannot be
applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007 was not and cannot be
superseded by the Mirant Pagbilao case promulgated by the Second Division of this Honorable Court on September 12, 2008
in light of the explicit provision of Section 4(3), Article VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi Forging Company of Asia,
Inc., cannot be applied retroactively to Mindanao I in the present case.41
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and 194637 to avoid
conflicting rulings in related cases.
The Court’s Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or the interpretation of
Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.
Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of ₱3,160,984.69 and
₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s unutilized input VAT tax credit for the first,
second, third, and fourth quarters of 2003, in the amounts of ₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, respectively,
are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and Mindanao I’s administrative
and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided,
however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither Atlas nor Mirant has
been promulgated. Atlas was promulgated on 8 June 2007, while Mirant was promulgated on 12 September 2008. It is
therefore misleading to state that Atlas was the controlling doctrine at the time of filing of the claims. The 1997 Tax Code,
which took effect on 1 January 1998, was the applicable law at the time of filing of the claims in issue. As this Court explained
in the recent consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining
Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue (San
Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the Commissioner to
decide whether to grant or deny San Roque’s application for tax refund or credit. It is indisputable that compliance with the
120-day waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60 days only, was part of the
provisions of the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting period was
extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of
administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the CTA
does not acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and
reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner of Internal
Revenue in cases involving x x x refunds of internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax
refund or credit with the CTA without waiting for the decision of the Commissioner, there is no "decision" of the Commissioner
to review and thus the CTA as a court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also
expressly provides that if the Commissioner fails to decide within "a specific period" required by law, such "inaction shall be
deemed a denial" of the application for tax refund or credit. It is the Commissioner’s decision, or inaction "deemed a denial,"
that the taxpayer can take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.
San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA void. Article 5 of
the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be void, except when the law
itself authorizes their validity." San Roque’s void petition for review cannot be legitimized by the CTA or this Court because
Article 5 of the Civil Code states that such void petition cannot be legitimized "except when the law itself authorizes its validity."
There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or acquire
any right from his void act. A right cannot spring in favor of a person from his own void or illegal act. This doctrine is repeated
in Article 2254 of the Civil Code, which states, "No vested or acquired right can arise from acts or omissions which are against
the law or which infringe upon the rights of others." For violating a mandatory provision of law in filing its petition with the CTA,
San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap of
paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just because
the Commissioner merely asserts that the case was prematurely filed with the CTA and does not question the entitlement of
San Roque to the refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as a matter of right to a tax refund or credit. Strict
compliance with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is essential
and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly
construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the Commissioner
chose not to contest the numerical correctness of the claim for tax refund or credit of the taxpayer. Non-compliance with
mandatory periods, non-observance of prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the Commissioner questions the numerical correctness of the claim of
the taxpayer. This Court should not establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render
meaningless compliance with mandatory and jurisdictional requirements, for then every tax refund case will have to be decided
on the numerical correctness of the amounts claimed, regardless of non-compliance with mandatory and jurisdictional
conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed its petition
for review with the CTA more than four years before Atlas was promulgated. The Atlas doctrine did not exist at the time San
Roque failed to comply with the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse for its failure
to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely stated that the two-year prescriptive period
should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 day periods.49
(Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed, we see no need to
rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales x x x."
We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003 was on 31 March 2005.
Mindanao II filed its administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before
the CIR on 4 April 2005. Both claims have prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of 2003 was on 30 June
2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of 2003 was on 30 September
2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of 2003 was on 2 January
2006. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim
before the CIR on 4 April 2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have been properly appealed, we still see
no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax Code. The second paragraph of Section
112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in the law.
Section 112(C) expressly grants the Commissioner 120 days within which to decide the taxpayer’s claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents." Following the verba legis doctrine,
this law must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition
with the CTA without waiting for the Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA
will have no jurisdiction because there will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA to
review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of the
Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration
of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis
supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied exactly as
worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of the
Commissioner to the CTA within 30 days from receipt of the Commissioner’s decision, or if the Commissioner does not act on
the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of the
120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive period, as
long as the administrative claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of the creditable input
tax due or paid to such sales." In short, the law states that the taxpayer may apply with the Commissioner for a refund or credit
"within two (2) years," which means at anytime within two years. Thus, the application for refund or credit may be filed by the
taxpayer with the Commissioner on the last day of the two-year prescriptive period and it will still strictly comply with the law.
The two-year prescriptive period is a grace period in favor of the taxpayer and he can avail of the full period before his right to
apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one hundred
twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with
Subsection (A)." The reference in Section 112(C) of the submission of documents "in support of the application filed in
accordance with Subsection A" means that the application in Section 112(A) is the administrative claim that the Commissioner
must decide within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period
does not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the Commissioner.
As held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or refund’ refers to applications for
refund/credit with the CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to 730 days),
then the taxpayer must file his administrative claim for refund or credit within the first 610 days of the two-year prescriptive
period. Otherwise, the filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA being filed
beyond the two-year prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the Commissioner decides only on
the 731st day, or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-year
prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal
before the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the
two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found in the law.
It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his administrative claim with the
Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer can file his
administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files his claim on the last day of
the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file his
judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation of Section 112(A) and
(C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s recognition of BIR Ruling No. DA-489-03 on
claims filed between 10 December 2003 and 6 October 2010. Mindanao I and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005. Counting 120
days after filing of the administrative claim with the CIR (11 August 2005) and 30 days after the CIR’s denial by inaction, the
last day for filing a judicial claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September 2005.
However, the judicial claim cannot be filed earlier than 11 August 2005, which is the expiration of the 120-day period for the
Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before the expiration of the
120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao II’s judicial claim for the second quarter of 2003
was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao II’s judicial
claim for the second quarter of 2003 qualifies under the exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005. Mindanao II’s judicial
claim for the third quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005. Mindanao II’s judicial
claim for the fourth quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005. Counting 120 days
after filing of the administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s denial by inaction,52 the last
day for filing a judicial claim with the CTA for the second, third, and fourth quarters of 2003 was on 1 September 2005.
However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration of the 120-day period for the
Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before the expiration of the
120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao I’s judicial claim for the second quarter of 2003
was prematurely filed. However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that
Mindanao I’s judicial claim for the second quarter of 2003 qualifies under the exception to the strict application of the 120+30
day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005. Mindanao I’s judicial
claim for the third quarter of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax
Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005. Mindanao I’s judicial
claim for the fourth quarter of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax
Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims for tax refund or
credit of three different companies. In San Roque, we reiterated that "following the verba legis doctrine, Section 112(C) must
be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA
without waiting for the Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will have no
jurisdiction because there will be no ‘decision’ or ‘deemed a denial decision’ of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized that BIR
Ruling No. DA-489-03 constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03 expressly states that
the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way
of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of
law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input
VAT tax refund or credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they received or could have received under Atlas
prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation,
the reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling
under Section 246, should also apply prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a
specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency
Tax Credit and Drawback Center of the Department of Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the Commissioner
the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do
in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-
day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court
held that the 120+30 day periods are mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No. DA-489-03
on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day
period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-
03, which shields the filing of its judicial claim from the vice of prematurity. (Emphasis in the original)
Summary of Rules on Prescriptive Periods Involving VAT
We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT
as provided in Section 112 of the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-
rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within
which to decide whether to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year
period from the filing of the administrative claim if the claim is filed in the later part of the two-year period. If the 120-day period
expires without any decision from the CIR, then the administrative claim may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying the administrative
claim or from the expiration of the 120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its
business; hence, it is an isolated transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or
services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock,
nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being rendered in the course of trade or business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay)55 and Imperial v. Collector of
Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the NIRC of 1986, involved the sale of vessels
of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was not in the course
of NDC’s trade or business as it was involuntary and made pursuant to the Government’s policy for privatization. Magsaysay,
in quoting from the CTA’s decision, imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "‘to engage’ is to embark in a business or to employ oneself therein."57
Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not follow that an
isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the
1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto."
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC.
In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was
part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made
in the course of Mindanao II’s business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it has substantially complied
with the substantiation requirements of Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented
by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a finding of fact. The CTA
En Banc evaluated the records of the case and found that the transactions in question are purchases for services and that
Mindanao II failed to comply with the substantiation requirements. We affirm the CTA En Banc’s finding of fact, which in turn
affirmed the finding of the CTA First Division. We see no reason to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A EB No. 513
promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the Decision of the Court of Tax
Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well as the Amended Decision promulgated
on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED while its claims
for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal
Partnership for the first, third, and fourth quarters of 2003 are DENIED while its claim for the second quarter of 2003 is
GRANTED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
 G.R. No. 178697 November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SONY PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution of the Court
of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First
Division2 which, in turn, partially granted the petition for review of respondent Sony Philippines, Inc. (Sony). The CTA-First
Division decision cancelled the deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against
Sony for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding tax (EWT) in the amount of
₱1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain revenue officers to
examine Sony’s books of accounts and other accounting records regarding revenue taxes for "the period 1997 and
unverified prior years." On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued
by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter
of demand and the details of discrepancies.4 Said details of the deficiency taxes and penalties for late remittance of internal
revenue taxes are as follows:
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony submitted relevant
documents in support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting documents to the CIR,
Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising expense paid
by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division
maintained the deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of ₱10,523,821.99 was incurred from January to March 1998 which was
again beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December 1997
and for the late remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s petition
by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the penalties.
Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and
WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However, the deficiency assessments
for expanded withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the amount of
₱1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum of ₱1,269,593.90:
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency VAT in
the amount of ₱11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with respect to
the 5% withholding tax on rental deposit in the amount of ₱10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the CIR filed a petition for
review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the
amount of ₱10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period January to March 1998 was
filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s petition on May 17,
2007. CIR’s motion for reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the CTA-First
Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I the assessment or examination is a nullity.
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT
OF PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT
OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF
THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT
PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE
PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a manifestation
informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved to give due course to
the petition and to decide the case on the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be understood to mean
the fiscal year ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue officer
assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and
other accounting records of a taxpayer for the purpose of collecting the correct amount of tax.15 The very provision of the Tax
Code that the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority,
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting through its
revenue officers went beyond the scope of their authority because the deficiency VAT assessment they arrived at was based
on records from January to March 1998 or using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-
First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation. Thus, if CIR
wanted or intended the investigation to include the year 1998, it should have done so by including it in the LOA or issuing
another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified prior years,"
violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As covering
audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR’s argument, that
Sony’s advertising expense could not be considered as an input VAT credit because the same was eventually reimbursed by
Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any advertising
expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising expense should be
for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s deficiency VAT
assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been realized from the advertising
expense of the latter.18 It is evident under Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a
VAT invoice is a legitimate business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer Antonio
Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies issued
invoices in the name of Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid for advertising expense/
services. Where the money came from is another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. In support of
this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to the latter’s
advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that our client is not subject to VAT on the subsidy income as this
was not derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court agrees.
However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the said subsidy
termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s advertising expense for it was but an
assistance or aid in view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s)
advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no
such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for goods
or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for a fee even on
reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however, is not applicable to
the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. This is not
true in the present case. Sony did not render any service to SIS at all. The services rendered by the advertising companies,
paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to
the latter’s advertising expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR insists that said deficiency
EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98
dated April 17, 1998.24 The said revenue regulation provides that the 10% rate is applied when the recipient of the commission
income is a natural person. According to the CIR, Sony’s schedule of Selling, General and Administrative expenses shows the
commission expense as "commission/dealer salesman incentive," emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g) of Revenue
Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers – five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to 5% withholding
tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in the schedule of Selling,
General and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer salesman
incentive" the same does not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule during the subject period
of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in
April 1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents was only
increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate was only
5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT assessment on the
rental deposit. According to their findings, Sony incurred the subject rental deposit in the amount of ₱10,523,821.99 only from
January to March 1998. As stated earlier, in the absence of the appropriate LOA specifying the coverage, the CIR’s deficiency
EWT assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of December
1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First Division when it upheld
the CIR with respect to the royalties for December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue
Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March of 1998. At the same
time, it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly
in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax on royalty.
Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when the royalty is paid or is
payable. After which, the corresponding return and remittance must be made within 10 days after the end of each month. The
question now is when does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE shall furnish to
the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the furnishing of
the above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in June 30 and
December 31. However, the CTA-First Division found that there was accrual of royalty by the end of December 1997 as well as
by the end of June 1998. Given this, the FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and
July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from
January to March 1998 was seasonably filed. Although the royalty from January to March 1998 was well within the semi-
annual period ending June 30, which meant that the royalty may be payable until August 1998 pursuant to the MLA, the FWT
for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when
Sony remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.

THIRD DIVISION
April 5, 2017
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2, 2015 and
Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the
CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per annum starting
January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its
clients. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by duly licensed physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. 7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on
April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR informed
MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for
deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the issuance of a Formal
Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10,
2007 for alleged deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under Section
4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care
Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide medical and/or hospital services, but
merely arranges for the same, its services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical and/or hospital
services by hospitals and/or clinics but include actual and direct rendition of medical and laboratory services; in fact, its 2006
audited balance sheet shows that it owns x-ray and laboratory facilities which it used in providing medical and laboratory
services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients that are
registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the processing fees amounting
to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which represent advances for professional
fees due from clients which were paid by MEDICARD while the remainder was already previously subjected to VAT; (4) the
professional fees in the amount of Pl 1 Million should also be excluded because it represents the amount of medical services
actually and directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for
the VAT, the 12% VAT rate should not be applied on the entire amount but only for the period when the 12% VAT rate was
already in effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and deficiency interest because it did
not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to verify the
supporting documents of MEDICARD's Protest. MEDICARD also submitted additional supporting documentary evidence in aid
of its Protest thru a letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009, denying
MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in total sum of
₱196,614,476.99. It is requested that you pay said deficiency taxes immediately. Should payment be made later, adjustment
has to be made to impose interest until date of payment. This is olir final decision. If you disagree, you may take an appeal to
the [CTA] within the period provided by law, otherwise, said assessment shall become final, executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position before the tax
authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's deficiency VAT assessment
covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering taxable
year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of 1997,
as amended, computed as follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl
78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC
of 1997, as amended; and
 b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of ₱223,173,208.35
representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20%
deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full payment
thereof pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of Authority (LOA)
alone as the CIR is granted vast powers to perform examination and assessment functions; (2) in lieu of an LOA, an LN was
issued to MEDICARD informing it· of the discrepancies between its ITRs and VAT Returns and this procedure is authorized
under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the
validity of the assessment on the ground of lack of LOA since the assessment issued against MEDICARD contained the
requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it in fact availed of the remedies
provided by law without questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and
eventually paid to doctors, hospitals and clinics cannot be excluded from · the computation of its gross receipts under the
provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself an act of ownership and management over
the funds by MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and
laboratory facilities cannot be excluded from its gross receipts because the operation of these clinics and laboratory is merely
an incident to MEDICARD's main line of business as HMO and there is no evidence that MEDICARD segregated the amounts
pertaining to this at the time it received the premium from its members; and (6) MEDICARD was not able to substantiate the
amount pertaining to its January 2006 income and therefore has no basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the matter to the
CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10% VAT rate for
January 2006 is concerned but sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the Decision
date June 5, 2014 is hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered
to pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of
1997, as amended, computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58 computed
from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 (representing basic
deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the deficiency interest which
have accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to Section
249(C) of the NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was denied. 23Hence,
MEDICARD now seeks recourse to this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE MEDICAL
SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or
enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of
collecting the correct amount of tax. 25 An LOA is premised on the fact that the examination of a taxpayer who has already filed
his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of
the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized representative may authorize the examinationof any taxpayer and
the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances
contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or
surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to
arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives,
other tax agents may not validly conduct any of these kinds of examinations without prior authority.
With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated RMO No. xxxx
30-2003 to lay down the policies and guidelines once its then incipient centralized Data Warehouse (DW) becomes fully
operational in conjunction with its Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect 8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the concerned taxpayer
tax leaks by matching the data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party will be given an opportunity to reconcile its records with those of the BIR within
sources. Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales and
purchases can be generated to uncover under declared income and over claimed purchases of Goods and services.
One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer shall no longer
be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day period from the LN issuance.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System, particularly with
regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems Group (ISG) is responsible for:
(1) coming up with the List of Taxpayers with discrepancies within the threshold amount set by management for the issuance 9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day period,
of LN and for the system-generated LNs; and (2) sending the same to the taxpayer and to the Audit Information, Tax the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to replace the LN. The
Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID under the Assessment head of the concerned investigating office shall submit a summary list of LNs for conversion to LAs (using the herein
prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation
"This LA cancels LN_________ No. "
Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the LNs to the
investigating offices [Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the appropriate action on the LN s issued to xxxx
taxpayers with RELIEF data discrepancy would be determined.
V. PROCEDURES
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in the CIR's
exercise of its ·power to authorize any examination of taxpayer arid the assessment of the correct amount of tax. The no- xxxx
contact-audit approach includes the process of computerized matching of sales and purchases data contained in the
Schedules of Sales and Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF B. At the Regional Office/Large Taxpayers Service
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of
data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or
Creditable Withholding Taxes. xxxx

Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the computerized/manual 7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval.
matching of sales and purchases/expenses appears to reveal discrepancies, the same shall be communicated to the
concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for 8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.
Informal Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may begin an examination
of the taxpayer even prior to the issuance of an LN or even in the absence of an LOA with the aid of a computerized/manual
xxxx
matching of taxpayers': documents/records. Accordingly, under the RELIEF System, the presumption that the tax returns are in
accordance with law and are presumed correct since these are filed under the penalty of perjury 27 are easily rebutted and the
taxpayer becomes instantly burdened to explain a purported discrepancy. Decision 11 G.R. No. 222743

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any
investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely similar
to a Notice for Informal Conference. However, for a Notice of Informal Conference, which generally precedes the issuance of
an assessment notice to be valid, the same presupposes that the revenue officer who issued the same is properly authorized
in the first place.
xxxx
10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for conversion to
LAs, to the concerned investigating offices for the encoding of the required information x x x and for service to the concerned
taxpayers.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003, was xxxx
amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against taxpayers'· issued LNs by
reconciling various revenue issuances which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-
C. At the RDO x x x
2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment and
collection of deficiency taxes.
xxxx
IV. POLICIES AND GUIDELINES
11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance thereof, prepare a
summary list of said LN s for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED ICARD.
Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even dispute the applicability of the above provision of
RMO 32-2005 in the present case which is clear and unequivocal on the necessity of an LOA for the· assessment proceeding
to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant the reversal of the assailed decision and
resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.30 (Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself. Under
RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data generated under the RELIEF
system. Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary Assessment and Abatement Program. If a
taxpayer fails or refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies, particularly
closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires
the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the CIR
would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for
the purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is specifically
required under the NIRC before an examination of a taxpayer may be had while an LN is not found in the NIRC and is only for
the purpose of notifying the taxpayer that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid
only for 30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue officer only a period of
10days from receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due process demands, as
recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer should have properly secured
an LOA before proceeding with the further examination and assessment of the petitioner. Unfortunarely, this was not done in
this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial books or
records being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires an authority from
the CIR or from his duly authorized representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically open his books and financial
records but only on whether a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster. The ease
by which the BIR's revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative issuance. In fact, apart from being a statutory requirement, an
LOA is equally needed even under the BIR's RELIEF System because the rationale of requirement is the same whether or not
the CIR conducts a physical examination of the taxpayer's records: to prevent undue harassment of a taxpayer and level the
playing field between the government' s vast resources for tax assessment, collection and enforcement, on one hand, and the
solitary taxpayer's dual need to prosecute its business while at the same time responding to the BIR exercise of its statutory
powers. The balance between these is achieved by ensuring that any examination of the taxpayer by the BIR' s revenue
officers is properly authorized in the first place by those to whom the discretion to exercise the power of examination is given
by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is crucial is whether the proceedings that led to the issuance of
VAT deficiency assessment against MEDICARD had the prior approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the first place, the assessment issued by the CIR is
inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in MEDICARD's
substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that the gross receipts of
an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members undiminished
by any amount paid or payable to the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated contracts. One is between a corporate client
and MEDICARD, with the corporate client's employees being considered as MEDICARD members; and the other is between
the health care institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals for the
coverage of MEDICARD members under specific health related services for a specified period of time in exchange for payment
of a more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides that 20%
of the membership fees per individual, regardless of the amount involved, already includes the VAT of 10%/20% excluding the
remaining 80o/o because MED ICARD would earmark this latter portion for medical utilization of its members. Lastly,
MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from medical services which it actually and directly
rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care services that are
needed by plan holders/members for fixed prepaid membership fees and for a specified period of time, then MEDICARD is
principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined under Section
108(A)32 of the Tax Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose gross
receipts is the amount actually received as contract price without allowing any deduction from the gross receipts. 33 This
restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and gross receipts in general were
defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or
constructively received during the taxable period for the services performed or to be performed for another person, excluding
the value-added tax. The compensation for their services representing their service fee, is presumed to be the total
amount received as enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and
deposits applied as payments for services rendered, and advance payments actually or constructively received during the
taxable period for the services performed or to be performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in
general.35
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross receipts
because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD
is the definition of gross receipts of an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general
under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that the amount
received by an HMO as membership fee is the HMO's compensation for their services. As a mere presumption, an HMO is,
thus, allowed to establish that a portion of the amount it received as membership fee does NOT actually compensate it but
some other person, which in this case are the medical service providers themselves. It is a well-settled principle of legal
hermeneutics that words of a statute will be interpreted in their natural, plain and ordinary acceptation and signification, unless
it is evident that the legislature intended a technical or special legal meaning to those words. The Court cannot read the word
"presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC does not
contain any specific definition.36 Therefore, absent a statutory definition, this Court has construed the term gross receipts in its
plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any
deduction.37 Congress, under Section 108, could have simply left the term gross receipts similarly undefined and its
interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope of the term gross receipts for
VAT purposes only to the amount that the taxpayer received for the services it performed or to the amount it received as
advance payment for the services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not seriously
disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its
members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling membership with MED
ICARD, its members will be able to avail of the pre-arranged medical services from its accredited healthcare providers without
the necessary protocol of posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics,
especially during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail of medical services from MEDICARD's
accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members obviously knew that beyond
the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member beforehand that 80% of the
amount would be earmarked for medical utilization and only the remaining 20% comprises its service fee. In the latter case,
MEDICARD's sale of its services is exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend the
definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another person, other
than the taxpayer, but even to amounts that were indisputably utilized not by MED ICARD itself but by the medical service
providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative
is preferred over that which makes some words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat
quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 38the Court adopted the principal object and
purpose object in determining whether the MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive, diagnostic and curative medical services
is not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally
to these features, the indemnification for cost after .the services is rendered. Except the last, these are not distinctive
or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting
in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost
when or after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a
tax on the value added by the performance of the service by the taxpayer. It is, thus, this service and the value charged thereof
by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. 40 But the Court's task
however is not to weigh these policy considerations but to determine if these considerations in favor of taxation can even be
implied from the statute where the CIR purports to derive her authority. This Court rules that they cannot because the language
of the NIRC is pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar
doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax laws. 41 (Citation omitted and emphasis and underlining
ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should have been Republic of the Philippines
reasonably founded from the language of the statute. That language is wanting in this case. In the scheme of judicial tax SUPREME COURT
administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the Manila
details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold these SECOND DIVISION
authorities' interpretations when dearly absurd, erroneous or improper. 42 The CIR's interpretation of gross receipts in the
present case is patently erroneous for lack of both textual and non-textual support.
G.R. No. 181961 December 5, 2011
As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and management over the
funds, the Court does not agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount LVM CONSTRUCTION CORPORATION, represented by its Managing Director, ANDRES CHUA LAO,Petitioner,
it received as membership fee at the time of payment that weakens the ownership imputed to it. By earmarking or allocating vs.
80% of the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner but as F.T. SANCHEZ/SOCOR/KIMWA (JOINT VENTURE), F.T. SANCHEZ CONSTRUCTION CORPORATION, SOCOR
a mere administrator of the same. For this reason, at most, MEDICARD's right in relation to these amounts is a mere inchoate CONSTRUCTION CORPORATION AND KIMWA CONSTRUCTION AND DEVELOPMENT CORPORATION all represented
owner which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of the by FORTUNATO O. SANCHEZ, JR., Respondents.
fiscal year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an administrator once its members
avail of the medical services of MEDICARD's healthcare providers. DECISION

Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked,
corresponding to 80% of its enrollment fees, and paid to the medical service providers should form part of its gross receipt for
VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in this regard that
MEDICARD established that upon receipt of payment of membership fee it actually issued two official receipts, one pertaining
to the VAT able portion, representing compensation for its services, and the other represents the non-vatable portion
pertaining to the amount earmarked for medical utilization.: Therefore, the absence of an actual and physical segregation of
the amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption
under the law and from proving that indeed services were rendered by its healthcare providers for which it paid the amount it
sought to be excluded from its gross receipts.
PEREZ, J.:
Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review on certiorari at bench seeks the reversal
of the 28 September 2007 Decision1 rendered by the then Thirteenth Division of the Court of Appeals (CA) in CA-G.R. SP No.
94849,2 the decretal portion of which states:
WHEREFORE, premises considered, the assailed Decision dated April 26, 2006 of the Construction Industry Arbitration
Commission in CIAC Case No. 25-2005 is hereby AFFIRMED.

With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the NIRC, on one SO ORDERED.3
hand, and the utter lack of legal basis of the CIR's position on the computation of MEDICARD's gross receipts, the Court finds
it unnecessary, nay useless, to discuss the rest of the parties' arguments and counter-arguments. The Facts

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en banc grounded
as it is on due process violation. The Court likewise rules that for purposes of determining the VAT liability of an HMO, the
amounts earmarked and actually spent for medical utilization of its members should not be included in the computation of its
gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision dated
September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224
are REVERSED and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in
relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent (80%) of the amount of the
contract price earmarked as fiduciary funds for the medical utilization of its members. Further, the Value-Added Tax deficiency
assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter
of Authority by the Commissioner of Internal Revenue or his duly authorized representatives.
SO ORDERED.
Petitioner LVM Construction Corporation (LVM) is a duly licensed construction firm primarily engaged in the construction of
roads and bridges for the Department of Public Works and Highways (DPWH). Awarded the construction of the Arterial Road
Link Development Project in Southern Leyte (the Project), LVM sub-contracted approximately 30% of the contract amount with
the Joint Venture composed of respondents F.T. Sanchez Corporation (FTSC), Socor Construction Corporation (SCC) and
Kimwa Construction Development Corporation (KCDC). For the contract price of ₱90,061,917.25 which was later on reduced
to ₱86,318,478.38,4 the Joint Venture agreed to undertake construction of the portion of the Project starting from Sta. 154 +
210.20 to Sta. 160 + 480.00. With LVM as the Contractor and the Joint Venture as Sub-Contractor, the 27 November 1996
Sub-Contract Agreement5 executed by the parties pertinently provided as follows:
3) That payment to the SUB-CONTRACTOR shall be on item of work accomplished in the sub-contracted portion of
the project at awarded unit cost of the project less NINE PERCENT (9%). The SUB-CONTRACTOR shall issue a
BIR registered receipt to the CONTRACTOR.
4) Ten percent (10%) retention to be deducted for every billing of sub-contractor as prescribed under the Tender
Documents.

xxxx
 13) The payment to the SUB-CONTRACTOR shall be made within seven (7) days after the check issued by DPWH
to CONTRACTOR has already been made good.6
For work rendered in the premises, there is no dispute regarding the fact that the Joint Venture sent LVM a total of 27 Billings.
For Billing Nos. 1 to 26, LVM paid the Joint Venture the total sum of ₱80,414,697.12 and retained the sum of ₱8,041,469.79
by way of the 10% retention stipulated in the Sub-Contract Agreement.7 For Billing No. 27 in the sum of ₱5,903,780.96, on the
other hand, LVM paid the Joint Venture the partial sum of ₱2,544,934.99 on 31 May 2001,8 claiming that it had not yet been
fully paid by the DPWH.9 Having completed the sub-contracted works, the Joint Venture subsequently demanded from LVM
the settlement of its unpaid claims as well as the release of money retained by the latter in accordance with the Sub-Contract
Agreement. In a letter dated 16 May 2001, however, LVM apprised the Joint Venture of the fact that its auditors have belatedly
discovered that no deductions for E-VAT had been made from its payments on Billing Nos. 1 to 26 and that it was, as a
consequence, going to deduct the 8.5% payments for said tax from the amount still due in the premises. 10 In its 14 June 2001
Reply, the Joint Venture claimed that, having issued Official Receipts for every payment it received, it was liable to pay 10%
VAT thereon and that LVM can, in turn, claim therefrom an equivalent input tax of 10%.11
With its claims still unpaid despite the lapse of more than four (4) years from the completion of the sub-contracted works, the
Joint Venture, thru its Managing Director, Fortunato O. Sanchez, Jr., filed against LVM the 30 June 2005 complaint for sum of
money and damages which was docketed before the Construction Industry Arbitration Commission (CIAC) as CIAC Case No.
25-2005.12 Having submitted a Bill of Particulars in response to LVM’s motion therefor, 13 the Joint Venture went on to file an
Amended Complaint dated 23 December 2005 specifying its claims as follows: (a) ₱8,041,469.73 as retention monies for
Billing Nos. 1 to 26; (b) ₱3,358,845.97 as unpaid balance on Billing No. 27; (c) ₱6,186,570.71 as interest on unpaid retention
money computed at 12% per annum reckoned from 6 August 1999 up to 1 January 2006; and (d) ₱5,365,677.70 as interest at
12% per annum on delayed payment of monies collected from DPWH on Billing Nos. 1 to 26. In addition, the Joint Venture
sought indemnity for attorney’s fees equivalent to 10% of the amount collected and/or in a sum not less than ₱1,000,000.00.14
In its 21 October 2005 Answer with Compulsory Counterclaim, LVM maintained that it did not release the 10% retention for
Billing Nos. 1 to 26 on the ground that it had yet to make the corresponding 8.5% deductions for E-VAT which the Joint
Venture should have paid to the Bureau of Internal Revenue (BIR) and that there is, as a consequence, a need to offset the
sums corresponding thereto from the retention money still in its possession. Moreover, LVM alleged that the Joint Venture’s
claims failed to take into consideration its own outstanding obligation in the total amount of ₱21,737,094.05, representing the
liquidated damages it incurred as a consequence of its delays in the completion of the project. In addition to said liquidated
damages, LVM prayed for the grant of its counterclaims for exemplary damages and attorney’s fees.15 In its 2 January 2006
supplemental answer, LVM likewise argued that the Joint Venture’s prayer for imposition of 12% interest on the retention
money and the balance of Billing No. 27 is bereft of factual and legal bases since no interest was stipulated in the parties’
agreement and it was justified in refusing the release of said sums claimed.16
With the parties’ assent to the 19 December 2005 Terms of Reference which identified, among other matters, the issues to be
resolved in the case,17 the CIAC proceeded to receive the parties’ evidence in support of their respective causes. On 26 April
2006, the CIAC rendered its decision granting the Joint Venture’s claims for the payment of the retention money for Billing Nos.
1 to 26 as well as the interest thereon and the unpaid balance billing from 6 August 1999 to 1 January 2006 in the aggregate
sum of ₱11,307,646.68. Discounting the contractual and legal bases for LVM’s claim that it had the right to offset its E-VAT
payments from the retention money still in its possession, the CIAC ruled that the VAT deductions the DPWH made from its
payments to LVM were for the whole project and already included all its supplies and subcontractors. Instead of withholding
said retention money, LVM was determined to have – to its credit and for its use – the input VAT corresponding to the 10%
equivalent VAT paid by the Joint Venture based on the BIR-registered official receipts it issued. Finding that the delays
incurred by the Joint Venture were justified, the CIAC likewise denied LVM’s counterclaim for liquidated damages for lack of
contractual basis.18
Elevated by LVM to the CA through a petition for review filed pursuant to Rule 43 of the 1997 Rules of Civil Procedure, 19 the
CIAC’s decision was affirmed in toto in the herein assailed Decision dated 28 September 2007 rendered by said court’s
Thirteenth Division in CA-G.R. SP No. 94849.20 In upholding the CIAC’s rejection of LVM’s insistence on the offsetting of E-
VAT payments from the retention money, the CA ruled as follows:
Clearly, there was no provision in the Sub-Contract Agreement that would hold Sanchez liable for EVAT on the amounts paid
to it by LVM. As pointed out by the CIAC in its Award, ‘the contract documents provide only for the payment of the awarded
cost of the project less 9%. Any other deduction must be clearly stated in the provisions of the contract or upon agreement of
the parties. xxx The tribunal finds no provision that EVAT will be deducted from the sub-contractor. xxx If [the Joint Venture]
should pay or share in the payment of the EVAT, it must be clearly defined in the sub-contract agreement.’
Elucidating further, CIAC pointed out that Sanchez, under the contract was required to issue official receipts registered with the
BIR for every payment LVM makes for the progress billings, which it did. For these official receipts issued by Sanchez to LVM,
Sanchez already paid 10% VAT to the BIR, thus: ‘The VAT Law is very clear. Everyone must pay 10% VAT based on their
issued official receipts. These receipts must be official receipts and registered with the BIR. Respondent (LVM) must pay its
output Vat based on its receipts. Complainant (Sanchez) must also pay output VAT based on its receipts. The law however
allow each entity to deduct the input VAT based on the official receipts issued to it. Clearly, therefore, respondent [LVM], has
to its credit the 10% output VAT paid by claimant [Joint Venture] based on the official receipts issued to it. Respondent [LVM]
can use this input VAT to offset any output VAT respondent [LVM] must pay for any of its other projects."21
LVM’s motion for reconsideration of the foregoing decision was denied for lack of merit in the CA’s 26 February 2008
Resolution,22 hence, this Rule 45 petition for review on certiorari.
The Issues
LVM urges the grant of its petition for review upon the following errors imputed against the CA, to wit:
I
CONTRARY TO THE FINDING OF THE COURT OF APPEALS, RESPONDENTS’ LIABILITY TO PAY VALUE
ADDED TAX NEED NOT BE STATED IN THE SUB-CONTRACT AGREEMENT DATED 27 NOVEMBER 1996 AS
THE PROVISIONS OF REPUBLIC ACT 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE
CODE OF THE PHILIPPINES, FORM PART OF, AND ARE DEEMED INCORPORATED AND READ INTO SAID
AGREEMENT.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT RESPONDENTS ARE DEEMED TO HAVE
ALREADY PAID VALUE ADDED TAX MERELY BECAUSE RESPONDENTS HAD ALLEGEDLY ISSUED
RECEIPTS FOR SERVICES RENDERED.23
The Court’s Ruling
The petition is bereft of merit.
For lack of any stipulation regarding the same in the parties’ Sub-Contract Agreement, we find that the CA correctly brushed
aside LVM’s insistence on deducting its supposed E-VAT payments from the retention money demanded by the Joint Venture.
Indeed, a contract constitutes the law between the parties who are, therefore, bound by its stipulations 24 which, when couched
in clear and plain language, should be applied according to their literal tenor.25That there was no agreement regarding the
offsetting urged by LVM may likewise be readily gleaned from the parties’ contemporaneous and subsequent acts which are
given primordial consideration in determining their intention.26 The record shows that, except for deducting sums
corresponding to the 10% retention agreed upon, 9% as contingency on sub-contract, 1% withholding tax and such other
itemized miscellaneous expenses, LVM settled the Joint Venture’s Billing Nos. 1 to 26 without any mention of deductions for
the E-VAT payments it claims to have advanced.27 It was, in fact, only on 16 May 2001 that LVM’s Managing Director, Andres
C. Lao, apprised the Joint Venture in writing of its intention to deduct said payments,28 to wit:
If you would recall, during our last meeting with Deputy Project Manager of the DPWH-PJHL, Eng. Jimmy T. Chan, last March
2001 at the PJHL Office in Palo, Leyte, our company made a commitment to pay up to 99% accomplishment and release the
retention money up to the 23rd partial billing after receipt by our company of the 27th partial billing from JBIC and GOP relative
to the above mentioned project.
Much as our company wants to comply with said commitment, our auditors recently discovered that all payments made by us
to your Joint Venture, relative to the above mentioned project were made without the corresponding deduction of the E-VAT of
8.50% x 10/11, which your Joint Venture should have paid to the BIR. Records would show that from billing number 1 up to 26,
no deductions for E-VAT were made. As a matter of fact, our company was the one who shouldered all payments due for the
E-VAT which should have been deducted from the payments made by us to your Joint Venture. Copy of the payments made
by our company to the BIR relative to the E-VAT is hereto attached as Annex "1" for your perusal and ready
reference.1avvphi1
This being the case and to offset the advances made by our company, we would like to inform you that our company would
deduct the payments made for E-VAT to the amount due to your Joint Venture. Only by doing so, would our advances be
settled and liquidated. We hope that our auditor and your auditor can discuss this matter to avoid any possible conflict
regarding this matter.
From the foregoing letter, it is evident that LVM unilaterally broached its intention of deducting the subject E-VAT payments
only on 15 May 2001 or long after the project’s completion on 9 July 1999. 29 In the absence of any stipulation thereon,
however, the CA correctly disallowed the offsetting of said sums from the retention money undoubtedly due the Joint Venture.
Courts are obliged to give effect to the parties’ agreement and enforce the contract to the letter.30 The rule is settled that they
have no authority to alter a contract by construction or to make a new contract for the parties; their duty is confined to the
interpretation of the one which the parties have made for themselves, without regard to its wisdom or folly. Courts cannot
supply material stipulations, read into the contract words it does not contain31 or, for that matter, read into it any other intention
that would contradict its plain import.32This is particularly true in this case where, in addition to the dearth of a meeting of minds
between the parties, their contemporaneous and subsequent acts fail to yield any intention to offset the said E-VAT payments
from the retention money still in LVM’s possession.lawphi1
In taking exception to the CA’s affirmance of the CIAC’s rejection of its position for lack of contractual basis, LVM argues that
the Joint Venture’s liability for E-VAT as an entity that renders services in the course of trade or business need not be stated in
the Sub-Contract Agreement considering that it is an obligation imposed by law which forms part of, and is read into, every
contract.33 As correctly argued by the Joint Venture, however, there are two (2) contracts under the factual milieu of the case:
the main contract DPWH entered into with LVM for the construction of the Arterial Road Link Development Project in Southern
Leyte and the Sub-Contract Agreement the latter in turn concluded with the Joint Venture over 30% of said project’s contract
amount. As the entity which directly dealt with the government insofar as the main contract was concerned, LVM was itself
required by law to pay the 8.5% VAT which was withheld by the DPWH in accordance with Republic Act No. 842434 or the Tax
Reform Act of 1997 as well as the National Internal Revenue Code of 1997 (NIRC). Section 114 (C) of said law provides as
follows:
"Section 114. Return and Payment of Value-Added Tax. –
xxxx
(C) Withholding of Creditable Value-added Tax. - The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each
purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross
payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale
or installment payment which shall be creditable against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent."
For the Sub-Contract Agreement, on the other hand, respondent F. Sanchez Construction, acting on behalf of the Joint
Venture, issued BIR-registered receipts for the sums paid by LVM for Billing Nos. 1 to 26, indicating the total amount paid by
the latter, the retention fee deducted therefrom and the tax due thereon.35 These were in consonance with paragraph 3 of the
Sub-Contract Agreement which, after stating that LVM’s payment shall "be on item of work accomplished in the sub-contracted
portion of the project awarded unit cost of the project less NINE PERCENT (9%)," simply provided, that "(t)he SUB-
CONTRACTOR shall issue a BIR registered receipt to the CONTRACTOR."36 As the VAT-registered person, on the other
hand, Fortunato T. Sanchez, Sr.37 also filed the corresponding Monthly VAT Declarations38 with the BIR which, by themselves,
are evidence of the Joint Venture’s VAT liability for LVM’s payments on its billings. In fixing the base of the tax, the first
paragraph A Section 108 of the NIRC provides that "(t)here 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."
In the absence of any stipulation regarding the Joint Venture’s sharing in the VAT deducted and withheld by the DPWH from its
payment on the main contract, the CIAC and the CA correctly ruled that LVM has no basis in offsetting the amounts of said tax
from the retention still in its possession. VAT is a uniform tax levied on every importation of goods, whether or not in the course
of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of
services in the course of trade or business.39 It 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.40 As an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services, VAT should be understood not in the context of the person or entity that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on consumption.41
Neither do we find merit in LVM’s harping over the lack of showing in the record that the Joint Venture has actually paid its
liability for VAT. For this purpose, LVM insists that the Official Receipts for its payments on the Joint Venture’s billing were
issued by respondent F. Sanchez Construction and that the Monthly VAT Declarations were, in fact, filed by Fortunato
Sanchez, Sr. However, the evidence on record is to the effect that, failing to register with the Securities and Exchange
Commission (SEC) and to obtain a Mayor’s Permit and authorization from the BIR to print its official receipts, the Joint Venture
apprised LVM of its intention to use respondent F. Sanchez Construction’s BIR-registered receipts.42 Aside from being
indicative of its knowledge of the foregoing circumstances, LVM’s previous unqualified acceptance of said official receipts
should, clearly, bar the belated exceptions it now takes with respect thereto. A party, having performed affirmative acts upon
which another person based his subsequent actions, cannot thereafter refute his acts or renege on the effects of the same, to
the prejudice of the latter.43
To recapitulate, LVM, as Contractor for the Project, was liable for the 8.5% VAT which was withheld by the DPWH from its
payments, pursuant to Section 114 (C) of the NIRC. Absent any agreement to that effect, LVM cannot deduct the amounts
thus withheld from the sums it still owed the Joint Venture which, as Sub-Contractor of 30% of the Project, had its own liability
for 10% VAT insofar as the sums paid for the sub-contracted works were concerned. Although the burden to pay an indirect
tax like VAT can, admittedly, be passed on to the purchaser of the goods or services, it bears emphasizing that the liability to
pay the same remains with the manufacturer or seller like LVM and the Joint Venture. In the same manner that LVM is liable
for the VAT due on the payments made by the DPWH pursuant to the contract on the Project, the Joint Venture is,
Total Input Tax ₱9,355,809.80
consequently, liable for the VAT due on the payments made by LVM pursuant to the parties’ Sub-Contract.

WHEREFORE, premises considered, the petition is DENIED for lack of merit and the CA’s 28 September 2007 Decision is, Zero-rated Sales ₱316,113,513.34
accordingly, AFFIRMED in toto.
Total Sales ₱335,640,544.74
SO ORDERED.
Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for October 2002, on
12 November 2002. These returns were amended on 9 January 2003. Accenture’s Quarterly VAT Return for the first quarter of
2003, which included the period 1 September 2002 to 30 November 2002 (2nd period), was filed on 17 December 2002; and
Republic of the Philippines the Amended Quarterly VAT Return, on 18 June 2004. The latter contains the following information:6
SUPREME COURT
Purchases Amount Input VAT
Manila
Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41
SECOND DIVISION
Domestic Purchases- Goods other than capital Goods ₱132,820,541.70 ₱13,282,054.17
G.R. No. 190102 July 11, 2012 Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80

ACCENTURE, INC., Petitioner, Total Input Tax ₱27,682,459.38

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Zero-rated Sales ₱545,686,639.18

DECISION Total Sales ₱ ₱572,880,982.68

SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the Decision of the Court
of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent Resolution dated 23 October 2009.1
The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT credits earned
from its zero-rated transactions against its output VAT liabilities, it still had excess or unutilized input VAT credits. These VAT
credits are in the amounts of P9,355,809.80 for the 1st period and P27,682,459.38 for the 2nd period, or a total of
P37,038,269.18.7

Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting, business strategies Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture’s "domestic purchases of
development, and selling and/or licensing of software.2 It is duly registered with the Bureau of Internal Revenue (BIR) as a taxable goods which cannot be directly attributed to its zero-rated sale of services."8 This allocated input VAT was broken
Value Added Tax (VAT) taxpayer or enterprise in accordance with Section 236 of the National Internal Revenue Code (Tax down to P8,811,301.66 for the 1st period and P26,367,542.55 for the 2nd period.9
Code).3
The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter when the amount
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st period). Its was earned—or to any of the succeeding quarters. Instead, it was carried forward to petitioner’s 2nd Quarterly VAT Return for
Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st period, was filed on 17 September 2002; and an 2003.10
Amended Quarterly VAT Return, on 21 June 2004.4 The following are reflected in Accenture’s VAT Return for the fourth
quarter of 2002:5
1âwphi1 Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the refund or the
issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of Accenture. Hence, on 31 August 2004, the
Purchases Amount Input VAT latter filed a Petition for Review with the First Division of the Court of Tax Appeals (Division), praying for the issuance of a TCC
in its favor in the amount of P35,178,844.21.
Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20

Domestic Purchases- Goods other than capital Goods ₱64,789,507.90 ₱6,478,950.79 The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:

Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81 1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
 2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it is entitled to
a refund, because its claim has not been fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the latter’s sale of
services to the alleged foreign clients qualified for zero percent VAT.13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in the amount of
P35,178,844.21,14 the Division ruled that Accenture had failed to present evidence to prove that the foreign clients to which the
former rendered services did business outside the Philippines.15 Ruling that Accenture’s services would qualify for zero-rating
under the 1997 National Internal Revenue Code of the Philippines (Tax Code) only if the recipient of the services was doing
business outside of the Philippines,16 the Division cited Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc. (Burmeister)17 as basis.
Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR).18 In its MR, it argued that the reliance
of the Division on Burmeister was misplaced19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the recipient of its
service was doing business in the Philippines; it was not an issue of failure of the applicant to present evidence to
prove the fact that the recipient of its services was a foreign corporation doing business outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing business
outside the Philippines, and Accenture had successfully established that.21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division, Burmeister
cannot be made to apply to this case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex)23 in support of its position. The MR was
denied by the Division in its 12 March 2009 Resolution.24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by Republic Act No. (R.A.)
9337, 25 there was no requirement that the services must be rendered to a person engaged in business conducted outside the
Philippines to qualify for zero-rating. The CTA En Banc agreed that because the case pertained to the third and the fourth
quarters of taxable year 2002, the applicable law was the 1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though
the provision used in Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the pronouncement therein requiring
recipients of services to be engaged in business outside the Philippines to qualify for zero-rating was applicable to the case at
bar, because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter’s allegation that its clients were
foreign-based.27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Division’s Decision and
Resolution.28 A subsequent MR was also denied in a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.
In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following issues for resolution:
1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT purposes under Section
108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioner’s claim for refund/tax credit in the amount of P35,178,884.21 represents unutilized input
VAT paid on its domestic purchases of goods and services for the period commencing from 1 July 2002 until 30
November 2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged unutilized
input VAT paid on its domestic purchases of goods and services for the period commencing from 1 July 2002 until
30 November 2002, and applied the same fully to its output VAT liability for the said period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the unutilized
input VAT on domestic purchases of goods and services for the period commencing from 1 July 2002 until 30
November 2002, from its sales of services to various foreign clients.
5. Whether or not Petitioner’s claim for refund/tax credit in the amount of P35,178,884.21, as alleged unutilized
input VAT on domestic purchases of goods and services for the period covering 1 July 2002 until 30 November
2002 are duly substantiated by proper documents.30
For consideration in the present Petition are the following issues:
1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be zero-
rated under Section 108(B)(2) of the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?
Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of unutilized input VAT
earned from zero-rated or effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-
rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt
sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Section
108(B) referred to in the foregoing provision was first seen when Presidential Decree No. (P.D.) 199431 amended Title IV of
P.D. 1158,32 which is also known as the National Internal Revenue Code of 1977. Several Decisions have referred to this as
the 1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further amended provisions of Title IV. E.O. 273
by transferring the old Title IV provisions to Title VI and filling in the former title with new provisions that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716.34 This law, which was
approved on 5 May 1994, widened the tax base. Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x
xxx xxx xxx
"(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)."
Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A. 7716—provides that if the
consideration for the services provided by a VAT-registered person is in a foreign currency, then this transaction shall be
subjected to zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered
persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding 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); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered
persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph 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 Bangko Sentral ng Pilipinas (BSP); x x x."
(Emphasis supplied)
The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax Code state that services, to be zero-
rated, should be rendered to clients doing business outside the Philippines, the requirement introduced by R.A.
9337.35 Required by Section 108(B), prior to the amendment, is that the consideration for the services rendered be in foreign
currency and in accordance with the rules of the Bangko Sentral ng Pilipinas (BSP). Since Accenture has complied with all the
conditions imposed in Section 108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B) reveals a clear intent on
the part of the legislators not to impose the condition of being "consumed abroad" in order for the services performed in the
Philippines to be zero-rated.36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement—that the client must be doing
business outside the Philippines—can be disregarded, because this requirement is expressly provided in Article 108(2) of the
Tax Code.37
Accenture questions the Division’s application to this case of the pronouncements made in Burmeister. According to petitioner,
the provision applied to the present case was Section 102(b) of the 1977 Tax Code, and not Section 108(B) of the 1997 Tax
Code, which was the law effective when the subject transactions were entered into and a refund was applied for.
In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a mere
reproduction of Section 102(b) of the 1977 Tax Code, this Court’s interpretation of the latter may be used in interpreting the
former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977 Tax Code, as
amended, pertaining to zero-rated transactions. A parallel approach should be accorded to the renumbered provisions of
Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This means that Section 108(B)(2) must be read in conjunction with
Section 108(B)(1). Section 108(B)(2) requires as follows: a) services other than processing, manufacturing or repacking
rendered by VAT registered persons in the Philippines; and b) the transaction paid for in acceptable foreign currency duly
accounted for in accordance with BSP rules and regulations. The same provision made reference to Section 108(B)(1) further
imposing the requisite c) that the recipient of services must be performing business outside of Philippines. Otherwise, if both
the provider and recipient of service are doing business in the Philippines, the sale transaction is subject to regular VAT as
explained in the Burmeister case x x x.
xxx xxx xxx
Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the recipient of the services must be doing
business outside the Philippines as mandated by law govern the instant case.38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to apply to Burmeister
this Court’s interpretation of Section 102(b) of the 1977 Tax Code, because the Petition of Accenture had already been filed
before the case was even promulgated on 22 January 2007,39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the statute itself, however,
the same cannot be applied retroactively against the Petitioner because to do so will be prejudicial to the latter.40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the Supreme Court,
whose interpretation of the law is part of that law as of the date of its enactment.41
We rule that the recipient of the service must be doing business outside the Philippines for the transaction to qualify for zero-
rating under Section 108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a verbatim copy of
Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the former.
Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the pronouncements made in that
case may be applied to the present one without violating the rule against retroactive application. When this Court decides a
case, it does not pass a new law, but merely interprets a preexisting one. 42 When this Court interpreted Section 102(b) of the
1977 Tax Code in Burmeister, this interpretation became part of the law from the moment it became effective. It is elementary
that the interpretation of a law by this Court constitutes part of that law from the date it was originally passed, since this Court's
construction merely establishes the contemporaneous legislative intent that the interpreted law carried into effect.43
Accenture questions the CTA’s application of Burmeister, because the provision interpreted therein was Section 102(b) of the
1977 Tax Code. In support of its position that Section 108 of the 1997 Tax Code does not require that the services be
rendered to an entity doing business outside the Philippines, Accenture invokes this Court’s pronouncements in Amex.
However, a reading of that case will readily reveal that the provision applied was Section 102(b) of the 1977 Tax Code, and not
Section 108 of the 1997 Tax Code. As previously mentioned, an interpretation of Section 102(b) of the 1977 Tax Code is an
interpretation of Section 108 of the 1997 Tax Code, the latter being a mere reproduction of the former.
This Court further finds that Accenture’s reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed abroad to be zero-
rated. However, nowhere in that case did this Court discuss the necessary qualification of the recipient of the service, as this
matter was never put in question. In fact, the recipient of the service in Amex is a nonresident foreign client.
The aforementioned case explains how the credit card system works. The issuance of a credit card allows the holder thereof to
obtain, on credit, goods and services from certain establishments. As proof that this credit is extended by the establishment, a
credit card draft is issued. Thereafter, the company issuing the credit card will pay for the purchases of the credit card holders
by redeeming the drafts. The obligation to collect from the card holders and to bear the loss—in case they do not pay—rests
on the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from establishments located
in the Philippines and forwarding them to its parent company's regional operating centers outside the country. It facilitated in
the Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client.
The Court explained how the services rendered in Amex were considered to have been performed and consumed in the
Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in the performer’s release from any past or future liability x x x."
The services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts
and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore
also consumed in the Philippines.44
The effect of the place of consumption on the zero-rating of the transaction was not the issue in Burmeister.1âwphi1Instead,
this Court addressed the squarely raised issue of whether the recipient of services should be doing business outside the
Philippines for the transaction to qualify for zero-rating. We ruled that it should. Thus, another essential condition for
qualification for zero-rating under Section 102(b)(2) of the 1977 Tax Code is that the recipient of the business be doing that
business outside the Philippines. In clarifying that there is no conflict between this pronouncement and that laid down in Amex,
we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), 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 NAPOCOR’s two 100-megawatt power barges
in Mindanao. (Emphasis in the original)45
In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In Burmeister, the Court
found that, although the place of the consumption of the service does not affect the entitlement of a transaction to zero-rating,
the place where the recipient conducts its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax Code—and
consequently Section 108(B)(2) of the 1997 Tax Code—was intended to operate, the two aforementioned cases should be
taken together. The zero-rating of the services performed by respondent in Amex was affirmed by the Court, because although
the services rendered were both performed and consumed in the Philippines, the recipient of the service was still an entity
doing business outside the Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is the only logical
interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:
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.
xxx xxx xxx
Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely
under Section 102 (a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of
services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102 (b).
Thus, when Section 102 (b) (2) speaks of "services 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. (Emphasis in the original)46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the intent behind
Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier provision. R.A. 9337
added the following phrase: "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."
Accenture has failed to establish that the recipients of its services do business outside the Philippines.
Accenture argues that based on the documentary evidence it presented,47 it was able to establish the following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that Accenture’s clients have not
established any branch office in which to do business in the Philippines.
2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which is likewise a
foreign corporation with no "presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to pay in acceptable currency
for their purchase of goods and services from the Philippines. Thus, 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.48
Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel Mendoza, the Court-
commissioned Independent Certified Public Accountant. He ascertained that Accenture’s gross billings pertaining to zero-rated
sales were all supported by zero-rated Official Receipts and Billing Statements. These documents show that these zero-rated
sales were paid in foreign exchange currency and duly accounted for in the rules and regulations of the BSP.49
In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the existence of the sales, receipt
of foreign currency payments, and inward remittance of the proceeds of these sales duly accounted for in accordance with
BSP rules. Petitioner presented no evidence whatsoever that these clients were doing business outside the Philippines.50
Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations doing business
outside the Philippines, unlike in Burmeister, which allegedly involved a foreign corporation doing business in the Philippines.51
We deny Accenture’s Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are foreign.1âwphi1 This fact does not
automatically mean, however, that these clients were doing business outside the Philippines. After all, the Tax Code itself has
provisions for a foreign corporation engaged in business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx xxx xxx
(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the
Philippines.
(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or business
within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service be proven to
be a foreign corporation; rather, it must be specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled thus in
Commissioner of Internal Revenue v. British Overseas Airways Corporation:52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be
judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a
temporary character."53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that claim.1âwphi1 Tax
refunds, like tax exemptions, are construed strictly against the taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were foreign entities.
However, as found by both the CTA Division and the CTA En Banc, no evidence was presented by Accenture to prove the fact
that the foreign clients to whom petitioner rendered its services were clients doing business outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements, Memo Invoices-
Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture merely substantiated the existence of
sales, receipt of foreign currency payments, and inward remittance of the proceeds of such sales duly accounted for in
accordance with BSP rules, all of these were devoid of any evidence that the clients were doing business outside of the
Philippines.55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009 Resolution of the
Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund of the excess or unutilized input
VAT credits of Accenture, Inc., are AFFIRMED.
SO ORDERED.
 Republic of the Philippines I July 23, 2001 2nd quarter – 2001 2,166,051.96
SUPREME COURT
Manila L July 23, 2002 3rd quarter –2001 1,598,482.39
O July 24, 2002 4th quarter – 2001 4,127,449.58
FIRST DIVISION
Total 9,795,427.89
G.R. No. 188260 November 13, 2013
On November 26, 2001, the petitioner filed a written claim for refund or tax credit relative to its unutilized input VAT for the
LUZON HYDRO CORPORATION, Petitioner, period from October 1999 to October 2001 aggregating ₱14,557,004.38.7 Subsequently, on July 24, 2002, it amended the
vs. claim for refund or tax credit to cover the period from October 1999 to May 2002 for ₱20,609,047.56.8
COMMISSIONER OF INTERNAL REVENUE, Respondent.
The BIR, through Revenue Examiner Felicidad Mangabat of Revenue District Office No. 2 in Vigan City, concluded an
DECISION investigation, and made a recommendation in its report dated August 19, 2002 favorable to the petitioner’s claim for the period
from January 1, 2001 to December 31, 2001.9
BERSAMIN, J.:
Respondent Commissioner of Internal Revenue (Commissioner) did not ultimately act on the petitioner’s claim despite the
This case involves a claim for refund or tax credit to cover petitioner Luzon Hydro Corporation's unutilized Input Value-Added favorable recommendation. Hence, on April 14, 2003, the petitioner filed its petition for review in the CTA, praying for the
Tax (VAT) worth 1 2,920,665 .16 corresponding to the four quarters of taxable year 2001. refund or tax credit certificate (TCC) corresponding to the unutilized input VAT paid for the four quarters of 2001 totalling
₱9,795,427.88.10
The Case
Answering on May 29, 2003,11 the Commissioner denied the claim, and raised the following special and affirmative defenses,
to wit:
The petitioner brought this action in the Court of Tax Appeals (CTA) after the Commissioner of Internal Revenue (respondent)
did not act on the claim (CTA Case No. 6669). The CTA 2nd Division denied the claim on May 2, 2008 on the ground that the
petitioner did not prove that it had zero-rated sales for the four quarters of 2001.1 The CT A En Banc denied the petitioner's xxxx
motion for reconsideration, and affirmed the decision of the CTA 2nd Division through its decision dated May 5, 2009. 2 Hence,
the petitioner appeals the decision of the CTA En Banc. 7. The petitioner has failed to demonstrate that the taxes sought to be refunded were erroneously or illegally
collected;
Antecedents
8. In an action for tax refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure to
The petitioner, a corporation duly organized under the laws of the Philippines, has been registered with the Bureau of Internal sustain the same is fatal to the action for tax refund;
Revenue (BIR) as a VAT taxpayer under Taxpayer Identification No. 004-266-526. It was formed as a consortium of several
corporations, namely: Northern Mini Hydro Corporation, Aboitiz Equity Ventures, Inc., Ever Electrical Manufacturing, Inc. and 9. It is incumbent upon petitioner to show compliance with the provisions of Section 112 and Section 229, both of
Pacific Hydro Limited. the National Internal Revenue Code, as amended;

Pursuant to the Power Purchase Agreement entered into with the National Power Corporation (NPC), the electricity produced 10. Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from
by the petitioner from its operation of the Bakun Hydroelectric Power Plant was to be sold exclusively to NPC. 3 Relative to its taxation (Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and
sale to NPC, the petitioner was granted by the BIR a certificate for Zero Rate for VAT purposes in the periods from January 1, as such they are looked upon [with] disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124
2000 to December 31, 2000; February 1, 2000 to December 31, 2000 (Certificate No. Z-162-2000); and from January 2, 2001 SCRA 121);
to December 31, 2001 (Certificate No. 2001-269).4
11. Taxes paid and collected are presumed to have been made in accordance with the law and regulations, hence,
The petitioner alleged herein that it had incurred input VAT in the amount of ₱9,795,427.89 on its domestic purchases of not refundable.12
goods and services used in its generation and sales of electricity to NPC in the four quarters of 2001; 5and that it had declared
the input VAT of ₱9,795,427.89 in its amended VAT returns for the four quarters on 2001, as follows:6
xxxx
Exhibit Date Filed Period Covered Input VAT (P)
F May 25, 2001 1st quarter – 2001 1,903,443.96 On October 30, 2003, the parties submitted a Joint Stipulation of Facts and Issues,13 which the CTA in Division approved on
November 10, 2003. The issues to be resolved were consequently the following:
 1. Whether or not the input value added tax being claimed by petitioner is supported by sufficient documentary
evidence;
2. Whether petitioner has excess and unutilized input VAT from its purchases of domestic goods and services,
including capital goods in the amount of ₱9,795,427.88;
3. Whether or not the input VAT being claimed by petitioner is attributable to its zero-rated sale of electricity to the
NPC;
4.Whether or not the operation of the Bakun Hydroelectric Power Plant is directly connected and attributable to the
generation and sale of electricity to NPC, the sole business of petitioner; and 5. Whether or not the claim filed by
the petitioner was filed within the reglementary period provided by law.14
While the case was pending hearing, the Commissioner, through the Assistant Commissioner for Assessment Services,
informed the petitioner by the letter dated March 3, 2005 that its claim had been granted in the amount of ₱6,874,762.72, net
of disallowances of ₱2,920,665.16. Accompanying the letter was the TCC for ₱6,874,762.72 (TCC No. 00002618).15
On May 3, 2005, the petitioner filed a Motion for Leave of Court to Amend Petition for Review in consideration of the partial
grant of the claim through TCC No. 00002618. The CTA in Division granted the motion on May 11, 2005, and admitted the
Amended Petition for Review, whereby the petitioner sought the refund or tax credit in the reduced amount of ₱2,920,665.16.
The CTA in Division also directed the respondent to file a supplemental answer within ten days from notice.16
When no supplemental answer was filed within the period thus allowed, the CTA in Division treated the answer filed on May
16, 2003 as the Commissioner’s answer to the Amended Petition for Review.17
Thereafter, the petitioner presented testimonial and documentary evidence to support its claim. On the other hand, the
Commissioner submitted the case for decision based on the pleadings.18 On May 2, 2007, the case was submitted for decision
without the memorandum of the Commissioner.19
Ruling of the CTA in Division
The CTA in Division promulgated its decision in favor of the respondent denying the petition for review, viz:
In petitioner’s VAT returns for the four quarters of 2001, no amount of zero-rated sales was declared. Likewise, petitioner did
not submit any VAT official receipt of payments for services rendered to NPC. The only proof submitted by petitioner is a letter
from Regional Director Rene Q. Aguas, Revenue Region No. 1, stating that the financial statements and annual income tax
return constitute sufficient secondary proof of effectively zero-rated and that based on their examination and evaluation of the
financial statements and annual income tax return of petitioner for taxable year 2000, it had annual gross receipts of
Ph₱187,992,524.00. This Court cannot give credence to the said letter as it refers to taxable year 2000, while the instant case
refers to taxable year 2001.
Without zero-rated sales for the four quarters of 2001, the input VAT payments of Ph₱9,795,427.88 (including the present
claim of Ph₱2,920,665.16) allegedly attributable thereto cannot be refunded. It is clear under Section 112 (A) of the NIRC of
1997 that the refund/tax credit of unutilized input VAT is premised on the existence of zero-rated or effectively zero-rated sales.
xxxx
For petitioner’s non-compliance with the first requisite of proving that it had effectively zero-rated sales for the four quarters of
2001, the claimed unutilized input VAT payments of Ph₱2,920,665.16 cannot be granted.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.
SO ORDERED.20
On May 21, 2008, the petitioner moved to reconsider the decision of the CTA in Division. 21 However, the CTA in Division
denied the petitioner’s motion for reconsideration on September 5, 2008.22
Decision of the CTA En Banc
On October 17, 2008, the petitioner filed a petition for review in the CTA En Banc (CTA E.B No. 420), posing the main issue
whether or not the CTA in Division erred in denying its claim for refund or tax credit upon a finding that it had not established its
having effectively zero-rated sales for the four quarters of 2001.
On May 5, 2009, the CTA En Banc promulgated the assailed decision affirming the Division, and denying the claim for refund
or tax credit, stating:
The other argument of petitioner that even if the tax credit certificate will not be used as evidence, it was able to prove that it
has zero-rated sale as shown in its financial statements and income tax returns quoting the letter opinion of Regional Director
Rene Q. Aguas that the statements and the return are considered sufficient to establish that it generated zero-rated sale of
electricity is bereft of merit. As found by the Court a quo, the letter opinion refers to taxable year 2000, while the instant case
covers taxable year 2001; hence, cannot be given credence. Even assuming for the sake of argument that the financial
statements, the return and the letter opinion relates to 2001, the same could not be taken plainly as it is because there is still a
need to produce the supporting documents proving the existence of such zero-rated sales, which is wanting in this case.
Considering that there are no zero-rated sales to speak of for taxable year 2001, petitioner is, therefore, not entitled to a refund
of Ph₱2,920,665.16 input tax allegedly attributable thereto since it is basic requirement under Section 112 (A) of the NIRC that
there should exists a zero-rated sales in order to be entitled to a refund of unutilized input tax.
It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayer and that the claimant has the
burden of proof to establish the factual basis of its claim for tax credit or refund. Failure in this regard, petitioner’s claim must
therefore, fail.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.
SO ORDERED.23
On June 10, 2009, the CTA En Banc also denied the petitioner’s motion for reconsideration.24
Issue
Aggrieved, the petitioner has appealed, urging as the lone issue: –
WHETHER THE CTA EN BANC COMMITTED A REVERSIBLE ERROR IN AFFIRMING THE DECISION OF THE CTA.
In its August 3, 2009 petition for review,25 the petitioner has argued as follows:
(1) Its sale of electricity to NPC was automatically zero-rated pursuant to Republic Act No. 9136 (EPIRA Law);
hence, it need not prove that it had zero-rated sales in the period from January 1, 2001 to December 31, 2001 by
the presentation of VAT official receipts that would contain all the necessary information required under Section 113
of the National Internal Revenue Code of 1997, as implemented by Section 4.108-1 of Revenue Regulations No. 7-
95. Evidence of sale of electricity to NPC other than official receipts could prove zero-rated sales.
(2) The TCC, once issued, constituted an administrative opinion that deserved consideration and respect by the
CTA En Banc.
(3) The CTA En Banc was devoid of any authority to determine the existence of the petitioner’s zero-rated sales,
inasmuch as that would constitute an encroachment on the powers granted to an administrative agency having
expertise on the matter.
(4) The CTA En Banc manifestly overlooked evidence not disputed by the parties and which, if properly considered,
would justify a different conclusion.26
The petitioner has prayed for the reversal of the decision of the CTA En Banc, and for the remand of the case to the CTA for
the reception of its VAT official receipts as newly discovered evidence. It has supported the latter relief prayed for by
representing that the VAT official receipts had been misplaced by Edwin Tapay, its former Finance and Accounting Manager,
but had been found only after the CTA En Banc has already affirmed the decision of the CTA in Division. In the alternative, it
has asked that the Commissioner allow the claim for refund or tax credit of ₱2,920,665.16.
In the comment submitted on December 3, 2009,27
the Commissioner has insisted that the petitioner’s claim cannot be granted
because it did not incur any zero-rated sale; that its failure to comply with the invoicing requirements on the documents
supporting the sale of services to NPC resulted in the disallowance of its claim for the input tax; and the claim should also be
denied for not being substantiated by appropriate and sufficient evidence.
In its reply filed on February 4, 2010,28 the petitioner reiterated its contention that it had established its claim for refund or tax
credit; and that it should be allowed to present the official receipts in a new trial.
Ruling of the Court
The petition is without merit.
Section 112 of the National Internal Revenue Code 1997 provides:
SEC. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales--Any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had
been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of
goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
xxxx
A claim for refund or tax credit for unutilized input VAT may be allowed only if the following requisites concur, namely: (a) the
taxpayer is VAT-registered; (b) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (c) the input taxes are due
or paid; (d) the input taxes are not transitional input taxes; (e) the input taxes have not been applied against output taxes
during and in the succeeding quarters; (f) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
(g) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency
exchange proceeds have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas; (h) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis
of sales volume; and (i) the claim is filed within two years after the close of the taxable quarter when such sales were made.29
The petitioner did not competently establish its claim for refund or tax credit.1avvphi1 We agree with the CTA En Banc that the
petitioner did not produce evidence showing that it had zero-rated sales for the four quarters of taxable year 2001. As the CTA
En Banc precisely found, the petitioner did not reflect any zero-rated sales from its power generation in its four quarterly VAT
returns, which indicated that it had not made any sale of electricity. Had there been zero-rated sales, it would have reported
them in the returns. Indeed, it carried the burden not only that it was entitled under the substantive law to the allowance of its
claim for refund or tax credit but also that it met all the requirements for evidentiary substantiation of its claim before the
administrative official concerned, or in the de novo litigation before the CTA in Division.30
Although the petitioner has correctly contended here that the sale of electricity by a power generation company like it should
be subject to zero-rated VAT under Republic Act No. 9136,31 its assertion that it need not prove its having actually made zero-
rated sales of electricity by presenting the VAT official receipts and VAT returns cannot be upheld. It ought to be reminded that
it could not be permitted to substitute such vital and material documents with secondary evidence like financial statements.
We further find to be lacking in substance and bereft of merit the petitioner’s insistence that the CTA En Banc should not have
disregarded the letter opinion by BIR Regional Director Rene Q. Aguas to the effect that its financial statements and its return
were sufficient to establish that it had generated zero-rated sale of electricity. To recall, the CTA En Banc rejected the
insistence because, firstly, the letter opinion referred to taxable year 2000 but this case related to taxable year 2001, and,
secondly, even assuming for the sake of argument that the financial statements, the return and the letter opinion had related to
taxable year 2001, they still could not be taken at face value for the purpose of approving the claim for refund or tax credit due
to the need to produce the supporting documents proving the existence of the zero-rated sales, which did not happen here. In
that respect, the CTA En Banc properly disregarded the letter opinion as irrelevant to the present claim of the petitioner.
We further see no reason to grant the prayer of the petitioner for the remand of this case to enable it to present before the CTA
newly discovered evidence consisting in VAT official receipts.
Ordinarily, the concept of newly discovered evidence is applicable to litigations in which a litigant seeks a new trial or the re-
opening of the case in the trial court. Seldom is the concept appropriate when the litigation is already on appeal, particularly in
this Court. The absence of a specific rule on newly discovered evidence at this late stage of the proceedings is not without
reason. The propriety of remanding the case for the purpose of enabling the CTA to receive newly discovered evidence would
undo the decision already on appeal and require the examination of the pieces of newly discovered evidence, an act that the
Court could not do by virtue of its not being a trier of facts. Verily, the Court has emphasized in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue32 that a judicial claim for tax refund or tax credit brought to the
CTA is by no means an original action but an appeal by way of a petition for review of the taxpayer’s unsuccessful
administrative claim; hence, the taxpayer has to convince the CTA that the quasi-judicial agency a quo should not have denied
the claim, and to do so the taxpayer should prove every minute aspect of its case by presenting, formally offering and
submitting its evidence to the CTA, including whatever was required for the successful prosecution of the administrative claim
as the means of demonstrating to the CTA that its administrative claim should have been granted in the first place.

Nonetheless, on the proposition that we may relax the stringent rules of procedure for the sake of rendering justice, we still
hold that the concept of newly discovered evidence may not apply herein. In order that newly discovered evidence may be a
ground for allowing a new trial, it must be fairly shown that: (a) the evidence is discovered after the trial; (b) such evidence
could not have been discovered and produced at the trial even with the exercise of reasonable diligence; (c) such evidence is
material, not merely cumulative, corroborative, or impeaching; and (d) such evidence is of such weight that it would probably
change the judgment if admitted.33

The first two requisites are not attendant. To start with, the proposed evidence was plainly not newly discovered considering
the petitioner s admission that its former Finance and Accounting Manager had misplaced the VAT official receipts. If that was
true, the misplaced receipts were forgotten evidence. And, secondly, the receipts, had they truly existed, could have been
sooner discovered and easily produced at the trial with the exercise of reasonable diligence. But the petitioner made no
convincing demonstration that it had exercised reasonable diligence. The Court cannot accept its tender of such receipts and
return now, for, indeed, the non-production of documents as vital and material as such receipts and return were to the success
of its claim for refund or tax credit was improbable, as it goes against the sound business practice of safekeeping relevant
documents precisely to ensure their future use to support an eventual substantial claim for refund or tax credit.

WHEREFORE, the Court DENIES the petition for review on certiorari for its lack of merit; AFFIRMS the decision dated May 5,
2009 of the Court of Tax Appeals En Bane; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.