GR No. 153866 CIR vs.

 Seagate
 
 
FACTS: Respondent is a resident foreign corporation duly registered with the
Securities and Exchange Commission to do business in the Philippines and is
registered with the Philippine Export Zone Authority (PEZA). The respondent is
Value Added Tax-registered entity and filed for the VAT returns. An administrative
claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition
for Review), was filed on 4 October 1999, but no final action has been received by
the respondent from the petitioner on the claim for VAT refund. CIR asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to the
VAT. Consequently, the capital goods and services respondent has purchased are
not considered used in the VAT business, and no VAT refund or credit is due.
 
ISSUE: Whether or not Seagate, a VAT-Registered PEZA Enterprise is entitled to
tax refund or credit.
HELD: Yes, Seagate is entitled to refund or credit. As a PEZA-registered enterprise
within a special economic zone, respondent is entitled to the fiscal incentives and
benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227 and 7844.
Respondent, which as an entity is exempt, is different from its transactions which
are not exempt. The end result, however, is that it is not subject to the VAT. The
non-taxability of transactions that are otherwise taxable is merely a necessary
incident to the tax exemption conferred by law upon it as an entity, not upon the
transactions themselves.
The petitioner’s assertion that the capital goods and services respondent has
purchased are not considered used in the VAT business, and thus no VAT refund or
credit is due is non sequitur. On this matter, the SC held that by the VAT’s very
nature as a tax on consumption, the capital goods and services respondent has
purchased are subject to the VAT, although at zero rate.
Seagate has complied with all the requisites for VAT refund or credit. First,
respondent is a VAT-registered entity. Second, the input taxes paid on the capital
goods of respondent are duly supported by VAT invoices and have not been offset
against any output taxes.
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is
considered as a separate customs territory. As such, respondent is exempt from all
internal revenue taxes, including the VAT, and regulations pertaining thereto. Its
sales transactions intended for export may not be exempt, but like its purchase
transactions, they are zero-rated. No prior application for the effective zero rating of
its transactions is necessary. Being VAT-registered and having satisfactorily
complied with all the requisites for claiming a tax refund of or credit for the input
VAT paid on capital goods purchased, respondent is entitled to such VAT refund or
credit.
Having determined that respondent’s purchase transactions are subject to a zero
VAT rate, the SC has determined that tax refund or credit is in order.

CONTEX CORPORATION vs. HON. COMMISSIONER OF INTERNAL REVENUE

[G.R. No. 151135, July 2, 2004]
Facts: Petitioner is a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital supplies for export.
It is duly registered with the Subic Bay Metropolitan Authority (SBMA) As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c) of Rep. Act No.
7227. Petitioner also registered with the BIR as a non-VAT taxpayer. Petitioner
purchased various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted unto petitioner the
10% VAT on the purchased items, which led the petitioner to pay input taxes in the
total amount of P1,108,307.72. Petitioner then filed two applications for tax refund
or tax credit of the VAT it paid. When no response was forthcoming, petitioner then
elevated the matter to the CTA. The BIR contended that since petitioner failed to
establish both its right to a tax refund or tax credit and its compliance with the rules
on tax refund as provided for in Sections 204 and 229 of the Tax Code, its claim
should be denied.
Q. Does the VAT exemption embodied in Rep. Act No. 7227 apply to petitioner as a
purchaser. Is Petitioner entitled to the tax refund on its purchases of supplies and
raw materials?
A. No. A VAT exemption means that the sale of goods or properties and/or services
and the use or lease of properties is not subject to VAT (output tax) and the seller is
not allowed any tax credit on VAT (input tax) previously paid. This is a case wherein
the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or
exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill
any output tax to his customers because the said transaction is not subject to VAT.
On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input tax on such
purchase despite the issuance of a VAT invoice or receipt.
On the other hand, Zero-rated Sales are sales by VAT-registered persons which are
subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A
zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases
of goods, properties or services related to such zero-rated sale shall be available as
tax credit or refund in accordance with these regulations.
The petitioner’s claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act
No. 7227, which basically exempts them from all national and local internal revenue
taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.
Petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT
taxpayer per Certificate of Registration issued by the BIR. As such, it is exempt
from VAT on all its sales and importations of goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies
and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-
Registered entities can claim Input VAT Credit/Refund. While it is true that the
petitioner should not have been liable for the VAT inadvertently passed on to it by
its supplier since such is a zero-rated sale on the part of the supplier, the petitioner
is not the proper party to claim such VAT refund. Since the transaction is deemed a
zero-rated sale because the sale was in favor of an ecozone firm, petitioner’s
supplier may claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.
2. No. The petitioner is registered as a NON-VAT taxpayer and thus, is exempt from
VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid. In fine, even if we are to assume that exemption from the burden of
VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit
or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
CIR v. CA and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION

Facts:

COMASERCO, a corporation duly organized under the laws of the Philippines, is

an affiliate of Philamlife, and is organized by the latter to perform collection,
consultative and other technical services, including functioning as internal auditor.

BIR issued an assessment to COMASERCO for deficiency VAT amounting to

351,851 for 1988.

COMASERCO’s annual corporate income tax return endiing Dec31 1988 indicaed a
net loss in its operations in the amount of 6,077.

COMASERCO filed with the CTRA a PFR contesting the Commissioner’s

assessment. It asserted that the services its rendered to Philamlife and its affiliates,
relating to collections, consultative and other technical assistance, including
functioning as internal auditor, were on a “no-profit, reimbursement-of-cost only”
basis. it averred that it was not engaged in the business of providing services to
Philamlife and its affiliate. comaserco was established to ensure operational
orderliness and admin efficiency of Philamlife and its affiliates, and not in the sale of
services. comaserco stressed that it was not profit-motivated, thus not engaged in
business. In fact, it did not generate profit but a suffered a net loss. Since it was not
engaged in business, comaserco averred that it was not liable to pay VAT.

CTA decided in favor of CIR wit h slight modifications. CIR filed with the CA a PFR
of the said decision.

CA reversed the CTA decision upholding that, in one case involving the same
parties ,COMASERCO was not liable to pay fixed and contractor’s tax for services
rendered to philamlife and its affiliates, therefore since it was not engaged in
business of proving services to philamlife and its affiliates, it was not liable to pay
VAT.

Issue:
Whether or not COMASERCO was engaged in the sale of services, and thus liable
to pay VAT thereon.

Ruling:
No.

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

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive

Order (E. O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. — Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who, imports goods shall be subject to the value-
added tax (VAT) imposed in Sections 100 to 102 of this Code.

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

We disagree.

Contrary to COMASERCO's contention the above provision clarifies that even a

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

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

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

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

receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides service for a fee, remuneration
or consideration, then the service rendered is subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes
that allow exemptions are construed strictly against the grantee and liberally in
favor of the government. Otherwise stated, any exemption from the payment of a
tax must be clearly stated in the language of the law; it cannot be merely implied
therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates
the transactions exempted from VAT. The services rendered by COMASERCO do
not fall within the exemptions.