FIRST DIVISION
COMASERCO averred that
[G.R. No. 125355. March 30, 2000]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. COURT OF APPEALS
and COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION, respondents. Court
DECISION
PARDO, J.:
What is before the Court is a petition for review
on certiorari of the decision of the Court of Appeals,
[1]
reversing that of the Court of Tax Appeals,[2] which
affirmed with modification the decision of the
Commissioner of Internal Revenue ruling that
Commonwealth Management and Services
Corporation, is liable for value added tax for services
to clients during taxable year 1988.
Commonwealth Management and Services
Corporation (COMASERCO, for brevity), is a
corporation duly organized and existing under the
laws of the Philippines. It is an affiliate of Philippine
American Life Insurance Co. (Philamlife), organized
by the letter to perform collection, consultative and
other technical services, including functioning as an
internal auditor, of Philamlife and its other affiliates.
On January 24, 1992, the Bureau of Internal Revenue
(BIR) issued an assessment to private respondent
COMASERCO for deficiency value-added tax (VAT)
amounting to P351,851.01, for taxable year 1988,
computed as follows:
"Taxable
sale/receipt P1,679,155.00
10% tax due thereon 167,915.50 in taxable year 1988.
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late
payment 16,000.00
TOTAL AMOUNT DUE AND
COLLECTIBLE P 351,831.01"[3]
COMASERCO's annual corporate income tax return
ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00. J lexj
On February 10, 1992, COMASERCO filed with the
BIR, a letter-protest objecting to the latter's finding of
deficiency VAT. On August 20, 1992, the
Commissioner of Internal Revenue sent a collection
letter to COMASERCO demanding payment of the
deficiency VAT.
On September 29,1992, COMASERCO filed with the
Court of Tax Appeals[4] a petition for review
contesting the Commissioner's assessment.
COMASERCO asserted that the services it rendered
to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including
functioning as an internal auditor, were on a "no-
profit, reimbursement-of-cost-only" basis. It averred
that it was not engaged id the business of providing
services to Philamlife and its affiliates.
COMASERCO was established to ensure operational
orderliness and administrative efficiency of
Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In
fact, it did not generate profit but suffered a net loss
since it was not engaged in business, it was not liable
to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered
decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:
"WHEREFORE, the decision of the
Commissioner of Internal Revenue
assessing petitioner deficiency
value-added tax for the taxable year
1988 is AFFIRMED with slight
modifications. Accordingly,
petitioner is ordered to pay
respondent Commissioner of
Internal Revenue the amount of
P335,831.01 inclusive of the 25%
surcharge and interest plus 20%
interest from January 24, 1992 until
fully paid pursuant to Section 248
and 249 of the Tax Code.
"The compromise penalty of
P16,000.00 imposed by the
respondent in her assessment letter
shall not be included in the
payment as there was no
compromise agreement entered into
between petitioner and respondent
with respect to the value-added tax
deficiency."[5]
On July 26, 1995, respondent filed with the Court of
Appeals, petition for review of the decision of the
Court of Appeals.
After due proceedings, on May 13, 1996, the Court of
Appeals rendered decision reversing that of the Court
of Tax Appeals, the dispositive portion of which
reads: Lexj uris
"WHEREFORE, in view of the
foregoing, judgment is hereby
rendered REVERSING and
SETTING ASIDE the questioned
Decision promulgated on 22 June
1995. The assessment for
deficiency value-added tax for the
taxable year 1988 inclusive of
surcharge, interest and penalty
charges are ordered CANCELLED
for lack of legal and factual
basis."[6]
The Court of Appeals anchored its decision on the
ratiocination in another tax case involving the same
parties,[7] where it was held that COMASERCO was
not liable to pay fixed and contractor's tax for
services rendered to Philamlife and its affiliates. The
Court of Appeals, in that case, reasoned that
COMASERCO was not engaged in business of
providing services to Philamlife and its affiliates. In
the same manner, the Court of Appeals held that
COMASERCO was not liable to pay VAT for it was
not engaged in the business of selling services.
On July 16, 1996, the Commissioner of Internal
Revenue filed with this Court a petition for review on
certiorari assailing the decision of the Court of
Appeals.
On August 7, 1996, we required respondent
COMASERCO to file comment on the petition, and
on September 26, 1996, COMASERCO complied
with the resolution.[8]
We give due course to the petition.
At issue in this case is whether COMASERCO was
engaged in the sale of services, and thus liable to pay
VAT thereon.
Petitioner avers that to "engage in business" and to
"engage in the sale of services" are two different
things. Petitioner maintains that the services rendered
by COMASERCO to Philamlife and its affiliates, for
a fee or consideration, are subject to VAT. VAT is a
tax on the value added by the performance of the
service. It is immaterial whether profit is derived
from rendering the service. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of
1986, as amended by Executive Order (E.O.) No. 273
in 1988, provides that:
"Section 99. Persons liable. - Any
person who, in the course of trade
or business, sells, barters or
exchanges goods, renders services,
or engages in similar transactions
and any person who imports goods
shall be subject to the value-added
tax (VAT) imposed in Sections 100
to 102 of this Code."[9]
COMASERCO contends that the term "in the course
of trade or business" requires that the "business" is
carried on with a view to profit or livelihood. It avers
that the activities of the entity must be profit-
oriented. COMASERCO submits that it is not
motivated by profit, as defined by its primary purpose
in the articles of incorporation, stating that it is
operating "only on reimbursement-of-cost basis,
without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax
for purposes of determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act
No. 7716, the Expanded VAT Law (EVAT), amending
among other sections, Section 99 of the Tax Code.
On January 1, 1998, Republic Act 8424, the National
Internal Revenue Code of 1997, took effect. The
amended law provides that:
"SEC. 105. Persons Liable. - Any
person who, in the course of trade
or business, sells, barters,
exchanges, leases goods or
properties, renders services, and
any person who imports goods
shall be subject to the value-added
tax (VAT) imposed in Sections 106
and 108 of this Code.
"The value-added tax is an indirect
tax and the amount of tax may be
shifted or passed on to the buyer,
transferee or lessee of the goods,
properties or services. This rule
shall likewise apply to existing sale
or lease of goods, properties or
services at the time of the
effectivity of Republic Act
No.7716.
"The phrase "in the course of trade
or business" means the regular
conduct or pursuit of a commercial
or an economic activity, including
transactions incidental thereto, by
any person regardless of whether or
not the person engaged therein is a
nonstock, nonprofit organization
(irrespective of the disposition of
its net income and whether or not it
 sells exclusively to members of
their guests), or government
entity. Jjj uris
"The rule of regularity, to the
contrary notwithstanding, services
as defined in this Code rendered in
the Philippines by nonresident
foreign persons shall be considered
as being rendered in the course of
trade or business."
Contrary to COMASERCO's contention the above
provision clarifies that even a non-stock, non-
profit, organization or government entity, is liable to
pay VAT on the sale of goods or services. VAT is a
tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of
goods or property, and on the performance of
services, even in the absence of profit attributable
thereto. The term "in the course of trade or business"
requires the regular conduct or pursuit of a
commercial or an economic activity, regardless of
whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or
business" incorporated in the present law applies to
all transactions even to those made prior to its
enactment. Executive Order No. 273 stated that any
person who, in the course of trade or business, sells,
barters or exchanges goods and services, was already
liable to pay VAT. The present law merely stresses
that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of
goods and services.
Section 108 of the National Internal Revenue Code of
1997[10] defines the phrase "sale of services" as the
"performance of all kinds of services for others for a
fee, remuneration or consideration." It includes "the
supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or
commercial undertaking or project."[11]
On February 5, 1998, the Commissioner of Internal
Revenue issued BIR Ruling No. 010-
98[12] emphasizing that a domestic corporation that
provided technical, research, management and
technical assistance to its affiliated companies and
received payments on a reimbursement-of-cost basis,
without any intention of realizing profit, was subject
to VAT on services rendered. In fact, even if such
corporation was organized without any intention of
realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to
income tax. lex
Hence, it is immaterial whether the primary purpose
of a corporation indicates that it receives payments
for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing
profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then
the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the
lifeblood of the nation, statutes that allow exemptions
are construed strictly against the grantee and liberally
in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly
stated in the language of the law; it cannot be merely
implied therefrom.[13] In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the
Court of Tax Appeals correctly ruled that the services
rendered by COMASERCO to Philamlife and its
affiliates are subject to VAT. As pointed out by the
Commissioner, the performance of all kinds of
services for others for a fee, remuneration or
consideration is considered as sale of services subject
to VAT. As the government agency charged with the
enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of
any showing that it is plainly wrong, is entitled to
great weight.[14] Also, it has been the long standing
policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the
Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily
developed an expertise on the subject, unless there
has been an abuse or improvident exercise of its
authority.[15]
There is no merit to respondent's contention that the
Court of Appeals' decision in CA-G. R. No. 34042,
declaring the COMASERCO as not engaged in
business and not liable for the payment of fixed and
percentage taxes, binds petitioner. The issue in CA-G.
R. No. 34042 is different from the present case,
which involves COMASERCO's liability for VAT. As
heretofore stated, every person who sells, barters, or
exchanges goods and services, in the course of trade
or business, as defined by law, is subject to
VAT. Jksm
WHEREFORE, the Court GRANTS the petition and
REVERSES the decision of the Court of Appeals in
CA-G. R. SP No. 37930. The Court hereby
REINSTATES the decision of the Court of Tax
Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 146984 July 28, 2006
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG
NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale
by the National Development Company (NDC) of
five (5) of its vessels to the private respondents is
subject to value-added tax (VAT) under the National
Internal Revenue Code of 1986 (Tax Code) then
prevailing at the time of the sale. The Court of Tax
Appeals (CTA) and the Court of Appeals commonly
ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that
utilized by the rulings under review. The fact that the
sale was not in the course of the trade or business of
NDC is sufficient in itself to declare the sale as
outside the coverage of VAT.
The facts are culled primarily from the ruling of the
CTA.
Pursuant to a government program of privatization,
NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships,
which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels.1 The vessels were constructed for the
NDC between 1981 and 1984, then initially leased to
Luzon Stevedoring Company, also its wholly-owned
subsidiary. Subsequently, the vessels were transferred
and leased, on a bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for
public bidding. Among the stipulated terms and
conditions for the public auction was that the winning
bidder was to pay "a value added tax of 10% on the
value of the vessels."3On 3 June 1988, private
respondent Magsaysay Lines, Inc. (Magsaysay Lines)
offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company
still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden
Group based in Hongkong (collectively, private
respondents).4 The bid was approved by the
Committee on Privatization, and a Notice of Award
dated 1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of
Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM
Limited, on the other. Paragraph 11.02 of the contract
stipulated that "[v]alue-added tax, if any, shall be for
the account of the PURCHASER."5 Per arrangement,
an irrevocable confirmed Letter of Credit previously
filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this time,
a formal request for a ruling on whether or not the
sale of the vessels was subject to VAT had already
been filed with the Bureau of Internal Revenue (BIR)
by the law firm of Sycip Salazar Hernandez &
Gatmaitan, presumably in behalf of private
respondents. Thus, the parties agreed that should no
favorable ruling be received from the BIR, NDC was
authorized to draw on the Letter of Credit upon
written demand the amount needed for the payment
of the VAT on the stipulated due date, 20 December
1988.6
In January of 1989, private respondents through
counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale
of the vessels was subject to the 10% VAT. The ruling
cited the fact that NDC was a VAT-registered
enterprise, and thus its "transactions incident to its
normal VAT registered activity of leasing out
personal property including sale of its own assets that
are movable, tangible objects which are appropriable
or transferable are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of
VAT Ruling No. 568-88, as well as VAT Ruling No.
395-88 (dated 18 August 1988), which made a similar
ruling on the sale of the same vessels in response to
an inquiry from the Chairman of the Senate Blue
Ribbon Committee. Their motion was denied when
the BIR issued VAT Ruling Nos. 007-89 dated 24
February 1989, reiterating the earlier VAT rulings. At
this point, NDC drew on the Letter of Credit to pay
for the VAT, and the amount of P15,120,000.00 in
taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an
Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review on
14 July 1989. They prayed for the reversal of VAT
Rulings No. 395-88, 568-88 and 007-89, as well as
the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal
Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in
interest as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then Tax
Code. The CIR also squarely defended the VAT
rulings holding the sale of the vessels liable for VAT,
especially citing Section 3 of Revenue Regulation
No. 5-87 (R.R. No. 5-87), which provided that
"[VAT] is imposed on any sale or transactions
deemed sale of taxable goods (including capital
goods, irrespective of the date of acquisition)." The
CIR argued that the sale of the vessels were among
those transactions "deemed sale," as enumerated in
Section 4 of R.R. No. 5-87. It seems that the CIR
particularly emphasized Section 4(E)(i) of the
Regulation, which classified "change of ownership of
business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected
the CIRs arguments and granted the petition.9 The
CTA ruled that the sale of a vessel was an "isolated
transaction," not done in the ordinary course of
NDCs business, and was thus not subject to VAT,
which under Section 99 of the Tax Code, was applied
only to sales in the course of trade or business. The
CTA further held that the sale of the vessels could not
be "deemed sale," and thus subject to VAT, as the
transaction did not fall under the enumeration of
transactions deemed sale as listed either in Section
100(b) of the Tax Code, or Section 4 of R.R. No. 5-
87. Finally, the CTA ruled that any case of doubt
should be resolved in favor of private respondents
since Section 99 of the Tax Code which implemented
VAT is not an exemption provision, but a
classification provision which warranted the
resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of
Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate
court agreed that the sale was an isolated transaction,
not made in the course of NDCs regular trade or
business, it nonetheless found that the transaction fell
within the classification of those "deemed sale" under
R.R. No. 5-87, since the sale of the vessels together
with the NMC shares brought about a change of
ownership in NMC. The Court of Appeals also
applied the principle governing tax exemptions that
such should be strictly construed against the taxpayer,
and liberally in favor of the government.12
However, the Court of Appeals reversed itself upon
reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled
that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a
consequence of the "retirement from or cessation of
business" by the owner of the goods, as provided for
in Section 100 of the Tax Code. The Court of Appeals
also agreed with the CTA that the classification of
transactions "deemed sale" was a classification
statute, and not an exemption statute, thus warranting
the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the
present petition have already been adequately
discussed and refuted in the rulings assailed before
us. Evidently, the petition should be denied. Yet the
Court finds that Section 99 of the Tax Code is
sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the
lower courts on the applicability of Section 100 of the
Tax Code and Section 4 of R.R. No. 5-87 are
ultimately irrelevant.
A brief reiteration of the basic principles governing
VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many
levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or
services which ultimately shoulders the tax, as the
liability therefrom is passed on to the end users by
the providers of these goods or services16 who in turn
may credit their own VAT liability (or input VAT)
from the VAT payments they receive from the final
consumer (or output VAT).17 The final purchase by
the end consumer represents the final link in a
production chain that itself involves several
transactions and several acts of consumption. The
VAT system assures fiscal adequacy through the
collection of taxes on every level of
consumption,18 yet assuages the manufacturers or
providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next
link of the chain until finally the end consumer
shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every
transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section 99
of the Tax Code and its subsequent incarnations,19 the
tax is levied only on the sale, barter or exchange of
goods or services by persons who engage in such
activities, in the course of trade or business. These
transactions outside the course of trade or business
may invariably contribute to the production chain,
but they do so only as a matter of accident or
incident. As the sales of goods or services do not
occur within the course of trade or business, the
providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any
VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT
arises in the first place only through the ordinary
course of trade or business.
That the sale of the vessels was not in the ordinary
course of trade or business of NDC was appreciated
by both the CTA and the Court of Appeals, the latter
doing so even in its first decision which it eventually
reconsidered.20We cite with approval the CTAs
explanation on this point:
In Imperial v. Collector of Internal
Revenue, G.R. No. L-7924, September 30,
1955 (97 Phil. 992), the term "carrying on
business" does not mean the performance of
a single disconnected act, but means
conducting, prosecuting and continuing
business by performing progressively all the
acts normally incident thereof; while "doing
business" conveys the idea of business
being done, not from time to time, but all the
time. [J. Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)].
"Course of business" is what is usually
done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So.
761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].
What is clear therefore, based on the
aforecited jurisprudence, is that "course of
business" or "doing business" connotes
regularity of activity. In the instant case, the
sale was an isolated transaction. The sale
which was involuntary and made pursuant to
the declared policy of Government for
privatization could no longer be repeated or
carried on with regularity. It should be
emphasized that the normal VAT-registered
activity of NDC is leasing personal
property.21
This finding is confirmed by the Revised Charter22 of
the NDC which bears no indication that the NDC was
created for the primary purpose of selling real
property.23
The conclusion that the sale was not in the course of
trade or business, which the CIR does not dispute
before this Court,24 should have definitively settled
the matter. Any sale, barter or exchange of goods or
services not in the course of trade or business is not
subject to VAT.
Section 100 of the Tax Code, which is implemented
by Section 4(E)(i) of R.R. No. 5-87 now relied upon
by the CIR, is captioned "Value-added tax on sale of
goods," and it expressly states that "[t]here shall be
levied, assessed and collected on every sale, barter or
exchange of goods, a value added tax x x x." Section
100 should be read in light of Section 99, which lays
down the general rule on which persons are liable for
VAT in the first place and on what transaction if at
all. It may even be noted that Section 99 is the very
first provision in Title IV of the Tax Code, the Title
that covers VAT in the law. Before any portion of
Section 100, or the rest of the law for that matter,
may be applied in order to subject a transaction to
VAT, it must first be satisfied that the taxpayer and
transaction involved is liable for VAT in the first
place under Section 99.
It would have been a different matter if Section 100
purported to define the phrase "in the course of trade
or business" as expressed in Section 99. If that were
so, reference to Section 100 would have been
necessary as a means of ascertaining whether the sale
of the vessels was "in the course of trade or
business," and thus subject to
VAT. But that is not the case. What Section 100 and
Section 4(E)(i) of R.R. No. 5-87 elaborate on is not
the meaning of "in the course of trade or business,"
but instead the identification of the transactions
which may be deemed as sale. It would become
necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only
if it is settled that the transaction occurred in the
course of trade or business in the first place. If the
transaction transpired outside the course of trade or
business, it would be irrelevant for the purpose of
determining VAT liability whether the transaction
may be deemed sale, since it anyway is not subject to
VAT.
Accordingly, the Court rules that given the
undisputed finding that the transaction in question
was not made in the course of trade or business of the
seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter
how the said sale may hew to those transactions
deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R.
No. 5-87 were to find application in this case, the
Court finds the discussions offered on this point by
the CTA and the Court of Appeals (in its subsequent
Resolution) essentially correct. Section 4 (E)(i) of
R.R. No. 5-87 does classify as among the transactions
deemed sale those involving "change of ownership of
business." However, Section 4(E) of R.R. No. 5-87,
reflecting Section 100 of the Tax Code, clarifies that
such "change of ownership" is only an attending
circumstance to "retirement from or cessation of
business[, ] with respect to all goods on hand [as] of
the date of such retirement or cessation."25Indeed,
Section 4(E) of R.R. No. 5-87 expressly characterizes
the "change of ownership of business" as only a
"circumstance" that attends those transactions
"deemed sale," which are otherwise stated in the
same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
 SECOND DIVISION resources, and the sale or marketing thereof to gold. It then filed applications for tax refunds/credits
COMMISSIONER OF G.R. Nos. 134587 & 134588 various entities.[4] Respondent is a value added tax corresponding to input VAT for the
INTERNAL REVENUE, (VAT) registered enterprise.[5] amounts[13] of P46,177,861.12,[14]
Petitioner, Present: P19,218,738.44,[15] and P84,909,247.96.[16] Responde
nts applications were either unacted upon or
PUNO, J., expressly disallowed by petitioner.[17] In addition,
Chairman, petitioner issued a deficiency assessment against
- versus - AUSTRIA-MARTINEZ, respondent when, after applying respondents
CALLEJO, SR., creditable input VAT costs against the retroactive
TINGA, and 10% VAT levy, there resulted a balance of excess
CHICO- The transactions in question occurred during output VAT.[18]
NAZARIO, JJ. the period between 1988 and 1991. Under Sec. 99 of
BENGUET CORPORATION, the National Internal Revenue Code (NIRC),[6] as The express disallowance of respondents
Respondent. amended by Executive Order (E.O.) No. 273 s. 1987, application for refunds/credits and the issuance of
P then in effect, any person who, in the course of trade deficiency assessments against it were based on a
romulga or business, sells, barters or exchanges goods, renders BIR rulingBIR VAT Ruling No. 008-92 dated 23
ted: services, or engages in similar transactions and any January 1992that was issued subsequent to the
July 8, 2005 person who imports goods is liable for output VAT at consummation of the subject sales of gold to the
x--------------------------------------------------------------- rates of either 10% or 0% (zero-rated) depending on Central Bank which provides that sales of gold to the
----x the classification of the transaction under Sec. 100 of Central Bank shall not be considered as export sales
the NIRC. Persons registered under the VAT and thus, shall be subject to 10% VAT. In addition,
DECISION system[7] are allowed to recognize input VAT, or the BIR VAT Ruling No. 008-92 withdrew, modified, and
VAT due from or paid by it in the course of its trade superseded all inconsistent BIR issuances. The
TINGA, J.: or business on importation of goods or local relevant portions of the ruling provides, thus:
purchases of goods or service, including lease or use
This is a petition for the review of a of properties, from a VAT-registered person.[8] 1. In general, for purposes of the
consolidated Decision of the Former Fourteenth term export sales only direct export
Division of the Court of Appeals[1] ordering the In January of 1988, respondent applied for sales and foreign currency
Commissioner of Internal Revenue to award tax and was granted by the BIR zero-rated status on its denominated sales, shall be
credits to Benguet Corporation in the amount sale of gold to Central Bank.[9] On 28 August 1988, qualified for zero-rating.
corresponding to the input value added taxes that the Deputy Commissioner of Internal Revenue Eufracio
latter had incurred in relation to its sale of gold to the D. Santos issued VAT Ruling No. 3788-88, which ....
Central Bank during the period of 01 August 1989 to declared that [t]he sale of gold to Central Bank is
31 July 1991. considered as export sale subject to zero-rate 4. Local sales of goods, which by
pursuant to Section 100[[10]] of the Tax Code, as fiction of law are considered export
Petitioner is the Commissioner of Internal amended by Executive Order No. 273. The BIR came sales (e.g., the Export Duty Law
Revenue (petitioner) acting in his official capacity as out with at least six (6) other issuances [11] reiterating considers sales of gold to the
head of the Bureau of Internal Revenue (BIR), an the zero-rating of sale of gold to the Central Bank, Central Bank of the Philippines, as
attached agency of the Department of Finance,[2] with the latest of which is VAT Ruling No. 036-90 dated export sale). This transaction shall
the authority, inter alia, to determine claims for 14 February 1990.[12] not be considered as export sale for
[3]
refunds or tax credits as provided by law. VAT purposes.
Relying on its zero-rated status and the
Respondent Benguet Corporation above issuances, respondent sold gold to the Central ....
(respondent) is a domestic corporation organized and Bank during the period of 1 August 1989 to 31 July [A]ll Orders and Memoranda
existing by virtue of Philippine laws, engaged in the 1991 and entered into transactions that resulted in issued by this Office inconsistent
exploration, development and operation of mineral input VAT incurred in relation to the subject sales of herewith are considered withdrawn,
 modified or superseded. (Emphasis
supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28
April 1992 and Revenue Memorandum Order No.
22-92 which decreed that the revocation of VAT
Ruling No. 3788-88 by VAT Ruling No. 008-92
would not unduly prejudice mining companies and,
thus, could be applied retroactively.[19]
Respondent filed three separate petitions for
review with the Court of Tax Appeals (CTA),
docketed as CTA Case No. 4945, CTA Case No.
4627, and the consolidated cases of CTA Case Nos.
4686 and 4829.
In the three cases, respondent argued that a
retroactive application of BIR VAT Ruling No. 008-
92 would violate Sec. 246 of the NIRC, which
mandates the non-retroactivity of rulings or circulars
issued by the Commissioner of Internal Revenue that
would operate to prejudice the taxpayer. Respondent
then discussed in detail the manner and extent by
which it was prejudiced by this retroactive
application.[20] Petitioner on the other hand,
maintained that BIR VAT Ruling No. 008-92 is,
firstly, not void and entitled to great respect, having
been issued by the body charged with the duty of
administering the VAT law, and secondly, it may
validly be given retroactive effect since it was not
prejudicial to respondent.
In three separate decisions,[21] the CTA
dismissed respondents respective petitions. It held,
with Presiding Judge Ernesto D. Acosta dissenting,
that no prejudice had befallen respondent by virtue of
the retroactive application of BIR VAT Ruling No.
008-92, and that, consequently, the application did
not violate Sec. 246 of the NIRC.[22]
The CTA decisions were appealed by
respondent to the Court of Appeals. The cases were
docketed therein as CA-G.R. SP Nos. 37205, 38958,
and 39435, and thereafter consolidated. The Court of
Appeals, after evaluating the arguments of the
parties, rendered the questioned Decision reversing
the Court of Tax Appeals insofar as the latter had
ruled that BIR VAT Ruling No. 008-92 did not
prejudice the respondent and that the same could be
given retroactive effect.
In its Decision, the appellate court held that
respondent suffered financial damage equivalent to
the sum of the disapproved claims. It stated that had
respondent known that such sales were subject to
10% VAT, which rate was not the prevailing rate at
the time of the transactions, respondent would have
passed on the cost of the input taxes to the Central
Bank. It also ruled that the remedies which the CTA
supposed would eliminate any resultant prejudice to
respondent were not sufficient palliatives as the
monetary values provided in the supposed remedies
do not approximate the monetary values of the tax
credits that respondent lost after the implementation
of the VAT ruling in question. It cited
Manila Mining Corporation v. Commissioner of
Internal Revenue,[23] in which the Court of Appeals
held[24] that BIR VAT Ruling No. 008-92 cannot be
given retroactive effect. Lastly, the Court of Appeals
observed that R.A. 7716, the The New Expanded
VAT Law, reveals the intent of the lawmakers with
regard to the treatment of sale of gold to the Central
Bank since the amended version therein of Sec. 100
of the NIRC expressly provides that the sale of gold
to the Bangko Sentral ng Pilipinas is an export sale
subject to 0% VAT rate. The appellate court thus
allowed respondents claims, decreeing in its
dispositive portion, viz:
WHEREFORE, the appealed
decision is hereby REVERSED. The
respondent Commissioner of Internal
Revenue is ordered to award the
following tax credits to petitioner.
1) In CA-G.R. SP No.
37209 P49,611,914.00
2) in CA-G.R. SP No. 38958
- P19,218,738.44
3) in CA-G.R. SP No. 39435
- P84,909,247.96[25]
Dissatisfied with the above ruling, petitioner
filed the instant Petition for Review questioning the
determination of the Court of Appeals that the
retroactive application of the subject issuance was
prejudicial to respondent and could not be applied
retroactively.
Apart from the central issue on the validity
of the retroactive application of VAT Ruling No. 008-
92, the question of the validity of the issuance itself
has been touched upon in the pleadings, including a
reference made by respondent to a Court of
Appeals Decision holding that the VAT Ruling had no
legal basis.[26] For its part, as the party that raised this
issue, petitioner spiritedly defends the validity of the
issuance.[27]Effectively, however, the question is a
non-issue and delving into it would be a needless
exercise for, as respondent emphatically pointed out
in its Comment, unlike petitioners formulation of the
issues, the only real issue in this case is whether VAT
Ruling No. 008-92 which revoked previous rulings of
the petitioner which respondent heavily relied
upon . . . may be legally applied retroactively to
respondent.[28] This Court need not invalidate the BIR
issuances, which have the force and effect of law,
unless the issue of validity is so crucially at the heart
of the controversy that the Court cannot resolve the
case without having to strike down the issuances.
Clearly, whether the subject VAT ruling may validly
be given retrospective effect is the lis mota in the
case. Put in another but specific fashion, the sole
issue to be addressed is whether respondents sale of
gold to the Central Bank during the period when such
was classified by BIR issuances as zero-rated could
be taxed validly at a 10% rate after the consummation
of the transactions involved.
In a long line of cases, [29] this Court has
affirmed that the rulings, circular, rules and
regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive
application if to so apply them would be prejudicial
to the taxpayers. In fact, both petitioner [30] and
respondent[31] agree that the retroactive application of
VAT Ruling No. 008-92 is valid only if such
application would not be prejudicial to the respondent
pursuant to the explicit mandate under Sec. 246 of
the NIRC, thus:
Sec. 246. Non-
retroactivity of rulings.- Any
revocation, modification or reversal
of any of the rules and
regulations promulgated in
accordance with the preceding
Section or any of the rulings or
circulars promulgated by the
Commissioner shall not be given
retroactive application if the
revocation, modification or reversal
will be prejudicial to the
taxpayers except in the following
cases: (a) where the taxpayer
deliberately misstates or omits
material facts from his return on
any document required of him by
the Bureau of Internal Revenue; (b)
where the facts subsequently
gathered by the Bureau of Internal
Revenue are materially different
form the facts on which the ruling
is based; or (c) where the taxpayer
acted in bad faith. (Emphasis
supplied)
In that regard, petitioner submits that
respondent would not be prejudiced by a retroactive
application; respondent maintains the contrary.
Consequently, the determination of the issue of
retroactivity hinges on whether respondent would
suffer prejudice from the retroactive application of
VAT Ruling No. 008-92.
We agree with the Court of Appeals and the
respondent.
To begin with, the determination of whether
respondent had suffered prejudice is a factual issue. It
is an established rule that in the exercise of its power
of review, the Supreme Court is not a trier of facts.
Moreover, in the exercise of the Supreme Courts
power of review, the findings of facts of the Court of
Appeals are conclusive and binding on the Supreme
Court.[32] An exception to this rule is when the
findings of fact a quo are conflicting,[33] as is in this
case.
VAT is a percentage tax imposed at every
stage of the distribution process on the sale, barter,
exchange or lease of goods or properties and
rendition of services in the course of trade or
business, or the importation of goods.[34] It is an
indirect tax, which may be shifted to the buyer,
transferee, or lessee of the goods, properties, or
services.[35] However, the party directly liable for the
payment of the tax is the seller.[36]
In transactions taxed at a 10% rate, when at
the end of any given taxable quarter the output VAT
exceeds the input VAT, the excess shall be paid to the
government; when the input VAT exceeds the output
VAT, the excess would be carried over to VAT
liabilities for the succeeding quarter or quarters.
[37]
On the other hand, transactions which are taxed at
zero-rate do not result in any output tax. Input VAT
attributable to zero-rated sales could be refunded or
credited against other internal revenue taxes at the
option of the taxpayer.[38]
To illustrate, in a zero-rated transaction,
when a VAT-registered person (taxpayer) purchases
materials from his supplier at P80.00,P7.30[39] of
which was passed on to him by his supplier as the
latters 10% output VAT, the taxpayer is allowed to
recover P7.30 from the BIR, in addition to other input
VAT he had incurred in relation to the zero-rated
transaction, through tax credits or refunds. When the
taxpayer sells his finished product in a zero-rated
transaction, say, for P110.00, he is not required to pay
any output VAT thereon. In the case of a transaction
subject to 10% VAT, the taxpayer is allowed to
recover both the input VAT of P7.30 which he paid to
his supplier and his output VAT of P2.70 (10%
the P30.00 value he has added to the P80.00 material)
by passing on both costs to the buyer. Thus, the buyer
pays the total 10% VAT cost, in this case P10.00 on
the product.
In both situations, the taxpayer has the
option not to carry any VAT cost because in the zero-
rated transaction, the taxpayer is allowed to recover
input tax from the BIR without need to pay output
tax, while in 10% rated VAT, the taxpayer is allowed
to pass on both input and output VAT to the buyer.
Thus, there is an elemental similarity between the
two types of VAT ratings in that the taxpayer has the
option not to take on any VAT payment for his
transactions by simply exercising his right to pass on
the VAT costs in the manner discussed above.
Proceeding from the foregoing, there
appears to be no upfront economic difference in
changing the sale of gold to the Central Bank from a
0% to 10% VAT rate provided that respondent would
be allowed the choice to pass on its VAT costs to the
Central Bank. In the instant case, the retroactive
application of VAT Ruling No. 008-92 unilaterally
forfeited or withdrew this option of respondent. The
adverse effect is that respondent became the
unexpected and unwilling debtor to the BIR of the
amount equivalent to the total VAT cost of its
product, a liability it previously could have recovered
from the BIR in a zero-rated scenario or at least
passed on to the Central Bank had it known it would
have been taxed at a 10% rate. Thus, it is clear that
respondent suffered economic prejudice when its
consummated sales of gold to the Central Bank were
taken out of the zero-rated category. The change in
the VAT rating of respondents transactions with the
Central Bank resulted in the twin loss of its
exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same
time subjected it to the 10% VAT sans the option to
pass on this cost to the Central Bank, with the total
prejudice in money terms being equivalent to the
10% VAT levied on its sales of gold to the Central
Bank.
Petitioner had made its position hopelessly
untenable by arguing that the deficiency 10% that
may be assessable will only be equal to 1/11thof the
amount billed to the [Central Bank] rather than 10%
thereof. In short, [respondent] may only be charged
based on the tax amount actually and technically
passed on to the [Central Bank] as part of the
invoiced price.[40] To the Court, the aforequoted
statement is a clear recognition that respondent would
suffer prejudice in the amount actually and
technically passed on to the [Central Bank] as part of
the invoiced price. In determining the prejudice
suffered by respondent, it matters little how the
amount charged against respondent is computed,
[41]
the point is that the amount (equal to 1/11th of the
amount billed to the Central Bank) was charged
against respondent, resulting in damage to the latter.
Petitioner posits that the retroactive
application of BIR VAT Ruling No. 008-92 is
stripped of any prejudicial effect when viewed in
relation to several available options to recoup
whatever liabilities respondent may have
incurred, i.e., respondents input VAT may still be
used (1) to offset its output VAT on the sales of gold
to the Central Bank or on its output VAT on other
sales subject to 10% VAT, and (2) as deductions on its
income tax under Sec. 29 of the Tax Code.[42]
On petitioners first suggested recoupment
modality, respondent counters that its other sales
subject to 10% VAT are so minimal that this mode is
of little value. Indeed, what use would a credit be
where there is nothing to set it off against? Moreover,
respondent points out that after having been imposed
with 10% VAT sans the opportunity to pass on the
same to the Central Bank, it was issued a deficiency
tax assessment because its input VAT tax credits were
not enough to offset the retroactive 10% output VAT.
The prejudice then experienced by respondent lies in
the fact that the tax refunds/credits that it expected to
receive had effectively disappeared by virtue of its
newfound output VAT liability against which
petitioner had offset the expected refund/credit.
Additionally, the prejudice to respondent would not
simply disappear, as petitioner claims, when a
liability (which liability was not there to begin with)
is imposed concurrently with an opportunity to
reduce, not totally eradicate, the newfound liability.
In sum, contrary to petitioners suggestion,
respondents net income still decreased corresponding
to the amount it expected as its refunds/credits and
the deficiency assessments against it, which when
summed up would be the total cost of the 10%
retroactive VAT levied on respondent.
Respondent claims to have incurred further
prejudice. In computing its income taxes for the
relevant years, the input VAT cost that respondent had
paid to its suppliers was not treated by respondent as
part of its cost of goods sold, which is deductible
from gross income for income tax purposes, but as an
asset which could be refunded or applied as payment
for other internal revenue taxes. In fact, Revenue
Regulation No. 5-87 (VAT Implementing Guidelines),
requires input VAT to be recorded not as part of the
cost of materials or inventory purchased but as a
separate entry called input taxes, which may then be
applied against output VAT, other internal revenue
taxes, or refunded as the case may be. [43] In being
denied the opportunity to deduct the input VAT from
its gross income, respondents net income was
overstated by the amount of its input VAT. This
overstatement was assessed tax at the 32% corporate
income tax rate, resulting in respondents
overpayment of income taxes in the corresponding
amount. Thus, respondent not only lost its right to
refund/ credit its input VAT and became liable for
deficiency VAT, it also overpaid its income tax in the
amount of 32% of its input VAT.
This leads us to the second recourse that
petitioner has suggested to offset any resulting
prejudice to respondent as a consequence of giving
retroactive effect to BIR VAT Ruling No. 008-92.
Petitioner submits that granting that respondent has
no other sale subject to 10% VAT against which its
input taxes may be used in payment, then respondent
is constituted as the final entity against which the
costs of the tax passes-onshall legally stop; hence, the
input taxes may be converted as costs available as
deduction for income tax purposes.[44]
Even assuming that the right to recover
respondents excess payment of income tax has not
yet prescribed, this relief would only address
respondents overpayment of income tax but not the
other burdens discussed above. Verily, this remedy is
not a feasible option for respondent because the very
reason why it was issued a deficiency tax assessment
is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having
to go through an unnecessary and cumbersome
refund process is prejudice enough. Moreover, there
is in fact nothing left to claim as a deduction from
income taxes.
From the foregoing it is clear that petitioners
suggested options by which prejudice would be
eliminated from a retroactive application of VAT
Ruling No. 008-92 are either simply inadequate or
grossly unrealistic.
At the time when the subject transactions
were consummated, the prevailing BIR regulations
relied upon by respondent ordained that gold sales to
the Central Bank were zero-rated. The BIR
interpreted Sec. 100 of the NIRC in relation to Sec. 2
of E.O. No. 581 s. 1980 which prescribed that gold
sold to the Central Bank shall be considered export
and therefore shall be subject to the export and
premium duties. In coming out with this
interpretation, the BIR also considered Sec. 169 of
Central Bank Circular No. 960 which states that all
sales of gold to the Central Bank are considered

constructive exports.[45] Respondent should not be
faulted for relying on the BIRs interpretation of the
said laws and regulations.[46] While it is true, as
petitioner alleges, that government is not estopped
from collecting taxes which remain unpaid on
account of the errors or mistakes of its agents and/or
officials and there could be no vested right arising
from an erroneous interpretation of law, these
principles must give way to exceptions based on and
in keeping with the interest of justice and fairplay, as
has been done in the instant matter. For, it is
primordial that every person must, in the exercise of
his rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.[47]
The case of ABS-CBN Broadcasting
Corporation v. Court of Tax Appeals[48] involved a
similar factual milieu. There the Commissioner of
Internal Revenue issued Memorandum Circular No.
4-71 revoking an earlier circular for being erroneous
for lack of legal basis. When the prior circular was
still in effect, petitioner therein relied on it and
consummated its transactions on the basis thereof.
We held, thus:
. . . .Petitioner was no longer in a
position to withhold taxes due from
foreign corporations because it had
already remitted all film rentals and
no longer had any control over
them when the new Circular was
issued. . . .
....
This Court is not unaware
of the well-entrenched principle
that the [g]overnment is never
estopped from collecting taxes
because of mistakes or errors on the
part of its agents. But, like other
principles of law, this also admits
of exceptions in the interest of
justice and fairplay. . . .In fact, in
the United States, . . . it has been
held that the Commissioner [of
Internal Revenue] is precluded
from adopting a position
inconsistent with one previously
taken where injustice would result
therefrom or where there has been a
misrepresentation to the taxpayer.
[49]
Respondent, in this case, has similarly been
put on the receiving end of a grossly unfair deal.
Before respondent was entitled to tax refunds or
credits based on petitioners own issuances. Then
suddenly, it found itself instead being made to pay
deficiency taxes with petitioners retroactive change
in the VAT categorization of respondents transactions
with the Central Bank. This is the sort of unjust
treatment of a taxpayer which the law in Sec. 246 of
the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of
merit. The Decision of the Court of Appeals is
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
EN BANC
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly
AASJAS) OFFICERS SAMSON S. ALCANTARA
and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY
EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF
FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P.
EJERCITO-ESTRADA, JINGGOY E. ESTRADA,
PANFILO M. LACSON, ALFREDO S. LIM,
JAMBY A.S. MADRIGAL, AND SERGIO R.
OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R.
ERMITA, CESAR V. PURISIMA, SECRETARY
OF FINANCE, GUILLERMO L. PARAYNO, JR.,
COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS,
INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS ASSOCIATION
represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE
PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO
doing business under the name and style of "ANB
NORTH SHELL SERVICE STATION"; LOURDES
MARTINEZ doing business under the name and style
of "SHELL GATE N. DOMINGO"; BETHZAIDA
TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P.
MONTOYA doing business under the name and style
of "NEW LAMUAN SHELL SERVICE STATION";
EFREN SOTTO doing business under the name and
style of "RED FIELD SHELL SERVICE STATION";
DONICA CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E. MARBIBI
doing business under the name and style of "R&R
PETRON STATION"; PETER M. UNGSON doing
business under the name and style of "CLASSIC
STAR GASOLINE SERVICE STATION"; MARIAN
SHEILA A. LEE doing business under the name and
style of "NTE GASOLINE & SERVICE STATION";
JULIAN CESAR P. POSADAS doing business under
the name and style of "STARCARGA
ENTERPRISES"; ADORACION MAEBO doing
business under the name and style of "CMA
MOTORISTS CENTER"; SUSAN M. ENTRATA
doing business under the name and style of
"LEONAS GASOLINE STATION and SERVICE
CENTER"; CARMELITA BALDONADO doing
business under the name and style of "FIRST
CHOICE SERVICE CENTER"; MERCEDITAS A.
GARCIA doing business under the name and style of
"LORPED SERVICE CENTER"; RHEAMAR A.
RAMOS doing business under the name and style of
"RJRAM PTT GAS STATION"; MA. ISABEL
VIOLAGO doing business under the name and style
of "VIOLAGO-PTT SERVICE CENTER";
MOTORISTS HEART CORPORATION represented
by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President
for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE
STANDARD OIL CORPORATION represented by
its Vice-President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing business
under the name and style of "ROMMAN
GASOLINE STATION"; ANTHONY ALBERT
CRUZ III doing business under the name and style of
"TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as
Secretary of the Department of Finance and
GUILLERMO L. PARAYNO, JR., in his capacity
as Commissioner of Internal Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT
CRISOLOGO, EMMANUEL JOEL J.
VILLANUEVA, RODOLFO G. PLAZA, DARLENE
ANTONINO-CUSTODIO, OSCAR G.
MALAPITAN, BENJAMIN C. AGARAO, JR.
JUAN EDGARDO M. ANGARA, JUSTIN MARC
SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S.
HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY
ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as
Secretary of Finance, GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner
of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive
Secretary, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA,
JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the
Executive Secretary; HON. MARGARITO TEVES,
in his capacity as Secretary of Finance; HON. JOSE
MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue;
and HON. ALEXANDER AREVALO, in his capacity
as the OIC Commissioner of the Bureau of Customs,
Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object
the interest of all, should be borne by everyone, and
the more man enjoys the advantages of society, the
more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation,
inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage
for full value-added tax benefits these are the
reasons why Republic Act No. 9337 (R.A. No.
9337)1 was enacted. Reasons, the wisdom of which,
the Court even with its extensive constitutional power
of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the
law, but also perceived constitutional infirmities in its
passage.
Every law enjoys in its favor the presumption of
constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity
of the law. Hence, R.A. No. 9337 is not
unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative
bills namely, House Bill Nos. 3555 and 3705, and
Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading
on January 7, 2005. The House Committee on Ways
and Means approved the bill, in substitution of House
Bill No. 1468, which Representative (Rep.) Eric D.
Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate
enactment. On January 27, 2005, the House of
Representatives approved the bill on second and third
reading.
House Bill No. 37053 on the other hand, substituted
House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by
Rep. Jacinto V. Paras. Its "mother bill" is House Bill
No. 3555. The House Committee on Ways and Means
approved the bill on February 2, 2005. The President
also certified it as urgent on February 8, 2005. The
House of Representatives approved the bill on second
and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and
Means approved Senate Bill No. 19504 on March 7,
2005, "in substitution of Senate Bill Nos. 1337, 1838
and 1873, taking into consideration House Bill Nos.
3555 and 3705." Senator Ralph G. Recto sponsored
Senate Bill No. 1337, while Senate Bill Nos. 1838
and 1873 were both sponsored by Sens. Franklin M.
Drilon, Juan M. Flavier and Francis N. Pangilinan.
The President certified the bill on March 11, 2005,
and was approved by the Senate on second and third
reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed
to the request of the House of Representatives for a
committee conference on the disagreeing provisions
of the proposed bills.
Before long, the Conference Committee on the
Disagreeing Provisions of House Bill No. 3555,
House Bill No. 3705, and Senate Bill No. 1950, "after
having met and discussed in full free and
conference," recommended the approval of its report,
which the Senate did on May 10, 2005, and with the
House of Representatives agreeing thereto the next
day, May 11, 2005.
On May 23, 2005, the enrolled copy of the
consolidated House and Senate version was
transmitted to the President, who signed the same
into law on May 24, 2005. Thus, came R.A. No.
9337.
July 1, 2005 is the effectivity date of R.A. No.
9337.5 When said date came, the Court issued a
temporary restraining order, effective immediately
and continuing until further orders, enjoining
respondents from enforcing and implementing the
law.
Oral arguments were held on July 14, 2005.
Significantly, during the hearing, the Court speaking
through Mr. Justice Artemio V. Panganiban, voiced
the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the
details of your presentation, let me just tell you a
little background. You know when the law took effect
on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a
lot of complaints aired on television and on radio.
Some people in a gas station were complaining that
the gas prices went up by 10%. Some people were
complaining that their electric bill will go up by 10%.
Other times people riding in domestic air carrier were
complaining that the prices that theyll have to pay
would have to go up by 10%. While all that was
being aired, per your presentation and per our own
understanding of the law, thats not true. Its not true
that the e-vat law necessarily increased prices by
10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor,
there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was
meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the
mitigating measures would be the elimination of the
Excise Tax and the import duties. That is why, it is
not correct to say that the VAT as to petroleum
dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no
justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax
and the import duties, the Net Tax would probably be
in the neighborhood of 7%? We are not going into
exact figures I am just trying to deliver a point that
different industries, different products, different
services are hit differently. So its not correct to say
that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic
Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law
took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best 7%,
correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the
people were complaining on that first day, were being
increased arbitrarily by 10%. And thats one reason
among many others this Court had to issue TRO
because of the confusion in the implementation.
Thats why we added as an issue in this case, even if
its tangentially taken up by the pleadings of the
parties, the confusion in the implementation of the E-
vat. Our people were subjected to the mercy of that
confusion of an across the board increase of 10%,
which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it
should be 3% only, in some cases it should be 6%
depending on these mitigating measures and the
location and situation of each product, of each
service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why
we had to issue a TRO pending the clarification of all
these and we wish the government will take time to
clarify all these by means of a more detailed
implementing rules, in case the law is upheld by this
Court. . . .6
The Court also directed the parties to file their
respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect,
petitioners ABAKADA GURO Party List, et al., filed
a petition for prohibition on May 27, 2005. They
question the constitutionality of Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and
108, respectively, of the National Internal Revenue
Code (NIRC). Section 4 imposes a 10% VAT on sale
of goods and properties, Section 5 imposes a 10%
VAT on importation of goods, and Section 6 imposes
a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a
uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise
the VAT rate to 12%, effective January 1, 2006, after
any of the following conditions have been satisfied,
to wit:
. . . That the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions
has been satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
Petitioners argue that the law is unconstitutional, as it
constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI,
Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et
al., filed a petition for certiorari likewise assailing
the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337.
Aside from questioning the so-called stand-by
authority of the President to increase the VAT rate to
12%, on the ground that it amounts to an undue
delegation of legislative power, petitioners also
contend that the increase in the VAT rate to 12%
contingent on any of the two conditions being
satisfied violates the due process clause embodied in
Article III, Section 1 of the Constitution, as it
imposes an unfair and additional tax burden on the
people, in that: (1) the 12% increase is ambiguous
because it does not state if the rate would be returned
to the original 10% if the conditions are no longer
satisfied; (2) the rate is unfair and unreasonable, as
the people are unsure of the applicable VAT rate from
year to year; and (3) the increase in the VAT rate,
which is supposed to be an incentive to the President
to raise the VAT collection to at least 2 4/5 of the GDP
of the previous year, should only be based on fiscal
adequacy.
Petitioners further claim that the inclusion of a stand-
by authority granted to the President by the
Bicameral Conference Committee is a violation of
the "no-amendment rule" upon last reading of a bill
laid down in Article VI, Section 26(2) of the
Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on
June 29, 2005, by the Association of Pilipinas Shell
Dealers, Inc., et al., assailing the following
provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the
NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if
the acquisition, excluding the VAT components,
exceeds One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC,
imposing a 70% limit on the amount of input tax to
be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC,
authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including
GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are
subject to 10% VAT under Sections 106 (sale of
goods and properties) and 108 (sale of services and
use or lease of properties) of the NIRC.
Petitioners contend that these provisions are
unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.
Petitioners argument is premised on the
constitutional right of non-deprivation of life, liberty
or property without due process of law under Article
III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations
on the amount of input tax that may be claimed.
Petitioners also argue that the input tax partakes the
nature of a property that may not be confiscated,
appropriated, or limited without due process of law.
Petitioners further contend that like any other
property or property right, the input tax credit may be
transferred or disposed of, and that by limiting the
same, the government gets to tax a profit or value-
added even if there is no profit or value-added.
Petitioners also believe that these provisions violate
the constitutional guarantee of equal protection of the
law under Article III, Section 1 of the Constitution, as
the limitation on the creditable input tax if: (1) the
entity has a high ratio of input tax; or (2) invests in
capital equipment; or (3) has several transactions
with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is
anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is the
smaller businesses with higher input tax to output tax
ratio that will suffer the consequences thereof for it
wipes out whatever meager margins the petitioners
make.
G.R. No. 168463
Several members of the House of Representatives led
by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following
grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an
undue delegation of legislative power, in violation of
Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted
without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and
House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee
of Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148,
151, 236, 237 and 288, which were present in Senate
Bill No. 1950, violates Article VI, Section 24(1) of
the Constitution, which provides that all
appropriation, revenue or tariff bills shall originate
exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia
filed a petition for certiorari and prohibition on July
20, 2005, alleging unconstitutionality of the law on
the ground that the limitation on the creditable input
tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, thus
violating the principle that tax collection and revenue
should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that
allowing these establishments to pass on the tax to
the consumers is inequitable, in violation of Article
VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a
Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the
presumption of constitutionality and petitioners failed
to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of
Finance, 235 SCRA
630 (1994), respondents argue that the procedural
issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of
revenue measures and the power of the Senate
concomitant thereto, have already been settled. With
regard to the issue of undue delegation of legislative
power to the President, respondents contend that the
law is complete and leaves no discretion to the
President but to increase the rate to 12% once any of
the two conditions provided therein arise.
Respondents also refute petitioners argument that the
increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on
the purchase or importation of capital goods
exceeding P1,000,000.00, and the 5% final
withholding tax by government agencies, is arbitrary,
oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation,
among others.
Finally, respondents manifest that R.A. No. 9337 is
the anchor of the governments fiscal reform agenda.
A reform in the value-added system of taxation is the
core revenue measure that will tilt the balance
towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following
provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending
Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the
general principles and concepts of value-added tax
(VAT), as the confusion and inevitably, litigation,
breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is
levied on the sale, barter, exchange or lease of goods
or properties and services.8 Being an indirect tax on
expenditure, the seller of goods or services may pass
on the amount of tax paid to the buyer,9 with the
seller acting merely as a tax collector.10 The burden of
VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer
is directly liable on the transaction or business it
engages in, without transferring the burden to
someone else.11 Examples are individual and
corporate income taxes, transfer taxes, and residence
taxes.12
In the Philippines, the value-added system of sales
taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a
single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers.
The single-stage system was subsequently modified,
and a mixture of the "cost deduction method" and
"tax credit method" was used to determine the value-
added tax payable.13 Under the "tax credit method,"
an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.14
It was only in 1987, when President Corazon C.
Aquino issued Executive Order No. 273, that the VAT
system was rationalized by imposing a multi-stage
tax rate of 0% or 10% on all sales using the "tax
credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the
Expanded VAT Law,16 R.A. No. 8241 or the
Improved VAT Law,17 R.A. No. 8424 or the Tax
Reform Act of 1997,18 and finally, the presently
beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
The Court will now discuss the issues in logical
sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following
provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al.,
allege that the Bicameral Conference Committee
exceeded its authority by:
1) Inserting the stand-by authority in favor of the
President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found
in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on
the amount of input tax to be credited against the
output tax; and
4) Including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of taxes
in addition to the value-added tax.
Petitioners now beseech the Court to define the
powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal
regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by
Justice Story, "[i]f the power did not exist, it would
be utterly impracticable to transact the business of
the nation, either at all, or at least with decency,
deliberation, and order."19Thus, Article VI, Section
16 (3) of the Constitution provides that "each House
may determine the rules of its proceedings." Pursuant
to this inherent constitutional power to promulgate
and implement its own rules of procedure, the
respective rules of each house of Congress provided
for the creation of a Bicameral Conference
Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of
House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that
the House does not agree with the Senate on the
amendment to any bill or joint resolution, the
differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the
House panel shall, as much as possible, adhere to and
support the House Bill. If the differences with the
Senate are so substantial that they materially impair
the House Bill, the panel shall report such fact to the
House for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each
report shall contain a detailed, sufficiently explicit
statement of the changes in or amendments to the
subject measure.
...
The Chairman of the House panel may be
interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on
the Conference Committee Report in the same
manner and procedure as it votes on a bill on third
and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree
with the House of Representatives on the provision of
any bill or joint resolution, the differences shall be
settled by a conference committee of both Houses
which shall meet within ten (10) days after their
composition. The President shall designate the
members of the Senate Panel in the conference
committee with the approval of the Senate.
Each Conference Committee Report shall contain a
detailed and sufficiently explicit statement of the
changes in, or amendments to the subject measure,
and shall be signed by a majority of the members of
each House panel, voting separately.
A comparative presentation of the conflicting House
and Senate provisions and a reconciled version
thereof with the explanatory statement of the
conference committee shall be attached to the report.
...
The creation of such conference committee was
apparently in response to a problem, not addressed by
any constitutional provision, where the two houses of
Congress find themselves in disagreement over
changes or amendments introduced by the other
house in a legislative bill. Given that one of the most
basic powers of the legislative branch is to formulate
and implement its own rules of proceedings and to
discipline its members, may the Court then delve into
the details of how Congress complies with its internal
rules or how it conducts its business of passing
legislation? Note that in the present petitions, the
issue is not whether provisions of the rules of both
houses creating the bicameral conference committee
are unconstitutional, but whether the bicameral
conference committee has strictly complied with
the rules of both houses, thereby remaining within
the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive
Secretary,20 the Court En
Banc, unanimously reiterated and emphasized its
adherence to the "enrolled bill doctrine," thus,
declining therein petitioners plea for the Court to go
behind the enrolled copy of the bill. Assailed in said
case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said
committees proceedings, the alleged violation of said
committees of the rules of both houses, and the
disappearance or deletion of one of the provisions in
the compromise bill submitted by the bicameral
conference committee. It was argued that such
irregularities in the passage of the law nullified R.A.
No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a
bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of
both Houses of Congress that it was passed are
conclusive of its due enactment. A review of cases
reveals the Courts consistent adherence to the
rule. The Court finds no reason to deviate from the
salutary rule in this case where the irregularities
alleged by the petitioners mostly involved the
internal rules of Congress, e.g., creation of the 2nd
or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the
enforcement of these internal rules of Congress,
whether House or Senate. Parliamentary rules are
merely procedural and with their observance the
courts have no concern. Whatever doubts there
may be as to the formal validity of Rep. Act No.
9006 must be resolved in its favor. The Court
reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying
forms of expression, all deny to the courts the
power to inquire into allegations that, in enacting
a law, a House of Congress failed to comply with
its own rules, in the absence of showing that there
was a violation of a constitutional provision or the
rights of private individuals. In Osmea v.
Pendatun, it was held: "At any rate, courts have
declared that the rules adopted by deliberative
bodies are subject to revocation, modification or
waiver at the pleasure of the body adopting
them. And it has been said that "Parliamentary
rules are merely procedural, and with their
observance, the courts have no concern. They may
be waived or disregarded by the legislative body."
Consequently, "mere failure to conform to
parliamentary usage will not invalidate the action
(taken by a deliberative body) when the requisite
number of members have agreed to a particular
measure."21 (Emphasis supplied)
The foregoing declaration is exactly in point with the
present cases, where petitioners allege irregularities
committed by the conference committee in
introducing changes or deleting provisions in the
House and Senate bills. Akin to
the Farias case,22 the present petitions also raise an
issue regarding the actions taken by the conference
committee on matters regarding Congress
compliance with its own internal rules. As stated
earlier, one of the most basic and inherent power of
the legislature is the power to formulate rules for its
proceedings and the discipline of its members.
Congress is the best judge of how it should conduct
its own business expeditiously and in the most
orderly manner. It is also the sole
concern of Congress to instill discipline among the
members of its conference committee if it believes
that said members violated any of its rules of
proceedings. Even the expanded jurisdiction of this
Court cannot apply to questions regarding only the
internal operation of Congress, thus, the Court is
wont to deny a review of the internal proceedings of
a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years
ago, in the case of Tolentino vs. Secretary of
Finance,23the Court already made the pronouncement
that "[i]f a change is desired in the practice [of the
Bicameral Conference Committee] it must be
sought in Congress since this question is not
covered by any constitutional provision but is only
an internal rule of each house." 24 To date, Congress
has not seen it fit to make such changes adverted to
by the Court. It seems, therefore, that Congress finds
the practices of the bicameral conference committee
to be very useful for purposes of prompt and efficient
legislative action.
Nevertheless, just to put minds at ease that no blatant
irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary
to dwell on the issue. The Court observes that there
was a necessity for a conference committee because a
comparison of the provisions of House Bill Nos.
3555 and 3705 on one hand, and Senate Bill No.
1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said
disagreements were as follows:
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of goods (amending
108 of NIRC)
With regard to the "no pass-on" provision
No similar provision
With regard to 70% limit on input tax credit
Provides that the input tax credit for capital goods on which a VAT
shall not exceed 5% of the total amount of such goods and services;
With regard to amendments to be made to NIRC provisions
No similar provision No similar provision
The disagreements between the provisions in the
House bills and the Senate bill were with regard to
(1) what rate of VAT is to be imposed; (2) whether
only the VAT imposed on electricity generation,
transmission and distribution companies should not
be passed on to consumers, as proposed in the Senate
bill, or both the VAT imposed on electricity
generation, transmission and distribution companies
and the VAT imposed on sale of petroleum products
should not be passed on to consumers, as proposed in
the House bill; (3) in what manner input tax credits
should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.
There being differences and/or disagreements on the
foregoing provisions of the House and Senate bills,
the Bicameral Conference Committee was mandated
by the rules of both houses of Congress to act on the
same by settling said differences and/or
disagreements. The Bicameral Conference
Committee acted on the disagreeing provisions by
making the following changes:
1. With regard to the disagreement on the rate of VAT
to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference
Committee tried to bridge the gap in the difference
between the 10% VAT rate proposed by the Senate,
and the various rates with 12% as the highest VAT
rate proposed by the House, by striking a
compromise whereby the present 10% VAT rate
would be retained until certain conditions arise, i.e.,
the value-added tax collection as a percentage of
gross domestic product (GDP) of the previous year
exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1
%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to
12% effective January 1, 2006.
2. With regard to the disagreement on whether only
has been
the VAT paidon
imposed shall be equally
electricity distributed over 5 years or th
generation,
and for persons engaged in retail
transmission and distribution companies trading ofnot
should goods, the allo
regarding income and excise taxes
be passed on to consumers or whether both the VAT
imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale
of petroleum products may be passed on to
consumers, the Bicameral Conference Committee
chose to settle such disagreement by altogether
deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input
tax credits should be limited or not, the Bicameral
Conference Committee decided to adopt the position
of the House by putting a limitation on the amount of
input tax that may be credited against the output tax,
although it crafted its own language as to the amount
of the limitation on input tax credits and the manner
of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or
imported in a calendar month for use in trade or
business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost
for such goods, excluding the VAT component
thereof, exceeds one million Pesos (P1,000,000.00):
PROVIDED, however, that if the estimated useful
life of the capital good is less than five (5) years, as
used for depreciation purposes, then the input VAT
shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any
taxable quarter the output tax exceeds the input tax,
the excess shall be paid by the VAT-registered person.
If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or
quarters: PROVIDED that the input tax inclusive of
input VAT carried over from the previous quarter that
may be credited
in every
Sec. 107 quarterand
of NIRC); shall
12% notVAT
exceed
on sale of service
seventy percent (70%) of the output VAT:
PROVIDED, HOWEVER, THAT any input tax
attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or credited
against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions
of the NIRC on corporate income tax, franchise,
percentage and excise taxes, the conference
committee decided to include such amendments and
basically adopted the provisions found in Senate Bill
No. 1950, with some changes as to the rate of the tax
to be imposed.
Under the provisions of both the Rules of the House
of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the
differences between the disagreeing provisions in the
House bill and the Senate bill. The term "settle" is
synonymous to "reconcile" and "harmonize."25 To
reconcile or harmonize disagreeing provisions, the
Bicameral Conference Committee may then (a) adopt
the specific provisions of either the House bill or
Senate bill, (b) decide that neither provisions in the
House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try
to arrive at a compromise between the disagreeing
provisions.
In the present case, the changes introduced by the
Bicameral Conference Committee on disagreeing
provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not
inject any idea or intent that is wholly foreign to the
subject embraced by the original provisions.
The so-called stand-by authority in favor of the
President, whereby the rate of 10% VAT wanted by
the Senate is retained until such time that certain
conditions arise when the 12% VAT wanted by the
House shall be imposed, appears to be a compromise
to try to bridge the difference in the rate of VAT
proposed by the two houses of Congress.
Nevertheless, such compromise is still totally within
the subject of what rate of VAT should be imposed on
taxpayers.
The no pass-on provision was deleted altogether. In
the transcripts of the proceedings of the Bicameral
Conference Committee held on May 10, 2005, Sen.
Ralph Recto, Chairman of the Senate Panel,
explained the reason for deleting the no pass-
on provision in this wise:
. . . the thinking was just to keep the VAT law or the
VAT bill simple. And we were thinking that no sector
should be a beneficiary of legislative grace, neither
should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And lets keep it
plain and simple. Lets not confuse the bill and put a
no pass-on provision. Two-thirds of the world have a
VAT system and in this two-thirds of the globe, I
have yet to see a VAT with a no pass-though
provision. So, the thinking of the Senate is basically
simple, lets keep the VAT simple.26 (Emphasis
supplied)
Rep. Teodoro Locsin further made the manifestation
that the no pass-on provision "never really enjoyed
the support of either House."27
With regard to the amount of input tax to be credited
against output tax, the Bicameral Conference
Committee came to a compromise on the percentage
rate of the limitation or cap on such input tax credit,
but again, the change introduced by the Bicameral
Conference Committee was totally within the intent
of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of
the subject revenue bill in the House of
Representatives, one of the major objectives was to
"plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the
claiming of input VAT tax credits . . ." and "[b]y
introducing limitations on the claiming of tax credit,
we are capping a major leakage that has placed our
collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes
other than the value-added tax proposed in Senate
Bill No. 1950, since said provisions were among
those referred to it, the conference committee had to
act on the same and it basically adopted the version
of the Senate.
Thus, all the changes or modifications made by the
Bicameral Conference Committee were germane to
subjects of the provisions referred
to it for reconciliation. Such being the case, the Court
does not see any grave abuse of discretion amounting
to lack or excess of jurisdiction committed by the
Bicameral Conference Committee. In the earlier
cases of Philippine Judges Association vs.
Prado29 and Tolentino vs. Secretary of Finance,30 the
Court recognized the long-standing legislative
practice of giving said conference committee ample
latitude for compromising differences between the
Senate and the House. Thus, in the Tolentino case, it
was held that:
. . . it is within the power of a conference committee
to include in its report an entirely new provision that
is not found either in the House bill or in the Senate
bill. If the committee can propose an amendment
consisting of one or two provisions, there is no
reason why it cannot propose several provisions,
collectively considered as an "amendment in the
nature of a substitute," so long as such amendment is
germane to the subject of the bills before the
committee. After all, its report was not final but
needed the approval of both houses of Congress to
become valid as an act of the legislative
department. The charge that in this case the
Conference Committee acted as a third legislative
chamber is thus without any basis.31 (Emphasis
supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section
26(2) of the Constitution on the "No-Amendment
Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law
unless it has passed three readings on separate days,
and printed copies thereof in its final form have been
distributed to its Members three days before its
passage, except when the President certifies to the
necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a
bill, no amendment thereto shall be allowed, and the
vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a
bicameral conference committee is allowed to add or
delete provisions in the House bill and the Senate bill
after these had passed three readings is in effect a
circumvention of the "no amendment rule" (Sec. 26
(2), Art. VI of the 1987 Constitution), fails to
convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for requiring that the
Committees Report in these cases must have
undergone three readings in each of the two houses.
If that be the case, there would be no end to
negotiation since each house may seek modification
of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as
referring only to bills introduced for the first time
in either house of Congress, not to the conference
committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment
rule" refers only to the procedure to be followed
by each house of Congress with regard to bills
initiated in each of said respective houses, before
said bill is transmitted to the other house for its
concurrence or amendment. Verily, to construe said
provision in a way as to proscribe any further
changes to a bill after one house has voted on it
would lead to absurdity as this would mean that the
other house of Congress would be deprived of its
constitutional power to amend or introduce changes
to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee
of amendments and modifications to disagreeing
provisions in bills that have been acted upon by both
houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section
24 of the Constitution on Exclusive Origination of
Revenue Bills
Coming to the issue of the validity of the
amendments made regarding the NIRC provisions on
corporate income taxes and percentage, excise taxes.
Petitioners refer to the following provisions, to wit:
Section 27 Rates of Income Tax on Domestic Corporationbeing amended in the House bills, still within the
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237
Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these
provisions of the NIRC did not at all originate from
the House. They aver that House Bill No. 3555
proposed amendments only regarding Sections 106,
107, 108, 110 and 114 of the NIRC, while House Bill
No. 3705 proposed amendments only to Sections
106, 107,108, 109, 110 and 111 of the NIRC; thus,
the other sections of the NIRC which the Senate
amended but which amendments were not found in
the House bills are not intended to be amended by the
House of Representatives. Hence, they argue that
since the proposed amendments did not originate
from the House, such amendments are a violation of
Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills shall originate
exclusively in the House of Representatives but the
Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was
indeed House Bill Nos. 3555 and 3705 that initiated
the move for amending provisions of the NIRC
dealing mainly with the value-added tax. Upon
transmittal of said House bills to the Senate, the
Senate came out with Senate Bill No. 1950 proposing
amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC
provisions on other kinds of taxes. Is the introduction
by the Senate of provisions not dealing directly with
the value- added tax, which is the only kind of tax
purview of the constitutional provision authorizing
the Senate to propose or concur with amendments to
a revenue bill that originated from the House?
The foregoing question had been squarely answered
in the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue
bill which is required by the Constitution to
"originate exclusively" in the House of
Representatives. It is important to emphasize this,
because a bill originating in the House may undergo
such extensive changes in the Senate that the result
may be a rewriting of the whole. . . . At this point,
what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To
insist that a revenue statute and not only the bill
which initiated the legislative process culminating
in the enactment of the law must substantially be
the same as the House bill would be to deny the
Senates power not only to "concur with
amendments" but also to "propose
amendments." It would be to violate the coequality
of legislative power of the two houses of Congress
and in fact make the House superior to the Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own
version even with respect to bills which are
required by the Constitution to originate in the
House.
...
Indeed, what the Constitution simply means is that
the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private
bills and bills of local application must come from
the House of Representatives on the theory that,
elected as they are from the districts, the members of
the House can be expected to be more sensitive to
the local needs and problems. On the other hand,
the senators, who are elected at large, are expected
to approach the same problems from the national
perspective. Both views are thereby made to bear
on the enactment of such laws.33 (Emphasis
supplied)
Since there is no question that the revenue bill
exclusively originated in the House of
Representatives, the Senate was acting within its
constitutional power to introduce amendments to the
House bill when it included provisions in Senate Bill
No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes. Verily, Article
VI, Section 24 of the Constitution does not contain
any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to
the House revenue bill.
Furthermore, the amendments introduced by the
Senate to the NIRC provisions that had not been
touched in the House bills are still in furtherance of
the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill
No. 1468, the very first House bill introduced on the
floor, which was later substituted by House Bill No.
3555, stated:
One of the challenges faced by the present
administration is the urgent and daunting task of
solving the countrys serious financial problems. To
do this, government expenditures must be strictly
monitored and controlled and revenues must be
significantly increased. This may be easier said than
done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget
by the year 2009. In fact, several measures that will
result to significant expenditure savings have been
identified by the administration. It is supported with
a credible package of revenue measures that
include measures to improve tax administration
and control the leakages in revenues from income
taxes and the value-added tax (VAT). (Emphasis
supplied)
Rep. Eric D. Singson, in his sponsorship speech for
House Bill No. 3555, declared that:
In the budget message of our President in the year
2005, she reiterated that we all acknowledged that on
top of our agenda must be the restoration of the
health of our fiscal system.
In order to considerably lower the consolidated
public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize
windows of opportunities which might seem
poignant in the beginning, but in the long run
prove effective and beneficial to the overall status
of our economy. One such opportunity is a review
of existing tax rates, evaluating the relevance
given our present conditions.34(Emphasis supplied)
Notably therefore, the main purpose of the bills
emanating from the House of Representatives is to
bring in sizeable revenues for the government
to supplement our countrys serious financial
problems, and improve tax administration and control
of the leakages in revenues from income taxes and
value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the
measures from the point of national perspective, can
introduce amendments within the purposes of those
bills. It can provide for ways that would soften the
impact of the VAT measure on the consumer, i.e., by
distributing the burden across all sectors instead of
putting it entirely on the shoulders of the consumers.
The sponsorship speech of Sen. Ralph Recto on why
the provisions on income tax on corporation were
included is worth quoting:
All in all, the proposal of the Senate Committee on
Ways and Means will raise P64.3 billion in additional
revenues annually even while by mitigating prices of
power, services and petroleum products.
However, not all of this will be wrung out of VAT. In
fact, only P48.7 billion amount is from the VAT on
twelve goods and services. The rest of the tab P10.5
billion- will be picked by corporations.
What we therefore prescribe is a burden sharing
between corporate Philippines and the consumer.
Why should the latter bear all the pain? Why should
the fiscal salvation be only on the burden of the
consumer?
The corporate worlds equity is in form of the
increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5
billion a year. After that, the rate will slide back, not
to its old rate of 32 percent, but two notches lower, to
30 percent.
Clearly, we are telling those with the capacity to pay,
corporations, to bear with this emergency provision
that will be in effect for 1,200 days, while we put our
fiscal house in order. This fiscal medicine will have
an expiry date.
For their assistance, a reward of tax reduction awaits
them. We intend to keep the length of their sacrifice
brief. We would like to assure them that not because
there is a light at the end of the tunnel, this
government will keep on making the tunnel long.
The responsibility will not rest solely on the weary
shoulders of the small man. Big business will be
there to share the burden.35
As the Court has said, the Senate can propose
amendments and in fact, the amendments made on
provisions in the tax on income of corporations are
germane to the purpose of the house bills which is to
raise revenues for the government.
Likewise, the Court finds the sections referring to
other percentage and excise taxes germane to the
reforms to the VAT system, as these sections would
cushion the effects of VAT on consumers.
Considering that certain goods and services which
were subject to percentage tax and excise tax would
no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in
addition to these taxes. Thus, there is a need to amend
these sections to soften the impact of VAT. Again, in
his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will
reduce to zero the present excise tax on bunker fuel,
to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out
the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the
VAT on oil products, so as not to destroy the VAT
chain, we will however bring down the excise tax on
socially sensitive products such as diesel, bunker, fuel
and kerosene.
...
What do all these exercises point to? These are not
contortions of giving to the left hand what was taken
from the right. Rather, these sprang from our concern
of softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to
pay as a result of VAT.36
The other sections amended by the Senate pertained
to matters of tax administration which are necessary
for the implementation of the changes in the VAT
system.
To reiterate, the sections introduced by the Senate are
germane to the subject matter and purposes of the
house bills, which is to supplement our countrys
fiscal deficit, among others. Thus, the Senate acted
within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al.,
Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of
the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12%
when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is
hereby further amended to read as follows:
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, a 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: provided, that the
President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
SEC. 5. Section 107 of the same Code, as amended,
is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of
Goods.
(A) In General. There shall be levied, assessed and
collected on every importation of goods a value-
added tax equivalent to ten percent (10%) based on
the total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such
tax to be paid by the importer prior to the release of
such goods from customs custody: Provided, That
where the customs duties are determined on the basis
of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the
President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
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
(A) Rate and Base of Tax. There shall be levied,
assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from
the sale or exchange of services: provided, that the
President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by
authority to the President to increase the VAT rate is a
virtual abdication by Congress of its exclusive power
to tax because such delegation is not within the
purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to
fix within specified limits, and may impose, tariff
rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the
framework of the national development program of
the government.
They argue that the VAT is a tax levied on the sale,
barter or exchange of goods and properties as well as
on the sale or exchange of services, which cannot be
included within the purview of tariffs under the
exempted delegation as the latter refers to customs
duties, tolls or tribute payable upon merchandise to
the government and usually imposed on goods or
merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al.,
further contend that delegating to the President the
legislative power to tax is contrary to republicanism.
They insist that accountability, responsibility and
transparency should dictate the actions of Congress
and they should not pass to the President the decision
to impose taxes. They also argue that the law also
effectively nullified the Presidents power of control,
which includes the authority to set aside and nullify
the acts of her subordinates like the Secretary of
Finance, by mandating the fixing of the tax rate by
the President upon the recommendation of the
Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has
ample powers to cause, influence or create the
conditions provided by the law to bring about either
or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find
bizarre and revolting the situation that the imposition
of the 12% rate would be subject to the whim of the
Secretary of Finance, an unelected bureaucrat,
contrary to the principle of no taxation without
representation. They submit that the Secretary of
Finance is not mandated to give a favorable
recommendation and he may not even give his
recommendation. Moreover, they allege that no
guiding standards are provided in the law on what
basis and as to how he will make his
recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can
easily be brushed aside by the President since the
former is a mere alter ego of the latter, such that,
ultimately, it is the President who decides whether to
impose the increased tax rate or not.
A brief discourse on the principle of non-delegation
of powers is instructive.
The principle of separation of powers ordains that
each of the three great branches of government has
exclusive cognizance of and is supreme in matters
falling within its own constitutionally allocated
sphere.37 A logical
corollary to the doctrine of separation of powers is
the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata non
delegari potest which means "what has been
delegated, cannot be delegated."38 This doctrine is
based on the ethical principle that such as delegated
power constitutes not only a right but a duty to be
performed by the delegate through the
instrumentality of his own judgment and not through
the intervening mind of another.39
With respect to the Legislature, Section 1 of Article
VI of the Constitution provides that "the Legislative
power shall be vested in the Congress of the
Philippines which shall consist of a Senate and a
House of Representatives." The powers which
Congress is prohibited from delegating are those
which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never
be delegated, has been described as the authority to
make a complete law complete as to the time
when it shall take effect and as to whom it shall be
applicable and to determine the expediency of its
enactment.40 Thus, the rule is that in order that a
court may be justified in holding a statute
unconstitutional as a delegation of legislative power,
it must appear that the power involved is purely
legislative in nature that is, one appertaining
exclusively to the legislative department. It is the
nature of the power, and not the liability of its use or
the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of
legislative powers is subject to the following
recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under
Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President
under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be
a showing that the delegation itself is valid. It is valid
only if the law (a) is complete in itself, setting forth
therein the policy to be executed, carried out, or
implemented by the delegate;41 and (b) fixes a
standard the limits of which are sufficiently
determinate and determinable to which the
delegate must conform in the performance of his
functions.42 A sufficient standard is one which defines
legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to apply
it. It indicates the circumstances under which the
legislative command is to be effected.43 Both tests are
intended to prevent a total transference of legislative
authority to the delegate, who is not allowed to step
into the shoes of the legislature and exercise a power
essentially legislative.44
In People vs. Vera,45 the Court, through eminent
Justice Jose P. Laurel, expounded on the concept and
extent of delegation of power in this wise:
In testing whether a statute constitutes an undue
delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its
terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of
any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is administrative official is not the legislative
between the delegation of power to make the law,
which necessarily involves a discretion as to what
it shall be, and conferring an authority or
discretion as to its execution, to be exercised under
and in pursuance of the law. The first cannot be
done; to the latter no valid objection can be
made.
...
It is contended, however, that a legislative act may be
made to the effect as law after it leaves the hands of
the legislature. It is true that laws may be made
effective on certain contingencies, as by proclamation
of the executive or the adoption by the people of a
particular community. In Wayman vs. Southard, the
Supreme Court of the United States ruled that the
legislature may delegate a power not legislative
which it may itself rightfully exercise. The power to
ascertain facts is such a power which may be
delegated. There is nothing essentially legislative
in ascertaining the existence of facts or conditions
as the basis of the taking into effect of a law. That
is a mental process common to all branches of the
government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of
legislative authority on account of the complexity
arising from social and economic forces at work in
this modern industrial age, the orthodox
pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the
United States in the following language speaking
of declaration of legislative power to administrative
agencies: The principle which permits the
legislature to provide that the administrative
agent may determine when the circumstances are
such as require the application of a law is
defended upon the ground that at the time this
authority is granted, the rule of public policy,
which is the essence of the legislative act, is
determined by the legislature. In other words, the
legislature, as it is its duty to do, determines that,
under given circumstances, certain executive or
administrative action is to be taken, and that,
under other circumstances, different or no action
at all is to be taken. What is thus left to the
determination of what public policy demands, but
simply the ascertainment of what the facts of the
case require to be done according to the terms of
the law by which he is governed. The efficiency of
an Act as a declaration of legislative will must, of
course, come from Congress, but the
ascertainment of the contingency upon which the
Act shall take effect may be left to such agencies
as it may designate. The legislature, then, may
provide that a law shall take effect upon the
happening of future specified contingencies
leaving to some other person or body the power to
determine when the specified contingency has
arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the
Constitution to make laws and to alter and repeal
them; the test is the completeness of the statute in all
its terms and provisions when it leaves the hands of
the legislature. To determine whether or not there is
an undue delegation of legislative power, the inquiry
must be directed to the scope and definiteness of the
measure enacted. The legislative does not abdicate
its functions when it describes what job must be
done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the
only way in which the legislative process can go
forward. A distinction has rightfully been made
between delegation of power to make the laws
which necessarily involves a discretion as to what
it shall be, which constitutionally may not be done,
and delegation of authority or discretion as to its
execution to be exercised under and in pursuance
of the law, to which no valid objection can be
made. The Constitution is thus not to be regarded as
denying the legislature the necessary resources of
flexibility and practicability. (Emphasis supplied). 48
Clearly, the legislature may delegate to executive
officers or bodies the power to determine certain facts
or conditions, or the happening of contingencies, on
which the operation of a statute is, by its terms, made
to depend, but the legislature must prescribe
sufficient standards, policies or limitations on their
authority.49 While the power to tax cannot be
delegated to executive agencies, details as to the
enforcement and administration of an exercise of
such power may be left to them, including the power
to determine the existence of facts on which its
operation depends.50
The rationale for this is that the preliminary
ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is
simply ancillary to legislation. Thus, the duty of
correlating information and making
recommendations is the kind of subsidiary activity
which the legislature may perform through its
members, or which it may delegate to others to
perform. Intelligent legislation on the complicated
problems of modern society is impossible in the
absence of accurate information on the part of the
legislators, and any reasonable method of securing
such information is proper.51 The Constitution as a
continuously operative charter of government does
not require that Congress find for itself
every fact upon which it desires to base legislative
action or that it make for itself detailed
determinations which it has declared to be
prerequisite to application of legislative policy to
particular facts and circumstances impossible for
Congress itself properly to investigate.52
In the present case, the challenged section of R.A.
No. 9337 is the common proviso in Sections 4, 5 and
6 which reads as follows:
That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
The case before the Court is not a delegation of
legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and
administration of the increase rate under the law is
contingent. The legislature has made the operation of
the 12% rate effective January 1, 2006, contingent
upon a specified fact or condition. It leaves the entire
operation or non-operation of the 12% rate upon
factual matters outside of the control of the executive.
No discretion would be exercised by the President.
Highlighting the absence of discretion is the fact that
the word shall is used in the common proviso. The
use of the word shall connotes a mandatory order. Its
use in a statute denotes an imperative obligation and
is inconsistent with the idea of discretion.53 Where
the law is clear and unambiguous, it must be taken to
mean exactly what it says, and courts have no choice
but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to
immediately impose the 12% rate upon the existence
of any of the conditions specified by Congress. This
is a duty which cannot be evaded by the President.
Inasmuch as the law specifically uses the word shall,
the exercise of discretion by the President does not
come into play. It is a clear directive to impose the
12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12%
VAT rate is based on the happening of a certain
specified contingency, or upon the ascertainment of
certain facts or conditions by a person or body other
than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that
the law effectively nullified the Presidents power of
control over the Secretary of Finance by mandating
the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The
Court cannot also subscribe to the position of
petitioners
Pimentel, et al. that the word shall should be
interpreted to mean may in view of the phrase "upon
the recommendation of the Secretary of Finance."
Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any
recommendation by the Secretary of Finance can
easily be brushed aside by the President since the
former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the
alter ego of the President, it simply means that as
head of the Department of Finance he is the assistant
and agent of the Chief Executive. The multifarious
executive and administrative functions of the Chief
Executive are performed by and through the
executive departments, and the acts of the secretaries
of such departments, such as the Department of
Finance, performed and promulgated in the regular
course of business, are, unless disapproved or
reprobated by the Chief Executive, presumptively the
acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and
holds office in an advisory capacity, and, in the
language of Thomas Jefferson, "should be of the
President's bosom confidence" and, in the language
of Attorney-General Cushing, is "subject to the
direction of the President."55
In the present case, in making his recommendation to
the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as
the alter ego of the President or even her subordinate.
In such instance, he is not subject to the power of
control and direction of the President. He is acting as
the agent of the legislative department, to determine
and declare the event upon which its expressed will is
to take effect.56The Secretary of Finance becomes the
means or tool by which legislative policy is
determined and implemented, considering that he
possesses all the facilities to gather data and
information and has a much broader perspective to
properly evaluate them. His function is to gather and
collate statistical data and other pertinent information
and verify if any of the two conditions laid out by
Congress is present. His personality in such instance
is in reality but a projection of that of Congress.
Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or
nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former
for that of the latter.
Congress simply granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-
fifth percent (24/5%) or the national government
deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1%). If either of
these two instances has occurred, the Secretary of
Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate
must be imposed by the President effective January 1,
2006. There is no undue delegation of legislative
power but only of the discretion as to the
execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes
what job must be done, who must do it, and what is
the scope of his authority; in our complex economy
that is frequently the only way in which the
legislative process can go forward.58
As to the argument of petitioners ABAKADA
GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to
the principle of republicanism, the same deserves
scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law.
The intent and will to increase the VAT rate to 12%
came from Congress and the task of the President is
to simply execute the legislative policy. That
Congress chose to do so in such a manner is not
within the province of the Court to inquire into, its
task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the
President has ample powers to cause, influence or
create the conditions to bring about either or both the
conditions precedent does not deserve any merit as
this argument is highly speculative. The Court does
not rule on allegations which are manifestly
conjectural, as these may not exist at all. The Court
deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances
instead of realities, justice and law will be short-
lived.
B. The 12% Increase VAT Rate Does Not Impose an
Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12%
increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also
argue that the 12% increase, dependent on any of the
2 conditions set forth in the contested provisions, is
ambiguous because it does not state if the VAT rate
would be returned to the original 10% if the rates are
no longer satisfied. Petitioners also argue that such
rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of
R.A. No. 9337, if any of the two conditions set forth
therein are satisfied, the President shall increase the
VAT rate to 12%. The provisions of the law are clear.
It does not provide for a return to the 10% rate nor
does it empower the President to so revert if, after the
rate is increased to 12%, the VAT collection goes
below the 24/5 of the GDP of the previous year or that
the national government deficit as a percentage of
GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation
is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the
law is a forbidden ground that only Congress may
tread upon.60
Thus, in the absence of any provision providing for a
return to the 10% rate, which in this case the Court
finds none, petitioners argument is, at best, purely
speculative. There is no basis for petitioners fear of a
fluctuating VAT rate because the law itself does not
provide that the rate should go back to 10% if the
conditions provided in Sections 4, 5 and 6 are no
longer present. The rule is that where the provision of
the law is clear and unambiguous, so that there is no
occasion for the court's seeking the legislative intent,
the law must be taken as it is, devoid of judicial
addition or subtraction.61
Petitioners also contend that the increase in the VAT
rate, which was allegedly an incentive to the
President to raise the VAT collection to at least
2 4/5 of the GDP of the previous year, should be based
on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one
and one-half percent (1 %).
Respondents explained the philosophy behind these
alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12%
have economic or fiscal meaning. If VAT/GDP is less
than 2.8%, it means that government has weak or no
capability of implementing the VAT or that VAT is
not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12%
because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when
deficit/GDP is 1.5% or less means the fiscal condition
of government has reached a relatively sound
position or is towards the direction of a balanced
budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a
relatively healthy position. Otherwise stated, if the
ratio is more than 1.5%, there is indeed a need to
increase the VAT rate.62
That the first condition amounts to an incentive to the
President to increase the VAT collection does not
render it unconstitutional so long as there is a public
purpose for which the law was passed, which in this
case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of
a sound tax system was originally stated by Adam
Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take
out and to keep out of the pockets of the people as
little as possible over and above what it brings into
the public treasury of the state.63
It simply means that sources of revenues must be
adequate to meet government expenditures and their
variations.64
The dire need for revenue cannot be ignored. Our
country is in a quagmire of financial woe. During the
Bicameral Conference Committee hearing, then
Finance Secretary Purisima bluntly depicted the
countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines
finds itself in right now. We are in a position where
90 percent of our revenue is used for debt service. So,
for every peso of revenue that we currently raise, 90
goes to debt service. Thats interest plus amortization
of our debt. So clearly, this is not a sustainable
situation. Thats the first fact.
The second fact is that our debt to GDP level is way
out of line compared to other peer countries that
borrow money from that international financial
markets. Our debt to GDP is approximately equal to
our GDP. Again, that shows you that this is not a
sustainable situation.
The third thing that Id like to point out is the
environment that we are presently operating in is not
as benign as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we
were operating in a period of basically global growth
and low interest rates. The past few months, we have
seen an inching up, in fact, a rapid increase in the
interest rates in the leading economies of the world.
And, therefore, our ability to borrow at reasonable
prices is going to be challenged. In fact, ultimately,
the question is our ability to access the financial
markets.
When the President made her speech in July last year,
the environment was not as bad as it is now, at least
based on the forecast of most financial institutions.
So, we were assuming that raising 80 billion would
put us in a position where we can then convince them
to improve our ability to borrow at lower rates. But
conditions have changed on us because the interest
rates have gone up. In fact, just within this room, we
tried to access the market for a billion dollars because
for this year alone, the Philippines will have to
borrow 4 billion dollars. Of that amount, we have
borrowed 1.5 billion. We issued last January a 25-
year bond at 9.7 percent cost. We were trying to
access last week and the market was not as favorable
and up to now we have not accessed and we might
pull back because the conditions are not very good.
So given this situation, we at the Department of
Finance believe that we really need to front-end our
deficit reduction. Because it is deficit that is causing
the increase of the debt and we are in what we call a
debt spiral. The more debt you have, the more deficit
you have because interest and debt service eats and
eats more of your revenue. We need to get out of this
debt spiral. And the only way, I think, we can get out
of this debt spiral is really have a front-end
adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the
law hoping for rescue from an inevitable catastrophe.
Whether the law is indeed sufficient to answer the
states economic dilemma is not for the Court to
judge. In the Farias case, the Court refused to
consider the various arguments raised therein that
dwelt on the wisdom of Section 14 of R.A. No. 9006
(The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court.
Government policy is within the exclusive dominion
of the political branches of the government. It is not
for this Court to look into the wisdom or propriety of
legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is based on
sound economic theory, whether it is the best means
to achieve the desired results, whether, in short, the
legislative discretion within its prescribed limits
should be exercised in a particular manner are
matters for the judgment of the legislature, and the
serious conflict of opinions does not suffice to bring
them within the range of judicial cognizance.66
In the same vein, the Court in this case will not
dawdle on the purpose of Congress or the executive
policy, given that it is not for the judiciary to "pass
upon questions of wisdom, justice or expediency of
legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending
Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers,
Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section
12 of R.A. No. 9337, amending Section 114 (C) of
the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the
constitutional right against deprivation of life, liberty
of property without due process of law, as embodied
in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate
the constitutional guarantee of equal protection of the
law.
The doctrine is that where the due process and equal
protection clauses are invoked, considering that they
are not fixed rules but rather broad standards, there is
a need for proof of such persuasive character as
would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section
110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited against the
output tax. It states, in part: "[P]rovided, that the
input tax inclusive of the input VAT carried over from
the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the
output VAT: "
Input Tax is defined under Section 110(A) of the
NIRC, as amended, as the value-added tax
due from or paid by a VAT-registered person on the
importation of goods or local purchase of good and
services, including lease or use of property, in the
course of trade or business, from a VAT-registered
person, and Output Tax is the value-added tax due on
the sale or lease of taxable goods or properties or
services by any person registered or required to
register under the law.
Petitioners claim that the contested sections impose
limitations on the amount of input tax that may be
claimed. In effect, a portion of the input tax that has
already been paid cannot now be credited against the
output tax.
Petitioners argument is not absolute. It assumes that
the input tax exceeds 70% of the output tax, and
therefore, the input tax in excess of 70% remains
uncredited. However, to the extent that the input tax
is less than 70% of the output tax, then 100% of such
input tax is still creditable.
More importantly, the excess input tax, if any, is
retained in a businesss books of accounts and
remains creditable in the succeeding quarter/s. This is
explicitly allowed by Section 110(B), which provides
that "if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter
or quarters." In addition, Section 112(B) allows a
VAT-registered person to apply for the issuance of a
tax credit certificate or refund for any unused input
taxes, to the extent that such input taxes have not
been applied against the output taxes. Such unused
input tax may be used in payment of his other
internal revenue taxes.
The non-application of the unutilized input tax in a
given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of
the 70% limitation is incomplete and one-sided. It
ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter.
It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over
provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under
Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia
failed to comprehend the operation of the 70%
limitation on the input tax. According to petitioner,
the limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a
portion of the taxes they collect, which violates the
principle that tax collection and revenue should be
for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a
person, passed on to him by the seller, when he buys
goods. Output tax meanwhile is the tax due to the
person when he sells goods. In computing the VAT
payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output
taxes charged by the seller are equal to the input taxes
that he paid and passed on by the suppliers, then no
payment is required;
Second, when the output taxes exceed the input taxes,
the person shall be liable for the excess, which has to
be paid to the Bureau of Internal Revenue
(BIR);69 and
Third, if the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter
or quarters. Should the input taxes result from zero-
rated or effectively zero-rated transactions, any
excess over the output taxes shall instead be refunded
to the taxpayer or credited against other internal
revenue taxes, at the taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70%
limitation on the input tax. Thus, a person can credit
his input tax only up to the extent of 70% of the
output tax. In laymans term, the value-added taxes
that a person/taxpayer paid and passed on to him by a
seller can only be credited up to 70% of the value-
added taxes that is due to him on a taxable
transaction. There is no retention of any tax
collection because the person/taxpayer has already
previously paid the input tax to a seller, and the seller
will subsequently remit such input tax to the BIR.
The party directly liable for the payment of the tax is
the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes,
as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers,
Inc., et al. also argue that the input tax partakes the
nature of a property that may not be confiscated,
appropriated, or limited without due process of law.
The input tax is not a property or a property right
within the constitutional purview of the due process
clause. A VAT-registered persons entitlement to the
creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and
vested rights must be borne in mind for persons have
no vested rights in statutory privileges. The state may
change or take away rights, which were created by
the law of the state, although it may not take away
property, which was vested by virtue of such rights.72
Under the previous system of single-stage taxation,
taxes paid at every level of distribution are not
recoverable from the taxes payable, although it
becomes part of the cost, which is deductible from
the gross revenue. When Pres. Aquino issued E.O.
No. 273 imposing a 10% multi-stage tax on all sales,
it was then that the crediting of the input tax paid on
purchase or importation of goods and services by
VAT-registered persons against the output tax was
introduced.73 This was adopted by the Expanded VAT
Law (R.A. No. 7716),74 and The Tax Reform Act of
1997 (R.A. No. 8424).75 The right to credit input tax
as against the output tax is clearly a privilege created
by law, a privilege that also the law can remove, or in
this case, limit.
Petitioners also contest as arbitrary, oppressive,
excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC, which
provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or
imported in a calendar month for use in trade or
business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost
for such goods, excluding the VAT component
thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the
estimated useful life of the capital goods is less than
five (5) years, as used for depreciation purposes, then
the input VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase
of services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or license
upon payment of the compensation, rental, royalty or
fee.
The foregoing section imposes a 60-month period
within which to amortize the creditable input tax on
purchase or importation of capital goods with
acquisition cost of P1 Million pesos, exclusive of the
VAT component. Such spread out only poses a delay
in the crediting of the input tax. Petitioners argument
is without basis because the taxpayer is not
permanently deprived of his privilege to credit the
input tax.
It is worth mentioning that Congress admitted that
the spread-out of the creditable input tax in this case
amounts to a 4-year interest-free loan to the
government.76 In the same breath, Congress also
justified its move by saying that the provision was
designed to raise an annual revenue of 22.6
billion.77 The legislature also dispelled the fear that
the provision will fend off foreign investments,
saying that foreign investors have other tax incentives
provided by law, and citing the case of China, where
despite a 17.5% non-creditable VAT, foreign
investments were not deterred.78 Again, for whatever
is the purpose of the 60-month amortization, this
involves executive economic policy and legislative
wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax
imposed on payments made by the government for
taxable transactions, Section 12 of R.A. No. 9337,
which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of 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 and services which are subject to the value-
added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold a final value-added tax at
the rate of five percent (5%) of the gross payment
thereof: Provided, 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 purposes of this Section,
the payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall
be remitted within ten (10) days following the end of
the month the withholding was made.
Section 114(C) merely provides a method of
collection, or as stated by respondents, a more
simplified VAT withholding system. The government
in this case is constituted as a withholding agent with
respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for
different rates of value-added taxes to be withheld --
3% on gross payments for purchases of goods; 6% on
gross payments for services supplied by contractors
other than by public works contractors; 8.5% on
gross payments for services supplied by public work
contractors; or 10% on payment for the lease or use
of properties or property rights to nonresident
owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or
property rights payment to nonresidents, were
deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used
the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section
114(C): "final value-added tax at the rate of five
percent (5%)."
In Revenue Regulations No. 02-98, implementing
R.A. No. 8424 (The Tax Reform Act of 1997), the
concept of final withholding tax on income was
explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final
withholding tax system the amount of income tax
withheld by the withholding agent is constituted
as full and final payment of the income tax due
from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to
withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the
payor/withholding agent.
(B) Creditable Withholding Tax. Under the
creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at
least approximate the tax due of the payee on said
income. Taxes withheld on income payments
covered by the expanded withholding tax (referred to
in Sec. 2.57.2 of these regulations) and compensation
income (referred to in Sec. 2.78 also of these
regulations) are creditable in nature.
As applied to value-added tax, this means that taxable
transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax
payable on the transaction. This represents the net
VAT payable of the seller. The other 5% effectively
accounts for the standard input VAT (deemed input
VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79
The Court need not explore the rationale behind the
provision. It is clear that Congress intended to treat
differently taxable transactions with the
government.80 This is supported by the fact that under
the old provision, the 5% tax withheld by the
government remains creditable against the tax
liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(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.
The valued-added tax withheld under this Section
shall be remitted within ten (10) days following the
end of the month the withholding was made.
(Emphasis supplied)
As amended, the use of the word final and the
deletion of the word creditable exhibits Congresss
intention to treat transactions with the government
differently. Since it has not been shown that the class
subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum
dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal
with the government.
Moreover, the actual input tax is not totally lost or
uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-
Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5%
of gross payments, the excess may form part of the
cost. Equally, should the actual input tax be less than
5%, the difference is treated as income.81
Petitioners also argue that by imposing a limitation
on the creditable input tax, the government gets to tax
a profit or value-added even if there is no profit or
value-added.
Petitioners stance is purely hypothetical,
argumentative, and again, one-sided. The Court will
not engage in a legal joust where premises are what
ifs, arguments, theoretical and facts, uncertain. Any
disquisition by the Court on this point will only be, as
Shakespeare describes life in Macbeth,82 "full of
sound and fury, signifying nothing."
Whats more, petitioners contention assumes the
proposition that there is no profit or value-added. It
need not take an astute businessman to know that it is
a matter of exception that a business will sell goods
or services without profit or value-added. It cannot be
overstressed that a business is created precisely for
profit.
The equal protection clause under the Constitution
means that "no person or class of persons shall be
deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same
place and in like circumstances."83
The power of the State to make reasonable and
natural classifications for the purposes of taxation has
long been established. Whether it relates to the
subject of taxation, the kind of property, the rates to
be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the States
power is entitled to presumption of validity. As a rule,
the judiciary will not interfere with such power
absent a clear showing of unreasonableness,
discrimination, or arbitrariness.84
Petitioners point out that the limitation on the
creditable input tax if the entity has a high ratio of
input tax, or invests in capital equipment, or has
several transactions with the government, is not
based on real and substantial differences to meet a
valid classification.
The argument is pedantic, if not outright baseless.
The law does not make any classification in the
subject of taxation, the kind of property, the rates to
be levied or the amounts to be raised, the methods of
assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear
different consequences. While the implementation of
the law may yield varying end results depending on
ones profit margin and value-added, the Court
cannot go beyond what the legislature has laid down
and interfere with the affairs of business.
The equal protection clause does not require the
universal application of the laws on all persons or
things without distinction. This might in fact
sometimes result in unequal protection. What the
clause requires is equality among equals as
determined according to a valid classification. By
classification is meant the grouping of persons or
things similar to each other in certain particulars and
different from all others in these same particulars.85
Petitioners brought to the Courts attention the
introduction of Senate Bill No. 2038 by Sens. S.R.
Osmea III and Ma. Ana Consuelo A.S. Madrigal
on June 6, 2005, and House Bill No. 4493 by Rep.
Eric D. Singson. The proposed legislation seeks to
amend the 70% limitation by increasing the same to
90%. This, according to petitioners, supports their
stance that the 70% limitation is arbitrary and
confiscatory. On this score, suffice it to say that these
are still proposed legislations. Until Congress amends
the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of
taxation.
Uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be taxed
at the same rate. Different articles may be taxed at
different amounts provided that the rate is uniform on
the same class everywhere with all people at all
times.86
In this case, the tax law is uniform as it provides a
standard rate of 0% or 10% (or 12%) on all goods
and services. Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of
the NIRC, provide for a rate of 10% (or 12%) on sale
of goods and properties, importation of goods, and
sale of services and use or lease of properties. These
same sections also provide for a 0% rate on certain
sales and transaction.
Neither does the law make any distinction as to the
type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year
amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the
government. It must be stressed that the rule of
uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only
demands uniformity within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped
with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services
with gross annual sales or receipts not
exceeding P1,500,000.00.88 Also, basic marine and
agricultural food products in their original state are
still not subject to the tax,89 thus ensuring that prices
at the grassroots level will remain accessible. As was
stated in Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed
only on sales of goods or services by persons
engaged in business with an aggregate gross annual
sales exceeding P200,000.00. Small corner sari-
sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales
of farm and marine products, so that the costs of
basic food and other necessities, spared as they are
from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general
public.
It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly
favors those with high profit margins. Congress was
not oblivious to this. Thus, to equalize the weighty
burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons
under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5
Million. This acts as a equalizer because in effect,
bigger businesses that qualify for VAT coverage and
VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to
cushion the impact of the imposition of the tax on
those previously exempt. Excise taxes on petroleum
products91 and natural gas92 were reduced. Percentage
tax on domestic carriers was removed.93 Power
producers are now exempt from paying franchise
tax.94
Aside from these, Congress also increased the
income tax rates of corporations, in order to distribute
the burden of taxation. Domestic, foreign, and non-
resident corporations are now subject to a 35%
income tax rate, from a previous
32%.95 Intercorporate dividends of non-resident
foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the
corporations domicile was increased to 20%.96 The
Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes
anymore.97 Even the sale by an artist of his works or
services performed for the production of such works
was not spared.
All these were designed to ease, as well as spread
out, the burden of taxation, which would otherwise
rest largely on the consumers. It cannot therefore be
gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the
creditable input tax is anything but regressive. It is
the smaller business with higher input tax-output tax
ratio that will suffer the consequences.
Progressive taxation is built on the principle of the
taxpayers ability to pay. This principle was also
lifted from Adam Smiths Canons of Taxation, and it
states:
I. The subjects of every state ought to contribute
towards the support of the government, as nearly as
possible, in proportion to their respective abilities;
that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up
depending on the resources of the person affected.98
The VAT is an antithesis of progressive taxation. By
its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed
is the same regardless of income. In
other words, the VAT paid eats the same portion of an
income, whether big or small. The disparity lies in
the income earned by a person or profit margin
marked by a business, such that the higher the
income or profit margin, the smaller the portion of
the income or profit that is eaten by VAT. A converso,
the lower the income or profit margin, the bigger the
part that the VAT eats away. At the end of the day, it
is really the lower income group or businesses with
low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really
prohibit the imposition of indirect taxes, like the VAT.
What it simply provides is that Congress shall
"evolve a progressive system of taxation." The Court
stated in the Tolentino case, thus:
The Constitution does not really prohibit the
imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress
shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean
simply that direct taxes are . . . to be preferred [and]
as much as possible, indirect taxes should be
minimized. (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221
(Second ed. 1977)) Indeed, the mandate to Congress
is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the
oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, 17 (1)
of the 1973 Constitution from which the present Art.
VI, 28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not
avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes
according to the taxpayers' ability to pay. In the case
of the VAT, the law minimizes the regressive effects
of this imposition by providing for zero rating of
certain transactions (R.A. No. 7716, 3, amending
102 (b) of the NIRC), while granting exemptions to
other transactions. (R.A. No. 7716, 4 amending
103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the
government. In this case, it is just an enema, a first-
aid measure to resuscitate an economy in distress.
The Court is neither blind nor is it turning a deaf ear
on the plight of the masses. But it does not have the
panacea for the malady that the law seeks to remedy.
As in other cases, the Court cannot strike down a law
as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for
every wrong there is a remedy, and that the judiciary
should stand ready to afford relief. There are
undoubtedly many wrongs the judicature may not
correct, for instance, those involving political
questions. . . .
Let us likewise disabuse our minds from the notion
that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the
Constitution has judiciously allocated the powers of
government to three distinct and separate
compartments; and that judicial interpretation has
tended to the preservation of the independence of the
three, and a zealous regard of the prerogatives of
each, knowing full well that one is not the guardian
of the others and that, for official wrong-doing, each
may be brought to account, either by impeachment,
trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds
true then, as it still holds true now. All things
considered, there is no raison d'tre for the
unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being
unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are
hereby DISMISSED.
There being no constitutional impediment to the full
enforcement and implementation of R.A. No. 9337,
the temporary restraining order issued by the Court
on July 1, 2005 is LIFTED upon finality of herein
decision.
SO ORDERED.
 EN BANC
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011
x Petitioners hold the view that Congress did
----------------------------------------------------------------
------------------------ x
DECISION
ABAD, J.:
May toll fees collected by tollway operators be
subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma.
F. Timbol (petitioners) filed this petition for
declaratory relief[1] assailing the validity of the
impending imposition of value-added tax (VAT) by
the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would
result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR
action. Additionally, Diaz claims that he sponsored
the approval of Republic Act 7716 (the 1994
Expanded VAT Law or EVAT Law) and Republic Act
8424 (the 1997 National Internal Revenue Code or
the NIRC) at the House of Representatives. Timbol,
on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry
and consultant of the Toll Regulatory Board (TRB) in
the past administration.
Petitioners allege that the BIR attempted
during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The
imposition was deferred, however, in view of the
consistent opposition of Diaz and other sectors to
such move. But, upon President Benigno C. Aquino
IIIs assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
not, when it enacted the NIRC, intend to include toll
fees within the meaning of sale of services that are
subject to VAT; that a toll fee is a users tax, not a sale
of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT
was never factored into the formula for computing
toll fees, its imposition would violate the non-
impairment clause of the constitution.
On August 13, 2010 the Court issued a
temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the
government, represented by respondents Cesar V.
Purisima, Secretary of the Department of Finance,
and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within
10 days from notice.[2] Later, the Court issued another
resolution treating the petition as one for prohibition.
[3]
On August 23, 2010 the Office of the Solicitor
General filed the governments comment.[4] The
government avers that the NIRC imposes VAT on all
kinds of services of franchise grantees, including
tollway operations, except where the law provides
otherwise; that the Court should seek the meaning
and intent of the law from the words used in the
statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of
several BIR rulings and circulars.[5]
The government also argues that petitioners
have no right to invoke the non-impairment of
contracts clause since they clearly have no personal
interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At
any rate, the non-impairment clause cannot limit the
States sovereign taxing power which is generally read
into contracts.
Finally, the government contends that the non-
inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators
from VAT. In any event, it cannot be claimed that the
rights of tollway operators to a reasonable rate of
return will be impaired by the VAT since this is
imposed on top of the toll rate. Further, the
imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.
In their reply[6] to the governments
comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the
NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the
VAT by rounding off the toll rate and putting any
excess collection in an escrow account. But this
would be illegal since only the Congress can modify
VAT rates and authorize its disbursement. Finally,
BIR Revenue Memorandum Circular 63-2010 (BIR
RMC 63-2010), which directs toll companies to
record an accumulated input VAT of zero balance in
their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that
first become liable to VAT a transitional input tax
credit of 2% on beginning inventory. For this reason,
the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the
petition for declaratory relief as one for prohibition;
and
 2. Whether or not petitioners Diaz and
Timbol have legal standing to file the action.
The case also presents two substantive
issues:
1. Whether or not the government is
unlawfully expanding VAT coverage by including
tollway operators and tollway operations in the terms
franchise grantees and sale of services under Section
108 of the Code; and
2. Whether or not the imposition of VAT on
tollway operators a) amounts to a tax on tax and not a
tax on services; b) will impair the tollway operators
right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and
cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a
resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the
characterization that petitioners Diaz and Timbol
gave their action. The government has sought
reconsideration of the Courts resolution, [7] however,
arguing that petitioners allegations clearly made out a
case for declaratory relief, an action over which the
Court has no original jurisdiction. The government
adds, moreover, that the petition does not meet the
requirements of Rule 65 for actions for prohibition
since the BIR did not exercise judicial, quasi-judicial,
or ministerial functions when it sought to impose
VAT on toll fees. Besides, petitioners Diaz and
Timbol has a plain, speedy, and adequate remedy in
the ordinary course of law against the BIR action in
the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for
declaratory relief as one for prohibition if the case
has far-reaching implications and raises questions
that need to be resolved for the public good. [8] The
Court has also held that a petition for prohibition is a
proper remedy to prohibit or nullify acts of executive
officials that amount to usurpation of legislative
authority.[9]
Here, the imposition of VAT on toll fees has
far-reaching implications. Its imposition would
impact, not only on the more than half a million
motorists who use the tollways everyday, but more so
on the governments effort to raise revenue for
funding various projects and for reducing budgetary
deficits.
To dismiss the petition and resolve the
issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-
paying public and the government. A belated
declaration of nullity of the BIR action would make
any attempt to refund to the motorists what they paid
an administrative nightmare with no
solution.Consequently, it is not only the right, but the
duty of the Court to take cognizance of and resolve
the issues that the petition raises.
Although the petition does not strictly
comply with the requirements of Rule 65, the Court
has ample power to waive such technical
requirements when the legal questions to be resolved
are of great importance to the public. The same may
be said of the requirement of locus standi which is a
mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section
108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on
the gross receipts derived from the sale or exchange
of services as well as from the use or lease of
properties. The third paragraph of Section 108
defines sale or exchange of services as follows:
The phrase sale or
exchange of services means the
performance of all kinds of
services in the Philippines for
others for a fee, remuneration or
consideration, including those
performed or rendered by
construction and service
contractors; stock, real estate,
commercial, customs and
immigration brokers; lessors of
property, whether personal or
real; warehousing services;
lessors or distributors of
cinematographic films; persons
engaged in milling, processing,
manufacturing or repacking
goods for others; proprietors,
operators or keepers of hotels,
motels, resthouses, pension
houses, inns, resorts; proprietors
or operators of restaurants,
refreshment parlors, cafes and
other eating places, including
clubs and caterers; dealers in
securities; lending investors;
transportation contractors on
their transport of goods or
cargoes, including persons who
transport goods or cargoes for
hire and other domestic common
carriers by land relative to their
transport of goods or cargoes;
common carriers by air and sea
relative to their transport of
passengers, goods or cargoes
from one place in the Philippines
to another place in the
Philippines; sales of electricity by
generation companies,
transmission, and distribution
companies; services of franchise
grantees of electric utilities,
telephone and telegraph, radio
and television broadcasting and
all other franchise grantees
except those under Section 119 of
this Code and non-life insurance
companies (except their crop
insurances), including surety,
fidelity, indemnity and bonding
companies; and similar services
 regardless of whether or not the
performance thereof calls for the
exercise or use of the physical or
mental faculties. (Underscoring
supplied)
It is plain from the above that the law
imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified in
the list. The enumeration of affected services is not
exclusive.[11] By qualifying services with the words
all kinds, Congress has given the term services an all-
encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and
broad is the VATs reach rather than establish concrete
limits to its application. Thus, every activity that can
be imagined as a form of service rendered for a fee
should be deemed included unless some provision of
law especially excludes it.
Now, do tollway operators render services for a
fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the
services that tollway operators render. Essentially,
tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular
public highways that meander through populated
areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-
moving. In consideration for constructing tollways at
their expense, the operators are allowed to collect
government-approved fees from motorists using the
tollways until such operators could fully recover their
expenses and earn reasonable returns from their
investments.
When a tollway operator takes a toll fee from a
motorist, the fee is in effect for the latters use of the
tollway facilities over which the operator enjoys
private proprietary rights[12]that its contract and the
law recognize. In this sense, the tollway operator is
no different from the following service providers
under Section 108 who allow others to use their
properties or facilities for a fee:
1. Lessors of property,
whether personal or real;
2. Warehousing service
operators;
3. Lessors or distributors
of cinematographic films;
4. Proprietors, operators or
keepers of hotels, motels,
resthouses, pension houses, inns,
resorts;
5. Lending investors (for
use of money);
6. Transportation
contractors on their transport of
goods or cargoes, including persons
who transport goods or cargoes for
hire and other domestic common
carriers by land relative to their
transport of goods or cargoes; and
7. Common carriers by air
and sea relative to their transport of
passengers, goods or cargoes from
one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that
Section 108 subjects to VAT all kinds of services
rendered for a fee regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties. This means that
services to be subject to VAT need not fall under the
traditional concept of services, the personal or
professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the
broad term all kinds of services, they also come
under the specific class described in Section 108 as
all other franchise grantees who are subject to VAT,
except those under Section 119 of this Code.
Tollway operators are franchise grantees and
they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with
gross annual incomes of less than P10 million and
gas and water utilities) that Section 119[13] spares
from the payment of VAT. The word franchise
broadly covers government grants of a special right
to do an act or series of acts of public concern.[14]
Petitioners of course contend that tollway
operators cannot be considered franchise grantees
under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that
the franchise grantees it speaks of are those who hold
legislative franchises. Petitioners give no reason, and
the Court cannot surmise any, for making a
distinction between franchises granted by Congress
and franchises granted by some other government
agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by
local authorities, as agents of the state, constitute as
much a legislative franchise as though the grant had
been made by Congress itself. [15] The term franchise
has been broadly construed as referring, not only to
authorizations that Congress directly issues in the
form of a special law, but also to those granted by
administrative agencies to which the power to grant
franchises has been delegated by Congress.[16]
Tollway operators are, owing to the nature
and object of their business, franchise grantees. The
construction, operation, and maintenance of toll
facilities on public improvements are activities of
public consequence that necessarily require a special
grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways
to the Philippine National Construction Company, the
former tollway concessionaire for the North and
South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers under
P.D. 1112.[17] The franchise in this case is evidenced
by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of
the services rendered by tollway operators excludes
such services from the term sale of services under
Section 108 of the Code.But, again, nothing in
Section 108 supports this contention. The reverse is
true. In specifically including by way of example
electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of
VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its
use or service is a franchise.[19]
Nor can petitioners cite as binding on the
Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be
law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,[20] statements
made by individual members of Congress in the
consideration of a bill do not necessarily reflect the
sense of that body and are, consequently, not
controlling in the interpretation of law. The
congressional will is ultimately determined by the
language of the law that the lawmakers voted
on. Consequently, the meaning and intention of the
law must first be sought in the words of the statute
itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations,
according to good and approved usage and without
resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a
users tax and to impose VAT on toll fees is
tantamount to taxing a tax.[21] Actually, petitioners
base this argument on the following discussion
in Manila International Airport Authority (MIAA) v.
Court of Appeals:[22]
No one can dispute that
properties of public dominion
mentioned in Article 420 of the
Civil Code, like roads, canals,
rivers, torrents, ports and bridges
constructed by the State,are
owned by the State. The term
ports includes seaports and
airports.
The MIAA Airport Lands and
Buildings constitute a port
constructed by the State. Under
Article 420 of the Civil Code,
the MIAA Airport Lands and
Buildings are properties of public
dominion and thus owned by the
State or the Republic of
the Philippines.
x x x The operation by
the government of a tollway does
not change the character of the
road as one for public use.
Someone must pay for the
maintenance of the road, either
the public indirectly through the
taxes they pay the government,
or only those among the public
who actually use the road
through the toll fees they pay
upon using the road. The tollway
system is even a more efficient
and equitable manner of taxing
the public for the maintenance of
public roads.
The charging of fees to
the public does not determine the
character of the property
whether it is for public dominion
or not. Article 420 of the Civil
Code defines property of public
dominion as one intended for
public use. Even if the
government collects toll fees, the
road is still intended for public
use if anyone can use the road
under the same terms and
conditions as the rest of the
public. The charging of fees, the
limitation on the kind of vehicles
that can use the road, the speed
restrictions and other conditions
for the use of the road do not
affect the public character of the
road.
The terminal fees MIAA
charges to passengers, as well as
the landing fees MIAA charges to
airlines, constitute the bulk of the
income that maintains the
operations of MIAA. The
collection of such fees does not
change the character of MIAA as
an airport for public use. Such
fees are often termed users tax.
This means taxing those among
the public who actually use a
public facility instead of taxing
all the public including those who
never use the particular public
facility. A users tax is more
equitable a principle of taxation
mandated in the 1987
Constitution.[23] (Underscoring
supplied)
Petitioners assume that what the Court said
above, equating terminal fees to a users tax must also
pertain to tollway fees. But the main issue in
the MIAA case was whether or
not Paraaque City could sell airport lands and
buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local
governments have no power to tax the national
government, the Court held that the City could not
proceed with the auction sale. MIAA forms part of
the national government although not integrated in
the department framework.[24] Thus, its airport lands
and buildings are properties of public dominion
beyond the commerce of man under Article 420(1)
[25]
of the Civil Code and could not be sold at public
auction.
As can be seen, the discussion in
the MIAA case on toll roads and toll fees was made,
not to establish a rule that tollway fees are users tax,
but to make the point that airport lands and buildings
are properties of public dominion and that the
collection of terminal fees for their use does not make
them private properties. Tollway fees are not
taxes.Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the
government.
 It would of course be another matter if
Congress enacts a law imposing a users tax,
collectible from motorists, for the construction and
maintenance of certain roadways.The tax in such a
case goes directly to the government for the
replenishment of resources it spends for the
roadways. This is not the case here. What the
government seeks to tax here are fees collected from
tollways that are constructed, maintained, and
operated by private tollway operators at their own
expense under the build, operate, and transfer scheme
that the government has adopted for expressways.
[26]
Except for a fraction given to the government, the
toll fees essentially end up as earnings of the tollway
operators.
In sum, fees paid by the public to tollway operators
for use of the tollways, are not taxes in any sense. A
tax is imposed under the taxing power of the
government principally for the purpose of raising
revenues to fund public expenditures. [27] Toll fees, on
the other hand, are collected by private tollway
operators as reimbursement for the costs and
expenses incurred in the construction, maintenance
and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll
fees are charged for the use of public facilities,
therefore, they are not government exactions that can
be properly treated as a tax. Taxes may be imposed
only by the government under its sovereign authority,
toll fees may be demanded by either the government
or private individuals or entities, as an attribute of
ownership.[28]
Parenthetically, VAT on tollway operations cannot be
deemed a tax on tax due to the nature of VAT as an
indirect tax. In indirect taxation, a distinction is made
between the liability for the tax and burden of the tax.
The seller who is liable for the VAT may shift or pass
on the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is
transferred is not the sellers liability but merely the
burden of the VAT.[29]
Thus, the seller remains directly and legally
liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT
ceases to be a tax[30] and simply becomes part of the
cost that the buyer must pay in order to purchase the
good, property or service.
Consequently, VAT on tollway operations is
not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is
imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other
words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The
latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.
For this reason, VAT on tollway operations
cannot be a tax on tax even if toll fees were deemed
as a users tax. VAT is assessed against the tollway
operators gross receipts and not necessarily on the
toll fees. Although the tollway operator may shift the
VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT
burden simply becomes part of the toll fees that one
has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke
the non-impairment of contract clause on behalf of
private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the
alleged diminution in return of investments that may
result from the VAT imposition. She has no interest at
all in the profits to be earned under the TOAs. The
interest in and right to recover investments solely
belongs to the private tollway investors.
Besides, her allegation that the private
investors rate of recovery will be adversely affected
by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion
that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that
are manifestly conjectural. Neither can it prohibit the
State from exercising its sovereign taxing power
based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the
substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and
incapable of implementation. They cite the fact that,
in order to claim input VAT, the name, address and
tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner
by which the BIR intends to implement the VAT by
rounding off the toll rate and putting any excess
collection in an escrow account is also illegal, while
the alternative of giving change to thousands of
motorists in order to meet the exact toll rate would be
a logistical nightmare. Thus, according to them, the
VAT on tollway operations is not administratively
feasible.[33]
Administrative feasibility is one of the
canons of a sound tax system. It simply means that
the tax system should be capable of being effectively
administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the
canon, however, will not render a tax imposition
invalid except to the extent that specific
constitutional or statutory limitations are impaired.
[34]
Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is
not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing
authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the
manner of its implementation is illegal or
unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go
about it,[35] the facts pertaining to the matter are not
sufficiently established for the Court to pass
judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first
be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively
rests. The Court cannot preempt the BIRs discretion
on the matter, absent any clear violation of law or the
Constitution.
 For the same reason, the Court cannot
prematurely declare as illegal, BIR RMC 63-2010
which directs toll companies to record an
accumulated input VAT of zero balance in their books
as of August 16, 2010, the date when the VAT
imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code
which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.
In this connection, the BIR explained that
BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been
assessed VAT as early as 2005, but failed to charge
VAT-inclusive toll fees which by now can no longer
be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT
belongs to the tollway operators who have not
questioned the circulars validity. They are thus the
ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal
Revenue did not usurp legislative prerogative or
expand the VAT laws coverage when she sought to
impose VAT on tollway operations. Section 108(A) of
the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code.Tollway
operators are not among the franchise grantees
subject to franchise tax under the latter
provision. Neither are their services among the VAT-
exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt
tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for the
law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on
language in the law too plain to be mistaken. [37] But
as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to
simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter
of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely
uphold this legislative policy, as reflected first and
foremost in the language of the tax statute. Thus, any
unwarranted burden that may be perceived to result
from enforcing such policy must be properly referred
to Congress. The Court has no discretion on the
matter but simply applies the law.
The VAT on franchise grantees has been in
the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is
only now, however, that the executive has earnestly
pursued the VAT imposition against tollway
operators. The executive exercises exclusive
discretion in matters pertaining to the implementation
and execution of tax laws. Consequently, the
executive is more properly suited to deal with the
immediate and practical consequences of the VAT
imposition.
WHEREFORE, the
Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenues motion for
reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V.
Diaz and Aurora Ma. F. Timbols petition for lack of
merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 149073 February 16, 2005
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
CEBU TOYO CORPORATION, respondent.
DECISION
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of
Appeals, in CA-G.R. SP No. 60304, affirmed
the Resolutions dated May 31, 20002 and August 2,
2000,3 of the Court of Tax Appeals (CTA) ordering
the Commissioner of Internal Revenue (CIR) to allow
a partial refund or, alternatively, to issue a tax credit
certificate in favor of Cebu Toyo Corporation in the
sum of P2,158,714.46, representing the unutilized
input value-added tax (VAT) payments.
The facts, as culled from the records, are as follows:
Respondent Cebu Toyo Corporation is a domestic
corporation engaged in the manufacture of lenses and
various optical components used in television sets,
cameras, compact discs and other similar devices. Its
principal office is located at the Mactan Export
Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It
is a subsidiary of Toyo Lens Corporation, a non-
resident corporation organized under the laws of
Japan. Respondent is a zone export enterprise
registered with the Philippine Economic Zone
Authority (PEZA), pursuant to the provisions of
Presidential Decree No. 66.4 It is also registered with
the Bureau of Internal Revenue (BIR) as a VAT
taxpayer.5
As an export enterprise, respondent sells 80% of its
products to its mother corporation, the Japan-based
Toyo Lens Corporation, pursuant to an Agreement of
Offsetting. The rest are sold to various enterprises
doing business in the MEPZ. Inasmuch as both sales
are considered export sales subject to Value-Added
Tax (VAT) at 0% rate under Section 106(A)(2)(a)6 of
the National Internal Revenue Code, as amended,
respondent filed its quarterly VAT returns from April
1, 1996 to December 31, 1997 showing a total input
VAT of P4,462,412.63.
On March 30, 1998, respondent filed with the Tax
and Revenue Group of the One-Stop Inter-Agency
Tax Credit and Duty Drawback Center of the
Department of Finance, an application for tax
credit/refund of VAT paid for the period April 1, 1996
to December 31, 1997 amounting to P4,439,827.21
representing excess VAT input payments.
Respondent, however, did not bother to wait for the
Resolution of its claim by the CIR. Instead, on June
26, 1998, it filed a Petition for Review with the CTA
to toll the running of the two-year prescriptive period
pursuant to Section 2307 of the Tax Code.
Before the CTA, the respondent posits that as a VAT-
registered exporter of goods, it is subject to VAT at
the rate of 0% on its export sales that do not result in
any output tax. Hence, the unutilized VAT input taxes
on its purchases of goods and services related to such
zero-rated activities are available as tax credits or
refunds.
The petitioners position is that respondent was not
entitled to a refund or tax credit since: (1) it failed to
show that the tax was erroneously or illegally
collected; (2) the taxes paid and collected are
presumed to have been made in accordance with law;
and (3) claims for refund are strictly construed
against the claimant as these partake of the nature of
tax exemption.
Initially, the CTA denied the petition for insufficiency
of evidence.8 The tax court sustained respondents
argument that it was a VAT-registered entity. It also
found that the petition was timely, as it was filed
within the prescription period. The CTA also ruled
that the respondents sales to Toyo Lens Corporation
and to certain establishments in the Mactan Export
Processing Zone were export sales subject to VAT at
0% rate. It found that the input VAT covered by
respondents claim was not applied against any
output VAT. However, the tax court decreed that the
petition should nonetheless be denied because of the
respondents failure to present documentary evidence
to show that there were foreign currency exchange
proceeds from its export sales. The CTA also
observed that respondent failed to submit the
approval by Bangko Sentral ng Pilipinas (BSP) of its
Agreement of Offsetting with Toyo Lens Corporation
and the certification of constructive inward
remittance.
Undaunted, respondent filed on February 21, 2000,
a Motion for Reconsideration arguing that: (1)
proof of its inward remittance was not required by
law; (2) BSP and BIR regulations do not require BSP
approval on its Agreement of Offsetting nor do they
require certification on the amount constructively
remitted; (3) it was not legally required to prove
foreign currency payments on the remaining sales to
MEPZ enterprises; and (4) it had complied with the
substantiation requirements under Section 106(A)(2)
(a) of the Tax Code. Hence, it was entitled to a refund
of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the
motion for reconsideration in a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be
meritorious, the same is hereby partially granted.
Accordingly, the Court hereby MODIFIES its
decision in the above-entitled case, the dispositive
portion of which shall now read as follows:
WHEREFORE, finding the petition for review
partially meritorious, respondent is hereby
ORDERED to REFUND or, in the alternative, to
ISSUE a TAX CREDIT CERTIFICATE in favor of
Petitioner in the amount of P2,158,714.46
representing unutilized input tax payments.
SO ORDERED.9
In granting partial reconsideration, the tax court
found that there was no need for BSP approval of the
Agreement of Offsetting since the same may be
categorized as an inter-company open account offset
arrangement. Hence, the respondent need not present
proof of foreign currency exchange proceeds from its
sales to MEPZ enterprises pursuant to Section 106(A)
(2)(a)10 of the Tax Code. However, the CTA stressed
that respondent must still prove that there was an
actual offsetting of accounts to prove that
constructive foreign currency exchange proceeds
were inwardly remitted as required under Section
106(A)(2)(a).
The CTA found that only the amount
of Y274,043,858.00 covering respondents sales to
Toyo Lens Corporation and purchases from said
mother company for the period August 7, 1996 to
August 26, 1997 were actually offset against
respondents related accounts receivable and accounts
payable as shown by the Agreement for Offsetting Total Zero-
dated August 30, 1997. Resort to the respondents Rated Sales
Accounts Receivable and Accounts Payable
Quotient
subsidiary ledgers corroborated the amount. The tax
court also found that out of the total export sales for Multiply by
the period April 1, 1996 to December 31, 1997 Allowable P3,684,441.91 No. 60304, praying for the reversal of the CTA
amounting to Y700,654,606.15, respondents sales to Input Tax
MEPZ enterprises amounted only
to Y136,473,908.05 of said total. Thus, allocating the Amount P2,158,714. to a refund of input taxes since it is VAT-exempt.
input taxes supported by receipts to the export sales, Refundable
the CTA determined that the refund/credit amounted
to only P2,158,714.46,11 computed as follows: On June 21, 2000, petitioner Commissioner filed
a Motion for Reconsideration arguing that
Total Input respondent was not entitled to a refund because as a
Taxes
P4,439,827.21 PEZA-registered enterprise, it was not subject to VAT
Claimed by pursuant to Section 2413of Republic Act No.
respondent 7916,14 as amended by Rep. Act No. 8748.15 Thus,
since respondent was not subject to VAT, the
Less: Commissioner contended that the capital goods it
Exceptions purchased must be deemed not used in VAT taxable
made by business and therefore it was not entitled to refund of
SGV input taxes on such capital goods pursuant to Section
4.106-1 of Revenue Regulations No. 7-95.16
a.) 1996 P651,256.17
Petitioner filed a Motion for Reconsideration on
b.) 1997 104,129.13 755,385.30 June 21, 2000 based on the following theories: (1)
that respondent being registered with the PEZA as an
Validly ecozone enterprise is not subject to VAT pursuant to
Supported P3,684,441.91 Sec. 24 of Rep. Act No. 7916; and (2) since
Input Taxes respondents business is not subject to VAT, the
capital goods it purchased are considered not used in
Allocation: a VAT taxable business and therefore is not entitled to
a refund of input taxes.17
Verified The respondent opposed the Commissioners Motion
Zero-Rated for Reconsideration and prayed that the CTA
Sales resolution be modified so as to grant it the entire
amount of tax refund or credit it was seeking.
a.) Toyo On August 2, 2000, the Court of Tax Appeals denied
Lens Y274,043,858.0 the petitioners motion for reconsideration. It held
Corporatio 0 that the grounds relied upon were only raised for the
n first time and that Section 24 of Rep. Act No. 7916
was not applicable since respondent has availed of
b.) MEPZ Y410,517,766.0 the income tax holiday incentive under Executive
136,473,908.05
Enterprises Order No. 226 or the Omnibus Investment Code of
1987 pursuant to Section 2318 of Rep. Act No. 7916.
Divided by Y700,654,606.1 The tax court pointed out that E.O. No. 226 granted
PEZA-registered enterprises an exemption from
payment of income taxes for 4 or 6 years depending
on whether the registration was as a pioneer or as a
non-pioneer enterprise, but subject to other national
taxes including VAT.
0.5859
The petitioner then filed a Petition for Review with
the Court of Appeals (CA), docketed as CA-G.R. SP
Resolutions dated May 31, 2000 and August 2, 2000,
and reiterating its claim that respondent is not entitled
[52] On July 6, 2001, the appellate court decided CA-G.R.
SP No. 60304 in respondents favor, thus:
WHEREFORE, finding no merit in the petition, this
Court DISMISSES it and AFFIRMS the Resolutions
dated May 31, 2000 and August 2, 2000 . . . of the
Court of Tax Appeals.
SO ORDERED.19
The Court of Appeals found no reason to set aside the
conclusions of the Court of Tax Appeals. The
appellate court held as untenable herein petitioners
argument that respondent is not entitled to a refund
because it is VAT-exempt since the evidence showed
that it is a VAT-registered enterprise subject to VAT at
the rate of 0%. It agreed with the ruling of the tax
court that respondent had two options under Section
23 of Rep. Act No. 7916, namely: (1) to avail of an
income tax holiday under E.O. No. 226 and be
subject to VAT at the rate of 0%; or (2) to avail of the
5% preferential tax under P.D. No. 66 and enjoy VAT
exemption. Since respondent availed of the incentives
under E.O. No. 226, then the 0% VAT rate would be
applicable to it and any unutilized input VAT should
be refunded to respondent upon proper application
with and substantiation by the BIR.1awphi1.nt
Hence, the instant petition for review now before us,
with herein petitioner alleging that:
I. RESPONDENT BEING REGISTERED WITH
THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA) AS AN ECOZONE EXPORT
ENTERPRISE, ITS BUSINESS IS NOT SUBJECT
TO VAT PURSUANT TO SECTION 24 OF
REPUBLIC ACT NO. 7916 IN RELATION TO
SECTION 103 OF THE TAX CODE, AS
AMENDED BY RA NO. 7716.
II. SINCE RESPONDENTS BUSINESS IS NOT
SUBJECT TO VAT, IT IS NOT ENTITLED TO
REFUND OF INPUT TAXES PURSUANT TO
SECTION 4.103-1 OF REVENUE REGULATIONS
NO. 7-95.20
In our view, the main issue for our resolution is
whether the Court of Appeals erred in affirming the
Court of Tax Appeals resolution granting a refund in
the amount of P2,158,714.46 representing unutilized
input VAT on goods and services for the period April
1, 1996 to December 31, 1997.
Both the Commissioner of Internal Revenue and the
Office of the Solicitor General argue that respondent
Cebu Toyo Corporation, as a PEZA-registered
enterprise, is exempt from national and local taxes,
including VAT, under Section 24 of Rep. Act No.
7916 and Section 10921 of the NIRC. Thus, they
contend that respondent Cebu Toyo Corporation is
not entitled to any refund or credit on input taxes it
previously paid as provided under Section 4.103-
122 of Revenue Regulations No. 7-95,
notwithstanding its registration as a VAT taxpayer.
For petitioner claims that said registration was
erroneous and did not confer upon the respondent any
right to claim recognition of the input tax credit.
The respondent counters that it availed of the income
tax holiday under E.O. No. 226 for four years from
August 7, 1995 making it exempt from income tax
but not from other taxes such as VAT. Hence,
according to respondent, its export sales are not
exempt from VAT, contrary to petitioners claim, but
its export sales is subject to 0% VAT. Moreover, it
argues that it was able to establish through a report
certified by an independent Certified Public
Accountant that the input taxes it incurred from April
1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have
any output tax against which said input taxes may be
offset, it had the option to file a claim for refund/tax
credit of its unutilized input taxes.
Considering the submission of the parties and the
evidence on record, we find the petition bereft of
merit.
Petitioners contention that respondent is not entitled
to refund for being exempt from VAT is untenable.
This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises
under Section 23 of Rep. Act No. 7916. Note that
under said statute, the respondent had two options
with respect to its tax burden. It could avail of an
income tax holiday pursuant to provisions of E.O.
No. 226, thus exempt it from income taxes for a
number of years but not from other internal revenue
taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D.
No. 66 and pay only the preferential tax rate of 5%
under Rep. Act No. 7916. Both the Court of Appeals
and the Court of Tax Appeals found that respondent
availed of the income tax holiday for four (4) years
starting from August 7, 1995, as clearly reflected in
its 1996 and 1997 Annual Corporate Income Tax
Returns, where respondent specified that it was
availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly
registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions.
Taxable transactions are those transactions which are
subject to value-added tax either at the rate of ten
percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit
for the value-added tax paid on purchases and leases
of goods, properties or services.23
An exemption means that the sale of goods,
properties 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. 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. Thus, a VAT-
registered purchaser of goods, properties or services
that are VAT-exempt, is not entitled to any input tax
on such purchases despite the issuance of a VAT
invoice or receipt.24
Now, having determined that respondent is engaged
in taxable transactions subject to VAT, let us then
proceed to determine whether it is subject to 10% or
zero (0%) rate of VAT. To begin with, it must be
recalled that generally, sale of goods and supply of
services performed in the Philippines are taxable at
the rate of 10%. However, export sales, or sales
outside the Philippines, shall be subject to value-
added tax at 0% if made by a VAT-registered
person.25 Under the value-added tax system, 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
purchase of goods, properties or services related to
such zero-rated sale shall be available as tax credit or
refund.261awphi1.nt
In principle, the purpose of applying a zero percent
(0%) rate on a taxable transaction is to exempt the
transaction completely from VAT previously
collected on inputs. It is thus the only true way to
ensure that goods are provided free of VAT. While the
zero rating and the exemption are computationally
the same, they actually differ in several aspects, to
wit:
(a) A zero-rated sale is a taxable transaction
but does not result in an output tax while an
exempted transaction is not subject to the
output tax;
(b) The input VAT on the purchases of a
VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded
while the seller in an exempt transaction is
not entitled to any input tax on his purchases
despite the issuance of a VAT invoice or
receipt.
(c) Persons engaged in transactions which
are zero-rated, being subject to VAT, are
required to register while registration is
optional for VAT-exempt persons.
In this case, it is undisputed that respondent is
engaged in the export business and is registered as a
VAT taxpayer per Certificate of Registration of the
BIR.27 Further, the records show that the respondent
is subject to VAT as it availed of the income tax
holiday under E.O. No. 226. Perforce, respondent is
subject to VAT at 0% rate and is entitled to a refund
or credit of the unutilized input taxes, which the
Court of Tax Appeals computed at P2,158,714.46, but
which we findafter recomputationshould
be P2,158,714.52.
The Supreme Court will not set aside lightly the
conclusions reached by the Court of Tax Appeals
which, by the very nature of its functions, is
dedicated exclusively to the resolution of tax
problems and has accordingly developed an expertise
on the subject, unless there has been an abuse or
improvident exercise of authority.28 In this case, we
find no cogent reason to deviate from this well-
entrenched principle. Thus, we are persuaded that
indeed the Court of Appeals committed no reversible
error in affirming the assailed ruling of the Court of
Tax Appeals.
WHEREFORE, the petition is DENIED for lack of
merit.l^vvphi1.net The assailed Decision dated July 6,
2001 of the Court of Appeals, in CA-G.R. SP No.
60304 is AFFIRMED with very slight modification.
Petitioner is hereby ORDERED to REFUND or, in
the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of respondent in the amount
of P2,158,714.52 representing unutilized input tax
payments. No pronouncement as to costs.
SO ORDERED.
 THIRD DIVISION
[G.R. No. 153866. February 11, 2005]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. SEAGATE
TECHNOLOGY
(PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating
from the Special Economic Zone in Naga, Cebu --
like herein respondent -- are entities exempt from all
internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or
VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated.
Hence, in the present case, the distinction between
exempt entities and exempt transactions has little
significance, because the net result is that the
taxpayer is not liable for the VAT. Respondent, a
VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for
the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of
Appeals did not err in ruling that it is entitled to such
refund or credit.
The Case
Before us is a Petition for Review [1] under Rule
45 of the Rules of Court, seeking to set aside the May
27, 2002 Decision[2] of the Court of Appeals (CA) in
CA-GR SP No. 66093. The decretal portion of the
Decision reads as follows:
WHEREFORE, foregoing premises considered, the
petition for review is DENIED for lack of merit.[3]
The Facts
The CA quoted the facts narrated by the Court
of Tax Appeals (CTA), as follows:
As jointly stipulated by the parties, the pertinent facts
x x x involved in this case are as follows:
1. [Respondent] is a resident foreign
corporation duly registered with the
Securities and Exchange Commission
to do business in the Philippines, with
principal office address at the new
Cebu Township One, Special
Economic Zone, Barangay Cantao-an,
Naga, Cebu;
2. [Petitioner] is sued in his official
capacity, having been duly appointed
and empowered to perform the duties
of his office, including, among others,
the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the
Philippine Export Zone Authority
(PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as
amended, to engage in the manufacture
of recording components primarily
used in computers for export. Such
registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added
Tax)]-registered entity as evidenced by
VAT Registration Certification No. 97-
083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998
to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of
VAT input taxes in the amount
of P28,369,226.38 with supporting
documents (inclusive of
the P12,267,981.04 VAT input taxes
subject of this Petition for Review),
was filed on 4 October 1999 with
Revenue District Office No. 83,
Talisay Cebu;
7. No final action has been received by
[respondent] from [petitioner] on
[respondents] claim for VAT refund.
The administrative claim for refund by the
[respondent] on October 4, 1999 was not acted upon
by the [petitioner] prompting the [respondent] to
elevate the case to [the CTA] on July 21, 2000 by
way of Petition for Review in order to toll the
running of the two-year prescriptive period.
For his part, [petitioner] x x x raised the following
Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax
refund/credit is subject to
administrative routinary
investigation/examination by
[petitioners] Bureau;
2. Since taxes are presumed to have been
collected in accordance with laws and
regulations, the [respondent] has the
burden of proof that the taxes sought to
be refunded were erroneously or
illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals,
280 SCRA 459 (1997), the Supreme
Court ruled that:
A claimant
has the
burden of
proof to
establish
the
factual
basis of
his or her
claim for
tax
credit/ref
und.
4. Claims for tax refund/tax credit are
construed in strictissimi juris against
the taxpayer. This is due to the fact that
claims for refund/credit [partake of]
the nature of an exemption from tax.
Thus, it is incumbent upon the
[respondent] to prove that it is indeed
entitled to the refund/credit sought.
Failure on the part of the [respondent]
to prove the same is fatal to its claim
for tax credit. He who claims
exemption must be able to justify his
claim by the clearest grant of organic
or statutory law. An exemption from
the common burden cannot be
permitted to exist upon vague
implications;
5. Granting, without admitting, that
[respondent] is a Philippine Economic
Zone Authority (PEZA) registered
Ecozone Enterprise, then its business is
not subject to VAT pursuant to Section
 24 of Republic Act No. ([RA]) 7916 in
relation to Section 103 of the Tax
Code, as amended. As [respondents]
business is not subject to VAT, the
capital goods and services it alleged to
have purchased are considered not
used in VAT taxable business. As such,
[respondent] is not entitled to refund of
input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue
Regulations No. ([RR])7-95, and of
input taxes on services pursuant to
Section 4.103 of said regulations.
6. [Respondent] must show compliance
with the provisions of Section 204 (C)
and 229 of the 1997 Tax Code on filing
of a written claim for refund within
two (2) years from the date of payment
of tax.
On July 19, 2001, the Tax Court rendered a decision
granting the claim for refund.[4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA
granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the
reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input
VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent
had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as
the Omnibus Investment Code of 1987), not of those
under both Presidential Decree No. (PD) 66, as
amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the
payment of income tax when it opted for the income
tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109
of the Tax Code nor Sections 4.106-1 and 4.103-1 of
RR 7-95 were applicable. Having paid the input VAT
on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims
for its refund within the two-year prescriptive period.
Such payments were -- to the extent of the refundable
value -- duly supported by VAT invoices or official
receipts, and were not yet offset against any output
VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our
consideration:
Whether or not respondent is entitled to the refund or
issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized
input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999.[6]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered
PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise
within a special economic zone,[7] respondent is
entitled to the fiscal incentives and
benefits[8] provided for in either PD 66 [9] or EO 226.
[10]
It shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic Act
Nos. (RA) 7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the
provisions of other laws to the contrary, respondent
shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares,
except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled,
installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities. [13] Even so,
respondent would enjoy a net-operating loss carry
over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export
taxes, local taxes and licenses.[14]
Comparatively, the same exemption from
internal revenue laws and regulations applies if EO
226[15] is chosen. Under this law, respondent shall
further be entitled to an income tax holiday;
additional deduction for labor expense; simplification
of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing
warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment,
as well as for taxes and duties on raw materials; and
exemption from contractors taxes, wharfage dues,
taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees,
[16]
local taxes and licenses, and real property taxes.[17]
A privilege available to respondent under the
provision in RA 7227 on tax and duty-free
importation of raw materials, capital and
equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and
regulations to the contrary -- extends [20] to that zone
the provision stating that no local or national taxes
shall be imposed therein.[21] No exchange control
policy shall be applied; and free markets for foreign
exchange, gold, securities and future shall be allowed
and maintained.[22] Banking and finance shall also be
liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency
depository units of local commercial banks and
offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA
7844 from negotiable tax credits[24] for locally-
produced materials used as inputs. Aside from the
other incentives possibly already granted to it by the
Board of Investments, it also enjoys preferential
credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately
clear that petitioner enjoys preferential tax treatment.
[27]
It is not subject to internal revenue laws and
regulations and is even entitled to tax credits. The
VAT on capital goods is an internal revenue tax from
which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt,
petitioner as a VAT-registered person,[28] however, is
entitled to their credits.
Nature of the VAT and
the Tax Credit Method
Viewed broadly, the VAT is a uniform tax
ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not
in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties
or on each rendition of services in the course of trade
or business[29] as they pass along the production and
distribution chain, the tax being limited only to the
value added[30] to such goods, properties or services
by the seller, transferor or lessor.[31] It is an indirect
tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or
services.[32] As such, it should be understood not in
the context of the person or entity that is primarily,
directly and legally liable for its payment, but in
terms of its nature as a tax on consumption. [33] In
either case, though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in
the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method.
[35]
Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented
and practiced in Europe and subsequently adopted in
New Zealand and Canada.[36] Under the present
method that relies on invoices, an entity can credit
against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and
imports.[37]
If at the end of a taxable quarter the output
taxes[38] charged by a seller[39] are equal to the input
taxes[40] passed on by the suppliers, no payment is
required. It is when the output taxes exceed the input
taxes that the excess has to be paid.[41] If, however,
the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or
quarters.[42] Should the input taxes result from zero-
rated or effectively zero-rated transactions or from
the acquisition of capital goods,[43] any excess over
the output taxes shall instead be refunded [44] to the
taxpayer or credited[45] against other internal revenue
taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect,
zero-rated transactions differ from effectively zero-
rated transactions as to their source.
Zero-rated transactions generally refer to the
export sale of goods and supply of services.[47] The
tax rate is set at zero.[48] When applied to the tax base,
such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions
charges no output tax,[49] but can claim a refund of or
a tax credit certificate for the VAT previously charged
by suppliers.
Effectively zero-rated transactions, however,
refer to the sale of goods[50] or supply of services[51] to
persons or entities whose exemption under special
laws or international agreements to which the
Philippines is a signatory effectively subjects such
transactions to a zero rate.[52] Again, as applied to the
tax base, such rate does not yield any tax chargeable
against the purchaser. The seller who charges zero
output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT
previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating
and exemption are the same, but the extent of
relief that results from either one of them is not.
Applying the destination principle[53] to the
exportation of goods, automatic zero rating[54] is
primarily intended to be enjoyed by the seller who is
directly and legally liable for the VAT, making such
seller internationally competitive by allowing the
refund or credit of input taxes that are attributable to
export sales.[55] Effective zero rating, on the contrary,
is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by
the suppliers.
In both instances of zero rating, there is total
relief for the purchaser from the burden of the tax.
[56]
But in an exemption there is only partial relief,
[57]
because the purchaser is not allowed any tax
refund of or credit for input taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may
either be the transaction itself or any of the parties to
the transaction.[59]
An exempt transaction, on the one hand,
involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax
status -- VAT-exempt or not -- of the party to
the transaction.[60] Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any
tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person
or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which
the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT.
[61]
Such party is also not subject to the VAT, but may
be allowed a tax refund of or credit for input taxes
paid, depending on its registration as a VAT or non-
VAT taxpayer.
As mentioned earlier, the VAT is a tax on
consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods,
properties or services.[62] While the liability is
imposed on one person, the burden may be passed on
to another. Therefore, if a special law merely exempts
a party as a seller from its direct liability for payment
of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted
to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to
the case at bar, the purchase transactions entered into
by respondent are not VAT-exempt.
Special laws may certainly exempt transactions
from the VAT.[63] However, the Tax Code provides
that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which
respondent was registered. The
purchase transactions it entered into are, therefore,
not VAT-exempt. These are subject to the VAT;
respondent is required to register.
Its sales transactions, however, will either be
zero-rated or taxed at the standard rate of 10 percent,
[64]
depending again on the application of
the destination principle.[65]
If respondent enters into such sales transactions
with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these
shall be subject to 0 percent. [66] If entered into with a
purchaser for use or consumption in the Philippines,
then these shall be subject to 10 percent, [67] unless the
purchaser is exempt from the indirect burden of the
VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not
exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916
effectively subjects such transactions to a zero rate,
[68]
because the ecozone within which it is registered
is managed and operated by the PEZA as a separate
customs territory.[69] This means that in such zone is
created the legal fiction of foreign territory.[70] Under
the cross-border principle[71] of the VAT system being
enforced by the Bureau of Internal Revenue (BIR),
[72]
no VAT shall be imposed to form part of the cost
of goods destined for consumption outside of the
territorial border of the taxing authority. If exports of
goods and services from the Philippines to a foreign
country are free of the VAT,[73] then the same rule
holds for such exports from the national territory --
except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the
customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely,
sales by a PEZA-registered entity to a VAT-registered
person in the customs territory are deemed imports
from a foreign country.[74] An ecozone -- indubitably
a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil. [75] This legal
fiction is necessary to give meaningful effect to the
policies of the special law creating the zone. [76] If
respondent is located in an export processing
zone[77] within that ecozone, sales to the export
processing zone, even without being actually
exported, shall in fact be viewed as constructively
exported under EO 226.[78] Considered as export
sales,[79] such purchase transactions by respondent
would indeed be subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier
discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect
taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt
entity, can neither be directly charged for the VAT on
its sales nor indirectly made to bear, as added cost to
such sales, the equivalent VAT on its purchases. Ubi
lex non distinguit, nec nos distinguere debemus.
Where the law does not distinguish, we ought not to
distinguish.
Moreover, the exemption is both express and
pervasive for the following reasons:
First, RA 7916 states that no taxes, local and
national, shall be imposed on business establishments
operating within the ecozone.[81] Since this law does
not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus
non exceptis. An exception confirms the rule in cases
not excepted; that is, a thing not being excepted must
be regarded as coming within the purview of the
general rule.
Moreover, even though the VAT is not imposed
on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That
no VAT shall be imposed directly upon business
establishments operating within the ecozone under
RA 7916 also means that no VAT may be passed on
and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When
anything is prohibited directly, it is also prohibited
indirectly.
Second, when RA 8748 was enacted to amend
RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land
owned by developers.[82] This similar and repeated
prohibition is an unambiguous ratification of the laws
intent in not imposing local or national taxes on
business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw
materials, equipment and the like shall not be subject
to x x x internal revenue laws and regulations under
PD 66[83] -- the original charter of PEZA (then EPZA)
that was later amended by RA 7916.[84] No provisions
in the latter law modify such exemption.
Although this exemption puts the government at
an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national
economy by enticing more business investments and
creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA
law clearly reiterate that merchandise -- except those
prohibited by law -- shall not be subject to x x x
internal revenue laws and regulations x x x[86] if
brought to the ecozones restricted area [87] for
manufacturing by registered export enterprises, [88] of
which respondent is one. These rules also apply to all
enterprises registered with the EPZA prior to the
effectivity of such rules.[89]
Fifth, export processing zone enterprises
registered[90] with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from
national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used
for the manufacture of their products;[91] on required
supplies and spare part for consigned equipment;
[92]
and on foreign and domestic merchandise, raw
materials, equipment and the like -- except those
prohibited by law -- brought into the zone for
manufacturing.[93] In addition, they are given credits
for the value of the national internal revenue taxes
imposed on domestic capital equipment also
reasonably needed and exclusively used for the
manufacture of their products,[94] as well as for the
value of such taxes imposed on domestic raw
materials and supplies that are used in the
manufacture of their export products and that form
part thereof.[95]
Sixth, the exemption from local and national
taxes granted under RA 7227[96] are ipso facto
accorded to ecozones.[97] In case of doubt, conflicts
with respect to such tax exemption privilege shall be
resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 --
given for imported raw materials primarily used in
the production of export goods, [99] and for locally
produced raw materials, capital equipment and spare
parts used by exporters of non-traditional
products[100] -- shall also be continuously enjoyed by
similar exporters within the ecozone.[101] Indeed, the
latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions
are construed strictissimi juris[102] against the
taxpayer[103] and liberally in favor of the taxing
authority.[104]
Tax refunds are in the nature of such
exemptions.[105] Accordingly, the claimants of those
refunds bear the burden of proving the factual basis
of their claims;[106] and of showing, by words too
plain to be mistaken, that the legislature intended to
exempt them.[107] In the present case, all the cited
legal provisions are teeming with life with respect to
the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the
challenge.
Respondent, which as an entity is exempt, is
different from its transactions which are not exempt.
The end result, however, is that it is not subject to the
VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to
the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.
[108]
Nonetheless, its exemption as an entity and the
non-exemption of its transactions lead to the same
result for the following considerations:
First, the contemporaneous construction of our
tax laws by BIR authorities who are called upon to
execute or administer such laws[109] will have to be
adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable
failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the
application of the destination principle.[110] Revenue
Memorandum Circular No. (RMC) 74-99, however,
now clearly and correctly provides that any VAT-
registered suppliers sale of goods, property or
services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of
the class or type of the latters PEZA registration -- is
legally entitled to a zero rate.[111]
Second, the policies of the law should prevail.
Ratio legis est anima. The reason for the law is its
very soul.
In PD 66, the urgent creation of the EPZA
which preceded the PEZA, as well as the
establishment of export processing zones, seeks to
encourage and promote foreign commerce as a means
of x x x strengthening our export trade and foreign
exchange position, of hastening industrialization, of
reducing domestic unemployment, and of
accelerating the development of the country.[112]
RA 7916, as amended by RA 8748, declared
that by creating the PEZA and integrating the special
economic zones, the government shall actively
encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social
development of the country x x x through the
establishment, among others, of special economic
zones x x x that shall effectively attract legitimate
and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x
foreign investments in industry x x x which shall x x
x meet the tests of international competitiveness[,]
accelerate development of less developed regions of
the country[,] and result in increased volume and
value of exports for the economy.[114] Fiscal
incentives that are cost-efficient and simple to
administer shall be devised and extended to
significant projects to compensate for market
imperfections, to reward performance contributing to
economic development,[115] and to stimulate the
establishment and assist initial operations of the
enterprise.[116]
Wisely accorded to ecozones created under RA
7916[117] was the governments policy -- spelled out
earlier in RA 7227 -- of converting into alternative
productive uses[118] the former military reservations
and their extensions,[119] as well as of providing them
incentives[120] to enhance the benefits that would be
derived from them[121] in promoting economic and
social development.[122]
Finally, under RA 7844, the State declares the
need to evolve export development into a national
effort[123] in order to win international markets. By
providing many export and tax incentives, [124] the
State is able to drive home the point that exporting is
indeed the key to national survival and the means
through which the economic goals of increased
employment and enhanced incomes can most
expeditiously be achieved.[125]
The Tax Code itself seeks to promote
sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust
environment for business to enable firms to compete
better in the regional as well as the global market.
[126]
After all, international competitiveness requires
economic and tax incentives to lower the cost of
goods produced for export. State actions that affect
global competition need to be specific and selective
in the pricing of particular goods or services.[127]
All these statutory policies are congruent to the
constitutional mandates of providing incentives to
needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally
produced goods and adopting measures to help make
these competitive.[129] Tax credits for domestic inputs
strengthen backward linkages. Rightly so, the rule of
law and the existence of credible and efficient public
institutions are essential prerequisites for sustainable
economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement
under our VAT law.[131] Petitioner alleges that
respondent did register for VAT purposes with the
appropriate Revenue District Office. However, it is
now too late in the day for petitioner to challenge the
VAT-registered status of respondent, given the latters
prior representation before the lower courts and the
mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the
provisions of the EPZA law, is clear in exempting
from internal revenue laws and regulations the
equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in
manufacturing.[132] EO 226 even reiterates this
privilege among the incentives it gives to such
enterprises.[133] Petitioner merely asserts that by virtue
of the PEZA registration alone of respondent, the
latter is not subject to the VAT. Consequently, the
capital goods and services respondent has purchased
are not considered used in the VAT business, and no
VAT refund or credit is due. [134] This is a non sequitur.
By the VATs very nature as a tax on consumption, the
capital goods and services respondent has purchased
are subject to the VAT, although at zero rate.
Registration does not determine taxability under the
VAT law.
Moreover, the facts have already been
determined by the lower courts. Having failed to
present evidence to support its contentions against
the income tax holiday privilege of respondent,
[135]
petitioner is deemed to have conceded. It is a
cardinal rule that issues and arguments not
adequately and seriously brought below cannot be
raised for the first time on appeal. [136] This is a matter
of procedure[137] and a question of fairness.[138] Failure
to assert within a reasonable time warrants a
presumption that the party entitled to assert it either
has abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an
approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of
respondents transactions. The scope of such
regulations is not within the statutory authority x x x
granted by the legislature.[141]
First, a mere administrative issuance, like a BIR
regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.
[142]
The courts will not countenance one that
overrides the statute it seeks to apply and implement.
[143]
Other than the general registration of a taxpayer
the VAT status of which is aptly determined, no
provision under our VAT law requires an additional
application to be made for such taxpayers
transactions to be considered effectively zero-rated.
An effectively zero-rated transaction does not and
cannot become exempt simply because an application
therefor was not made or, if made, was denied. To
allow the additional requirement is to give unfettered
discretion to those officials or agents who, without
fluid consideration, are bent on denying a valid
application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its
officials or agents.[144]
Second, grantia argumenti that such an
application is required by law, there is still the
presumption of regularity in the performance of
official duty.[145] Respondents registration carries with
it the presumption that, in the absence of
contradictory evidence, an application for effective
zero rating was also filed and approval thereof given.
Besides, it is also presumed that the law has been
obeyed[146] by both the administrative officials and the
applicant.
Third, even though such an application was not
made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but
also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in
ecozones is an imperative, precisely to spur economic
growth in the country and attain global
competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance
with the invoicing requirements,[147] is sufficient for
the effective zero rating of the transactions of a
taxpayer. The nature of its business and transactions
can easily be perused from, as already clearly
indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its
transactions cannot be exempted by its mere failure
to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by
their nature, but by the taxpayers negligence -- a
result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase
transactions are subject to a zero VAT rate, the tax
refund or credit is in order.
As correctly held by both the CA and the Tax
Court, respondent had chosen the fiscal incentives in
EO 226 over those in RA 7916 and PD 66. It opted
for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath
of a simple registration under the PEZA law,[148] for
EO 226[149] also has provisions to contend with. These
two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While
EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered
exempt, not from the VAT, but only from the payment
of income tax for a certain number of years,
depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the
aforesaid 5 percent of gross income earned in lieu of
local and national taxes imposable upon business
establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be
refunded or credited.
Even if it is argued that respondent is subject to
the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One
can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on
business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent
as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in
excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court,
respondent complied with all the requisites for
claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This
fact alone distinguishes the present case from Contex,
in which this Court held that the petitioner therein
was registered as a non-VAT taxpayer.[151] Hence, for
being merely VAT-exempt, the petitioner in that case
cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital
goods of respondent are duly supported by VAT
invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI
after December 31, 1994 would no longer enjoy the
tax credit incentives on domestic capital equipment --
as provided for under Article 39(d), Title III, Book I
of EO 226[152] -- starting January 1, 1996, respondent
would still have the same benefit under a general and
express exemption contained in both Article 77(1),
Book VI of EO 226; and Section 12, paragraph 2 (c)
of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our
legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them
tax credits. This fact was revealed by the sponsorship
speeches in Congress during the second reading of
House Bill No. 14295, which later became RA 7916,
as shown below:
MR. RECTO. x x x Some of the incentives that this
bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x
x.
xxxxxxxxx
MR. DEL MAR. x x x To advance its cause in
encouraging investments and creating an
environment conducive for investors, the bill offers
incentives such as the exemption from local and
national taxes, x x x tax credits for locally sourced
inputs x x x.[153]
And third, no question as to either the filing of
such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under
all the special laws cited above is broad enough to
cover even the enforcement of internal revenue laws,
including prescription.[154]
Summary
To summarize, special laws expressly grant
preferential tax treatment to business establishments
registered and operating within an ecozone, which by
law is considered as a separate customs territory. As
such, respondent is exempt from all internal revenue
taxes, including the VAT, and regulations pertaining
thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax
regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions
intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior
application for the effective zero rating of its
transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites
for claiming a tax refund of or credit for the input
VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and
the Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
 SECOND DIVISION
[G.R. No. 150154. August 9, 2005]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. TOSHIBA
INFORMATION EQUIPMENT
(PHILS.), INC., respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review under Rule 45 of the
Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) prays for the reversal of the decision
of the Court of Appeals in CA-G.R. SP No. 59106,
[1]
affirming the order of the Court of Tax Appeals
(CTA) in CTA Case No. 5593,[2] which ordered said
petitioner CIR to refund or, in the alternative, to issue
a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the
amount of P16,188,045.44, representing unutilized
input value-added tax (VAT) payments for the first
and second quarters of 1996.
There is hardly any dispute as to the facts giving
rise to the present Petition.
Respondent Toshiba was organized and
established as a domestic corporation, duly-registered
with the Securities and Exchange Commission on 07
July 1995,[3] with the primary purpose of engaging in
the business of manufacturing and exporting of
electrical and mechanical machinery, equipment,
systems, accessories, parts, components, materials
and goods of all kinds, including, without limitation,
to those relating to office automation and information
technology, and all types of computer hardware and
software, such as HDD, CD-ROM and personal
computer printed circuit boards.[4]
On 27 September 1995, respondent Toshiba also
registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export
Enterprise, with principal office in Laguna
Technopark, Bian, Laguna.[5] Finally, on 29
December 1995, it registered with the Bureau of
Internal Revenue (BIR) as a VAT taxpayer and a
withholding agent.[6]
Respondent Toshiba filed its VAT returns for the
first and second quarters of taxable year 1996,
reporting input VAT in the amount
of P13,118,542.00[7] and P5,128,761.94,
[8]
respectively, or a total of P18,247,303.94. It alleged
that the said input VAT was from its purchases of
capital goods and services which remained unutilized
since it had not yet engaged in any business activity
or transaction for which it may be liable for any
output VAT.[9] Consequently, on 27 March 1998,
respondent Toshiba filed with the One-Stop Shop
Inter-Agency Tax Credit and Duty Drawback Center
of the Department of Finance (DOF) applications for
tax credit/refund of its unutilized input VAT for 01
January to 31 March 1996 in the amount
of P14,176,601.28,[10] and for 01 April to 30 June
1996 in the amount of P5,161,820.79,[11] for a total
of P19,338,422.07. To toll the running of the two-
year prescriptive period for judicially claiming a tax
credit/refund, respondent Toshiba, on 31 March 1998,
filed with the CTA a Petition for Review. It would
subsequently file an Amended Petition for Review on
10 November 1998 so as to conform to the evidence
presented before the CTA during the hearings.
In his Answer to the Amended Petition for
Review before the CTA, petitioner CIR raised several
Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner
filed a claim for refund/tax credit, the
same is subject to investigation by the
Bureau of Internal Revenue.
6. Taxes are presumed to have been collected
in accordance with law. Hence, petitioner
must prove that the taxes sought to be
refunded were erroneously or illegally
collected.
7. Petitioner must prove the allegations
supporting its entitlement to a refund.
8. Petitioner must show that it has complied
with the provisions of Sections 204(c) and
229 of the 1997 Tax Code on the filing of
a written claim for refund within two (2)
years from the date of payment of the tax.
9. Claims for refund of taxes are construed
strictly against claimants, the same being
in the nature of an exemption from
taxation.[12]
After evaluating the evidence submitted by
respondent Toshiba,[13] the CTA, in its Decision dated
10 March 2000, ordered petitioner CIR to refund, or
in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of P16,188,045.44.
[14]
In a Resolution, dated 24 May 2000, the CTA
denied petitioner CIRs Motion for Reconsideration
for lack of merit.[15]
 The Court of Appeals, in its Decision dated 27
September 2001, dismissed petitioner CIRs Petition
for Review and affirmed the CTA Decision dated 10
March 2000.
Comes now petitioner CIR before this Court
assailing the above-mentioned Decision of the Court
of Appeals based on the following grounds
1. The Court of Appeals erred in holding that
petitioners failure to raise in the Tax Court
the arguments relied upon by him in the
petition, is fatal to his cause.
2. The Court of Appeals erred in not holding
that respondent being registered with the
Philippine Economic Zone Authority
(PEZA) as an Ecozone Export Enterprise,
its business is not subject to VAT pursuant
to Section 24 of Republic Act No. 7916 in
relation to Section 103 (now 109) of the
Tax Code.
3. The Court of Appeals erred in not holding
that since respondents business is not
subject to VAT, the capital goods and
services it purchased are considered not
used in VAT taxable business, and,
therefore, it is not entitled to refund of
input taxes on such capital goods pursuant
to Section 4.106-1 of Revenue
Regulations No. 7-95 and of input taxes
on services pursuant to Section 4.103-1 of
said Regulations.
4. The Court of Appeals erred in holding that
respondent is entitled to a refund or tax
credit of input taxes it paid on zero-rated
transactions.[16]
Ultimately, however, the issue still to be
resolved herein shall be whether respondent Toshiba
is entitled to the tax credit/refund of its input VAT on
its purchases of capital goods and services, to which
this Court answers in the affirmative.
I within two (2) years after the close of the taxable
An ECOZONE enterprise is a VAT-exempt entity.
Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises
shall be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax
credit/refund on Section 106(b) of the Tax Code of
1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input
tax.
(b) Capital goods. A VAT-registered person may
apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported
or locally purchased, to the extent that such input
taxes have not been applied against output taxes. The
application may be made only within two (2) years
after the close of the taxable quarter when the
importation or purchase was made.[17]
Petitioner CIR, on the other hand, opposes such
claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the
VAT Regulations, as amended, which provides as
follows
Sec. 4.106-1. Refunds or tax credits of input tax.
...
(b) Capital Goods. -- Only a VAT-registered person
may apply for issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported
or locally purchased. The refund shall be allowed to
the extent that such input taxes have not been applied
against output taxes. The application should be made
quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are
used in VAT taxable business. If it is also used in
exempt operations, the input tax refundable shall only
be the ratable portion corresponding to the taxable
operations.
Capital goods or properties refer to goods or
properties with estimated useful life greater than one
year and which are treated as depreciable assets
under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services.
(Underscoring ours.)
Petitioner CIR argues that although respondent
Toshiba may be a VAT-registered taxpayer, it is not
engaged in a VAT-taxable business. According to
petitioner CIR, respondent Toshiba is actually VAT-
exempt, invoking the following provision of the Tax
Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall
be exempt from value-added tax.
(q) Transactions which are exempt under special
laws, except those granted under Presidential Decree
No. 66, 529, 972, 1491, and 1590, and non-electric
cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a
signatory.[18]
 Since respondent Toshiba is a PEZA-registered
enterprise, it is subject to the five percent (5%)
preferential tax rate imposed under Chapter III,
Section 24 of Republic Act No. 7916, otherwise
known as The Special Economic Zone Act of 1995,
as amended. According to the said section, [e]xcept
for real property taxes on land owned by developers,
no taxes, local and national, shall be imposed on
business establishments operating within the
ECOZONE. In lieu thereof, five percent (5%) of the
gross income earned by all business enterprises
within the ECOZONE shall be paid The five percent
(5%) preferential tax rate imposed on the gross
income of a PEZA-registered enterprise shall be in
lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is
VAT-exempt by virtue of a special law, Rep. Act No.
7916, as amended.
It would seem that petitioner CIR failed to
differentiate between VAT-exempt transactions from
VAT-exempt entities. In the case of Commissioner of
Internal Revenue v. Seagate Technology
(Philippines),[19] this Court already made such
distinction
An exempt transaction, on the one hand, involves
goods or services which, by their nature, are
specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax
status VAT-exempt or not of the party to the
transaction
An exempt party, on the other hand, is a person or
entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which
the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from VAT
Section 103(q) of the Tax Code of 1977, as
amended, relied upon by petitioner CIR, relates to
VAT-exempt transactions. These are transactions
exempted from VAT by special laws or international
agreements to which the Philippines is a signatory.
Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the
purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they
had paid thereon.
Section 103(q) of the Tax Code of 1977, as
amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes
that transactions covered by special laws may be
exempt from VAT, the very same section provides
that those falling under Presidential Decree No. 66
are not. Presidential Decree No. 66, creating the
Export Processing Zone Authority (EPZA), is the
precursor of Rep. Act No. 7916, as amended, [20] under
which the EPZA evolved into the PEZA.
Consequently, the exception of Presidential Decree
No. 66 from Section 103(q) of the Tax Code of 1977,
as amended, extends likewise to Rep. Act No. 7916,
as amended.
This Court agrees, however, that PEZA-
registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities,
not because of Section 24 of Rep. Act No. 7916, as
amended, which imposes the five percent (5%)
preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather,
because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign
territory.
It is important to note herein that respondent
Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been
described as
. . . [S]elected areas with highly developed or which
have the potential to be developed into agro-
industrial, industrial, tourist, recreational,
commercial, banking, investment and financial
centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An
ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones
(EPZs), free trade zones and tourist/recreational
centers.[21]
The national territory of the Philippines outside of the
proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.[22]
Section 8 of Rep. Act No. 7916, as amended,
mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory; [23] thus,
creating the fiction that the ECOZONE is a foreign
territory.[24] As a result, sales made by a supplier in
the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from
the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the
Customs Territory shall be considered as an
importation into the Customs Territory.
Given the preceding discussion, what would be
the VAT implication of sales made by a supplier from
the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross
Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and
services from the Philippines to a foreign country
must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed
with ten percent (10%) VAT.[25]
Applying said doctrine to the sale of goods,
properties, and services to and from the ECOZONES,
[26]
the BIR issued Revenue Memorandum Circular
(RMC) No. 74-99, on 15 October 1999. Of particular
interest to the present Petition is Section 3 thereof,
which reads
SECTION 3. Tax Treatment Of Sales Made By a
VAT Registered Supplier from The Customs
Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise
which is subject to the 5% special tax regime, in lieu
of all taxes, except real property tax, pursuant to R.A.
No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). This shall be
treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)
(5), NIRC and Sec. 23 of R.A. No. 7916, in relation
to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. This shall be treated subject to
zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling
No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is
not embraced by the 5% special tax regime, hence,
subject to taxes under the NIRC, e.g., Service
Establishments which are subject to taxes under the
NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be
treated as indirect export hence, considered subject to
zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)
(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to
ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. This shall be treated subject to
zero percent (0%) VAT under the cross border
doctrine of the VAT System, pursuant to VAT Ruling
No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property
or services made by a VAT registered supplier from
the Customs Territory to any registered enterprise
operating in the ecozone, regardless of the class or
type of the latters PEZA registration, is actually
qualified and thus legally entitled to the zero percent
(0%) VAT. Accordingly, all sales of goods or property
to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to
0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in
relation to ART. 77(2) of the Omnibus Investments
Code, while all sales of services to the said
enterprises, made by VAT registered suppliers from
the Customs Territory, shall be treated effectively
subject to the 0% VAT, pursuant to Section 108(B)
(3), NIRC, in relation to the provisions of R.A. No.
7916 and the Cross Border Doctrine of the VAT
system.
This Circular shall serve as a sufficient basis to
entitle such supplier of goods, property or services to
the benefit of the zero percent (0%) VAT for sales
made to the aforementioned ECOZONE enterprises
and shall serve as sufficient compliance to the
requirement for prior approval of zero-rating imposed
by Revenue Regulations No. 7-95 effective as of the
date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to
an ECOZONE enterprise since it is a VAT-exempt
entity. The VAT treatment of sales to it, however,
varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a
VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent
(0%). In zero-rated transactions, the VAT-registered
supplier shall not pass on any output VAT to the
ECOZONE enterprise, and at the same time, shall be
entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales
primarily intends to benefit the exporter (i.e.,the
supplier from the Customs Territory), who is directly
and legally liable for the VAT, making it
internationally competitive by allowing it to
credit/refund the input VAT attributable to its export
sales.
Meanwhile, sales to an ECOZONE enterprise
made by a non-VAT or unregistered supplier would
only be exempt from VAT and the supplier shall not
be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent
Toshiba, as a PEZA-registered enterprise, is a VAT-
exempt entity that could not have engaged in a VAT-
taxable business, this Court still believes, given the
particular circumstances of the present case, that it is
entitled to a credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-registered
enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed
subject to VAT.
 In his Petition, petitioner CIR opposed the grant
of tax credit/refund to respondent Toshiba, reasoning
thus
In the first place, respondent could not have paid
input taxes on its purchases of goods and services
from VAT-registered suppliers because such
purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or
passed on to respondent. The VAT is an indirect tax
and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties
or services (Section 105, 1997 Tax Code).
Secondly, Section 4.100-2 of Revenue Regulations
No. 7-95 provides:
SEC. 4.100-2. Zero-rated sales. A zero-rated sale by
a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in
accordance with these regulations.
From the foregoing, the VAT-registered person who
can avail as tax credit or refund of the input tax on
his purchases of goods, services or properties is the
seller whose sale is zero-rated. Applying the
foregoing provision to the case at bench, the VAT-
registered supplier, whose sale of goods and services
to respondent is zero-rated, can avail as tax credit or
refund the input taxes on its (supplier) own purchases
of goods and services related to its zero-rated sale of
goods and services to respondent. On the other hand,
respondent, as the buyer in such zero-rated sale of
goods and services, could not have paid input taxes
for which it can claim as tax credit or refund.[27]
Before anything else, this Court wishes to point
out that petitioner CIR is working on the erroneous
premise that respondent Toshiba is claiming tax credit
or refund of input VAT based on Section 4.100-2,
[28]
in relation to Section 4.106-1(a),[29] of RR No. 7-
95, as amended, which allows the tax credit/refund of
input VAT on zero-rated sales of goods, properties or
services. Instead, respondent Toshiba is basing its
claim for tax credit or refund on Sec. 4.106-1(b) of
the same regulations, which allows a VAT-registered
person to apply for tax credit/refund of the input VAT
on its capital goods. While in the former, the seller of
the goods, properties or services is the one entitled to
the tax credit/refund; in the latter, it is the purchaser
of the capital goods.
Nevertheless, regardless of his mistake as to the
basis for respondent Toshibas application for tax
credit/refund, petitioner CIR validly raised the
question of whether any output VAT was actually
passed on to respondent Toshiba which it could claim
as input VAT subject to credit/refund. If the VAT-
registered supplier from the Customs Territory did
not charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is subject to
zero-rated VAT, then respondent Toshiba did not pay
any input VAT on its purchase of capital goods and it
could not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered
supplier from the Customs Territory to a PEZA-
registered enterprise shall be considered an export
sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the
issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered
enterprise was VAT-exempt depended on the type of
fiscal incentives availed of by the said enterprise.
This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also
recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,[30] cannot be lightly
disregarded considering the great number of PEZA-
registered enterprises which did rely on it to
determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep.
Act No. 7916, as amended, gives the PEZA-
registered enterprise the option to choose between
two sets of fiscal incentives: (a) The five percent
(5%) preferential tax rate on its gross income under
Rep. Act No. 7916, as amended; and (b) the income
tax holiday provided under Executive Order No. 226,
otherwise known as the Omnibus Investment Code of
1987, as amended.[31]
The five percent (5%) preferential tax rate on
gross income under Rep. Act No. 7916, as amended,
is in lieu of all taxes. Except for real property taxes,
no other national or local tax may be imposed on a
PEZA-registered enterprise availing of this particular
fiscal incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226,
as amended, grants income tax holiday to registered
pioneer and non-pioneer enterprises for six-year and
four-year periods, respectively.[32] Those availing of
this incentive are exempt only from income tax, but
shall be subject to all other taxes, including the ten
percent (10%) VAT.
This old rule clearly did not take into
consideration the Cross Border Doctrine essential to
the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of
fiscal incentives of the PEZA-registered enterprise.
Again, for emphasis, the old VAT rule for PEZA-
registered enterprises was based on their choice of
fiscal incentives: (1) If the PEZA-registered
enterprise chose the five percent (5%) preferential tax
on its gross income, in lieu of all taxes, as provided
by Rep. Act No. 7916, as amended, then it would be
VAT-exempt; (2) If the PEZA-registered enterprise
availed of the income tax holiday under Exec. Order
No. 226, as amended, it shall be subject to VAT at ten
percent (10%). Such distinction was abolished by
RMC No. 74-99, which categorically declared that all
sales of goods, properties, and services made by a
VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be subject to VAT,
at zero percent (0%) rate, regardless of the latters
type or class of PEZA registration; and, thus,
affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the
Customs Territory to respondent Toshiba in the
present Petition took place during the first and second
quarters of 1996, way before the issuance of RMC
No. 74-99, and when the old rule was accepted and
implemented by no less than the BIR itself. Since
respondent Toshiba opted to avail itself of the income
tax holiday under Exec. Order No. 226, as amended,
then it was deemed subject to the ten percent (10%)
VAT. It was very likely therefore that suppliers from
the Customs Territory had passed on output VAT to
respondent Toshiba, and the latter, thus, incurred
input VAT. It bears emphasis that the CTA, with the
help of SGV & Co., the independent accountant it
commissioned to make a report, already thoroughly
reviewed the evidence submitted by respondent
Toshiba consisting of receipts, invoices, and
vouchers, from its suppliers from the Customs
Territory. Accordingly, this Court gives due respect to
and adopts herein the CTAs findings that the
suppliers of capital goods from the Customs Territory
did pass on output VAT to respondent Toshiba and the
amount of input VAT which respondent Toshiba
could claim as credit/refund.
Moreover, in another circular, Revenue
Memorandum Circular (RMC) No. 42-2003, issued
on 15 July 2003, the BIR answered the following
question
Q-5: Under Revenue Memorandum Circular
(RMC) No. 74-99, purchases by
PEZA-registered firms
automatically qualify as zero-rated
without seeking prior approval
from the BIR effective October
1999.
1) Will the OSS-DOF Center still
accept applications from
PEZA-registered claimants
who were allegedly billed VAT
by their suppliers before and
during the effectivity of the
RMC by issuing VAT
invoices/receipts?
A-5(1): If the PEZA-registered enterprise is
paying the 5% preferential tax in
lieu of all other taxes, the said
PEZA-registered taxpayer cannot
claim TCC or refund for the VAT
paid on purchases. However, if the
taxpayer is availing of the income
tax holiday, it can claim VAT credit
provided:
a. The taxpayer-claimant is VAT-
registered;
b. Purchases are evidenced by VAT
invoices or receipts, whichever
is applicable, with shifted VAT
to the purchaser prior to the
implementation of RMC No.
74-99; and
c. The supplier issues a sworn
statement under penalties of
perjury that it shifted the VAT
and declared the sales to the
PEZA-registered purchaser as
taxable sales in its VAT
returns.
For invoices/receipts issued upon
the effectivity of RMC No. 74-99,
the claims for input VAT by PEZA-
registered companies, regardless of
the type or class of PEZA
registration, should be denied.
Under RMC No. 42-2003, the DOF would still
accept applications for tax credit/refund filed by
PEZA-registered enterprises, availing of the income
tax holiday, for input VAT on their purchases made
prior to RMC No. 74-99. Acceptance of applications
essentially implies processing and possible approval
thereof depending on whether the given conditions
are met. Respondent Toshibas claim for tax
credit/refund arose from the very same circumstances
recognized by Q-5(1) and A-5(1) of RMC No. 42-
2003. It therefore seems irrational and unreasonable
for petitioner CIR to oppose respondent Toshibas
application for tax credit/refund of its input VAT,
when such claim had already been determined and
approved by the CTA after due hearing, and even
affirmed by the Court of Appeals; while it could
accept, process, and even approve applications filed
by other similarly-situated PEZA-registered
enterprises at the administrative level.
III
 Findings of fact by the CTA are respected and
adopted by this Court.

Finally, petitioner CIR, in a last desperate

attempt to block respondent Toshibas claim for tax
credit/refund, challenges the allegation of said
respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than
the five percent (5%) preferential tax rate under Rep.
Act No. 7916, as amended. Undoubtedly, this is a
factual matter that should have been raised and
threshed out in the lower courts. Giving it credence
would belie petitioner CIRs assertion that it is raising
only issues of law in its Petition that may be resolved
without need for reception of additional evidences.
Once more, this Court respects and adopts the finding
of the CTA, affirmed by the Court of Appeals, that
respondent Toshiba had indeed availed of the income
tax holiday under Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this

Court AFFIRMS the decision of the Court of Appeals
in CA-G.R. SP. No. 59106, and the order of the CTA
in CTA Case No. 5593, ordering said petitioner CIR
to refund or, in the alternative, to issue a tax credit
certificate to respondent Toshiba, in the amount
of P16,188,045.44, representing unutilized input VAT
for the first and second quarters of 1996.

SO ORDERED.
 SECOND DIVISION acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
COMMISSIONER OF INTERNAL G.R. No. 164365 [Bangko Sentral ng Pilipinas], are zero-rated. [3] The
REVENUE, grant of the present petition entails the extreme step
Petitioner, of rejecting American Express as precedent, a
Present: recourse which the Court is unwilling to take.
QUISUMBING, J.,
- versus - Chairperson, The facts, as culled from the recital in the assailed
CARPIO, Decision[4] dated 30 June 2004 of the Court of
CARPIO MORALES, Appeals, follow.
TINGA, and
PLACER DOME TECHNICAL VELASCO, JR., JJ. On 24 March 1996, at the San Antonio Mines in
SERVICES (PHILS.), INC., Marinduque owned by Marcopper Mining
Respondent. Corporation (Marcopper), mine tailings from the
P Taipan Pit started to escape through the Makulapnit
r Tunnel and Boac Rivers, causing the cessation of
o mining and milling operations, and causing potential
m environmental damage to the rivers and the
u immediate area. To contain the damage and prevent
l the further spread of the tailing leak, Placer Dome,
g Inc. (PDI), the owner of 39.9% of Marcopper,
a undertook to perform the clean-up and rehabilitation
t of the Makalupnit and Boac Rivers, through a
e subsidiary. To accomplish this, PDI engaged Placer
d Dome Technical Services Limited (PDTSL), a non-
: resident foreign corporation with office in Canada, to
carry out the project. In turn, PDTSL engaged the
June 8, 2007 services of Placer Dome Technical Services
(Philippines), Inc. (respondent), a domestic
x--------------------------------------------------------------- corporation and registered Value-Added Tax (VAT)
------------------x entity, to implement the project in the Philippines.
DECISION
PDTSL and respondent thus entered into an
TINGA, J.: Implementation Agreement signed on 15 November
1996. Due to the urgency and potentially significant
damage to the environment, respondent had agreed to
Two years ago, the Court in Commissioner of immediately implement the project, and the
Internal Revenue v. American Express International, Implementation Agreement stipulated that all
Inc. (Philippine Branch)[1] definitively ruled that implementation services rendered by respondent even
under the National Internal Revenue Code of 1986, as prior to the agreements signing shall be deemed to
amended,[2] services performed by VAT-registered have been provided pursuant to the said Agreement.
persons in the Philippines (other than the processing, The Agreement further stipulated that PDTSL was to
manufacturing or repacking of goods for persons pay respondent an amount of money, in U.S. funds,
doing business outside the Philippines), when paid in equal to all Costs incurred for Implementation
Services performed under the Agreement,[5] as well as
a fee agreed to one percent (1%) of such Costs.[6]
In August of 1998, respondent amended its quarterly
VAT returns for the last two quarters of 1996, and for
the four quarters of 1997. In the amended returns,
respondent declared a total input VAT payment
of P43,015,461.98 for the said quarters,
and P42,837,933.60 as its total excess input VAT for
the same period. Then on 11 September 1998,
respondent filed an administrative claim for the
refund of its reported total input VAT payments in
relation to the project it had contracted from PDTSL,
amounting to P43,015,461.98. In support of this
claim for refund, respondent argued that the revenues
it derived from services rendered to PDTSL, pursuant
to the Agreement, qualified as zero-rated sales under
Section 102(b)(2) of the then Tax Code, since it was
paid in foreign currency inwardly remitted to the
Philippines. When the Commissioner of Internal
Revenue (CIR) did not act on this claim, respondent
duly filed a Petition for Review with the Court of Tax
Appeals (CTA), praying for the refund of its total
reported excess input VAT totaling P42,837,933.60.
In its Answer to the Petition, the CIR merely invoked
the presumption that taxes are collected in
accordance with law, and that claims for refund of
taxes are construed strictly against claimants, as the
same was in the nature of an exemption from
taxation.[7]
In its Decision dated 19 March 2002,[8] the CTA
supported respondents legal position that its sale of
services to PDTSL constituted a zero-rated
transaction under the Tax Code, as these services
were paid for in acceptable foreign currency which
had been inwardly remitted to the Philippines in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP). At the same time,
the CTA pointed out that of the US$27,544,707.00
paid by PDTSL to respondent, only
US$14,750,473.00 was inwardly remitted and
accounted for in accordance with the BSP.[9] The CTA
also noted that not all the reported total input VAT
payments of respondent were properly supported by
VAT invoices and/or official receipts,[10] and that not
all of the allowable input VAT of the respondent Section 102. Value-Added
could be directly attributed to its zero-rated sales. Tax on Sale of Services and
[11]
In the end, the CTA found that only the resulting Use or Lease of Properties.
input VAT of P17,178,373.12 could be refunded the
respondent.[12] (a) xxx
The CIR filed a Motion for Reconsideration where (b) Transactions Subject to Zero
he invoked Section 4.102-2(b)(2) of Revenue Percent (0%) Rate. The following
Regulation No. 5-96,[13] and especially VAT Ruling services performed
No. 040-98 dated 23 November 1998, which had the Philippines by VAT-registered
interpreted the aforecited provision. persons shall be subject to zero
percent (0%) rate:
The CTA remained unpersuaded despite the cited
issuances. In fact, the CTA Resolution[14] dated 20 (1) Processing,
June 2002, denying the CIRs motion for manufacturing or
reconsideration, noted that petitioners argument was repacking goods
not novel as it had debunked the same when first for other persons
raised before it, referring to its decision dated 19 doing business
April 2002 in CTA Case No. 6099, American outside the
Express International, Inc. Philippine Branch v. Philippines which
Commissioner of Internal Revenue.[15] The CTA goods are
reiterated its pronouncement in said case, thus: x x x subsequently
it is very clear that VAT Ruling No. 040-98 not only exported, where
expands the language of Section (108)(B)(2) but also the services are
of Revenue Regulation No. 5-96 which interprets the paid for in
said statute. The same cannot be countenanced. It is a acceptable
settled rule of legal hermeneutics that the foreign currency
implementing rules and regulations cannot amend the and accounted for
act of Congress x x x for administrative rules and in accordance
regulations are intended to carry out, not supplant or with the rules and
modify, the law.[16] regulations of the
Bangko Sentral
The rulings of the CTA were elevated by petitioner to ng Pilipinas
the Court of Appeals on Petition for Review. In a (BSP);
Decision[17] dated 30 June 2004, the appellate court
affirmed the CTA rulings. As a consequence, the
present petition is now before us.
Our evaluation of the petition must begin
with the statutory scope of the services performed in (2) Services other
the Philippines by VAT-registered persons,[18] referred than those
to in the law applicable at the time of the subject mentioned in the
incidents, the National Internal Revenue Code of preceding
1986, as amended[19] (1986 NIRC). Section 102(b) of subparagraph, the
the 1986 NIRC reads: consideration for
which is paid for
in acceptable
foreign currency
and accounted for
in accordance
with the rules and
regulations of the
[BSP].
in x x x [20]
It is Section 102(b)(2) which finds special relevance
to this case. As explicitly provided in the law, a zero-
rated VAT transaction includes services by VAT-
registered persons other than processing,
manufacturing or repacking goods for other persons
doing business outside the Philippines, which goods
are subsequently exported, the consideration for
which is paid in foreign currency and accounted for
in accordance with the rules and regulations of the
BSP.
Still, this provision was interpreted by the
Bureau of Internal Revenue through Revenue
Regulation No. 5-96, Section 4.102-2(b)(2) of which
states:
Section 4.102(b)(2)- Services other
than processing, manufacturing or
repacking for other persons doing
business outside the Philippines for
goods which are subsequently
exported, as well as services by a
resident to a non-resident foreign
client such as project studies,
information services, engineering
and architectural designs and other
similar services, the consideration
for which is paid for in acceptable
foreign currency and accounted for
in accordance with the rules and
regulations of the BSP.

Although there is nothing in Section 4.102-2(b)(2)
that is expressly fatal to respondents claim, VAT
Ruling No. 040-98 interpreted the provision in such
fashion. The relevant portion of the ruling reads:
The sales of services
subject to zero percent (0%) VAT
under Section 108(B)(2), of the Tax
Code of 1997, are limited to such
sales which are destined for
consumption outside of the
Philippines in that such services are
tacked-in as part of the cost of
goods exported. The zero-rating
also extends to project studies,
information services, engineering
and architectural designs and other
similar services sold by a resident
of the Philippines to a non-resident
foreign client because these
services are likewise destined to be
consumed abroad. The phrase
project studies, information
services, engineering and
architectural designs and other
similar services does not include
services rendered by travel agents
to foreign tourists in the Philippines
following the doctrine of ejusdem
generis, since such services by
travel agents are not of the same
class or of the same nature as those
enumerated under the aforesaid
section.
Considering that the services by
your client to foreign tourists are
basically and substantially rendered
within the Philippines, it follows
that the onus of taxation of the
revenue arising therefrom, for VAT
purposes, is also within
the Philippines. For this reason, it
is our considered opinion that the
tour package services of your client
to foreign tourists in
the Philippines cannot legally
qualify for zero-rated (0%) VAT but
rather subject to the regular VAT
rate of 10%.
Petitioner argues that following Section
4.102-2(b)(2) of Revenue Regulation No. 5-96, there
are only two categories of services that are subject to
zero percent VAT, namely: services other than
processing, manufacturing or repacking for other
persons doing business outside the Philippines for
goods which are subsequently exported; and services
by a resident to a non-resident foreign client, such as
project studies, information services, engineering and
architectural designs and other similar services.
[21]
Petitioner explains that the services rendered by
respondent were not for goods which were
subsequently exported. Likewise, it is argued that the
services rendered by respondent were not similar to
project studies, information services, engineering and
architectural designs which were destined to be
consumed abroad by non-resident foreign clients.
These views, petitioner points out, were
reiterated in VAT Ruling No. 040-98. It is clear from
that issuance that the location or destination where
the services were destined for consumption was
determinative of whether the zero-rating availed
when such services were sold by a resident of
the Philippines to a non-resident foreign client. VAT
Ruling No. 040-98 expresses that the zero-rating may
apply only when the services are destined for
consumption abroad. This view aligns with the
theoretical principle that the VAT is ultimately levied
on consumption.[22] If the service were destined for
consumption in the Philippines, the service provider
would have the faculty to pass on its VAT liability to
the end-user, thus avoiding having to shoulder the tax
itself.
Unfortunately for petitioner, his arguments
are no longer fresh. The Court spurned them
in Commissioner of Internal Revenue v. American
Express.[23]
American Express involved transactions
invoked as zero-rated by a VAT-registered person
that facilitates the collection and payment of
receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. [24] The
CIR in that case relied extensively on the same VAT
Ruling No. 040-98 now cited before us. However,
the Court would conclude in American Express that
the opinion therein that the service must be destined
for consumption outside of the Philippines was
clearly ultra vires and invalid.[25]
The discussion of the issues in American
Express was comprehensive enough as to address
each issue now presently raised before us.
American Express explained the nature of
VAT imposed on services in this manner:
The VAT is a tax on
consumption "expressed as a
percentage of the value added to
goods or services" purchased by the
producer or taxpayer. As an indirect
tax on services, its main object is
the transaction itself or, more
concretely, the performance of all
kinds of services conducted in the
course of trade or business in
the Philippines. These services
must be regularly conducted in this
country; undertaken in "pursuit of a
commercial or an economic
activity;" for a valuable
consideration; and not exempt
under the Tax Code, other special
laws, or any international
agreement.[26]

Yet even as services may be subject to VAT,
our tax laws extend the benefit of zero-rating the VAT
due on certain services. The aforementioned Section
102(b) of the 1986 NIRC activates such zero-rating
on two categories of transactions: (1) Processing,
manufacturing or repacking goods for other persons
doing business outside the Philippines which goods
are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the
BSP;and (2) services other than those mentioned in
the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP.[27]
Obviously, it is the second category that
begs for further explication, owing to its apparently
broad scope, covering as it does services other than
those mentioned in the preceding subparagraph. Yet,
as found by the Court in American Express, such
broad scope did not mean that Section 102(b) is
vague, thus:
The law is very clear.
Under the last paragraph [of
Section 102(b)], services performed
by VAT-registered persons in
the Philippines (other than the
processing, manufacturing or
repacking of goods for persons
doing business outside
the Philippines), when paid in
acceptable foreign currency and
accounted for in accordance with
the rules and regulations of the
BSP, are zero-rated.[28]
Since Section 102(b) is, in fact, very clear, the Court
declared that any resort to statutory construction or
interpretation was unnecessary.
As mentioned at the
outset, Section 102(b)(2) of the Tax
Code is very clear. Therefore, no
statutory construction or
interpretation is needed. Neither
can conditions or limitations be
introduced where none is provided
for. Rewriting the law is a
forbidden ground that only
Congress may tread upon.
The Court may not
construe a statute that is free from
doubt. "[W]here the law speaks in
clear and categorical language,
there is no room for interpretation.
There is only room for
application." The Court has no
choice but to "see to it that its
mandate is obeyed."[29]
It was from the awareness that Section 102(b) is free
from ambiguity in providing so broad an extension of
the zero-rated benefit on VAT-registered persons
performing services that the Court in American
Express proceeded to consider the same Section
4.102-2(b)(2) of Revenue Regulation No. 5-96 now
cited by petitioner. The Court in American
Express explained that Revenue Regulation No. 5-96
had amended Revenue Regulation No. 7-95, Section
4.102-2 of which had retained the broad language of
Section 102(b) in defining transactions subject to
zero-rate, adding only, by way of specific example,
the phrase those [services] rendered by hotels and
other service establishments.[30] However, the
amendatory Revenue Regulation No. 5-96 opted for a
more specific approach, providing, by way of
example, an enumeration of those services
contemplated as zero-rated.[31] In the present case, it
is because of such enumeration that petitioner now
argues that respondents services likewise do not fall
under the second category mentioned in Section
4.102-2(b)(2) [as amended by Revenue Regulation
No. 5-96], because they are not similar to project
studies, information services, engineering and
architectural designs which are destined to be
consumed abroad by non-resident foreign clients.[32]
However, the Court in American Express clearly
rebuffed a similar contention.
Aside from the already
scopious coverage of services in
Section 4.102-2(b)(2) of RR 7-95,
the amendment introduced by RR
5-96 further enumerates specific
services entitled to zero rating.
Although superfluous, these sample
services are meant to be merely
illustrative. In this provision, the
use of the term "as well as" is not
restrictive. As a prepositional
phrase with an adverbial relation
to some other word, it simply
means "in addition to, besides,
also or too."
Neither the law nor any
of the implementing revenue
regulations aforequoted
categorically defines or limits the
services that may be sold or
exchanged for a fee,
remuneration or
consideration. Rather, both merely
enumerate the items of service that
fall under the term "sale or
exchange of services."
xxxx
The canon of statutory construction
known as ejusdem generis or "of
the same kind or specie" does not
apply to Section 4.102-2(b)(2) of
RR 7-95 as amended by RR 5-96.
First, although the
regulatory provision contains an
enumeration of particular or
specific words, followed by the
 general phrase "and other
similar services," such words do
not constitute a readily
discernible class and are patently
not of the same kind. Project
studies involve investments or
marketing; information services
focus on data technology;
engineering and architectural
designs require creativity. Aside
from calling for the exercise or use
of mental faculties or perhaps
producing written technical
outputs, no common denominator
to the exclusion of all others
characterizes these three services.
Nothing sets them apart from other
and similar general services that
may involve advertising,
computers, consultancy, health
care, management, messengerial
work to name only a few.
Second, there is the
regulatory intent to give the general
phrase "and other similar services"
a broader meaning. Clearly, the
preceding phrase "as well as" is
not meant to limit the effect of
"and other similar services."
Third, and most
important, the statutory
provision upon which this
regulation is based is by itself not
restrictive. The scope of the word
"services" in Section 102(b)(2) of
the [1986 NIRC] is broad; it is
not susceptible of narrow
interpretation. (Emphasis
supplied)[33]
The Court in American Express recognized
the existence of the contrary holding in VAT Ruling
No. 040-98, now relied upon by petitioner especially
as he states that the zero-rating applied only when the
services are destined for consumption
abroad. American Express minced no words in
criticizing said ruling.
VAT Ruling No. 040-98
relied upon by petitioner is a less
general interpretation at the
administrative level, rendered by
the BIR commissioner upon request
of a taxpayer to clarify certain
provisions of the VAT law. As
correctly held by the CA, when
this ruling states that the service
must be "destined for
consumption outside of
the Philippines" in order to
qualify for zero rating, it
contravenes both the law and the
regulations issued pursuant to it.
This portion of VAT Ruling No.
040-98 is clearly ultra vires and
invalid.
Although "[i]t is widely
accepted that the interpretation
placed upon a statute by the
executive officers, whose duty is
to enforce it, is entitled to great
respect by the courts," this
interpretation is not conclusive
and will have to be "ignored if
judicially found to be erroneous"
and "clearly absurd x x x or
improper." An administrative
issuance that overrides the law it
merely seeks to interpret, instead
of remaining consistent and in
harmony with it, will not be
countenanced by this Court.
(Emphasis supplied)[34]
Petitioner presently invokes the destination
principle, citing that [r]espondents services, while
rendered to a non-resident foreign corporation, are
not destined to be consumed abroad. Hence, the onus
of taxation of the revenue arising therefrom, for VAT
purposes, is also within the Philippines. Yet the Court
in American Express debunked this argument when it
rebutted the theoretical underpinnings of VAT Ruling
No. 040-98, particularly its reliance on the
destination principle in taxation:
As a general rule, the
VAT system uses the destination
principle as a basis for the
jurisdictional reach of the tax.
Goods and services are taxed only
in the country where they are
consumed. Thus, exports are zero-
rated, while imports are taxed.
Confusion in zero rating
arises because petitioner equates
the performance of a particular
type of service with the
consumption of its output
abroad. In the present case, the
facilitation of the collection of
receivables is different from the
utilization or consumption of the
outcome of such service. While the
facilitation is done in
the Philippines, the consumption is
not. Respondent renders assistance
to its foreign clients the ROCs
outside the country by receiving the
bills of service establishments
located here in the country and
forwarding them to the ROCs
abroad. The consumption
contemplated by law, contrary to
petitioner's administrative
interpretation, does not imply
that the service be done abroad
in order to be zero-rated.
Consumption is "the use
of a thing in a way that thereby
exhausts it." 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.
Unlike goods, services
cannot be physically used in or
bound for a specific place when
their destination is determined.
Instead, there can only be a
"predetermined end of a course"
when determining the service
"location or position x x x for
legal purposes." Respondent's
facilitation service has no physical
existence, yet takes place upon
rendition, and therefore upon
consumption, in the Philippines.
Under the destination principle, as
petitioner asserts, such service is
subject to VAT at the rate of 10
percent.
xxxx
However, the law clearly
provides for an exception to the
destination principle; that is, for
a zero percent VAT rate for
services that are performed in the
Philippines, "paid for in
acceptable foreign currency and
accounted for in accordance with
the rules and regulations of the
[BSP]." Thus, for the supply of
service to be zero-rated as an
exception, the law merely requires
that first, the service be performed
in the Philippines; second, the
service fall under any of the
categories in Section 102(b) of the
Tax Code; and, third, it be paid in
acceptable foreign currency
accounted for in accordance with
BSP rules and regulations.
(Emphasis supplied)[35]
xxxx
Again, contrary to petitioner's
stand, for the cost of respondent's
service to be zero-rated, it need
not be tacked in as part of the
cost of goods exported. The law
neither imposes such
requirement nor associates
services with exported goods. It
simply states that the services
performed by VAT-registered
persons in the Philippines
services other than the
processing, manufacturing or
repacking of goods for persons
doing business outside this
country if paid in acceptable
foreign currency and accounted
for in accordance with the rules
and regulations of the BSP, are
zero-rated. The service rendered
by respondent is clearly different
from the product that arises from
the rendition of such service. The
activity that creates the income
must not be confused with the main
business in the course of which that
income is realized. (Emphasis
supplied)[36]
xxxx
The law neither makes a
qualification nor adds a condition
in determining the tax situs of a
zero-rated service. Under this
criterion, the place where the
service is rendered determines the
jurisdiction to impose the
VAT. Performed in
the Philippines, such service is
necessarily subject to its
jurisdiction, for the State
necessarily has to have "a
substantial connection" to it, in
order to enforce a zero rate. The
place of payment is immaterial;
much less is the place where the
output of the service will be
further or ultimately used.[37]
Finally, the Court in American Express found support
from the legislative record that revealed that
consumption abroad is not a pertinent factor to imbue
the zero-rating on services by VAT-registered persons
performed in the Philippines.
Interpellations on the subject in the
halls of the Senate also reveal a
clear intent on the part of the
legislators not to impose the
condition of being "consumed
abroad" in order for services
performed in the Philippines by a
VAT-registered person to be zero-
rated. We quote the relevant
portions of the proceedings:
"Senator Maceda: Going
back to Section 102 just for the
moment. Will the Gentleman
kindly explain to me I am
referring to the lower part of the
first paragraph with the
'Provided'. Section 102. 'Provided
that the following services
performed in the Philippines by
VAT registered persons shall be
subject to zero percent.' There are
three here. What is the difference
between the three here which is
subject to zero percent and
Section 103 which is exempt
transactions, to being with?
"Senator Herrera: Mr.
President, in the case of
processing and manufacturing or
repacking goods for persons
doing business outside the
Philippines which are
subsequently exported, and where
the services are paid for in
acceptable foreign currencies
inwardly remitted, this is
considered as subject to 0%. But
if these conditions are not
complied with, they are subject to
the VAT.
"In the case of No. 2,
again, as the Gentleman pointed
out, these three are zero-rated and
the other one that he indicated are
exempted from the very
beginning. These three
enumerations under Section 102
are zero-rated provided that these
conditions indicated in these three
paragraphs are also complied
with. If they are not complied
with, then they are not entitled to
the zero ratings. Just like in the
export of minerals, if these are
not exported, then they cannot
qualify under this provision of
zero rating.
"Senator Maceda: Mr.
President, just one small item so
we can leave this. Under the
proviso, it is required that the
following services be performed
in the Philippines.
"Under No. 2, services
other than those mentioned above
includes, let us say,
manufacturing computers and
computer chips or repacking
goods for persons doing business
outside the Philippines. Meaning
to say, we ship the goods to them
in Chicago or Washington and
they send the payment inwardly
to the Philippines in foreign
currency, and that is, of course,
zero-rated.
"Now, when we say
'services other than those
mentioned in the preceding
subsection[,'] may I have some
examples of these?
"Senator Herrera:
Which portion is the Gentleman
referring to?
"Senator Maceda: I am
referring to the second paragraph,
in the same Section 102. The first
paragraph is when one
manufactures or packages
something here and he sends it
abroad and they pay him, that is
covered. That is clear to me. The
second paragraph says 'Services
other than those mentioned in the
preceding subparagraph, the
consideration of which is paid for
in acceptable foreign
currency. . . .'
"One example I could
immediately think ofI do not
know why this comes to my mind
tonightis for tourism or escort
services. For example, the
services of the tour operator or
tour escortjust a good name for
all kinds of activitiesis made here
at the Midtown Ramada Hotel or
at the Philippine Plaza, but the
payment is made from outside
and remitted into the country.
"Senator Herrera: What
is important here is that these
services are paid in acceptable
foreign currency remitted
inwardly to the Philippines.
"Senator Maceda: Yes,
Mr. President. Like those
Japanese tours which include $50
for the services of a woman or a
tourist guide, it is zero-rated
when it is remitted here.
"Senator Herrera: I
guess it can be interpreted that
way, although this tourist guide
should also be considered as
among the professionals. If they
earn more than P200,000, they
should be covered.
xxxx
Senator Maceda: So, the
services by Filipino citizens
outside the Philippines are subject
to VAT, and I am talking of all
services. Do big contractual
engineers in Saudi Arabia pay
VAT?
"Senator Herrera: This
provision applies to a VAT-
registered person. When he
performs services in
the Philippines, that is zero-rated.
 "Senator Maceda: That
is right."[38]

It is indubitable that petitioners arguments cannot

withstand the Courts ruling in American Express, a
precedent warranting stare decisis application and
one which, in any event, we are disinclined to revisit
at this juncture.

WHEREFORE, the petition is DENIED. No

pronouncement as to costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 152609 June 29, 2005
COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL,
INC. (PHILIPPINE BRANCH), Respondent.
DECISION
PANGANIBAN, J.:
As a general rule, the value-added tax (VAT) system
uses the destination principle. However, our VAT law
itself provides for a clear exception, under which the
supply of service shall be zero-rated when the
following requirements are met: (1) the service is
performed in the Philippines; (2) the service falls
under any of the categories provided in Section
102(b) of the Tax Code; and (3) it is paid for in
acceptable foreign currency that is accounted for in
accordance with the regulations of the Bangko
Sentral ng Pilipinas. Since respondents services meet
these requirements, they are zero-rated. Petitioners
Revenue Regulations that alter or revoke the above
requirements are ultra vires and invalid.
The Case
Before us is a Petition for Review1 under Rule 45 of
the Rules of Court, assailing the February 28, 2002
Decision2of the Court of Appeals (CA) in CA-GR SP
No. 62727. The assailed Decision disposed as
follows:
"WHEREFORE, premises considered, the petition is
hereby DISMISSED for lack of merit. The assailed
decision of the Court of Tax Appeals (CTA)
is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed
facts as follows:
"[Respondent] is a Philippine branch of American
Express International, Inc., a corporation duly
organized and existing under and by virtue of the
laws of the State of Delaware, U.S.A., with office in
the Philippines at the Ground Floor, ACE Building,
corner Rada and de la Rosa Streets, Legaspi Village,
Makati City. It is a servicing unit of American
Express International, Inc. - Hongkong Branch Section 110. Tax Credits. -
(Amex-HK) and is engaged primarily to facilitate the xxxxxxxxx
collections of Amex-HK receivables from card (B) Excess Output or Input Tax. - If at the end of any
members situated in the Philippines and payment to taxable quarter the output tax exceeds the input tax,
service establishments in the Philippines. the excess shall be paid by the VAT-registered person.
"Amex Philippines registered itself with the Bureau If the input tax exceeds the output tax, the excess
of Internal Revenue (BIR), Revenue District Office shall be carried over to the succeeding quarter or
No. 47 (East Makati) as a value-added tax (VAT) quarters. Any input tax attributable to the purchase of
taxpayer effective March 1988 and was issued VAT capital goods or to zero-rated sales by a VAT-
Registration Certificate No. 088445 bearing VAT registered person may at his option be refunded or
Registration No. 32A-3-004868. For the period credited against other internal revenue taxes, subject
January 1, 1997 to December 31, 1997, [respondent] to the provisions of Section 112.
filed with the BIR its quarterly VAT returns as "There being no immediate action on the part of the
follows: [petitioner], [respondents] petition was filed on April
Exhibit Period Covered Date Filed15, 1999.
"In support of its Petition for Review, the following
D 1997 1st Qtr. April 18, 1997
arguments were raised by [respondent]:
A. Export sales by a VAT-registered person, the
F 2nd Qtr. July 21, 1997
consideration for which is paid for in acceptable
G 3rd Qtr. October 2,foreign
1997 currency inwardly remitted to the Philippines
and accounted for in accordance with existing
H 4th Qtr. January 20, 1998
regulations of the Bangko Sentral ng Pilipinas, are
"On March 23, 1999, however, [respondent] amended subject to [VAT] at zero percent (0%). According to
the aforesaid returns and declared the following: [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax
Exh 1997 Taxable Sales Output Code, to wit:
VAT Section 102.(sic) Value-added tax on sale of
I 1st qtr P59,597.20 P5,959.72 services.- (a) Rate and base of tax. - There shall be
levied, assessed and collected, a value-added tax
J 2nd qtr 67,517.20 6,751.72 equivalent to 10% percent of gross receipts derived
by any person engaged in the sale of services. The
K 3rd qtr 51,936.60 5,193.66
phrase "sale of services" means the performance of
L 4th qtr 67,994.30 6,799.43 all kinds of services for others for a fee, remuneration
or consideration, including those performed or
rendered by construction and service contractors:
Total P247,045.30 P24,704.53 stock, real estate, commercial, customs and
immigration brokers; lessors of personal property;
"On April 13, 1999, [respondent] filed with the BIR a lessors or distributors of cinematographic films;
letter-request for the refund of its 1997 excess input persons engaged in milling, processing,
taxes in the amount of P3,751,067.04, which amount manufacturing or repacking goods for others; and
was arrived at after deducting from its total input similar services regardless of whether o[r] not the
VAT paid of P3,763,060.43 its applied output VAT performance thereof calls for the exercise or use of
liabilities only for the third and fourth quarters of the physical or mental faculties: Provided That the
1997 amounting to P5,193.66 and P6,799.43, following services performed in the Philippines by
respectively. [Respondent] cites as basis therefor, VAT-registered persons shall be subject to 0%:
Section 110 (B) of the 1997 Tax Code, to state: (1) x x x
 (2) Services other than those mentioned in
the preceding subparagraph, the
consideration is paid for in acceptable
foreign currency which is remitted inwardly
to the Philippines and accounted for in
accordance with the rules and regulations of
the BSP. x x x.
In addition, [respondent] relied on VAT Ruling No.
080-89, dated April 3, 1989, the pertinent portion of
which reads as follows:
In Reply, please be informed that, as a VAT
registered entity whose service is paid for in
acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the
Central [B]ank of the Philippines, your service
income is automatically zero rated effective January
1, 1998. [Section 102(a)(2) of the Tax Code as
amended].4 For this, there is no need to file an
application for zero-rate.
B. Input taxes on domestic purchases of taxable
goods and services related to zero-rated revenues are
available as tax refund in accordance with Section
106 (now Section 112) of the [Tax Code] and Section
8(a) of [Revenue] Regulations [(RR)] No. 5-87, to
state:
Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any
VAT-registered person, except those covered by
paragraph (a) above, whose sales are zero-rated or are
effectively zero-rated, may, within two (2) years after
the close of the taxable quarter when such sales were
made, apply for the issuance of tax credit certificate
or refund of the input taxes due or attributable to such
sales, to the extent that such input tax has not been
applied against output tax. x x x. [Section 106(a) of
the Tax Code]5
Section 8. Zero-rating. - (a) In general. - A zero-
rated sale is a taxable transaction for value-added tax
purposes. A sale by a VAT-registered person of goods
and/or services taxed at zero rate shall not result in
any output tax. The input tax on his purchases of
goods or services related to such zero-rated sale shall
be available as tax credit or refundable in accordance
with Section 16 of these Regulations. x x x. [Section
8(a), [RR] 5-87].6
"[Petitioner], in his Answer filed on May 6, 1999,
claimed by way of Special and Affirmative Defenses
that:
7. The claim for refund is subject to investigation by
the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have
been made in accordance with laws and regulations,
hence, not refundable. Claims for tax refund are
construed strictly against the claimant as they partake
of the nature of tax exemption from tax and it is
incumbent upon the [respondent] to prove that it is
entitled thereto under the law and he who claims
exemption must be able to justify his claim by the
clearest grant of organic or statu[t]e law. An
exemption from the common burden [cannot] be
permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has
complied with the governing rules with reference to
tax recovery or refund, which are found in Sections
204(c) and 229 of the Tax Code, as amended, which
are quoted as follows:
Section 204. Authority of the Commissioner to
Compromise, Abate and Refund or Credit Taxes. -
The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally
received or penalties imposed without authority,
refund the value of internal revenue stamps when
they are returned in good condition by the purchaser,
and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two
(2) years after payment of the tax or
penalty: Provided, however, That a return filed with
an overpayment shall be considered a written claim
for credit or refund.
Section 229. Recovery of tax erroneously or
illegally collected.- No suit or proceeding shall be
maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected
without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed
with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun
(sic) after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of
any supervening cause that may arise after
payment: Provided, however, That the Commissioner
may, even without written claim therefor, refund or
credit any tax, where on the face of the return upon
which payment was made, such payment appears
clearly to have been erroneously paid.
"From the foregoing, the [CTA], through the
Presiding Judge Ernesto D. Acosta rendered a
decision7 in favor of the herein respondent holding
that its services are subject to zero-rate pursuant to
Section 108(b) of the Tax Reform Act of 1997 and
Section 4.102-2 (b)(2) of Revenue Regulations 5-96,
the decretal portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this
Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is
hereby ORDERED to REFUND to [respondent] the
amount of P3,352,406.59 representing the latters
excess input VAT paid for the year 1997."8
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents
services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR
5-96. More particularly, its "services were not of the
same class or of the same nature as project studies,
information, or engineering and architectural
designs" for non-resident foreign clients; rather, they
were "services other than the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines." The
consideration in both types of service, however, was
paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT
Ruling No. 040-98 was unwarranted. By requiring
that respondents services be consumed abroad in
order to be zero-rated, petitioner went beyond the
sphere of interpretation and into that of legislation.
Even granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and
oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our consideration:
"Whether or not the Court of Appeals committed
reversible error in holding that respondent is entitled
to the refund of the amount of P3,352,406.59
allegedly representing excess input VAT for the year
1997."10
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and
use or lease of properties. -- (a) Rate and base of tax.
-- There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of
services x x x.
"The phrase 'sale or exchange of services' means the
performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration, including those performed or rendered
by x x x persons engaged in milling, processing,
manufacturing or repacking goods for others; x x x
services of banks, non-bank financial intermediaries
and finance companies; x x x and similar services
regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental
faculties. The phrase 'sale or exchange of services'
shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or
information;
(4) The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or enjoyment of x x x any such
knowledge or information as is mentioned in
subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any x x x
commercial undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of
money or its equivalent representing the contract
price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied
with the services and deposits and advanced
payments actually or constructively received during
the taxable quarter for the services performed or to be
performed for another person, excluding value-added
tax.
"(b) Transactions subject to zero percent (0%) rate. --
The following services performed in the Philippines
by VAT-registered persons shall be subject to zero
percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those mentioned in the
preceding subparagraph, the consideration for which
is paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the [BSP];"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph
quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP,
are zero-rated.
Respondent is a VAT-registered person that facilitates
the collection and payment of receivables belonging
to its non-resident foreign client, for which it gets
paid in acceptable foreign currency inwardly remitted
and accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in the
Philippines is not in the same category as
"processing, manufacturing or repacking of goods"
and should, therefore, be zero-rated. In reply to a
query of respondent, the BIR opined in VAT Ruling
No. 080-89 that the income respondent earned from
its parent companys regional operating centers
(ROCs) was automatically zero-rated effective
January 1, 1988.12
Service has been defined as "the art of doing
something useful for a person or company for a
fee"13 or "useful labor or work rendered or to be
rendered by one person to another."14 For facilitating
in the Philippines the collection and payment of
receivables belonging to its Hong Kong-based
foreign client, and getting paid for it in duly
accounted acceptable foreign currency, respondent
renders service falling under the category of zero
rating. Pursuant to the Tax Code, a VAT of zero
percent should, therefore, be levied upon the supply
of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the said
collection is different from the main business of
issuing credit cards.16 Under the credit card system,
the credit card company extends credit
accommodations to its card holders for the purchase
of goods and services from its member
establishments, to be reimbursed by them later on
upon proper billing. Given the complexities of
present-day business transactions, the components of
this system can certainly function as separate billable
services.
Under RA 8484,17 the credit card that is issued by
banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device
existing for the purpose of obtaining x x x goods x x
x or services x x x on credit;"19 and is being used
"usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between the
issuer and the holder of the credit card enables the
latter to procure goods or services "on a continuing
basis as long as the outstanding balance does not
exceed a specified limit."21 The card holder is,
therefore, given "the power to obtain present control
of goods or service on a promise to pay for them in
the future."22
Business establishments may extend credit sales
through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of
uncollectible accounts from their customers. Under
this system, the establishments do not deposit in their
bank accounts the credit card drafts23 that arise from
the credit sales. Instead, they merely record their
receivables from the credit card company and
periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as
payment to these business establishments, but it does
not redeem the drafts at full price. The agreement
between them usually provides for discounts to be
taken by the company upon its redemption of the
drafts.24 At the end of each month, it then bills its
credit card holders for their respective drafts
redeemed during the previous month. If the holders
fail to pay the amounts owed, the company sustains
the loss.25
In the present case, respondents role in the consumer
credit26 process described above primarily consists of
gathering the bills and credit card drafts of different
service establishments located in the Philippines and
forwarding them to the ROCs outside the country.
Servicing the bill is not the same as billing. For the
former type of service alone, respondent already gets
paid.
The parent company -- to which the ROCs and
respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the
checks to the service establishments, but also of
billing the credit card holders for their respective
drafts that it has redeemed. While it usually imposes
finance charges27 upon the holders, none may be
exacted by respondent upon either the ROCs or the
card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are
operated as branches. This means that each of them is
a unit, "an offshoot, lateral extension, or
division"28 located at some distance from the home
office29 of the parent company; carrying separate
inventories; incurring their own expenses; and
generating their respective incomes. Each may
conduct sales operations in any locality as an
extension of the principal office.30
The extent of accounting activity at any of these
branches depends upon company policy,31 but the
financial reports of the entire business enterprise --
the credit card company to which they all belong --
must always show its financial position, results of
operation, and changes in its financial position as a
single unit.32 Reciprocal accounts are reconciled or
eliminated, because they lose all significance when
the branches and home office are viewed as a single
entity.33 In like manner, intra-company profits or
losses must be offset against each other for
accounting purposes.
Contrary to petitioners assertion,34 respondent can
sell its services to another branch of the same parent
company.35 In fact, the business concept of a transfer
price allows goods and services to be sold between
and among intra-company units at cost or above
cost.36 A branch may be operated as a revenue center,
cost center, profit center or investment center,
depending upon the policies and accounting system
of its parent company.37Furthermore, the latter may
choose not to make any sale itself, but merely to
function as a control center, where most or all of its
expenses are allocated to any of its branches.38
Gratia argumenti that the sending of drafts and bills
by service establishments to respondent is equivalent
to the act of sending them directly to its parent
company abroad, and that the parent companys
subsequent redemption of these drafts and billings of
credit card holders is also attributable to respondent,
then with greater reason should the service rendered
by respondent be zero-rated under our VAT system.
The service partakes of the nature of export sales as
applied to goods,39 especially when rendered in the
Philippines by a VAT-registered person40 that gets
paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a
percentage of the value added to goods or
services"42purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main
object is the transaction46itself or, more concretely,
the performance of all kinds of services47 conducted
in the course of trade or business in the
Philippines.48 These services must be regularly
conducted in this country; undertaken in "pursuit of a
commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50
Without doubt, the transactions respondent entered
into with its Hong Kong-based client meet all these
requirements.
First, respondent regularly renders in the
Philippines the service of facilitating the
collection and payment of receivables
belonging to a foreign company that is a
clearly separate and distinct entity.
Second, such service is commercial in
nature; carried on over a sustained period of
time; on a significant scale; with a
reasonable degree of frequency; and not at
random, fortuitous or attenuated.
Third, for this service, respondent definitely
receives consideration in foreign currency
that is accounted for in conformity with law.
Finally, respondent is not an entity exempt
under any of our laws or international
agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the
destination principle as a basis for the jurisdictional
reach of the tax.51Goods and services are taxed only
in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner
equates the performance of a particular type of
service with the consumption of its output abroad. In
the present case, the facilitation of the collection of
receivables is different from the utilization or
consumption of the outcome of such service. While
the facilitation is done in the Philippines,
the consumption is not. Respondent renders
assistance to its foreign clients -- the ROCs outside
the country -- by receiving the bills of service
establishments located here in the country and
forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to
petitioners administrative interpretation,52 does not
imply that the service be done abroad in order to be
zero-rated.
Consumption is "the use of a thing in a way that
thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of
a contractual duty, usually resulting in the
performers release from any past or future liability x
x x."54 The services rendered by respondent are
performed or successfully completed upon its
sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its
services, having been performed in the Philippines,
are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in
or bound for a specific place when their destination is
determined. Instead, there can only be a
"predetermined end of a course"55 when determining
the service "location or position x x x for legal
purposes."56 Respondents facilitation service has no
physical existence, yet takes place upon rendition,
and therefore upon consumption, in the Philippines.
Under the destination principle, as petitioner asserts,
such service is subject to VAT at the rate of 10
percent.
Respondents Services Exempt from the Destination
Principle
However, the law clearly provides for an exception to
the destination principle; that is, for a zero percent
VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the [BSP]."57 Thus, for the supply of
service to be zero-rated as an exception, the law
merely requires that first, the service be performed in
the Philippines; second, the service fall under any of
the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from
the destination principle are met by respondent. Its
facilitation service is performed in the Philippines. It
falls under the second category found in Section
102(b) of the Tax Code, because it is a service other
than "processing, manufacturing or repacking of
goods" as mentioned in the provision. Undisputed is
the fact that such service meets the statutory
condition that it be paid in acceptable foreign
currency duly accounted for in accordance with BSP
rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising
from Performance
Again, contrary to petitioners stand, for the cost of
respondents service to be zero-rated, it need not be
tacked in as part of the cost of goods exported.58 The
law neither imposes such requirement nor associates
services with exported goods. It simply states that
the services performed by VAT-registered persons in
the Philippines -- services other than the processing,
manufacturing or repacking of goods for persons
doing business outside this country -- if paid in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP,
are zero-rated. The service rendered by respondent is
clearly different from the product that arises from the
rendition of such service. The activity that creates the
income must not be confused with the main business
in the course of which that income is realized.59
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the
service is rendered determines the jurisdiction60 to
impose the VAT.61Performed in the Philippines, such
service is necessarily subject to its jurisdiction,62 for
the State necessarily has to have "a substantial
connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65much
less is the place where the output of the service will
be further or ultimately used.
Statutory Construction or Interpretation
Unnecessary
As mentioned at the outset, Section 102(b)(2) of the
Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground
that only Congress may tread upon.
The Court may not construe a statute that is free from
doubt.66 "[W]here the law speaks in clear and
categorical language, there is no room for
interpretation. There is only room for
application."67 The Court has no choice but to "see to
it that its mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code,
RR 5-87 provides for the zero rating of services other
than the processing, manufacturing or repacking of
goods -- in general and without qualifications -- when
paid for by the person to whom such services are
rendered in acceptable foreign currency inwardly
remitted and duly accounted for in accordance with
the BSP (then Central Bank) regulations. Section 8 of
RR 5-87 states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-
rated sale is a taxable transaction for value-added tax
purposes. A sale by a VAT-registered person of goods
and/or services taxed at zero rate shall not result in
any output tax. The input tax on his purchases of
goods or services related to such zero-rated sale shall
be available as tax credit or refundable in accordance
with Section 16 of these Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following
services rendered by VAT-registered persons are zero-
rated:
(1) Services in connection with the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines, where such
goods are actually shipped out of the Philippines to
said persons or their assignees and the services are
paid for in acceptable foreign currency inwardly
remitted and duly accounted for under the regulations
of the Central Bank of the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than
those mentioned in subparagraph (1) above which are
paid for by the person or entity to whom the service
is rendered in acceptable foreign currency inwardly
remitted and duly accounted for in accordance with
Central Bank regulations. Where the contract
involves payment in both foreign and local currency,
only the service corresponding to that paid in foreign
currency shall enjoy zero-rating. The portion paid for
in local currency shall be subject to VAT at the rate of
10%."
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated VAT
Regulations,"69 reiterates the above-quoted provision
and further presents as examples only the services
performed in the Philippines by VAT-registered hotels
and other service establishments. Again, the
condition remains that these services must be paid in
acceptable foreign currency inwardly remitted and
accounted for in accordance with the rules and
regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover
respondents facilitation service. Section 4.102-2 of
RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. --
A zero-rated sale by a VAT registered person, which
is a taxable transaction for VAT purposes, shall not
result in any output tax. However, the input tax on his
purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or
refund in accordance with these regulations.
"(b) Transaction subject to zero-rate. -- The following
services performed in the Philippines by VAT-
registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
(2) Services other than those mentioned in
the preceding subparagraph, e.g. those
rendered by hotels and other service
establishments, the consideration for which
is paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently
amended by RR 5-96 to read as follows:
"Section 4.102-2(b)(2) -- Services other than
processing, manufacturing or repacking for other
persons doing business outside the Philippines for
goods which are subsequently exported, as well as
services by a resident to a non-resident foreign client
such as project studies, information services,
engineering and architectural designs and other
similar services, the consideration for which is paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
BSP."
Aside from the already scopious coverage of services
in Section 4.102-2(b)(2) of RR 7-95, the amendment
introduced by RR 5-96 further enumerates specific
services entitled to zero rating. Although superfluous,
these sample services are meant to be merely
illustrative. In this provision, the use of the term "as
well as" is not restrictive. As a prepositional phrase
with an adverbial relation to some other word, it
simply means "in addition to, besides, also or too."70
Neither the law nor any of the implementing revenue
regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for
a fee, remuneration or consideration. Rather, both
merely enumerate the items of service that fall under
the term "sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known
as ejusdem generis or "of the same kind or specie"
does not apply to Section 4.102-2(b)(2) of RR 7-95
as amended by RR 5-96.
First, although the regulatory provision
contains an enumeration of particular or
specific words, followed by the general
phrase "and other similar services," such
words do not constitute a readily discernible
class and are patently not of the same
kind.72 Project studies involve investments
or marketing; information services focus on
data technology; engineering and
architectural designs require creativity.
Aside from calling for the exercise or use of
mental faculties or perhaps producing
written technical outputs, no common
denominator to the exclusion of all others
characterizes these three services. Nothing
sets them apart from other and similar
general services that may involve
advertising, computers, consultancy, health
care, management, messengerial work -- to
name only a few.
Second, there is the regulatory intent to give
the general phrase "and other similar
services" a broader meaning.73 Clearly, the
preceding phrase "as well as" is not meant to
limit the effect of "and other similar
services."
Third, and most important, the statutory
provision upon which this regulation is
based is by itself not restrictive. The scope
of the word "services" in Section 102(b)(2)
of the Tax Code is broad; it is not
susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a
less general interpretation at the administrative
level,75rendered by the BIR commissioner upon
request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this
ruling states that the service must be "destined for
consumption outside of the Philippines"76 in order to
qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it.77 This
portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.78
Although "[i]t is widely accepted that the
interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to
great respect by the courts,"79 this interpretation is not
conclusive and will have to be "ignored if judicially
found to be erroneous"80 and "clearly absurd x x x or
improper."81 An administrative issuance that
overrides the law it merely seeks to interpret, instead
of remaining consistent and in harmony with it, will
not be countenanced by this Court.82
In the present case, respondent has relied upon VAT
Ruling No. 080-89, which clearly recognizes its zero
rating. Changing this status will certainly deprive
respondent of a refund of the substantial amount of
excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-
98 revoked VAT Ruling No. 080-89, such revocation
could not be given retroactive effect if the application
of the latter ruling would only be prejudicial to
respondent.83 Section 246 of the Tax Code
categorically declares that "[a]ny revocation x x x of
x x x any of the rulings x x x promulgated by the
Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial
to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be
given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive
application to respondent does the Court find in VAT
Ruling No. 040-98. Neither do the exceptions
enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the
provisions of the Tax Code88 and not bound by
predecessors acts or rulings, the BIR commissioner
may render a different construction to a statute89 only
if the new interpretation is in congruence with the
law. Otherwise, no amount of interpretation can ever
revoke, repeal or modify what the law says.
"Consumed Abroad" Not Required by Legislature
Interpellations on the subject in the halls of the
Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being
"consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-
rated. We quote the relevant portions of the
proceedings:
"Senator Maceda: Going back to Section 102 just
for the moment. Will the Gentleman kindly explain to
me - I am referring to the lower part of the first
paragraph with the Provided. Section
102. Provided that the following services performed
in the Philippines by VAT registered persons shall be
subject to zero percent. There are three here. What is
the difference between the three here which is subject
to zero percent and Section 103 which is exempt
transactions, to being with?
"Senator Herrera: Mr. President, in the case of
processing and manufacturing or repacking goods for
persons doing business outside the Philippines which
are subsequently exported, and where the services are
paid for in acceptable foreign currencies inwardly
remitted, this is considered as subject to 0%. But if
these conditions are not complied with, they are
subject to the VAT.
"In the case of No. 2, again, as the Gentleman pointed
out, these three are zero-rated and the other one that
he indicated are exempted from the very beginning.
These three enumerations under Section 102 are zero-
rated provided that these conditions indicated in these
three paragraphs are also complied with. If they are
not complied with, then they are not entitled to the
zero ratings. Just like in the export of minerals, if
these are not exported, then they cannot qualify under
this provision of zero rating.
"Senator Maceda: Mr. President, just one small item
so we can leave this. Under the proviso, it is required
that the following services be performed in the
Philippines.
"Under No. 2, services other than those mentioned
above includes, let us say, manufacturing computers
and computer chips or repacking goods for persons
doing business outside the Philippines. Meaning to
say, we ship the goods to them in Chicago or
Washington and they send the payment inwardly to
the Philippines in foreign currency, and that is, of
course, zero-rated.lawphil.net
"Now, when we say services other than those
mentioned in the preceding subsection[,] may I have
some examples of these?
"Senator Herrera: Which portion is the Gentleman
referring to?
"Senator Maceda: I am referring to the second
paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages
something here and he sends it abroad and they pay
him, that is covered. That is clear to me. The second
paragraph says Services other than those mentioned
in the preceding subparagraph, the consideration of
which is paid for in acceptable foreign currency mentioned earlier are, therefore, re-enforced. "When
"One example I could immediately think of -- I do
not know why this comes to my mind tonight -- is for
tourism or escort services. For example, the services
of the tour operator or tour escort -- just a good name
for all kinds of activities -- is made here at the
Midtown Ramada Hotel or at the Philippine Plaza,
but the payment is made from outside and remitted
into the country.
"Senator Herrera: What is important here is that
these services are paid in acceptable foreign currency
remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those
Japanese tours which include $50 for the services of a
woman or a tourist guide, it is zero-rated when it is
remitted here.
"Senator Herrera: I guess it can be interpreted that
way, although this tourist guide should also be
considered as among the professionals. If they earn
more than P200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino
citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual
engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-
registered person. When he performs services in the
Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which
substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the
Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly
obtains. This principle means that "the reenactment
of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior
executive construction."91
The legislature is presumed to have reenacted the law
with full knowledge of the contents of the revenue
regulations then in force regarding the VAT, and to
have approved or confirmed them because they
would carry out the legislative purpose. The
particular provisions of the regulations we have
a statute is susceptible of the meaning placed upon it
by a ruling of the government agency charged with
its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial
change, such action is to some extent confirmatory
that the ruling carries out the legislative purpose."92
In sum, having resolved that transactions of
respondent are zero-rated, the Court upholds the
formers entitlement to the refund as determined by
the appellate court. Moreover, there is no conflict
between the decisions of the CTA and CA. This Court
respects the findings and conclusions of a specialized
court like the CTA "which, by the nature of its
functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale or
exchange of a particular service is completely freed
from the VAT, because the seller is entitled to recover,
by way of a refund or as an input tax credit, the tax
that is included in the cost of purchases attributable to
the sale or exchange.94 "[T]he tax paid or withheld is
not deducted from the tax base."95 Having been
applied for within the reglementary
period,96 respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and
the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN
CONTRACTOR MINDANAO, INC., Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16
April 2002 Decision2 of the Court of Appeals in CA-
G.R. SP No. 66341 affirming the 8 August 2001
Decision3 of the Court of Tax Appeals (CTA). The
CTA ordered the Commissioner of Internal Revenue
(petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain
Scandinavian Contractor Mindanao, Inc.
(respondent).
The Antecedents
The CTA summarized the facts, which the Court of
Appeals adopted, as follows:
[Respondent] is a domestic corporation duly
organized and existing under and by virtue of the
laws of the Philippines with principal address located
at Daruma Building, Jose P. Laurel Avenue, Lanang,
Davao City.
It is represented that a foreign consortium composed
of Burmeister and Wain Scandinavian Contractor A/S
(BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered
into a contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance of
[NAPOCORs] two power barges. The Consortium
appointed BWSC-Denmark as its coordination
manager.
BWSC-Denmark established [respondent] which
subcontracted the actual operation and maintenance
of NAPOCORs two power barges as well as the
performance of other duties and acts which
necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the
Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso
component is deposited directly to the Consortiums
bank accounts in Denmark and Japan, while the Peso- On December 29, 1997, [respondent] availed of the
denominated component is deposited in a separate Voluntary Assessment Program (VAP) of the BIR. It
and special designated bank account in the allegedly misinterpreted Revenue Regulations No. 5-
Philippines. On the other hand, the Consortium pays 96 dated February 20, 1996 to be applicable to its
[respondent] in foreign currency inwardly remitted to case. Revenue Regulations No. 5-96 provides in part
the Philippines through the banking system. thus:
In order to ascertain the tax implications of the above SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
transactions, [respondent] sought a ruling from the Revenue Regulations No. 7-95 are hereby amended
BIR which responded with BIR Ruling No. 023-95 to read as follows:
dated February 14, 1995, declaring therein that if Section 4.102-2(b)(2) "Services other than
[respondent] chooses to register as a VAT person and processing, manufacturing or repacking for other
the consideration for its services is paid for in persons doing business outside the Philippines for
acceptable foreign currency and accounted for in goods which are subsequently exported, as well as
accordance with the rules and regulations of the services by a resident to a non-resident foreign client
Bangko Sentral ng Pilipinas, the aforesaid services such as project studies, information services,
shall be subject to VAT at zero-rate. engineering and architectural designs and other
[Respondent] chose to register as a VAT taxpayer. On similar services, the consideration for which is paid
May 26, 1995, the Certificate of Registration bearing for in acceptable foreign currency and accounted for
RDO Control No. 95-113-007556 was issued in favor in accordance with the rules and regulations of the
of [respondent] by the Revenue District Office No. BSP."
113 of Davao City. x x x x x x x x x x.
For the year 1996, [respondent] seasonably filed its In [conformity] with the aforecited Revenue
quarterly Value-Added Tax Returns reflecting, among Regulations, [respondent] subjected its sale of
others, a total zero-rated sales of P147,317,189.62 services to the Consortium to the 10% VAT in the
with VAT input taxes of P3,361,174.14, detailed as total amount of P103,558,338.11 representing April
follows: to December 1996 sales since said Revenue
Regulations No. 5-96 became effective only on April
Exh Date Zero-Rated VAT Input
Qtr. 1996. The sum of P43,893,951.07, representing
. Filed Sales Tax
January to March 1996 sales was subjected to zero
rate. Consequently, [respondent] filed its 1996
amended VAT return consolidating therein the VAT
04- P 33,019,651.0 output and input taxes for the four calendar quarters
1st E P608,953.48
18-96 7 of 1996. It paid the amount of P6,994,659.67 through
BIRs collecting agent, PCIBank, as its output tax
07- liability for the year 1996, computed as follows:
2nd F 37,108,863.33 756,802.66
16-96 Amount subject to 10%
10- VAT P103,558,338.11
3rd G 34,196,372.35 930,279.14 Multiply by 10%
14-96
VAT Output Tax P 10,355,833.81
01- Less: 1996 Input VAT P 3,361,174.14
4th H 42,992,302.87 1,065,138.86
20-97 VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure
Total VAT Ruling No. 003-99 from the VAT Review
s P147,317,189.6 P3,361,174.1 Committee which reconfirmed BIR Ruling No. 023-
2 4
95 "insofar as it held that the services being rendered
by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings,
[respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue
District No. 113 of the BIR. [Respondent] believed
that it erroneously paid the output VAT for 1996 due
to its availment of the Voluntary Assessment Program
(VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for
review with the CTA in order to toll the running of
the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered
petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTAs
ruling stated:
[Respondents] sale of services to the Consortium
[was] paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted
for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established
by various BPI Credit Memos showing remittances in
Danish Kroner (DKK) and US dollars (US$) as
payments for the specific invoices billed by
[respondent] to the consortium. These remittances
were further certified by the Branch Manager x x x of
BPI-Davao Lanang Branch to represent payments for
sub-contract fees that came from Den Danske
Aktieselskab Bank-Denmark for the account of
[respondent]. Clearly, [respondents] sale of services
to the Consortium is subject to VAT at 0% pursuant to
Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to
the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February
15, 1995, and later by VAT Ruling No. 003-99 dated
January 7,1999, x x x.
Since it is apparent that the payments for the services
rendered by [respondent] were indeed subject to VAT
at zero percent, it follows that it mistakenly availed
of the Voluntary Assessment Program by paying
output tax for its sale of services. x x x
x x x Considering the principle of solutio
indebiti which requires the return of what has been
delivered by mistake, the [petitioner] is obligated to
issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the Court of
Appeals, which dismissed the petition for lack of
merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected
petitioners view that since respondents services are
not destined for consumption abroad, they are not of
the same nature as project studies, information
services, engineering and architectural designs, and
other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject
to 0% VAT. Thus, according to petitioner,
respondents services cannot legally qualify for 0%
VAT but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioners
contention that under VAT Ruling No. 040-98,
respondents services should be destined for
consumption abroad to enjoy zero-rating. Contrary to
petitioners interpretation, there are two kinds of
transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a) services
other than repacking goods for other persons doing
business outside the Philippines which goods are
subsequently exported; and (b) services by a resident
to a non-resident foreign client, such as project
studies, information services, engineering and
architectural designs and other similar services, the
consideration for which is paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first
classification is required by the provision to be
consumed abroad in order to be taxed at zero rate. In
x x x the absence of such express or implied
stipulation in the statute, the second classification
need not be consumed abroad."10
The Court of Appeals further held that assuming
petitioners interpretation of Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment
to the Tax Code. Petitioner went beyond merely
providing the implementing details by adding another
requirement to zero-rating. "This is indicated by the
additional phrase as well as services by a resident to
a non-resident foreign client, such as project studies,
information services and engineering and
architectural designs and other similar services. In
effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident
to a non-resident; and (b) these must be in the nature
of project studies, information services, etc."11
The Court of Appeals explained that under Section
108(b)(2) of the Tax Code,12 for services which were
performed in the Philippines to enjoy zero-rating,
these must comply only with two requisites, to wit:
(1) payment in acceptable foreign currency and (2)
accounted for in accordance with the rules of the
BSP. Section 108(b)(2) of the Tax Code does not
provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioners
argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed
the destination principle underlies and is the basis of
the VAT laws, then petitioners proper remedy would
be to recommend an amendment of Section 108(b)(2)
to Congress. Without such amendment, however,
petitioner should apply the terms of the basic law.
Petitioner could not resort to administrative
legislation, as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is
entitled to the refund of P6,994,659.67 as erroneously
paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the
instant petition is not on the ground that respondents
services are subject to 0% VAT. Rather, it is based on
the non-retroactivity of the prejudicial revocation of
BIR Ruling No. 023-9517 and VAT Ruling No. 003-
99,18 which held that respondents services are subject
to 0% VAT and which respondent invoked in
applying for refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable
provision in 1996 when respondent rendered the
services and paid the VAT in question, enumerates
which services are zero-rated, thus:
(b) Transactions subject to zero-rate. The
following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(2) Services other than those mentioned in
the preceding sub-paragraph, the
consideration for which is paid for in
acceptable foreign currency and accounted
for in accordance with the rules and
regulations of the Bangko Sentral ng
Pilipinas (BSP);
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
rate;
(4) Services rendered to vessels engaged
exclusively in international shipping; and
(5) Services performed by subcontractors
and/or contractors in processing, converting,
or manufacturing goods for an enterprise
whose export sales exceed seventy percent
(70%) of total annual production. (Emphasis
supplied)
In insisting that its services should be zero-rated,
respondent claims that it complied with the
requirements of the Tax Code for zero rating under
the second paragraph of Section 102(b). Respondent
asserts that (1) the payment of its service fees was in
acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the
Philippines, and (3) accounting of such remittance
was in accordance with BSP rules. Moreover,
respondent contends that its services which
"constitute the actual operation and management of
two (2) power barges in Mindanao" are not "even
remotely similar to project studies, information
services and engineering and architectural designs
under Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96." As such, respondents services need not be
"destined to be consumed abroad in order to be VAT
zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be
other than "processing, manufacturing or repacking
of goods" and that payment for such services be in
acceptable foreign currency accounted for in
accordance with BSP rules. Another essential
condition for qualification to zero-rating under
Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines.
While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b)
where the listed services must be "for other persons
doing business outside the Philippines." The phrase
"for other persons doing business outside the
Philippines" not only refers to the services
enumerated in the first paragraph of Section 102(b),
but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b).
In short, services other than processing,
manufacturing, or repacking of goods must likewise
be performed for persons doing business outside the
Philippines.
This can only be the logical interpretation of Section
102(b)(2). If the provider and recipient of the "other
services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant.
Otherwise, those subject to the regular VAT under
Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly
remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to make
the payment of the regular VAT under Section 102(a)
dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular
VAT or avoid it by stipulating payment in foreign
currency inwardly remitted by the payer-recipient.
Such interpretation removes Section 102(a) as a tax
measure in the Tax Code, an interpretation this Court
cannot sanction. A tax is a mandatory exaction, not a
voluntary contribution.
When Section 102(b)(2) stipulates payment in
"acceptable foreign currency" under BSP rules, the
law clearly envisions the payer-recipient of services
to be doing business outside the Philippines. Only
those not doing business in the Philippines can be
required under BSP rules20 to pay in acceptable
foreign currency for their purchase of goods or
services from the Philippines. In a domestic
transaction, where the provider and recipient of
services are both doing business in the Philippines,
the BSP cannot require any party to make payment in
foreign currency.
Services covered by Section 102(b) (1) and (2) are in
the nature of export sales since the payer-recipient of
services is doing business outside the Philippines.
Under BSP rules,21 the proceeds of export sales must
be reported to the Bangko Sentral ng Pilipinas. Thus,
there is reason to require the provider of services
under Section 102(b) (1) and (2) to account for the
foreign currency proceeds to the BSP. The same
rationale does not apply if the provider and recipient
of the services are both doing business in the
Philippines since their transaction is not in the nature
of an export sale even if payment is denominated in
foreign currency.
Further, when the provider and recipient of services
are both doing business in the Philippines, their
transaction falls squarely under Section 102(a)
governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of
services subject to the regular VAT, unless of course
the transaction falls under the other provisions of
Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices
other than those mentioned in the preceding
subparagraph," the legislative intent is that only the
services are different between subparagraphs 1 and 2.
The requirements for zero-rating, including the
essential condition that the recipient of services is
doing business outside the Philippines, remain the
same under both subparagraphs.
Significantly, the amended Section
108(b)22 [previously Section 102(b)] of the present
Tax Code clarifies this legislative intent. Expressly
included among the transactions subject to 0% VAT
are "[s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a
person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the
services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the
BSP."
In this case, the payer-recipient of respondents
services is the Consortium which is a joint-venture
doing business in the Philippines. While the
Consortiums principal members are non-resident
foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract
between the Consortium and NAPOCOR is for a 15-
year term, thus:
This refers to your letter dated January 14, 1994
requesting for a clarification of the tax implications
of a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S
("BWSC"), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. ("MITSUI"), all
referred to hereinafter as the "Consortium", and the
National Power Corporation ("NAPOCOR") for the
operation and maintenance of two 100-Megawatt
power barges ("Power Barges") acquired by
NAPOCOR for a 15-year term.23 (Emphasis
supplied)
Considering this length of time, the Consortiums
operation and maintenance of NAPOCORs power
barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of
the services must be a person doing business outside
the Philippines. Therefore, respondents services to
the Consortium, not being supplied to a person doing
business outside the Philippines, cannot legally
qualify for 0% VAT.
Respondent, as subcontractor of the Consortium,
operates and maintains NAPOCORs power barges in
the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign
currency outwardly remitted. In turn, the Consortium
pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP
rules. This payment scheme does not entitle
respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch),24 the
place of payment is immaterial, much less is the
place where the output of the service is ultimately
used. An essential condition for entitlement to 0%
VAT under Section 102(b)(1) and (2) is that the
recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of
the services is the Consortium, which is doing
business not outside, but within the Philippines
because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power
barges in Mindanao.
The Court recognizes the rule that the VAT system
generally follows the "destination principle" (exports
are zero-rated whereas imports are taxed). However,
as the Court stated in American Express, there is an
exception to this rule.25 This exception refers to the
0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by
Section 102(b)(1) and (2), the recipient of the
services must be a person doing business outside the
Philippines. Thus, to be exempt from the destination
principle under Section 102(b)(1) and (2), the
services must be (a) performed in the Philippines; (b)
for a person doing business outside the Philippines;
and (c) paid in acceptable foreign currency accounted
for in accordance with BSP rules.
Respondents reliance on the ruling in American
Express26 is misplaced. That case involved a recipient
of services, specifically American Express
International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court
stated:
Respondent [American Express International, Inc.
(Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables
belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong
Branch)], for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x
x27 (Emphasis supplied)
In contrast, this case involves a recipient of services
the Consortium which is doing business in the
Philippines. Hence, American Express services were
subject to 0% VAT, while respondents services
should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output
tax, respondent relied on VAT Ruling No. 003-
99,28 which reconfirmed BIR Ruling No. 023-
9529 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero
percent (0%)." Respondents reliance on these BIR
rulings binds petitioner.
Petitioners filing of his Answer before the CTA
challenging respondents claim for refund effectively
serves as a revocation of VAT Ruling No. 003-99 and
BIR Ruling No. 023-95. However, such revocation
cannot be given retroactive effect since it will
prejudice respondent. Changing respondents status
will deprive respondent of a refund of a substantial
amount representing excess output tax.30 Section 246
of the Tax Code provides that any revocation of a
ruling by the Commissioner of Internal Revenue shall
not be given retroactive application if the revocation
will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions
enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.
However, upon the filing of petitioners Answer
dated 2 March 2000 before the CTA contesting
respondents claim for refund, respondents services
shall be subject to the regular 10% VAT.31 Such filing
is deemed a revocation of VAT Ruling No. 003-99
and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
 Republic of the Philippines The facts as found by the appellate court are transaction with PAGCOR
SUPREME COURT undisputed, thus: was subject to zero rate as it
Manila was rendered to a tax-
Acesite is the owner and exempt entity. On 21 May
operator of the Holiday Inn 1998, Acesite filed an
SECOND DIVISION Manila Pavilion Hotel administrative claim for
along United Nations refund with the CIR but the
Avenue in Manila. It leases latter failed to resolve the
THE COMMISIONER OF G.R. No. 147295 6,768.53 square meters of same. Thus on 29 May
INTERNAL REVENUE, the hotels premises to the 1998, Acesite filed a
Petitioner, Present: Philippine Amusement and petition with the Court of
Gaming Corporation Tax Appeals [hereafter,
QUISUMBING, J., Chairperson, [hereafter, PAGCOR] for CTA] which was decided in
- versus - CARPIO, casino operations. It also this wise:
CARPIO MORALES, caters food and beverages to
TINGA, and PAGCORs casino patrons As earlier
VELASCO, JR., JJ. through the hotels restaurant stated, Petitioner
ACESITE (PHILIPPINES) outlets. For the period is subject to zero
HOTEL CORPORATION, Promulgated: January (sic) 96 to April percent tax
Respondent. 1997, Acesite incurred VAT pursuant to
February 16, 2007 amounting to Section 102 (b)
x--------------------------------------------------------------- P30,152,892.02 from its (3) [now 106(A)
--------------------------x rental income and sale of (C)] insofar as its
food and beverages to gross income
PAGCOR during said from rentals and
DECISION period. Acesite tried to shift sales to
the said taxes to PAGCOR PAGCOR, a tax
VELASCO, JR., J.: by incorporating it in the exempt entity by
amount assessed to virtue of a special
The Case PAGCOR but the latter law. Accordingly,
refused to pay the taxes on the amounts of
Before us is a Petition for Review on account of its tax exempt P21,413,026.78
Certiorari[1] under Rule 45 of the Rules of Court, status. and
assailing the November 17, 2000 Decision [2] of the P8,739,865.24,
Court of Appeals (CA) in CA-G.R. SP No. 56816, Thus, PAGCOR paid the representing the
which affirmed the January 3, 2000 Decision[3] of amount due to Acesite 10% EVAT on its
the Court of Tax Appeals (CTA) in CTA Case No. minus the P30,152,892.02 sales of food and
5645 entitled Acesite (Philippines) Hotel VAT while the latter paid the services and
Corporation v. The Commissioner of Internal VAT to the Commissioner of gross rentals,
Revenue for Refund of VAT Payments. Internal Revenue [hereafter, respectively from
CIR] as it feared the legal PAGCOR shall,
consequences of non- as a matter of
payment of the course, be
The Facts tax. However, Acesite refunded to the
belatedly arrived at the petitioner for
conclusion that its having been
inadvertently vvvvvvv The Issues
remitted to the vvvvvv
respondent. WHEREFO Hence, we have the instant petition with the
RE, in view of all following issues: (1) whether PAGCORs tax
Thus, taking the foregoing, the exemption privilege includes the indirect tax of VAT
into consideration instant Petition to entitle Acesite to zero percent (0%) VAT rate; and
the prescribed for Review is (2) whether the zero percent (0%) VAT rate under
portion of partially then Section 102 (b)(3) of the Tax Code (now Section
Petitioners claim GRANTED. The 108 (B)(3) of the Tax Code of 1997) legally applies
for refund of Respondent is to Acesite.
P98,743.40, and hereby
considering ORDERED to The petition is devoid of merit.
further the REFUND to the
principle petitioner the In resolving the first issue on whether
of solutio amount of PAGCORs tax exemption privilege includes the
indebiti which THIRTY indirect tax of VAT to entitle Acesite to zero percent
requires the MILLION (0%) VAT rate, we answer in the affirmative. We will
return of what FIFTY FOUR however discuss both issues together.
has been THOUSAND
delivered through ONE HUNDRED PAGCOR is exempt from payment of indirect
mistake, FORTY EIGHT taxes
Respondent must PESOS AND
refund to the SIXTY FOUR It is undisputed that P.D. 1869, the charter
Petitioner the CENTAVOS creating PAGCOR, grants the latter an exemption
amount of (P30,054,148.64) from the payment of taxes. Section 13 of P.D. 1869
P30,054,148.64 immediately. pertinently provides:
computed as
follows: SO Sec. 13. Exemptions.
ORDERED.[4]
Total amount xxxx
per
claim 30,152,892 (2) Income and other
.02 The Ruling of the Court of Appeals taxes. (a) Franchise
Less Holder: No tax of any kind
Prescribed Upon appeal by petitioner, the CA or form, income or
amount (Exhs A, affirmed in toto the decision of the CTA holding that otherwise, as well as fees,
X, & X-20) PAGCOR was not only exempt from direct taxes but charges or levies of
January was also exempt from indirect taxes like the VAT and whatever nature, whether
1996 P 2,199.94 consequently, the transactions between respondent National or Local, shall be
February Acesite and PAGCOR were effectively zero-rated assessed and collected
1996 26,205.04 because they involved the rendition of services to an under this Franchise from
March entity exempt from indirect taxes. Thus, the CA the Corporation; nor shall
1996 70,338.42 9 affirmed the CTAs determination by ruling that any form of tax or charge
8,743.40 respondent Acesite was entitled to a refund of PhP attach in any way to the
P30,054, 30,054,148.64 from petitioner. earnings of the
148.64 Corporation, except a
Franchise Tax of five (5%) furnished and/or technical and neither is Acesite as the
percent of the gross revenue services rendered to the latter is effectively subject
or earnings derived by the Corporation or operator. to zero percent rate under
Corporation from its (Emphasis supplied.) Sec. 108 B (3). R.A.
operation under this 8424. (Emphasis supplied.)
Franchise. Such tax shall be Petitioner contends that the above tax
due and payable quarterly to exemption refers only to PAGCORs direct tax
the National Government liability and not to indirect taxes, like the VAT. Indeed, by extending the exemption to
and shall be in lieu of all entities or individuals dealing with PAGCOR, the
kinds of taxes, levies, fees We disagree. legislature clearly granted exemption also from
or assessments of any kind, indirect taxes. It must be noted that the indirect tax of
nature or description, levied, A close scrutiny of the above provisos VAT, as in the instant case, can be shifted or passed to
established or collected by clearly gives PAGCOR a blanket exemption to taxes the buyer, transferee, or lessee of the goods,
any municipal, provincial, with no distinction on whether the taxes are direct or properties, or services subject to VAT. Thus, by
or national government indirect. We are one with the CA ruling that extending the tax exemption to entities or individuals
authority. PAGCOR is also exempt from indirect taxes, like dealing with PAGCOR in casino operations, it is
VAT, as follows: exempting PAGCOR from being liable to indirect
xxxx taxes.
Under the above provision
(b) Others: The exemp [Section 13 (2) (b) of P.D. The manner of charging VAT does not make
tions herein granted for 1869], the term Corporation PAGCOR liable to said tax
earnings derived from the or operator refers to
operations conducted PAGCOR. Although the law It is true that VAT can either be incorporated
under the franchise does not specifically in the value of the goods, properties, or services sold
specifically from the mention PAGCORs or leased, in which case it is computed as 1/11 of
payment of any tax, exemption from indirect such value, or charged as an additional 10% to the
income or otherwise, as taxes, PAGCOR is value. Verily, the seller or lessor has the option to
well as any form of undoubtedly exempt from follow either way in charging its clients and
charges, fees or such taxes because the law customer. In the instant case, Acesite followed the
levies, shall inure to the exempts from taxes latter method, that is, charging an additional 10% of
benefit of and extend to persons or entities the gross sales and rentals. Be that as it may, the use
corporation(s), contracting with of either method, and in particular, the first method,
association(s), agency(ies), PAGCOR in casino does not denigrate the fact that PAGCOR is exempt
or individual(s) with operations.Although, from an indirect tax, like VAT.
whom the Corporation or differently worded, the
operator has any provision clearly exempts VAT exemption
contractual relationship in PAGCOR from indirect extends to
connection with the taxes. In fact, it goes one Acesite
operations of the casino(s) step further by granting
authorized to be tax exempt status to Thus, while it was proper for PAGCOR not
conducted under this persons dealing with to pay the 10% VAT charged by Acesite, the latter is
Franchise and to those PAGCOR in casino not liable for the payment of it as it is exempt in this
receiving compensation or operations. The particular transaction by operation of law to pay the
other remuneration from the unmistakable conclusion is indirect tax. Such exemption falls within the former
Corporation or operator as a that PAGCOR is not liable Section 102 (b) (3) of the 1977 Tax Code, as
result of essential facilities for the P30,152,892.02 VAT
amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:
Section 102. Value-added
tax on sale of services (a)
Rate and base of tax There
shall be levied, assessed and
collected, a value-added tax
equivalent to 10% of gross
receipts derived by any
person engaged in the sale
of services x x x; Provided,
that the following services
performed in the Philippines
by VAT-registered persons
shall be subject to 0%.
xxxx
(b) Transactions subject to
zero percent (0%) rated.
xxxx
(3) Services rendered to
persons or entities whose
exemption under special
laws or international
agreements to which the
Philippines is a signatory
effectively subjects the
supply of such services to
zero (0%) rate (emphasis
supplied).
The rationale for the exemption from
indirect taxes provided for in P.D. 1869 and the
extension of such exemption to entities or individuals
dealing with PAGCOR in casino operations are best
elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc.,
[5]
where the absolute tax exemption of the World
Health Organization (WHO) upon an international
agreement was upheld. We held in said case that the
exemption of contractee WHO should be
implemented to mean that the entity or person
exempt is the contractor itself who constructed the
building owned by contractee WHO, and such does
not violate the rule that tax exemptions are personal
because the manifest intention of the agreement is
to exempt the contractor so that no contractors
tax may be shifted to the contractee WHO. Thus,
the proviso in P.D. 1869, extending the exemption to
entities or individuals dealing with PAGCOR in
casino operations, is clearly to proscribe any indirect
tax, like VAT, that may be shifted to PAGCOR.
Acesite paid VAT by mistake
Considering the foregoing discussion, there
are undoubtedly erroneous payments of the VAT
pertaining to the effectively zero-rate transactions
between Acesite and PAGCOR. Verily, Acesite has
clearly shown that it paid the subject taxes under a
mistake of fact, that is, when it was not aware that the
transactions it had with PAGCOR were zero-rated at
the time it made the payments. In UST Cooperative
Store v. City of Manila,[6] we explained that there is
erroneous payment of taxes when a taxpayer pays
under a mistake of fact, as for the instance in a case
where he is not aware of an existing exemption in his
favor at the time the payment was made. [7] Such
payment is held to be not voluntary and, therefore,
can be recovered or refunded.[8]
Moreover, it must be noted that aside from
not raising the issue of Acesites compliance with
pertinent Revenue Regulations on exemptions during
the proceedings in the CTA, it cannot be gainsaid that
Acesite should have done so as it paid the VAT under
a mistake of fact. Hence, petitioners argument on this
point is utterly tenuous.
Solutio
indebiti applies
to the
Government
Tax refunds are based on the principle of
quasi-contract or solutio indebiti and the pertinent
laws governing this principle are found in Arts. 2142
and 2154 of the Civil Code, which provide, thus:
Art. 2142. Certain lawful,
voluntary, and unilateral
acts give rise to the juridical
relation of quasi-contract to
the end that no one shall be
unjustly enriched or
benefited at the expense of
another.
Art. 2154. If something is
received when there is no
right to demand it, and it
was unduly delivered
through mistake, the
obligation to return it arises.
When money is paid to another under the
influence of a mistake of fact, that is to say, on the
mistaken supposition of the existence of a specific
fact, where it would not have been known that the
fact was otherwise, it may be recovered. The ground
upon which the right of recovery rests is that money
paid through misapprehension of facts belongs in
equity and in good conscience to the person who paid
it.[9]
The Government comes within the scope of solutio
indebiti principle as elucidated in Commissioner of
Internal Revenue v. Firemans Fund Insurance
Company, where we held that: Enshrined in the basic
legal principles is the time-honored doctrine that no
person shall unjustly enrich himself at the expense of
another. It goes without saying that the Government
is not exempted from the application of this doctrine.
[10]
Action for refund strictly construed; Acesite
discharged the
burden of proof
Since an action for a tax refund partakes of
the nature of an exemption, which cannot be allowed
unless granted in the most explicit and categorical
language, it is strictly construed against the claimant
who must discharge such burden convincingly.[11] In
the instant case, respondent Acesite had discharged
this burden as found by the CTA and the CA. Indeed,
the records show that Acesite proved its actual VAT
payments subject to refund, as attested to by an
independent Certified Public Accountant who was
duly commissioned by the CTA. On the other hand,
petitioner never disputed nor contested respondents
testimonial and documentary evidence. In fact,
petitioner never presented any evidence on its behalf.

One final word. The BIR must release the

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

WHEREFORE, the petition

is DENIED for lack of merit and the November 17,
2000 Decision of the CA is hereby AFFIRMED. No
costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT Goods
Manila
Domestic Zero-rated
SECOND DIVISION P545,686,639.18
Purchases- P16,455,868.10 P1,645,586.81 Sales
G.R. No. 190102 July 11, 2012
Services
ACCENTURE, INC., Petitioner, Total Sales P P572,880,982.68
vs. Total
COMMISSIONER OF INTERNAL P9,355,809.80 The monthly and quarterly VAT returns of Accenture
Input Tax
REVENUE, Respondent. show that, notwithstanding its application of the input
DECISION VAT credits earned from its zero-rated transactions
SERENO, J.: against its output VAT liabilities, it still had excess or
This is a Petition filed under Rule 45 of the 1997 Zero-rated unutilized input VAT credits. These VAT credits are in
Rules of Civil Procedure, praying for the reversal of P316,113,513.34 the amounts of P9,355,809.80 for the 1st period and
Sales
the Decision of the Court of Tax Appeals En Banc P27,682,459.38 for the 2nd period, or a total of
7
(CTA En Banc ) dated 22 September 2009 and its Total Sales P335,640,544.74 P37,038,269.18.
subsequent Resolution dated 23 October 2009.1 Out of the P37,038,269.18, only P35,178,844.21
Accenture, Inc. (Accenture) is a corporation engaged Accenture filed its Monthly VAT Return for the pertained to the allocated input VAT on Accentures
in the business of providing management consulting, month of September 2002 on 24 October 2002; and "domestic purchases of taxable goods which cannot
business strategies development, and selling and/or that for October 2002, on 12 November 2002. These be directly attributed to its zero-rated sale of
licensing of software.2 It is duly registered with the returns were amended on 9 January 2003. services."8 This allocated input VAT was broken
Bureau of Internal Revenue (BIR) as a Value Added Accentures Quarterly VAT Return for the first down to P8,811,301.66 for the 1st period and
Tax (VAT) taxpayer or enterprise in accordance with quarter of 2003, which included the period 1 P26,367,542.55 for the 2nd period.9
Section 236 of the National Internal Revenue Code September 2002 to 30 November 2002 (2nd period), The excess input VAT was not applied to any output
(Tax Code).3 was filed on 17 December 2002; and the Amended VAT that Accenture was liable for in the same quarter
On 9 August 2002, Accenture filed its Monthly VAT Quarterly VAT Return, on 18 June 2004. The latter when the amount was earnedor to any of the
Return for the period 1 July 2002 to 31 August 2002 contains the following information:6 succeeding quarters. Instead, it was carried forward
(1st period). Its Quarterly VAT Return for the fourth Purchases Amount Input VAT to petitioners 2nd Quarterly VAT Return for 2003.10
quarter of 2002, which covers the 1st period, was Thus, on 1 July 2004, Accenture filed with the
filed on 17 September 2002; and an Amended Domestic Department of Finance (DoF) an administrative claim
Quarterly VAT Return, on 21 June 2004.4 The Purchases- for the refund or the issuance of a Tax Credit
following are reflected in Accentures VAT Return for P80,765,294.10 P8,076,529.41 Certificate (TCC). The DoF did not act on the claim
Capital
the fourth quarter of 2002:5 Goods of Accenture. Hence, on 31 August 2004, the latter
1wphi1 filed a Petition for Review with the First Division of
Domestic the Court of Tax Appeals (Division), praying for the
Purchases Amount Input VAT issuance of a TCC in its favor in the amount of
Purchases-
Goods P35,178,844.21.
Domestic P132,820,541.70 P13,282,054.17 The Commissioner of Internal Revenue (CIR), in its
Purchases- other than
P12,312,722.00 P1,231,272.20 capital Answer,11 argued thus:
Capital
Goods 1. The sale by Accenture of goods and
Goods
services to its clients are not zero-rated
Domestic P64,789,507.90 P6,478,950.79 Domestic transactions.
Purchases- Purchases- P63,238,758.00 P6,323,875.80 2. Claims for refund are construed strictly
Goods Services against the claimant, and Accenture has
other than failed to prove that it is entitled to a refund,
Total because its claim has not been fully
capital P27,682,459.38
Input Tax substantiated or documented.
In a 13 November 2008 Decision,12 the Division
denied the Petition of Accenture for failing to prove
that the latters 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 Accentures 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 Divisions 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 latters 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
Divisions 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 Petitioners 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 petitioners 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 Petitioners 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 Codeas
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 Accentures 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
Philippinescan be disregarded, because this
requirement is expressly provided in Article 108(2) of
the Tax Code.37
Accenture questions the Divisions 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 Accentures 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 Courts 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 Courts 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 Courts 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 Accentures 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 CTAs 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 Courts 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 Accentures 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 payrests 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
performers 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.1wphi1 Instead, 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 NAPOCORs 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 Codeand consequently Section 108(B)(2) of
the 1997 Tax Codewas 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
Accentures 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
Accentures 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 CTAs 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 Accentures Petition for a tax refund.
The evidence presented by Accenture may have
established that its clients are foreign.1wphi1 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 services were clients doing business outside the
foreign corporation engaged in business within the Philippines.
Philippines and vice versa, to wit: As ruled by the CTA En Banc, the Official Receipts,
SEC. 22. Definitions - When used in this Title: Intercompany Payment Requests, Billing Statements,
xxx xxx xxx Memo Invoices-Receivable, Memo Invoices-Payable,
(H) The term "resident foreign corporation" and Bank Statements presented by Accenture merely
applies to a foreign corporation engaged in substantiated the existence of sales, receipt of foreign
trade or business within the Philippines. currency payments, and inward remittance of the
(I) The term nonresident foreign proceeds of such sales duly accounted for in
corporation applies to a foreign corporation accordance with BSP rules, all of these were devoid
not engaged in trade or business within the of any evidence that the clients were doing business
Philippines. (Emphasis in the original) outside of the Philippines.55
Consequently, to come within the purview of Section WHEREFORE, the instant Petition is DENIED. The
108(B)(2), it is not enough that the recipient of the 22 September 2009 Decision and the 23 October
service be proven to be a foreign corporation; rather, 2009 Resolution of the Court of Tax Appeals En
it must be specifically proven to be a nonresident Banc in C.T.A. EB No. 477, dismissing the Petition
foreign corporation. for the refund of the excess or unutilized input VAT
There is no specific criterion as to what constitutes credits of Accenture, Inc., are AFFIRMED.
"doing" or "engaging in" or "transacting" business. SO ORDERED.
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.1wphi1 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
 SECOND DIVISION sub-assemblies, parts, and components. It is
registered with the Board of Investments as a
preferred pioneer enterprise under the Omnibus
Investments Code of 1987. It is also a registered
value-added tax (VAT) enterprise.
From April 1 to September 30, 1998 and
PANASONIC COMMUNICATIONS G.R. No. from October 1, 1998 to March 31, 1999, petitioner
178090 Panasonic generated export sales amounting to
IMAGING CORPORATION OF THE US$12,819,475.15 and US$11,859,489.78,
PHILIPPINES (formerly MATSUSHITA respectively, for a total of
BUSINESS MACHINE CORPORATION US$24,678,964.93. Believing that these export sales
OF THE PHILIPPINES), were zero-rated for VAT under Section 106(A)(2)(a)
(1) of the 1997 National Internal Revenue Code as
Petitioner, Present: amended by Republic Act (R.A.) 8424 (1997 NIRC),
[2]
Panasonic paid input VAT of P4,980,254.26
- versus - and P4,388,228.14 for the two periods or a total
COMMISSIONER OF INTERNAL of P9,368,482.40 attributable to its zero-rated sales.
REVENUE, Promulgated:
Respondent. Claiming that the input VAT it paid
February 8, 2010 remained unutilized or unapplied, on March 12, 1999
x and July 20, 1999 petitioner Panasonic filed with the
---------------------------------------------------------------- Bureau of Internal Revenue (BIR) two separate
----------------------- x applications for refund or tax credit of what it
paid. When the BIR did not act on the
same, Panasonic filed on December 16, 1999 a
DECISION petition for review with the CTA, averring
the inaction of the respondent Commissioner of Inter
ABAD, J.: nal Revenue (CIR) on its applications.
After trial or on August 22, 2006 the CTAs
This petition for review puts in issue First Division rendered judgment,[3] denying the
the May 23, 2007 Decision[1] of the Court of Tax petition for lack of merit. The First Division said that,
Appeals (CTA) en banc in CTA EB while petitioner Panasonics export sales were subject
239, entitled Panasonic Communications Imaging to 0% VAT under Section 106(A)(2)(a)(1) of the 1997
Corporation of the Philippines v. Commissioner of NIRC, the same did not qualify for zero-rating
Internal Revenue, which affirmed the denial of because the word zero-rated was not printed on
petitioners claim for refund. Panasonics export invoices. This omission, said the
First Division, violates the invoicing requirements of
Section 4.108-1 of Revenue Regulations (RR) 7-95.[4]
The Facts and the Case Its motion for reconsideration having been
denied, on January 5, 2007 petitioner Panasonic
Petitioner Panasonic Communications appealed the First Divisions decision to the CTA en
Imaging Corporation of the Philippines (Panasonic) banc. On May 23, 2007 the CTA en banc upheld the
produces and exports plain paper copiers and their First Divisions decision and resolution and dismissed
the petition. Panasonic filed a motion for
reconsideration of the en banc decision but this was
denied. Thus, petitioner filed the present petition in
accordance with R.A. 9282.[5]
The Issue Presented
The sole issue presented in this case is
whether or not the CTA en banc correctly denied
petitioner Panasonics claim for refund of the VAT it
paid as a zero-rated taxpayer on the ground that its
sales invoices did not state on their faces that its sales
were zero-rated.
The Courts Ruling
The VAT is a tax on consumption, an
indirect tax that the provider of goods or services
may pass on to his customers. Under the VAT method
of taxation, which is invoice-based, an entity can
subtract from the VAT charged on its sales or outputs
the VAT it paid on its purchases, inputs and imports.
[6]
For example, when a seller charges VAT on its sale,
it issues an invoice to the buyer, indicating the
amount of VAT he charged. For his part, if the buyer
is also a seller subjected to the payment of VAT on
his sales, he can use the invoice issued to him by his
supplier to get a reduction of his own VAT
liability. The difference in tax shown on invoices
passed and invoices received is the tax paid to the
government. In case the tax on invoices received
exceeds that on invoices passed, a tax refund may be
claimed.
Under the 1997 NIRC, if at the end of a
taxable quarter the seller charges output taxes [7] equal
to the input taxes[8] that his suppliers passed on to
him, no payment is required of him. It is when his
output taxes exceed his input taxes that he has to pay
the excess to the BIR. If the input taxes exceed the
output taxes, however, the excess payment shall be
carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-
rated or effectively zero-rated transactions or from
the acquisition of capital goods, any excess over the
output taxes shall instead be refunded to the taxpayer.
[9]
Zero-rated transactions generally refer to the
export sale of goods and services. The tax rate in this
case is set at zero. When applied to the tax base or the
selling price of the goods or services sold, such zero
rate results in no tax chargeable against the foreign
buyer or customer. But, although the seller in such
transactions charges no output tax, he can claim a
refund of the VAT that his suppliers charged him. The
seller thus enjoys automatic zero rating, which allows
him to recover the input taxes he paid relating to the
export sales, making him internationally competitive.
[10]
For the effective zero rating of such
transactions, however, the taxpayer has to be VAT-
registered and must comply with invoicing
requirements.[11] Interpreting these requirements,
respondent CIR ruled that under Revenue
Memorandum Circular (RMC) 42-2003, the
taxpayers failure to comply with invoicing
requirements will result in the disallowance of his
claim for refund. RMC 42-2003 provides:
A-13. Failure by the
supplier to comply with the
invoicing requirements on the
documents supporting the sale of
goods and services will result to
the disallowance of the claim for
input tax by the purchaser-
claimant.
If the claim for
refund/TCC is based on the
existence of zero-rated sales by
the taxpayer but it fails to comply
with the invoicing requirements
in the issuance of sales invoices
(e.g., failure to indicate the TIN),
its claim for tax credit/refund of
VAT on its purchases shall be
denied considering that the
invoice it is issuing to its
customers does not depict its
being a VAT-registered taxpayer
whose sales are classified as zero-
rated sales. Nonetheless, this
treatment is without prejudice to
the right of the taxpayer to
charge the input taxes to the
appropriate expense account or
asset account subject to
depreciation, whichever is
applicable. Moreover, the case
shall be referred by the
processing office to the concerned
BIR office for verification of
other tax liabilities of the
taxpayer.
Petitioner Panasonic points out, however,
that in requiring the printing on its sales invoices of
the word zero-rated, the Secretary of Finance unduly
expanded, amended, and modified by a mere
regulation (Section 4.108-1 of RR 7-95) the letter and
spirit of Sections 113 and 237 of the 1997
NIRC, prior to their amendment by R.A. 9337.
[12]
Panasonic argues that the 1997 NIRC, which
applied to its paymentsspecifically Sections 113 and
237required the VAT-registered taxpayers receipts or
invoices to indicate only the following information:
(1) A statement that the
seller is a VAT-registered person,
followed by his taxpayer's
identification number (TIN);
(2) The total amount
which the purchaser pays or is
obligated to pay to the seller with
the indication that such amount
includes the value-added tax;
(3) The date of
transaction, quantity, unit cost
and description of the goods or
properties or nature of the
service; and
(4) The name, business
style, if any, address and
taxpayers identification number
(TIN) of the purchaser, customer
or client.
Petitioner Panasonic points out that Sections
113 and 237 did not require the inclusion of the word
zero-rated for zero-rated sales covered by its receipts
or invoices. The BIR incorporated this requirement
only after the enactment of R.A. 9337 on November
1, 2005, a law that did not yet exist at the time it
issued its invoices.
But when petitioner Panasonic made the
export sales subject of this case, i.e., from April 1998
to March 1999, the rule that applied was Section
4.108-1 of RR 7-95, otherwise known as the
Consolidated Value-Added Tax Regulations, which
the Secretary of Finance issued on December 9, 1995
and took effect on January 1, 1996. It already
required the printing of the word zero-rated on the
invoices covering zero-rated sales. When R.A. 9337
amended the 1997 NIRC on November 1, 2005, it
made this particular revenue regulation a part of the
tax code. This conversion from regulation to law did
not diminish the binding force of such regulation
with respect to acts committed prior to the enactment
of that law.
Section 4.108-1 of RR 7-95 proceeds from
the rule-making authority granted to the Secretary of
Finance under Section 245 of the 1977 NIRC
(Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its
amendments.[13] The requirement is reasonable and is
in accord with the efficient collection of VAT from
the covered sales of goods and services. As aptly
explained by the CTAs First Division, the appearance
of the word zero-rated on the face of invoices
covering zero-rated sales prevents buyers from
falsely claiming input VAT from their purchases
when no VAT was actually paid. If, absent such word,
a successful claim for input VAT is made, the
government would be refunding money it did not
collect.[14]
 This Court will not set aside lightly the
Further, the printing of the word zero-rated conclusions reached by the CTA which, by the very
on the invoice helps segregate sales that are subject to nature of its functions, is dedicated exclusively to the
10% (now 12%) VAT from those sales that are zero- resolution of tax problems and has accordingly
rated.[15] Unable to submit the proper invoices, developed an expertise on the subject, unless there
petitioner Panasonic has been unable to substantiate has been an abuse or improvident exercise of
its claim for refund. authority.[17] Besides, statutes that grant tax
exemptions are construed strictissimi juris against the
Petitioner Panasonics citation of Intel taxpayer and liberally in favor of the taxing
Technology Philippines, Inc. v. Commissioner of authority. Tax refunds in relation to the VAT are in
Internal Revenue[16] is misplaced. Quite the contrary, the nature of such exemptions. The general rule is
it strengthens the position taken by respondent that claimants of tax refunds bear the burden of
CIR. In that case, the CIR denied the claim for tax proving the factual basis of their claims. Taxes are the
refund on the ground of the taxpayers failure to lifeblood of the nation. Therefore, statutes that allow
indicate on its invoices the BIR authority to print. But exemptions are construed strictly against the grantee
Sec. 4.108-1 required only the following to be and liberally in favor of the government.[18]
reflected on the invoice:
WHEREFORE, the petition
1. The name, taxpayers is DENIED for lack of merit.
identification number (TIN) and
address of seller; Costs against petitioner.
2. Date of transaction;
3. Quantity, unit cost and SO ORDERED.
description of merchandise or
nature of service;
4. The name, TIN,
business style, if any, and address
of the VAT-registered purchaser,
customer or client;
5. The word zero-rated
imprinted on the invoice covering
zero-rated sales; and
6. The invoice value or
consideration.

This Court held that, since the BIR authority

to print is not one of the items required to be
indicated on the invoices or receipts, the BIR erred in
denying the claim for refund. Here, however, the
ground for denial of petitioner Panasonics claim for
tax refundthe absence of the word zero-rated on its
invoicesis one which is specifically and precisely
included in the above enumeration. Consequently, the
BIR correctly denied Panasonics claim for tax refund.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 172378 January 17, 2011
SILICON PHILIPPINES, INC., (Formerly
INTEL PHILIPPINES MANUFACTURING,
INC.), Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
DEL CASTILLO, J.:
The burden of proving entitlement to a refund lies
with the claimant.
This Petition for Review on Certiorari under Rule 45
of the Rules of Court seeks to set aside the September
30, 2005 Decision1 and the April 20, 2006
Resolution2 of the Court of Tax Appeals (CTA) En
Banc.
Factual Antecedents
Petitioner Silicon Philippines, Inc., a corporation duly
organized and existing under and by virtue of the
laws of the Republic of the Philippines, is engaged in
the business of designing, developing, manufacturing
and exporting advance and large-scale integrated
circuit components or "ICs."3 Petitioner is registered
with the Bureau of Internal Revenue (BIR) as a Value
Added Tax (VAT) taxpayer 4 and with the Board of
Investments (BOI) as a preferred pioneer enterprise.5
On May 21, 1999, petitioner filed with the
respondent Commissioner of Internal Revenue (CIR),
through the One-Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center of the Department of
Finance (DOF), an application for credit/refund of
unutilized input VAT for the period October 1, 1998
to December 31, 1998 in the amount
of P31,902,507.50, broken down as follows:
Tax Paid on Imported/Locally Purchased
Capital Equipment
Total VAT paid on Purchases per Invoices
Received During the Period for which
this Application is Filed
Amount of Tax Credit/Refund Applied For
Proceedings before the CTA Division
On December 27, 2000, due to the inaction of the
respondent, petitioner filed a Petition for Review
with the CTA Division, docketed as CTA Case No.
6212. Petitioner alleged that for the 4th quarter of
1998, it generated and recorded zero-rated export
sales in the amount of P3,027,880,818.42, paid to
petitioner in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas;7 and
that for the said period, petitioner paid input VAT in
the total amount of P31,902,507.50,8 which have not
been applied to any output VAT.9
To this, respondent filed an Answer10 raising the
following special and affirmative defenses, to wit:
8. The petition states no cause of action as it
does not allege the dates when the taxes
sought to be refunded/credited were actually
paid;
9. It is incumbent upon herein petitioner to
show that it complied with the provisions of
Section 229 of the Tax Code as amended;
10. Claims for refund are construed strictly
against the claimant, the same being in the
nature of exemption from taxes
(Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95; Manila Electric Co.
vs. Commissioner of Internal Revenue, 67
SCRA 35);
11. One who claims to be exempt from
payment of a particular tax must do so under
clear and unmistakable terms found in the
statute (Asiatic Petroleum vs. Llanes, 49
Phil. 466; Union Garment Co. vs. Court of
Tax Appeals, 4 SCRA 304);
12. In an action for refund, the burden is
upon the taxpayer to prove that he is entitled
thereto, and failure to sustain the same is
fatal to the action for refund. Furthermore,
as pointed out in the case of William Li Yao
vs. Collector (L-11875, December 28,
1963), amounts sought to be recovered or
credited should be shown to be taxes which
are erroneously or illegally collected; that is
to say, their payment was an independent
single act of voluntary payment of a tax
believed to be due and collectible and
accepted by the government, which had
therefor become part of the State moneys
subject to expenditure and perhaps already
spent or appropriated; and
13. Taxes paid and collected are presumed to
have been made in accordance with the law
and regulations, hence not refundable.11
On November 18, 2003, the CTA Division rendered a
Decision12 partially granting petitioners claim for
refund of unutilized input VAT on capital goods. Out
of the amount of P15,170,082.00, only P9,898,867.00
was allowed to be refunded because training
materials, office supplies, posters, banners, T-shirts,
books, and other similar items purchased by
petitioner were not considered capital goods under
Section 4.106-1(b) of Revenue Regulations (RR) No.
7-95 (Consolidated Value-Added Tax
Regulations).13 With regard to petitioners claim for
credit/refund of input VAT attributable to its zero-
rated export sales, the CTA Division denied the same
because petitioner failed to present an Authority to
Print (ATP) from the BIR;14 neither did it print on its
export sales invoices the ATP and the word "zero-
rated."15 Thus, the CTA Division disposed of the case
in this wise:
WHEREFORE, in view of the foregoing the instant
petition for review is hereby PARTIALLY
GRANTED. Respondent is ORDERED to ISSUE A
TAX CREDIT CERTIFICATE in favor of petitioner
in the reduced amount of P9,898,867.00 representing
input VAT on importation of capital goods. However,
the claim for refund of input VAT attributable to
petitioner's alleged zero-rated sales in the amount of
P16,732,425.50 is hereby DENIED for lack of merit.
SO ORDERED.16
Not satisfied with the Decision, petitioner moved for
reconsideration.17 It claimed that it is not required to
secure an ATP since it has a "Permit to Adopt
Computerized Accounting Documents such as Sales
Invoice and Official Receipts" from the
BIR.18 Petitioner further argued that because all its
finished products are exported to its mother company,
Intel Corporation, a non-resident corporation and a
non-VAT registered entity, the printing of the word
"zero-rated" on its export sales invoices is not
necessary.19
On its part, respondent filed a Motion for Partial
Reconsideration20 contending that petitioner is not
entitled to a credit/refund of unutilized input VAT on
capital goods because it failed to show that the goods
imported/purchased are indeed capital goods as
defined in Section 4.106-1 of RR No. 7-95.21
The CTA Division denied both motions in a
Resolution22 dated August 10, 2004. It noted that:
[P]etitioners request for Permit to Adopt
Computerized Accounting Documents such as Sales
Invoice and Official Receipt was approved on August
31, 2001 while the period involved in this case was
October 31, 1998 to December 31, 1998 x x x. While
it appears that petitioner was previously issued a
permit by the BIR Makati Branch, such permit was
only limited to the use of computerized books of
account x x x. It was only on August 31, 2001 that
petitioner was permitted to generate computerized
sales invoices and official receipts [provided that the
BIR Permit Number is printed] in the header of the
document x x x.
xxxx
Thus, petitioners contention that it is not required to
show its BIR permit number on the sales invoices
runs counter to the requirements under the said
"Permit." This court also wonders why petitioner was
issuing computer generated sales invoices during the
period involved (October 1998 to December 1998)
when it did not have an authority or permit.
Therefore, we are convinced that such documents
lack probative value and should be treated as
inadmissible, incompetent and immaterial to prove
petitioners export sales transaction.
xxxx
ACCORDINGLY, the Motion for Reconsideration
and the Supplemental Motion for Reconsideration
filed by petitioner as well as the Motion for Partial
Reconsideration of respondent are hereby DENIED
for lack of merit. The pronouncement in the assailed
decision is REITERATED.
SO ORDERED 23
Ruling of the CTA En Banc
Undaunted, petitioner elevated the case to the
CTA En Banc via a Petition for Review,24 docketed as
EB Case No. 23.
On September 30, 2005, the CTA En Banc issued the
assailed Decision25 denying the petition for lack of
merit. Pertinent portions of the Decision read:
This Court notes that petitioner raised the same issues
which have already been thoroughly discussed in the
assailed Decision, as well as, in the Resolution
denying petitioner's Motion for Partial
Reconsideration.
With regard to the first assigned error, this Court
reiterates that, the requirement of [printing] the BIR
permit to print on the face of the sales invoices and
official receipts is a control mechanism adopted by
the Bureau of Internal Revenue to safeguard the
interest of the government.
This requirement is clearly mandated under Section
238 of the 1997 National Internal Revenue Code,
which provides that:
SEC. 238. Printing of Receipts or Sales or
Commercial Invoice. All persons who are engaged
in business shall secure from the Bureau of Internal
Revenue an authority to print receipts or sales or
commercial invoices before a printer can print the
same.
The above mentioned provision seeks to eliminate the
use of unregistered and double or multiple sets of
receipts by striking at the very root of the problem
the printer (H. S. de Leon, The National Internal
Revenue Code Annotated, 7th Ed., p. 901). And what
better way to prove that the required permit to print
was secured from the Bureau of Internal Revenue
than to show or print the same on the face of the
invoices. There can be no other valid proof of
compliance with the above provision than to show
the Authority to Print Permit number [printed] on the
sales invoices and official receipts.
With regard to petitioners failure to print the word
"zero-rated" on the face of its export sales invoices, it
must be emphasized that Section 4.108-1 of Revenue
Regulations No. 7-95 specifically requires that all
value-added tax registered persons shall, for every
sale or lease of goods or properties or services, issue
duly registered invoices which must show the word
"zero-rated" [printed] on the invoices covering zero-
rated sales.
It is not enough that petitioner prove[s] that it is
entitled to its claim for refund by way of substantial
evidence. Well settled in our jurisprudence [is] that
tax refunds are in the nature of tax exemptions and as
such, they are regarded as in derogation of sovereign
authority (Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95). Thus, tax refunds are
construed in strictissimi juris against the person or
entity claiming the same (Commissioner of Internal
Revenue vs. Procter & Gamble Philippines
Manufacturing Corporation, 204 SCRA 377;
Commissioner of Internal Revenue vs. Tokyo
Shipping Co., Ltd., 244 SCRA 332).
In this case, not only should petitioner establish that
it is entitled to the claim but it must most importantly
show proof of compliance with the substantiation
requirements as mandated by law or regulations.
The rest of the assigned errors pertain to the alleged
errors of the First Division: in finding that the
petitioner failed to comply with the substantiation
requirements provided by law in proving its claim for
refund; in reducing the amount of petitioners tax
credit for input vat on importation of capital goods;
and in denying petitioners claim for refund of input
vat attributable to petitioners zero-rated sales.
It is petitioners contention that it has clearly
established its right to the tax credit or refund by way
of substantial evidence in the form of material and
documentary evidence and it would be improper to
set aside with haste the claimed input VAT on capital
goods expended for training materials, office
supplies, posters, banners, t-shirts, books and the like
because Revenue Regulations No. 7-95 defines
capital goods as to include even those goods which
are indirectly used in the production or sale of taxable
goods or services.
Capital goods or properties, as defined under Section
4.106-1(b) of Revenue Regulations No. 7-95, refer
"to goods or properties with estimated useful life
greater than one year and which are treated as
depreciable assets under Section 29 (f), used directly
or indirectly in the production or sale of taxable
goods or services."
Considering that the items (training materials, office
supplies, posters, banners, t-shirts, books and the
like) purchased by petitioner as reflected in the
summary were not duly proven to have been used,
directly or indirectly[,] in the production or sale of
taxable goods or services, the same cannot be
considered as capital goods as defined above[.
Consequently,] the same may not x x x then [be]
claimed as such.
WHEREFORE, in view of the foregoing, this instant
Petition for Review is hereby DENIED DUE
COURSE and hereby DISMISSED for lack of merit.
This Court's Decision of November 18, 2003 and
Resolution of August 10, 2004 are hereby
AFFIRMED in all respects.
SO ORDERED.26
Petitioner sought reconsideration of the assailed
Decision but the CTA En Banc denied the Motion27 in
a Resolution28 dated April 20, 2006.
Issues
Hence, the instant Petition raising the following
issues for resolution:
(1) whether the CTA En Banc erred in
denying petitioners claim for credit/ refund
of input VAT attributable to its zero-rated
sales in the amount of P16,732,425.00 due
to its failure:
(a) to show that it secured an ATP
from the BIR and to indicate the
same in its export sales invoices;
and
(b) to print the word "zero-rated" in
its export sales invoices.29
(2) whether the CTA En Banc erred in ruling
that only the amount of P9,898,867.00 can
be classified as input VAT paid on capital
goods.30
Petitioners Arguments
Petitioner posits that the denial by the CTA En Banc
of its claim for refund of input VAT attributable to its
zero-rated sales has no legal basis because the
printing of the ATP and the word "zero-rated" on the
export sales invoices are not required under Sections
113 and 237 of the National Internal Revenue Code
(NIRC).31 And since there is no law requiring the
ATP and the word "zero-rated" to be indicated on the
sales invoices,32 the absence of such information in
the sales invoices should not invalidate the
petition33 nor result in the outright denial of a claim
for tax credit/refund.34 To support its position,
petitioner cites Intel Technology Philippines, Inc. v.
Commissioner of Internal Revenue,35 where Intels
failure to print the ATP on the sales invoices or
receipts did not result in the outright denial of its
claim for tax credit/refund.36 Although the cited case
only dealt with the printing of the ATP, petitioner
submits that the reasoning in that case should also
apply to the printing of the word "zero-
rated."37 Hence, failure to print of the word "zero-
rated" on the sales invoices should not result in the
denial of a claim.
As to the claim for refund of input VAT on capital
goods, petitioner insists that it has sufficiently proven
through testimonial and documentary evidence that
all the goods purchased were used in the production
and manufacture of its finished products which were
sold and exported.38
Respondents Arguments
To refute petitioners arguments, respondent asserts
that the printing of the ATP on the export sales
invoices, which serves as a control mechanism for the
BIR, is mandated by Section 238 of the
NIRC;39 while the printing of the word "zero-rated"
on the export sales invoices, which seeks to prevent
purchasers of zero-rated sales or services from
claiming non-existent input VAT credit/refund,40 is
required under RR No. 7-95, promulgated pursuant to
Section 244 of the NIRC.41 With regard to the
unutilized input VAT on capital goods, respondent
counters that petitioner failed to show that the goods
it purchased/imported are capital goods as defined in
Section 4.106-1 of RR No. 7-95. 42
Our Ruling
The petition is bereft of merit.
Before us are two types of input VAT credits. One is a
credit/refund of input VAT attributable to zero-rated
sales under Section 112 (A) of the NIRC, and the
other is a credit/refund of input VAT on capital goods
pursuant to Section 112 (B) of the same Code.
Credit/refund of input VAT on zero-rated sales
In a claim for credit/refund of input VAT attributable
to zero-rated sales, Section 112 (A)43 of the NIRC
lays down four requisites, to wit:
1) the taxpayer must be VAT-registered;
2) the taxpayer must be engaged in sales
which are zero-rated or effectively zero-
rated;
3) the claim must be filed within two years
after the close of the taxable quarter when
such sales were made; and
4) the creditable input tax due or paid must
be attributable to such sales, except the
transitional input tax, to the extent that such
input tax has not been applied against the
output tax.
To prove that it is engaged in zero-rated sales,
petitioner presented export sales invoices,
certifications of inward remittance, export
declarations, and airway bills of lading for the fourth
quarter of 1998. The CTA Division, however, found
the export sales invoices of no probative value in
establishing petitioners zero-rated sales for the
purpose of claiming credit/refund of input VAT
because petitioner failed to show that it has an ATP
from the BIR and to indicate the ATP and the word
"zero-rated" in its export sales invoices.44 The CTA
Division cited as basis Sections 113,45 23746 and
23847 of the NIRC, in relation to Section 4.108-1 of
RR No. 7-95.48
We partly agree with the CTA.
Printing the ATP on the invoices or receipts is not
required
It has been settled in Intel Technology Philippines,
Inc. v. Commissioner of Internal Revenue49 that the
ATP need not be reflected or indicated in the invoices
or receipts because there is no law or regulation
requiring it.50 Thus, in the absence of such law or
regulation, failure to print the ATP on the invoices or
receipts should not result in the outright denial of a
claim or the invalidation of the invoices or receipts
for purposes of claiming a refund.51
ATP must be secured from the BIR
But while there is no law requiring the ATP to be
printed on the invoices or receipts, Section 238 of the
NIRC expressly requires persons engaged in business
to secure an ATP from the BIR prior to printing
invoices or receipts. Failure to do so makes the
person liable under Section 26452 of the NIRC.
This brings us to the question of whether a claimant
for unutilized input VAT on zero-rated sales is
required to present proof that it has secured an ATP
from the BIR prior to the printing of its invoices or
receipts.
We rule in the affirmative.
Under Section 112 (A) of the NIRC, a claimant must
be engaged in sales which are zero-rated or
effectively zero-rated. To prove this, duly registered
invoices or receipts evidencing zero-rated sales must
be presented. However, since the ATP is not indicated
in the invoices or receipts, the only way to verify
whether the invoices or receipts are duly registered is
by requiring the claimant to present its ATP from the
BIR. Without this proof, the invoices or receipts
would have no probative value for the purpose of
refund. In the case of Intel, we emphasized that:
It bears reiterating that while the pertinent provisions
of the Tax Code and the rules and regulations
implementing them require entities engaged in
business to secure a BIR authority to print invoices or
receipts and to issue duly registered invoices or
receipts, it is not specifically required that the BIR
authority to print be reflected or indicated therein.
Indeed, what is important with respect to the BIR
authority to print is that it has been secured or
obtained by the taxpayer, and that invoices or receipts
are duly registered.53 (Emphasis supplied)
Failure to print the word "zero-rated" on the sales
invoices is fatal to a claim for refund of input
VAT1awphi1
Similarly, failure to print the word "zero-rated" on the
sales invoices or receipts is fatal to a claim for
credit/refund of input VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation
of the Philippines (formerly Matsushita Business
Machine Corporation of the Philippines) v.
Commissioner of Internal Revenue,54 we upheld the
denial of Panasonics claim for tax credit/refund due
to the absence of the word "zero-rated" in its
invoices. We explained that compliance with Section
4.108-1 of RR 7-95, requiring the printing of the
word "zero rated" on the invoice covering zero-rated
sales, is essential as this regulation proceeds from the
rule-making authority of the Secretary of Finance
under Section 24455 of the NIRC.
All told, the non-presentation of the ATP and the
failure to indicate the word "zero-rated" in the
invoices or receipts are fatal to a claim for
credit/refund of input VAT on zero-rated sales. The
failure to indicate the ATP in the sales invoices or
receipts, on the other hand, is not. In this case,
petitioner failed to present its ATP and to print the
word "zero-rated" on its export sales invoices. Thus,
we find no error on the part of the CTA in denying
outright petitioners claim for credit/refund of input
VAT attributable to its zero-rated sales.
Credit/refund of input VAT on capital goods
Capital goods are defined under Section 4.106-1(b)
of RR No. 7-95
To claim a refund of input VAT on capital goods,
Section 112 (B)56 of the NIRC requires that:
1. the claimant must be a VAT registered
person;
2. the input taxes claimed must have been
paid on capital goods;
3. the input taxes must not have been
applied against any output tax liability; and
4. the administrative claim for refund must
have been filed within two (2) years after the
close of the taxable quarter when the
importation or purchase was made.
Corollarily, Section 4.106-1 (b) of RR No. 7-95
defines capital goods as follows:
"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),57 used directly or indirectly in
the production or sale of taxable goods or services.
Based on the foregoing definition, we find no reason
to deviate from the findings of the CTA that training
materials, office supplies, posters, banners, T-shirts,
books, and the other similar items reflected in
petitioners Summary of Importation of Goods are
not capital goods. A reduction in the refundable input
VAT on capital goods from P15,170,082.00
to P9,898,867.00 is therefore in order.
WHEREFORE, the Petition is hereby DENIED. The
assailed Decision dated September 30, 2005 and the
Resolution dated April 20, 2006 of the Court of Tax
Appeals En Banc are hereby AFFIRMED.
SO ORDERED.
SECOND DIVISION
KEPCO PHILIPPINES CORPORATION,
Petitioner,
- versus -
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
X Exhibit 1999 Carried-over from This quarter Carried
----------------------------------------------------------------
---------------------- X
DECISION
MENDOZA, J.:
This is a petition for review on certiorari
under Rule 45 of the 1997 Rules of Civil Procedure
assailing the May 17, 2007 Decision [1] of the Court of
Tax Appeals En Banc (CTA), in C.T.A. E.B. No. 186
entitled KEPCO Philippines Corporation v.
Commissioner of Internal Revenue, which denied
petitioners claim for refund or issuance of tax credit
certificate for the unapplied input value-added taxes
attributable to zero-rated sales of services for taxable
year 1999, as well as its Resolution, dated September
28, 2007, which denied the motion for
reconsideration of the said decision.
THE FACTS
Petitioner Kepco Philippines Corporation
(Kepco) is a domestic corporation duly organized and
existing under and by virtue of the laws of the
Republic of the Philippines.It is a value-added
tax (VAT) registered taxpayer engaged in the
production and sale of electricity as an independent
power producer. It sells its electricity to the National
Power Corporation (NPC). Kepco filed with
respondent Commissioner of Internal Revenue (CIR)
an application for effective zero-rating of its sales of
electricity to the NPC.
Kepco alleged that for the taxable year 1999,
it incurred input VAT in the amount
of P10,527,202.54 on its domestic purchases of
goods and services that were used in its production
and sale of electricity to NPC for the same period. In
its 1999 quarterly VAT returns filed with the Bureau
of Internal Revenue (BIR) on March 30, 2000, Kepco
declared the said input VAT as follows:
INPUT TAX
over previous quarter to next quarter
A 1st qtr 100,564,209.14 4,804,974.70 105,369,183.8
4 receipts resulted in non-entitlement to the benefit of
B 2nd qtr 105,369,183.84 1,461,960.38 106,831,144.2
2 input tax. The decision reads in part:
C 3rd qtr 106,831,144.22 2,563,288.00 109,394,432.2
2
D 4th qtr 109,394,432.22 1,696,979.46 111,091,411.6
8 Banc finds no cogent justification
_____________
TOTAL P10,527,202.54:[2]
Thus, on January 29, 2001, Kepco filed an
administrative claim for refund corresponding to its
reported unutilized input VAT for the four quarters of
1999 in the amount of P10,527,202.54. Thereafter,
on April 24, 2001, Kepco filed a petition for review
before the CTA pursuant to Section 112(A) of the
1997 National Internal Revenue Code (NIRC), which
grants refund of unutilized input taxes attributable to
zero-rated or effectively zero-rated sales. This was
docketed as CTA Case No. 6287.
On August 31, 2005, the CTA Second
Division rendered a decision[3] denying Kepcos claim
for refund for failure to properly substantiate its
effectively zero-rated sales for the taxable year 1999
in the total amount of P860,340,488.96, with the
alleged input VAT of P10,527,202.54 directly
attributable thereto. The tax court held that Kepco
failed to comply with the invoicing requirements in
clear violation of Section 4.108-1 of Revenue
Regulations (R.R.) No. 7-95, implementing Section
108(B)(3) in conjunction with Section 113 of the
1997 NIRC.
In view of the denial of its motion for
reconsideration, Kepco filed an appeal via petition
for review before the CTA En Banc, on the ground
that the CTA Second Division erred in not
considering the amount of P10,514,023.92 as
refundable tax credit and in failing to appreciate that
it was exclusively selling electricity to NPC, a tax
exempt entity.
On May 17, 2007, the CTA En
Banc dismissed the petition, reasoning out that
Kepcos failure to comply with the requirement of
imprinting the words zero-rated on its official
VAT zero-rating and denial of its claim for refund of
In sum, the Court En
to disturb the findings and
conclusion spelled out in the
assailed August 31, 2005 Decision
and May 4, 2006 Resolution of the
CTA Second Division. What the
instant petition seeks is for the
Court En Banc to view and
appreciate the evidence in their
own perspective of things, which
unfortunately had already been
considered and passed upon.
WHEREFORE, the
instant Petition is hereby DENIED
DUE
COURSE and DISMISSED for
lack of merit.
SO ORDERED.[4]

Presiding Justice Ernesto D. Acosta agreed
with the majority that services rendered by a VAT-
registered entity to the NPC, a tax-exempt entity,
were effectively zero-rated.He was likewise of the
view that Kepcos claim could not be granted because
it presented official receipts which were not in
sequence indicating, that it might have sold
electricity to entities other than NPC. But, he strongly
dissented on the outright rejection of Kepcos refund
claim for failure to comply with the imprinting
requirements. His dissenting opinion states in part:
However, I dissent to the
majoritys finding that imprinting
the term zero-rated as well as the
BIR authority to print or BIR
Permit marker on duly registered
Value Added Tax (VAT) official
receipts/invoices is necessary such
that non-compliance would result
to the outright denial of petitioners
claim.
Xxxx
Clearly, the applicable
provisions of the Tax Code does
not require the word zero-rated or
the other information required by
the majority in the invoice/official
receipt.The requirement of
imprinting the questioned
information on the VAT invoice or
receipt can be found in Section
4.108-1 of Revenue Regulations
No. 7-95 (The Implementing Rules
and Regulations of the VAT
law). Then again, the said provision
is merely a regulation created for
the sole and limited purpose of
implementing an otherwise very
exact law.
AMOUNT OF PHP10,514,023.92.
[7]
Moreover, granting for the From the foregoing arguments, the principal
sake of argument that the Revenue issue to be resolved is whether Kepcos failure to
Regulations above cited may imprint the words zero-rated on its official receipts
validly impose such requirements, issued to NPC justifies an outright denial of its claim
no provision allows the outright for refund of unutilized input tax credits.
rejection of a refund claim as
penalty for a tax-payers failure to Kepco contends that the provisions of the
abide by the requirements laid 1997 Tax Code, specifically Section 113 in relation to
down in the said regulations.[5] Section 237, do not mention the mandatory
requirement of imprinting the words zero-rated to
Kepco filed a motion for reconsideration of purchases covering zero-rated transactions. The only
the decision but it was denied for lack of merit by the provision which requires the imprinting of the word
CTA En Banc in its Resolution[6] dated September 28, zero-rated on VAT invoice or official receipt is
2007. Section 4.108-1 of R.R. No. 7-95. Kepco argues that
the condition imposed by the said administrative
Hence, Kepco interposes this petition issuance should not be controlling over Section 113
praying for the reversal and setting aside of the May of the 1997 Tax Code, considering the long-settled
17, 2007 CTA Decision anchored on the following rule that administrative rules and regulations cannot
expand the letter and spirit of the law they seek to
GROUNDS: enforce.
(I) Kepco further argues that there is no law or
regulation which imposes automatic denial of
THE COURT OF TAX taxpayers refund claim for failure to comply with the
APPEALS EN BANC invoicing requirements. No jurisprudence sanctions
COMMITTED SERIOUS the same, not even the Atlas case,[8] cited by the
ERROR OF LAW WHEN IT CTA En Banc. According to Kepco, although it
RULED THAT PETITIONERS agrees with the CTA ruling that administrative
FAILURE TO IMPRINT THE issuances, like BIR regulations, requiring an
WORDS ZERO-RATED ON ITS imprinting of zero-rated on zero-rating transactions
VAT OFFICIAL RECEIPTS should be strictly complied with, it opposes the
ISSUED TO NPC IS FATAL TO outright denial of refund claim for non-compliance
ITS CLAIM FOR REFUND OF thereof. It insists that such automatic denial is too
UNUTILIZED INPUT TAX harsh a penalty and runs counter to the doctrine
CREDITS. of solutio indebiti under Article 2154 of the New
Civil Code.
(II)
The CIR, in his Comment,[9] counters that
PETITIONER HAS Kepco is not entitled to a tax refund because it was
SUFFICIENTLY PROVEN not able to substantiate the amount of P10,514,023.92
THAT IT IS RIGHTFULLY representing zero-rated transactions for failure to
ENTITLED TO A REFUND OR submit VAT official receipts and invoices imprinted
ISSUANCE OF TAX CREDIT with the wordings zero-rated in violation of Section
CERTIFICATE IN THE 4.108-1 of R.R. 7-95.
 subjects the Sec. 113. Invoicing and
The petition is bereft of merit. supply of such Accounting Requirements for
services to zero VAT-Registered Persons.
The pertinent laws governing the present case is percent (0%)
Section 108(B)(3) of the NIRC of 1997 in relation to rate; (A) Invoicing Requirements. A
Section 13 of Republic Act (R.A.) No. 6395 (The xxx VAT-registered person shall, for
Revised NPC Charter), as amended by Presidential Sec. 13. Non-profit every sale, issue an invoice or
Decree (P.D.) Nos. 380 and 938, which provide as Character of the Corporation; receipt. In addition to the
follows: Exemption from All Taxes, information required under Section
Sec. 108. Value-added Duties, Fees, Imposts and Other 237, the following information
Tax on Sale of Services and Use Charges by the Government and shall be indicated in the invoice or
or Lease of Properties. Government receipt:
(A) Rate and Instrumentalities. The
Base of Corporation shall be non-profit and (1) A statement
Tax. x x x shall devote all its return from its that the seller is a
(B) Transaction capital investment as well as excess VAT-registered
s Subject to revenues from its operation, for person, followed
Zero expansion. To enable the by his taxpayers
Percent Corporation to pay its indebtedness identification
(0%) Rate. and obligations and in furtherance number; and
The and effective implementation of the
following policy enunciated in Section One of (2) The total
services this Act, the Corporation, including amount which the
performed its subsidiaries, is hereby declared purchaser pays or
in exempt from the payment of all is obligated to
the Philippi forms of taxes, duties, fees, imposts pay to the seller
nes by VAT- as well as costs and service fees with the
registered including filing fees, appeal bonds, indication that
persons supersedeas bonds, in any court or such amount
shall be administrative proceedings. includes the
subject to value-added tax.
zero percent
(0%) rate: Based on the afore-quoted provisions, there (B) Accounting Requirements.
xxx is no doubt that NPC is an entity with a special Notwithstanding the provisions of
(3) Services charter and exempt from payment of all forms of Section 233, all persons subject to
rendered to taxes, including VAT. As such, services rendered by the value-added tax under Sections
persons or any VAT-registered person/entity, like Kepco, to NPC 106 and 108 shall, in addition to the
entities whose are effectively subject to zero percent (0%) rate. regular accounting records
exemption under required, maintain a subsidiary
special laws or For the effective zero rating of such services, sales journal and subsidiary
international however, the VAT-registered taxpayer must comply purchase journal on which the daily
agreements to with invoicing requirements under Sections 113 and sales and purchases are
which the 237 of the 1997 NIRC as implemented by Section recorded. The subsidiary journals
Philippines is a 4.108-1 of R.R. No. 7-95, thus: shall contain such information as
signatory may be required by the Secretary of
effectively Finance.[10] (Emphasis supplied)

Sec. 237. Issuance of
Receipts or Sales or Commercial
Invoices. All persons subject to an
internal revenue tax shall, for each
sale or transfer of merchandise or
for services rendered valued at
Twenty-five pesos (P25.00) or
more, issue duly registered receipts
or sales or commercial invoices,
prepared at least in duplicate,
showing the date of transaction,
quantity, unit cost and description
of merchandise or nature of
service: Provided, however, That in
the case of sales, receipts or
transfers in the amount of One
Hundred Pesos (P100.00) or more,
or regardless of amount, where the
sale or transfer is made by a person
liable to value-added tax to another
person also liable to value-added
tax; or where the receipt is issued
to cover payment made as rentals,
commissions, compensations or
fees, receipts or invoices shall be
issued which shall show the name,
business style, if any, and address
of the purchaser, customer or
client; Provided, further, That
where the purchaser is a VAT-
registered person, in addition to the
information herein required, the
invoice or receipt shall further
show the Taxpayer Identification
Number (TIN) of the purchaser.
The original of each receipt or
invoice shall be issued to the
purchaser, customer or client at the
time the transaction is effected,
who, if engaged in business or in
the exercise of profession, shall
keep and preserve the same in his
place of business for a period of
three (3) years from the close of the
taxable year in which such invoice
or receipt was issued, while the
duplicate shall be kept and
preserved by the issuer, also in his
place of business, for a like period.
The Commissioner may, in
meritorious cases, exempt any
person subject to an internal
revenue tax from compliance with
the provisions of this Section.[11]
Section 4.108-1.
Invoicing Requirements. All VAT-
registered persons shall, for every
sale or lease of goods or properties
or services, issue duly registered
receipts or sales or commercial
invoices which must show:
1. The name, TIN and
address of seller;
2. Date of transaction;
3. Quantity, unit cost and
description of
merchandise or nature of
service;
4. The name, TIN,
business style, if any, and
address of the VAT-
registered purchaser,
customer or client;
5. The word "zero-
rated" imprinted on the
invoice covering zero-
rated sales;
6. The invoice value or
consideration.
In the case of sale of real
property subject to VAT and where
the zonal or market value is higher
than the actual consideration, the
VAT shall be separately indicated in
the invoice or receipt.
Only VAT-registered
persons are required to print
their TIN followed by the word
"VAT" in their invoices or
receipts and this shall be
considered as "VAT Invoice." All
purchases covered by
invoices other than "VAT Invoice"
shall not give rise to any input tax.
If the taxable person is
also engaged in exempt operations,
he should issue separate invoices or
receipts for the taxable and exempt
operations. A "VAT Invoice" shall
be issued only for sales of goods,
properties or services subject to
VAT imposed in Sections 100 and
102 of the code.
The invoice or receipt
shall be prepared at least in
duplicate, the original to be given
to the buyer and the duplicate to be
retained by the seller as part of his
accounting records. (Emphases
supplied)
Also, as correctly noted by the CTA En
Banc, in Kepcos approved Application/Certificate for
Zero Rate issued by the CIR on January 19, 1999, the
imprinting requirement was likewise specified, viz:
Valid only for sale of services
from Jan. 19, 1999 up to December
31, 1999 unless sooner revoked.
Note: Zero-Rated Sales must be
indicated in the invoice/receipt.[12]
Indeed, it is the duty of Kepco to comply
with the requirements, including the imprinting of the
words zero-rated in its VAT official receipts and
invoices in order for its sales of electricity to NPC to
qualify for zero-rating.
It must be emphasized that the requirement
of imprinting the word zero-rated on the invoices or
receipts under Section 4.108-1 of R.R. No. 7-95 is
mandatory as ruled by the CTA En Banc,
citing Tropitek International, Inc. v. Commissioner of
Internal Revenue.[13] In Kepco Philippines
Corporation v. Commissioner of Internal Revenue,
[14]
the CTA En Banc explained the rationale behind 1997 Tax Code, is unavailing. Indubitably, said Further, the printing of the
such requirement in this wise: revenue regulation is merely a precautionary measure word "zero-rated" on the invoice
to ensure the effective implementation of the Tax helps segregate sales that are
The imprinting of zero- Code. It was not used by the CTA to expound the subject to 10% (now 12%) VAT
rated is necessary to distinguish meaning of Sections 113 and 237 of the NIRC. As a from those sales that are zero-rated.
sales subject to 10% VAT, those matter of fact, the provision of Section 4.108-1 of Unable to submit the proper
that are subject to 0% VAT (zero- R.R. 7-95 was incorporated in Section 113 (B)(2)(c) invoices, petitioner Panasonic has
rated) and exempt sales, to enable of R.A. No. 9337,[15] which states that if the sale is been unable to substantiate its
the Bureau of Internal Revenue to subject to zero percent (0%) value-added tax, the claim for refund.
properly implement and enforce the term zero-rated sale shall be written or printed
other provisions of the 1997 NIRC prominently on the invoice or receipt. This, in effect, To bolster its claim for tax refund or credit,
on VAT, namely: and as correctly concluded by the CIR, confirms the Kepco cites the case of Intel Technology Philippines,
validity of the imprinting requirement on VAT Inc. v. Commissioner of Internal Revenue.[17] Kepcos
1. Zero-rated invoices or official receipts even prior to the reliance on the said case is misplaced because the
sales [Sec. enactment of R.A. No. 9337 under the principle of factual milieu there is quite different from that of the
106(A)(2) legislative approval of administrative interpretation case at bench. In the Intel case, the claim for tax
and Sec. by reenactment. refund or issuance of a tax credit certificate was
108(B)]; denied due to the taxpayers failure to reflect or
2. Exempt Quite significant is the ruling handed down indicate in the sales invoices the BIR authority to
transactions in the case of Panasonic Communications Imaging print. The Court held that the BIR authority to print
[Sec. 109] in Corporation of the Philippines v. Commissioner of was not one of the items required by law or BIR
relation to Internal Revenue, [16] to wit: regulation to be indicated or reflected in the invoices
Sec. 112(A); Section 4.108-1 of RR 7- or receipts, hence, the BIR erred in denying the claim
3. Tax Credits 95 proceeds from the rule-making for refund. In the present case, however, the principal
[Sec. 110]; authority granted to the Secretary ground for the denial was the absence of the word
and of Finance under Section 245 of the zero-rated on the invoices, in clear violation of the
4. Refunds or 1977 NIRC (Presidential Decree invoicing requirements under Section 108(B)(3) of
tax credits of 1158) for the efficient enforcement the 1997 NIRC, in conjunction with Section 4.108-1
input tax of the tax code and of course its of R.R. No. 7-95.
[Sec. 112] amendments. The requirement is Regarding Kepcos contention, that non-
reasonable and is in accord with the compliance with the requirement of invoicing would
xxx efficient collection of VAT from the only subject the non-complying taxpayer to penalties
covered sales of goods and of fine and imprisonment under Section 264 of the
services. As aptly explained by the Tax Code, and not to the outright denial of the claim
Records disclose, as correctly found by the CTAs First Division, the for tax refund or credit, must likewise fail. Section
CTA that Kepco failed to substantiate the claimed appearance of the word "zero- 264 categorically provides for penalties in case of
zero-rated sales of P10,514,023.92. The wordings rated" on the face of invoices Failure or Refusal to Issue Receipts or Sales or
zero-rated sales were not imprinted on the VAT covering zero-rated sales prevents Commercial Invoices, Violations related to the
official receipts presented by Kepco (marked as buyers from falsely claiming input Printing of such Receipts or Invoices and Other
Exhibits S to S-11) for taxable year 1999, in clear VAT from their purchases when no Violations, but not to penalties for failure to comply
violation of Section 4.108-1 of R.R. No. 7-95 and the VAT was actually paid. If, absent with the requirement of invoicing. As recently held
condition imposed under its approved such word, a successful claim for in Kepco Philippines Corporation v. Commissioner
Application/Certificate for Zero-rate as well. input VAT is made, the government of Internal Revenue,[18] Section 264 of the 1997 NIRC
would be refunding money it did was not intended to excuse the compliance of the
Kepcos claim that Section 4.108-1 of R.R. not collect. substantive invoicing requirement needed to justify a
7-95 expanded the letter and spirit of Section 113 of claim for refund on input VAT payments.
 Thus, for Kepcos failure to substantiate its
effectively zero-rated sales for the taxable year 1999,
the claimed P10,527,202.54 input VAT cannot be
refunded.
Indeed, in a string of recent decisions on this
matter, to wit: Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of
Internal Revenue,[19]J.R.A. Philippines, Inc. v.
Commissioner of Internal Revenue,[20] Hitachi Global
Storage Technologies Philippines Corp. (formerly
Hitachi Computer Products (Asia) Corporations) v.
Commissioner of Internal Revenue,[21] and Kepco
Philippines Corporation v. Commissioner of Internal
Revenue,[22] this Court has consistently held that
failure to print the word zero-rated on the invoices or
receipts is fatal to a claim for refund or credit of input
VAT on zero-rated sales.

Contrary to Kepcos view, the denial of its

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

Well-settled in this jurisdiction is the

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

WHEREFORE, the petition is DENIED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19707 August 17, 1967
PHILIPPINE ACETYLENE CO.,
INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS, respondents.
Ponce Enrile, Siguion Reyna, Montecillo and Belo,
for petitioner.
Office of the Solicitor General for respondents.
CASTRO, J.:
The petitioner is a corporation engaged in the
manufacture and sale of oxygen and acetylene gases.
During the period from June 2, 1953 to June 30,
1958, it made various sales of its products to the
National Power Corporation, an agency of the
Philippine Government, and to the Voice of America
an agency of the United States Government. The
sales to the NPC amounted to P145,866.70, while
those to the VOA amounted to P1,683, on account of
which the respondent Commission of Internal
Revenue assessed against, and demanded from, the
petitioner the payment of P12,910.60 as deficiency
sales tax and surcharge, pursuant to the following-
provisions of the National Internal Revenue Code:
Sec. 186. Percentage tax on sales of other
articles.There shall be levied, assessed
and collected once only on every original
sale, barter, exchange, and similar
transaction either for nominal or valuable
considerations, intended to transfer
ownership of, or title to, the articles not
enumerated in sections one hundred and
eighty-four and one hundred and eighty-five
a tax equivalent to seven per centum of the
gross selling price or gross value in money
of the articles so sold, bartered exchanged,
or transferred, such tax to be paid by the
manufacturer or producer: . . . .
Sec. 183. Payment of percentage taxes.
(a) In general.It shall be the duty of every
person conducting business on which a
percentage tax is imposed under this Title, to
make a true and complete return of the
amount of his, her, or its gross monthly
sales, receipts or earnings, or gross value of
output actually removed from the factory or
mill warehouse and within twenty days after
the end of each month, pay the tax due
thereon: Provided, That any person retiring
from a business subject to the percentage tax
shall notify the nearest internal revenue
officer thereof, file his return or declaration
and pay the tax due thereon within twenty
days after closing his business.
If the percentage tax on any business is not
paid within the time specified above, the
amount of the tax shall be increased by
twenty-five per centum, the increment to be
a part of the tax.
The petitioner denied liability for the payment of the
tax on the ground that both the NPC and the VOA are
exempt from taxation. It asked for a reconsideration
of the assessment and, failing to secure one, appealed
to the Court of Tax Appeals.
The court ruled that the tax on the sale of articles or
goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that
the "petitioner Philippine Acetylene Company, the
manufacturer or producer of oxygen and acetylene
gases sold to the National Power Corporation, cannot
claim exemption from the payment of sales tax
simply because its buyer the National Power
Corporation is exempt from the payment of all
taxes." With respect to the sales made to the VOA,
the court held that goods purchased by the American
Government or its agencies from manufacturers or
producers are exempt from the payment of the sales
tax under the agreement between the Government of
the Philippines and that of the United States,
provided the purchases are supported by certificates
of exemption, and since purchases amounting to only
P558, out of a total of P1,683, were not covered by
certificates of exemption, only the sales in the sum of
P558 were subject to the payment of tax.
Accordingly, the assessment was revised and the
petitioner's liability was reduced from P12,910.60, as
assessed by the respondent commission, to
P12,812.16.1
The petitioner appealed to this Court. Its position is
that it is not liable for the payment of tax on the sales
it made to the NPC and the VOA because both
entities are exempt from taxation.
I
The NPC enjoys tax exemption by virtue of an act2 of
Congress which provides as follows:
Sec. 2. To facilitate the payment of its
indebtedness, the National Power
Corporation shall be exempt from all taxes,
except real property tax, and from all duties,
fees, imposts, charges, and restrictions of the
Republic of the Philippines, its provinces,
cities and municipalities.
It is contended that the immunity thus given to the
NPC would be impaired by the imposition of a tax on
sales made to it because while the tax is paid by the
manufacturer or producer, the tax is ultimately shifted
by the latter to the former. The petitioner invokes in
support of its position a 1954 opinion of the Secretary
of Justice which ruled that the NPC is exempt from
the payment of all taxes "whether direct or indirect."
We begin with an analysis of the nature of the
percentage (sales) tax imposed by section 186 of the
Code. Is it a tax on the producer or on the purchaser?
Statutes of the type under consideration, which
impose a tax on sales, have been described as "act[s]
with schizophrenic symptoms,"3 as they apparently
have two faces one that of a vendor tax, the other,
a vendee tax. Fortunately for us the provisions of the
Code throw some light on the problem. The Code
states that the sales tax "shall be paid by the
manufacturer or producer,"4 who must "make a true
and complete return of the amount of his, her or its
gross monthly sales, receipts or earnings or gross
value of output actually removed from the factory or
mill warehouse and within twenty days after the end
of each month, pay the tax due thereon."5
But it is argued that a sales tax is ultimately passed
on to the purchaser, and that, so far as the purchaser
is an entity like the NPC which is exempt from the
payment of "all taxes, except real property tax," the
tax cannot be collected from sales.
Many years ago, Mr. Justice Oliver Wendell Holmes
expressed dissatisfaction with the use of the phrase
"pass the tax on." Writing the opinion of the U.S.
Supreme Court in Lash's Products v. United
States,6 he said: "The phrase 'passed the tax on' is
inaccurate, as obviously the tax is laid and remains
on the manufacturer and on him alone. The purchaser
does not really pay the tax. He pays or may pay the
seller more for the goods because of the seller's
obligation, but that is all. . . . The price is the sum
total paid for the goods. The amount added because
of the tax is paid to get the goods and for nothing
else. Therefore it is part of the price . . .".
It may indeed be that the incidence of the tax
ultimately settles on the purchaser, but it is not for
that reason alone that one may validly argue that it is
a tax on the purchaser. The exemption granted to the
NPC may be likened to the immunity of the Federal
Government from state taxation and vice versa in the
federal system of government of the United States. In
the early case of Panhandle Oil Co. v.
Mississippi7 the doctrine of intergovernment mental
tax immunity was held as prohibiting the imposition
of a tax on sales of gasoline made to the Federal
Government. Said the Supreme court of the United
States:
A charge at the prescribed. rate is made on
account of every gallon acquired by the
United States. It is immaterial that the seller
and not the purchaser is required to report
and make payment to the state. Sale and
purchase constitute a transaction by which
the tax is measured and on which the burden
rests. . . . The necessary operation of these
enactments when so construed is directly to
retard, impede and burden the exertion by
the United States, of its constitutional
powers to operate the fleet and hospital. . . .
To use the number of gallons sold the United
States as a measure of the privilege tax is in
substance and legal effect to tax the sale. . . .
And that is to tax the United States to
exact tribute on its transactions and apply
the same to the support of the
state.1wph1.t
Justice Holmes did not agree. In a powerful dissent
joined by Justices Brandeis and Stone, he said:
If the plaintiff in error had paid the tax and
added it to the price the government would
have nothing to say. It could take the
gasoline or leave it but it could not require
the seller to abate his charge even if it had
been arbitrarily increased in the hope of
getting more from the government than
could be got from the public at large. . . . It
does not appear that the government would
have refused to pay a price that included the
tax if demanded, but if the government had
refused it would not have exonerated the
seller. . . .
. . . I am not aware that the President, the
Members of the Congress, the Judiciary or
to come nearer to the case at hand, the Coast
Guard or the officials of the Veterans'
Hospital [to which the sales were made],
because they are instrumentalities of
government and cannot function naked and
unfed, hitherto have been held entitled to
have their bills for food and clothing cut
down so far as their butchers and tailors
have been taxed on their sales; and I had not
supposed that the butchers and tailors could
omit from their tax returns all receipts from
the large class of customers to which I have
referred. The question of interference with
Government, I repeat, is one of
reasonableness and degree and it seems to
me that the interference in this case is too
remote.
But time was not long in coming to confirm the
soundness of Holmes' position. Soon it became
obvious that to test the constitutionality of a statute
by determining the party on which the legal incidence
of the tax fell was an unsatisfactory way of doing
things. The fall of the bastion was signalled by Chief
Justice Hughes' statement in James v. Dravo
Constructing Co.8 that "These cases [referring to
Panhandle and Indian Motorcycle Co. v. United
States, 283 U.S. 570 (1931)] have been distinguished
and must be deemed to be limited to their particular
facts."
In 1941, Alabama v. King & Boozer9 held that the
constitutional immunity of the United States from
state taxation was not infringed by the imposition of a
state sales tax with which the seller was chargeable
but which he was required to collect from the buyer,
in respect of materials purchased by a contractor with
the United States on a cost-plus basis for use in
carrying out its contract, despite the fact that the
economic burden of the tax was borne by the United
States.
The asserted right of the one to be free of
taxation by the other does not spell
immunity from paying the added costs,
attributable to the taxation of those who
furnish supplies to the Government and who
have been granted no tax immunity. So far
as a different view has prevailed, see
Panhandle Oil Co. v. Mississippi and Graves
v. Texas Co., supra, we think it no longer
tenable.
Further inroads into the doctrine of Panhandle were
made in 1943 when the U.S. Supreme Court held that
immunity from state regulation in the performance of
governmental functions by Federal officers and
agencies did not extend to those who merely
contracted to furnish supplies or render services to
the government even though as a result of an increase
in the price of such supplies or services attributable to
the state regulation, its ultimate effect may be to
impose an additional economic burden on the
Government.10
But if a complete turnabout from the rule announced
in Panhandle was yet to be made, it was so made in
1952 in Esso Standard Oil v. Evans11 which held that
a contractor is not exempt from the payment of a
state privilege tax on the business of storing gasoline
simply because the Federal Government with which
it has a contract for the storage of gasoline is immune
from state taxation.
This tax was imposed because Esso stored
gasoline. It is not . . . based on the worth of
the government property. Instead, the
amount collected is graduated in accordance
with the exercise of Esso's privilege to
engage in such operations; so it is not "on"
the federal property. . . . Federal ownership
of the fuel will not immunize such a private
contractor from the tax on storage. It may
generally, as it did here, burden the United
States financially. But since James vs. Dravo
 Contracting Co., 302 U.S. 134, 151, 82 L.
ed. 155, 167, 58 S. Ct. 208, 114 ALR 318,
this has been no fatal flaw. . . . 12
We have determined the current status of the doctrine
of intergovernmental tax immunity in the United
States, by showing the drift of the decisions
following announcement of the original rule, to point
up the that fact that even in those cases where
exemption from tax was sought on the ground of state
immunity, the attempt has not met with success.
As Thomas Reed Powell noted in 1945 in reviewing
the development of the doctrine:
Since the Dravo case settled that it does not
matter that the economic burden of the gross
receipts tax may be shifted to the
Government, it could hardly matter that the
shift comes about by explicit agreement
covering taxes rather than by being absorbed
in a higher contract price by bidders for a
contract. The situation differed from that in
the Panhandle and similar cases in that they
involved but two parties whereas here the
transaction was tripartite. These cases are
condemned in so far as they rested on the
economic ground of the ultimate incidence
of the burden being on the Government, but
this condemnation still leaves open the
question whether either the state or the
United States when acting in governmental
matters may be made legally liable to the
other for a tax imposed on it as vendee.
The carefully chosen language of the Chief
Justice keeps these cases from foreclosing
the issue. . . . Yet at the time it would have
been a rash man who would find in this a
dictum that a sales tax clearly on the
Government as purchaser is invalid or a
dictum that Congress may immunize its
contractors.13
If a claim of exemption from sales tax based on state
immunity cannot command assent, much less can a
claim resting on statutory grant.
It may indeed be that the economic burden of the tax
finally falls on the purchaser; when it does the tax
becomes a part of the price which the purchaser must
pay. It does not matter that an additional amount is
billed as tax to the purchaser. The method of listing
the price and the tax separately and defining taxable
gross receipts as the amount received less the amount
of the tax added, merely avoids payment by the seller
of a tax on the amount of the tax. The effect is still
the same, namely, that the purchaser does not pay the
tax. He pays or may pay the seller more for the goods
because of the seller's obligation, but that is all and
the amount added because of the tax is paid to get the
goods and for nothing else.14
But the tax burden may not even be shifted to the
purchaser at all. A decision to absorb the burden of
the tax is largely a matter of economics.15 Then it can
no longer be contended that a sales tax is a tax on the
purchaser.
We therefore hold that the tax imposed by section
186 of the National Internal Revenue Code is a tax on
the manufacturer or producer and not a tax on the
purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the
sales made to tax-exempt entities like the NPC is
permissible.
II
This conclusion should dispose of the same issue
with respect to sales made to the VOA, except that a
claim is here made that the exemption of such sales
from taxation rests on stronger grounds. Even the
Court of Tax Appeals appears to share this view as is
evident from the following portion of its decision:
With regard to petitioner's sales to the Voice
of America, it appears that the petitioner and
the respondent are in agreement that the
Voice of America is an agency of the United
States Government and as such, all goods
purchased locally by it directly from
manufacturers or producers are exempt from
the payment of the sales tax under the
provisions of the agreement between the
Government of the Philippines and the
Government of the United States, (See
Commonwealth Act No. 733) provided such
purchases are supported by serially
numbered Certificates of Tax Exemption
issued by the vendee-agency, as required by
General Circular No. V-41, dated October
16, 1947. . . .
The circular referred to reads:
Goods purchased locally by U.S. civilian
agencies directly from manufacturers,
producers or importers shall be exempt from
the sales tax.
It was issued purportedly to implement the
Agreement between the Republic of the Philippines
and the United States of America Concerning
Military Bases,16 but we find nothing in the language
of the Agreement to warrant the general exemption
granted by that circular.
The pertinent provisions of the Agreement read:
ARTICLE V. Exemption from Customs
and Other Duties
No import, excise, consumption or other tax,
duty or impost shall be charged on material,
equipment, supplies or goods, including
food stores and clothing, for exclusive use in
the construction, maintenance, operation or
defense of the bases, consigned to, or
destined for, the United States authorities
and certified by them to be for such
purposes.
ARTICLE XVIII.Sales and Services
Within the Bases
1. It is mutually agreed that the United
States Shall have the right to establish on
bases, free of all licenses; fees; sales, excise
or other taxes, or imposts; Government
agencies, including concessions, such as
sales commissaries and post exchanges,
messes and social clubs, for the exclusive
use of the United States military forces and
authorized civilian personnel and their
families. The merchandise or services sold
or dispensed by such agencies shall be free
of all taxes, duties and inspection by the
Philippine authorities. . . .
Thus only sales made "for exclusive use in the
construction, maintenance, operation or defense of
the bases," in a word, only sales to the quartermaster,
are exempt under article V from taxation. Sales of
goods to any other party even if it be an agency of the
United States, such as the VOA, or even to the
quartermaster but for a different purpose, are not free
from the payment of the tax.
On the other hand, article XVIII exempts from the
payment of the tax sales made within the base by (not
sales to) commissaries and the like in recognition of
the principle that a sales tax is a tax on the seller and
not on the purchaser.
It is a familiar learning in the American law of
taxation that tax exemption must be strictly construed
and that the exemption will not be held to be
conferred unless the terms under which it is granted
clearly and distinctly show that such was the
intention of the parties.17 Hence, in so far as the
circular of the Bureau of Internal Revenue would
give the tax exemptions in the Agreement an
expansive construction it is void.
We hold, therefore, that sales to the VOA are subject
to the payment of percentage taxes under section 186
of the Code. The petitioner is thus liable for
P12,910.60, computed as follows:
Sales to NPC P145,866.70
Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by

ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax
and surcharge, with costs against the petitioner.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 150947 July 15, 2003
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
MICHEL J. LHUILLIER PAWNSHOP,
INC., respondent.
DAVIDE, JR., C.J.:
Are pawnshops included in the term lending investors
for the purpose of imposing the 5% percentage tax
under then Section 116 of the National Internal
Revenue Code (NIRC) of 1977, as amended by
Executive Order No. 273?
Petitioner Commissioner of Internal Revenue (CIR)
filed the instant petition for review to set aside the
decision1 of 20 November 2001 of the Court of
Appeals in CA G.R. SP No. 62463, which affirmed
the decision of 13 December 2000 of the Court of
Tax Appeals (CTA) in CTA Case No. 5690 cancelling
the assessment issued against respondent Michel J.
Lhuillier Pawnshop, Inc. (hereafter Lhuillier) in the
amount of P3,360,335.11 as deficiency percentage
tax for 1994, inclusive of interest and surcharges.
The facts are as follows:
On 11 March 1991, CIR Jose U. Ong issued
Revenue Memorandum Order (RMO) No.
15-91 imposing a 5% lending investors tax
on pawnshops; thus:
A restudy of P.D. [No.] 114 shows that the
principal activity of pawnshops is lending
money at interest and incidentally accepting
a "pawn" of personal property delivered by
the pawner to the pawnee as security for the
loan.(Sec. 3, Ibid). Clearly, this makes
pawnshop business akin to lending
investors business activity which is broad
enough to encompass the business of
lending money at interest by any person
whether natural or juridical. Such being the
case, pawnshops shall be subject to the 5%
lending investors tax based on their gross
income pursuant to Section 116 of the Tax
Code, as amended.
This RMO was clarified by Revenue Memorandum
Circular (RMC) No. 43-91 on 27 May 1991, which
reads:
1. RM[O] 15-91 dated March 11, 1991.
This Circular subjects to the 5% lending
investors tax the gross income of
pawnshops pursuant to Section 116 of the
Tax Code, and it thus revokes BIR Ruling
No[]. 6-90, and VAT Ruling Nos. 22-90 and
67-90. In order to have a uniform cut-off
date, avoid unfairness on the part of tax-
payers if they are required to pay the tax on
past transactions, and so as to give meaning
to the express provisions of Section 246 of
the Tax Code, pawnshop owners or
operators shall become liable to the lending
investors tax on their gross income
beginning January 1, 1991. Since the
deadline for the filing of percentage tax
return (BIR Form No. 2529A-0) and the
payment of the tax on lending investors
covering the first calendar quarter of 1991
has already lapsed, taxpayers are given up to
June 30, 1991 within which to pay the said
tax without penalty. If the tax is paid after
June 30, 1991, the corresponding penalties
shall be assessed and computed from April
21, 1991.
Since pawnshops are considered as lending investors
effective January 1, 1991, they also become subject
to documentary stamp taxes prescribed in Title VII of
the Tax Code. BIR Ruling No. 325-88 dated July 13,
1988 is hereby revoked.
On 11 September 1997, pursuant to these issuances,
the Bureau of Internal Revenue (BIR) issued
Assessment Notice No. 81-PT-13-94-97-9-118
against Lhuillier demanding payment of deficiency
percentage tax in the sum of P3,360,335.11 for 1994
inclusive of interest and surcharges.
On 3 October 1997, Lhuillier filed an administrative
protest with the Office of the Revenue Regional
Director contending that (1) neither the Tax Code nor
the VAT Law expressly imposes 5% percentage tax
on the gross income of pawnshops; (2) pawnshops
are different from lending investors, which are
subject to the 5% percentage tax under the specific
provision of the Tax Code; (3) RMO No. 15-91 is not
implementing any provision of the Internal Revenue
laws but is a new and additional tax measure on
pawnshops, which only Congress could enact; (4)
RMO No. 15-91 impliedly amends the Tax Code and
is therefore taxation by implication, which is
proscribed by law; and (5) RMO No. 15-91 is a
"class legislation" because it singles out pawnshops
among other lending and financial operations.
On 12 October 1998, Deputy BIR Commissioner
Romeo S. Panganiban issued Warrant of Distraint
and/or Levy No. 81-043-98 against Lhuilliers
property for the enforcement and payment of the
assessed percentage tax.
Its protest having been unacted upon, Lhuillier, in a
letter dated 3 March 1998, elevated the matter to the
CIR. Still, the protest was not acted upon by the CIR.
Thus, on 11 November 1998, Lhuillier filed a "Notice
and Memorandum on Appeal" with the Court of Tax
Appeals invoking Section 228 of Republic Act No.
8424, otherwise known as the Tax Reform Act of
1997, which provides:
Section 228. Protesting of Assessment.
If the protest is denied in whole or in part, or
is not acted upon within one hundred eighty
(180) days from submission of documents,
the taxpayer adversely affected by the
decision or inaction may appeal to the Court
of Tax Appeals within thirty (30) days from
receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day
period; otherwise, the decision shall become
final, executory and demandable.
The case was docketed as CTA Case No.
5690.
On 19 November 1998, the CIR filed with
the CTA a motion to dismiss Lhuilliers
petition on the ground that it did not state a
cause of action, as there was no action yet
on the protest.
Lhuillier opposed the motion to dismiss and
moved for the issuance of a writ of
preliminary injunction praying that the BIR
be enjoined from enforcing the warrant of
distraint and levy.
For Lhuilliers failure to appear on the
scheduled date of hearing, the CTA denied
the motion for the issuance of a writ of
preliminary injunction. However, on
Lhuilliers motion for reconsideration, said
denial was set aside and a hearing on the
motion for the issuance of a writ of
preliminary injunction was set.
On 30 June 1999, after due hearing, the CTA
denied the CIRs motion to dismiss and
granted Lhuilliers motion for the issuance
of a writ of preliminary injunction.
On 13 December 2000, the CTA rendered a
decision declaring (1) RMO No. 15-91 and
RMC No. 43-91 null and void insofar as
they classify pawnshops as lending investors
subject to 5% percentage tax; and (2)
Assessment Notice No. 81-PT-13-94-97-9-
118 as cancelled, withdrawn, and with no
force and effect.2
Dissatisfied, the CIR filed a petition for review with
the Court of Appeals praying that the aforesaid
decision be reversed and set aside and another one be
rendered ordering Lhuillier to pay the 5% lending
investors tax for 1994 with interests and surcharges.
Upon due consideration of the issues presented by the
parties in their respective memoranda, the Court of
Appeals affirmed the CTA decision on 20 November
2001.
The CIR is now before this Court via this petition for
review on certiorari, alleging that the Court of
Appeals erred in holding that pawnshops are not
subject to the 5% lending investors tax. He invokes
then Section 116 of the Tax Code, which imposed a
5% percentage tax on lending investors. He argues
that the legal definition of lending investors provided
in Section 157 (u) of the Tax Code is broad enough to
include pawnshop operators. Section 3 of Presidential
Decree No. 114 states that the principal business
activity of a pawnshop is lending money; thus, a
pawnshop easily falls under the legal definition of
lending investors. RMO No. 15-91 and RMC No. 43-
91, which subject pawnshops to the 5% lending
investors tax based on their gross income, are valid.
Being mere interpretations of the NIRC, they need
not be published. Lastly, the CIR invokes the case of
Commissioner of Internal Revenue vs. Agencia
Exquisite of Bohol, Inc.,3 where the Court of
Appeals Special Fourteenth Division ruled that a
pawnshop is subject to the 5% lending investors tax.4
Lhuillier, on the other hand, maintains that before and
after the amendment of the Tax Code by E.O. No.
273, which took effect on 1 January 1988, pawnshops
and lending investors were subjected to different tax
treatments. Pawnshops were required to pay an
annual fixed tax of only P1,000, while lending
investors were subject to a 5% percentage tax on their
gross income in addition to their fixed annual taxes.
Accordingly, during the period from April 1982 up to
December 1990, the CIR consistently ruled that a
pawnshop is not a lending investor and should not
therefore be required to pay percentage tax on its
gross income.
Lhuillier likewise asserts that RMO No. 15-91 and
RMC No. 43-91 are not implementing rules but are
new and additional tax measures, which only
Congress is empowered to enact. Besides, they are
invalid because they have never been published in the
Official Gazette or any newspaper of general
circulation.
Lhuillier further points out that pawnshops are
strictly regulated by the Central Bank pursuant to
P.D. No. 114, otherwise known as The Pawnshop
Regulation Act. On the other hand, there is no special
law governing lending investors. Due to the wide
differences between the two, pawnshops had never
been considered as lending investors for tax
purposes. In fact, in 1994, Congress passed House
Bill No. 11197,5 which attempted to amend Section
116 of the NIRC, as amended, to include owners of
pawnshops as among those subject to percentage tax.
However, the Senate Bill and the subsequent
Bicameral Committee version, which eventually
became the E-VAT Law, did not incorporate such
proposed amendment.
Lastly, Lhuillier argues that following the maxim in
statutory construction "expressio unius est exclusio
alterius," it was not the intention of the Legislature to
impose percentage taxes on pawnshops because if it
were so, pawnshops would have been included as
among the businesses subject to the said tax.
Inasmuch as revenue laws impose special burdens
upon taxpayers, the enforcement of such laws should
not be extended by implication beyond the clear
import of the language used.
We are therefore called upon to resolve the issue of
whether pawnshops are subject to the 5% lending
investors tax. Corollary to this issue are the
following questions: (1) Are RMO No. 15-91 and
RMC No. 43-91 valid? (2) Were they issued to
implement Section 116 of the NIRC of 1977, as
amended? (3) Are pawnshops considered "lending
investors" for the purpose of the imposition of the
lending investors tax? (4) Is publication necessary
for the validity of RMO No. 15-91 and RMC No. 43-
91.
RMO No. 15-91 and RMC No. 43-91 were issued in
accordance with the power of the CIR to make
rulings and opinions in connection with the
implementation of internal revenue laws, which was
bestowed by then Section 245 of the NIRC of 1977,
as amended by E.O. No. 273.6 Such power of the CIR
cannot be controverted. However, the CIR cannot, in
the exercise of such power, issue administrative
rulings or circulars not consistent with the law sought
to be applied. Indeed, administrative issuances must
not override, supplant or modify the law, but must
remain consistent with the law they intend to carry
out. Only Congress can repeal or amend the law.7
The CIR argues that both issuances are mere rules
and regulations implementing then Section 116 of the
NIRC, as amended, which provided:
SEC. 116. Percentage tax on dealers in
securities; lending investors. - Dealers in
securities and lending investors shall pay a
tax equivalent to six (6) per centum of their
gross income. Lending investors shall pay a
tax equivalent to five (5%) percent of their
gross income.
It is clear from the aforequoted provision that
pawnshops are not specifically included. Thus, the
question is whether pawnshops are considered
lending investors for the purpose of imposing
percentage tax.
We rule in the negative.
Incidentally, we observe that both parties, as well as
the Court of Tax Appeals and the Court of Appeals,
refer to the National Internal Revenue Code as the
Tax Code. They did not specify whether the
provisions they cited were taken from the NIRC of
1977, as amended, or the NIRC of 1986, as amended.
For clarity, it must be pointed out that the NIRC of
1977 as renumbered and rearranged by E.O. No. 273
is a later law than the NIRC of 1986, as amended by
P.D. Nos. 1991, 1994, 2006 and 2031. The citation of
the specific Code is important for us to determine the
intent of the law.
Under Section 157(u) of the NIRC of 1986, as
amended, the term lending investor includes "all
persons who make a practice of lending money for
themselves or others at interest." A pawnshop, on the
other hand, is defined under Section 3 of P.D. No.
114 as "a person or entity engaged in the business of
lending money on personal property delivered as
security for loans and shall be synonymous, and may
be used interchangeably, with pawnbroker or pawn
brokerage."
While it is true that pawnshops are engaged in the
business of lending money, they are not considered
"lending investors" for the purpose of imposing the
5% percentage taxes for the following reasons:
First. Under Section 192, paragraph 3, sub-
paragraphs (dd) and (ff), of the NIRC of
1977, prior to its amendment by E.O. No.
273, as well as Section 161, paragraph 2,
sub-paragraphs (dd) and (ff), of the NIRC of
1986, pawnshops and lending investors were
subjected to different tax treatments; thus:
(3) Other Fixed Taxes. The following
fixed taxes shall be collected as follows, the
amount stated being for the whole year,
when not otherwise specified:
.
(dd) Lending investors
 1. In chartered cities and first class
municipalities, one thousand pesos;
2. In second and third class municipalities,
five hundred pesos;
3. In fourth and fifth class municipalities and
municipal districts, two hundred fifty pesos:
Provided, That lending investors who do
business as such in more than one province
shall pay a tax of one thousand pesos.
. is to operate, everything else must necessarily and by
(ff) Pawnshops, one thousand pesos
(underscoring ours)
Second. Congress never intended pawnshops to be
treated in the same way as lending investors. Section
116 of the NIRC of 1977, as renumbered and
rearranged by E.O. No. 273, was basically lifted from
Section 1758 of the NIRC of 1986, which treated both
tax subjects differently. Section 175 of the latter Code
read as follows:
Sec. 175. Percentage tax on dealers in
securities, lending investors. -- Dealers in
securities shall pay a tax equivalent to six
(6%) percent of their gross income. Lending
investors shall pay a tax equivalent to five
(5%) percent of their gross income. (As
amended by P.D. No. 1739, P.D. No. 1959
and P.D. No. 1994).
We note that the definition of lending investors found
in Section 157 (u) of the NIRC of 1986 is not found
in the NIRC of 1977, as amended by E.O. No. 273,
where Section 116 invoked by the CIR is found.
However, as emphasized earlier, both the NIRC of
1986 and the NIRC of 1977 dealt with pawnshops
and lending investors differently. Verily then, it was
the intent of Congress to deal with both subjects
differently. Hence, we must likewise interpret the
statute to conform with such legislative intent.
Third. Section 116 of the NIRC of 1977, as amended
by E.O. No. 273, subjects to percentage tax dealers in
securities and lending investors only. There is no
mention of pawnshops. Under the maxim expressio
unius est exclusio alterius, the mention of one thing
implies the exclusion of another thing not mentioned.
Thus, if a statute enumerates the things upon which it
implication be excluded from its operation and
effect.9 This rule, as a guide to probable legislative
intent, is based upon the rules of logic and natural
workings of the human mind.10
Fourth. The BIR had ruled several times prior to the
issuance of RMO No. 15-91 and RMC 43-91 that
pawnshops were not subject to the 5% percentage tax
imposed by Section 116 of the NIRC of 1977, as
amended by E.O. No. 273. This was even admitted
by the CIR in RMO No. 15-91 itself. Considering
that Section 116 of the NIRC of 1977, as amended,
was practically lifted from Section 175 of the NIRC
of 1986, as amended, and there being no change in
the law, the interpretation thereof should not have
been altered.
It may not be amiss to state that, as pointed out by the
respondent, pawnshops was sought to be included as
among those subject to 5% percentage tax by House
Bill No. 11197 in 1994. Section 13 thereof reads:
Section 13. Section 116 of the National
Internal Revenue Code, as amended, is
hereby further amended to read as follows:
"SEC. 116. Percentage tax on
dealers in securities; lending
investors; OWNERS OF
PAWNSHOPS; FOREIGN
CURRENCY DEALERS AND/OR
MONEY CHANGERS. Dealers
in securities shall pay a tax
equivalent to Six (6%) per centum
of their gross income. Lending
investors, OWNERS OF
PAWNSHOPS AND FOREIGN
CURRENCY DEALERS AND/OR
MONEY CHANGERS shall pay a
tax equivalent to Five (5%) percent
of their gross income."
If pawnshops were covered within the term lending
investor, there would have been no need to introduce
such amendment to include owners of pawnshops. At
any rate, such proposed amendment was not adopted.
Instead, the approved bill which became R.A. No.
771611 repealed Section 116 of NIRC of 1977, as
amended, which was the basis of RMO No. 15-91
and RMC No. 43-91; thus:
SEC. 20. Repealing Clauses. -- The
provisions of any special law relative to the
rate of franchise taxes are hereby expressly
repealed. Sections 113, 114 and 116 of the
National Internal Revenue Code are hereby
repealed.
Section 21 of the same law provides that the
law shall take effect fifteen (15) days after
its complete publication in the Official
Gazette or in at least two (2) national
newspapers of general circulation whichever
comes earlier. R.A. No. 7716 was published
in the Official Gazette on 1 August 199412;
in the Journal and Malaya newspapers, on
 12 May 1994; and in the Manila Bulletin, on
5 June 1994. Thus, R.A. No. 7716 is deemed
effective on 27 May 1994.
Since Section 116 of the NIRC of 1977, which
breathed life on the questioned administrative
issuances, had already been repealed, RMO 15-91
and RMC 43-91, which depended upon it, are
deemed automatically repealed. Hence, even granting
that pawnshops are included within the term lending
investors, the assessment from 27 May 1994 onward
would have no leg to stand on.
Adding to the invalidity of the RMC No. 43-91 and
RMO No. 15-91 is the absence of publication. While
the rule-making authority of the CIR is not doubted,
like any other government agency, the CIR may not
disregard legal requirements or applicable principles
in the exercise of quasi-legislative powers.
Let us first distinguish between two kinds of
administrative issuances: the legislative rule and the
interpretative rule. A legislative rule is in the nature
of subordinate legislation, designed to implement a
primary legislation by providing the details thereof.
An interpretative rule, on the other hand, is designed
to provide guidelines to the law which the
administrative agency is in charge of enforcing.13
In Misamis Oriental Association of Coco Traders,
Inc. vs. Department of Finance Secretary,14 this
Tribunal ruled:
In the same way that laws must have the
benefit of public hearing, it is generally
required that before a legislative rule is
adopted there must be hearing. In this
connection, the Administrative Code of 1987
provides:
Public Participation. - If not otherwise
required by law, an agency shall, as far as
practicable, publish or circulate notices of
proposed rules and afford interested parties
the opportunity to submit their views prior
to the adoption of any rule.
(2) In the fixing of rates, no rule or final
order shall be valid unless the proposed rates
shall have been published in a newspaper of
general circulation at least two weeks before
the first hearing thereon.
(3) In case of opposition, the rules on
contested cases shall be observed.
In addition, such rule must be published.
When an administrative rule is merely interpretative
in nature, its applicability needs nothing further than
its bare issuance, for it gives no real consequence
more than what the law itself has already prescribed.
When, on the other hand, the administrative rule goes
beyond merely providing for the means that can
facilitate or render least cumbersome the
implementation of the law but substantially increases
the burden of those governed, it behooves the agency
to accord at least to those directly affected a chance
to be heard, and thereafter to be duly informed,
before that new issuance is given the force and effect
of law.15
RMO No. 15-91 and RMC No. 43-91 cannot be
viewed simply as implementing rules or corrective
measures revoking in the process the previous rulings
of past Commissioners. Specifically, they would have
been amendatory provisions applicable to
pawnshops. Without these disputed CIR issuances,
pawnshops would not be liable to pay the 5%
percentage tax, considering that they were not
specifically included in Section 116 of the NIRC of
1977, as amended. In so doing, the CIR did not
simply interpret the law. The due observance of the
requirements of notice, hearing, and publication
should not have been ignored.
There is no need for us to discuss the ruling in CA-
G.R. SP No. 59282 entitled Commissioner of Internal
Revenue v. Agencia Exquisite of Bohol Inc., which
upheld the validity of RMO No. 15-91 and RMC No.
43-91. Suffice it to say that the judgment in that case
cannot be binding upon the Supreme Court because it
is only a decision of the Court of Appeals. The
Supreme Court, by tradition and in our system of
judicial administration, has the last word on what the
law is; it is the final arbiter of any justifiable
controversy. There is only one Supreme Court from
whose decisions all other courts should take their
bearings.16
In view of the foregoing, RMO No. 15-91 and RMC
No. 43-91 are hereby declared null and void.
Consequently, Lhuillier is not liable to pay the 5%
lending investors tax.
WHEREFORE, the petition is hereby DISMISSED
for lack of merit. The decision of the Court of
Appeals of 20 November 2001 in CA-G.R. SP No.
62463 is AFFIRMED.
SO ORDERED.
 Republic of the Philippines To consolidate the laws pertaining to the
Supreme Court franchise and powers of PAGCOR, P.D. No.
Manila 1869[6] was issued. Section 13 thereof reads as
follows:
EN BANC
PERALTA, J.:

PHILIPPINE AMUSEMENT AND GAMING

CORPORATION (PAGCOR), Sec. 13. Exemptions. x x x
For resolution of this Court is the Petition
Petitioner, for Certiorari and Prohibition[1] with prayer for the
issuance of a Temporary Restraining Order and/or
Preliminary Injunction, dated April 17, 2006, of (1) Customs Duties, taxes
petitioner Philippine Amusement and Gaming and other imposts on importations.
Corporation (PAGCOR), seeking the declaration of - All importations of equipment,
nullity of Section 1 of Republic Act (R.A.) No. 9337 vehicles, automobiles, boats, ships,
- versus - insofar as it amends Section 27 (c) of the National barges, aircraft and such other
Internal Revenue Code of 1997, by excluding gambling paraphernalia, including
petitioner from exemption from corporate income tax accessories or related facilities, for
THE BUREAU OF INTERNAL REVENUE for being repugnant to Sections 1 and 10 of Article III the sole and exclusive use of the
(BIR), represented herein by HON. JOSE MARIO of the Constitution. Petitioner further seeks to casinos, the proper and efficient
BUAG, in his official capacity as COMMISSIONER OF prohibit the implementation of Bureau of Internal management and administration
INTERNAL REVENUE, Revenue (BIR) Revenue Regulations No. 16-2005 for thereof and such other clubs,
Public Respondent, being contrary to law. recreation or amusement places to
JOHN DOE and JANE DOE, who are persons acting for, be established under and by virtue
in behalf, or under the authority of Respondent. of this Franchise shall be exempt
Public and Private Respondents. from the payment of duties, taxes
The undisputed facts follow. and other imposts, including all
kinds of fees, levies, or charges of
any kind or nature.

PAGCOR was created pursuant to Vessels and/or accessory

x--------------------------------------------------------------- Presidential Decree (P.D.) No. 1067-A[2] on January ferry boats imported or to be
--------------------------x imported by any corporation
1, 1977. Simultaneous to its creation, P.D. No. 1067-
B[3] (supplementing P.D. No. 1067-A) was issued having existing contractual
exempting PAGCOR from the payment of any type arrangements with the Corporation,
of tax, except a franchise tax of five percent (5%) of for the sole and exclusive use of the
the gross revenue.[4] Thereafter, on June 2, 1978, P.D. casino or to be used to service the
No. 1399 was issued expanding the scope of operations and requirements of the
DECISION PAGCOR's exemption.[5] casino, shall likewise be totally
exempt from the payment of all
customs duties, taxes and other
imposts, including all kinds of fees,
levies, assessments or charges of
any kind or nature, whether
National or Local.
(2) Income and other
taxes. - (a) Franchise Holder: No
tax of any kind or form, income
or otherwise, as well as fees,
charges, or levies of whatever
nature, whether National or
Local, shall be assessed and
collected under this Franchise
from the Corporation; nor shall
any form of tax or charge attach
in any way to the earnings of the
Corporation, except a Franchise
Tax of five percent (5%)of the
gross revenue or earnings derived
by the Corporation from its
operation under this Franchise.
Such tax shall be due and
payable quarterly to the National
Government and shall be in lieu
of all kinds of taxes, levies, fees or
assessments of any kind, nature
or description, levied,
established, or collected by any
municipal, provincial or national
government authority.
(b) Others: The exemption
herein granted for earnings derived
from the operations conducted
under the franchise, specifically
from the payment of any tax,
income or otherwise, as well as any
form of charges, fees or levies,
shall inure to the benefit of and
extend to corporation(s),
association(s), agency(ies), or
individual(s) with whom the
Corporation or operator has any
contractual relationship in
connection with the operations of
the casino(s) authorized to be
conducted under this Franchise and
to those receiving compensation or
other remuneration from the
Corporation as a result of essential
facilities furnished and/or technical
services rendered to
the Corporation or operator.
The fee or remuneration of
foreign entertainers contracted by
the Corporation or operator in
pursuance of this provision shall be
free of any tax.
(3) Dividend Income.
Notwithstanding any provision of
law to the contrary, in the event the
Corporation should declare a cash
dividend income corresponding to
the participation of the private
sector shall, as an incentive to the
beneficiaries, be subject only to a
final flat income rate of ten percent
(10%) of the regular income tax
rates. The dividend income shall
not in such case be considered as
part of the beneficiaries' taxable
income; provided, however, that
such dividend income shall be
totally exempted from income or
other form of taxes if invested
within six (6) months from the date
the dividend income is received in
the following:
(a) operation of
the casino(s) or
investments in any affiliate
activity that will ultimately
redound to the benefit of
the Corporation; or any
other corporation with
whom the Corporation has
any existing arrangements
in connection with or
related to the operations of
the casino(s);
(b) Government
bonds, securities, treasury
notes, or government
debentures; or
(c) BOI-registered
or export-oriented
corporation(s).[7]
PAGCOR's tax exemption was removed in
June 1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which was
issued in September 1984.
 On January 1, 1998, R.A. No. 8424, Section 1 of R.A. No. 9337, which amended Section 1) Section 4, which imposes a 10% Value
[8]
otherwise known as the National Internal Revenue 27 (c) of the National Internal Revenue Code of 1997 Added Tax (VAT) on sale of goods and properties;
Code of 1997, took effect. Section 27 (c) of R.A. No. by excluding PAGCOR from the enumeration of Section 5, which imposes a 10% VAT on importation
8424 provides that government-owned and controlled GOCCs that are exempt from payment of corporate of goods; and Section 6, which imposes a 10% VAT
corporations (GOCCs) shall pay corporate income income tax, thus: on sale of services and use or lease of properties, all
tax, except petitioner PAGCOR, the Government contain a uniform proviso authorizing the President,
Service and Insurance Corporation, the Social upon the recommendation of the Secretary of
Security System, the Philippine Health Insurance Finance, to raise the VAT rate to 12%. The said
Corporation, and the Philippine Charity Sweepstakes (c) Government-owned or provisions were alleged to be violative of Section 28
Office, thus: Controlled Corporations, Agencies (2), Article VI of the Constitution, which section
or Instrumentalities. - The vests in Congress the exclusive authority to fix the
(c) Government-owned or provisions of existing special rate of taxes, and of Section 1, Article III of the
Controlled Corporations, Agencies general laws to the contrary Constitution on due process, as well as of Section 26
or Instrumentalities. - The notwithstanding, all corporations, (2), Article VI of the Constitution, which section
provisions of existing special agencies, or instrumentalities owned provides for the "no amendment rule" upon the last
general laws to the contrary and controlled by the reading of a bill;
notwithstanding, all corporations, Government, except the
agencies or instrumentalities owned Government Service and
and controlled by the Insurance Corporation (GSIS),
Government, except the the Social Security System (SSS), 2) Sections 8 and 12 were alleged to be
Government Service and the Philippine Health Insurance violative of Section 1, Article III of the Constitution,
Insurance Corporation (GSIS), Corporation (PHIC), and the or the guarantee of equal protection of the laws, and
the Social Security System (SSS), Philippine Charity Sweepstakes Section 28 (1), Article VI of the Constitution; and
the Philippine Health Insurance Office (PCSO), shall pay such rate
Corporation (PHIC), the of tax upon their taxable income as
Philippine Charity Sweepstakes are imposed by this Section upon
Office (PCSO), and the corporations or associations 3) other technical aspects of the passage of
Philippine Amusement and engaged in similar business, the law, questioning the manner it was passed.
Gaming Corporation industry, or activity.
(PAGCOR), shall pay such rate of
tax upon their taxable income as
are imposed by this Section upon On September 1, 2005, the Court dismissed
corporations or associations Different groups came to this Court via all the petitions and upheld the constitutionality of
engaged in similar business, petitions for certiorari and prohibition[11] assailing R.A. No. 9337.[12]
industry, or activity.[9] the validity and constitutionality of R.A. No. 9337,
in particular: On the same date, respondent BIR issued
With the enactment of R.A. No. 9337[10] on Revenue Regulations (RR) No. 16-2005,
May 24, 2005, certain sections of the National [13]
specifically identifying PAGCOR as one of the
Internal Revenue Code of 1997 were amended. The franchisees subject to 10% VAT imposed under
particular amendment that is at issue in this case is Section 108 of the National Internal Revenue Code
of 1997, as amended by R.A. No. 9337. The said WHETHER OR NOT RR 16-2005,
revenue regulation, in part, reads: SECTION 4.108-3, PARAGRAPH
(H) IS NULL AND VOID AB
INITIO FOR BEING BEYOND
PAGCOR raises the following THE SCOPE OF THE BASIC
issues: LAW, RA 8424, SECTION 108,
INSOFAR AS THE SAID
Sec. 4. 108-3. Definitions REGULATION IMPOSED VAT
and Specific Rules on Selected ON THE SERVICES OF THE
Services. PETITIONER AS WELL AS
PETITIONERS LICENSEES OR
I FRANCHISEES WHEN THE
BASIC LAW, AS INTERPRETED
xxxx WHETHER OR NOT RA 9337, BY APPLICABLE
SECTION 1 (C) IS NULL AND JURISPRUDENCE, DOES NOT
VOID AB INITIO FOR BEING IMPOSE VAT ON PETITIONER
REPUGNANT TO THE EQUAL OR ON PETITIONERS
PROTECTION [CLAUSE] LICENSEES OR FRANCHISEES.
(h) x x x [14]
EMBODIED IN SECTION 1,
ARTICLE III OF THE 1987
CONSTITUTION. The BIR, in its Comment[15] dated December
29, 2006, counters:
Gross Receipts of all other
franchisees, other than those
covered by Sec. 119 of the Tax
Code, regardless of how their II
franchisees may have been granted,
shall be subject to the 10% VAT WHETHER OR NOT RA 9337,
imposed under Sec.108 of the Tax SECTION 1 (C) IS NULL AND I
Code. This includes, among others, VOID AB INITIO FOR BEING
the Philippine Amusement and REPUGNANT TO THE NON- SECTION 1 OF R.A. NO. 9337
Gaming Corporation (PAGCOR), IMPAIRMENT [CLAUSE] AND SECTION 13 (2) OF P.D.
and its licensees or franchisees. EMBODIED IN SECTION 10, 1869 ARE BOTH VALID AND
ARTICLE III OF THE 1987 CONSTITUTIONAL
CONSTITUTION. PROVISIONS OF LAWS THAT
SHOULD BE HARMONIOUSLY
CONSTRUED TOGETHER SO
AS TO GIVE EFFECT TO ALL
III OF THEIR PROVISIONS
Hence, the present petition
WHENEVER POSSIBLE.
for certiorari.
 I The main issue is whether or not PAGCOR
I is still exempt from corporate income tax and VAT
with the enactment of R.A. No. 9337.
SECTION 1 OF R.A. NO. 9337 IS
NOT VIOLATIVE OF SECTION 1
AND SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION. After a careful study of the positions
presented by the parties, this Court finds the petition
I partly meritorious.
I classes in like circumstances. The
I Under Section 1 of R.A. No. 9337,
amending Section 27 (c) of the National Internal
BIR REVENUE REGULATIONS Revenue Code of 1977, petitioner is no longer
ARE PRESUMED VALID AND exempt from corporate income tax as it has been
CONSTITUTIONAL UNTIL effectively omitted from the list of GOCCs that are
STRICKEN DOWN BY LAWFUL exempt from it. Petitioner argues that such omission
AUTHORITIES. is unconstitutional, as it is violative of its right to
equal protection of the laws under Section 1, Article
III of the Constitution:
responsibilities imposed. Similar
subjects, in other words, should not
be treated differently, so as to give
undue favor to some and unjustly
discriminate against others. The
guarantee means that no person or
class of persons shall be denied the
same protection of laws which is
enjoyed by other persons or other
"equal protection of the laws is a
pledge of the protection of equal
laws." It limits governmental
discrimination. The equal protection
clause extends to artificial persons but
only insofar as their property is
concerned.
xxxx

The Office of the Solicitor General (OSG),
by way of Manifestation In Lieu of Comment,
[16]
concurred with the arguments of the petitioner. It
added that although the State is free to select the
subjects of taxation and that the inequity resulting
from singling out a particular class for taxation or
exemption is not an infringement of the
constitutional limitation, a tax law must operate with
the same force and effect to all persons, firms and
corporations placed in a similar situation.
Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority
when it enacted RR No. 16-2005, because the latter's
provisions are contrary to the mandates of P.D. No.
1869 in relation to R.A. No. 9337.
Sec. 1. No person shall be
deprived of life, liberty, or property
without due process of law, nor
shall any person be denied the
equal protection of the laws.
. clause. The classification must, as an
In City of Manila v. Laguio, Jr.,[17] this Court
expounded the meaning and scope of equal
protection, thus:
Equal protection requires
that all persons or things similarly
situated should be treated alike, both
as to rights conferred and
Legislative bodies are
allowed to classify the subjects of
legislation. If the classification is
reasonable, the law may operate only
on some and not all of the people
without violating the equal protection
indispensable requisite, not be
arbitrary. To be valid, it must conform
to the following requirements:
1) It must be based on
substantial distinctions.
2) It must be germane to
the purposes of the law.
 3) It must not be limited to
existing conditions
only.
4) It must apply equally to
all members of the
class.[18]
It is not contested that before the enactment
of R.A. No. 9337, petitioner was one of the five
GOCCs exempted from payment of corporate income
tax as shown in R.A. No. 8424, Section 27 (c) of
which, reads:
(c) Government-owned or
Controlled Corporations, Agencies
or Instrumentalities. - The
provisions of existing special or
general laws to the contrary
notwithstanding, all corporations,
agencies or instrumentalities owned
and controlled by the Government,
except the Government Service and
Insurance Corporation (GSIS), the
Social Security System (SSS), the
Philippine Health Insurance
Corporation (PHIC), the Philippine
Charity Sweepstakes Office
(PCSO), and the Philippine
Amusement and Gaming
Corporation (PAGCOR), shall
pay such rate of tax upon their
taxable income as are imposed by
this Section upon corporations or
associations engaged in similar
business, industry, or activity.[19]
A perusal of the legislative records of the
Bicameral Conference Meeting of the Committee on
Ways on Means dated October 27, 1997 would show
that the exemption of PAGCOR from the payment CHAIRMAN
of corporate income tax was due to the ENRILE. No, we removed the ---
acquiescence of the Committee on Ways on Means
to the request of PAGCOR that it be exempt from
such tax.[20] The records of the Bicameral Conference
Meeting reveal: HON. R. DIAZ. I . . .
(inaudible) natin yong lotto?
CHAIRMAN
HON. R. DIAZ. The other ENRILE. Pati PAGCOR tinangga
thing, sir, is we --- I noticed we l upon request.
imposed a tax on lotto winnings.
CHAIRMAN
ENRILE. Wala na, tinanggal na CHAIRMAN
namin yon. JAVIER. Yeah, Philippine
Insurance Commission.
HON. R.
DIAZ. Tinanggal na ba natin yon? CHAIRMAN
ENRILE. Philippine Insurance ---
Health, health ba. Yon
ang request ng Chairman, I will
CHAIRMAN accept. (laughter) Pag-Pag-ibig
ENRILE. Oo. yon, maliliit na sa tao yon.
HON. R. DIAZ. Because I HON. ROXAS. Mr.
was wondering whether we covered Chairman, I wonder if in the
the tax on --- Whether on a revenue gainers if we factored in an
universal basis, we included a tax amount that would reflect the VAT
on cockfighting winnings. and other sales taxes---
 CHAIRMAN
ENRILE. No, were talking of this
measure only. We will not ---
(discontinued)
HON. ROXAS. No, no,
no, no, from the --- arising from the
exemption. Assuming that when we
release the money into the hands of
the public, they will not use that to
--- for wallpaper.They will spend
that eh, Mr. Chairman. So when
they spend that---
CHAIRMAN
ENRILE. Theres a VAT.
HON. ROXAS. There will
be a VAT and there will be other
sales taxes no. Is there a
quantification? Is there an
approximation?
CHAIRMAN
JAVIER. Not anything.
HON. ROXAS. So, in
effect, we have sterilized that entire
seven billion. In effect, it is not
circulating in the economy which is
unrealistic.
CHAIRMAN ENRILE. It
does, it does, because this is taken
and spent by government,
somebody receives it in the form of
wages and supplies and other
services and other goods. They are
not being taken from the public and
stored in a vault.
CHAIRMAN
JAVIER. That 7.7 loss because of
tax exemption. That will be extra
income for the taxpayers.
HON. ROXAS. Precisely, so they
will be spending it.[21]
The discussion above bears out that under
R.A. No. 8424, the exemption of PAGCOR from
paying corporate income tax was not based on a
classification showing substantial distinctions which
make for real differences, but to reiterate, the
exemption was granted upon the request of PAGCOR
that it be exempt from the payment of corporate
income tax.
With the subsequent enactment of R.A. No.
9337, amending R.A. No. 8424, PAGCOR has been
excluded from the enumeration of GOCCs that are
exempt from paying corporate income tax. The
records of the Bicameral Conference Meeting dated
April 18, 2005, of the Committee on the Disagreeing
Provisions of Senate Bill No. 1950 and House Bill
No. 3555, show that it is the legislative intent that
PAGCOR be subject to the payment of corporate
income tax, thus:
THE CHAIRMAN (SEN.
RECTO). Yes, Osmea, the
proponent of the amendment.
SEN. OSMEA. Yeah. Mr.
Chairman, one of the reasons
why we're even considering this
VAT bill is we want to show the
world who our creditors, that we
are increasing official revenues
that go to the national budget.
Unfortunately today, Pagcor is
unofficial.
Now, in 2003, I took a quick look
this morning, Pagcor had a net
income of 9.7 billion after paying
some small taxes that they are
subjected to. Of the 9.7 billion,
they claim they remitted to
national government seven
billion. Pagkatapos, there are
other specific remittances like to
the Philippine Sports
Commission, etc., as mandated
by various laws, and then about
400 million to the President's
Social Fund. But all in all, their
net profit today should be about
12 billion. That's why I am
questioning this two
billion. Because while
essentially they claim that the
money goes to government, and
I will accept that just for the
sake of argument. It does not
pass through the appropriation
process. And I think that at
least if we can capture 35
percent or 32 percent through
the budgetary process, first, it
is reflected in our official
income of government which is
applied to the national budget,
and secondly, it goes through
what is constitutionally
mandated as Congress
appropriating and defining
where the money is spent and
not through a board of
directors that has absolutely no
accountability.
REP. PUENTEBELLA. Well,
with all due respect, Mr.
Chairman, follow up lang.
There is wisdom in the comments
of my good friend from Cebu,
Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And
Negros at the same time ay
Kasimanwa. But I would not
want to put my friends from the
Department of Finance in a
difficult position, but may we
know your comments on this
knowing that as Senator Osmea
just mentioned, he said, I accept
that that a lot of it is going to
spending for basic services, you
know, going to most, I think,
supposedly a lot or most of it
should go to government
spending, social services and the
like. What is your comment on
this? This is going to affect a lot
of services on the government
side.
THE CHAIRMAN (REP.
LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from
pocket to the other, Monico.
REP. PUENTEBELLA. I know
that. But I wanted to ask them,
Mr. Senator, because you may
have your own pre-judgment on
this and I don't blame you. I don't
blame you. And I know you have
your own research. But will this
not affect a lot, the disbursements
on social services and other?
REP. LOCSIN. Mr.
Chairman. Mr. Chairman, if I can
add to that question
also. Wouldn't it be easier for you
to explain to, say,
foreign creditors, how do you
explain to them that if there is a
fiscal gap some of our richest
corporations has [been] spared
[from] taxation by the
government which is one rich
source of revenues. Now, why do
you save, why do you spare
certain government corporations
on that, like Pagcor? So, would it
be easier for you to make an
argument if everything was
exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP.
LAPUS). Can we ask the DOF to
respond to those before we call
Congressman Teves?
MR. PURISIMA. Thank you, Mr.
Chair.
Yes, from definitely improving
the collection, it will help us
because it will then enter as an
official revenue although when
dividends declare it also goes in
as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP.
LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is
controlled under Section 27,
that is on income tax. Now, we
are talking here on value-added
tax. Do you mean to say we are
going to amend it from income
tax to value-added tax, as far as
Pagcor is concerned?
THE CHAIRMAN (SEN.
RECTO). No. We are just
amending that section with
regard to the exemption from
income tax of Pagcor.
xxxx
REP. NOGRALES. Mr.
Chairman, Mr. Chairman. Mr.
Chairman.
THE CHAIRMAN (REP.
LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point
of inquiry from the Chair. What
 exactly are the functions of
Pagcor that are VATable? What
will we VAT in Pagcor?
THE CHAIRMAN (REP.
LAPUS). This is on own income
tax. This is Pagcor income tax.
REP. NOGRALES. No, that's
why. Anong i-va-Vat natin sa
kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr.
Chairman, my question is, what
are we VATing Pagcor with, is it
the . . .
REP. NOGRALES. Mr.
Chairman, this is a secret
agreement or the way they craft
their contract, which basis?
THE CHAIRMAN (SEN.
RECTO). Congressman
Nograles, the Senate version
does not discuss a VAT on
Pagcor but it just takes away
their exemption from non-
payment of income tax.[22]
Taxation is the rule and exemption is the
exception.[23] The burden of proof rests upon the party
claiming exemption to prove that it is, in fact,
covered by the exemption so claimed.[24] As a rule,
tax exemptions are construed strongly against the
claimant.[25] Exemptions must be shown to exist
clearly and categorically, and supported by clear legal
provision.[26]
In this case, PAGCOR failed to prove that it
is still exempt from the payment of corporate income
tax, considering that Section 1 of R.A. No. 9337
amended Section 27 (c) of the National Internal
Revenue Code of 1997 by omitting PAGCOR from
the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is
to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from
exemption from the payment of corporate income
tax. It is a basic precept of statutory construction that
the express mention of one person, thing, act, or
consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.
[27]
Thus, the express mention of the GOCCs
exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner
PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the
maxim: exceptio firmat regulam in casibus non
exceptis.[28]
PAGCOR cannot find support in the equal
protection clause of the Constitution, as the
legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee
on Ways and Means, show that PAGCORs exemption
from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National
Internal Revenue Code of 1997, was not made
pursuant to a valid classification based on substantial
distinctions and the other requirements of a
reasonable classification bylegislative bodies, so that
the law may operate only on some, and not all,
without violating the equal protection clause. The
legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax
was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c)
of R.A. No. 9337 is null and void ab initio for
violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of,
and is read into, the contract even without the parties
expressly saying so. Petitioner states that the private
parties/investors transacting with it considered the tax
exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to
transact/invest with it. Petitioner argues that the
withdrawal of its exemption from corporate income
tax by R.A. No. 9337 has the effect of changing the
main consideration and inducement for the
transactions of private parties with it; thus, the
amendatory provision is violative of the non-
impairment clause of the Constitution.
Petitioners contention lacks merit.
 The non-impairment clause is contained in
Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of
contracts shall be passed. The non-impairment clause
is limited in application to laws that derogate from
prior acts or contracts by enlarging, abridging or in
any manner changing the intention of the parties.
[29]
There is impairment if a subsequent law changes
the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or
withdraws remedies for the enforcement of the rights
of the parties.[30]
As regards franchises, Section 11, Article
XII of the Constitution[31] provides that no franchise
or right shall be granted except under the
condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the
common good so requires.[32]
In Manila Electric Company v. Province of
Laguna,[33] the Court held that a franchise partakes
the nature of a grant, which is beyond the purview
of the non-impairment clause of the Constitution.
[34]
The pertinent portion of the case states:
While the Court has, not
too infrequently, referred to tax
exemptions contained in special
franchises as being in the nature of
contracts and a part of the
inducement for carrying on the
franchise, these exemptions,
nevertheless, are far from being
strictly contractual in
nature. Contractual tax exemptions,
in the real sense of the term and
where the non-impairment clause
of the Constitution can rightly be
invoked, are those agreed to by the
taxing authority in contracts, such
as those contained in government
bonds or debentures, lawfully
entered into by them under
enabling laws in which the
government, acting in its private
capacity, sheds its cloak of
authority and waives its
governmental immunity. Truly, tax
exemptions of this kind may not be
revoked without impairing the
obligations of contracts. These
contractual tax exemptions,
however, are not to be confused
with tax exemptions granted under
franchises. A franchise partakes
the nature of a grant which is
beyond the purview of the non-
impairment clause of the
Constitution. Indeed, Article XII,
Section 11, of the 1987
Constitution, like its precursor
provisions in the 1935 and the
1973 Constitutions, is explicit
that no franchise for the
operation of a public utility shall
be granted except under the
condition that such privilege shall
be subject to amendment,
alteration or repeal by Congress
as and when the common good so
requires.[35]
In this case, PAGCOR was granted a
franchise to operate and maintain gambling casinos,
clubs and other recreation or amusement places,
sports, gaming pools, i.e., basketball, football,
lotteries, etc., whether on land or sea, within the
territorial jurisdiction of the Republic of the
Philippines.[36] Under Section 11, Article XII of the
Constitution, PAGCORs franchise is subject to
amendment, alteration or repeal by Congress such as
the amendment under Section 1 of R.A. No.
9377. Hence, the provision in Section 1 of R.A. No.
9337, amending Section 27 (c) of R.A. No. 8424
by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits
to PAGCORs transactions with private parties, is not
violative of the non-impairment clause of the
Constitution.
Anent the validity of RR No. 16-2005, the
Court holds that the provision subjecting PAGCOR to
10% VAT is invalid for being contrary to R.A. No.
9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is
clear only as to the removal of petitioner's exemption
from the payment of corporate income tax, which
was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337
itself exempts petitioner from VAT pursuant to
Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the
same Code, as amended, is hereby
further amended to read as follows:
 Section or lease of
109. Exempt properties: x x x
Transactions. - Moreover, the exemption of PAGCOR from
(1) Subject to the VAT is supported by Section 6 of R.A. No. 9337, xxxx
provisions of which retained Section 108 (B) (3) of R.A. No. 8424,
Subsection (2) thus:
hereof, the
following (B) Tra
transactions shall nsactions
be exempt from [R.A. No. 9337], SEC. Subject to Zero
the value-added 6. Section 108 of the same Code Percent (0%)
tax: (R.A. No. 8424), as amended, is Rate. The
hereby further amended to read as following
xxxx follows: services
performed in the
Philippines by
VAT-registered
(k) Tra SEC. persons shall be
nsactions which 108. Value- subject to zero
are exempt under Added Tax on percent (0%)
international Sale of Services rate;
agreements to and Use or Lease
which the of Properties.
Philippines is a
signatory xxxx
or under special
laws, except (A) Rate
Presidential and Base of
Decree No. 529. Tax. There shall (3) Serv
[37]
be levied, ices rendered to
assessed and persons or
collected, a entities whose
value-added tax exemption
equivalent to ten under special
percent (10%) of laws or
Petitioner is exempt from the payment of gross receipts international
VAT, because PAGCORs charter, P.D. No. 1869, is a derived from the agreements to
special law that grants petitioner exemption from sale or exchange which the
taxes. of services, Philippines is a
including the use signatory
 effectively subje to April 1997. Acesite tried to shift the said Sec.
cts the supply of taxes to PAGCOR by incorporating it in the 13. Exemptions.
such services to amount assessed to PAGCOR. However,
zero percent PAGCOR refused to pay the taxes because
(0%) rate; of its tax-exempt status. PAGCOR paid
only the amount due to Acesite minus VAT xxxx
in the sum of P30,152,892.02. Acesite paid
VAT in the amount of P30,152,892.02 to
x x x x[38] the Commissioner of Internal Revenue,
fearing the legal consequences of its non- (2) Inco
payment. In May 1998, Acesite sought the me and other
taxes. - (a)
refund of the amount it paid as VAT on the
Franchise Holder:
ground that its transaction with PAGCOR
No tax of any
was subject to zero rate as it was rendered
As pointed out by petitioner, although R.A. kind or form,
to a tax-exempt entity. The Court ruled
No. 9337 introduced amendments to Section 108 of income or
that PAGCOR and Acesite were both
R.A. No. 8424 by imposing VAT on other services otherwise, as well
exempt from paying VAT, thus: as fees, charges
not previously covered, it did not amend the portion
of Section 108 (B) (3) that subjects to zero percent or levies of
rate services performed by VAT-registered persons to whatever nature,
persons or entities whose exemption under special whether National
laws or international agreements to which the or Local, shall be
Philippines is a signatory effectively subjects the assessed and
supply of such services to 0% rate. xxxx collected under
this Franchise
from the
Corporation; nor
Petitioner's exemption from VAT PAGCOR is exempt from payment of shall any form of
under Section 108 (B) (3) of R.A. No. indirect taxes tax or charge
8424 has been thoroughly and extensively attach in any way
discussed in Commissioner of Internal to the earnings of
the Corporation,
Revenue v.Acesite (Philippines) Hotel
It is undisputed that P.D. except a
Corporation.[39] Acesite was the owner and
1869, the charter creating Franchise Tax of
operator of the Holiday Inn Manila Pavilion
PAGCOR, grants the latter five (5%) percent
Hotel. It leased a portion of the hotels
an exemption from the payment of of the gross
premises to PAGCOR. It incurred VAT revenue or
taxes. Section 13 of P.D. 1869
amounting to P30,152,892.02 from its earnings derived
pertinently provides:
rental income and sale of food and by the
beverages to PAGCOR from January 1996 Corporation from
its operation or levies, shall We disagree.
under this inure to the
Franchise. Such benefit of and
tax shall be due extend to
and payable corporation(s), A close scrutiny of the
quarterly to the association(s), above provisos clearly gives
National agency(ies), or PAGCOR a blanket exemption to
Government and individual(s) with taxes with no distinction on
shall be in lieu of whom the whether the taxes are direct or
all kinds of taxes, Corporation or indirect. We are one with the CA
levies, fees or operator has any ruling that PAGCOR is also exempt
assessments of contractual from indirect taxes, like VAT, as
any kind, nature relationship in follows:
or description, connection with
levied, the operations of Under
established or the casino(s) the above
collected by any authorized to be provision
municipal, conducted under [Section 13 (2)
provincial, or this Franchise (b) of P.D. 1869],
national and to those the term
government receiving "Corporation" or
authority. compensation or operator refers to
other PAGCOR.
remuneration Although the law
from the does not
(b) Othe Corporation or specifically
rs: The operator as a mention
exemptions result of essential PAGCOR's
herein granted for facilities exemption from
earnings derived furnished and/or indirect
from the technical services taxes, PAGCOR
operations rendered to the is undoubtedly
conducted under Corporation or exempt from
the franchise operator. such taxes
specifically from because the law
the payment of Petitioner contends that the exempts from
any tax, income above tax exemption refers only to taxes persons or
or otherwise, as PAGCOR's direct tax liability and entities
well as any form not to indirect taxes, like the VAT. contracting with
of charges, fees PAGCOR in
 casino It must be noted that the indirect
operations. tax of VAT, as in the instant case,
Although, can be shifted or passed to the Thus, while it was proper
differently buyer, transferee, or lessee of the for PAGCOR not to pay the 10%
worded, the goods, properties, or services VAT charged by Acesite, the latter
provision clearly subject to VAT. Thus, by is not liable for the payment of it as
exempts extending the tax exemption to it is exempt in this particular
PAGCOR from entities or individuals dealing transaction by operation of law to
indirect taxes. In with PAGCOR in casino pay the indirect tax. Such
fact, it goes one operations, it is exempting exemption falls within the former
step further by PAGCOR from being liable to Section 102 (b) (3) of the 1977 Tax
granting tax indirect taxes. Code, as amended (now Sec. 108
exempt status to [b] [3] of R.A. 8424), which
persons dealing The manner of charging VAT provides:
with PAGCOR does not make PAGCOR liable to
in casino said tax. Section
operations. The 102. Value-added
unmistakable tax on sale of
conclusion is that services.- (a) Rate
PAGCOR is not It is true that VAT can and base of tax -
liable for the P30, either be incorporated in the value There shall be
152,892.02 VAT of the goods, properties, or services levied, assessed
and neither is sold or leased, in which case it is and collected, a
Acesite as the computed as 1/11 of such value, or value-added tax
latter is charged as an additional 10% to the equivalent to 10%
effectively value. Verily, the seller or lessor of gross receipts
subject to zero has the option to follow either way derived by any
percent rate in charging its clients and customer. person engaged in
under Sec. 108 B In the instant case, Acesite the sale of services
(3), R.A. 8424. followed the latter method, that is, x x x; Provided,
(Emphasis charging an additional 10% of the that the following
supplied.) gross sales and rentals. Be that as it services performed
may, the use of either method, and in the Philippines
in particular, the first method, does by VAT registered
not denigrate the fact that persons shall be
Indeed, by extending the PAGCOR is exempt from an subject to 0%.
exemption to entities or individuals indirect tax, like VAT.
dealing with PAGCOR, the xxxx
legislature clearly granted VAT exemption extends to Acesite
exemption also from indirect taxes.
 (3) Serv constructed the building owned by WHEREFORE, the petition
ices rendered to contractee WHO, and such does not is PARTLY GRANTED. Section 1 of Republic Act
persons or violate the rule that tax exemptions No. 9337, amending Section 27 (c) of the National
entities whose are personal because the manifest Internal Revenue Code of 1997, by excluding
exemption intention of the agreement is to petitioner Philippine Amusement and Gaming
under special exempt the contractor so that no Corporation from the enumeration of government-
laws or contractor's tax may be shifted to owned and controlled corporations exempted from
international the contractee WHO. Thus, the corporate income tax is valid and constitutional,
agreements to proviso in P.D. 1869, extending while BIR Revenue Regulations No. 16-2005 insofar
which the the exemption to entities or as it subjects PAGCOR to 10% VAT is null and void
Philippines is a individuals dealing with for being contrary to the National Internal Revenue
signatory PAGCOR in casino operations, is Code of 1997, as amended by Republic Act No.
effectively clearly to proscribe any indirect 9337.
subjects the tax, like VAT, that may be shifted
supply of such to PAGCOR.[40]
services to zero
(0%) rate No costs.
(emphasis
supplied). Although the basis of the exemption of
PAGCOR and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite SO ORDERED.
(Philippines) Hotel Corporationwas Section 102 (b)
The rationale for the of the 1977 Tax Code, as amended, which section
exemption from indirect taxes was retained as Section 108 (B) (3) in R.A. No.
provided for in P.D. 1869 and the 8424,[41] it is still applicable to this case, since the
extension of such exemption to provision relied upon has been retained in R.A. No.
entities or individuals dealing with 9337.[42]
PAGCOR in casino operations are
best elucidated from the 1987 case It is settled rule that in case of discrepancy
of Commissioner of Internal between the basic law and a rule or regulation issued
Revenue v. John Gotamco & Sons, to implement said law, the basic law prevails,
Inc., where the absolute tax because the said rule or regulation cannot go beyond
exemption of the World Health the terms and provisions of the basic law.[43] RR No.
Organization (WHO) upon an 16-2005, therefore, cannot go beyond the provisions
international agreement was of R.A. No. 9337. Since PAGCOR is exempt from
upheld. We held in said case that VAT under R.A. No. 9337, the BIR exceeded its
the exemption of contractee WHO authority in subjecting PAGCOR to 10% VAT under
should be implemented to mean RR No. 16-2005; hence, the said regulatory provision
that the entity or person exempt is is hereby nullified.
the contractor itself who
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31092 February 27, 1987
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE
COURT OF TAX APPEALS, respondents.
YAP, J.:
The question involved in this petition is whether
respondent John Gotamco & Sons, Inc. should pay
the 3% contractor's tax under Section 191 of the
National Internal Revenue Code on the gross receipts
it realized from the construction of the World Health
Organization office building in Manila.
The World Health Organization (WHO for short) is
an international organization which has a regional
office in Manila. As an international organization, it
enjoys privileges and immunities which are defined
more specifically in the Host Agreement entered into
between the Republic of the Philippines and the said
Organization on July 22, 1951. Section 11 of that
Agreement provides, inter alia, that "the
Organization, its assets, income and other properties
shall be: (a) exempt from all direct and indirect taxes.
It is understood, however, that the Organization will
not claim exemption from taxes which are, in fact, no
more than charges for public utility services; . . .
When the WHO decided to construct a building to
house its own offices, as well as the other United
Nations offices stationed in Manila, it entered into a
further agreement with the Govermment of the
Republic of the Philippines on November 26, 1957.
This agreement contained the following provision
(Article III, paragraph 2):
The Organization may import into
the country materials and fixtures
required for the construction free
from all duties and taxes and agrees
not to utilize any portion of the
international reserves of the
Government.
Article VIII of the above-mentioned agreement
referred to the Host Agreement concluded on July 22,
1951 which granted the Organization exemption from
all direct and indirect taxes.
In inviting bids for the construction of the building,
the WHO informed the bidders that the building to be
constructed belonged to an international organization
with diplomatic status and thus exempt from the
payment of all fees, licenses, and taxes, and that
therefore their bids "must take this into account and
should not include items for such taxes, licenses and
other payments to Government agencies."
The construction contract was awarded to respondent
John Gotamco & Sons, Inc. (Gotamco for short) on
February 10, 1958 for the stipulated price of
P370,000.00, but when the building was completed
the price reached a total of P452,544.00.
Sometime in May 1958, the WHO received an
opinion from the Commissioner of the Bureau of
Internal Revenue stating that "as the 3% contractor's
tax is an indirect tax on the assets and income of the
Organization, the gross receipts derived by
contractors from their contracts with the WHO for the
construction of its new building, are exempt from tax
in accordance with . . . the Host Agreement."
Subsequently, however, on June 3, 1958, the
Commissioner of Internal Revenue reversed his
opinion and stated that "as the 3% contractor's tax is
not a direct nor an indirect tax on the WHO, but a tax
that is primarily due from the contractor, the same is
not covered by . . . the Host Agreement."
On January 2, 1960, the WHO issued a certification
state 91 inter alia,:
When the request for bids for the
construction of the World Health
Organization office building was
called for, contractors were
informed that there would be no
taxes or fees levied upon them for
their work in connection with the
construction of the building as this
will be considered an indirect tax to
the Organization caused by the
increase of the contractor's bid in
order to cover these taxes. This was
upheld by the Bureau of Internal
Revenue and it can be stated that
the contractors submitted their bids
in good faith with the exemption in
mind.
The undersigned, therefore,
certifies that the bid of John
Gotamco & Sons, made under the
condition stated above, should be
exempted from any taxes in
connection with the construction of
 the World Health Organization
office building.
On January 17, 1961, the Commissioner of Internal
Revenue sent a letter of demand to Gotamco
demanding payment of P 16,970.40, representing the
3% contractor's tax plus surcharges on the gross
receipts it received from the WHO in the construction
of the latter's building.
Respondent Gotamco appealed the Commissioner's
decision to the Court of Tax Appeals, which after trial
rendered a decision, in favor of Gotamco and
reversed the Commissioner's decision. The Court of
Tax Appeal's decision is now before us for review on
certiorari.
In his first assignment of error, petitioner questions
the entitlement of the WHO to tax exemption,
contending that the Host Agreement is null and void,
not having been ratified by the Philippine Senate as
required by the Constitution. We find no merit in this
contention. While treaties are required to be ratified
by the Senate under the Constitution, less formal
types of international agreements may be entered into
by the Chief Executive and become binding without
the concurrence of the legislative body. 1 The Host
Agreement comes within the latter category; it is a
valid and binding international agreement even
without the concurrence of the Philippine Senate.
The privileges and immunities granted to the WHO
under the Host Agreement have been recognized by
this Court as legally binding on Philippine
authorities. 2
Petitioner maintains that even assuming that the Host
Agreement granting tax exemption to the WHO is
valid and enforceable, the 3% contractor's tax
assessed on Gotamco is not an "indirect tax" within
its purview. Petitioner's position is that the
contractor's tax "is in the nature of an excise tax
which is a charge imposed upon the performance of
an act, the enjoyment of a privilege or the engaging
in an occupation. . . It is a tax due primarily and
directly on the contractor, not on the owner of the
building. Since this tax has no bearing upon the
WHO, it cannot be deemed an indirect taxation upon
it."
We agree with the Court of Tax Appeals in rejecting
this contention of the petitioner. Said the respondent
court:
In context, direct taxes are those
that are demanded from the very
person who, it is intended or
desired, should pay them; while
indirect taxes are those that are
demanded in the first instance from
one person in the expectation and
intention that he can shift the
burden to someone else. (Pollock
vs. Farmers, L & T Co., 1957 US
429, 15 S. Ct. 673, 39 Law. Ed.
759.) The contractor's tax is of
course payable by the contractor
but in the last analysis it is the
owner of the building that
shoulders the burden of the tax
because the same is shifted by the
contractor to the owner as a matter
of self-preservation. Thus, it is an
indirect tax. And it is an indirect tax
on the WHO because, although it is
payable by the petitioner, the latter
can shift its burden on the WHO. In
the last analysis it is the WHO that
will pay the tax indirectly through
the contractor and it certainly
cannot be said that 'this tax has no
bearing upon the World Health
Organization.
Petitioner claims that under the authority of the
Philippine Acetylene Company versus Commissioner
of Internal Revenue, et al., 3 the 3% contractor's tax
fans directly on Gotamco and cannot be shifted to the
WHO. The Court of Tax Appeals, however, held that
the said case is not controlling in this case, since the
Host Agreement specifically exempts the WHO from
"indirect taxes." We agree. The Philippine
Acetylene case involved a tax on sales of goods
which under the law had to be paid by the
manufacturer or producer; the fact that the
manufacturer or producer might have added the
amount of the tax to the price of the goods did not
make the sales tax "a tax on the purchaser." The
Court held that the sales tax must be paid by the
manufacturer or producer even if the sale is made to
tax-exempt entities like the National Power
Corporation, an agency of the Philippine
Government, and to the Voice of America, an agency
of the United States Government.
The Host Agreement, in specifically exempting the
WHO from "indirect taxes," contemplates taxes
which, although not imposed upon or paid by the
Organization directly, form part of the price paid or to
be paid by it. This is made clear in Section 12 of the
Host Agreement which provides:
While the Organization will not, as
a general rule, in the case of minor
purchases, claim exemption from
excise duties, and from taxes on the
sale of movable and immovable
property which form part of the
price to be paid, nevertheless, when
the Organization is
 making important purchases for
official use of property on which
such duties and taxes have been
charged or are chargeable the
Government of the Republic of the
Philippines shall make appropriate
administrative arrangements for
the remission or return of the
amount of duty or tax. (Emphasis
supplied).

The above-quoted provision, although referring only

to purchases made by the WHO, elucidates the clear
intention of the Agreement to exempt the WHO from
"indirect" taxation.

The certification issued by the WHO, dated January

20, 1960, sought exemption of the contractor,
Gotamco, from any taxes in connection with the
construction of the WHO office building. The 3%
contractor's tax would be within this category and
should be viewed as a form of an "indirect tax" On
the Organization, as the payment thereof or its
inclusion in the bid price would have meant an
increase in the construction cost of the building.

Accordingly, finding no reversible error committed

by the respondent Court of Tax Appeals, the appealed
decision is hereby affirmed.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his
capacity as Executive Secretary, Office of the
President, HON. VICENTE JAYME, ETC., ET
AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent
Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place
twice in some instances, this matter of indirect tax
exemption of the private respondent National Power
Corporation (NPC) is brought to this Court a second
time. Unfazed by the Decision We promulgated on
May 31, 1991 1 petitioner Ernesto Maceda asks this
Court to reconsider said Decision. Lest We be
criticized for denying due process to the petitioner.
We have decided to take a second look at the issues.
In the process, a hearing was held on July 9, 1992
where all parties presented their respective
arguments. Etched in this Court's mind are the
paradoxical claims by both petitioner and private
respondents that their respective positions are for the
benefit of the Filipino people.
I
A Chronological review of the relevant NPC laws,
specially with respect to its tax exemption provisions,
at the risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120
was enacted creating the National Power
Corporation, a public corporation, mainly to develop
hydraulic power from all water sources in the
Philippines. 2 The sum of P250,000.00 was
appropriated out of the funds in the Philippine
Treasury for the purpose of organizing the NPC and
conducting its preliminary work. 3 The main source of
funds for the NPC was the flotation of bonds in the
capital markets 4and these bonds
. . . issued under the authority of
this Act shall be exempt from the
payment of all taxes by the
Commonwealth of the Philippines,
or by any authority, branch,
division or political subdivision
thereof and subject to the
provisions of the Act of Congress,
approved March 24, 1934,
otherwise known as the Tydings
McDuffle Law, which facts shall be
stated upon the face of said bonds. .
. . .5
On June 24, 1938, C.A. No. 344 was enacted
increasing to P550,000.00 the funds needed for the
initial operations of the NPC and reiterating the
provision of the flotation of bonds as soon as the first
construction of any hydraulic power project was to be
decided by the NPC Board. 6 The provision on tax
exemption in relation to the issuance of the NPC
bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted
removing the provision on the payment of the bond's
principal and interest in "gold coins" but adding that
payment could be made in United States
dollars. 7 The provision on tax exemption in relation
to the issuance of the NPC bonds was neither
amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines to
guarantee, absolutely and unconditionally, as primary
obligor, the payment of any and all NPC loans. 8 He
was also authorized to contract on behalf of the NPC
with the International Bank for Reconstruction and
Development (IBRD) for NPC loans for the
accomplishment of NPC's corporate objectives 9 and
for the reconstruction and development of the
economy of the country. 10 It was expressly stated
that:
Any such loan or loans shall be
exempt from taxes, duties, fees,
imposts, charges, contributions and
restrictions of the Republic of the
Philippines, its provinces, cities and
municipalities. 11
On the same date, R.A. No. 358 was enacted
expressly authorizing the NPC, for the first time, to
incur other types of indebtedness, aside from
indebtedness incurred by flotation of bonds. 12 As to
the pertinent tax exemption provision, the law stated
as follows:
 To facilitate payment of its
indebtedness, the National Power
Corporation shall be exempt from
all taxes, duties, fees, imposts,
charges, and restrictions of the
Republic of the Philippines, its
provinces, cities and
municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted
amending R.A. No. 357 in that, aside from the IBRD,
the President of the Philippines was authorized to
negotiate, contract and guarantee loans with the
Export-Import Bank of of Washigton, D.C., U.S.A.,
or any other international financial institution. 14 The
tax provision for repayment of these loans, as stated
in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted
specifically to withdraw NPC's tax exemption for real
estate taxes. As enacted, the law states as follows:
To facilitate payment of its
indebtedness, the National Power
Corporation shall be exempt from
all taxes, except real property tax,
and from all duties, fees, imposts,
charges, and restrictions of the
Republic of the Philippines, its
provinces, cities, and
municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted
directing that the NPC projects to be funded by the
increased indebtedness 16 should bear the National
Economic Council's stamp of approval. The tax
exemption provision related to the payment of this
total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted
increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the
US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax
provision related to the repayment of these loans was
not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing
the corporate life of NPC to December 31,
2000. 18 All laws or provisions of laws and executive
orders contrary to said R.A. No. 2058 were expressly
repealed. 19
On June 18, 1960, R.A. No 2641 was enacted
converting the NPC from a public corporation into a
stock corporation with an authorized capital stock of
P100,000,000.00 divided into 1,000.000 shares
having a par value of P100.00 each, with said capital
stock wholly subscribed to by the Government. 20 No
tax exemption was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted
increasing the above-mentioned authorized capital
stock to P250,000,000.00 with the increase to be
wholly subscribed by the Government. 21 No tax
provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's
capital stock was increased again to
P300,000,000.00, the increase to be wholly
subscribed by the Government. No tax provision was
incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted
revising the charter of the NPC, C.A. No. 120, as
amended. Declared as primary objectives of the
nation were:
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 the government,
including the financial
institutions. 23
Section 4 of C.A. No. 120, was renumbered as
Section 8, and divided into sections 8 (a) (Authority
to incur Domestic Indebtedness) and Section 8 (b)
(Authority to Incur Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph
No. 3 of Section 8(a), states as follows:
The bonds issued under the
authority of this subsection shall be
exempt from the payment of all
taxes by the Republic of the
Philippines, or by any authority,
branch, division or political
subdivision thereof which facts
shall be stated upon the face of said
bonds. . . . 24
As to the foreign loans the NPC was authorized to
contract, Paragraph No. 5, Section 8(b), states as
follows:
 The loans, credits and indebtedness
contracted under this subsection
and the payment of the principal,
interest and other charges thereon,
as well as the importation of
machinery, equipment, materials
and supplies by the Corporation,
paid from the proceeds of any loan,
credit or indebtedeness incurred
under this Act, shall also be exempt
from all taxes, fees, imposts, other
charges and restrictions, including
import restrictions, by the Republic
of the Philippines, or any of its
agencies and political
subdivisions. 25
A new section was added to the charter, now known
as Section 13, R.A. No. 6395, which declares the
non-profit character and tax exemptions of NPC as
follows:
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 one 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,
and 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 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. 26
On November 7, 1972, Presidential
Decree No. 40 was issued declaring
that the electrification of the entire
country was one of the primary
concerns of the country. And in
connection with this, it was
specifically stated that:
The setting up of transmission line
grids and the construction of
associated generation facilities in
Luzon, Mindanao and major
islands of the country, including the
Visayas, shall be the responsibility
of the National Power Corporation
(NPC) as the authorized
implementing agency of the
State. 27
xxx xxx xxx
It is the ultimate objective of the
State for the NPC to own and
operate as a single integrated
system all generating facilities
supplying electric power to the
entire area embraced by any grid
set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving
extra powers to the NPC to enable it to fulfill its role
under aforesaid P.D. No. 40. Its authorized capital
stock was raised to P2,000,000,000.00, 29 its total
domestic indebtedness was pegged at a maximum of
P3,000,000,000.00 at any one time, 30 and the NPC
was authorized to borrow a total of
US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these
foreign loans states as follows:
The loans, credits and indebtedness
contracted under this subsection
and the payment of the principal,
interest and other charges thereon,
as well as the importation of
machinery, equipment, materials,
supplies and services, by the
Corporation, paid from the
proceeds of any loan, credit or
indebtedness incurred under this
 Act, shall also be exempt from all
direct and indirect taxes, fees,
imposts, other charges and
restrictions, including import
restrictions previously and
presently imposed, and to be
imposed by the Republic of the
Philippines, or any of its agencies
and political
subdivisions. 32 (Emphasis
supplied)
Section 13(a) and 13(d) of R.A. No 6395 were
amended to read as follows:
(a) From the payment of all taxes,
duties, fees, imposts, charges and
restrictions to the Republic of the
Philippines, its provinces, cities,
municipalities and other
government agencies and
instrumentalities including the
taxes, duties, fees, imposts and
other charges provided for under
the Tariff and Customs Code of the
Philippines, Republic Act
Numbered Nineteen Hundred
Thirty-Seven, as amended, and as
further amended by Presidential
Decree No. 34 dated October 27,
1972, and Presidential Decree No.
69, dated November 24, 1972, and
costs and service fees in any court
or administrative proceedings in
which it may be a party;
xxx xxx xxx
(d) From all taxes, duties, fees,
imposts, and all other charges
imposed directly or indirectly 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. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued
removing certain restrictions in the NPC's sale of
electricity to its different customers. 34 No tax
exemption provision was amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing
that P200,000,000.00 would be appropriated annually
to cover the unpaid subscription of the Government
in the NPC authorized capital stock, which amount
would be taken from taxes accruing to the General
Funds of the Government, proceeds from loans,
issuance of bonds, treasury bills or notes to be issued
by the Secretary of Finance for this particular
purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated
expansion programs for generation
and transmission facilities which
includes nuclear power generation,
the present capitalization of
National Power Corporation (NPC)
and the ceilings for domestic and
foreign borrowings are deemed
insufficient; 36
xxx xxx xxx
(I)n the application of the tax
exemption provisions of the
Revised Charter, the non-profit
character of NPC has not been fully
utilized because of restrictive
interpretation of the taxing agencies
of the government on said
provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated
expansion program and attain the
declared objective of total
electrification of the country,
further amendments of certain
sections of Republic Act No. 6395,
as amended by Presidential Decrees
Nos. 380, 395 and 758, have
become imperative; 38
Thus NPC's capital stock was raised to
P8,000,000,000.00, 39 the total domestic indebtedness
ceiling was increased to P12,000,000,000.00, 40 the
total foreign loan ceiling was raised to
US$4,000,000,000.00 41 and Section 13 of R.A. No.
6395, was amended to read as follows:
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 to its
indebtedness and obligations and in
furtherance and effective
implementation of the policy
enunciated in Section one of this
Act, the Corporation, including its
subsidiaries, is hereby declared
 exempt from the payment of all
forms of taxes, duties, fees, imposts
as well as costs and service fees
including filing fees, appeal bonds,
supersedeas bonds, in any court or
administrative proceedings. 42
II
On the other hand, the pertinent tax laws involved in
this controversy are P.D. Nos. 882, 1177, 1931 and
Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued
withdrawing the tax exemption of NPC with regard
to imports as follows:
WHEREAS, importations by
certain government agencies,
including government-owned or
controlled corporation, are exempt
from the payment of customs duties
and compensating tax; and
WHEREAS, in order to reduce
foreign exchange spending and to
protect domestic industries, it is
necessary to restrict and regulate
such tax-free importations.
NOW THEREFORE, I,
FERDINAND E. MARCOS,
President of the Philippines, by
virtue of the powers vested in me
by the Constitution, and do hereby
decree and order the following:
Sec. 1. All importations of any
government agency, including
government-owned or controlled
corporations which are exempt
from the payment of customs duties
and internal revenue taxes, shall be
subject to the prior approval of an
Inter-Agency Committee which
shall insure compliance with the
following conditions:
(a) That no such article of local
manufacture are available in
sufficient quantity and comparable
quality at reasonable prices;
(b) That the articles to be imported
are directly and actually needed
and will be used exclusively by the
grantee of the exemption for its
operations and projects or in the
conduct of its functions; and
(c) The shipping documents
covering the importation are in the
name of the grantee to whom the
goods shall be delivered directly by
customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have
the power to regulate and control
the tax-free importation of
government agencies in accordance
with the conditions set forth in
Section 1 hereof and the
regulations to be promulgated to
implement the provisions of this
Decree. Provided, however, That
any government agency or
government-owned or controlled
corporation, or any local
manufacturer or business firm
adversely affected by any decision
or ruling of the Inter-Agency
Committee may file an appeal with
the Office of the President within
ten days from the date of notice
thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic
Act No. 6395; . . .. and all similar
provisions of all general and
special laws and decrees are hereby
amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State
to formulate and implement a
National Budget that is an
instrument of national
development, reflective of national
objectives, strategies and plans.
The budget shall be supportive of
and consistent with the socio-
economic development plan and
shall be oriented towards the
achievement of explicit objectives
and expected results, to ensure that
funds are utilized and operations
are conducted effectively,
economically and efficiently. The
national budget shall be formulated
within a context of a regionalized
government structure and of the
totality of revenues and other
receipts, expenditures and
 borrowings of all levels of
government-owned or controlled
corporations. The budget shall
likewise be prepared within the
context of the national long-term
plan and of a long-term budget
program. 43
In line with such policy, the law decreed that
All units of government, including government-
owned or controlled corporations, shall pay income
taxes, customs duties and other taxes and fees are
imposed under revenues laws: provided, that
organizations otherwise exempted by law from the
payment of such taxes/duties may ask for a subsidy
from the General Fund in the exact amount of
taxes/duties due: provided, further, that a procedure
shall be established by the Secretary of Finance and
the Commissioner of the Budget, whereby such
subsidies shall automatically be considered as both
revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive
orders, rules and regulations or
parts thereof which are inconsistent
with the provisions of the Decree
are hereby repealed and/or
modified accordingly. 45
On July 11, 1984, most likely due to the economic
morass the Government found itself in after the
Aquino assassination, P.D. No. 1931 was issued to
reiterate that:
WHEREAS, Presidential Decree
No. 1177 has already expressly
repealed the grant of tax privileges
to any government-owned or
controlled corporation and all other
units of government; 46
and since there was a
. . . need for government-owned or
controlled corporations and all
other units of government enjoying
tax privileges to share in the
requirements of development, fiscal
or otherwise, by paying the duties,
taxes and other charges due from
them. 47
it was decreed that:
Sec. 1. The provisions of special on
general law to the contrary
notwithstanding, all exemptions
from the payment of duties, taxes,
fees, imposts and other charges
heretofore granted in favor of
government-owned or controlled
corporations including their
subsidiaries, are hereby withdrawn.
Sec. 2. The President of the
Philippines and/or the Minister of
Finance, upon the recommendation
of the Fiscal Incentives Review
Board created under Presidential
Decree No. 776, is hereby
empowered to restore, partially or
totally, the exemptions withdrawn
by Section 1 above, any applicable
tax and duty, taking into account,
among others, any or all of the
following:
1) The effect on the relative price
levels;
2) The relative contribution of the
corporation to the revenue
generation effort;
3) The nature of the activity in
which the corporation is engaged
in; or
4) In general the greater national
interest to be served.
xxx xxx xxx
Sec. 5. The provisions of
Presidential Decree No. 1177 as
well as all other laws, decrees,
executive orders, administrative
orders, rules, regulations or parts
thereof which are inconsistent with
this Decree are hereby repealed,
amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was
issued with a view to correct presidential restoration
or grant of tax exemption to other government and
private entities without benefit of review by the
Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree
Nos. 1931 and 1955 issued on June
11, 1984 and October 14, 1984,
respectively, withdrew the tax and
duty exemption privileges,
including the preferential tax
treatment, of government and
private entities with certain
exceptions, in order that the
 requirements of national economic a) those covered by the non- d) those enjoyed by the copper
development, in terms of fiscals impairment clause of the mining industry pursuant to the
and other resources, may be met Constitution; provisions of Letter of Instructions
more adequately; No. 1416;
b) those conferred by effective
xxx xxx xxx internation agreement to which the e) those conferred under the four
Government of the Republic of the basic codes namely:
WHEREAS, in addition to those Philippines is a signatory;
tax and duty exemption privileges (i) the Tariff and
were restored by the Fiscal c) those enjoyed by enterprises Customs Code, as
Incentives Review Board (FIRB), a registered with: amended;
number of affected entities,
government and private, had their (i) the Board of (ii) the National
tax and duty exemption privileges Investment Internal Revenue
restored or granted by Presidential pursuant to Code, as
action without benefit or review by Presidential amended;
the Fiscal Incentives Review Board Decree No. 1789,
(FIRB); as amended; (iii) the Local
Tax Code, as
xxx xxx xxx (ii) the Export amended;
Processing Zone
Since it was decided that: Authority, (iv) the Real
pursuant to Property Tax
[A]ssistance to government and Presidential Code, as
private entities may be better Decree No. 66 as amended;
provided where necessary by amended;
explicit subsidy and budgetary f) those approved
support rather than tax and duty (iii) the by the President
exemption privileges if only to Philippine upon the
improve the fiscal monitoring Veterans recommendation
aspects of government operations. Investment of the Fiscal
Development Incentives
It was thus ordered that: Corporation Review Board.
Industrial
Sec. 1. The Provisions of any Authority Sec. 2. The Fiscal Incentives
general or special law to the pursuant to Review Board created under
contrary notwithstanding, all tax Presidential Presidential Decree No. 776, as
and duty incentives granted to Decree No. 538, amended, is hereby authorized to:
government and private entities are was amended.
hereby withdrawn, except:
a) restore tax and/or duty
exemptions withdrawn hereunder
in whole or in part;
b) revise the scope and coverage of
tax and/or duty exemption that may
be restored;
c) impose conditions for the
restoration of tax and/or duty
exemption;
d) prescribe the date of period of
effectivity of the restoration of tax
and/or duty exemption;
e) formulate and submit to the
President for approval, a complete
system for the grant of subsidies to
deserving beneficiaries, in lieu of
or in combination with the
restoration of tax and duty
exemptions or preferential
treatment in taxation, indicating the
source of funding therefor, eligible
beneficiaries and the terms and
conditions for the grant thereof
taking into consideration the
international commitment of the
Philippines and the necessary
precautions such that the grant of
subsidies does not become the basis
for countervailing action.
Sec. 3. In the discharge of its
authority hereunder, the Fiscal
Incentives Review Board shall take
into account any or all of the
following considerations:
a) the effect on relative price levels;
b) relative contribution of the
beneficiary to the revenue
generation effort;
c) nature of the activity the
beneficiary is engaged; and
d) in general, the greater national
interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances,
rules and regulations or parts
thereof inconsistent with this
Executive Order are hereby
repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be
effective 48 upon the promulgation of the rules and
regulations, to be issued by the Ministry of
Finance. 49 Said rules and regulations were
promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the
15th day after promulgation 50 in the Official
Gasetter, 51 which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very
simplistic approach that all would-be lawyers, learn
in their TAXATION I course, which fro convenient
reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or
who bear the burden:
a. Direct Tax the where the
person supposed to pay the tax
really pays
it. WITHOUT transferring the
burden to someone else.
Examples: Individual income tax,
corporate income tax, transfer taxes
(estate tax, donor's tax), residence
tax, immigration tax
b. Indirect Tax that where the
tax is imposed upon
goods BEFORE reaching the
consumer who ultimately pays for
it, not as a tax, but as a part of the
purchase price.
Examples: the internal revenue
indirect taxes (specific tax,
percentage taxes, (VAT) and the
tariff and customs indirect taxes
(import duties, special import tax
and other dues) 52
IV
To simply matter, the issues raised by petitioner in his
motion for reconsideration can be reduced to the
following:
(1) What kind of tax exemption privileges did NPC
have?
(2) For what periods in time were these privileges
being enjoyed?
(3) If there are taxes to be paid, who shall pay for
these taxes?
 V bone of contention among the parties. For easy
Petitioner contends that P.D. No. 938 repealed the
indirect tax exemption of NPC as the phrase "all
forms of taxes etc.," in its section 10, amending
Section 13, R.A. No. 6395, as amended by P.D. No.
380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show
that it has been the lawmaker's intention that the NPC
was to be completely tax exempt from all forms of
taxes direct and indirect.
NPC's tax exemptions at first applied to the bonds it
was authorized to float to finance its operations upon
its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the
IBRD for foreign financing, any loans obtained were
to be completely tax exempt.
After the NPC was authorized to borrow from other
sources of funds aside issuance of bonds it was
again specifically exempted from all types of taxes
"to facilitate payment of its indebtedness." Even
when the ceilings for domestic and foreign
borrowings were periodically increased, the tax
exemption privileges of the NPC were maintained.
NPC's tax exemption from real estate taxes was,
however, specifically withdrawn by Rep. Act No.
987, as above stated. The exemption was, however,
restored by R.A. No. 6395.
Section 13, R.A. No. 6395, was very comprehensive
in its enumeration of the tax exemptions allowed
NPC. Its section 13(d) is the starting point of this
reference, it is reproduced as follows:
[T]he Corporation is hereby
declared exempt:
xxx xxx xxx
(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.
P.D. No. 380 added phrase "directly or indirectly" to
said Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees,
imposts, and all other charges
imposed directly or indirectly 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. (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a),
(b), (c) and (d) into one very simple paragraph as
follows:
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 one of
this Act, the Corporation, including
its subsidiaries, is hereby declared
exempt from the payment of ALL
FORMS OF taxes, duties, fees,
imposts as well as costs and service
fees including filing fees, appeal
bonds, supersedeas bonds, in any
court or administrative
proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that
Presidential Decree Nos. 380
and 938 were issued by one man,
acting as such the Executive and
Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees
were made by the same person, it
would have been very easy for him
to retain the same or similar
language used in P.D. No. 380 P.D.
No. 938 if his intention were to
preserve the indirect tax exemption
of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of
then President Marcos no matter what his fault were.
It should be noted that section 13, R.A. No. 6395,
provided for tax exemptions for the following items:
13(a) : court or administrative
proceedings;
13(b) : income, franchise, realty
taxes;
13(c) : import of foreign goods
required for its operations and
projects;
13(d) : petroleum products used in
generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into
the phrase "ALL FORMS OF TAXES, ETC.,",
included 13(a) under the "as well as" clause and
added PNOC subsidiaries as qualified for tax
exemptions.
This is the only conclusion one can arrive at if he has
read all the NPC laws in the order of enactment or
issuance as narrated above in part I hereof. President
Marcos must have considered all the NPC statutes
from C.A. No. 120 up to its latest amendments, P.D.
No. 380, P.D. No. 395 and P.D. No. 759, AND came
up 55 with a very simple Section 13, R.A. No. 6395,
as amended by P.D. No. 938.
One common theme in all these laws is that the NPC
must be enable to pay its indebtedness 56 which, as of
P.D. No. 938, was P12 Billion in total domestic
indebtedness, at any one time, and U$4 Billion in
total foreign loans at any one time. The NPC must be
and has to be exempt from all forms of taxes if this
goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was
raised to P8 Billion. It must be remembered that to
pay the government share in its capital stock P.D. No.
758 was issued mandating that P200 Million would
be appropriated annually to cover the said unpaid
subscription of the Government in NPC's authorized
capital stock. And significantly one of the sources of
this annual appropriation of P200 million is TAX
MONEY accruing to the General Fund of the
Government. It does not stand to reason then that
former President Marcos would order P200 Million
to be taken partially or totally from tax money to be
used to pay the Government subscription in the NPC,
on one hand, and then order the NPC to pay all its
indirect taxes, on the other.
The above conclusion that then President Marcos
lumped up Sections 13 (b), 13 (c) and (d) into the
phrase "All FORMS OF" is supported by the fact that
he did not do the same for the tax exemption
provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section
8(b), R.A. No. 6395, reads as follows:
The loans, credits and indebtedness
contracted under this subsection
and the payment of the principal,
interest and other charges thereon,
as well as the importation of
machinery, equipment, materials
and supplies by the Corporation,
paid from the proceeds of any loan,
credit or indebtedness incurred
under this Act, shall also be exempt
from all taxes, fees, imposts, other
charges and restrictions, including
import restrictions, by the Republic
of the Philippines, or any of its
agencies and political
subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness
contracted this subsection and the
payment of the principal, interest
and other charges thereon, as well
as the importation of machinery,
equipment, materials, supplies and
services, by the Corporation, paid
from the proceeds of any loan,
credit or indebtedness incurred
under this Act, shall also be exempt
from all direct and indirect taxes,
fees, imposts, other charges and
restrictions, including import
restrictions previously and
presently imposed, and to be
imposed by the Republic of the
Philippines, or any of its agencies
and political
subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax
exemption provision in Section 8 (b), R.A. No. 6395,
as amended by P.D. No. 380, still stands. Since the
subject matter of this particular Section 8 (b) had to
do only with loans and machinery imported, paid for
from the proceeds of these foreign loans, THERE
WAS NO OTHER SUBJECT MATTER TO LUMP IT
UP WITH, and so, the tax exemption stood as is
with the express mention of "direct
and indirect" tax exemptions. And this "direct and
indirect" tax exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be imposed" in the
future surely, an indication that the lawmakers
wanted the NPC to be exempt from ALL FORMS of
taxes direct and indirect.
It is crystal clear, therefore, that NPC had been
granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New
Society, the Government decided to rationalize
government receipts and expenditures by formulating
and implementing a National Budget. 60 The NPC,
being a government owned and controlled
corporation had to be shed off its tax exemption
status privileges under P.D. No. 1177. It was,
however, allowed to ask for a subsidy from the
General Fund in the exact amount of taxes/duties due.
Actually, much earlier, P.D. No. 882 had already
repealed NPC's tax-free importation privileges. It
allowed, however, NPC to appeal said repeal with the
Office of the President and to avail of tax-free
importation privileges under its Section 1, subject to
the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed
that the NPC, being the special creation of the State,
was allowed to continue its tax-free importations.
This Court notes that petitioner brought to the
attention of this Court, the matter of the abolition of
NPC's tax exemption privileges by P.D. No.
1177 61 only in his Common Reply/Comment to
private Respondents' "Opposition" and "Comment" to
Motion for Reconsideration, four (4) months AFTER
the motion for Reconsideration had been filed.
During oral arguments heard on July 9, 1992, he
proceeded to discuss this tax exemption withdrawal
as explained by then Secretary of Justice Vicente
Abad Santos in opinion No. 133 (S '77). 62 A careful
perusal of petitioner's senate Blue Ribbon Committee
Report No. 474, the basis of the petition at bar, fails
to yield any mention of said P.D. No. 1177's effect on
NPC's tax exemption privileges. 63 Applying by
analogy Pulido vs. Pablo, 64 the court declares that
the matter of P.D. No. 1177 abolishing NPC's tax
exemption privileges was not seasonably
invoked 65 by the petitioner.
Be that as it may, the Court still has to discuss the
effect of P.D. No. 1177 on the NPC tax exemption
privileges as this statute has been reiterated twice in
P.D. No. 1931. The express repeal of tax privileges of
any government-owned or controlled corporation
(GOCC). NPC included, was reiterated in the fourth
whereas clause of P.D. No. 1931's preamble. The
subsidy provided for in Section 23, P.D. No. 1177,
being inconsistent with Section 2, P.D. No. 1931, was
deemed repealed as the Fiscal Incentives Revenue
Board was tasked with recommending the partial or
total restoration of tax exemptions withdrawn by
Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not
NPC asked for the subsidy contemplated in Section
23, P.D. No. 1177. Considering, however, that under
Section 16 of P.D. No. 1177, NPC had to submit to
the Office of the President its request for the P200
million mandated by P.D. No. 758 to be appropriated
annually by the Government to cover its unpaid
subscription to the NPC authorized capital stock and
that under Section 22, of the same P.D. No. NPC had
to likewise submit to the Office of the President its
internal operating budget for review due to capital
inputs of the government (P.D. No. 758) and to the
national government's guarantee of the domestic and
foreign indebtedness of the NPC, it is clear that NPC
was covered by P.D. No. 1177.
There is reason to believe that NPC availed of
subsidy granted to exempt GOCC's that suddenly
found themselves having to pay taxes. It will be
noted that Section 23, P.D. No. 1177, mandated that
the Secretary of Finance and the Commissioner of the
Budget had to establish the necessary procedure to
accomplish the tax payment/tax subsidy scheme of
the Government. In effect, NPC, did not put any cash
to pay any tax as it got from the General Fund the
amounts necessary to pay different revenue collectors
for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner
submits:
[T]hat with the enactment of P.D.
No. 1177 on July 30, 1977, the
NPC lost all its duty and tax
exemptions, whether direct or
indirect. And so there was nothing
to be withdrawn or to be restored
under P.D. No. 1931, issued on
June 11, 1984. This is evident from
sections 1 and 2 of said P.D. No.
1931, which reads:
"Section 1. The section 1 above. . taken to be a continuation of the
provisions of .. former act or acts, although the
special or general former act or acts may be expressly
law to the Hence, P.D. No. 1931 did not have repealed by the revised and
contrary any effect or did it change NPC's consolidated act; and all rights
notwithstanding, status. Since it had already lost all and liabilities under the former act
all exemptions its tax exemptions privilege with or acts are preserved and may be
from the payment the issuance of P.D. No. 1177 seven enforced. 66
of duties, taxes, (7) years earlier or on July 30,
fees, imports and 1977, there were no tax exemptions the Court rules that when P.D. No. 1931 basically
other charges to be withdrawn by section 1 which reenacted in its Section 1 the first half of Section 23,
heretofore could later be restored by the P.D. No. 1177, on withdrawal of tax exemption
granted in favor Minister of Finance upon the privileges of all GOCC's said Section 1, P.D. No.
of government- recommendation of the FIRB under 1931 was deemed to be a continuation of the first half
owned or Section 2 of P.D. No. 1931. of Section 23, P.D. No. 1177, although the second
controlled Consequently, FIRB resolutions half of Section 23, P.D. No. 177, on the subsidy
corporations No. 10-85, and 1-86, were all scheme for former tax exempt GOCCs had been
including their illegally and validly issued since expressly repealed by Section 2 with its institution of
subsidiaries are FIRB acted beyond their statutory the FIRB recommendation of partial/total restoration
hereby authority by creating and not of tax exemption privileges.
withdrawn." merely restoring the tax exempt
status of NPC. The same is true for The NPC tax privileges withdrawn by Section 1. P.D.
Sec. 2. The FIRB Res. No. 17-87 which No. 1931, were, therefore, the same NPC tax
President of the restored NPC's tax exemption exemption privileges withdrawn by Section 23, P.D.
Philippines under E.O. No. 93 which likewise No. 1177. NPC could no longer obtain a subsidy for
and/or the abolished all duties and tax the taxes it had to pay. It could, however, under P.D.
Minister of exemptions but allowed the No. 1931, ask for a total restoration of its tax
Finance, upon the President upon recommendation of exemption privileges, which, it did, and the same
recommendation the FIRB to restore those abolished. were granted under FIRB Resolutions Nos. 10-
of the Fiscal 85 67 and 1-86 68 as approved by the Minister of
Incentives The Court disagrees. Finance.
Review Board
created under Applying by analogy the weight of authority that: Consequently, contrary to petitioner's submission,
P.D. No. 776, is FIRB Resolutions Nos. 10-85 and 1-86 were both
hereby When a revised and consolidated legally and validly issued by the FIRB pursuant to
empowered to act re-enacts in the same or P.D. No. 1931. FIRB did not created NPC's tax
restore partially substantially the same terms the exemption status but merely restored it. 69
or totally, the provisions of the act or acts so
exemptions revised and consolidated, the Some quarters have expressed the view that P.D. No.
withdrawn by revision and consolidation shall be 1931 was illegally issued under the now rather
infamous Amendment No. 6 70 as there was no
showing that President Marcos' encroachment on
legislative prerogatives was justified under the then
prevailing condition that he could legislate "only if
the Batasang Pambansa 'failed or was unable to act
inadequately on any matter that in his judgment
required immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then
President Marcos could issue decrees not only when
the Interim Batasang Pambansa failed or was unable
to act adequately on any matter for any reason that in
his (Marcos') judgment required immediate action,
but also when there existed a grave emergency or a
threat or thereof. It must be remembered that said
Presidential Decree was issued only around nine (9)
months after the Philippines unilaterally declared a
moratorium on its foreign debt payments 72 as a result
of the economic crisis triggered by loss of confidence
in the government brought about by the Aquino
assassination. The Philippines was then trying to
reschedule its debt payments. 73 One of the big
borrowers was the NPC 74 which had a US$ 2.1
billion white elephant of a Bataan Nuclear Power
Plant on its back. 75 From all indications, it must have
been this grave emergency of a debt rescheduling
which compelled Marcos to issue P.D. No. 1931,
under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution
"no law granting a tax exemption shall be passed
without the concurrence of a majority of all the
members of the Batasang Pambansa" 77 does not
apply as said P.D. No. 1931 was not passed by the
Interim Batasang Pambansa but by then President
Marcos under His Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then
President Marcos under his Amendment No. 6
authority.
Under E.O No. 93 (S'86) NPC's tax exemption
privileges were again clipped by, this time, President
Aquino. Its section 2 allowed the NPC to apply for
the restoration of its tax exemption privileges. The
same was granted under FIRB Resolution No. 17-
87 78 dated June 24, 1987 which restored NPC's tax
exemption privileges effective, starting March 10,
1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the
President on October 5, 1987. 79 There is no
indication, however, from the records of the case
whether or not similar approvals were given by then
President Marcos for FIRB Resolutions Nos. 10-85
and 1- 86. This has led some quarters to believe that a
"travesty of justice" might have occurred when the
Minister of Finance approved his own
recommendation as Chairman of the Fiscal Incentives
Review Board as what happened in Zambales
Chromate vs. Court of Appeals 80 when the Secretary
of Agriculture and Natural Resources approved a
decision earlier rendered by him when he was the
Director of Mines, 81 and in Anzaldo vs.
Clave 82 where Presidential Executive Assistant Clave
affirmed, on appeal to Malacaang, his own decision
as Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to
whether one can talk about "due process" being
violated when FIRB Resolutions Nos. 10-85 and 1-86
were approved by the Minister of Finance when the
same were recommended by him in his capacity as
Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different
parties were involved: mining groups and scientist-
doctors, respectively. Thus, there was a need for
procedural due process to be followed.
In the case of the tax exemption restoration of NPC,
there is no other comparable entity not even a
single public or private corporation whose rights
would be violated if NPC's tax exemption privileges
were to be restored. While there might have been a
MERALCO before Martial Law, it is of public
knowledge that the MERALCO generating plants
were sold to the NPC in line with the State policy that
NPC was to be the State implementing arm for the
electrification of the entire country. Besides,
MERALCO was limited to Manila and its environs.
And as of 1984, there was no more MERALCO as
a producer of electricity which could have
objected to the restoration of NPC's tax exemption
privileges.
It should be noted that NPC was not asking to be
granted tax exemption privileges for the first time. It
was just asking that its tax exemption privileges be
restored. It is for these reasons that, at least in NPC's
case, the recommendation and approval of NPC's tax
exemption privileges under FIRB Resolution Nos.
10-85 and 1-86, done by the same person acting in
his dual capacities as Chairman of the Fiscal
Incentives Review Board and Minister of Finance,
respectively, do not violate procedural due process.
While as above-mentioned, FIRB Resolution No. 17-
87 was approved by President Aquino on October 5,
1987, the view has been expressed that President
Aquino, at least with regard to E.O. 93 (S'86), had no
authority to sub-delegate to the FIRB, which was
allegedly not a delegate of the legislature, the power
delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President
Aquino was exercising both Executive and
Legislative powers. Thus, there was no power
delegated to her, rather it was she who was delegating
her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the
legislature. Clearly, she was not sub-delegating her
power.
And E.O. No. 93 (S'86), as a delegating law, was
complete in itself it set forth the policy to be
carried out 85 and it fixed the standard to which the
delegate had to conform in the performance of his
functions, 86 both qualities having been enunciated by
this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC
had its tax exemption privileges restored from June
11, 1984 up to the present.
VII
The next question that projects itself is who pays
the tax?
The answer to the question could be gleamed from
the manner by which the Commissaries of the Armed
Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the
Armed of the Philippines, and their defendants but
groceries and other goods free of all taxes and duties
if bought from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably
treat the unchargeable specific, ad valorem and other
taxes on the goods earmarked for AFP Commissaries
as an added cost of operation and distribute it over
the total units of goods sold as it would any other
cost. Thus, even the ordinary supermarket buyer
probably pays for the specific, ad valorem and other
taxes which theses suppliers do not charge the AFP
Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that
private respondents-oil companies have to absorb the
taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as
May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the
National Power Corporation from
"all taxes, duties, fees, imposts,
charges, and restrictions of the
Republic of the Philippines and its
provinces, cities, and
municipalities." This exemption is
broad enough to include all taxes,
whether direct or indirect, which
the National Power Corporation
may be required to pay, such as the
specific tax on petroleum products.
That it is indirect or is of no
amount [should be of no moment],
for it is the corporation that
ultimately pays it. The view which
refuses to accord the exemption
because the tax is first paid by the
seller disregards realities and gives
more importance to form than to
substance. Equity and law always
exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to
be construed strictly but not so
grudgingly as knowledge that many
impositions taxpayers have to pay
are in the nature of indirect taxes.
To limit the exemption granted the
National Power Corporation to
direct taxes notwithstanding the
general and broad language of the
statue will be to thwrat 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.
(Emphasis supplied)
In view of all the foregoing, the Court rules and
declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon
said bunker fuel oil sold to NPC. By the very nature
of indirect taxation, the economic burden of such
taxation is expected to be passed on through the
channels of commerce to the user or consumer of the
goods sold. Because, however, the NPC has been
exempted from both direct and indirect taxation, the
NPC must beheld exempted from absorbing the
economic burden of indirect taxation. This means, on
the one hand, that the oil companies which wish to
sell to NPC absorb all or part of the economic burden
of the taxes previously paid to BIR, which could they
shift to NPC if NPC did not enjoy exemption from
indirect taxes. This means also, on the other hand,
that the NPC may refuse to pay the part of the
"normal" purchase price of bunker fuel oil which
represents all or part of the taxes previously paid by
the oil companies to BIR. If NPC nonetheless
purchases such oil from the oil companies because
to do so may be more convenient and ultimately less
costly for NPC than NPC itself importing and hauling
and storing the oil from overseas NPC is entitled
to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the
tax already paid by the oil company-vendor to the
BIR.
It should be noted at this point in time that the whole
issue of who WILL pay these indirect taxes HAS
BEEN RENDERED moot and academic by E.O. No.
195 issued on June 16, 1987 by virtue of which
the ad valorem tax rate on bunker fuel oil was
reduced to ZERO (0%) PER CENTUM. Said E.O.
no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b)
OF SECTION 128 OF THE
NATIONAL INTERNAL
REVENUE CODE, AS
AMENDED BY REVISING THE
EXCISE TAX RATES OF
CERTAIN PETROLEUM
PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section
128 of the National Internal
Revenue Code, as amended, is
hereby amended to read as follows:
Par. (b) For products subject
to ad valorem tax only:
PRODUCT AD VALOREM TAX
RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as
bunker oil and on similar fuel oils
having more or less the same
generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall
take effect immediately.
Done in the city of Manila, this
17th day of June, in the year of Our
Lord, nineteen hundred and eighty-
seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to
NPC without having to worry about who is going to
bear the economic burden of the ad valorem taxes.
What this Court will now dispose of are petitioner's
complaints that some indirect tax money has been
illegally refunded by the Bureau of Internal Revenue
to the NPC and that more claims for refunds by the
NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the
Bureau of Internal Revenue in favor of the NPC last
July 7, 1986 for P58.020.110.79 which were for
"erroneously paid specific and ad valorem taxes
during the period from October 31, 1984 to April 27,
1985. 91 Petitioner asks Us to declare this Tax Credit
Memo illegal as the PNC did not have indirect tax
exemptions with the enactment of P.D. No. 938. As
We have already ruled otherwise, the only questions
left are whether NPC Is entitled to a tax refund for
the tax component of the price of the bunker fuel oil
purchased from Caltex (Phils.) Inc. and whether the
Bureau of Internal Revenue properly refunded the
amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984
withdrawing the
tax exemptions of all GOCCs NPC included, it
was only on May 8, 1985 when the BIR issues its
letter authority to the NPC authorizing it to withdraw
tax-free bunker fuel oil from the oil companies
pursuant to FIRB Resolution No. 10-85. 92 Since the
tax exemption restoration was retroactive to June 11,
1984 there was a need. therefore, to recover said
amount as Caltex (PhiIs.) Inc. had already paid the
BIR the specific and ad valorem taxes on the bunker
oil it sold NPC during the period above indicated and
had billed NPC correspondingly. 93 It should be noted
that the NPC, in its letter-claim dated September 11,
1985 to the Commissioner of the Bureau of Internal
Revenue DID NOT CATEGORICALLY AND
UNEQUIVOCALLY STATE that itself paid the
P58.020,110.79 as part of the bunker fuel oil price it
purchased from Caltex (Phils) Inc. 94
The law governing recovery of erroneously or
illegally, collected taxes is section 230 of the
National Internal Revenue Code of 1977, as amended
which reads as follows:
Sec. 230. Recover of tax
erroneously or illegally collected.
No suit or proceeding shall be
maintained in any court for the
recovery of any national internal
revenue tax hereafter alleged to
have been erroneously or illegally
assessed or collected, or of any
penalty claimed to have been
collected without authority, or of
any sum alleged to have been
excessive or in any Manner
wrongfully collected. until a claim
for refund or credit has been duly
filed with the Commissioner; but
such suit or proceeding may be
maintained, whether or not such
 tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or
proceeding shall be begun after the
expiration of two years from the
date of payment of the tax or
penalty regardless of any
supervening cause that may arise
after payment; Provided, however,
That the Commissioner may, even
without a written claim therefor,
refund or credit any tax, where on
the face of the return upon which
payment was made, such payment
appears clearly, to have been
erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79
on September 11, 1985, 95 the Commissioner
correctly issued the Tax Credit Memo in view of
NPC's indirect tax exemption.
Petitioner, however, asks Us to restrain the
Commissioner from acting favorably on NPC's claim
for P410.580,000.00 which represents specific
and ad valorem taxes paid by the oil companies to the
BIR from June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and
annexes attached thereto does not reveal when the
alleged claim for a P410,580,000.00 tax refund was
filed. It is only stated In paragraph No. 2 of the Deed
of Assignment 97 executed by and between NPC and
Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a
pending tax credit claim with the
Bureau of Internal Revenue
amounting to P442,887,716.16.
P58.020,110.79 of which is due to
Assignor's oil purchases from the
Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a
"Mexican standoff." We cannot restrain the BIR from
refunding said amount because of Our ruling that
NPC has both direct and indirect tax exemption
privileges. Neither can We order the BIR to refund
said amount to NPC as there is no pending petition
for review on certiorari of a suit for its collection
before Us. At any rate, at this point in time, NPC can
no longer file any suit to collect said amount EVEN
IF lt has previously filed a claim with the BIR
because it is time-barred under Section 230 of the
National Internal Revenue Code of 1977. as
amended, which states:
In any case, no such suit or
proceeding shall be begun after the
expiration of two years from the
date of payment of the tax or
penalty REGARDLESS of any
supervening cause that may arise
after payment. . . . (Emphasis
supplied)
The date of the Deed of Assignment is June 6. 1986.
Even if We were to assume that payment by NPC for
the amount of P410,580,000.00 had been made on
said date. it is clear that more than two (2) years had
already elapsed from said date. At the same time, We
should note that there is no legal obstacle to the BIR
granting, even without a suit by NPC, the tax credit
or refund claimed by NPC, assuming that NPC's
claim had been made seasonably, and assuming the
amounts covered had actually been paid previously
by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the
Motion for Reconsideration of petitioner is hereby
DENIED for lack of merit and the decision of this
Court promulgated on May 31, 1991 is hereby
AFFIRMED.
SO ORDERED.