FIRST DIVISION

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.

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.1âwphi1.nêt

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:

P1,679,155.00
Taxable sale/receipt ===========
=

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 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.

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 in the business of providing services to Philamlife and its affiliates. COMASERCO was
established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates,
and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged
in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO
averred that since it was not engaged in business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner

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

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall
not be included in the payment as there was no compromise agreement entered into between
petitioner and respondent with respect to the value-added tax deficiency.5

On July 26, 1995, respondent filed with the Court of Appeals, a 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:

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,7where 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 certiorariassailing 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.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273
in 1988, provides that:

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

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

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the
supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking or project." 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 realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service for a
fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1

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

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.

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.1âwphi1.nêt

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

HIRD DIVISION

COMMISSIONER OF G.R. No. 152609

INTERNAL REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
AMERICAN EXPRESS
INTERNATIONAL, INC. Promulgated:
(PHILIPPINE BRANCH),
Respondent. June 29, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

s 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

A
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 BangkoSentral 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 Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2002

Decision[2] of 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 (Amex-HK) and is engaged
primarily to facilitate the collections of Amex-HK receivables from card members situated
in the Philippines and payment to service establishments in the Philippines.

Amex Philippines registered itself with the Bureau of Internal Revenue (BIR),
Revenue District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer
effective March 1988 and was issued VAT Registration Certificate No. 088445 bearing
VAT Registration No. 32A-3-004868. For the period January 1, 1997 to December 31,
1997, [respondent] filed with the BIR its quarterly VAT returns as follows:

Exhibit Period Covered Date Filed

D 1997 1st Qtr. April 18, 1997

F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998

On March 23, 1999, however, [respondent] amended the aforesaid returns and
declared the following:

Taxable Output Zero-rated Domestic Input

Exh 1997 Sales VAT Sales Purchases VAT

I 1st qtr P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23

J 2nd qtr 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21

Total P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43

On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund
of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived
at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66
and P6,799.43, respectively. [Respondent] cites as basis therefor, Section 110 (B) of the
1997 Tax Code, to state:

Section 110. Tax Credits. -

x xxxxxxxx

(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. Any
input tax attributable to the purchase of capital goods or to zero-rated
sales by a VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, subject to the provisions of
Section 112.

There being no immediate action on the part of the [petitioner], [respondents]

petition was filed on April 15, 1999.

In support of its Petition for Review, the following arguments were raised by
[respondent]:

A. Export sales by a VAT-registered person, the consideration

for which is paid for in acceptable foreign currency inwardly remitted to
the Philippines and accounted for in accordance with existing regulations
of the BangkoSentral ng Pilipinas, are subject to [VAT] at zero percent
(0%). According to [respondent], being a VAT-registered entity, it is
subject to the VAT imposed under Title IV of the Tax Code, to wit:

Section 102.(sic) Value-added tax on sale of

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

(1) x xx
(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 xx.

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 xx. [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 xx. [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 xx.

(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 decision[7] 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 BangkoSentral 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 Code[11] 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 xx.

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 xx persons engaged in milling, processing,
manufacturing or repacking goods for others; x xx services of banks, non-bank financial
intermediaries and finance companies; x xx 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:

x xxxxxxxx
(3) The supply of x xx 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 xx any such knowledge or information as is mentioned in
subparagraph (3);
x xxxxxxxx
(6) The supply of technical advice, assistance or services
rendered in connection with technical management or administration of
any x xx commercial undertaking, venture, project or scheme;

x xxxxxxxx

"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 BangkoSentral 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];

x xxxxxxxx
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 banks[18] in general, or by non-banks in particular, refers to any card x

xx or other credit device existing for the purpose of obtaining x xx goods x xx or services x xx 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 drafts [23] 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 credit [26]

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 charges [27]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 office[29] 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. [37] Furthermore, 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 person[40] 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 consumption[41] expressed as a percentage of the value added to goods or services [42] purchased by

the producer or taxpayer.[43] As an indirect tax[44] on services,[45] its main object is the transaction[46] itself or, more

concretely, the performance of all kinds of services[47] 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.[51] 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 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 xx 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 jurisdiction [60] to impose the VAT.[61] Performed 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;[65] much 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.

x xxxxxxxx

(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.

x xxxxxxxx
(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.[74]

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, [75] 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 [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 xx 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 xx of x xx any of the rulings x xx promulgated by the Commissioner

shall not be given retroactive application if the revocation x xx will be prejudicial to the taxpayers. [84]

It is also basic in law that no x xx rule x xx shall be given retrospective effect [85] 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 246[87] of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code [88] and not bound by predecessors acts or

rulings, the BIR commissioner may render a different construction to a statute [89] 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.

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 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.

x xxxxxxxx

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 mentioned earlier are, therefore, re-enforced. When 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.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division
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
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination
manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of
NAPOCOR’s 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 Consortium’s bank
accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent]
in foreign currency inwardly remitted to the Philippines through the banking system.

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

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among
others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as
follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

 1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its
case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to
read as follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services by
a resident to a non-resident foreign client such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP."

x xxxxxxxxx.

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

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered
by BWSCMI is subject to VAT at zero percent (0%)."

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

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

The Ruling of the Court of Tax Appeals

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

[Respondent’s] 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
BangkoSentral 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 xx 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, [respondent’s] sale of services to the Consortium
is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

x xxx

The zero-rating of [respondent’s] 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 xx.

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 xx

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

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

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s 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,
respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT. 8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98,
respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s 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 xx 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 petitioner’s 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 petitioner’s 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 petitioner’s 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
respondent’s 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 respondent’s
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 BangkoSentral 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 BangkoSentral 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, respondent’s services need not be "destined to be
consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

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

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those
not doing business in the Philippines can be required under BSP rules 20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a domestic transaction, where
the provider and recipient of services are both doing business in the Philippines, the BSP cannot require
any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient
of services is doing business outside the Philippines. Under BSP rules, 21 the proceeds of export sales
must be reported to the BangkoSentral 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 respondent’s services is the Consortium which is a joint-venture doing
business in the Philippines. While the Consortium’s 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 Consortium’s operation and maintenance of NAPOCOR’s 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, respondent’s 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 NAPOCOR’s 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 NAPOCOR’s
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.

Respondent’s reliance on the ruling in American Express 26 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 xx x 27 (Emphasis
supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the
Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s 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%)." Respondent’s reliance on these BIR rulings binds
petitioner.

Petitioner’s filing of his Answer before the CTA challenging respondent’s 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 respondent’s 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 petitioner’s Answer dated 2 March 2000 before the CTA contesting
respondent’s claim for refund, respondent’s services shall be subject to the regular 10% VAT.31 Such
filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE
Petitioner,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,
FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:

July 28, 2006

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

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. [3] On 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 services[16] 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. [20] We

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 Charter[22] 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 xx. 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. [25] Indeed, 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.
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 xx 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 xx 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 xx;
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/refund.
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
BangkoSentral 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. Ubilex non distinguit, necnosdistingueredebemus. 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. Exceptiofirmatregulam 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. Quandoaliquidprohibetur ex
directoprohibetur 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 xx 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 xx 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 legisest 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 xx
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 xx through the establishment,
among others, of special economic zones x xx that shall effectively attract legitimate and productive
foreign investments.[113]
Under EO 226, the State shall encourage x xx foreign investments in industry x xx which shall x xx
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 xx; x xx increase economic
activity; and x xx 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 xx 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, grantiaargumenti 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 xx Some of the incentives that this bill provides are exemption from national and local taxes; x xx
tax credit for locally-sourced inputs x xx.

x xxxxxxxx
MR. DEL MAR. x xx 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 xx 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.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 180173 April 6, 2011

MICROSOFT PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition1 for review on certiorari assailing the Decision2 dated 24 October 2007 of
the Court of Tax Appeals (CTA) En Banc in CTA EB No. 258, which affirmed the Decision 3 dated 31
August 2006 and Resolution4 dated 8 January 2007 of the CTA Second Division in CTA Case No. 6681.

The Facts

Petitioner Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer duly registered with
the Bureau of Internal Revenue (BIR). Microsoft renders marketing services to Microsoft Operations Pte
Ltd. (MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-resident foreign corporations. The
services are paid for in acceptable foreign currency and qualify as zero-rated sales for VAT purposes
under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of 1997,5 as amended. Section
108(B)(2) states:

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 x xx;

(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 BangkoSentral ng Pilipinas (BSP); x xx

For the year 2001, Microsoft yielded total sales in the amount of ₱261,901,858.99. Of this amount,
₱235,724,614.68 pertain to sales derived from services rendered to MOP and MLI while ₱26,177,244.31
refer to sales to various local customers. Microsoft paid VAT input taxes in the amount of ₱11,449,814.99
on its domestic purchases of taxable goods and services.

On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT input taxes in the
amount of ₱11,449,814.99 with the BIR. The administrative claim for tax credit was filed within two years
from the close of the taxable quarters when the zero-rated sales were made.

On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with the CTA. 6 Microsoft
claimed to be entitled to a refund of unutilized input VAT attributable to its zero-rated sales and prayed
that judgment be rendered directing the claim for tax credit or refund of VAT input taxes for taxable year
2001.

On 16 June 2003, respondent Commissioner of Internal Revenue (CIR) filed his answer and prayed for
the dismissal of the petition for review.

In a Decision dated 31 August 2006, the CTA Second Division denied the claim for tax credit of VAT input
taxes. The CTA explained that Microsoft failed to comply with the invoicing requirements of Sections 113
and 237 of the NIRC as well as Section 4.108-1 of Revenue Regulations No. 7-957 (RR 7-95). The CTA
stated that Microsoft's official receipts do not bear the imprinted word "zero-rated" on its face, thus, the
official receipts cannot be considered as valid evidence to prove zero-rated sales for VAT purposes.

Microsoft filed a motion for reconsideration which was denied by the CTA Second Division in a Resolution
dated 8 January 2007.

Microsoft then filed a petition for review with the CTA En Banc.8 In a Decision dated 24 October 2007, the
CTA En Banc denied the petition for review and affirmed in toto the Decision dated 31 August 2006 and
Resolution dated 8 January 2007 of the CTA Second Division. The CTA En Banc found no new matters
that have not been considered and passed upon by the CTA Second Division and stated that the petition
had only been a mere rehash of the arguments earlier raised.

Hence, this petition.

The Issue

The main issue is whether Microsoft is entitled to a claim for a tax credit or refund of VAT input taxes on
domestic purchases of goods or services attributable to zero-rated sales for the year 2001 even if the
word "zero-rated" is not imprinted on Microsoft's official receipts.

The Court’s Ruling

The petition lacks merit.

Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 do not provide
that failure to indicate the word "zero-rated" in the invoices or receipts would result in the outright
invalidation of these invoices or receipts and the disallowance of a claim for tax credit or refund.

At the outset, a tax credit or refund, like tax exemption, is strictly construed against the taxpayer. 9 The
taxpayer claiming the tax credit or refund has the burden of proving that he is entitled to the refund or
credit, in this case VAT input tax, by submitting evidence that he has complied with the requirements laid
down in the tax code and the BIR's revenue regulations under which such privilege of credit or refund is
accorded.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VAT-registered
persons state:

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information shall be
indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. x xx

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 (₱100.00) or more, or regardless of the 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 internal revenue tax from
compliance with the provisions of this Section.

Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which must appear
on the face of the official receipts or invoices for every sale of goods by VAT-registered persons. At the
time Microsoft filed its claim for credit of VAT input tax, RR 7-95 was already in effect. The provision
states:

Sec. 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; and

6. the invoice value or consideration.

x xx

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 a "VAT invoice." All purchases covered by
invoices other than a "VAT invoice" shall not give rise to any input tax. (Emphasis supplied)

The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or services
attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section
4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases covered
by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's invoice, lacking
the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input tax.

The subsequent enactment of Republic Act No. 933710 on 1 November 2005 elevating provisions of RR
7-95 into law merely codified into law administrative regulations that already had the force and effect of
law. Such codification does not mean that prior to the codification the administrative regulations were not
enforceable.

We have ruled in several cases11 that the printing of the word "zero-rated" is required to be placed on
VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or refund.
In Panasonic v. Commissioner of Internal Revenue,12 we held that 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 is actually paid. Absent such word, the government may be refunding
taxes it did not collect.

Here, both the CTA Second Division and CTA En Banc found that Microsoft's receipts did not indicate the
word "zero-rated" on its official receipts. The findings of fact of the CTA are not to be disturbed unless
clearly shown to be unsupported by substantial evidence. 13 We see no reason to disturb the CTA's
findings. Indisputably, Microsoft failed to comply with the invoicing requirements of the NIRC and its
implementing revenue regulation to claim a tax credit or refund of VAT input tax for taxable year 2001.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24 October 2007 of the Court of
Tax Appeals En Banc in CTA EB No. 258.

SO ORDERED.
SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 178697

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

SONY PHILIPPINES, INC., Promulgated:

Respondent. November 17, 2010

X ---------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007
Resolution of the Court of Tax Appeals En Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004
Decision of the CTA-First Division[2] which, in turn, partially granted the petition for review of respondent Sony
Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the amount of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing
certain revenue officers to examine Sonys books of accounts and other accounting records regarding revenue taxes
for the period 1997 and unverified prior years. On December 6, 1999, a preliminary assessment for 1997
deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the
CIR issued final assessment notices, the formal letter of demand and the details of discrepancies. [4] Said details of
the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due P 7,958,700.00

Add: Penalties

Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41

Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due P 1,416,976.90

Add: Penalties

Interest up to 3-31-2000 P 550,485.82

Compromise 25,000.00 575,485.82

Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 359,177.80

Interest up to 3-31-2000 87,580.34

Compromise 16,000.00 462,758.14

Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 1,729,690.71

Interest up to 3-31-2000 508,783.07

Compromise 50,000.00 2,288,473.78

Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax Due P

Add: Penalties

25 % Surcharge P 8,865.34

Interest up to 3-31-2000 58.29

Compromise 2,000.00 10,923.60

Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

 Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony

submitted relevant documents in support of its protest on the 16 th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting
documents to the CIR, Sony filed a petition for review before the CTA. [7]

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As
regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sonys motor vehicles and
on professional fees paid to general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-
First Division, however, disallowed the EWT assessment on rental expense since it found that the total rental deposit
of P10,523,821.99 was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late payment of VAT
on royalties, for late remittance of final withholding tax on royalty as of December 1997 and for the late remittance
of EWT by some of Sonys branches.[8] In sum, the CTA-First Division partly granted Sonys petition by cancelling
the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the penalties. Thus,
the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.

Respondent is ORDERED to CANCEL and WITHDRAW the deficiency assessment for
value-added tax for 1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of internal revenue taxes are
UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency
expanded withholding tax in the amount of P1,035,879.70 and the following penalties for
late remittance of internal revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section
249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the following grounds in support
thereof:

A. The Honorable Court committed reversible error in holding that petitioner is not
liable for the deficiency VAT in the amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding
tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the

withholding tax assessment with respect to the 5% withholding tax on rental
deposit in the amount of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of
final withholding tax on royalties covering the period January to March 1998 was
filed on time.[10]
 On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR filed a
petition for review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of P2,894,797.00 should be

subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax
on rental deposit in the amount of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the
period January to March 1998 was filed outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIRs
petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it raised
before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT

LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN

THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN

THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH

RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING

TAX ON ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS
FILED ON TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently
filed a manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court
resolved to give due course to the petition and to decide the case on the basis of the pleadings filed. [13]
The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and unverified prior years, should be
understood to mean the fiscal year ending in March 31, 1998. [14]The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine
the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of
tax.[15]The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant
authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement.

(A)Examination of Returns and Determination of tax Due. After a return has

been filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination of any taxpayer. x
xx [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In
the absence of such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior years. For said reason, the CIR
acting through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment
they arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31,
1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period should
be covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should
have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase and
unverified prior years, violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
pertinent portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable
year. The practice of issuing L/As covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A. [16] [Emphasis
supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the
CIRs argument, that Sonys advertising expense could not be considered as an input VAT credit because the same
was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred
any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said
advertising expense should be for the account of SIS, and not Sony. [17]

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should have
been realized from the advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997 Tax Code
that an advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no
less than CIRs own witness, Revenue Officer Antonio Aluquin. [20] There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter
paid for the same.[21] Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came
from is another matter all together but will definitely not change said fact.
 The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus,
taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to
our client a subsidy equivalent to the latters advertising expenses will not affect the
validity of the input taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that our client is not
subject to VAT on the subsidy income as this was not derived from the sale of goods or
services.[22]

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax,
the Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sonys
advertising expense for it was but an assistance or aid in view of Sonys dire or adverse economic conditions, and
was only equivalent to the latters (Sonys) advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by
SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule that services rendered for
a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case,
however, is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in
turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it
incurred although without profit. This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and not
SIS. SIS just gave assistance to Sony in the amount equivalent to the latters advertising expense but never received
any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR insists
that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation provides that the 10% rate is
applied when the recipient of the commission income is a natural person. According to the CIR, Sonys schedule of
Selling, General and Administrative expenses shows the commission expense as commission/dealer salesman
incentive, emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional entertainers five
per centum (5%).[25]
 In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division,
held:

x xx, commission expense is indeed subject to 10% withholding tax but payments
made to broker is subject to 5% withholding tax pursuant to Section 1(g) of Revenue
Regulations No. 6-85. While the commission expense in the schedule of Selling, General
and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as
commission/dealer salesman incentive the same does not justify the automatic
imposition of flat 10% rate. As itemized by petitioner, such expense is composed of
Commission Expense in the amount of P10,200.00 and Broker Dealer of
P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the
applicable rule during the subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to 10% much later or by the end
of July 2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the
amount of P10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIRs deficiency EWT assessment from January to March 1998, is not valid and
must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i)
as of December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-
First Division when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from
January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from
January to March of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement
(MLA) between Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment of
final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments
when the royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10
days after the end of each month. The question now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments
were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and
December 31, the LICENSEE shall furnish to the LICENSOR a statement, certified by an
officer of the LICENSEE, showing quantities of the MODELS sold, leased or otherwise
disposed of by the LICENSEE during such respective semi-annual period and amount of
royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of the above statement. [30]
 Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which
ends in June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the
end of December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted
by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the
CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period ending June 30, which meant that the
royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or
before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on July
8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
SECOND DIVISION

KEPCO PHILIPPINES CORPORATION, G.R. No. 181858

Petitioner,

Present:

CARPIO, J., Chairperson,

- versus - NACHURA,

PERALTA,

ABAD, and

MENDOZA, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,

Respondent. November 24, 2010

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

DECISION

MENDOZA, J.:

This is a petition for review on certiorari[1] under Rule 45 of the Rules of Court seeking reversal of the
February 20, 2008 Decision[2] of the Court of Tax Appeals En Banc (CTA) in C.T.A. EB No. 299, which ruled that in
order for petitioner to be entitled to its claim for refund/issuance of tax credit certificate representing unutilized
input VAT attributable to its zero-rated sales for taxable year 2002, it must comply with the substantiation
requirements under the appropriate Revenue Regulations.

Petitioner KEPCO Philippines Corporation (Kepco) is a VAT-registered independent power producer

engaged in the business of generating electricity. It exclusively sells electricity to National Power
Corporation (NPC), an entity exempt from taxes under Section 13 of Republic Act No. 6395 (RA No. 6395).[3]

Records show that on December 4, 2001, Kepco filed an application for zero-rated sales with the Revenue
District Office (RDO) No. 54 of the Bureau of Internal Revenue (BIR). Kepcos application was approved under VAT
Ruling 64-01. Accordingly, for taxable year 2002, it filed four Quarterly VAT Returns declaring zero-rated sales in
the aggregate amount of P3,285,308,055.85 itemized as follows:

Exhibit Quarter Involved Zero-Rated Sales

B 1st Quarter P651,672,672.47

C 2nd Quarter 725,104,468.99

D 3rd Quarter 952,053,527.29

956,477,387.10
E 4th Quarter
________________

Total P3,285,308,055.85[4]

In the course of doing business with NPC, Kepco claimed expenses reportedly sustained in connection
with the production and sale of electricity with NPC. Based on Kepcos calculation, it paid input VAT amounting
to P11,710,868.86 attributing the same to its zero-rated sales of electricity with NPC. The table shows the
purchases and corresponding input VAT it paid.

Exhibit Quarter Involved Purchases Input VAT

B 1st Quarter P6,063,184.90 P606,318.49

C 2nd Quarter 18,410,193.20 1,841,019.32

D 3rd Quarter 16,811,819.21 1,681,181.93

E 4th Quarter 75,823,491.20 7,582,349.12

P117,108,688.51 P11,710,868.86[5]

Thus, on April 20, 2004, Kepco filed before the Commissioner of Internal Revenue (CIR) a claim for tax
refund covering unutilized input VAT payments attributable to its zero-rated sales transactions for taxable year
2002.[6] Two days later, on April 22, 2004, it filed a petition for review before the CTA. The case was docketed
as C.T.A. Case No. 6965.[7]

In its Answer,[8] respondent CIR averred that claims for refund were strictly construed against the taxpayer as it
was similar to a tax exemption. It asserted that the burden to show that the taxes were erroneous or illegal lay
upon the taxpayer. Thus, failure on the part of Kepco to prove the same was fatal to its cause of action because it
was its duty to prove the legal basis of the amount being claimed as a tax refund.
 During the hearing, Kepco presented court-commissioned Independent Certified Public Accountant,
Victor O. Machacon, who audited their bulky documentary evidence consisting of official receipts, invoices
and vouchers, to prove its claim for refund of unutilized input VAT. [9]

On February 26, 2007, the CTA Second Division ruled that out of the total declared zero-rated sales
of P3,285,308,055.85, Kepco was only able to properly substantiate P1,451,788,865.52 as its zero-rated sales. After
factoring, only 44.19% of the validly supported input VAT payments being claimed could be considered. [10] The CTA
Division used the following computation in determining Kepcos total allowable input VAT:

Substantiated zero-rated sales to NPC P1,451,788,865.52

Divided by the total declared zero-rated sales 3,285,308,055.85

Rate of substantiated zero-rated sales 44.19%[11]

Total Input VAT Claimed P11,710,868.86

Less:Disallowance

(a) Per verification of the P125,556.40

independent CPA

(b) Per Courts verification 5,045,357.80 5,170,914.20

Validly Supported Input VAT P6,539,954.66

Multiply by Rate of Substantiated 44.19%

Zero-Rated Sales

Total Allowed Input VAT P2,890,005.96[12]

The CTA Second Division likewise disallowed the P5,170,914.20 of Kepcos claimed input VAT due to

its failure to comply with the substantiation requirement.Specifically, the CTA Second Division wrote:

[i]nput VAT on purchases supported by invoices or official receipts stamped with

TIN-VAT shall be disallowed because these purchases are not supported by VAT Invoices
under the contemplation of the aforequoted invoicing requirement. To be considered a
VAT Invoice, the TIN-VAT must be printed, and not merely stamped.Consequently,
purchases supported by invoices or official receipts, wherein the TIN-VAT are not printed
thereon, shall not give rise to any input VAT. Likewise, input VAT on purchases
supported by invoices or official receipts which are not NON-VAT are disallowed because
these invoices or official receipts are not considered as VAT Invoices.Hence, the claims
for input VAT on purchases referred to in item (e) are properly disallowed.[13]
 Accordingly, the CTA Second Division partially granted Kepcos claim for refund of unutilized input VAT for
taxable year 2002. The dispositive portion of the decision[14]of the CTA Second Division reads:

WHEREFORE, petitioners claim for refund is hereby PARTIALLY

GRANTED. Accordingly, respondent is ORDERED to REFUND petitioner the reduced
amount of TWO MILLION EIGHT HUNDRED NINETY THOUSAND FIVE PESOS AND
96/100 (P2,890,005.96) representing unutilized input value-added tax for taxable year
2002.

SO ORDERED.[15]

Kepco moved for partial reconsideration, but the CTA Second Division denied it in its June 28,

2007 Resolution.[16]
On appeal to the CTA En Banc,[17] Kepco argued that the CTA Second Division erred in not
considering P8,691,873.81 in addition to P2,890,005.96 as refundable tax credit for Kepcos zero-rated sales to NPC
for taxable year 2002.

On February 20, 2008, the CTA En Banc dismissed the petition[18] and ruled that in order for Kepco to be
entitled to its claim for refund/issuance of tax credit certificate representing unutilized input VAT attributable to its
zero-rated sales for taxable year 2002, it must comply with the substantiation requirements under the appropriate
Revenue Regulations, i.e. Revenue Regulations 7-95.[19] Thus, it concluded that the Court in Division was correct in
disallowing a portion of Kepcos claim for refund on the ground that input taxes on Kepcos purchase of goods and
services were not supported by invoices and receipts printed with TIN-VAT.[20]

CTA Presiding Justice Ernesto Acosta concurred with the majority in finding that Kepcos claim could not be allowed
for lack of proper substantiation but expressed his dissent on the denial of certain claims, [21] to wit:

[I] dissent with regard to the denial of the amount P4,720,725.63 for nothing in
the law allows the automatic invalidation of official receipts/invoices which were not
imprinted with TIN-VAT; and further reduction of petitioners claim representing input
VAT on purchase of goods not supported by invoices in the amount of P64,509.50 and
input VAT on purchase of services not supported by official receipts in the amount
of P256,689.98, because the law makes use of invoices and official receipts
interchangeably.Both can validly substantiate petitioners claim.[22]

Hence, this petition alleging the following errors:

ASSIGNMENT OF ERRORS

I.
 THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED ITS DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION WHEN IT HELD THAT NON-COMPLIANCE WITH THE
INVOICING REQUIREMENT SHALL RESULT IN THE AUTOMATIC DENIAL OF THE CLAIM.

II.

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED ITS DISCRETION AMOUNTING TO
LACK OF EXCESS OF JURISDICTION WHEN IT DISALLOWED PETITIONERS CLAIM ON THE
GROUND THAT TIN-VAT IS NOT IMPRINTED ON THE INVOICES AND OFFICIAL RECEIPTS.

III.

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED ITS DISCRETION WHEN IT MADE A
DISTINCTION BETWEEN INVOICES AND OFFICIAL RECEIPTS AS SUPPORTING DOCUMENTS TO
CLAIM FOR AN INPUT VAT REFUND.[23]

At the outset, the Court has noticed that although this petition is denominated as Petition for Review
on Certiorari under Rule 45 of the Rules of Court, Kepco, in its assignment of errors, impugns against the CTA En
Banc grave abuse of discretion amounting to lack or excess of jurisdiction, which are grounds in a petition
for certiorari under Rule 65 of the Rules of Court. Time and again, the Court has emphasized that there is a whale
of difference between a Rule 45 petition (Petition for Review on Certiorari) and a Rule 65 petition (Petition for
Certiorari.) A Rule 65 petition is an original action that dwells on jurisdictional errors of whether a lower court
acted without or in excess of its jurisdiction or with grave abuse of discretion. [24] A Rule 45 petition, on the other
hand, is a mode of appeal which centers on the review on the merits of a judgment, final order or award rendered
by a lower court involving purely questions of law.[25] Thus, imputing jurisdictional errors against the CTA is not
proper in this Rule 45 petition. Kepco failed to follow the correct procedure. On this point alone, the Court can
deny the subject petition outright.

At any rate, even if the Court would disregard this procedural flaw, the petition would still fail.

Kepco argues that the 1997 National Internal Revenue Code (NIRC) does not require the imprinting of the word
zero-rated on invoices and/or official receipts covering zero-rated sales.[26] It claims that Section 113 in relation to
Section 237 of the 1997 NIRC does not mention the requirement of imprinting the words zero-rated to purchases
covering zero-rated transactions.[27] Only Section 4.108-1 of Revenue Regulation No. 7-95 (RR No. 7-95) required
the imprinting of the word zero-rated on the VAT invoice or receipt.[28]Thus, Section 4.108-1 of RR No. 7-95 cannot
be considered as a valid legislation considering the long settled rule that administrative rules and regulations
cannot expand the letter and spirit of the law they seek to enforce. [29]

The Court does not agree.

The issue of whether the word zero-rated should be imprinted on invoices and/or official receipts as part of the
invoicing requirement has been settled in the case of Panasonic Communications Imaging Corporation of the
Philippines vs. Commissioner of Internal Revenue[30] and restated in the later case of J.R.A. Philippines, Inc. v.
Commissioner.[31]In the first case, Panasonic Communications Imaging Corporation (Panasonic), a VAT-registered
entity, was engaged in the production and exportation of plain paper copiers and their parts and accessories. From
April 1998 to March 31, 1999, Panasonic generated export sales amounting to US$12,819,475.15 and
US$11,859,489.78 totaling US$24,678,964.93. Thus, it paid input VAT of P9,368,482.40 that it attributed to its
zero-rated sales. It filed applications for refund or tax credit on what it had paid. The CTA denied its
application. Panasonics export sales were subject to 0% VAT under Section 106(A)(2)(a)(1) of the 1997 NIRC but it
did not qualify for zero-rating because the word zero-rated was not printed on Panasonics export
invoices. This omission, according to the CTA, violated the invoicing requirements of Section 4.108-1 of RR No. 7-
95. Panasonic argued, 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 No. 7-
95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to their amendment by R.A.
9337.[32] Panasonic stressed that Sections 113 and 237 did not necessitate the imprinting of the word zero-rated
for its zero-rated sales receipts or invoices. The BIR integrated this requirement only after the enactment of R.A.
No. 9337 on November 1, 2005, a law that was still inexistent at the time of the
transactions. Denying Panasonics claim for refund, the Court stated:

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to

the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158)
for the efficient enforcement of the tax code and of course its amendments. The
requirement is reasonable and is in accord with the efficient collection of VAT from the
covered sales of goods and services. As aptly explained by the CTAs First Division, the
appearance of the word zero-rated on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their purchases when no VAT was
actually paid. If, absent such word, a successful claim for input VAT is made, the
government would be refunding money it did not collect.

Further, the printing of the word zero-rated on the invoice helps segregate sales
that are subject to 10% (now 12%) VAT from those sales that are zero-rated. Unable to
submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim
for refund.[33]

Following said ruling, Section 4.108-1 of RR 7-95[34] neither expanded nor supplanted the tax code but
merely supplemented what the tax code already defined and discussed. In fact, the necessity of indicating zero-
rated into VAT invoices/receipts became more apparent when the provisions of this revenue regulation was later
integrated into RA No. 9337,[35] the amendatory law of the 1997 NIRC. Section 113, in relation to Section 237 of the
1997 NIRC, as amended by RA No. 9337, now reads:
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
 (2) A VAT official receipt for every lease of goods or properties, and for every
sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The
following information shall be indicated in the VAT invoice or VAT official receipt:
(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: Provided, That:
(a) The amount of the tax shall be shown as a separate item in the
invoice or receipt;
(b) If the sale is exempt from value-added tax, the term "VAT-exempt
sale" shall be written or printed prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the term
"zero-rated sale" shall be written or printed prominently on the invoice or
receipt;
(d) If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or
receipt shall clearly indicate the breakdown of the sale price between its taxable,
exempt and zero-rated components, and the calculation of the value-added tax
on each portion of the sale shall be shown on the invoice or
receipt: Provided, That the seller may issue separate invoices or receipts for the
taxable, exempt, and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and description of the goods or
properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos (P1,000) or more
where the sale or transfer is made to a VAT-registered person, the name, business style, if
any, address and taxpayer identification number (TIN) of the purchaser, customer or
client.
(C) Accounting Requirements. - Notwithstanding the provisions of Section 233,
all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to
the regular accounting records required, maintain a subsidiary sales journal and
subsidiary purchase journal on which the daily sales and purchases are recorded. The
subsidiary journals shall contain such information as may be required by the Secretary of
Finance.
x xxx
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons
subject to an internal revenue tax shall, for each sale and transfer of merchandise or for
services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered
receipts or sale 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 where the receipt is issued to cover payment made as rentals,
commissions, compensation 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.
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. [Emphases
supplied]

Evidently, as it failed to indicate in its VAT invoices and receipts that the transactions were zero-rated,
Kepco failed to comply with the correct substantiation requirement for zero-rated transactions.

Kepco then argues that non-compliance of invoicing requirements should not result in the denial of the

taxpayers refund claim. Citing Atlas Consolidated Mining & Development Corporation vs. Commissioner of
Internal Revenue,[36] it claims that a party who fails to issue VAT official receipts/invoices for its sales should only

be imposed penalties as provided under Section 264 of the 1997 NIRC. [37]

The Court has read the Atlas decision, and has not come across any categorical ruling that refund

should be allowed for those who had not complied with the substantiation requirements. It merely recited

Section 263 which provided for penalties in case of Failure or refusal to Issue Receipts or Sales or Commercial

Invoices, Violations related to the Printing of such Receipts or Invoices and Other Violations. It does not

categorically say that the claimant should be refunded. At any rate, Section 264 (formerly Section 263)[38] of the

1997 NIRC was not intended to excuse the compliance of the substantive invoicing requirement needed to justify a

claim for refund on input VAT payments.

Furthermore, Kepco insists that Section 4.108.1 of Revenue Regulation 07-95 does not require the word

TIN-VAT to be imprinted on a VAT-registered persons supporting invoices and official receipts[39] and so there is

no reason for the denial of its P4,720,725.63 claim of input tax.[40]

In this regard, Internal Revenue Regulation 7-95 (Consolidated Value-Added Tax Regulations) is clear.

Section 4.108-1 thereof reads:

Only VAT registered persons are required to print their TIN followed by the word
VAT in their invoice or receipts and this shall be considered as a VAT Invoice. All
purchases covered by invoices other than VAT Invoice shall not give rise to any input tax.

Contrary to Kepcos allegation, the regulation specifically requires the VAT registered person to imprint

TIN-VAT on its invoices or receipts. Thus, the Court agrees with the CTA when it wrote: [T]o be considered a VAT

invoice, the TIN-VAT must be printed, and not merely stamped. Consequently, purchases supported by invoices or

official receipts, wherein the TIN-VAT is not printed thereon, shall not give rise to any input VAT. Likewise, input

VAT on purchases supported by invoices or official receipts which are NON-VAT are disallowed because these

invoices or official receipts are not considered as VAT Invoices. [41]

Kepco further argues that under Section 113(A) of the 1997 NIRC, invoices and official receipts are used

interchangeably for purposes of substantiating input VAT. [42]Hence, it claims that the CTA should have accepted its

substantiation of input VAT on (1) P64,509.50 on purchases of goods with official receipts and (2) P256,689.98 on

purchases of services with invoices.[43]

The Court is not persuaded.

Under the law, a VAT invoice is necessary for every sale, barter or exchange of goods or properties while

a VAT official receipt properly pertains to every lease of goods or properties, and for every sale, barter or exchange

of services.[44] In Commissioner of Internal Revenue v. Manila Mining Corporation,[45] the Court distinguished an

invoice from a receipt, thus:

 A sales or commercial invoice is a written account of goods sold or services
rendered indicating the prices charged therefor or a list by whatever name it is known
which is used in the ordinary course of business evidencing sale and transfer or
agreement to sell or transfer goods and services.

A receipt on the other hand is a written acknowledgment of the fact of payment in

money or other settlement between seller and buyer of goods, debtor or creditor, or
person rendering services and client or customer.

In other words, the VAT invoice is the sellers best proof of the sale of the goods or services to the buyer
while the VAT receipt is the buyers best evidence of the payment of goods or services received from the
seller. Even though VAT invoices and receipts are normally issued by the supplier/seller alone, the said invoices
and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and
their selling price (proof of transaction), and the best means to prove the input VAT payments (proof of
payment).[46] Hence, VAT invoice and VAT receipt should not be confused as referring to one and the same
thing. Certainly, neither does the law intend the two to be used alternatively.

Although it is true that the CTA is not strictly governed by technical rules of evidence, [47] the invoicing and

substantiation requirements must, nevertheless, be followed because it is the only way to determine the veracity of

Kepcos claims. Verily, the CTA En Banc correctly disallowed the input VAT that did not meet the required standard

of substantiation.

The CTA is devoted exclusively to the resolution of tax-related issues and has unmistakably acquired an

expertise on the subject matter. In the absence of abuse or reckless exercise of authority, [48] the CTA EnBancs

decision should be upheld.

The Court has always decreed that tax refunds are in the nature of tax exemptions which represent a loss of

revenue to the government. These exemptions, therefore, must not rest on vague, uncertain or indefinite inference,

but should be granted only by a clear and unequivocal provision of law on the basis of language too plain to be

mistaken. Such exemptions must be strictly construed against the taxpayer, as taxes are the lifeblood of the

government.[49]

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
THIRD DIVISION

AT&T COMMUNICATIONS SERVICES G.R. No. 182364

PHILIPPINES, INC.,
Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,
- versus - BRION,
BERSAMIN,
ABAD,* and
VILLARAMA, JR., JJ.
COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:

August 3, 2010

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

DECISION

CARPIO MORALES, J.,

AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation primarily engaged in the
business of providing information, promotional, supportive and liaison services to foreign corporations such as
AT&T Communications Services International Inc., AT&T Solutions, Inc., AT&T Singapore, Pte. Ltd.,, AT&T
Global Communications Services, Inc. and Acer, Inc., an enterprise registered with the Philippine Economic Zone
Authority (PEZA).

Under Service Agreements forged by petitioner with the above-named corporations, remuneration is paid in U.S.
Dollars and inwardly remitted in accordance with the rules and regulations of the BangkoSentral ng Pilipinas (BSP).

For the calendar year 2002, petitioner incurred input VAT when it generated and recorded zero-
rated sales in connection with its Service Agreements in the peso equivalent of P56,898,744.05. Petitioner also
incurred input VAT from purchases of capital goods and other taxable goods and services, and importation of
capital goods.

Despite the application of petitioners input VAT against its output VAT, an excess of unutilized input VAT
in the amount of P2,050,736.69 remained. As petitioners unutilized input VAT could not be directly and exclusively
attributed to either of its zero-rated sales or its domestic sales, an allocation of the input VAT was made which
resulted in the amount of P1,801,826.82 as petitioners claim attributable to its zero-rated sales.

On March 26, 2004, petitioner filed with the Commissioner of Internal Revenue (respondent) an
application for tax refund and/or tax credit of its excess/unutilized input VAT from zero-rated sales in the said
amount of P1,801,826.82.[1]

To prevent the running of the prescriptive period, petitioner subsequently filed a petition for review with
the Court of Tax Appeals (CTA) which was docketed as CTA Case No. 6907 and lodged before its First Division.
 In support of its claim, petitioner presented documents including its Summary of Zero-Rated Sales (Exhibit
DD) with corresponding supporting documents; VAT invoices on which were stamped zero-rated and bank credit
advices (Exhibits EE-1 to EE-56); copies of Service Agreements (Exhibits N to Q); and report of the commissioned
certified public accountant (Exhibit AA to AA-22).

After petitioner presented its evidence, respondent did not, despite notice, proffer any opposition to it. He
was eventually declared to have waived his right to present evidence.

By Decision of February 23, 2007,[2] the CTA First Division, conceding that petitioners transactions fall
under the classification of zero-rated sales, nevertheless denied petitioners claim for lack of substantiation, disposing
as follows:

In reiteration, considering that the subject revenues pertain to gross receipts from services
rendered by petitioner, valid VAT official receipts and not mere sales invoices should have been
submitted in support thereof. Without proper VAT official receipts, the foreign currency
payments received by petitioner from services rendered for the four (4) quarters of taxable year
2002 in the sum of US$1,102,315.48 with the peso equivalent of P56,898,744.05 cannot qualify
for zero-rating for VAT purposes. Consequently, the claimed input VAT payments allegedly
attributable thereto in the amount of P1,801,826.82 cannot be granted. It is clear from the
provisions of Section 112 (A) of the NIRC of 1997 that there must be zero-rated or effectively
zero-rated sales in order that a refund of input VAT could prosper.

x xx x[3] (emphasis and underscoring supplied)

The CTA First Division, relying on Sections 106[4] and 108[5] of the Tax Code, held that since petitioner is engaged
in sale of services, VAT Official Receipts should have been presented in order to substantiate its claim of zero-rated
sales, not VAT invoices which pertain to sale of goods or properties.

On petition for review, the CTA En Banc, by Decision of February 18, 2008,[6] affirmed that of the CTA
First Division. Petitioners motion for reconsideration having been denied by Resolution of April 2, 2008, the present
petition for review was filed.

The petition is impressed with merit.

A taxpayer engaged in zero-rated transactions may apply for tax refund or issuance of tax credit certificate
for unutilized input VAT, subject to the following requirements: (1) the taxpayer is engaged in sales which are zero-
rated (i.e., export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed
within two years after the close of the taxable quarter when such sales were made; (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; and (5) in case of zero-rated sales under Section 106 (A) (2) (a) (1) and (2), Section
106 (B) and Section 108 (B) (1) and (2), the acceptable foreign currency exchange proceeds thereof have been duly
accounted for in accordance with BSP rules and regulations.[7]

Commissioner of Internal Revenue v. Seagate Technology (Philippines) [8] teaches that petitioner, as zero-
rated seller, hence, directly and legally liable for VAT, can claim a refund or tax credit certificate.
 Zero-rated transactions generally refer to the export sale of goods and supply of services.
The tax rate is set at zero. 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 but can
claim a refund or a tax credit certificate for the VAT previously charged by suppliers. x xx

Applying the destination principle to the exportation of goods, automatic zero rating 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. (emphasis and underscoring supplied)

Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the requirements in
claiming tax credits/refunds:

Sec. 2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows: x

xx

(c) Claims for tax credits/refunds Application for Tax Credit/Refund of Value-Added Tax
Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or
municipality where the principal place of business of the applicant is located or directly with the
Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax
paid shall be submitted together with the application. The original copy of the said
invoice/receipt, however shall be presented for cancellation prior to the issuance of the Tax Credit
Certificate or refund. x xx (emphasis and underscoring supplied)

Section 113 of the Tax Code does not create a distinction between a sales invoice and an official receipt.

Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.

(A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an
invoice or receipt. In addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayers
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with
the indication that such amount includes the value-added tax. (emphasis, italics and
underscoring supplied)

Section 110 of the 1997 Tax Code in fact provides:

Section 110. Tax Credits

A. Creditable Input Tax.

(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:

(b) Purchase of services on which a value-added tax has actually been paid.
(emphasis, italics and underscoring supplied)

Parenthetically, to determine the validity of petitioners claim as to unutilized input VAT, an invoice would
suffice provided the requirements under Sections 113 and 237 of the Tax Code are met.
 Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are
proofs that a business transaction has been concluded, hence, should not be considered bereft of probative
value.[9] Only the preponderance of evidence threshold as applied in ordinary civil cases is needed to substantiate a
claim for tax refund proper.[10]
IN FINE, the Court finds that petitioner has complied with the substantiation requirements to prove entitlement to
refund/tax credit. The Court is not a trier of facts, however, hence the need to remand the case to the CTA for
determination and computation of petitioners refund/tax credit.

WHEREFORE, the petition is GRANTED. The Decision of February 18, 2008 of the Court of Tax
Appeals En Banc is REVERSED and SET ASIDE. Let the case be REMANDED to the Court of Tax Appeals
First Division for the determination of petitioners tax credit/refund.

SO ORDERED.

CONCHITA CARPIO MORALES0

Associate Justice
Chairperson
Republic of the Philippines
Supreme Court
Manila

FIRST DIVISION

SILICON PHILIPPINES, INC., (Formerly INTEL G.R. No. 172378

PHILIPPINES MANUFACTURING, INC.),
Present:
Petitioner,
CORONA, C.J., Chairperson,
VELASCO, JR.,
- versus - LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.
COMMISSIONER OF INTERNALREVENUE,
Promulgated:
Respondent. January 17, 2011
x-----------------------------------------------------------x

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
Decision and the April 20, 2006 Resolution[2] of the Court of Tax Appeals (CTA) En Banc.
[1]

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:
Amount
Tax Paid on Imported/Locally Purchased P 15,170,082.00
Capital Equipment
Total VAT paid on Purchases per Invoices
Received During the Period for which 16,732,425.50
this Application is Filed
Amount of Tax Credit/Refund Applied For P 31,902,507.50[6]

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 BangkoSentral 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 Answer[10] 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 Decision[12] 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 Reconsideration[20] 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 Resolution[22] 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 xx. 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 xx.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 xx.

x xxx

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.

x xxx

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 Decision[25] 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 xx 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 Motion[27] in a
Resolution[28] 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 petition[33] 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] 237[46] and 238[47] 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 Revenue[49] 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 264[52] 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 VAT

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 244[55] 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.
EN BANC

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

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

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

DECISION

ABAD, J.:

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

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal
Revenue (BIR) on the collections of tollway operators.

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

Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo
to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and
other sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR
revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially
enjoined.
 Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within
the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of
the VAT. The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the
Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition
within 10 days from notice.[2] Later, the Court issued another resolution treating the petition as one for prohibition.[3]

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

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

In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends
to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this
would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR
Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC
which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms franchise grantees and sale of services under Section 108 of the Code; and
 2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators right to a reasonable return of investment under their TOAs; and c) is
not administratively feasible and cannot be implemented.

The Courts Rulings

A. On the Procedural Issues:

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

But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-
reaching implications and raises questions that need to be resolved for the public good. [8] The Court has also held
that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority.[9]

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not
only on the more than half a million motorists who use the tollways everyday, but more so on the governments effort
to raise revenue for funding various projects and for reducing budgetary deficits.

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

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

B. On the Substantive Issues:

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

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

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

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree
establishes the legal basis for the services that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators expense. Tollways serve as alternatives to
regular public highways that meander through populated areas and branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In consideration for constructing tollways at their expense, the
operators are allowed to collect government-approved fees from motorists using the tollways until such operators
could fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities
over which the operator enjoys private proprietary rights[12]that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under Section 108 who allow others to use their
properties or facilities for a fee:

1. Lessors of property, whether personal or real;

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

It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered for a fee
regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties. This means that services to be subject to VAT need not fall under the traditional concept of services, the
personal or professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term all kinds of services, they also come under the
specific class described in Section 108 as all other franchise grantees who are subject to VAT, except those under
Section 119 of this Code.

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities)
that Section 119[13] spares from the payment of VAT. The word franchise broadly covers government grants of a
special right to do an act or series of acts of public concern.[14]

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

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

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

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner of
Internal Revenue,[20] statements made by individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law. The
congressional will is ultimately determined by the language of the law that the lawmakers voted on. Consequently,
the meaning and intention of the law must first be sought in the words of the statute itself, read and considered in
their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction.
 Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to taxing a
tax.[21] Actually, petitioners base this argument on the following discussion in Manila International Airport
Authority (MIAA) v. Court of Appeals:[22]

No one can dispute that properties of public dominion mentioned in Article 420 of
the Civil Code, like roads, canals, rivers, torrents, ports and bridges constructed by the
State,are owned by the State. The term ports includes seaports and airports.
The MIAA Airport Lands and Buildings constitute a port constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the Philippines.

x xxThe 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

EN BANC

G.R. No. 172087 March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG,
in his official capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of
Respondent.Public and Private Respondents.

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and Prohibition 1 with prayer for the issuance of a
Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine
Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of
Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code
of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to
Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation
of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 6 was issued.
Section 13 thereof reads as follows:

Sec. 13. Exemptions. — x xx

(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment,
vehicles, automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia,
including accessories or related facilities, for the sole and exclusive use of the casinos, the proper
and efficient management and administration thereof and such other clubs, recreation or
amusement places to be established under and by virtue of this Franchise shall be exempt from
the payment of duties, taxes and other imposts, including all kinds of fees, levies, or charges of
any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties, taxes and other imposts, including all kinds
of fees, levies, assessments or charges of any kind or nature, whether National or Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local, shall
be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or
charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five
percent (5%)of the gross revenue or earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established, or collected by any municipal, provincial or national government authority.

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

The fee or remuneration of foreign entertainers contracted by the Corporation or operator in

pursuance of this provision shall be free of any tax.

(3) Dividend Income. − Notwithstanding any provision of law to the contrary, in the event the
Corporation should declare a cash dividend income corresponding to the participation of the
private sector shall, as an incentive to the beneficiaries, be subject only to a final flat income rate
of ten percent (10%) of the regular income tax rates. The dividend income shall not in such case
be considered as part of the beneficiaries' taxable income; provided, however, that such dividend
income shall be totally exempted from income or other form of taxes if invested within six (6)
months from the date the dividend income is received in the following:

(a) operation of the casino(s) or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with or related to the operations
of the casino(s);

(b) Government bonds, securities, treasury notes, or government debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in similar business, industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section
1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax
upon their taxable income as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and
constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties;
Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes a
10% VAT on sale of services and use or lease of properties, all contain a uniform
proviso authorizing the President, upon the recommendation of the Secretary of Finance, to raise
the VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2), Article VI
 of the Constitution, which section vests in Congress the exclusive authority to fix the rate of taxes,
and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article
VI of the Constitution, which section provides for the "no amendment rule" upon the last reading
of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the
guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No.
9337.12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in
part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —

x xxx

(h) x xx

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code,
regardless of how their franchisees may have been granted, shall be subject to the 10% VAT imposed
under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming
Corporation (PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF
THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING
REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF
THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB
INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR
AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS
PETITIONER’S LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY
APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONER’S
LICENSEES OR FRANCHISEES.14

The BIR, in its Comment15 dated December 29, 2006, counters:

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND
CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.

II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF
THE 1987 CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN
DOWN BY LAWFUL AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with
the arguments of the petitioner. It added that although the State is free to select the subjects of taxation
and that the inequity resulting from singling out a particular class for taxation or exemption is not an
infringement of the constitutional limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation. Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's
provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the
enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the
list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is
violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.

In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to
rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee
means that no person or class of persons shall be denied the same protection of laws which is enjoyed by
other persons or other classes in like circumstances. The "equal protection of the laws is a pledge of the
protection of equal laws." It limits governmental discrimination. The equal protection clause extends to
artificial persons but only insofar as their property is concerned.

x xxx

Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the
law may operate only on some and not all of the people without violating the equal protection clause. The
classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the
following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs
exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which,
reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of

existing special or general laws to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the Government Service and
Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in similar business, industry, or activity.19

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on
Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request of
PAGCOR that it be exempt from such tax.20 The records of the Bicameral Conference Meeting reveal:

HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE. Wala na, tinanggalnanamin yon.

HON. R. DIAZ. Tinanggalnabanatin yon?

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal
basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natinyong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliitnasatao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would
reflect the VAT and other sales taxes---

CHAIRMAN ENRILE. No, we’re 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. There’s 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, Osmeña, the proponent of the amendment.

SEN. OSMEÑA. 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 Osmeña.

SEN. OSMEÑA. 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 Osmeña 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. OSMEÑA. 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)

x xxx

REP. TEVES. Mr. Chairman.

x xxx

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.

x xxx

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. Anongi-va-Vat natinsakanya. Sale of what?

x xxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATingPagcor 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 expressiouniusestexclusio
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:
exceptiofirmatregulam 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 PAGCOR’s 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
by legislative 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 PAGCOR’s 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.

Petitioner’s 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 Constitution31 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, PAGCOR’s 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 PAGCOR’s transactions with private parties,
is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT
is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can
be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:

x xxx

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory
or under special laws, except Presidential Decree No. 529.37

Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special
law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further
amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: x xx

x xxx

(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;

x xxx

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
percent (0%) rate;

x xx x38

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No.
8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section
108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a
portion of the hotel’s premises to PAGCOR. It incurred VAT amounting to ₱30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to
shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However,
PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due
to Acesite minus VAT in the sum of ₱30,152,892.02. Acesite paid VAT in the amount of ₱30,152,892.02
to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May
1998, Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that
PAGCOR and Acesite were both exempt from paying VAT, thus:

x xxx

PAGCOR is exempt from payment of indirect taxes

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

Sec. 13. Exemptions. —

x xxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal,
provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also
exempt from indirect taxes, like VAT, as follows:

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

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

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

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

VAT exemption extends to Acesite

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

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x xx; Provided, that the following services performed in the Philippines by
VAT registered persons shall be subject to 0%.

x xxx

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

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute
tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee WHO, and such
does not violate the rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO.
Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR
in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR. 40

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code,
as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, 41 it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of
R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority
in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is
hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending
Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue
Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to
the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 184823 October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.

DECISION

DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or
incentive in his favor, or under the principle of solutioindebiti requiring the return of taxes erroneously or
illegally collected. In both cases, a taxpayer must prove not only his entitlement to a refund but also his
compliance with the procedural due process as non-observance of the prescriptive periods within which
to file the administrative and the judicial claims would result in the denial of his claim.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30,
2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of
steel and its by-products.3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added
Tax (VAT) entity4 and its products, "close impression die steel forgings" and "tool and dies," are
registered with the Board of Investments (BOI) as a pioneer status. 5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1, 2002
to September 30, 2002 in the total amount of ₱3,891,123.82 with the petitioner Commissioner of Internal
Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax Credit and
Duty Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same input
VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of ₱131,791,399.00,8 which was paid pursuant to
Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC); 9 that for the
said period, it incurred and paid input VAT amounting to ₱3,912,088.14 from purchases and importation
attributable to its zero-rated sales;10and that in its application for refund/credit filed with the DOF One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the amount of
₱3,891,123.82.11

In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to wit:

4. Petitioner’s alleged claim for refund is subject to administrative investigation by the Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A) (2)
(a), and 108(B) (1) of the Tax Code of 1997;

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in
Section 229 of the Tax Code;
 8. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund,
and failure to sustain the burden is fatal to the claim for refund; and

9. Claims for refund are construed strictly against the claimant for the same partake of the nature
of exemption from taxation.13

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondent’s claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the
NIRC of 1997, as amended, provides:

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

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

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer is
engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (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.

The Court finds that the first three requirements have been complied [with] by petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales
which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on September 30,
2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two (2)
year prescriptive period from the close of the taxable quarter when the sales were made, which is from
September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and claims of
petitioner that are baseless and have not been satisfactorily substantiated.

x xxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate
representing unutilized excess input VAT payments for the period July 1, 2002 to September 30, 2002,
which are attributable to its zero-rated sales for the same period, but in the reduced amount of
₱3,239,119.25, computed as follows:

Amount of Claimed Input VAT ₱ 3,891,123.82

Less:
Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT ₱ 3,850,103.45

Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT ₱ 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in
favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED THIRTY NINE
THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS (₱3,239,119.25), representing the
unutilized input VAT incurred for the months of July to September 2002.

SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond the two-year
period to claim a tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He reasoned
that since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30,
2004 was beyond the two-year period, which expired on September 29, 2004.16 He cited as basis Article
13 of the Civil Code,17 which provides that when the law speaks of a year, it is equivalent to 365 days. In
addition, petitioner argued that the simultaneous filing of the administrative and the judicial claims
contravenes Sections 112 and 229 of the NIRC.18 According to the petitioner, a prior filing of an
administrative claim is a "condition precedent"19 before a judicial claim can be filed. He explained that the
rationale of such requirement rests not only on the doctrine of exhaustion of administrative remedies but
also on the fact that the CTA is an appellate body which exercises the power of judicial review over
administrative actions of the BIR. 20

The Second Division of the CTA, however, denied petitioner’s Motion for Partial Reconsideration for lack
of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year period,
the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by law
and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further contends
that respondent's filing of the administrative and judicial [claims] effectively eliminates the authority of the
honorable Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

[x xxx ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each taxable
quarter within which to file a quarterly return of the amount of his gross sales or receipts. In the case at
bar, the taxable quarter involved was for the period of July 1, 2002 to September 30, 2002. Applying
Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to file its quarterly
return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly Return on
October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its VAT
Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's administrative and
judicial claims for refund filed on September 30, 2004 were filed on time because AICHI has until October
20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous
filing of an administrative claim for refund prior to the judicial claim. This should not be the case as the law
does not prohibit the simultaneous filing of the administrative and judicial claims for refund. What is
controlling is that both claims for refund must be filed within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled out
in the assailed January 4, 2008 Decision and March 13, 2008 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 for Review is hereby DENIED DUE COURSE and DISMISSED for
lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA
Second Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs.
Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondent’s judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided in
Sections 112(A) and 229 of

the NIRC.24

Petitioner’s Arguments

Petitioner maintains that respondent’s administrative and judicial claims for tax refund/credit were filed in
violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the Civil
Code,26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30,
2004 was beyond the two-year period, which expired on September 29, 2004.27

Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance requirements
in the payment of VAT.28 He asserts that it is Section 112, paragraph (A), of the same Code that should
apply because it specifically provides for the period within which a claim for tax refund/ credit should be
made.29

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim
with the CTA were filed on the same day. 30 He opines that the simultaneous filing of the administrative
and the judicial claims contravenes Section 229 of the NIRC, which requires the prior filing of an
administrative claim.31 He insists that such procedural requirement is based on the doctrine of exhaustion
of administrative remedies and the fact that the CTA is an appellate body exercising judicial review over
administrative actions of the CIR.32

Respondent’s Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the period
July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied with all the
requirements provided by law.33 Respondent likewise defends the CTA En Banc in applying Section
114(A) of the NIRC in computing the prescriptive period for the claim for tax refund/credit. Respondent
believes that Section 112(A) of the NIRC must be read together with Section 114(A) of the same Code. 34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it
first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center of the DOF before it filed a judicial claim with the CTA.35 To prove this, respondent points out that
its Claimant Information Sheet No. 4970236 and BIR Form No. 1914 for the third quarter of 2002, 37 which
were filed with the DOF, were attached as Annexes "M" and "N," respectively, to the Petition for Review
filed with the CTA.38 Respondent further contends that the non-observance of the 120-day period given to
the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal because what is important is
that both claims are filed within the two-year prescriptive period.39 In support thereof, respondent cites
Commissioner of Internal Revenue v. Victorias Milling Co., Inc. 40 where it was ruled that "[i]f, however, the
[CIR] takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding
must be started in the [CTA] before the end of the two-year period without awaiting the decision of the
[CIR]."41 Lastly, respondent argues that even if the period had already lapsed, it may be suspended for
reasons of equity considering that it is not a jurisdictional requirement. 42

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the
sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:

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
BangkoSentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales. (Emphasis
supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which
read:

SEC. 114. Return and Payment of Value-Added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and
pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration:
Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.

x xxx

SEC. 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 filed 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. (Emphasis supplied.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for refund/credit
of unutilized input VAT should start from the date of payment of tax and not from the close of the taxable
quarter when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 44 where we
ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the two-year
period for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the NIRC
are inapplicable as "both provisions apply only to instances of erroneous payment or illegal collection of
internal revenue taxes."45 We explained that:
The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be
claimed within two years reckoned from the close of the taxable quarter when the relevant sales
were made pertaining to the input VAT regardless of whether said tax was paid or not. As the CA
aptly puts it, albeit it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences
from the close of the taxable quarter when the sales were made and not from the time the input VAT was
paid nor from the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its
input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or
tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the
quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be
that as it may, and given that the last creditable input VAT due for the period covering the progress billing
of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized
creditable input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996
or, to be precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on
December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for
the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of
a claim therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may –

x xxx

(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 the
payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.

x xxx

Sec. 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, of any sum alleged to have been excessively or in any manner wrongfully 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 filed 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 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.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of
the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only
to instances of erroneous payment or illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted
or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The
fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated
or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund
for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not
enter the equation.

x xxx
Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not
to the other actions which refer to erroneous payment of taxes. 46 (Emphasis supplied.)

In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229 of
the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized input VAT.
To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT. Thus,
the two-year period should be reckoned from the close of the taxable quarter when the sales were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and taking
into account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to file
a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on September 29,
2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between the
Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987,
which states that a year is composed of 12 calendar months, it is the latter that must prevail following the
legal maxim, Lex posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987
deal with the same subject matter – the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of
1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative
Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we
hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law,
governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14, 1998)
consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month
2nd calendar month
3rd calendar month
4th calendar month
5th calendar month
6th calendar month
7th calendar month
8th calendar month
9th calendar month
10th calendar month
11th calendar month
12th calendar month
Year 2 13th calendar month
14th calendar month
April 15, 1998 to May 14, 1998
May 15, 1998 to June 14, 1998
June 15, 1998 to July 14, 1998
July 15, 1998 to August 14, 1998
August 15, 1998 to September 14, 1998
September 15, 1998 to October 14, 1998
October 15, 1998 to November 14, 1998
November 15, 1998 to December 14, 1998
December 15, 1998 to January 14, 1999
January 15, 1999 to February 14, 1999
February 15, 1999 to March 14, 1999
March 15, 1999 to April 14, 1999
April 15, 1999 to May 14, 1999
May 15, 1999 to June 14, 1999
 15th calendar month
16th calendar month
17th calendar month
18th calendar month
19th calendar month
20th calendar month
21st calendar month
22nd calendar month
23rd calendar month
24th calendar month
June 15, 1999 to July 14, 1999
July 15, 1999 to August 14, 1999
August 15, 1999 to September 14, 1999
September 15, 1999 to October 14, 1999
October 15, 1999 to November 14, 1999
November 15, 1999 to December 14, 1999
December 15, 1999 to January 14, 2000
January 15, 2000 to February 14, 2000
February 15, 2000 to March 14, 2000
March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th
calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the
reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period
July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent’s administrative
claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondent’s claim for tax refund/credit for having been filed in violation of
Section 112(D) of the NIRC, which provides that:

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

x xxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission
of the complete documents in support of the application [for tax refund/credit]," within which to grant or
deny the claim. In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal
before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day
period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal
the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this
reason, we find the filing of the judicial claim with the CTA premature.

Respondent’s assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial
claim as long as both the administrative and the judicial claims are filed within the two-year prescriptive
period52 has no legal basis.

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two 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."
The phrase "within two (2) years x xx apply for the issuance of a tax credit certificate or refund" refers to
applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in
the first paragraph of subsection (D) of the same provision, which states that the CIR has "120 days from
the submission of complete documents in support of the application filed in accordance with Subsections
(A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC,
which already provides for a specific period within which a taxpayer should appeal the decision or inaction
of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a
decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made
after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with
the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306, now
Section 229 of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits of
input VAT, such as the instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the CTA warrants a
dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October 6,
2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The Court of Tax
Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed.

SO ORDERED.
EN BANC

FORT BONIFACIO DEVELOPMENT G.R. No. 158885

CORPORATION
Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE,

REGIONAL DIRECTOR, REVENUE REGION
NO. 8, and CHIEF, ASSESSMENT DIVISION,
REVENUE REGION NO. 8, BIR,
Respondents.

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

FORT BONIFACIO DEVELOPMENT

CORPORATION
Petitioner,

- versus -
G.R. No. 170680

COMMISSIONER OF INTERNAL REVENUE, REVENUE Present:

DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL
REVENUE.
PUNO, C.J.,

QUISUMBING,*
Respondents.
YNARES-SANTIAGO,

CARPIO,

CORONA,

CARPIO MORALES,

CHICO-NAZARIO,

VELASCO, JR.,

NACHURA,

LEONARDO-DE CASTRO,

BRION,**

PERALTA,

BERSAMIN,

DEL CASTILLO, and

ABAD, JJ.
 Promulgated:

October 2, 2009

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

RESOLUTION

LEONARDO-DE CASTRO, J.:

Before us is respondents Motion for Reconsideration of our Decision dated April 2, 2009 which granted
the consolidated petitions of petitioner Fort Bonifacio Development Corporation, the dispositive portion of which
reads:

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax
Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1)
restrained from collecting from petitioner the amount of P28,413,783.00 representing the
transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to
petitioner the amount of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light
of the persisting transitional input tax credit available to petitioner for the said quarter, or to issue
a tax credit corresponding to such amount. No pronouncement as to costs.

The Motion for Reconsideration raises the following arguments:

SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS
AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE
DISTINCTION BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL ESTATE
DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS INVOLVING
OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND
IN SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH
DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES
SUBJECT TO VAT FOR THE FIRST TIME.
 II

SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF

REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO
THE IMPROVEMENTS ON REAL PROPERTIES.

III

REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.

The instant motion for reconsideration lacks merit.

The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It
amended several provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise
accommodated the potential burdens of the shift to the VAT system by allowing newly VAT-registered persons to
avail of a transitional input tax credit as provided for in Section 105 of the Old NIRC. Section 105 as amended by EO
273 reads:

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

RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first
time value-added-tax on sale of real properties. The amendment reads:

Sec. 100. Value-added-tax on sale of goods or properties. (a) Rate and base of tax. There
shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a
value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods,
or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.
(1) The term 'goods or properties' shall mean all tangible and intangible objects which
are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business; xxx

The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the
enactment of RA 7716. Section 105 however was amended with the passage of the new National Internal Revenue
Code of 1997 (New NIRC), also officially known as Republic Act (RA) 8424. The provisions on the transitional input
tax credit are now embodied in Section 111(A) of the New NIRC, which reads:
 Section 111. Transitional/Presumptive Input Tax Credits.

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

The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporations (FBDC)
presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95)
and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section 4.105-1 of RR 7-95 provides:

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

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

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

In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-95
for being in conflict with the law. It held that the CIR had no power to limit the meaning and coverage of the
term goods in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such
limitation. This it did when it restricted the application of Section 105 in the case of real estate dealers only to
improvements on the real property belonging to their beginning inventory.

A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is
the cardinal rule in statutory construction that a statutes clauses and phrases must not be taken as detached and
isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its
parts in order to produce a harmonious whole. Every part of the statute must be interpreted with reference to the
context, i.e., that every part of the statute must be considered together with other parts of the statute and kept
subservient to the general intent of the whole enactment.[1]

In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe the
constituent parts together; ascertain the legislative intent from the whole act; consider each and every provision
thereof in the light of the general purpose of the statute; and endeavor to make every part effective, harmonious
and sensible.[2]

The statutory definition of the term goods or properties leaves no room for doubt. It states:

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

(1) The term goods or properties shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; xxx.

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

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

The term goods or properties by the unambiguous terms of Section 100 includes real properties held
primarily for sale to costumers or held for lease in the ordinary course of business. Having been defined in Section
100 of the NIRC, the term goods as used in Section 105 of the same code could not have a different meaning. This
has been explained in the Decision dated April 2, 2009, thus:

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the
transitional input tax credit. Goods, as commonly understood in the business sense, refers to the
product which the VAT-registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods." Such real properties are
the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties"
such "real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business." Said definition was taken from the very statutory language of Section 100 of
the Old NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR
not only contravened the definition of "goods" as provided in the Old NIRC, but also the
definition which the same revenue regulation itself has provided.
 Section 4.105-1 of RR 7-95 restricted the definition of goods, viz:

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

As mandated by Article 7 of the Civil Code,[3] an administrative rule or regulation cannot contravene the
law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term goods is
concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and
regulations that administrative agencies promulgate, which are the product of a delegated legislative power to
create new and additional legal provisions that have the effect of law, should be within the scope of the statutory
authority granted by the legislature to the objects and purposes of the law, and should not be in contradiction to,
but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to
implement. Any rule that is not consistent with the statute itself is null and void. [4]

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or
extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-
judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a
discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails. [5]

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

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

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

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97
which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods is
concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no intent to
repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and
repugnancy between the provisions of RR 6-97 and RR 7-95.

We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio.

At the outset, it must be stressed that FBDC sought the refund of the total amount of P347,741,695.74
which it had itself paid in cash to the BIR. It is argued that the transitional input tax credit applies only when taxes
were previously paid on the properties in the beginning inventory and that there should be a law imposing the tax
presumed to have been paid. The thesis is anchored on the argument that without any VAT or other input
business tax imposed by law on the real properties at the time of the sale, the 8% transitional input tax cannot be
presumed to have been paid.

The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax
credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of eight percent (8%) of
the value of such inventory followed by the clause or the actual value-added tax paid on such goods, materials and
supplies, the implication is clear that under the first clause, eight percent (8%) of the value of such inventory, the
law does not contemplate the payment of any prior tax on such inventory.This is distinguished from the second
clause, the actual value-added tax paid on the goods, materials and supplies where actual payment of VAT on the
goods, materials and supplies is assumed. Had the intention of the law been to limit the amount to the actual VAT
paid, there would have been no need to explicitly allow a claim based on 8% of the value of such inventory.

The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was
paid, whether or not it was actually paid, requires a transaction where a tax has been imposed by law, is utterly
without basis in law. The rationale behind the provisions of Section 105 was aptly elucidated in the Decision
sought to be reconsidered, thus:

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

As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were previously paid on the properties in the beginning
inventory and there is a law imposing the tax which is presumed to have been paid, is to impose conditions or
requisites to the application of the transitional tax input credit which are not found in the law. The courts must
not read into the law what is not there. To do so will violate the principle of separation of powers which prohibits
this Court from engaging in judicial legislation.[6]

WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of

merit.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice
Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 183505

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

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

DECISION

DEL CASTILLO, J.:

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

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

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are
domestic corporations duly organized and existing under the laws of the Republic of the Philippines. Both are engaged in the
business of operating cinema houses, among others.[7]

CTA Case No. 7079

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

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

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.[12]
CTA Case No. 7085

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

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

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

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

CTA Case No. 7111

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

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

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

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

CTA Case No. 7272

Re: Assessment Notice No. 008-02

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

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003 was
issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of
Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. [24]
 On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts
of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.[25]

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

Consolidated Petitions

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

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA Case No.
7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First Asia. The
motion was granted.[28]

Upon submission of the parties respective memoranda, the consolidated cases were submitted for decision on the sole
issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are subject to VAT.[29]

Ruling of the CTA First Division

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

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

SO ORDERED.[32]

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

Ruling of the CTA En Banc

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

Issue

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

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema
houses from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA

OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF
SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE

EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF
1997;

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

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

(d) GRANTING WITHOUT CONCEDING THAT RULES OF

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

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING

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

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER

ISSUES TO BE TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF

SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in
coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is
merely subject to the amusement tax imposed by the Local Government Code; and

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

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

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

Respondents Arguments

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

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the

NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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

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

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

x xxx

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

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

Among those included in the enumeration is the lease of motion picture films, films, tapes and discs. This, however, is
not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc:

Exhibition in Blacks Law Dictionary is defined as To show or display. x xxTo produce anything in public so
that it may be taken into possession (6th ed., p. 573). While the word lease is defined as a contract by which
one owning such property grants to another the right to possess, use and enjoy it on specified period of time
in exchange for periodic payment of a stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p.
889). x x x[40]

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not
included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase similar
services. The intent of the legislature must therefore be ascertained.

The legislature never intended operators

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

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

On January 1, 1988, the VAT Law[48] was promulgated. It amended certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain services. It
imposed VAT on sales of services under Section 102 thereof, which provides:

SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied,
assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person
engaged in the sale of services. The phrase sale of services means the performance of all kinds of services for
others for a fee, remuneration or consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, x xx

x xxx

Gross receipts means the total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged for materials supplied with the services and
deposits or advance payments actually or constructively received during the taxable quarter for the service
performed or to be performed for another person, excluding value-added tax.
 (b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is billed as a
separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

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

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the power to
impose amusement tax on gross receipts derived from admission tickets was exclusive with the local government units and that
only the gross receipts of amusement places derived from sources other than from admission tickets were subject to amusement
tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local governments to the
exclusion of the national government.

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

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

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

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

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

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

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

(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors,
lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

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

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to
impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses
and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement
tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

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

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

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

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:

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

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under the Local
Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators
or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously.[59] As it is, the power to impose amusement tax on cinema/theater operators or proprietors
remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

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

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

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the
coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him.[61] The reason is obvious: it is both illogical and impractical to determine who
are exempted without first determining who are covered by the provision.[62] Thus, unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed.[63] In
fact, in case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.[64]
 WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures, films or
movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as amended, and its
June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice
FIRST DIVISION

[G. R. No. 141658. March 18, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE PHILIPPINE AMERICAN

ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE
COMPANY, INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., respondents.

DECISION
CARPIO, J.:

The Case

Before the Court is a petition for review[1] assailing the Decision[2] of 7 January 2000 of the Court of
Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed the Decision [3]of 5 January 1995 of
the Court of Tax Appeals (CTA) in CTA Cases Nos. 2514, 2515 and 2516. The CTA ordered the
Commissioner of Internal Revenue (petitioner) to refund a total of P29,575.02 to respondent companies
(respondents).

Antecedent Facts

Respondents are domestic corporations licensed to transact insurance business in the country.
From August 1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest
the 3% tax imposed on lending investors by Section 195-A[4] of Commonwealth Act No. 466 (CA 466),
as amended by Republic Act No. 6110 (RA 6110) and other laws. CA 466 was the National Internal
Revenue Code (NIRC) applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American (PHILAM) Accident
Insurance Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97 from PHILAM
General Insurance Company. These amounts represented 3% of each companys interest income from
mortgage and other loans. Respondents also paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes
paid under protest. When respondents did not receive a response, each respondent filed on 26 April
1973 a petition for review with the CTA. These three petitions, which were later consolidated, argued
that respondents were not lending investors and as such were not subject to the 3% lending investors
tax under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue was
pending before the higher courts. When respondents case was reinstated, the CTA ruled that
respondents were entitled to their refund.

The Ruling of the Court of Tax Appeals

The CTA held that respondents are not taxable as lending investors because the term lending
investors does not embrace insurance companies. The CTA traced the history of the tax on lending
investors, as follows:

Originally, a person who was engaged in lending money at interest was taxed as a money lender. [Sec. 1464(x),
Rev. Adm. Code] The term money lenders was defined as including all persons who make a practice of lending
money for themselves or others at interest. [Sec. 1465(v), id.] Under this law, an insurance company was not
considered a money lender and was not taxable as such. To quote from an old BIR Ruling:

The lending of money at interest by insurance companies constitutes a necessary incident of their regular business.
For this reason, insurance companies are not liable to tax as money lenders or real estate brokers for making or
negotiating loans secured by real property. (Ruling, February 28, 1920; BIR 135.2) (The Internal Revenue Law,
Annotated, 2nd ed., 1929, by B.L. Meer, page 143)

The same rule has been applied to banks.

For making investments on salary loans, banks will not be required to pay the money lenders tax imposed by this
subsection, for the reason that money lending is considered a mere incident of the banking business. [See Ruling
No. 43, (October 8, 1926) 25 Off. Gaz. 1326) (The Internal Revenue Law, Annotated, id.)

The term money lenders was later changed to lending investors but the definition of the term remains the same.
[Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No. 215, and Sec. 1465(v) of the same Code, as
finally amended by Act No. 3963] The same law is embodied in the present National Internal Revenue Code
(Com. Act No. 466) without change, except in the amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u),
National Internal Revenue Code.]

It is a well-settled rule that an administrative interpretation of a law which has been followed and applied for a
long time, and thereafter the law is re-enacted without substantial change, such administrative interpretation is
deemed to have received legislative approval. In short, the administrative interpretation becomes part of the law as
it is presumed to carry out the legislative purpose.[5]

The CTA held that the practice of lending money at interest is part of the insurance business. CA
466 already taxes the insurance business. The CTA pointed out that the law recognizes and even
regulates this practice of lending money by insurance companies.
The CTA observed that CA 466 also treated differently insurance companies from lending
investors in regard to fixed taxes. Under Section 182(A)(3)(gg), insurance companies were subject to
the same fixed tax as banks and finance companies. The CTA reasoned that insurance companies
were grouped with banks and finance companies because the latters lending activities were also
integral to their business. In contrast, lending investors were taxed at a different fixed tax under Section
182(A)(3)(dd) of CA 466. The CTA stated that insurance companies xxx had never been required by
respondent [CIR] to pay the fixed tax imposed on lending investors xxx. [6]
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals (CTA
Decision) reads:

WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co., Philippine
American Assurance Co., and Philippine American General Insurance Co., Inc. are not taxable on their lending
transactions independently of their insurance business. Accordingly, respondent is hereby ordered to refund to
petitioner[s] the sum of P7,985.25, P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and 2516,
respectively representing the fixed and percentage taxes when (sic) paid by petitioners as lending investor from
August 1971 to September 1972.

No pronouncement as to cost.

SO ORDERED.[7]

Dissatisfied, petitioner elevated the matter to the Court of Appeals.[8]

The Ruling of the Court of Appeals

The Court of Appeals ruled that respondents are not taxable as lending investors. In its Decision of
7 January 2000 (CA Decision), the Court of Appeals affirmed the ruling of the CTA, thus:

WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the decision, dated
January 5, 1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515 and 2516.

SO ORDERED.[9]

Petitioner appealed the CA Decision to this Court.

The Issues
 Petitioner raises the sole issue:

WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3% PERCENTAGE TAX

AS LENDING INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN
RELATION TO SECTION 194(U), ALL OF THE NIRC.[10]

The Ruling of the Court

The petition lacks merit.

On the Additional Issue Raised by Petitioner

Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending on
their location.[11] The sole question before the CTA was whether respondents were subject to
the percentage tax on lending investors under Section 195-A. Petitioner raised for the first time the
issue of the fixed tax in the Petition for Review[12] petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial
court.[13] The Court of Appeals should not have taken cognizance of the issue on respondents supposed
liability under Section 182(A)(3)(dd). However, we cannot entirely fault the Court of Appeals or
petitioner. Even if the percentage tax on lending investors was the sole issue before it, the CTA ordered
petitioner to refund to the PHILAM companies the fixed and percentage taxes [t]hen paid by petitioners
as lending investor.[14] Although the amounts for refund consisted only of what respondents paid as
percentage taxes, the CTA Decision also ordered the refund to respondents of the fixed tax on lending
investors. Respondents in their pleadings deny any liability under Section 182(A)(3)(dd), on the same
ground that they are not lending investors.
The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd)
revolves around the same issue of whether respondents are taxable as lending investors. In similar
circumstances, the Court has held that an appellate court may consider an unassigned error if it is
closely related to an error that was properly assigned. [15] This rule properly applies to the present case.
Thus, we shall consider and rule on the issue of whether respondents are subject to the fixed tax under
Section 182(A)(3)(dd).

Whether Insurance Companies are

Taxable as Lending Investors

Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner
argues that insurance companies are subject to two fixed taxes and two percentage taxes. Petitioner
alleges that:

As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and another P500.00
under Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an insurance company is subject to the
3% tax of the total premiums collected and another 3% on the gross receipts as a lending investor under Sections
255 and 195-A, respectively of the same Code. xxx[16]

Petitioner also contends that the refund granted to respondents is in the nature of a tax exemption,
and cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax
clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of
a tax cannot be presumed.[17] Where there is doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.[18] This is because taxes are burdens on the taxpayer, and
should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. [19]
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(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;
 xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five
pesos; Provided, That lending investors who do business as such in more than one province
shall pay a tax of five hundred pesos.
Section 195-A of CA 466 provides:

Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities and lending investors
shall pay a tax equivalent to three per centum on their gross income.

Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section
182(A)(3)(dd) provides for the taxation of lending investors in different localities. Section 195-A refers to
dealers in securities and lending investors. The burden is thus on petitioner to show that insurance
companies are lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner
merely alleges that the definition of lending investors under CA 466 is broad enough to encompass
insurance companies. Petitioner insists that because of Section 194(u), the two principal activities of the
insurance business, namely, underwriting and investment, are separately taxable. [20]
Section 194(u) of CA 466 states:

(u) Lending investor includes all persons who make a practice of lending money for themselves or others at interest.

xxx

As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what
lending investors are. The question is whether the lending activities of insurance companies make them
lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be
considered lending investors under CA 466, as amended.

Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.

The definition in Section 194(u) of CA 466 is not broad enough to include the business of insurance
companies. The Insurance Code of 1978[21] is very clear on what constitutes an insurance company. It
provides that an insurer or insurance company shall include all individuals, partnerships, associations or
corporations xxx engaged as principals in the insurance business, excepting mutual benefit
associations.[22] More specifically, respondents fall under the category of insurance corporations as
defined in Section 185 of the Insurance Code, thus:

SECTION 185. Corporations formed or organized to save any person or persons or other corporations harmless from
loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate
any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the performance
of or compliance with contractual obligations or the payment of debts of others shall be known as insurance
corporations.

Plainly, insurance companies and lending investors are different enterprises in the eyes of the law.
Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor
provide compensation or indemnity for loss. The underwriting of risks is the prerogative of insurers, the
great majority of which are incorporated insurance companies[23] like respondents.

Granting of Mortgage and

other Loans are Investment
Practices that are Part of the
Insurance Business.
 True, respondents granted mortgage and other kinds of loans. However, this was not done
independently of respondents insurance business. The granting of certain loans is one of several means
of investment allowed to insurance companies. No less than the Insurance Code mandates and regulates
this practice.[24]
Unlike the practice of lending investors, the lending activities of insurance companies are
circumscribed and strictly regulated by the State. Insurance companies cannot freely lend to themselves
or others as lending investors can,[25] nor can insurance companies grant simply any kind of loan. Even
prior to 1978, the Insurance Code prescribed strict rules for the granting of loans by insurance
companies.[26] These provisions on mortgage, collateral and policy loans were reiterated in the Insurance
Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of the insurance
business as the task of underwriting. Nevertheless, petitioner argues that such investment practices are
separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other funds received
by respondents through the granting of mortgage and other loans was necessary to respondents
business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to meet
their obligations to policyholders.[27] This obviously cannot be accomplished through the collection of
premiums alone, as the legal reserves and capital and surplus insurance companies are obligated to
maintain run into millions of pesos. As such, the creation of investment income has long been held to be
generally, if not necessarily, essential to the business of insurance.[28]
The creation of investment income in the manner sanctioned by the laws on insurance is thus part of
the business of insurance, and the fruits of these investments are essentially income from the insurance
business. This is particularly true if the invested assets are held either as reserved funds to provide for
policy obligations or as capital and surplus to provide an extra margin of safety which will be attractive to
insurance buyers.[29]
The Court has also held that when a company is taxed on its main business, it is no longer taxable
further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its
main business.[30] Respondents already paid percentage and fixed taxes on their insurance business. To
require them to pay percentage and fixed taxes again for an activity which is necessarily a part of the
same business, the law must expressly require such additional payment of tax. There is, however, no
provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double
percentage and fixed taxes. They merely tax lending investors, not lending activities. Respondents were
not transformed into lending investors by the mere fact that they granted loans, as these investments
were part of, incidental and necessary to their insurance business.

Different Tax Treatment of

Insurance Companies and
Lending Investors.

Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance
companies. The relevant portions of Section 182 state:

Sec. 182. Fixed taxes. (A) On business xxx

(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;

xxx

(dd) Lending investors

1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and
twenty-five pesos; Provided, That lending investors who do business as such in more
than one province shall pay a tax of five hundred pesos.

xxx
(gg) Banks, insurance companies, finance and investment companies doing business in the Philippines and franchise
grantees, five hundred pesos.

xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance companies demonstrate an intention to
treat these businesses differently. If Congress intended insurance companies to be taxed as lending
investors, there would be no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been
sufficient. That insurance companies were included with banks, finance and investment companies also
supports the CTAs conclusion that insurance companies had more in common with the latter enterprises
than with lending investors. As the CTA pointed out, banks also regularly lend money at interest, but are
not taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject respondents to two
percentage taxes and two fixed taxes. Petitioners argument goes against the doctrine of strict
interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence. In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different tax
treatment accorded to pawnshops and lending investors in the NIRC of 1977 and the NIRC of 1986
showed the intent of Congress to deal with both subjects differently. The same reasoning applies
squarely to the present case.
Even the current tax law does not treat insurance companies as lending investors. Under Section
108(A)[32] of the NIRC of 1997, lending investors and non-life insurance companies, except for their crop
insurances, are subject to value-added tax (VAT). Life insurance companies are exempt from VAT, but
are subject to percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance
companies already implies the latters exclusion from the coverage of these provisions. When a statute
enumerates the things upon which it is to operate, everything else by implication must be excluded from
its operation and effect.[33]

Definition of Lending
Investors in CA 466 is Not
New.

Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money at
interest was a necessary incident of the insurance business, and that insurance companies were thus not
subject to the tax on money lenders. Petitioner argues only that the 1920 ruling does not apply to the
instant case because RA 6110 introduced the definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending investors were
still referred to as money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914[34] (1914 Tax
Code) state:

SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected as follows, the amount stated
being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding section words and
phrases shall be taken in the sense and extension indicated below:
xxx
Money lender includes all persons who make a practice of lending money for themselves or others at interest.
(Emphasis supplied)

As can be seen, the definitions of money lender under the 1914 Tax Code and lending investor
under CA 466 are identical. The term money lender was merely changed to lending investor when Act
No. 3963 amended the Revised Administrative Code in 1932.[35] This same definition of lending investor
has since appeared in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to an annual fixed
tax under the 1914 Tax Code.[36] That Congress later saw the need to introduce Section 182(A)(3)(gg) in
CA 466 bolsters our view that there was no legislative intent to tax insurance companies as lending
investors. If insurance companies were already taxed as lending investors, there would have been no
need for a separate provision specifically requiring insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.

Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily
developed an expertise in the subject of taxation that this Court has recognized time and again. For this
reason, the findings of fact of the CTA, particularly when affirmed by the Court of Appeals, are generally
conclusive on this Court absent grave abuse of discretion or palpable error, [37] which are not present in
this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the
Court of Appeals in CA-G.R. SP No. 36816.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.
SECOND DIVISION
COMMISSIONER OF G.R. Nos. 134587 & 134588
INTERNAL REVENUE,
Petitioner, Present:

PUNO, J.,
Chairman,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
BENGUET CORPORATION,
Respondent.
Promulgated:
July 8, 2005
x-------------------------------------------------------------------x

DECISION

TINGA, J.:

This is a petition for the review of a consolidated Decision of the Former Fourteenth

Division of the Court of Appeals[1] ordering the Commissioner of Internal Revenue to award tax

credits to Benguet Corporation in the amount corresponding to the input value added taxes

that the latter had incurred in relation to its sale of gold to the Central Bank during the period

of 01 August 1989 to 31 July 1991.

Petitioner is the Commissioner of Internal Revenue (petitioner) acting in his official

capacity as head of the Bureau of Internal Revenue (BIR), an attached agency of the

Department of Finance,[2] with the authority, inter alia, to determine claims for refunds or tax

credits as provided by law.[3]

Respondent Benguet Corporation (respondent) is a domestic corporation organized and

existing by virtue of Philippine laws, engaged in the exploration, development and operation of

mineral resources, and the sale or marketing thereof to various entities. [4] Respondent is a

value added tax (VAT) registered enterprise.[5]

The transactions in question occurred during the period between 1988 and 1991.

Under Sec. 99 of the National Internal Revenue Code (NIRC), [6] as amended by Executive Order

(E.O.) No. 273 s. 1987, then in effect, 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 is liable for output VAT at rates of either 10% or 0% (zero-rated)

depending on the classification of the transaction under Sec. 100 of the NIRC. Persons

registered under the VAT system[7] are allowed to recognize input VAT, or the VAT due from or

paid by it in the course of its trade or business on importation of goods or local purchases of

goods or service, including lease or use of properties, from a VAT-registered person.[8]

 In January of 1988, respondent applied for and was granted by the BIR zero-rated

status on its sale of gold to Central Bank.[9] On 28 August 1988, Deputy Commissioner of

Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared that [t]he

sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section

100[[10]] of the Tax Code, as amended by Executive Order No. 273. The BIR came out with at

least six (6) other issuances[11] reiterating the zero-rating of sale of gold to the Central Bank,

the latest of which is VAT Ruling No. 036-90 dated 14 February 1990.[12]

Relying on its zero-rated status and the above issuances, respondent sold gold to the

Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into

transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then

filed applications for tax refunds/credits corresponding to input VAT for the

amounts[13] of P46,177,861.12,[14]

P19,218,738.44,[15] and P84,909,247.96.[16] Respondents applications were either unacted

upon or expressly disallowed by petitioner.[17] In addition, petitioner issued a deficiency

assessment against respondent when, after applying respondents creditable input VAT costs

against the retroactive 10% VAT levy, there resulted a balance of excess output VAT. [18]

The express disallowance of respondents application for refunds/credits and the

issuance of deficiency assessments against it were based on a BIR rulingBIR VAT Ruling No.

008-92 dated 23 January 1992that was issued subsequent to the consummation of the

subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank

shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR

VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. The

relevant portions of the ruling provides, thus:

1. In general, for purposes of the term export sales only direct export sales and
foreign currency denominated sales, shall be qualified for zero-rating.

....

4. Local sales of goods, which by fiction of law are considered export sales (e.g.,
the Export Duty Law considers sales of gold to the Central Bank of the
Philippines, as export sale). This transaction shall not be considered as export
sale for VAT purposes.

....
[A]ll Orders and Memoranda issued by this Office inconsistent 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

BangkoSentral 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 lismota 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 1/11 thof 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.