SECOND DIVISION

G.R. No. 151135             July 2, 2004

CONTEX CORPORATION, petitioner, 
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:

For review is the Decision dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No.
1 

62823, which reversed and set aside the decision dated October 13, 2000, of the Court of Tax
2 

Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the
sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the
alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate
court’s Resolution, dated December 19, 2001, denying the motion for reconsideration.
3 

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and
garments and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay
Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. As an SBMA-
4 

registered firm, petitioner is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner also registered with
5 

the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO
Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively. 6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to
Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this
time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The
second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the
matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895.
Petitioner stressed that Section 112(A) if read in relation to Section 106(A)(2)(a) of the National
7  8 

Internal Revenue Code, as amended and Section 12(b) and (c) of Rep. Act No. 7227 would show
9 

that it was not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims
for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right
to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in
Sections 204 and 229 of the Tax Code, its claim should be denied, according to the BIR.
10  11 

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A
TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing
erroneously paid input VAT.

SO ORDERED. 12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A)
of the Tax Code. The tax court stressed that these provisions apply only to those entities registered
as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is
a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is
exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227
and the Implementing Rules and Regulations of the Bases Conversion and Development Act of
1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for
being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court
also limited the refund only to the input VAT paid by the petitioner on the supplies and materials
directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT
paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or
delivered to the petitioner’s Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA
decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under
Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input
component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax
is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the
tax lies with the suppliers and not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his
favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND

SET ASIDE. Contex’s claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED. 13
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act
No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax
Code], which is a direct liability of the importer, and in no way includes the value-added tax of the
seller-exporter the burden of which was passed on to the importer as an additional costs of the
goods." This was because the exemption granted by Rep. Act No. 7227 relates to the act of
14 

importation and Section 107 of the Tax Code specifically imposes the VAT on importations. The
15 

appellate court applied the principle that tax exemptions are strictly construed against the taxpayer.
The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only
to those for which they may be directly liable. It then stated that apparently, the legislative intent
behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their importation of raw materials, capital,
and equipment as well as the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was
denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL
REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE
ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS
PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT

PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS
PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998. 16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the
Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to
petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of
supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s
VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid
of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously
mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence,
said law should govern the case. Petitioner calls our attention to regulations issued by both the
SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act
No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect
taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid
on the goods, properties or services bought, transferred, or leased may be shifted or passed on by
the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the
17 

income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an
indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions
involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer
and ultimately to the final purchaser is the burden of the tax. Stated differently, a seller who is
18 

directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT,
the transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or
services and the use or lease of properties is not subject to VAT (output tax) and the seller is
not allowed any tax credit on VAT (input tax) previously paid. This is a case wherein the
20 

VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the
goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output
tax to his customers because the said transaction is not subject to VAT. On the other hand, a
VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt
from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0%
rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-
registered person, which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of goods, properties or services related
to such zero-rated sale shall be available as tax credit or refund in accordance with these
regulations. 22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firm’s business or non-retail customers. It is for this reason
that a sharp distinction must be made between zero-rating and exemption in designating a value-
added tax. 23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies
and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a)
of BIR Revenue Regulations No. 1-95. 24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted
by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration issued by the BIR. As such, it is exempt from VAT on all its sales and importations of
25 

goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials
is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input
VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to
it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the
proper party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-
Added Tax Regulations" provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a

taxable transaction for VAT purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

"Export Sales" shall mean

...

(5) Those considered export sales under Articles 23 and 77 of Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly
registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and
Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority
(PEZA), or international agreements, e.g. Asian Development Bank (ADB), International Rice
Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such
sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT
credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to
the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-
VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding
that petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly
liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any,
on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of
the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Puno, (Chairman), Callejo, Sr., and Tinga, JJ., concur.

Austria-Martinez, J., on leave.
 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, reversing that of the Court of Tax Appeals, which affirmed with modification the decision of
1  2 

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 a petition for review
4 

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, where it was held that COMASERCO was not liable to pay fixed and contractor's tax
7

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  defines the phrase "sale of services" as
10 

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.  In the case of VAT, Section 109, Republic Act 8424
13 

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.  Also, it has been the long
14 

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.

 SECOND DIVISION

G.R. No. 178697               November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals – En Banc 1 (CTA-EB), in C.T.A. EB No. 90, affirming
the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition
for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision cancelled the
deficiency assessment issued by petitioner Commissioner of Internal Revenue (CIR) against Sony
for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late remittance of internal revenue
taxes in the amount of ₱1,269, 593.90.3

THE FACTS:

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

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 15,895,632.655
          

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

2000. Sony submitted relevant documents in support of its protest on the 16th of that same month. 6

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

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sony’s motor vehicles and on professional fees paid to general professional partnerships. It also
assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of ₱10,523,821.99
was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches. 8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED
to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of
merit. However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax
in the amount of ₱1,035,879.70 and the following penalties for late remittance of internal revenue
taxes in the sum of ₱1,269,593.90:

1. VAT on Royalty P 429,242.07

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

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

SO ORDERED.9

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

A. The Honorable Court committed reversible error in holding that petitioner is not liable for
the deficiency VAT in the amount of ₱11,141,014.41;
 B. The Honorable court committed reversible error in holding that the commission expense in
the amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10%
tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
₱10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on time. 10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration.  Unfazed, the CIR
1avvphi1

filed a petition for review with the CTA-EB raising identical issues:

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

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

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

3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of ₱10,523,821.99 is proper; and

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

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

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

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

PHP1,992,462.72:

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

IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
 B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME. 12

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

The Court finds no merit in the petition.

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

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

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

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

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, 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 CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony. 17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-
EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter. 18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIR’s own witness, Revenue Officer
Antonio Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin testified
that advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the money
came from is another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:

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

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

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

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

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

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

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

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

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

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%). 25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does
not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is
composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents
was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental
deposit in the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment
from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

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

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

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

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

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the
FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10,
1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on
or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

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

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

WE CONCUR:
 ANTONIO T. CARPIO
Associate Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO* DIOSDADO M. PERALTA

Associate Justice Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA
Chief Justice
 SECOND DIVISION

G.R. No. 193301               March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as
well as the Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En
Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008 Decision 4 as well as
the 26 June 2009 Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First
Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division denied Mindanao II
Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for the first and second
quarters of taxable year 2003 for being filed out of time (CTA Case Nos. 7227 and 7287). The CTA
First Division, however, ordered the

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-
added tax (VAT) for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).

G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as
well as the Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB
Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision
and granted the CIR’s petition for review in CTA Case No. 476. The CTA En Banc denied Mindanao
I Geothermal Partnership’s (Mindanao I) claims for refund or tax credit for the first (CTA Case No.
7228), second (CTA Case No. 7286), third, and fourth quarters (CTA Case No. 7318) of 2003.

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission,
value added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power
Production Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric
Power Industry Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax
Reform Act of 1997 (1997 Tax Code), 9 when it decreed that sales of power by generation companies
shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR
claims for refund or tax credit of accumulated unutilized and/or excess input taxes due to VAT zero-
rated sales in 2003. Mindanao I and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR
 The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317,
which were consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax
refund or credit of Mindanao II’s alleged excess or unutilized input taxes due to VAT zero-rated
sales. In CTA Case No. 7227, Mindanao II claims a tax refund or credit of ₱3,160,984.69 for the first
quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax refund or credit of ₱1,562,085.33
for the second quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund or credit of
₱3,521,129.50 for the third and fourth quarters of 2003.

The CTA First Division’s narration of the pertinent facts is as follows:

xxxx

On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT)
contract with the Philippine National Oil Corporation – Energy Development Company (PNOC-EDC)
for finance, engineering, supply, installation, testing, commissioning, operation, and maintenance of
a 48.25 megawatt geothermal power plant, provided that PNOC-EDC shall supply and deliver steam
to Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric capacity and
energy for PNOC-EDC and shall deliver the same to the National Power Corporation (NPC) for and
in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated power and delivery of electric
capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.

xxxx

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and
accumulates therefrom creditable input taxes. Pursuant to the provisions of the National Internal
Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated input tax credits to offset
its output tax liability. Considering, however that its only revenue-generating activity is VAT zero-
rated under RA No. 9136, Mindanao II’s input tax credits remain unutilized.

Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-
rating of the EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on the
following dates:

CTA Case No. Period Covered Date of Filing

(2003)
Original Return Amended Return
7227 1st Quarter April 23, 2003 July 3, 2002 (sic),
April 1, 2004 &
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204
Considering that it has accumulated unutilized creditable input taxes from its only income-generating
activity, Mindanao II filed an application for refund and/or issuance of tax credit certificate with the
BIR’s Revenue District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by
the CIR. Hence, these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7,
2005 for the 2nd quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the
instance of Mindanao II, these petitions were consolidated on March 15, 2006 as they involve the
same parties and the same subject matter. The only difference lies with the taxable periods involved
in each petition.11

The Court of Tax Appeals’ Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin
requirements for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived
sales from power generation. The CTA First Division also stated that Mindanao II complied with five
requirements to be entitled to a refund:

1. There must be zero-rated or effectively zero-rated sales;

2. That input taxes were incurred or paid;

3. That such input VAT payments are directly attributable to zero-rated sales or effectively
zero-rated sales;

4. That the input VAT payments were not applied against any output VAT liability; and

5. That the claim for refund was filed within the two-year prescriptive period. 13

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao
II’s return as well as its administrative and judicial claims, and concluded that Mindanao II’s
administrative and judicial claims were timely filed in compliance with this Court’s ruling in Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas).14 The CTA First Division declared that the two-year prescriptive period for filing a VAT refund
claim should not be counted from the close of the quarter but from the date of the filing of the VAT
return. As ruled in Atlas, VAT liability or entitlement to a refund can only be determined upon the
filing of the quarterly VAT return.

CTA Period Date Filing

Case Covered
No. (2003) Original Amended Administrativ Judicial
Return Return e Claim
Return
7227 1st Quarter 23 April 1 April 13 April 2005 22 April
2003 2004 2005
7287 2nd 22 July 1 April 13 April 2005 7 July 2005
Quarter 2003 2004
7317 3rd 25 Oct. 1 April 13 April 2005 9 Sept. 2005
Quarter 2003 2004
 7317 4th 26 Jan. 1 April 13 April 2005 9 Sept.
Quarter 2004 2004 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when
Mindanao II filed its VAT returns, its administrative claim filed on 13 April 2005 and judicial claims
filed on 22 April 2005, 7 July 2005, and 9 September 2005 were timely filed in accordance with
Atlas.

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of
₱7,703,957.79, after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from
Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to
₱522,059.91 were disallowed for failure to meet invoicing requirements, while the input VAT on the
sale of the Nissan Patrol was reduced by ₱18,181.82 because the output VAT for the sale was not
included in the VAT declarations.

The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount
of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND
79/100 PESOS (₱7,703,957.79) representing its unutilized input VAT for the four (4) quarters of the
taxable year 2003.

SO ORDERED.17

Mindanao II filed a motion for partial reconsideration. 18 It stated that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to its VAT zero-rated operations.
Moreover, the disallowed input taxes substantially complied with the requirements for refund or tax
credit.

The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first
and second quarters of 2003 were filed beyond the period allowed by law, as stated in Section
112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a general provision, and
governs cases not covered by Section 112(A). The CIR countered the CTA First Division’s 22
September 2008 decision by citing this Court’s ruling in Commisioner of Internal Revenue v. Mirant
Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT payments must be claimed
within two years reckoned from the close of the taxable quarter when the relevant sales were made
regardless of whether said tax was paid.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s
motion for partial reconsideration partly meritorious, and rendered an Amended Decision 20 on 26
June 2009. The CTA First Division stated that the claim for refund or credit with the BIR and the
subsequent appeal to the CTA must be filed within the two-year period prescribed under Section
229. The two-year prescriptive period in Section 229 was denominated as a mandatory statute of
limitations. Therefore, Mindanao II’s claims for refund for the first and second quarters of 2003 had
already prescribed.

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the
sale of the Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover,
Mindanao II’s submitted documents failed to substantiate the requisites for the refund or credit
claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II
Geothermal Partnership in the modified amount of TWO MILLION NINE HUNDRED EIGHTY
THOUSAND EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77)
representing its unutilized input VAT for the third and fourth quarters of the taxable year 2003.

SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision 23 in CTA EB No. 513 and denied
Mindanao II’s petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that the
reckoning of the two-year prescriptive period for filing the application for refund or credit of input VAT
attributable to zero-rated sales or effectively zero-rated sales shall be counted from the close of the
taxable quarter when the sales were made; (2) the Atlas and Mirant cases applied different tax
codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax Code; (3) the sale of the
fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-rated transactions pursuant to
Section 105; (4) Mindanao II failed to comply with the substantiation requirements provided under
Section 113(A) in relation to Section 237 of the 1997 Tax Code as implemented by Section 4.104-1,
4.104-5, and 4.108-1 of Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax
exemptions cannot be relaxed in the present case.

The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is
DISMISSED for lack of merit. Accordingly, the Decision dated September 22, 2008 and the
Amended Decision dated June 26, 2009 issued by the First Division are AFFIRMED.

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s
Motion for Reconsideration.26 The CTA En Banc highlighted the following bases of their previous
ruling:

1. The Supreme Court has long decided that the claim for refund of unutilized input VAT
must be filed within two (2) years after the close of the taxable quarter when such sales were
made.

2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take
bearings.

3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its
literal meaning and applied without any interpretation. 27

G.R. No. 194637

Mindanao I v. CIR
 The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483.
Both CTA EB cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228,
7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao I’s
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales. In CTA Case No.
7228, Mindanao I claims a tax refund or credit of ₱3,893,566.14 for the first quarter of 2003. In CTA
Case No. 7286, Mindanao I claims a tax refund or credit of ₱2,351,000.83 for the second quarter of
2003. In CTA Case No. 7318, Mindanao I claims a tax refund or credit of ₱7,940,727.83 for the third
and fourth quarters of 2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent
facts is as follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the
Philippine National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance,
design, construction, testing, commissioning, operation, maintenance and repair of a 47-megawatt
geothermal power plant. Under the said BOT contract, PNOC-EDC shall supply and deliver steam to
Mindanao I at no cost. In turn, Mindanao I will convert the steam into electric capacity and energy for
PNOC-EDC and shall subsequently supply and deliver the same to the National Power Corporation
(NPC), for and in behalf of PNOC-EDC.

Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department
of Energy (DOE) as a Private Sector Generation Facility, pursuant to the provision of Executive
Order No. 215, wherein Certificate of Accreditation No. 95-037 was issued.

On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the
National Internal Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known
as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by Congress to ordain
reforms in the electric power industry, highlighting, among others, the importance of ensuring the
reliability, security and affordability of the supply of electric power to end users. Under the provisions
of this Republic Act and its implementing rules and regulations, the delivery and supply of electric
energy by generation companies became VAT zero-rated, which previously were subject to ten
percent (10%) VAT.

xxxx

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power
by generation companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted
the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed its VAT Returns, on
the belief that its sales qualify for VAT zero-rating.

Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for
the first, second, third, and fourth quarters of taxable year 2003, which were subsequently amended
and filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax
credit certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the
accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22,
2005, July 7, 2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318,
respectively. However, on October 10, 2005, Mindanao I received a copy of the letter dated
September 30, 2003 (sic) of the BIR denying its application for tax credit/refund. 28

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision 29 in CTA Case Nos. 7228,
7286, and 7318. The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I
can only claim 90.27% of the amount of substantiated excess input VAT because a portion was not
reported in its quarterly VAT returns; (2) out of the ₱14,185,294.80 excess input VAT applied for
refund, only ₱11,657,447.14 can be considered substantiated excess input VAT due to
disallowances by the Independent Certified Public Accountant, adjustment on the disallowances per
the CTA Second Division’s further verification, and additional disallowances per the CTA Second
Division’s further verification;

(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over
to the third quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same
procedure was done for the second, third, and fourth quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year prescriptive period reckoned from the respective
dates of filing of the quarterly VAT returns.

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:

WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY
GRANTED. Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in
favor of Mindanao I in the reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE
THOUSAND ONE HUNDRED SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53)
representing Mindanao I’s unutilized input VAT for the four quarters of the taxable year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification 31 on 11 November
2008. It claimed that the CTA Second Division should not have allocated proportionately Mindanao
I’s unutilized creditable input taxes for the taxable year 2003, because the proportionate allocation of
the amount of creditable taxes in Section 112(A) applies only when the creditable input taxes due
cannot be directly and entirely attributed to any of the zero-rated or effectively zero-rated sales.
Mindanao I claims that its unreported collection is directly attributable to its VAT zero-rated sales.
The CTA Second Division denied Mindanao I’s motion and maintained the proportionate allocation
because there was a portion of the gross receipts that was undeclared in Mindanao I’s gross
receipts.

The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that
Mindanao I failed to exhaust administrative remedies before it filed its petition for review. The CTA
Second Division denied the CIR’s motion, and cited Atlas33 as the basis for ruling that it is more
practical and reasonable to count the two-year prescriptive period for filing a claim for refund or
credit of input VAT on zero-rated sales from the date of filing of the return and payment of the tax
due.

The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s
Motion for Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and
denied the petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which
have not yet been considered and passed upon by the CTA Second Division in its assailed decision
and resolution.

The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of
merit. Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA
Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal
Partnership vs. Commissioner of Internal Revenue" are hereby AFFIRMED in toto.

SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010
Decision. In an Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed
with the CIR’s claim that Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling
in Mirant. The CTA En Banc also ruled that the procedure prescribed under Section 112(D) now
112(C)37 of the 1997 Tax Code should be followed first before the CTA En Banc can act on
Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010 Decision in light of this Court’s
ruling in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi). 38

The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the
First Quarter of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended,
Mindanao I has two years from March 31, 2003 or until March 31, 2005 within which to file its
administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized
input VAT for the first quarter of taxable year 2003 with the BIR, which is beyond the two-
year prescriptive period mentioned above.

C.T.A. Case No. 7286:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the
second quarter of 2003. Pursuant to

Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30,
2003, within which to file its administrative claim for refund for the second quarter of 2003, or
until June 30, 2005;
 (2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input
VAT for the second quarter of taxable year 2003 with the BIR, which is within the two-year
prescriptive period, provided under Section 112 (A) of the NIRC of 1997, as amended;

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the
supporting documents together with the application for refund) or until August 2, 2005, to
decide the administrative claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September
1, 2005, Mindanao I should have elevated its claim for refund to the CTA in Division;

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court,
docketed as CTA Case No. 7286, even before the 120-day period for the CIR to decide the
claim for refund had lapsed on August 2, 2005. The Petition for Review was, therefore,
prematurely filed and there was failure to exhaust administrative remedies;

xxxx

C.T.A. Case No. 7318:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the
third and fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as
amended, Mindanao I therefore, has two years from September 30, 2003 and December 31,
2003, or until September 30, 2005 and December 31, 2005, respectively, within which to file
its administrative claim for the third and fourth quarters of 2003;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input
VAT for the third and fourth quarters of taxable year 2003 with the BIR, which is well within
the two-year prescriptive period, provided under Section 112(A) of the NIRC of 1997, as
amended;

(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting
documents, together with the aforesaid application for refund, the CIR has 120 days or until
August 2, 2005, to decide the claim;

(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until
September 1, 2005 Mindanao I should have elevated its claim for refund to the CTA;

(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on
September 9, 2005, which is 8 days beyond the 30-day period to appeal to the CTA.

Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the
Petition for Review should have been dismissed for being filed late.

In recapitulation:

(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed beyond the
two-year prescriptive period;
 (2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply
with a condition precedent when it failed to exhaust administrative remedies by filing its
Petition for Review even before the lapse of the 120-day period for the CIR to decide the
administrative claim;

(3) C.T.A. Case No. 7318

Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for

Reconsideration is hereby GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby
DENIED for lack of merit.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is
hereby GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second,
third and fourth quarters of 2003 is hereby DENIED.

SO ORDERED.39

The Issues

G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the
1st and 2nd quarters of year 2003 has already prescribed pursuant to the Mirant case.

A. The Atlas case and Mirant case have conflicting interpretations of the law as to the
reckoning date of the two year prescriptive period for filing claims for VAT refund.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of
Section 4(3), Article VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter when
the sales were made as the reckoning date in counting the two-year prescriptive
period cannot be applied retroactively in the case of Mindanao II.

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax
Code, as amended in that the sale of the fully depreciated Nissan Patrol is a one-time
transaction and is not incidental to the VAT zero-rated operation of Mindanao II.

III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the
Independent Certified Public Accountant as Mindanao II substantially complied with the
requisites of the 1997 Tax Code, as amended, for refund/tax credit.
 A. The amount of ₱2,090.16 was brought about by the timing difference in the
recording of the foreign currency deposit transaction.

B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to

SGV & Company which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao
II’s claim for refund or tax credit for the year 2004 subject matter of CTA Case No.
7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present
case.40

G.R. No. 194637

Mindanao I v. CIR

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the controlling ruling at the time of filing.

A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made as
the reckoning date in counting the two-year prescriptive period, cannot be applied
retroactively in the case of Mindanao I.

B. The Atlas case promulgated by the Third Division of this Honorable Court on June
8, 2007 was not and cannot be superseded by the Mirant Pagbilao case promulgated
by the Second Division of this Honorable Court on September 12, 2008 in light of the
explicit provision of Section 4(3), Article VIII of the 1987 Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue
vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the
present case.41

In a Resolution dated 14 December 2011, 42 this Court resolved to consolidate G.R. Nos. 193301 and
194637 to avoid conflicting rulings in related cases.

The Court’s Ruling

Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive
period, or the interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and
Mirant.

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the
amounts of ₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while
Mindanao I’s unutilized input VAT tax credit for the first, second, third, and fourth quarters of 2003, in
the amounts of ₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by
G.R. No. 194637.

Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and
Mindanao I’s administrative and judicial claims, provide:

SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any
VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a
tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B)
and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had
been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.

xxxx

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

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

x x x x 43 (Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing
No. VAT Sales in when application application for with CTA45 case
2003 and sales of tax tax refund/ with CTA
amount were refund/tax credit with the (judicial
made credit CIR claim)
certificate (administrative
with the claim)44
CIR
7227 1st Quarter, 31 March 31 March 13 April 2005 12 22 April
₱3,160,984.69 2003 2005 September 2005
2005
 7287 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July 2005
₱1,562,085.33 2003 2005 September
2005
7317 3rd and 4th 30 30 13 April 2005 12 9
Quarters, September September September September
₱3,521,129.50 2003 2005 2005 2005
31 2 January
December 2006
2003 (31
December
2005 being
a
Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
No. VAT Sales in when sales application application for with CTA47 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
certificate (administrative
with the claim)46
CIR
7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
₱3,893,566.14 2003 2005 2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
₱2,351,000.83 2003 2005 2005
7317 3rd 30 30 4 April 2005 1 September 9 September
and 4th September September 2005 2005
Quarters, 2003 2005
₱7,940,727.83
31 2 January
December 2006
2003 (31
December
2005 being
a Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005,
neither Atlas nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant
was promulgated on 12 September 2008. It is therefore misleading to state that Atlas was the
controlling doctrine at the time of filing of the claims. The 1997 Tax Code, which took effect on 1
January 1998, was the applicable law at the time of filing of the claims in issue. As this Court
explained in the recent consolidated cases of Commissioner of Internal Revenue v. San Roque
Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex
Mining Corporation v. Commissioner of Internal Revenue (San Roque): 48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law
to the Commissioner to decide whether to grant or deny San Roque’s application for tax refund or
credit. It is indisputable that compliance with the 120-day waiting period is mandatory and
jurisdictional. The waiting period, originally fixed at 60 days only, was part of the provisions of the
first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting period was
extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus,
the waiting period has been in our statute books for more than fifteen (15) years before San Roque
filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates
the doctrine of exhaustion of administrative remedies and renders the petition premature and thus
without a cause of action, with the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and reiterating these
doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When
a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for
the decision of the Commissioner, there is no "decision" of the Commissioner to review and thus the
CTA as a court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also
expressly provides that if the Commissioner fails to decide within "a specific period" required by law,
such "inaction shall be deemed a denial" of the application for tax refund or credit. It is the
Commissioner’s decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for
review. Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with
the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself authorizes its validity."
There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his
own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions which are against the law or which infringe
upon the rights of others." For violating a mandatory provision of law in filing its petition with the
CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition
with the CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-
day period just because the Commissioner merely asserts that the case was prematurely filed with
the CTA and does not question the entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or
excessively collected from him, does not entitle him as a matter of right to a tax refund or credit.
Strict compliance with the mandatory and jurisdictional conditions prescribed by law to claim such
tax refund or credit is essential and necessary for such claim to prosper. Well-settled is the rule that
tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.

The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant
of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a taxpayer’s
claim for tax refund or credit, whether or not the Commissioner questions the numerical correctness
of the claim of the taxpayer. This Court should not establish the precedent that non-compliance with
mandatory and jurisdictional conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance
with mandatory and jurisdictional requirements, for then every tax refund case will have to be
decided on the numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because
San Roque filed its petition for review with the CTA more than four years before Atlas was
promulgated. The Atlas doctrine did not exist at the time San Roque failed to comply with the 120-
day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for
the 120-day period to lapse. In any event, the Atlas doctrine merely stated that the two-year
prescriptive period should be counted from the date of payment of the output VAT, not from the
close of the taxable quarter when the sales involving the input VAT were made. The Atlas doctrine
does not interpret, expressly or impliedly, the 120+30 day periods. 49 (Emphases in the original;
citations omitted)

Prescriptive Period for

the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have
prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is
clear: "Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales x x x."

We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of
2003 as follows:

(1) The last day for filing an application for tax refund or credit with the CIR for the first
quarter of 2003 was on 31 March 2005. Mindanao II filed its administrative claim before the
CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April
2005. Both claims have prescribed, pursuant to Section 112(A) of the 1997 Tax Code.

(2) The last day for filing an application for tax refund or credit with the CIR for the second
quarter of 2003 was on 30 June 2005. Mindanao II filed its administrative claim before the
CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April
2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.

(3) The last day for filing an application for tax refund or credit with the CIR for the third
quarter of 2003 was on 30 September 2005. Mindanao II filed its administrative claim before
the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4
April 2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the fourth
quarter of 2003 was on 2 January 2006. Mindanao II filed its administrative claim before the
 CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April
2005. Both claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.

Prescriptive Period for

the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 have been
properly appealed, we still see no need to refer to either Atlas or Mirant, or even to Section 229 of
the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: "In
case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration
of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals."

The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods
were already in the law. Section 112(C) expressly grants the Commissioner 120 days within which to
decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty
(120) days from the date of submission of complete documents." Following the verba legis doctrine,
this law must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer
cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the
120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be
no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San
Roque’s case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim
with the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period,
and it cannot blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision
or inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law
should be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the
taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from
receipt of the Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s claim
within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of
the 120-day period.

xxxx

There are three compelling reasons why the 30-day period need not necessarily fall within the two-
year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive
period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the issuance of
a tax credit certificate or refund of the creditable input tax due or paid to such sales." In short, the law
states that the taxpayer may apply with the Commissioner for a refund or credit "within two (2)
years," which means at anytime within two years. Thus, the application for refund or credit may be
filed by the taxpayer with the Commissioner on the last day of the two-year prescriptive period and it
will still strictly comply with the law. The two-year prescriptive period is a grace period in favor of the
taxpayer and he can avail of the full period before his right to apply for a tax refund or credit is barred
by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund or
credit "within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsection (A)." The reference in Section 112(C)
of the submission of documents "in support of the application filed in accordance with Subsection A"
means that the application in Section 112(A) is the administrative claim that the Commissioner must
decide within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers
to the period within which the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the
CTA but to the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase
‘within two years x x x apply for the issuance of a tax credit or refund’ refers to applications for
refund/credit with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period
(equivalent to 730 days), then the taxpayer must file his administrative claim for refund or credit
within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer
file his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days)
has lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA
becomes utterly useless, even if the taxpayer complied with the law by filing his administrative claim
within the two-year prescriptive period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition
that is not found in the law. It results in truncating 120 days from the 730 days that the law grants the
taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law
to defeat, wholly or even partly, a remedy that the law expressly grants in clear, plain, and
unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language.
The taxpayer can file his administrative claim for refund or credit at anytime within the two-year
prescriptive period. If he files his claim on the last day of the two-year prescriptive

period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide
the claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day,
the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning
but also the only logical interpretation of Section 112(A) and (C).50 (Emphases in the original;
citations omitted)

In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the
time of its issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this
Court held that the 120+30 day periods are mandatory and jurisdictional." 51 We shall discuss later
the effect of San Roque’s recognition of BIR Ruling No. DA-489-03 on claims filed between 10
December 2003 and 6 October 2010. Mindanao I and II filed their claims within this period.

We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as
follows:

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13
April 2005. Counting 120 days after filing of the administrative claim with the CIR (11 August 2005)
and 30 days after the CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for
the second, third, and fourth quarters of 2003 was on 12 September 2005. However, the judicial
claim cannot be filed earlier than 11 August 2005, which is the expiration of the 120-day period for
the Commissioner to act on the claim.

(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July
2005, before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao II’s judicial claim for the second quarter of 2003 was prematurely filed.

However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we
rule that Mindanao II’s judicial claim for the second quarter of 2003 qualifies under the
exception to the strict application of the 120+30 day periods.

(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for the third quarter of 2003 was thus filed on
time, pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on
time, pursuant to Section 112(C) of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April
2005. Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30
days after the CIR’s denial by inaction,52 the last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 1 September 2005. However, the judicial claim
cannot be filed earlier than 2 August 2005, which is the expiration of the 120-day period for the
Commissioner to act on the claim.

(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July
2005, before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao I’s judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we
rule that Mindanao I’s judicial claim for the second quarter of 2003 qualifies under the
exception to the strict application of the 120+30 day periods.
 (2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after
the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao I’s judicial claim for the fourth quarter of 2003 was thus filed
after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.

San Roque: Recognition of BIR Ruling No. DA-489-03

In the consolidated cases of San Roque, the Court En Banc 53 examined and ruled on the different
claims for tax refund or credit of three different companies. In San Roque, we reiterated that
"following the verba legis doctrine, Section 112(C) must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting
for the Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA
will have no jurisdiction because there will be no ‘decision’ or ‘deemed a denial decision’ of the
Commissioner for the CTA to review."

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San
Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel 54 in favor of
taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for
the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for
Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly

on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that
the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly
situated, being made to return the tax refund or credit they received or could have received under
Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud,
bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued by
the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable
to all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds
and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the
Department of Finance. This government agency is also the addressee, or the entity responded to,
in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in
fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.
 xxxx

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of
BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial
claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No.
DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the
filing of its judicial claim from the vice of prematurity. (Emphasis in the original)

Summary of Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR

  Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

  Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or
credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of the
taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in support of
the administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend beyond the two-year period from the filing of the
administrative claim if the claim is filed in the later part of the two-year period. If the 120-day
period expires without any decision from the CIR, then the administrative claim may be
considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s
decision denying the administrative claim or from the expiration of the 120-day period without
any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
as an exception to the mandatory and jurisdictional 120+30 day periods.

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction
in the course of its business; hence, it is an isolated transaction that should not have been subject to
10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters,
exchanges, leases goods or properties, renders services, and any person who imports goods shall
be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in
the Philippines by nonresident foreign persons shall be considered as being rendered in the course
of trade or business. (Emphasis supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc.

(Magsaysay)55 and Imperial v. Collector of Internal Revenue (Imperial) 56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was not in
the course of NDC’s trade or business as it was involuntary and made pursuant to the Government’s
policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed upon Imperial the
definition of "carrying on business." Imperial, however, is an unreported case that merely stated that
"‘to engage’ is to embark in a business or to employ oneself therein." 57

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.  However, it does not
1âwphi1

follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability.
Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course
of trade or business" includes "transactions incidental thereto."

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to
deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course
of Mindanao II’s business which should be liable for VAT.

Substantiation Requirements

Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it
has substantially complied with the substantiation requirements of Section 113(A) 58 in relation to
Section 23759 of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of
Revenue Regulation No. 7-95.60

We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a
finding of fact. The CTA En Banc evaluated the records of the case and found that the transactions
in question are purchases for services and that Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding of fact, which in turn affirmed the finding of the
CTA First Division. We see no reason to overturn their findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En
Bane in CT A EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on
28 July 2010, and the Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483
promulgated on 31 May 2010, as well as the Amended Decision promulgated on 24 November
2010, are AFFIRMED with MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is
DENIED while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R.
No. 19463 7, the claims of Mindanao I Geothermal Partnership for the first, third, and fourth quarters
of 2003 are DENIED while its claim for the second quarter of 2003 is GRANTED.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

ARTURO D. BRION
Associate Justice
 MARIANO C. DEL CASTILLO MARTIN S. VILLARAMA, JR.*
Associate Justice Associate Justice

ESTELA M. PERLAS BERNABE

Associate Justice

ATTESTATION

I attest that the. conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the I Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had: been reached in consultation before the case
was assigned to the write of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice
 EN BANC  

August 8, 2017

G.R. No. 198146

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

CARPIO, J.:

The Case

This petition for review  assails the 27 September 2010 Decision  and the 3 August 2011
1 2

Resolution  of the Court of Appeals in CA-G.R. SP No. 108156. The Court of Appeals nullified the
3

Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case No.
2007- 3 for lack of jurisdiction.

The Facts

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-
owned and controlled corporation created under Republic Act No. 9136 (RA 9136), also known as
the Electric Power Industry Reform Act of 2001 (EPIRA).  Section 50 of RA 9136 states that the
4

principal purpose of PSALM is to manage the orderly sale, disposition, and privatization of the
National Power Corporation (NPC) generation assets, real estate and other disposable assets, and
Independent Power Producer (IPP) contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in an optimal manner.

PSALM conducted public biddings for the privatization of the Pantabangan-Masiway Hydroelectric
Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant) on 8
September 2006 and 14 December 2006, respectively. First Gen Hydropower Corporation with its
$129 Million bid and SN Aboitiz Power Corporation with its $530 Million bid were the winning bidders
for the PantabanganMasiway Plant and Magat Plant, respectively.

On 28 August 2007, the NPC received a letter  dated 14 August 2007 from the Bureau of Internal
5

Revenue (BIR) demanding immediate payment of ₱3,813,080,472  deficiency value-added tax (VAT)
6

for the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand
letter to PSALM.

On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement
(MOA),  wherein they agreed that:
7

A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00,
representing basic VAT as shown in the BIR letter dated August 14, 2007, upon execution of this
Memorandum of Agreement (MOA).
B) This remittance shall be without prejudice to the outcome of the resolution of the Issues before
the appropriate courts or body.

C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues by the appropriate
courts or body.

D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter, except when the
case is elevated by the BIR before an appellate court.

E) Nothing contained in this MOA shall be claimed or construed to be an admission against interest
as to any party or evidence of any liability or wrongdoing whatsoever nor an abandonment of any
position taken by NPC/PSALM in connection with the Issues.

F) Each Party to this MOA hereto expressly represents that the authorized signatory hereto has the
legal authority to bind [the] party to all the terms of this MOA.

G) Any resolution by the appropriate courts or body in favor of the BIR, other than a decision by the
Supreme Court, shall not constitute as precedent and sufficient legal basis as to the taxability of
NPC/PSALM's transactions pursuant to the privatization of NPC's assets as mandated by the EPIRA
Law.

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the Department of
Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an application for
refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to
immediately process and approve the application, and release the tax refund/TCC within fifteen (15)
working days from issuance of the DOJ ruling that is favorable to NPC/PSALM.

I) Either party has the right to appeal any adverse decision against it before any appropriate court or
body.

J) In the event of failure by the BIR to fulfill the undertaking referred to in (H) above, NPC/PSALM
shall assign to DOF its right to the refund of the subject remittance, and the DOF shall offset such
amount against any liability of NPC/PSALM to the National Government pursuant to the objectives of
the EPIRA on the application of the privatization proceeds. 8

In compliance with the MOA, PSALM remitted under protest to the BIR the amount of ₱3, 813, 080,
472, representing the total basic VAT due.

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the
adjudication of the dispute with the BIR to resolve the issue of whether the sale of the power plants
should be subject to VAT. The case was docketed as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of PSALM, thus:

In cases involving purely question[s] of law, such as in the instant case, between and among the
government-owned and controlled corporation and government bureau, the issue is best settled in
this Department. In the final analysis, there is but one party in interest, the Government itself in this
litigation.

xxxx
The instant petition is an original petition involving only [a] question of law on whether or not the sale
of the Pantabangan-Masiway and Magat Power Plants to private entities under the mandate of the
EPIRA is subject to VAT. It is to be stressed that this is not an appeal from the decision of the
Commissioner of Internal Revenue involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, or other matters arising under the National Internal Revenue Code or
other law.

xxxx

Moreover, it must be noted that respondent already invoked this Office's jurisdiction over it by
praying in respondent's Motion for Extension of Time to File Comment (On Petitioner's Petition dated
21 September 2007) and later, Omnibus Motion To Lift Order dated 22 October 2007 and To Admit
Attached Comment. The Court has held that the filing of motions seeking affirmative relief, such as,
to admit answer, for additional time to answer, for reconsideration of a default judgment, and to lift
order of default with motion for reconsideration, are considered voluntary submission to the
jurisdiction of the court. Having sought this Office to grant extension of time to file answer or
comment to the instant petition, thereby submitting to the jurisdiction of this Court [sic], respondent
cannot now repudiate the very same authority it sought.

xxxx

When petitioner was created under Section 49 of R.A. No. 9136, for the principal purpose to manage
the orderly sale, disposition, and privatization of NPC generation assets, real estate and other
disposable assets, IPP contracts with the objective of liquidating all NPC financial obligations and
stranded contract costs in an optimal manner, there was, by operation of law, the transfer of
ownership of NPC assets. Such transfer of ownership was not carried out in the ordinary course of
transfer which must be accorded with the required elements present for a valid transfer, but in this
case, in accordance with the mandate of the law, that is, EPIRA. Thus, respondent cannot assert
that it was NPC who was the actual seller of the Pantabangan-Masiway :md Magat Power Plants,
because at the time of selling the aforesaid power plants, the owner then was already the petitioner
and not the NPC. Consequently, petitioner cannot also be considered a successor-in-· interest of
NPC.

Since it was petitioner who sold the Pantabangan-Masiway and Magat Power Plants and not the
NPC, through a competitive and public bidding to the private entities, Section 24(A) of R.A. No. 9337
cannot be applied to the instant case. Neither the grant of exemption and revocation of the tax
exemption accorded to the NPC, be also affected to petitioner.

xxxx

Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not in the regular
conduct or pursuit of a commercial or an economic activity, but was effected by the mandate of the
EPIRA upon petitioner to direct the orderly sale, disposition, and privatization of NPC generation
assets, real estate and other disposable assets, and IPP contracts, and afterward, to liquidate the
outstanding obligations of the NPC.

xxxx

Verily, to subject the sale of generation assets in accordance with a privatization plan submitted to
and approved by the President, which is a one time sale, to VAT would run counter to the purpose of
obtaining optimal proceeds since potential bidders would necessarily have to take into account such
extra cost of VAT.
WHEREFORE, premises considered, the imposition by respondent Bureau of lnternal Revenue of
deficiency Value-Added Tax in the amount of ₱3,813,080,472.00 on the privatization sale of the
Pantabangan Masiway and Magat Power Plants, done in accordance with the mandate of the
Electric Power Industry Reform Act of 2001, is hereby declared NULL and VOID. Respondent is
directed to refund the amount of ₱3,813,080,472.00 remitted under protest by petitioner to
respondent. 9

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute
involved tax laws administered by the BIR and therefore within the jurisdiction of the Court of Tax
Appeals (CTA). Furthermore, the BIR stated that the sale of the subject power plants by PSALM to
private entities is in the course of trade or business, as contemplated under Section 105 of the
National Internal Revenue Code (NIRC) of 1997, which covers incidental transactions. Thus, the
sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's Motion for Reconsideration. 10

On 7 April 2009,  the BIR Commissioner (Commissioner of Internal Revenue) filed with the Court of
11

Appeals a petition for certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction. In a
Resolution dated 23 April 2009, the Court of Appeals dismissed the petition for failure to attach the
relevant pleadings and documents.  Upon motion for reconsideration, the Court of Appeals
12

reinstated the petition in its Resolution dated 10 July 2009.13

The Ruling of the Court of Appeals

The Court of Appeals held that the petition filed by PSALM with the DOJ was really a protest against
the assessment of deficiency VAT, which under Section 204  of the NIRC of 1997 is within the
14

authority of the Commissioner of Internal Revenue (CIR) to resolve. In fact, PSALM's objective in
filing the petition was to recover the ₱3,813,080,472 VAT which was allegedly assessed erroneously
and which PSALM paid under protest to the BIR.

Quoting paragraph H  of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated
15

that the parties in effect agreed to consider a DOJ ruling favorable to PSALM as the latter's
application for refund.

Citing Section 4  of the NIRC of 1997, as amended by Section 3 of Republic Act No. 8424 (RA
16

8424)  and Section 7  of Republic Act No. 9282 (RA 9282),  the Court of Appeals ruled that the CIR
17 18 19

is the proper body to resolve cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the
NIRC or other laws administered by the BIR. The Court of Appeals stressed that jurisdiction is
conferred by law or by the Constitution; the parties, such as in this case, cannot agree or stipulate on
it by conferring jurisdiction in a body that has none. Jurisdiction over the person can be waived but
not the jurisdiction over the subject matter which is neither subject to agreement nor conferred by
consent of the parties. The Court of Appeals held that the DOJ Secretary erred in ruling that the CIR
is estopped from assailing the jurisdiction of the DOJ after having agreed to submit to its jurisdiction.
As a general rule, estoppel does not confer jurisdiction over a cause of action to a tribunal where
none, by law, exists.

In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion
amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. The
dispositive portion of the Court of Appeals' 27 September 2010 Decision reads:

WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly: (1) the [D]ecision
dated March 13, 2008, and the Decision dated January 14, 2009 both issued by the public
respondent Secretary of Justice in [OSJ Case No.] 2007-3 are declared NULL and VOID for having
been issued without jurisdiction.

No costs.

SO ORDERED. 20

PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August 2011
Resolution. Hence, this petition.

The Issues

Petitioner PSALM raises the following issues:

I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE COURSE TO THE
PETITION FOR CERTIORARI IN CA-G.R. SP NO. 108156?

II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN ASSUMING
JURISDICTION AND SETTLING THE DISPUTE BY AND BETWEEN THE BIR AND PSALM?

III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND
JURISPRUDENCE IN RENDERING JUDGMENT THAT THERE SHOULD BE·NO VAT ON THE
PRIVATIZATION, SALE OR DISPOSAL OF GENERATION ASSETS?

IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI? 21

The Ruling of the Court

We find the petition meritorious.

I. Whether the Secretary of Justice has jurisdiction over the case.

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No.
2007-3 which involves the resolution of whether the sale of the Pantabangan-Masiway Plant and
Magat Plant is subject to VAT.

We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the
Constitution or by law, and not by the parties to an action.  Jurisdiction cannot be conferred by
22

consent or acquiescence of the parties  or by erroneous belief of the court, quasi-judicial office or
23

government agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with
jurisdiction over this case. This case involves a dispute between PSALM and NPC, which are both
wholly government owned corporations, and the BIR, a government office, over the imposition of
VAT on the sale of the two power plants. There is no question that original jurisdiction is with the
CIR, who issues the preliminary and the final tax assessments. However, if the government entity
disputes the tax assessment, the dispute is already between the BIR (represented by the CIR) and
another government entity, in this case, the petitioner PSALM. Under Presidential Decree No.
242  (PD 242), all disputes and claims solely between government agencies and offices,
24

including government-owned or controlled· corporations, shall be administratively settled or

adjudicated by the Secretary of Justice, the Solicitor General, or the Government Corporate
Counsel, depending on the issues and government agencies involved. As regards cases
involving only questions of law, it is the Secretary of Justice who has jurisdiction. Sections 1, 2, and
3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and

controversies solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional offices or agencies,
arising from the interpretation and application of statutes, contracts or
agreements, shallhenceforth be administratively settled or adjudicated as provided
hereinafter: Provided, That, this shall not apply to cases already pending in court at the time of the
effectivity of this decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and
settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser of
all government owned or controlled corporations and entities, in consonance with Section 83 of the
Revised Administrative Code. His ruling or determination of the question in each case shall be
conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be
submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims [or] controversies
between or among the departments, bureaus, offices and other agencies of the
National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims or

controversies between or among the government-owned or controlled corporations
or entities being served by the Office of the Government Corporate Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or
controversies which do not fall under the categories mentioned in paragraphs (a) and
(b). (Emphasis supplied)

The use of the word "shall" in a statute connotes a mandatory order or an imperative obligation.  Its
25

use rendered the provisions mandatory and not merely permissive, and unless PD 242 is declared
unconstitutional, its provisions must be followed. The use of the word "shall" means that
administrative settlement or adjudication of disputes and claims between government agencies and
offices, including government-owned or controlled corporations, is not merely permissive but
mandatory and imperative. Thus, under PD 242, it is mandatory that disputes and claims "solely"
between government agencies and offices, including government-owned or controlled corporations,
involving only questions of law, be submitted to and settled or adjudicated by the Secretary of
Justice.

The law is clear and covers "all disputes, claims and controversies solely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies arising from the interpretation and
application of statutes, contracts or agreements." When the law says "all disputes, claims and
controversies solely" among government agencies, the law means all, without exception. Only those
cases already pending in court at the time of the effectivity of PD 242 are not covered by the law.

The purpose of PD 242 is to provide for a speedy and efficient administrative settlement or
adjudication of disputes between government offices or agencies under the Executive
branch, as well as to filter cases to lessen the clogged dockets of the courts. As explained by
the Court in Philippine Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez: 26

Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not diminish
the jurisdiction of [the] courts but only prescribes an administrative procedure for the settlement of
certain types of disputes between or among departments, bureaus, offices, agencies, and
instrumentalities of the National Government, including government-owned or controlled
corporations, so that they need not always repair to the courts for the settlement of controversies
arising from the interpretation and application of statutes, contracts or agreements. The procedure is
not much different, and no less desirable, than the arbitration procedures provided in Republic Act
No. 876 (Arbitration Law) and in Section 26, R.A. 6715 (The Labor Code). It is an alternative to, or a
substitute for, traditional litigation in court with the added advantage of avoiding the delays,
vexations and expense of court proceedings. Or, as P.D. No. 242 itself explains, its purpose is "the
elimination of needless clogging of court dockets to prevent the waste of time and energies not only
of the government lawyers but also of the courts, and eliminates expenses incurred in the filing and
prosecution of judicial actions."
27

PD 242 is only applicable to disputes, claims, and controversies solely between or among the

departments, bureaus, offices, agencies and instrumentalities of the National Government, including
government-owned or controlled corporations, and where no private party is involved. In other
words, PD 242 will only apply when all the parties involved are purely government offices and
government-owned or controlled corporations. Since this case is a dispute between PSALM arid
28

NPC, both government owned and controlled corporations, and the BIR, a National Government
office, PD 242 clearly applies and the Secretary of Justice has jurisdiction over this case. In fact, the
MOA executed by the BIR, NPC, and PSALM explicitly provides that "[a] ruling from the Department
of Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an application
for refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM."  Such provision
29

indicates that the BIR and petitioner PSALM and the NPC acknowledged that the Secretary of
Justice indeed has jurisdiction to resolve their dispute.

This case is different from the case of Philippine National Oil Company v. Court of Appeals,  (PNOC
30

v. CA) which involves not only the BIR (a government bureau) and the PNOC and PNB (both
government-owned or controlled corporations), but also respondent Tirso Savellano, a private
citizen. Clearly, PD 242 is not applicable to the case of PNOCv.CA. Even the ponencia in PNOC v.
CA stated that the dispute in that case is not covered by PD 242, thus:

Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the
present dispute would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly
provides that only disputes, claims and controversies solely between or among departments,
bureaus, offices, agencies, and instrumentalities of the National Government, including constitutional
offices or agencies, as well as government-owned and controlled corporations, shall be
administratively settled or adjudicated. While the BIR is obviously a government bureau, and
both PNOC and PNB are government-owned and controlled corporations, respondent
Savellano is a private. citizen. His standing in the controversy could not be lightly brushed aside. It
was private respondent Savellano who gave the BIR the information that resulted in the investigation
of PNOC and PNB; who requested the BIR Commissioner to reconsider the compromise agreement
in question; and who initiated the CTA Case No. 4249 by filing a Petition for Review.  (Emphasis
31

supplied)

In contrast, since this case is a dispute solely between PSALM and NPC, both government-owned
and controlled corporations, and the BIR, a National Government office, PD 242 clearly applies and
the Secretary of Justice has jurisdiction over this case.
It is only proper that intra-governmental disputes be settled administratively since the opposing
government offices, agencies and instrumentalities are all under the President's executive
control and supervision.Section 17, Article VII of the Constitution states unequivocally that: "The
President shall have control of all the executive departments, bureaus and offices. He shall
ensure that the laws be faithfully executed." In Carpio v. Executive Secretary,  the Court expounded
32

on the President's control over all the executive departments, bureaus and offices, thus:

This presidential power of control over the executive branch of government extends over all
executive officers from Cabinet Secretary to the lowliest clerk and has been held by us, in the
landmark case of Mondano vs. Silvosa, to mean "the power of [the President] to alter or modify or
nullify or set aside what a subordinate officer had done in the performance of his duties and to
substitute the judgment of the former with that of the latter." It is said to be at the very "heart of the
meaning of Chief Executive."

Equally well accepted, as a corollary rule to the control powers of the President, is the "Doctrine of
Qualified Political Agency." As the President cannot be expected to exercise his control powers all at
the same time and in person, he will have to delegate some of them to his Cabinet members.

Under this doctrine, which recognizes the establishment of a single executive, "all executive and
administrative organizations are adjuncts of the Executive Department, the heads of the various
executive departments are assistants and agents of the Chief Executive, and, except in cases where
the Chief Executive is required by the Constitution or law to act in person on the exigencies of the
situation demand that he act personally, the multifarious executive and administrative functions of
the Chief Executive are performed by and through the executive departments, and the acts of the
Secretaries of such departments, performed and promulgated in the regular course of business, are,
unless disapproved or reprobated by the Chief Executive presumptively the acts of the Chief
Executive."

Thus, and in short, "the President's power of control is directly exercised by him over the members
of the Cabinet who, in turn, and by his authority, control the bureaus and other offices under their
respective jurisdictions in the executive department. " 33

This power of control vested by the Constitution in the President cannot be diminished by law. As
held in Rufino v. Endriga,  Congress cannot by law deprive the President of his power of control,
34

thus:

The Legislature cannot validly enact a law· that puts a government office in the Executive branch
outside the control of the President in the guise of insulating that office from politics or making it
independent. If the office is part of the Executive branch, it must remain subject to the control
of the President. Otherwise, the Legislature can deprive the President of his constitutional
power of control over "all the executive x x x offices." If the Legislature can do this with the
Executive branch, then the Legislature can also deal a similar blow to the Judicial branch by
enacting a law putting decisions of certain lower courts beyond the review power of the
Supreme Court.This will destroy the system of checks and balances finely structured in the 1987
Constitution among the Executive, Legislative, and Judicial branches.  (Emphasis supplied)
35

Clearly, the President's constitutional power of control over all the executive departments, bureaus
and offices cannot be curtailed or diminished by law. "Since the Constitution has given the President
the power of control, with all its awesome implications, it is the Constitution alone which can curtail
such power."  This. constitutional power of control of the President cannot be diminished by
36

the CTA. Thus, if two executive offices or agencies cannot agree, it is only proper and logical
that the President, as the sole Executive who under the Constitution has control over both
offices or agencies in dispute, should resolve the dispute instead of the courts. The judiciary
should not intrude in this executive function of determining which is correct between the
opposing government offices or agencies, which are both under the sole control of the
President. Under his constitutional power of control, the President decides the dispute
between the two executive offices. The judiciary cannot substitute its decision over that of
the President. Only after the President has decided or settled the dispute can the courts' jurisdiction
be invoked. Until such time, the judiciary should not interfere since the issue is not yet ripe for
judicial adjudication. Otherwise, the judiciary would infringe on the President's exercise of his
constitutional power of control over all the executive departments, bureaus, and offices.

Furthermore, under the doctrine of exhaustion of administrative remedies, it is mandated that

where a remedy before an administrative body is provided by statute, relief must be sought
by exhausting this remedy prior to bringing an action in court in order to give the
administrative body every opportunity to decide a matter that comes within its jurisdiction.  A 37

litigant cannot go to court without first pursuing his administrative remedies; otherwise, his action is
premature and his case is not ripe for judicial determination.  PD 242 (now Chapter 14, Book IV of
38

Executive Order No. 292), provides for such administrative remedy. Thus, only after the President
has decided the dispute between government offices and agencies can the losing party resort to the
courts, if it so desires. Otherwise, a resort to the courts would be premature for failure to exhaust
administrative remedies. Non-observance of the doctrine of exhaustion of administrative remedies
would result in lack of cause of action,  which is one of the grounds for the dismissal of a complaint.
39

The rationale of the doctrine of exhaustion. of administrative remedies was aptly explained by the
Court in Universal Robina Corp. (Corn Division) v. Laguna Lake Development Authority: 40

The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The
thrust of the rule is that courts must allow administrative agencies to carry out their functions and
discharge their responsibilities within the specialized areas of their respective competence. The
rationale for this doctrine is obvious. It entails lesser expenses and provides for the speedier
resolution of the controversies. Comity and convenience also impel courts of justice to shy away
from a dispute until the system of administrative redress has been completed. 41

In requiring parties to exhaust administrative remedies before pursuing action in a court, the doctrine
prevents overworked courts from considering issues when remedies are available through
administrative channels. Furthermore, the doctrine endorses a more economical and less formal
42

means of resolving disputes,  and promotes efficiency since disputes and claims are generally
43

resolved more quickly and economically through administrative proceedings rather than through
court litigations.
44

The Court of Appeals ruled that under the 1997 NIRC, the dispute between the parties is within the
authority of the CIR to resolve. Section 4 of the 1997 NIRC reads:

SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds in internal revenue taxes, fees or other
charges. penalties imposed in relation thereto, or other matters arising under this Code or other laws
or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)
The first paragraph of Section 4 of the 1997 NIRC provides that the power of the CIR to interpret the
NIRC provisions and other tax laws is subject to review by the Secretary of Finance, who is the
alter ego of the President. Thus, the constitutional power of control of the President over all the
executive departments, bureaus, and offices  is still preserved. The President's power of control,
45

which cannot be limited or withdrawn by Congress, means the power of the President to alter,
modify, nullify, or set aside the judgment or action of a subordinate in the performance of his duties. 46

The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive appellate
jurisdiction of the CTA as regards the CIR's decisions on matters involving disputed assessments,
refunds in internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under NIRC, is in conflict with PD 242. Under PD 242, all disputes and
claims solely between government agencies and offices, including government-owned or controlled
corporations, shall be administratively settled or adjudicated by the Secretary of Justice, the Solicitor
General, or the Government Corporate Counsel, depending on the issues and government agencies
involved.

To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should be
adopted: (1) As regards private entities and the BIR, the power to decide disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the NIRC or other laws administered by the. BIR is vested in the CIR subject to
the exclusive appellate jurisdiction of the CTA, in accordance with Section 4 of the NIRC; and (2)
Where the disputing parties are all public entities (covers disputes between the BIR and other
government entities), the case shall be governed by PD 242.

Furthermore, it should be noted that the 1997 NIRC is a general law governing the imposition of
national internal revenue taxes, fees, and charges.  On the other hand, PD 242 is a special law
47

that applies only to disputes involving solely government offices, agencies, or

instrumentalities. The difference between a special law and a general law was clarified in Vinzons-
Chato v. Fortune Tobacco Corporation: 48

A general statute is one which embraces a class of subjects or places and does not omit any subject
or place naturally belonging to such class. A special statute, as the term is generally understood, is
one which relates to particular persons or things of a class or to a particular portion or section of the
state only.

A general law and a special law on the same subject are statutes in pari materia and should,
accordingly, be read together and harmonized, if possible, with a view to giving effect to both. The
rule is that where there are two acts, one of which is special and particular and the other general
which, if standing alone, would include the same matter and thus conflict with the special act, the
special law must prevail since it evinces the legislative intent more clearly than that of a general
statute and must not be taken as intended to affect the more particular and specific provisions of the
earlier act, unless it is absolutely necessary so to construe it in order to give its words any meaning
at all.

The circumstance that the special law is passed before or after the general act does not change the
principle. Where the special law is later, it will be regarded as an exception to, or a qualification of,
the prior general act; and where the general act is later, the special statute will be construed as
remaining an exception to its terms, unless repealed expressly or by necessary implication. 49

Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a special law,
will still prevail and is treated as an exception to the terms of the 1997 NIRC with regard
solely to intragovernmental disputes. PD 242 is a special law while the 1997 NIRC is a general
law, insofar as disputes solely between or among government agencies are concerned. Necessarily,
such disputes must be resolved under PD 242 and not under the NIRC, precisely because PD 242
specifically mandates the settlement of such disputes in accordance with PD 242. PD 242 is a valid
law prescribing the procedure for administrative settlement or adjudication of disputes among
government offices, agencies, and instrumentalities under the executive control and supervision of
the President.50

Even the BIR, through its authorized representative, then OIC-Commissioner of Internal Revenue
Lilian B. Hefti, acknowledged in the MOA executed by the BIR, NPC, and PSALM, that the Secretary
of Justice has jurisdiction to resolve its dispute with petitioner PSALM and the NPC. This is clear
from the provision in the MOA which states:

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the Department
of Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the filing of an
application for refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR
undertakes to immediately process and approve the application, and release the tax
refund/TCC within fifteen (15) working days from issuance of the DOJ ruling that is favorable
to NPC/PSALM. (Emphasis supplied)

PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO 292), otherwise
known as the Administrative Code of 1987, which took effect on 24 November 1989.51 The pertinent
provisions read:

Chapter 14- Controversies Among Government

Offices and Corporations

SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government, including
government-owned or controlled corporations, such as those arising from the interpretation and
application of statutes, contracts or agreements, shall be administratively settled or adjudicated in
the manner provided in this Chapter. This Chapter shall, however, not apply to disputes involving the
Congress, the Supreme Court, the Constitutional Commissions, and local governments.

SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the
National Government and as ex officio legal adviser of all government-owned or controlled
corporations. His ruling or decision thereon shall be conclusive and binding on all the parties
concerned.

SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed questions of law
and of fact or only factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only
departments, bureaus, offices and other agencies of the National Government as
well as government-owned or controlled corporations or entities of whom he is the
principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).
SEC. 69. Arbitration. - The determination of factual issues may be referred to an arbitration panel
composed of one representative each of the parties involved and presided over by a representative
of the Secretary of Justice or the Solicitor General, as the case may be.

SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor General,
when approved by the Secretary of Justice, shall be final and binding upon the parties involved.
Appeals may, however, be taken to the President where the amount of the claim or the value of the
property exceeds one million pesos. The decision of the President shall be final.

SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the rules and
regulations necessary to carry out the provisions of this Chapter.

Since the amount involved in this case is more than one million pesos, the DOJ Secretary's decision
may be appealed to the Office of the President in accordance with Section 70, Chapter 14, Book IV
of EO 292 and Section 552 of PD 242. If the appeal to the Office of the President is denied, the
aggrieved party can still appeal to the Court of Appeals under Section 1, Rule 43 of the 1997 Rules
of Civil Procedure.  However, in order not to further delay the disposition of this case, the Court
53

resolves to decide the substantive issue raised in the petition. 54

II. Whether the sale of the power plants is subject to VAT.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by
petitioner PSALM to private entities is subject to VAT, the Court must determine whether the sale is
"in the course of trade or business" as contemplated under Section 105 of the NIRC, which reads:

SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports
.goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this
Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act 7716.

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in
the Philippines by nonresident foreign persons shall be considered as being rendered in the course
of trade or business. (Emphasis supplied)

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale,
disposition, and privatization of the NPC generation assets, real estate and other disposable assets,
and IPP contracts with the objective of liquidating all NPC financial obligations and stranded contract
costs in an optimal manner.
PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway
and Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not
conducted in the course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020-
02, that PSALM' s sale of assets is not conducted in pursuit of any commercial or profitable activity
as to fall within the ambit of a VAT-able transaction under Sections 105 and 106 of the NIRC. The
pertinent portion of the ruling adverted to states:

2. Privatization of assets by PSALM is not subject to VAT

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods, is
collected from any person, who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, which tax shall be paid by the seller or transferor.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial activity, including transactions incidental thereto.

Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure the
orderly sale or disposition of' the property and thereafter to liquidate the outstanding loans and
obligations of NPC, utilizing the proceeds from sales and other property contributed to it, including
the proceeds from the Universal Charge, and not conducted in pursuit of any commercial or
profitable activity, including transactions incidental thereto, the same will be considered an
isolated ,transaction, which will therefore not be subject to VAT. (BIR Ruling No. 113-98 dated
July 23, 1998)  (Emphasis supplied)
55

On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13
of Republic Act No. 6395  (RA 6395) was expressly repealed by Section 24 of Republic Act No.
56

9337  (RA 9337), which reads:

57

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
persons and/or transactions affected herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National
Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the
sale of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and
regulations or parts thereof which are contrary to and inconsistent with any
provisions of this Act are hereby repealed, amended or modified accordingly.

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling
No. 020-02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore,
the CIR avers that prior to the sale, NPC still owned the power plants and not PSALM, which is just
considered as the trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-
interest of its power plants should be subject to the 10% VAT beginning 1 November 2005 and 12%
VAT beginning 1 February 2007.
We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a
successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. Under its charter, NPC
is mandated to "undertake the development of hydroelectric generation of power and the production
of electricity from nuclear, geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."  With the passage of the EPIRA law which restructured the electric
58

power industry into generation, transmission, distribution, and supply sectors, the NPC is now
primarily mandated to perform missionary electrification function through the Small Power Utilities
Group (SPUG) and is responsible for providing power generation and associated power delivery
systems in areas that are not connected to the transmission system.  On the other hand, PSALM, a
59

government-owned and controlled corporation, was created under the EPIRA law to manage the
orderly sale and privatization of NPC assets with the objective of liquidating all of NPC's financial
obligations in an optimal manner. Clearly, NPC and PSALM have different functions. Since PSALM
is not a successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does
not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power
plants is not "in the course of trade or business" as contemplated under Section 105 of the NIRC,
and thus, not subject to VAT. The sale of the power plants is not in pursuit of a commercial or
economic activity but a governmental function mandated by law to privatize NPC generation
assets. PSALM was created primarily to liquidate all NPC financial obligations and stranded contract
costs in an optimal manner. The purpose and objective of PSALM are explicitly stated in Section 50
of the EPIRA law, thus:

SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal purpose of the
PSALM Corp. is to manage the orderly sale, disposition, and privatization of NPC generation
assets, real estate and other disposable assets, and IPP contracts with the objective of
liquidating all NPC financial obligations and stranded contract costs in an optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of this Act,
unless otherwise provided by law, and all assets held by it, all moneys and properties belonging to it,
and all its liabilities outstanding upon the expiration of its term of existence shall revert to and be
assumed by the National Government. (Emphasis supplied)

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by
PSALM is not "in the course of trade or business" but purely for the specific purpose of privatizing
NPC assets in order to liquidate all NPC financial obligations. PSALM is tasked to sell and privatize
the NPC assets within the term of its existence. The EPIRA law even requires PSALM to submit a
60

plan for the endorsement by the Joint Congressional Power Commission and the approval of the
President of the total privatization of the NPC assets and IPP contracts. Section 47 of the EPIRA law
provides:

SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real estate, and
other disposable assets as well as IPP contracts of NPC shall be privatized in accordance with this
Act. Within six (6) months from the effectivity of this Act, the PSALM Corp. shall submit a plan for the
endorsement by the Joint Congressional Power Commission and the approval of the President of
the Philippines, on the total privatization of the generation assets, real estate, other disposable
assets as well as existing IPP contracts of NPC and thereafter, implement the same, in accordance
with the following guidelines, except as provided for in Paragraph (f) herein:
(a) The privatization value to the National Government of the NPC generation assets,
real estate, other disposable assets as well as IPP contracts shall be optimized;

(b) The participation by Filipino citizens and corporations in the purchase of NPC
assets shall be encouraged. In the case of foreign investors, at least seventy-five
percent (75%) of the funds used to acquire NPC-generation assets and IPP contracts
shall be inwardly remitted and registered with the Bangko Sentral ng Pilipinas;

(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its
related assets and assigned liabilities, if any, shall be grouped in a manner which
shall promote the viability of the resulting generation companies (gencos), ensure
economic efficiency, encourage competition, foster reasonable electricity rates and
create market appeal to optimize returns to the government from the sale and
disposition of such assets in a manner consistent with the objectives of this Act. In
the grouping of the generation assets and IPP contracts of NPC, the following criteria
shall be considered:

(1) A sufficient scale of operations and balance sheet strength to promote the
financial viability of the restructured units;

(2) Broad geographical groupings to ensure efficiency of operations but

without the formation of regional companies or consolidation of market
power;

(3) Portfolio of plants and IPP contracts to achieve management and

operational synergy without dominating any part of the market or the load
curve; and

(4) Such other factors as may be deemed beneficial to the best interest of the
National Government while ensuring attractiveness to potential investors.

(d) All assets of NPC shall be sold in open and transparent manner through public
bidding, and the same shall apply to the disposition of IPP contracts;

(e) In cases of transfer of possession, control, operation or privatization of multi-

purpose hydro facilities, safeguards shall be prescribed to ensure that the national
government may direct water usage in cases of shortage to protect potable water,
irrigation, and all other requirements imbued with public interest;

(f) The Agus and Pulangi complexes in Mindanao shall be excluded from an1ong the
generation companies that will be initially privatized. Their ownership shall be
transferred to the PSALM Corp. and both shall continue to be operated by the NPC.
Said complexes may be privatized not earlier than ten (10) years from the effectivity
of this Act, and, except for Agus Ill, shall not be subject to BuildOperate-Transfer (B-
0-T), Build-Rehabilitate-OperateTransfer (B-R-0-T) and other variations thereof
pursuant to Republic Act No. 6957. as amended by Republic Act No. 7718. The
privatization of Agus and Pulangi complexes hall be left to the discretion of PSALM
Corp. in consultation with Congress;

(g) The steamfield assets and generating plants of each geothermal complex shall
not be sold separately. They shall be combined and each geothermal complex shall
 be sold as one package through public bidding. The geothermal complexes covered
by this requirement include, but are not limited to, Tiwi-Makban, Leyte A and B
(Tongonan), Palinpinon, and Mt. Apo;

(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex

shall be transferred to the PSALM Corporation;

(i) Not later than three (3) years from the effectivity of this Act, and in no case later
than the initial implementation of open access, at least seventy percent (70%) of the
total capacity of generating assets of NPC and of the total capacity of the power
plants under contract with NPC located in Luzon and Visayas spall have been
privatized: Provided, That any unsold capacity shall be privatized not later than eight
(8) years from the effectivity of this Act; and

(j) NPC may generate and sell electricity only from the undisposed generating assets
and IPP contracts of PSALM Corp. and shall not incur any new obligations to
purchase power through bilateral contracts with generation companies or other
suppliers.

Thus, it is very clear that the sale of the power plants was an exercise of a governmental
function mandated by law for the primary purpose of privatizing NPC assets in accordance
with the guidelines imposed by the EPIRA law.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay),  the 61

Court ruled that the sale of the vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. is not subject to VAT since it was not in the course of trade or business, as it was
involuntary and made pursuant to the government's policy of privatization. The Court cited the CT A
ruling that the phrase "course of business" or "doing business" connotes regularity of activity. Thus,
since the sale of the vessels was an isolated transaction, made pursuant to the government's
privatization policy, and which transaction could no longer be repeated or carried on with regularity,
such sale was not in the course of trade or business and was not subject to VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made
pursuant to PSALM' s mandate to privatize NPC assets, and was not undertaken in the course of
trade or business. In selling the power plants, PSALM was merely exercising a governmental
function for which it was created under the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not
applicable in this case since it was decided under the 1986 NIRC. The CIR maintains that under
Section 105 of the 1997 NIRC, which amended Section 99  of the 1986 NIRC, the phrase "in the
62

course of trade or business" was expanded, and now covers incidental transactions. Since NPC still
owns the power plants and PSALM may only be considered as trustee of the NPC assets, the sale
of the power plants is considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's
ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law. The
pertinent provisions read:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is

hereby created a government-owned and -controlled corporation to be known as the "Power
Sector Assets and Liabilities Management Corporation," hereinafter referred to as "PSALM
Corp.," which shall take ownership of all existing NPC generation assets, liabilities, IPP
contracts, real estate and all other disposable assets. All outstanding obligations of the NPC
arising from loans, issuances of bonds, securities and other instruments of indebtedness shall be
transferred to and assumed by the PSALM Corp. within one hundred eighty (180) days from the
approval of this Act.

SEC 51. Powers. - The Corporation shall, in the performance of its functions and for the attainment
of its objectives, have the following powers:

(a) To formulate and implement a program for the sale and privatization of the NPC
assets and IPP contracts and the liquidation of the NPC debts and stranded costs,
such liquidation to be completed within the term of existence of the PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets
transferred to it;to sell or dispose of the same at such price and under such terms
and conditions as it may deem necessary or proper, subject to applicable laws, rules
and regulations;

xxxx

SEC. 55. Property of PSALM Corp. -The following funds, assets, contributions and other
property shall constitute the property of PSALM Corp.:

(a) The generation assets, real estate, IPP contracts, other disposable assets of
NPC,proceeds from the sale or disposition of such assets and residual assets from
B-0-T, R-0-T, and other variations thereof;

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPC's transferred

liabilities: Provided, however, That all borrowings shall be fully paid for by the end of
the life of the PSALM Corp.;

(d) Proceeds from the universal charge allocated for stranded contract costs and the
stranded debts of the NPC;

(e) Net profit of NPC;

(f) Net profit of TRANSCO;

(g) Official assistance, grants, and donations from external sources; and

(h) Other sources of funds as may be determined by PSALM Corp. necessary for the
above-mentioned purposes. (Emphasis supplied)

Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and other
disposable assets of the NPC was transferred to PSALM. Clearly, PSALM is not a mere trustee of
the NPC assets but is the owner thereof. Precisely, PSALM, as the owner of the NPC assets, is the
government entity tasked under the EPIRA law to privatize such NPC assets.

In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of Internal

Revenue (Mindanao 11),  which was decided under the 1997 NIRC, the Court held that the sale of a
63
fully depreciated vehicle that had been used in Mindanao II's business was subject to VAT, even if
such sale may be considered isolated. The Court ruled that it does not follow that an isolated
transaction cannot be an incidental transaction for VAT purposes. The Court then cited Section 105
of the 1997 NIRC which shows that a transaction "in the course of trade or business" includes
"transactions incidental thereto." Thus, the Court held that the sale of the vehicle is an incidental
transaction made in the course of Mindanao II's business which should be subject to VAT.

The CIR alleges that the sale made by NPC and/or its successors-in-interest of the power plants is
an incidental transaction which should be subject to VAT. This is erroneous. As previously
discussed, the power plants are already owned by PSALM, not NPC. Under the EPIRA law, the
ownership of these power plants was transferred to PSALM for sale, disposition, and privatization in
order to liquidate all NPC financial obligations. Unlike the Mindanao II case, the power plants in this
case were not previously used in PSALM's business. The power plants, which were previously
owned by NPC were transferred to PSALM for the specific purpose of privatizing such assets. The
sale of the power plants cannot be considered as an incidental transaction made in the course of
NPC's or PSALM's business. Therefore, the sale of the power plants should not be subject to VAT.

Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of
Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR to hold PSALM liable for
deficiency VAT in the amount of ₱3,813,080,472 for the sale of the Pantabangan-Masiway and
Magat Power Plants. The ₱3,813,080,472 deficiency VAT remitted by PSALM under protest should
therefore be refunded to PSALM.

However, to give effect to Section 70, Chapter 14, Book IV of the Administrative Code of 1987 on
appeals from decisions of the Secretary of Justice, the BIR is given an opportunity to appeal the
Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice to the Office of the
President within 10 days from finality of this Decision.
64

WHEREFORE, we GRANT the petition. We SETASIDE the 27 September 2010 Decision and the 3

August 2011 Resolution of the Court of Appeals in CA-G.R. SP No. 108156. The Decisions dated 13
March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case No. 2007- 3
are REINSTATED. No costs.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

(Please see concurring opinion) TERESITA J. LEONARDO-DE CASTRO

PRESBITERO J. VELASCO, JR. Associate Justice
Associate Justice

I join the dissent J. CD Castillo

DIOSDADO M. PERALTA
LUCAS P. BERSAMIN
Associate Justice
Associate Justice
 Please see dissenting opinion
JOSE CATRAL MENDOZA
MARIANO C. DEL CASTILLO
Associate Justice
Associate Justice

No Part
MARVIC M.V.F. LEONEN
ESTELA M. PERLAS-BERNABE
Associate Justice
Associate Justice

FRANCIS H. JARDELEZA ALFREDO BENJAMIN S. CAGUIOA

Associate Justice Associate Justice

SAMUEL R. MARTIRES NOEL GIMENEZ TIJAM

Associate Justice Associate Justice

ANDRES B. REYES, JR.

Associate Justice

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation,
I certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice
 THIRD DIVISION

April 5, 2017

G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review  seeks to reverse and set aside the Decision  dated September 2,
1 2

2015 and Resolution  dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB
3

No. 1224, affirming with modification the Decision  dated June 5, 2014 and the Resolution  dated
4 5

September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard
Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal Revenue (CIR) the
deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20%
interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)  of the
6

National Internal Revenue Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical
insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical services
provided by duly licensed physicians, specialists and other professional technical staff participating
in the group practice health delivery system at a hospital or clinic owned, operated or accredited by
it.
7

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and
Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and
its Fourth Quarterly VAT Return on January 25, 2007. 8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020
dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise
issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.  On. 9

January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged deficiency
VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties.  11

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any
deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner
of Internal Revenue v. Philippine Health Care Providers, Inc.,   the CIR argued that since
12

MEDICARD. does not actually provide medical and/or hospital services, but merely arranges for the
same, its services are not VAT exempt. 13

MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision
of medical and/or hospital services by hospitals and/or clinics but include actual and direct rendition
of medical and laboratory services; in fact, its 2006 audited balance sheet shows that it owns x-ray
and laboratory facilities which it used in providing medical and laboratory services to its members;
(2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients that are
registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the
processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts because P5.6
Million of which represent advances for professional fees due from clients which were paid by
MEDICARD while the remainder was already previously subjected to VAT; (4) the professional fees
in the amount of Pl 1 Million should also be excluded because it represents the amount of medical
services actually and directly rendered by MEDICARD and/or its subsidiary company; and (5) even
assuming that it is liable to pay for the VAT, the 12% VAT rate should not be applied on the entire
amount but only for the period when the 12% VAT rate was already in effect, i.e., on February 1,
2006. It should not also be held liable for surcharge and deficiency interest because it did not pass
on the VAT to its members. 14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also
submitted additional supporting documentary evidence in aid of its Protest thru a letter dated March
18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May
15, 2009, denying MEDICARD's protest, to wit:

IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency
[VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes
immediately. Should payment be made later, adjustment has to be made to impose interest until
date of payment. This is olir final decision. If you disagree, you may take an appeal to the [CTA]
within the period provided by law, otherwise, said assessment shall become final, executory and
demandable.  16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its
position before the tax authorities. 
17

On June 5, 2014, the CTA Division rendered a Decision  affirming with modifications the CIR's
18

deficiency VAT assessment covering taxable year 2006, viz.:

WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l
73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of
the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱l78,538,566.68

Add: 25% Surcharge 44,634,641.67

 Total ₱223.173.208.35

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency
VAT of Pl 78,538,566.68 computed from January 25, 2007 until full payment thereof
pursuant to Section 249(B) of the NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of
₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge
of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as afore-stated in
(a), computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of
the NIRC of 1997.

SO ORDERED. 19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of
Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning
the validity of the assessment on the ground of lack of LOA since the assessment issued against
MEDICARD contained the requisite legal and factual bases that put MEDICARD on notice of the
deficiencies and it in fact availed of the remedies provided by law without questioning the nullity of
the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors,
hospitals and clinics cannot be excluded from · the computation of its gross receipts under the
provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself an act of
ownership and management over the funds by MEDICARD which is beyond the contemplation of
RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory facilities cannot be
excluded from its gross receipts because the operation of these clinics and laboratory is merely an
incident to MEDICARD's main line of business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the premium from its members; and
(6) MEDICARD was not able to substantiate the amount pertaining to its January 2006 income and
therefore has no basis to impose a 10% VAT rate. 20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
elevated the matter to the CTA en banc.

In a Decision  dated September 2, 2015, the CTA en banc partially granted the petition only insofar
21

as the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA Division in
all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY

GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH

MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of
1997, as amended, computed as follows:

Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90

Total ₱220,234.609.48

In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l
76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to
Section 249(B) of the NIRC of 1997, as amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount of
₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge
of ₱44,046,921.90) and on the deficiency interest which have accrued as afore-stated in (a),
computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the
NIRC of 1997, as amended."

SO ORDERED. 22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it
was denied. Hence, MEDICARD now seeks recourse to this Court via a petition for review
23

on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID

TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS
RECEIPTS FOR VAT PURPOSES. 24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of tax.   An LOA is
25

premised on the fact that the examination of a taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section
6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement. –

(A) Examination of Return and Determination of Tax Due.- After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examinationof any taxpayer and the assessment of the correct
amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer.

x x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his
duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be
undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed
through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do
with the LOA. These are simply methods of examining the taxpayer in order to arrive at .the correct
amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized
representatives, other tax agents may not validly conduct any of these kinds of examinations without
prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue
(BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient
centralized Data Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of
Listing for Enforcement System (RELIEF System).  This system can detect tax leaks by matching
26

the data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party
sources. Through the consolidation and cross-referencing of third-party information, discrepancy
reports on sales and purchases can be generated to uncover under declared income and over
claimed purchases of Goods and services.

Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF
System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD) under the
Information Systems Group (ISG) is responsible for: (1) coming up with the List of Taxpayers with
discrepancies within the threshold amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and to the Audit Information, Tax
Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID under the
Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for
transmitting the LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers
District Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of
these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF data
discrepancy would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit
approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid the
assessment of the correct amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also
include the matching of data from other information or returns filed by the taxpayers with the BIR
such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books and records, if
the computerized/manual matching of sales and purchases/expenses appears to reveal
discrepancies, the same shall be communicated to the concerned taxpayer through the issuance of
LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may
begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of
an LOA with the aid of a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance with
law and are presumed correct since these are filed under the penalty of perjury  are easily rebutted
27

and the taxpayer becomes instantly burdened to explain a purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of
an LOA before any investigation or examination of the taxpayer may be conducted. As provided in
the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a
Notice of Informal Conference, which generally precedes the issuance of an assessment notice to
be valid, the same presupposes that the revenue officer who issued the same is properly authorized
in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by
RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handing
assessments against taxpayers'· issued LNs by reconciling various revenue issuances which conflict
with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe procedure
in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment and collection of
deficiency taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the
LN, the concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR
within

One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject
taxpayer shall no longer be entitled to the abatement of interest and penalties after the lapse of the
sixty (60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred and
Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall
recommend the issuance of [LOA) to replace the LN. The head of the concerned investigating
office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format in
Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the
notation "This LA cancels LN_________ No. "

xxxx

V. PROCEDURES

xxxx

B. At the Regional Office/Large Taxpayers Service

 xxxx

7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to
approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List
of LNs for conversion to LAs, to the concerned investigating offices for the encoding of the required
information x x x and for service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from
issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x.

xxxx

16. Effect the service of the above LAs to the concerned taxpayers. 28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN
against MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued
earlier was also not converted into an LOA contrary to the above quoted provision. Surprisingly, the
CIR did not even dispute the applicability of the above provision of RMO 32-2005 in the present case
which is clear and unequivocal on the necessity of an LOA for the· assessment proceeding to be
valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant the reversal of the
assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,  the Court said that:
29

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.  (Emphasis and underlining ours)
30

The Court cannot convert the LN into the LOA required under the law even if the same was issued
by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer may
avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and criminal .remedies, particularly
closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and
RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the absence
thereof cannot be simply swept under the rug, as the CIR would have it. In fact Revenue
Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue
officer is specifically required under the NIRC before an examination of a taxpayer may be had while
an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a
discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days
from date of issue while an LN has no such limitation. Third, an LOA gives the revenue officer only a
period of 10days from receipt of LOA to conduct his examination of the taxpayer whereas an LN
does not contain such a limitation.  Simply put, LN is entirely different and serves a different purpose
31

than an LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN has
serve its purpose, the revenue officer should have properly secured an LOA before proceeding with
the further examination and assessment of the petitioner. Unfortunarely, this was not done in this
case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of
the financial books or records being physically kept by MEDICARD was examined. To begin with,
Section 6 of the NIRC requires an authority from the CIR or from his duly authorized representatives
before an examination "of a taxpayer" may be made. The requirement of authorization is therefore
not dependent on whether the taxpayer may be required to physically open his books and financial
records but only on whether a taxpayer is being subject to examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much
easier and faster. The ease by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory requirement under Section 6 and with its
own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the taxpayer's records: to prevent undue
harassment of a taxpayer and level the playing field between the government' s vast resources for
tax assessment, collection and enforcement, on one hand, and the solitary taxpayer's dual need to
prosecute its business while at the same time responding to the BIR exercise of its statutory powers.
The balance between these is achieved by ensuring that any examination of the taxpayer by the BIR'
s revenue officers is properly authorized in the first place by those to whom the discretion to exercise
the power of examination is given by the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside the point because
the issue of their lack of authority was only brought up during the trial of the case. What is crucial is
whether the proceedings that led to the issuance of VAT deficiency assessment against MEDICARD
had the prior approval and authorization from the CIR or her duly authorized representatives. Not
having authority to examine MEDICARD in the first place, the assessment issued by the CIR is
inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds
merit in MEDICARD's substantive arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division
that the gross receipts of an HMO for VAT purposes shall be the total amount of money or its
equivalent actually received from members undiminished by any amount paid or payable to the
owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD explains that
its business as an HMO involves two different although interrelated contracts. One is between a
corporate client and MEDICARD, with the corporate client's employees being considered as
MEDICARD members; and the other is between the health care institutions/healthcare professionals
and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare

institutions/healthcare professionals for the coverage of MEDICARD members under specific health
related services for a specified period of time in exchange for payment of a more or less fixed
membership fee. Under its contract with its corporate clients, MEDICARD expressly provides that
20% of the membership fees per individual, regardless of the amount involved, already includes the
VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would earmark this latter
portion for medical utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in its
gross receipts of its earnings from medical services which it actually and directly rendered to its
members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid membership fees
and for a specified period of time, then MEDICARD is principally engaged in the sale of services. Its
VAT base and corresponding liability is, thus, determined under Section 108(A)  of the Tax Code, as
32

amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer
in securities whose gross receipts is the amount actually received as contract price without allowing
any deduction from the gross receipts.  This restrictive tenor changed under RR No. 16-2005. Under
33

this RR, an HMO's gross receipts and gross receipts in general were defined, thus:

Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service
fee actually or constructively received during the taxable period for the services performed or to be
performed for another person, excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received.

Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as payments for services
rendered, and advance payments actually or constructively received during the taxable period for
the services performed or to be performed for another person, excluding the VAT.  34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the
definition of gross receipts in general.
35

According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007
does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of an
HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under the
RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation for
their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the
amount it received as membership fee does NOT actually compensate it but some other person,
which in this case are the medical service providers themselves. It is a well-settled principle of legal
hermeneutics that words of a statute will be interpreted in their natural, plain and ordinary
acceptation and signification, unless it is evident that the legislature intended a technical or special
legal meaning to those words. The Court cannot read the word "presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base
under the NIRC does not contain any specific definition.  Therefore, absent a statutory definition, this
36

Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts
is understood as comprising the entire receipts without any deduction.  Congress, under Section
37

108, could have simply left the term gross receipts similarly undefined and its interpretation
subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope of the term gross
receipts for VAT purposes only to the amount that the taxpayer received for the services it performed
or to the amount it received as advance payment for the services it will render in the future for
another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members will
be able to avail of the pre-arranged medical services from its accredited healthcare providers without
the necessary protocol of posting cash bonds or deposits prior to being attended to or admitted to
hospitals or clinics, especially during emergencies, at any given time. Apart from this, MEDICARD
may also directly provide medical, hospital and laboratory services, which depends upon its
member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the
former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its ·members, MEDICARD would not actually be providing the actual healthcare
service. Thus, based on industry practice, MEDICARD informs its would-be member beforehand that
80% of the amount would be earmarked for medical utilization and only the remaining 20%
comprises its service fee. In the latter case, MEDICARD's sale of its services is exempt from VAT
under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC
that would extend the definition of gross receipts even to amounts that do not only pertain to the
services to be performed: by another person, other than the taxpayer, but even to amounts that were
indisputably utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat, that
is, we choose the interpretation which gives effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, the Court adopted
38

the principal object and purpose object in determining whether the MEDICARD therein is engaged in
the business of insurance and therefore liable for documentary stamp tax. The Court held therein
that an HMO engaged in preventive, diagnostic and curative medical services is not engaged in the
business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after .the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of service, even
on the contingency that it be needed, and contracting merely to stand its cost when or after it is
rendered.  (Emphasis ours)
39

In sum, the Court said that the main difference between an HMO arid an insurance company is that
HMOs undertake to provide or arrange for the provision of medical services through participating
physicians while insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the value added
by the performance of the service by the taxpayer. It is, thus, this service and the value charged
thereof by the taxpayer that is taxable under the NIRC.

To be sure, there are pros and cons in subjecting the entire amount of membership fees to
VAT.  But the Court's task however is not to weigh these policy considerations but to determine if
40

these considerations in favor of taxation can even be implied from the statute where the CIR
purports to derive her authority. This Court rules that they cannot because the language of the NIRC
is pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of
taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws
is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to tax statutes, it is basic that
in case of doubt, such statutes are to be construed most strongly against the government and in
favor of the subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws.   (Citation omitted and emphasis
41

and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the
authority should have been reasonably founded from the language of the statute. That language is
wanting in this case. In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts,
however, will not uphold these authorities' interpretations when dearly absurd, erroneous or
improper.  The CIR's interpretation of gross receipts in the present case is patently erroneous for
42

lack of both textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and
management over the funds, the Court does not agree.  On the contrary, it is MEDICARD's act of
1âwphi1

earmarking or allocating 80% of the amount it received as membership fee at the time of payment
that weakens the ownership imputed to it. By earmarking or allocating 80% of the amount,
MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner
but as a mere administrator of the same. For this reason, at most, MEDICARD's right in relation to
these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if,
there is underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDI
CARD is bound to pay from the amounts it had allocated as an administrator once its members avail
of the medical services of MEDICARD's healthcare providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts
MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical service
providers should form part of its gross receipt for VAT purposes, after having paid the VAT on the
amount comprising the 20%. It is significant to note in this regard that MEDICARD established that
upon receipt of payment of membership fee it actually issued two official receipts, one pertaining to
the VAT able portion, representing compensation for its services, and the other represents the non-
vatable portion pertaining to the amount earmarked for medical utilization.: Therefore, the absence
of an actual and physical segregation of the amounts pertaining to two different kinds · of fees
cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from
proving that indeed services were rendered by its healthcare providers for which it paid the amount it
sought to be excluded from its gross receipts.

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

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of
the CTA en banc grounded as it is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent for
medical utilization of its members should not be included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The

Decision dated September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of
Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE. The definition of gross
receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the
National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent (80%)
of the amount of the contract price earmarked as fiduciary funds for the medical utilization of its
members. Further, the Value-Added Tax deficiency assessment issued against Medicard
Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of Authority
by the Commissioner of Internal Revenue or his duly authorized representatives.

SO ORDERED.

BIENVENID L. REYES,
Associate Justice

WE CONCUR:
 PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson

LUCAS P. BERSAMIN ALFREDO BENJAMIN S. CAGUIOA

Associate Justice Associate Justice

NOEL G. TIJAM
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson,

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation,
I certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice
 SECOND DIVISION

G.R. No. 183505               February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.

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 matter3 to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act
(RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of
the Court of Tax Appeals (CTA).

Factual Antecedents

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

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount
of ₱119,276,047.40 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 ₱124,035,874.12. 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 ₱35,823,680.93. 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 ₱35,823,680.93 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 ₱35,840,895.78. 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 ₱35,840,895.78 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
₱32,802,912.21 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 ₱28,196,376.46 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 ₱33,610,202.91 and ₱28,590,826.50 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 State’s 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 State’s 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.
Respondent’s 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 denied36 the Petition for Review and dismissed37 as well petitioner’s 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.

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

Respondents’ Arguments

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

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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

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

The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by land, air and water relative to their transport
of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 119 of this Code; services
of banks, non-bank financial intermediaries and finance companies; and non-life insurance
companies (except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. The phrase "sale or exchange of services" shall
likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

xxxx

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

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

x x x x (Emphasis supplied)

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

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

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in
public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as
"a contract by which one owning such property grants to another the right to possess, use and enjoy
it on specified period of time in exchange for periodic payment of a stipulated price, referred to as
rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40

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 1143 of the Local Tax Code,44 however, amended this provision by
transferring the power to impose amusement tax45 on admission from theaters, cinematographs,
concert halls, circuses and other places of amusements exclusively to the local government. Thus,
when the NIRC of 197746 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 Law48 was promulgated. It amended certain provisions of the NIRC of
1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and
percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof,
which provides:
SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax. — There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods
for others; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties: Provided That the following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:

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

xxxx

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

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

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined by multiplying
the gross receipts (including the amount intended to cover the tax or the tax billed
erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted
from the coverage of VAT.49

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

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

xxxx

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

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

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

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

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC
of 199751 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
tax53 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. 1auuphil

(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

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION ROBERTO A. ABAD

Associate Justice Associate Justice

JOSE P. PEREZ
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s attestation, it
is hereby certified that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice
 EN BANC

G.R. No. 193007               July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners, 

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

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
relief1 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 III’s
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 "user’s 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 government’s 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 State’s 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 reply6 to the government’s 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 Court’s 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 Court’s 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
government’s 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 VAT’s 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 latter’s 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 ₱10 million
and gas and water utilities) that Section 11913 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 "user’s tax" and to impose VAT on toll fees is tantamount to
taxing a tax.21Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals: 22

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

x x x The operation by the government of a tollway does not change the character of the road as one
for public use. Someone must pay for the maintenance of the road, either the public indirectly
through the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a more efficient
and equitable manner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as "one
intended for public use." Even if the government collects toll fees, the road is still "intended for public
use" if anyone can use the road under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions
and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed
user’s 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 user’s 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 "user’s tax" must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque 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 user’s 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 user’s 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 seller’s
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 tax30 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
"user’s tax." VAT is assessed against the tollway operator’s 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 BIR’s 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 circular’s 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 law’s 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.
1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Court’s 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
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s
temporary restraining order dated August 13, 2010.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice

(On Leave)
DIOSDADO M. PERALTA
LUCAS P. BERSAMIN*
Associate Justice
Associate Justice

MARIANO C. DEL CASTILLO MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA

Associate Justice Associate Justice

(On Official Leave)

MARIA LOURDES P. A. SERENO**
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in
the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court.

RENATO C. CORONA
Chief Justice
 SECOND DIVISION

G.R. No. 209776, December 07, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNITED CADIZ SUGAR

FARMERS ASSOCIATION MULTI-PURPOSE COOPERATIVE, Respondent.

DECISION

BRION, J.:

Before us is the petition for review on certiorari1 (under Rule 45 of the Rules of Court) filed by the
Commissioner of Internal Revenue (CIR) to assail the June 5, 2013 decision 2 and the October 30, 2013
resolution3 of the Court of Tax Appeals (CTA) en banc in CTA EB No. 846 (CTA Case No. 7995).

In the assailed decision and resolution, the CTA en banc affirmed the decision4 and resolution5 of the CTA
Second Division (CTA division).

The Facts

By law, the CIR is empowered, among others, to act on and approve claims for tax refunds or credits.

The respondent United Cadiz Sugar Farmers Association Multi-purpose Cooperative (UCSFA-MPC) is a multi-
purpose cooperative with a Certificate of Registration issued by the Cooperative Development Authority
(CDA) dated January 14, 2004.6

In accordance with Revenue Regulations (RR) No. 20-2001, the Bureau of Internal Revenue ( BIR) issued
BIR Ruling No. RR12-08-2004,7 otherwise known as the "Certificate of Tax Exemption" in favor of UCSFA-
MPC.

In November 2007, BIR Regional Director Rodita B. Galanto of BIR Region 12 - Bacolod City required
UCSFA-MPC to pay in advance the value-added tax (VAT) before her office could issue the Authorization
Allowing Release of Refined Sugar (AARRS) from the sugar refinery/mill. This was the first instance that the
Cooperative was required to do so. This prompted the cooperative to confirm with the BIR 8 whether it is
exempt from the payment of VAT pursuant to Section 109(1) of the National Internal Revenue Code
(NIRC).9

The BIR responded favorably to UCSFA-MPC's query. In BIR Ruling No. ECCP-015-08, 10 the CIR11 ruled that
the cooperative "is considered as the actual producer of the members' sugarcane production, because it
primarily provided the various inputs (fertilizers), capital, technology transfer, and farm management."
(emphasis supplied) The CIR thus confirmed that UCSFA-MPC's sale of produce to members and non-
members is exempt from the payment of VAT.

As a result, Regional Director Galanto no longer required the advance payment of VAT from UCSFA-MPC and
began issuing AARRS in its favor, thereby allowing the cooperative to withdraw its refined sugar from the
refinery. But, in November 2008, the administrative legal opinion notwithstanding, Regional Director
Galanto, again demanded the payment of advance VAT from UCSFA-MPC. Unable to withdraw its refined
sugar from the refinery/mill for its operations, UCSFA-MPC was forced to pay advance VAT under protest.

On November 11, 2009, UCSFA-MPC filed an administrative claim for refund with the BIR, asserting that it
had been granted tax exemption under Article 61 of Republic Act No. (RA) 6938, otherwise known as the
Cooperative Code of the Philippines (Cooperative Code),12 and Section 109(1) of the NIRC.13
On November 16, 2009, it likewise filed a judicial claim for refund before the CTA division. During the trial,
UCSFA-MPC presented, among other documents, its Certificates of Registration 14 and Good Standing15 issued
by the CDA; Certificate of Tax Exemption, 16 and BIR Ruling No. ECCP-015-08 issued by the BIR, 17 as well as
its Summary of VAT Payments Under Protest, Certificates of Advance Payment, official receipts, and
payment forms to substantiate its claim.

The CTA division ruled in UCSFA-MPC's favor, 18 thus upholding the cooperative's exemption from the
payment of VAT; the division held that the amount of P3,469,734.00 representing advance VAT on 34,017
LKG bags of refined sugar withdrawn from the refinery, was illegally or erroneously collected by the BIR. The
CIR moved but failed to obtain reconsideration of the CTA division ruling.

The CIR then sought recourse before the CTA en banc. In its assailed decision, 19 the CTA en bancaffirmed
the CTA division's ruling and ruled that UCSFA-MPC successfully proved its entitlement to tax exemption
through its Certificate of Tax Exemption and BIR Ruling No. ECCP-015-08 (which confirmed its status as a
tax-exempt cooperative). The CTA en banc also held that both its administrative and judicial claims for
refund were timely filed, having been filed within the two-year prescriptive period, 20 in accordance with the
requirements of Sections 204(C) and 229 of the NIRC.

In denying the CIR's motion for reconsideration, 21 the CTA en banc further ruled that the payment of VAT on
sales necessarily includes the exemption from the payment of advance VAT. It also struck down the
argument questioning the validity of UCSFA-MPC's Certificate of Good Standing for having been raised
belatedly and thus considered waived.

Finally, it also held that as a tax-exempt cooperative, UCSFA-MPC is not required to file monthly VAT
declarations. The presentation of these documents is therefore not essential in proving its claim for refund.

These developments gave rise to the present petition.

The Court's Ruling

We find the petition unmeritorious.

We have consistently ruled that claims for tax refunds, when based on statutes granting tax exemption,
partake of the nature of an exemption.22 Tax refunds and exemptions are exceptions rather than the rule
and for this reason are highly disfavored. 23 Hence, in evaluating a claim for refund, the rule of strict
interpretation applies.

This rule requires the claimant to prove not only his entitlement to a refund, but also his due observance of
the reglementary periods within which he must file his administrative and judicial claims for refund. 24Non-
compliance with these substantive and procedural due process requirements results in the denial of the
claim.25  It is then essential for us to discuss each requirement and evaluate whether these have been duly
cralawred

complied with in the present case.

Procedural requirements: Present 

claim for refund was timely filed.

UCSFA-MPC s claim for refund - grounded as it is on payments of advance VAT alleged to have beenillegally
and erroneously collected from November 15, 2007 to February 13, 2009 - is governed by Sections
204(C)26 and 22927 of the NIRC. These provisions are clear: within two years from the date of payment of
tax, the claimant must first file an administrative claim with the CIR28 before filing itsjudicial claim with
the courts of law.29 Both claims must be filed within a two-year reglementary period. 30 Timeliness of the
filing of the claim is mandatory and jurisdictional. The court 31 cannot take cognizance of a judicial claim for
refund filed either prematurely or out of time.

In the present case, the court a quo  found that while the judicial claim was filed merely five days after filing
the administrative claim, both claims were filed within the two-year reglementary period. Thus, the CTA
correctly exercised jurisdiction over the judicial claim filed by UCSFA-MPC.
Substantive requirements: UCSFA 
MPC proved its entitlement to refund

As mentioned, the rule on strict interpretation requires the claimant to sufficiently establish his entitlement
to a tax refund. If the claimant asserts that he should be refunded the amount of tax he has previously paid
because he is exempted from paying the tax, 32 he must point to the specific legal provision of law granting
him the exemption. His right cannot be based on mere implication. 33

In this case, the cooperative claims that it is exempted — based on Section 61 of R.A. 6938 and Section
109(1) of the NIRC — from paying advance VAT when it withdraws refined sugar from the refinery/mill as
required by RR. No. 6-2007. UCSFA-MPC thus alleges that the amounts of advance VAT it paid under protest
from November 15, 2007 to February 13, 2009, were illegally arid erroneously collected.

UCSFA-MPC 's sale of refined sugar 

is VAT-exempt.

As a general rule under the NIRC, a seller shall be liable for VAT 34 on the sale of goods or properties based
on the gross selling price or gross value in money of the thing sold. 35 However, certain transactions are
exempted from the imposition of VAT. 36 One exempted transaction is the sale of agricultural food products in
their original state. 37 Agricultural food products that have undergone simple processes of preparation or
preservation for the market are nevertheless considered to be in their original state. 38

Sugar is an agricultural food product. Notably, tax regulations differentiate between raw sugar andrefined
sugar.39

For internal revenue purposes, the sale of raw cane sugar is exempt from VAT40 because it is considered to
be in its original state. 41 On the other hand,  refined sugar is an agricultural product that can no longer be
considered to be in its original state because it has undergone the refining process; its sale is thus subject to
VAT.

Although the sale of refined sugar is generally subject to VAT, such transaction may nevertheless qualify as
a VAT-exempt transaction if the sale is made by a cooperative. Under Section 109(1) of the NIRC, 42sales by
agricultural cooperatives  are exempt from VAT provided the following conditions concur, viz:

First, the seller must be an agricultural cooperative duly registered with the CDA. 43 An agricultural
cooperative is "duly registered" when it has been issued a certificate of registration by the CDA. This
certificate is conclusive evidence of its registration.44

Second, the cooperative must sell either:

1) exclusively to its members; or

2) to both members and non-members, its produce, whether in its original state or processed form.45

The second requisite differentiates cooperatives according to its customers. If the cooperative transacts only
with members, all its sales are VAT-exempt, regardless of what it sells. On the other hand, if it transacts
with both members and non-members, the product sold must be the cooperative's own produce in order to
be VAT-exempt. Stated differently, if the cooperative only sells its produce or goods that it manufactures on
its own, its entire sales is VAT-exempt.46

A cooperative is the producer of the sugar if it owns or leases the land tilled, incurs the cost of agricultural
production of the sugar, and produces the sugar cane to be refined. 47 It should not have merely purchased
the sugar cane from its planters-members. 48

UCSFA-MPC satisfies these requisites in the present case.

First, UCSFA-MPC presented its Certificate of Registration issued by the CDA. It does not appear in the
records that the CIR ever objected to the authenticity or validity of this certificate. Thus, the certificate is
conclusive proof that the cooperative is duly registered with the CDA. 49

While its certificate of registration is sufficient to establish the cooperative's due registration, we note that it
also presented the Certificate of Good Standing that the CDA issued. This further corroborates its claim that
it is duly registered with the CDA.

Second, the cooperative also presented BIR Ruling No. ECCP-015-08, which states that UCSFA-MPC "is
considered as the actual producer of the members' sugar cane production because it primarily provided
the various productions inputs (fertilizers), capital, technology transfer, and farm management." It
concluded that the cooperative "has direct participation in the sugar cane production of its farmers-
members."

Thus, the BIR itself acknowledged and confirmed that UCSFA-MPC is the producer of the refined sugar it
sells. Under the principle of equitable estoppel,50 the petitioner is now precluded from unilaterally revoking
its own pronouncement and unduly depriving the cooperative of an exemption clearly granted by law.

With the UCSFA-MPC established as a duly registered cooperative and the producer of sugar cane, its sale
of refined sugar is exempt from VAT, whether the sale is made to members or to non-members.

The VAT-exempt nature of the sales made by agricultural cooperatives under the NIRC is consistent with the
tax exemptions granted to qualified cooperatives under the Cooperative Code which grants cooperatives
exemption from sales tax51 on transactions with members and non-members.52

These conclusions reduce the issue in the case to whether the granted exemption also covers
the payment of advance VAT upon withdrawal of refined sugar from the refinery or mill.

Exemption from VAT on  sale  of

refined sugar by an agricultural
cooperative includes the exemption 
from the requirement of advance
payment  thereof.

The CTA en banc ruled that the cooperative is exempted from the payment of advance VAT.53 It also ruled
that the exemption from the payment of VAT on sales necessarily includes the exemption from the payment
of advance VAT.54

The CIR argues that the exemption granted by the Cooperative Code and NIRC, on which the Certificate of
Tax Exemption and BIR Ruling No. ECC-015-08 issued in favor of UCSFA-MPC were based, only covers VAT
on the sale of produced sugar. It does not include the exemption from the payment of advance VAT
in the withdrawal of refined sugar from the sugar mill.55

The CIR's argument fails to persuade us.

As we discussed above, the sale of refined sugar by an agricultural cooperative is exempt from VAT. To fully
understand the difference between VAT on the sale of refined sugar and the advance VAT upon withdrawal
of refined sugar, we distinguish between the tax liability that arises from the imposition of VAT and
the obligation of the taxpayer to pay the same.

Persons liable for VAT on the sale of goods shall pay the VAT due, in general, on a monthly basis. VAT
accruing from the sale of goods in the current month shall be payable the following month. 56 However, there
are instances where VAT is required to be paid in advance,57 such as in the sale of refined sugar. 58

To specifically address the policies and procedures governing the advance payment of VAT on the sale of
refined sugar, RR Nos. 6-2007 and 13-2008 were issued.
Under these regulations, VAT on the sale of refined sugar that, under regular circumstances, is payable
within the month following the actual sale of refined sugar, shall nonetheless be paid in advance before the
refined sugar can even be withdrawn from the sugar refinery/mill by the sugar owner. Any advance VAT
paid by sellers of refined sugar shall be allowed as credit  against their output tax on the actual gross selling
price of refined sugar.59

Recall in this regard that VAT is a transaction tax imposed at every stage of the distribution process: on the
sale, barter, exchange, or lease of goods or services. 60 Simply stated, VAT generally arises because an
actual sale, barter, or exchange has been consummated.

In the sugar industry, raw sugar is processed in a refinery/mill which thereafter transforms the raw sugar
into refined sugar. The refined sugar is then withdrawn or taken out of the refinery/mill and sold to
customers.61 Under this flow, the withdrawal of refined sugar evidently takes place prior to its sale.

The VAT implications of the withdrawal of refined sugar from the sugar refinery/mill and the actual sale of
refined sugar are different. While the sale is the actual transaction upon which VAT is imposed, the
withdrawal gives rise to the obligation to pay the VAT due, albeit in advance. Therefore, the requirement for
the advance payment of VAT for refined sugar creates a special situation: While the transaction giving rise
to the imposition of VAT — the actual sale of refined sugar — has not yet taken place, the VAT that would be
due from the subsequent sale is, nonetheless, already required to be paid earlier, which is before the
withdrawal of the goods from the sugar refinery/mill.

To be clear, the transaction subject to VAT is still the sale of refined sugar. The withdrawal of sugar is not a
separate transaction subject to VAT. It is only the payment thereof that is required to be made in advance.

While the payment of advance VAT on the sale of refined sugar is, in general, required before these goods
may be withdrawn from the refinery/mill, cooperatives are exempt from this requirement because they are
cooperatives.

Revenue regulations specifically provide that such withdrawal shall not be subject to the payment of
advance VAT if the following requisites are present, viz:

First, the withdrawal is made by a duly accredited and registered agricultural cooperative in good
standing.62 It was later clarified that a cooperative is in good standing if it is a holder of a certificate of
good standing issued by the CDA.63

Second, the cooperative should also the producer of the sugar being withdrawn.64

Third, the cooperative withdrawing the refined sugar should subsequently sell the same to either its
members or another agricultural cooperative. 65

In sum, the sale of refined sugar by an agricultural cooperative duly registered with the CDA is exempt from
VAT. A qualified cooperative also enjoys exemption from the requirement of advance payment of VAT upon
withdrawal from the refinery/mill. The agricultural cooperative's exemption from the requirement of advance
payment is a logical consequence of the exemption from VAT of its sales of refined sugar. We elaborate on
this point as follows:

First, the VAT required to be paid in advance (upon withdrawal) is the same VAT to be imposed on the
subsequent sale of refined sugar. If the very transaction (sale of refined sugar) is VAT-exempt, there is no
VAT to be paid in advance because, simply, there is no transaction upon which VAT is to be imposed.

Second, any advance VAT paid upon withdrawal shall be allowed as credit against its output tax arising from
its sales of refined sugar. If all sales by a cooperative are VAT-exempt, no output tax shall materialize. It is
simply absurd to require a cooperative to make advance VAT payments if it will not have any output tax
against which it can use/credit its advance payments.

Thus, we sustain the CTA en banc's ruling that if the taxpayer is exempt from VAT on the sale of refined
sugar, necessarily, it is also exempt from the advance payment of such tax.
Tax regulations cannot impose 
additional requirements other than 
what is required under the law as a
condition for tax exemption.

Insisting that UCSFA-MPC does not enjoy exemption from the payment of advance VAT, the CIR questions
the cooperative's compliance with tax regulations that require cooperatives to make additional documentary
submissions to the BIR prior to the issuance of a certificate of tax exemption.

According to the CIR, RR No. 13-2008 requires an agricultural producer cooperative duly registered with the
CDA to be in good standing before it can avail of the exemption from the advance payment of VAT. It claims
that the cooperative failed to present any certificate of good standing. While it did present a certificate of
good standing, the cooperative only acquired this certificate on August 25, 2009. Hence, it was not exempt
from advance payment of VAT during the period subject of its refund, or between November 15, 2007 to
February 15, 2009.66

We disagree with this CIR submission.

First, the CTA observed that the petitioner questioned the cooperative's certificate of good standing for the
first time in its motion for reconsideration filed before the CTA en banc. Thus, the CTA en banc was correct
in ruling that under the Rules of Court the argument is deemed waived, having been belatedly raised. No
new issue in a case can be raised in a pleading, which issue, by due diligence, could have been raised in
previous pleadings.67

Second, the certificate of good standing is one of the requirements for the issuance of a certificate of tax
exemption under RR No. 20-2001.

Article 2(d) of the Cooperative Code defines a certificate of tax exemption as "the ruling granting exemption
to the cooperative" issued by the BIR. In turn, under RR No. 20-2001, the cooperative shall file a letter-
application for the issuance of certificate of tax exemption, attaching thereto its certificates of registration
and good standing duly issued by the CDA. 68 The certificate of tax exemption shall remain valid so long as
the cooperative is "in good standing" as ascertained by the CDA. 69

In line with the presumption of regularity in the performance of duties of public officers, the issuance of the
certificate of tax exemption in favor of UCSFA-MPC presupposes that the cooperative submitted to the BIR
the complete documentary requirements for application, including its certificate of good standing. Simply
stated, when the cooperative's certificate of tax exemption was issued in 2004, it had already obtained its
certificate of good standing from the CDA.

The fact that its certificate of good standing was dated August 25, 2009, should not be detrimental to
UCSFA-MPC's case. As it correctly points out, a certificate of good standing is renewed and issued annually
by the CDA. Its renewal simply shows that it has remained to be in good standing with the CDA since its
original registration. More importantly, no evidence was presented to show that either the certificate of
registration or certificate of good standing had been previously revoked.

Third, as discussed earlier, the exemption from VAT on the sale of refined sugar carries with it the
exemption from the payment of advance VAT before the withdrawal of refined sugar from the refinery/mill.

Section 109(1) of the NIRC clearly sets forth only two requisites for the exemption of the sale of refined
sugar from VAT. Tax regulations implementing Sections 61 and 62 of the Cooperative Code as well as
Section 109(1) of the NIRC must be read together, and read as well to be consistent with the laws from
which they have been derived. Thus, RR 20-2001 must be understood to implement the same principle as
the Cooperative Code and the NIRC and not add to the existing requirements provided by these laws.

We must remember that regulations may not enlarge, alter, or restrict the provisions of the law it
administers; it cannot engraft additional requirements not contemplated by the legislature. 70 A taxpayer-
claimant should not be required to submit additional documents beyond what is required by the law; the
taxpayer-claimant should enjoy the exemption it has, by law, always been entitled to.
Hence, once the cooperative has sufficiently shown that it has satisfied the requirements under Section
109(1) of the NIRC for the exemption from VAT on its sale of refined sugar (i.e., that it is duly registered
with the CDA and it is the producer of the sugar cane from which refined sugar is derived), its exemption
from the advance payment of VAT should automatically be granted and recognized.

On these bases, we reject the CIR's insistence that RR No. 13-2008 requires the submission of a certificate
of good standing as a condition to a cooperative's exemption from the requirement of advance payment of
VAT. In the same vein, the petitioner's argument that the submission of monthly VAT declarations and
quarterly VAT returns is essential to a claim for tax refund must also fail.

The Certificate of Tax Exemption and 

BIR Ruling No. ECCP-015-2008 have 
not been revoked.

Finally, the CIR questions the validity of the certificate of exemption and BIR Ruling No. ECCP-015-08 used
by UCSFA-MPC to prove its exemption from tax. Citing Commissioner of Internal Revenue v. Burmeister and
Wain Scandinavian Contractor Mindanao, Inc.,71 the CIR insists that the BIR rulings on which the cooperative
anchors its exemption were, in the first place, deemed revoked when it filed an Answer to the cooperative's
judicial claim for refund before the CTA Division. 72

On the other hand, UCSFA-MPC points out that, while the case cited held that the filing of an answer by the
CIR is a revocation of prior rulings issued in favor of the taxpayer-claimant, it has a recognized exception:
the principle of non-retroactivity of rulings under Section 246 of the NIRC. 73

We agree with UCSFA-MPC.

The basic rule is that if any BIR ruling or issuance promulgated by the CIR is subsequently revoked or
nullified by the CIR herself or by the court, the revocation/nullification cannot be applied retroactively to the
prejudice of the taxpayers. Hence, even if we consider that the CIR had revoked the rulings previously
issued in favor of UCSFA-MPC upon the filing of her answer, it cannot effectively deprive UCSFA-MPC of its
rights under the rulings prior to their revocation.

We note that, as pointed out by UCSFA-MPC, this principle was recognized as an exception in the very case
the CIR cited, although the CIR opted to omit this portion of the cited case.

Being exempt from VAT on the sale of refined sugar and the requirement of advance payment of VAT, the
amounts that UCSFA-MPC had paid from November 15, 2007 to February 13, 2009, were illegally and
erroneously collected. Accordingly, a refund is in order.

WHEREFORE, we DENY the petition and accordingly AFFIRM the June 5, 2013 decision and the October
30, 2013 resolution of the CTA en banc in CTA EB No. 846.

SO ORDERED.

Carpio, (Chairperson), Del Castillo, Mendoza, and Leonen, JJ., concur. 

 FIRST DIVISION

G.R. No. 190506, June 13, 2016

CORAL BAY NICKEL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

BERSAMIN, J.:

This appeal is brought by a taxpayer whose claim for the refund or credit pertaining to its alleged unutilized
input tax for the third and fourth quarters of the year 2002 amounting to P50,124,086.75 had been denied
by the Commissioner of Internal Revenue. The Court of Tax Appeals (CTA) En Banc and in Division denied
its appeal.

We sustain the denial of the appeal.

Antecedents

The petitioner, a domestic corporation engaged in the manufacture of nickel and/or cobalt mixed sulphide, is
a VAT entity registered with the Bureau of Internal Revenue (BIR). It is also registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Rio Tuba Export Processing Zone
under PEZA Certificate of Registration dated December 27, 2002. 1 chanrobleslaw

On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring unutilized input tax from its
domestic purchases of capital goods, other than capital goods and services, for its third and fourth quarters
of 2002 totalling P50,124,086.75. On June 14, 2004,3 it filed with Revenue District Office No. 36 in Palawan
its Application for Tax Credits/Refund (BIR Form 1914) together with supporting documents.

Due to the alleged inaction of the respondent, the petitioner elevated its claim to the CTA on July 8, 2004 by
petition for review, praying for the refund of the aforesaid input VAT (CTA Case No. 7022). 4 chanrobleslaw

After trial on the merits, the CTA in Division promulgated its decision on March 10, 2008 5 denying the
petitioner's claim for refund on the ground that the petitioner was not entitled to the refund of alleged
unutilized input VAT following Section 106(A)(2)(a)(5) of the National Internal Revenue Code (NIRC) of
1997, as amended, in relation to Article 77(2) of the Omnibus Investment Code and conformably with the
Cross Border Doctrine. In support of its ruling, the CTA in Division cited Commissioner of Internal Revenue
v.  Toshiba  Information Equipment (Phils) Inc. (Toshiba)6 and Revenue Memorandum Circular ("RMC") No.
42-03.7chanrobleslaw

After the CTA in Division denied its Motion for Reconsideration 8 on July 2, 2008,9 the petitioner elevated the
matter to the CTA En Banc (CTA EB Case No. 403), which also denied the petition through the assailed
decision promulgated on May 29, 2009.10 chanrobleslaw

The CTA En Banc denied the petitioner's Motion for Reconsideration through the resolution dated December
10, 2009.11 chanrobleslaw

Hence, this appeal, whereby the petitioner contends that Toshiba is not applicable inasmuch as the
unutilized input VAT subject of its claim w(as incurred from May 1, 2002 to December 31, 2002 as a VAT-
registered taxpayer, not as a PEZA-registered enterprise; that during the period subject of its claim, it was
not yet registered with PEZA because it was only on December 27, 2002 that its Certificate of Registration
was issued;12 that until then, it could not have refused the payment of VAT on its purchases because it could
not present any valid proof of zero-rating to its VAT-registered suppliers; and that it complied with all the
procedural and substantive requirements under the law and regulations for its entitlement to the refund. 13 chanrobleslaw

Issue
Was the petitioner, an entity located within an ECOZONE, entitled to the refund of its unutilized input taxes
incurred before it became a PEZA registered entity?

Ruling of the Court

The appeal is bereft of merit.

We first explain why we have given due course to the petition for review on certiorari despite the petitioner's
premature filing of its judiqial claim in the CTA.

The petitioner filed with the BIR on June 10, 2004 its application for tax refund or credit representing the
unutilized input tax for the third and fourth quarters of 2002. Barely 28 days later, it brought its appeal in
the CTA contending that there was inaction on the part of the petitioner despite its not having waited for the
lapse of the 120-day period mandated by Section 112 (D) of the 1997 NTRC. At the time of the petitioner's
appeal, however, the applicable rule was that provided under BIR Ruling No. DA-489-03, 14issued on
December 10, 2003, to wit: ChanRoblesVirtualawlibrary

It appears, therefore, that it is not necessary for the Commissioner of Internal Revenue to first act
unfavorably on the claim for refund before the Court of Tax Appeals could validly take cognizance of the
case. This is so because of the positive mandate of Section 230 of the Tax Code and also by virtue of the
doctrine that the delay of the Commissioner in rendering his decision does not extend the reglementary
period prescribed by statute.

Incidentally, the taxpayer could not be faulted for taking advantage of the full two-year period set by law for
filing his claim for refund [with the Commissioner of Internal Revenue]. Indeed, no provision in the tax code
requires that the claim for refund be fxled at the earliest instance in order to give the Commissioner an
opportunity to rule on it and the court to review the ruling of the Commissioner of Internal Revenue on
appeal. xxx
As pronounced in Silicon Philippines Inc. vs. Commissioner of Internal Revenue,15 the exception to the
mandatory and jurisdictional compliance with the 120+30 day-period is when the claim for the tax refund or
credit was filed in the period between December 10, 2003 and October 5, 2010 during which BIR Ruling No.
DA-489-03 was still in effect. Accordingly, the premature filing of the judicial claim was allowed, giving to
the CTA jurisdiction over the appeal.

As to the main issue, we sustain the assailed decision of the CTA En Banc.

The petitioner's insistence, that Toshiba is not applicable because Toshiba Information Equipment (Phils)

Inc., the taxpayer involved thereat, was a PEZA-registered entity during the time subject of the claim for tax
refund or credit, is unwarranted. The most significant difference between Toshiba and this case is that
Revenue Memorandum Circular No. 74-9916 was not yet in effect at the time Toshiba Information Equipment
(Phils) Inc. brought its claim for refund. Regardless of the distinction, however, Toshibaactually discussed
the VAT implication of PEZA-registered enterprises and ECOZONE-located enterprises in its entirety, which
renders Toshiba applicable to the petitioner's case.

Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered enterprises was based on their
choice of fiscal incentives, namely: (1) if the PEZA-registered enterprise chose the 5% preferential tax on its
gross income in lieu of all taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-
exempt; and (2) if the PEZA-registered enterprise availed itself of the income tax holiday under Executive
Order No. 226, as amended, it was subject to VAT at 10% 17 (now, 12%). Based on this old
rule, Toshibaallowed the claim for refund or credit on the part of Toshiba Information Equipment (Phils) Inc.

This is not true with the petitioner. With the issuance of RMC 74-99, the distinction under the old rule was
disregarded and the new circular took into consideration the two important principles of the Philippine VAT
system: the Cross Border Doctrine and the Destination Principle. Thus, Toshiba opined: ChanRoblesVirtualawlibrary

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly established
only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or
not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by
the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by
the BIR, also recognized and affirmed by the CTA, the Court of Appeals, and even this Court, cannot be
lightly disregarded considering the great number of PEZA-registered enterprises which did rely on it to
determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential
tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided
under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.

xxxx

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the
VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the
five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916,
as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax
holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the tatter's
type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.18 (underscoring and Emphasis supplied)
Furthermore, Section 8 of Republic Act No. 7916 mandates that PEZA shall manage and operate the
ECOZONE as a separate customs territory. The provision thereby establishes the fiction that an ECOZONE is
a foreign tenitory separate and distinct from the customs territory. Accordingly, the sales made by suppliers
from a customs territory to a purchaser located within an ECOZONE will be considered as exportations.
Following the Philippine VAT system's adherence to the Cross Border Doctrine and Destination Principle, the
VAT implications are that "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" 19 Thus, Toshibahas discussed that: ChanRoblesVirtualawlibrary

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located
within ECQZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as
amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE
or a Special Economic Zone has been described as —

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and
bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational
centers.

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred
to as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign
territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by
a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation
into the Customs Territory.20 (underscoring and emphasis are supplied)
The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan. 21 Its plant site was
specifically located inside the Rio Tuba Export Processing Zone — a special economic zone (ECOZONE)
created by Proclamation No. 304, Series of 2002, in relation to Republic Act No. 7916. As such, the
purchases of goods and services by the petitioner that were destined for consumption within the ECOZONE
should be free of VAT; hence, no input VAT should then be paid on such purchases, rendering the petitioner
not entitled to claim a tax refund or credit. Verily, if the petitioner had paid the input VAT, the CTA was
correct in holding that the petitioner's proper recourse was not against the Government but against the
seller who had shifted to it the output VAT following RMC No. 42-03, 22 which provides: ChanRoblesVirtualawlibrary

In case the supplier alleges that it reported such sale as a taxable sale, the substantiation of remittance of
the output taxes of the seller (input taxes of the exporter-buyer) can only be established upon the thorough
audit of the suppliers' VAT returns and corresponding books and records. It is, therefore, imperative that the
processing office recommends to the concerned BIR Office the audit of the records of the seller.

In the meantime, the claim for input tax credit by the exporter-buyer should be denied without prejudice to
the claimant's right to seek reimbursement of the VAT paid, if any, from its supplier.
We should also take into consideration the nature of VAT as an indirect tax. Although the seller is statutorily
liable for the payment of VAT, the amount of the tax is allowed to be shifted or passed on to the
buyejr.23 However, reporting and remittance of the VAT paid to the BIR remained to be the seller/supplier's
obligation. Hence, the proper party to seek the tax refund or credit should be the suppliers, not the
petitioner.

In view of the foregoing considerations, the Court must uphold the rejection of the appeal of the petitioner.
This Court has repeatedly poirited out that a claim for tax refund or credit is similar to a tax exemption and
should be strictly construed against the taxpayer. The burden of proof to show that he is ultimately entitled
to the grant of such tax refund or credit rests on the taxpayer. 24 Sadly, the petitioner has not discharged its
burden.

WHEREFORE, the Court AFFIRMS the decision promulgated on May 29, 2009 in CTA EB Case No. 403;
and ORDERS the petitioner to pay the costs of suit.

SO ORDERED. chanRoblesvirtualLawlibrary

Sereno, C.J., Leonardo-De Castro, Perlas-Bernabe, and Caguioa, JJ., concur.

 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 under Rule 45 of the Rules of Court, seeking to set aside the May
1 

27, 2002 Decision of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the
2 

Decision reads as follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit." 3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT
refund.

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by
the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way
of Petition for Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/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
[respondent’s] 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 Court’s 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, respondent is entitled to

7 

the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
8  9  10 

privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
11  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. Even
13 

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 is 15 

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, local taxes and licenses,
16 

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 -- is, ipso facto, also accorded to the zone under RA 7916.
18  19 

Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the
contrary -- extends to that zone the provision stating that no local or national taxes shall be imposed
20 

therein. No exchange control policy shall be applied; and free markets for foreign exchange, gold,
21 

securities and future shall be allowed and maintained. Banking and finance shall also be liberalized
22 

under minimum Bangko Sentral regulation with the establishment of foreign currency depository
units of local commercial banks and offshore banking units of foreign banks. 23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locally- 24 

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 and exemption from PD 1853.
25  26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. It 27 

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, however, 28 

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 as they pass along the production and distribution chain, the tax being limited
29 

only to the value added to such goods, properties or services by the seller, transferor or lessor. It is
30  31 

an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the context of the person or entity
32 

that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.
33 

The law that originally imposed the VAT in the country, as well as the subsequent amendments of
34 

that law, has been drawn from the tax credit method. Such method adopted the mechanics and self-
35 

enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada. Under the present method that relies on invoices, an entity
36 

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 charged by a seller are equal to the input
38  39 

taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the
40 

input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the
41 

excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result
42 

from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any 43 
excess over the output taxes shall instead be refunded to the taxpayer or credited against other
44  45 

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. The tax 47 

rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable
48 

against the purchaser. The seller of such transactions charges no output tax, but can claim a refund
49 

of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to
50  51 

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. Again, as applied to
52 

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 to the exportation of goods, automatic zero rating is primarily
53  54 

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. Effective zero rating, on the contrary, is intended to benefit the purchaser who, not
55 

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. But 56 

in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or
57 

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. Indeed, such transaction is not
60 

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. Such party is also not subject
61 

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. While the liability is
62 

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. However, the Tax Code provides that
63 

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, depending again on the application of the destination principle.
64  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. If entered into
66 

with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall
67 

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, because the ecozone within which it is registered is managed and operated by the PEZA as
68 

a separate customs territory. This means that in such zone is created the legal fiction of foreign
69 

territory. Under the cross-border principle of the VAT system being enforced by the Bureau of
70  71 

Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for
72 

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, then the same rule holds for such
73 

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. An ecozone --
74 

indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil. This legal fiction is necessary to give meaningful effect to the policies of the special law
75 

creating the zone. If respondent is located in an export processing zone within that ecozone, sales
76  77 

to the export processing zone, even without being actually exported, shall in fact be viewed
as constructively exported under EO 226. Considered as export sales, such purchase transactions
78  79 

by respondent would indeed be subject to a zero rate. 80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone." Since this law does not exclude the VAT from the
81 

prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception

confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers. This similar and
82 

repeated prohibition is an unambiguous ratification of the law’s intent in not imposing local or
national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject
to x x x internal revenue laws and regulations" under PD 66 -- the original charter of PEZA (then
83 

EPZA) that was later amended by RA 7916. No provisions in the latter law modify such exemption.
84 

Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments
and creating more employment opportunities. 85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x" if
86 

brought to the ecozone’s restricted area for manufacturing by registered export enterprises, of
87  88 

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 with the Board of Investments (BOI) under EO
90 

226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products; on required supplies
91 

and spare part for consigned equipment; and on foreign and domestic merchandise, raw materials,
92 

equipment and the like -- except those prohibited by law -- brought into the zone for
manufacturing. In addition, they are given credits for the value of the national internal revenue taxes
93 

imposed on domestic capital equipment also reasonably needed and exclusively used for the
manufacture of their products, as well as for the value of such taxes imposed on domestic raw
94 

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 are ipso facto accorded
96 

to ecozones. In case of doubt, conflicts with respect to such tax exemption privilege shall be
97

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, and for locally produced raw materials, capital equipment and spare
99 

parts used by exporters of non-traditional products -- shall also be continuously enjoyed by similar
100 

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 against the
102 

taxpayer and liberally in favor of the taxing authority.

103  104

Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those refunds bear
105 

the burden of proving the factual basis of their claims; and of showing, by words too plain to be
106 

mistaken, that the legislature intended to exempt them. In the present case, all the cited legal
107 

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. Nonetheless, its exemption as an entity and the
108 

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 will have to be adopted. Their prior tax issuances have held
109 

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. Revenue
110 

Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered supplier’s 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 latter’s PEZA registration
-- is legally entitled to a zero rate.
111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its
very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of
reducing domestic unemployment, and of accelerating the development of the country." 112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments." 113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x
x meet the tests of international competitiveness[,] accelerate development of less developed
regions of the country[,] and result in increased volume and value of exports for the
economy." Fiscal incentives that are cost-efficient and simple to administer shall be devised and
114 

extended to significant projects "to compensate for market imperfections, to reward performance
contributing to economic development," and "to stimulate the establishment and assist initial
115 

operations of the enterprise." 116

Wisely accorded to ecozones created under RA 7916 was the government’s policy -- spelled out
117 

earlier in RA 7227 -- of converting into alternative productive uses the former military reservations
118 

and their extensions, as well as of providing them incentives to enhance the benefits that would be
119  120 

derived from them121 in promoting economic and social development. 122

Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort" in order to win international markets. By providing many export and tax incentives, the State
123  124 

is able to drive home the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved." 125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market." After all, international competitiveness requires economic
126 

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, as well as of promoting the preferential use of domestic materials and locally
128 

produced goods and adopting measures to help make these competitive. Tax credits for domestic 129 

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. Petitioner alleges that respondent
131 

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 latter’s
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. EO 226 even reiterates this privilege among the
132 

incentives it gives to such enterprises. Petitioner merely asserts that by virtue of the PEZA
133

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. This is a non sequitur. By the VAT’s very nature as a tax on consumption,
134 

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, petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments
135 

not adequately and seriously brought below cannot be raised for the first time on appeal." This is a 136 

"matter of procedure" and a "question of fairness." Failure to assert "within a reasonable time
137  138 

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 cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such
140 

regulations is not "within the statutory authority x x x granted by the legislature.

141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter. The courts will not countenance one that overrides
142 

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 taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or
agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or agents. 144

Second, grantia argumenti that such an application is required by law, there is still the presumption
of regularity in the performance of official duty. Respondent’s registration carries with it the
145 

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 by both the administrative officials and the applicant.
146 

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, is sufficient for the
147 

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 taxpayer’s negligence -- a result not at all contemplated.
Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s 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, for
148 

EO 226 also has provisions to contend with. These two regimes are in fact incompatible and cannot
149 

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. Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT
151 

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 -- starting January 1,
152 

1996, respondent would still have the same benefit under a general and express exemption
contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227,
extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and
local taxes; x x x tax credit for locally-sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from local and
national taxes, x x x tax credits for locally sourced inputs x x x."
153

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.154

Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to

costs.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

 EN BANC

G.R. No. 173425               September 4, 2012

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

DECISION

DEL CASTILLO, J.:

Courts cannot limit the application or coverage of a law, nor can it impose conditions not provided
therein. To do so constitutes judicial legislation.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the July 7, 2006
Decision of the Court of Appeals (CA) in CA-G.R. SP No. 61436, the dispositive portion of which
1 

reads.

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Decision dated

October 12, 2000 of the Court of Tax Appeals in CTA Case No. 5735, denying petitioner’s claim for
refund in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine
Pesos and Forty-Seven Centavos (₱ 359,652,009.47), is hereby AFFIRMED.

SO ORDERED. 2

Factual Antecedents

Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered domestic corporation
engaged in the development and sale of real property. The Bases Conversion Development
3 

Authority (BCDA), a wholly owned government corporation created under Republic Act (RA) No.
7227, owns 45% of petitioner’s issued and outstanding capital stock; while the Bonifacio Land
4 

Corporation, a consortium of private domestic corporations, owns the remaining 55%. 5

On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40, dated December 8, 1992,
6 

petitioner purchased from the national government a portion of the Fort Bonifacio reservation, now
known as the Fort Bonifacio Global City (Global City). 7

On January 1, 1996, RA 7716 restructured the Value-Added Tax (VAT) system by amending certain
8 

provisions of the old National Internal Revenue Code (NIRC). RA 7716 extended the coverage of
VAT to real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business.9

On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue (BIR) Revenue
District No. 44, Taguig and Pateros, an inventory of all its real properties, the book value of which
aggregated ₱ 71,227,503,200. Based on this value, petitioner claimed that it is entitled to a
10

transitional input tax credit of ₱ 5,698,200,256, pursuant to Section 105 of the old NIRC.
11 12 

In October 1996, petitioner started selling Global City lots to interested buyers. 13
For the first quarter of 1997, petitioner generated a total amount of ₱ 3,685,356,539.50 from its sales
and lease of lots, on which the output VAT payable was ₱ 368,535,653.95. Petitioner paid the
14 

output VAT by making cash payments to the BIR totalling ₱ 359,652,009.47 and crediting its
unutilized input tax credit on purchases of goods and services of ₱ 8,883,644.48. 15

Realizing that its transitional input tax credit was not applied in computing its output VAT for the first
quarter of 1997, petitioner on November 17, 1998 filed with the BIR a claim for refund of the amount
of ₱ 359,652,009.47 erroneously paid as output VAT for the said period. 16

Ruling of the Court of Tax Appeals

On February 24, 1999, due to the inaction of the respondent Commissioner of Internal Revenue
(CIR), petitioner elevated the matter to the Court of Tax Appeals (CTA) via a Petition for Review. 17

In opposing the claim for refund, respondents interposed the following special and affirmative
defenses:

xxxx

8. Under Revenue Regulations No. 7-95, implementing Section 105 of the Tax Code as amended by
E.O. 273, the basis of the presumptive input tax, in the case of real estate dealers, is the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed
on or after January 1, 1988.

9. Petitioner, by submitting its inventory listing of real properties only on September 19, 1996, failed
to comply with the aforesaid revenue regulations mandating that for purposes of availing the
presumptive input tax credits under its Transitory Provisions, "an inventory as of December 31,
1995, of such goods or properties and improvements showing the quantity, description, and amount
should be filed with the RDO no later than January 31, 1996. x x x" 18

On October 12, 2000, the CTA denied petitioner’s claim for refund. According to the CTA, "the
benefit of transitional input tax credit comes with the condition that business taxes should have been
paid first." In this case, since petitioner acquired the Global City property under a VAT-free sale
19 

transaction, it cannot avail of the transitional input tax credit. The CTA likewise pointed out that
20 

under Revenue Regulations No. (RR) 7-95, implementing Section 105 of the old NIRC, the 8%
transitional input tax credit should be based on the value of the improvements on land such as
buildings, roads, drainage system and other similar structures, constructed on or after January 1,
1998, and not on the book value of the real property. Thus, the CTA disposed of the case in this
21 

manner:

WHEREFORE, in view of all the foregoing, the claim for refund representing alleged overpaid value-
added tax covering the first quarter of 1997 is hereby DENIED for lack of merit.

SO ORDERED. 22

Ruling of the Court of Appeals

Aggrieved, petitioner filed a Petition for Review under Rule 43 of the Rules of Court before the CA.
23 

On July 7, 2006, the CA affirmed the decision of the CTA. The CA agreed that petitioner is not
entitled to the 8% transitional input tax credit since it did not pay any VAT when it purchased the
Global City property. The CA opined that transitional input tax credit is allowed only when business
24 

taxes have been paid and passed-on as part of the purchase price. In arriving at this conclusion, the
25 

CA relied heavily on the historical background of transitional input tax credit. As to the validity of RR
26 

7-95, which limited the 8% transitional input tax to the value of the improvements on the land, the CA
said that it is entitled to great weight as it was issued pursuant to Section 245 of the old NIRC.
27  28

Issues

Hence, the instant petition with the principal issue of whether petitioner is entitled to a refund of ₱
359,652,009.47 erroneously paid as output VAT for the first quarter of 1997, the resolution of which
depends on:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue
Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit which
may be claimed under Section 105 of the National Internal Revenue Code to the "improvements" on
real properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the
National Internal Revenue Code.

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue,
and declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals,
were in violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105
of the National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax by petitioner on its land
before it may claim the input tax credit granted by Section 105 of the National Internal Revenue
Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose of
the transitional/presumptive input tax provided for in Section 105 of the National Internal Revenue
Code.

3.05.g. Whether the economic and social objectives in the acquisition of the subject property by
petitioner from the Government should be taken into consideration. 29

Petitioner’s Arguments

Petitioner claims that it is entitled to recover the amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the first quarter of 1997 since its transitional input tax credit of ₱ 5,698,200,256 is
more than sufficient to cover its output VAT liability for the said period. 30

Petitioner assails the pronouncement of the CA that prior payment of taxes is required to avail of the
8% transitional input tax credit. Petitioner contends that there is nothing in Section 105 of the old
31 

NIRC to support such conclusion. 32

Petitioner further argues that RR 7-95, which limited the 8% transitional input tax credit to the value
of the improvements on the land, is invalid because it goes against the express provision of Section
105 of the old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716.
33  34
Respondents’ Arguments

Respondents, on the other hand, maintain that petitioner is not entitled to a transitional input tax
credit because no taxes were paid in the acquisition of the Global City property. Respondents assert
35 

that prior payment of taxes is inherent in the nature of a transitional input tax. Regarding RR 7-95,
36 

respondents insist that it is valid because it was issued by the Secretary of Finance, who is
mandated by law to promulgate all needful rules and regulations for the implementation of Section
105 of the old NIRC. 37

Our Ruling

The petition is meritorious.

The issues before us are no longer new or novel as these have been resolved in the related case
of Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue. 38

Prior payment of taxes is not required

for a taxpayer to avail of the 8%
transitional input tax credit

Section 105 of the old NIRC 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.
(Emphasis supplied.)

Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision to
indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax
credit. Obviously, all that is required is for the taxpayer to file a beginning inventory with the BIR.

To require prior payment of taxes, as proposed in the Dissent is not only tantamount to judicial
legislation but would also render nugatory the provision in Section 105 of the old NIRC that the
transitional input tax credit shall be "8% of the value of [the beginning] inventory or the actual [VAT]
paid on such goods, materials and supplies, whichever is higher" because the actual VAT (now
12%) paid on the goods, materials, and supplies would always be higher than the 8% (now 2%) of
the beginning inventory which, following the view of Justice Carpio, would have to exclude all goods,
materials, and supplies where no taxes were paid. Clearly, limiting the value of the beginning
inventory only to goods, materials, and supplies, where prior taxes were paid, was not the intention
of the law. Otherwise, it would have specifically stated that the beginning inventory excludes goods,
materials, and supplies where no taxes were paid. As retired Justice Consuelo Ynares-Santiago has
pointed out in her Concurring Opinion in the earlier case of Fort Bonifacio:

If the intent of the law were to limit the input tax to cases where actual VAT was paid, it could have
simply said that the tax base shall be the actual value-added tax paid. Instead, the law as framed
contemplates a situation where a transitional input tax credit is claimed even if there was no actual
payment of VAT in the underlying transaction. In such cases, the tax base used shall be the value of
the beginning inventory of goods, materials and supplies. 39
Moreover, prior payment of taxes is not required to avail of the transitional input tax credit because it
is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund. Tax refund is
defined as the money that a taxpayer overpaid and is thus returned by the taxing authority. Tax 40 

credit, on the other hand, is an amount subtracted directly from one’s total tax liability. It is any
41 

amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage investment. Thus,

unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a tax credit. In fact, in
Commissioner of Internal Revenue v. Central Luzon Drug Corp., we declared that prior payment of
42 

taxes is not required in order to avail of a tax credit. Pertinent portions of the Decision read:
43 

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not.
On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits,
even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar
provision for donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s tax
due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our
government.

Under Section 110, a VAT (Value-Added Tax) - registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any
input tax not directly attributable to either activity. This input tax may either be the VAT on the
purchase or importation of goods or services that is merely due from -- not necessarily paid by --
such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent
to only eight percent of the value of a VAT-registered person’s beginning inventory of goods,
materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on
the said items. Clearly from this provision, the tax credit refers to an input tax that is either due only
or given a value by mere comparison with the VAT actually paid -- then later prorated. No tax is
actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For
the purchase of primary agricultural products used as inputs -- either in the processing of sardines,
mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price
of public works contracts entered into with the government, again, no prior tax payments are needed
for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable
input taxes merely due -- again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output taxes. Where a
taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales,
the amount of creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned --
shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident
foreign corporation from a domestic corporation is subjected to the condition that a foreign tax credit
will be given by the domiciliary country in an amount equivalent to taxes that are merely deemed
paid. Although true, this provision actually refers to the tax credit as a condition only for the
imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is
not our government but the domiciliary country that credits against the income tax payable to the
latter by the foreign corporation, the tax to be foregone or spared.

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

against the income tax imposable under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover,
Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be allowed,
subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned
upon payment by the taxpayer of any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws
that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income
that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the
former is merely allowed as a credit against the tax levied in the latter. Apparently, payment is made
to the state of source, not the state of residence. No tax, therefore, has been previously paid to the
latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended
by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of the net
value earned, or five or ten percent of the net local content of export. In order to avail of such credits
under the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned. However, we do not agree with its
finding that the carry-over of tax credits under the said special law to succeeding taxable periods,
and even their application against internal revenue taxes, did not necessitate the existence of a tax
liability.

The examples above show that a tax liability is certainly important in the availment or use, not the
existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss
in its financial statements is no different from another that presents a net income. Both are entitled to
the tax credit provided for under RA 7432, since the law itself accords that unconditional benefit.
However, for the losing establishment to immediately apply such credit, where no tax is due, will be
an improvident usance. 44

In this case, when petitioner realized that its transitional input tax credit was not applied in computing
its output VAT for the 1st quarter of 1997, it filed a claim for refund to recover the output VAT it
erroneously or excessively paid for the 1st quarter of 1997. In filing a claim for tax refund, petitioner
is simply applying its transitional input tax credit against the output VAT it has paid. Hence, it is
merely availing of the tax credit incentive given by law to first time VAT taxpayers. As we have said
in the earlier case of Fort Bonifacio, the provision on transitional input tax credit was enacted to
benefit first time VAT taxpayers by mitigating the impact of VAT on the taxpayer. Thus, contrary to
45 

the view of Justice Carpio, the granting of a transitional input tax credit in favor of petitioner, which
would be paid out of the general fund of the government, would be an appropriation authorized by
law, specifically Section 105 of the old NIRC.

The history of the transitional input tax credit likewise does not support the ruling of the CTA and CA.
In our Decision dated April 2, 2009, in the related case of Fort Bonifacio, we explained that:

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the
absence of any relationship between such tax credit and the long-abolished sales taxes.

Obviously then, the purpose behind the transitional input tax credit is not confined to the transition
from sales tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such
transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in
particular. It could also occur when one decides to start a business. Section 105 states that the
transitional input tax credits become available either to (1) a person who becomes liable to VAT; or
(2) any person who elects to be VAT-registered. The clear language of the law entitles new trades or
businesses to avail of the tax credit once they become VAT-registered. The transitional input tax
credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered
person such as when a business as it commences operations. If we view the matter from the
perspective of a starting entrepreneur, greater clarity emerges on the continued utility of the
transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax
credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods,
materials and supplies in its beginning inventory. Consequently, as the CTA held below, if the new
enterprise has not paid VAT in its purchases of such goods, materials and supplies, then it should
not be able to claim the tax credit. However, it is not always true that the acquisition of such goods,
materials and supplies entail the payment of taxes on the part of the new business. In fact, this could
occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only
on account of a specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired
from a person in the course of trade or business, the transaction would not be subject to VAT under
Section 105. The sale would be subject to capital gains taxes under Section 24 (D), but since capital
gains is a tax on passive income it is the seller, not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition would not be subject to VAT
but to donor’s tax under Section 98 instead. It is the donor who would be liable to pay the donor’s
tax, and the donation would be exempt if the donor’s total net gifts during the calendar year does not
exceed ₱ 100,000.00.

If the goods or properties are acquired through testate or intestate succession, the transfer would not
be subject to VAT but liable instead for estate tax under Title III of the New NIRC. If the net estate
does not exceed ₱ 200,000.00, no estate tax would be assessed.

The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession, from
the beginning inventory on which the transitional input tax credit is based. This prospect all but
highlights the ultimate absurdity of the respondents’ position. Again, nothing in the Old NIRC (or
even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any
other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the beginning
inventory.

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 taxpayer's
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.

There is another point that weighs against the CTA’s interpretation. Under Section 105 of the Old
NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher." If indeed the
transitional input tax credit is premised on the previous payment of VAT, then it does not make
sense to afford the taxpayer the benefit of such credit based on "8% of the value of such inventory"
should the same prove higher than the actual VAT paid. This intent that the CTA alluded to could
have been implemented with ease had the legislature shared such intent by providing the actual
VAT paid as the sole basis for the rate of the transitional input tax credit.46

In view of the foregoing, we find petitioner entitled to the 8% transitional input tax credit provided in
Section 105 of the old NIRC. The fact that it acquired the Global City property under a tax-free
transaction makes no difference as prior payment of taxes is not a pre-requisite.

Section 4.105-1 of RR 7-95 is

inconsistent with Section 105 of the old
NIRC

As regards Section 4.105-1 of RR 7-95 which limited the 8% transitional input tax credit to the value
47 

of the improvements on the land, the same contravenes the provision of Section 105 of the old
NIRC, in relation to Section 100 of the same Code, as amended by RA 7716, which defines "goods
or properties," to wit:

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; x x x

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled that
Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of the
improvement of the real properties, is a nullity. Pertinent portions of the Resolution read:
48 
As mandated by Article 7 of the Civil Code, 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
1âwphi1

is intended to implement. Any rule that is not consistent with the statute itself is null and void.

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.

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. 49

As we see it then, the 8% transitional input tax credit should not be limited to the value of the
improvements on the real properties but should include the value of the real properties as well.

In this case, since petitioner is entitled to a transitional input tax credit of ₱ 5,698,200,256, which is
more than sufficient to cover its output VAT liability for the first quarter of 1997, a refund of the
amount of ₱ 359,652,009.47 erroneously paid as output VAT for the said quarter is in order.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated July 7, 2006 of the
Court of Appeals in CA-G.R. SP No. 61436 is REVERSED and SET ASIDE. Respondent
Commissioner of Internal Revenue is ordered to refund to petitioner Fort Bonifacio Development
Corporation the amount of ₱ 359,652,009.47 paid as output VAT for the first quarter of 1997 in light
of the transitional input tax credit available to petitioner for the said quarter, or in the alternative, to
issue a tax credit certificate corresponding to such amount.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice
 TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION
Associate Justice Associate Justice

DIOSDADO M. PERALTA LUCAS P. BERSAMIN

Associate Justice Associate Justice

ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA

Associate Justice Associate Justice

BIENVENDIO L. REYES ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice

CERTIFICATION

I certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court.

MARIA LOURDES P. A. SERENO

Chief Justice
 THIRD DIVISION

G.R. Nos. 141104 & 148763             June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner
Atlas Consolidated Mining and Development Corporation (petitioner corporation) for the refund/credit
of the input Value Added Tax (VAT) on its purchases of capital goods and on its zero-rated sales in
the taxable quarters of the years 1990 and 1992, the denial of which by the Court of Tax Appeals
(CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral
products, such as gold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was
initially issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register
anew with the appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR)
when it moved its principal place of business, and it was re-issued VAT Registration No. 32-0-
004622, dated 15 August 1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992. 2 It alleged that it
likewise filed with the BIR the corresponding application for the refund/credit of its input VAT on its
purchases of capital goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its
application for refund/credit remained unresolved by the BIR, petitioner corporation filed on 20 April
1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a
"zero-rated VAT person," it prayed that the CTA order herein respondent Commissioner of Internal
Revenue (respondent Commissioner) to refund/credit petitioner corporation with the amount
of P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992. The
respondent Commissioner opposed and sought the dismissal of the petition for review of petitioner
corporation for failure to state a cause of action. After due trial, the CTA promulgated its Decision 4 on
24 November 1997 with the following disposition –

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the
ground of prescription, insufficiency of evidence and failure to comply with Section 230 of the
Tax Code, as amended. Accordingly, the petition at bar is hereby DISMISSED for lack of
merit.

The CTA denied the motion for reconsideration of petitioner corporation in a Resolution 5 dated 15
April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court,
in its Decision,6 dated 6 July 1999, dismissed the appeal of petitioner corporation, finding no
reversible error in the CTA Decision, dated 24 November 1997. The subsequent motion for
reconsideration of petitioner corporation was also denied by the Court of Appeals in its
Resolution,7 dated 14 December 1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, assigning the following errors committed by the Court of
Appeals –

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE

REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF
INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF EXPORTS FOR ZERO-
RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO

SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT
INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED
BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED
WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-
OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE. 8

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above,
except that it relates to the claims of petitioner corporation for refund/credit of input VAT on its
purchases of capital goods and on its zero-rated sales made in the last three taxable quarters of
1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of
1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate
applications to the BIR for the refund/credit of the input VAT paid on its purchases of capital goods
and on its zero-rated sales, the details of which are presented as follows –

Date of Application Period Covered Amount Applied For

21 August 1990 2nd Quarter, 1990 P 54,014,722.04

21 November 1990 3rd Quarter, 1990 75,304,774.77

19 February 1991 4th Quarter, 1990 43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the
CTA the following petitions for review –

Date Filed Period Covered CTA Case No.

20 July 1992 2nd Quarter, 1990 4831

9 October 1992 3rd Quarter, 1990 4859

14 January 1993 4th Quarter, 1990 4944

which were eventually consolidated. The respondent Commissioner contested the foregoing
Petitions and prayed for the dismissal thereof. The CTA ruled in favor of respondent Commissioner
and in its Decision,9 dated 30 October 1997, dismissed the Petitions mainly on the ground that the
prescriptive periods for filing the same had expired. In a Resolution, 10 dated 15 January 1998, the
CTA denied the motion for reconsideration of petitioner corporation since the latter presented no
new matter not already discussed in the court's prior Decision. In the same Resolution, the CTA also
denied the alternative prayer of petitioner corporation for a new trial since it did not fall under any of
the grounds cited under Section 1, Rule 37 of the Revised Rules of Court, and it was not supported
by affidavits of merits required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R.
SP No. 46718. On 15 September 2000, the Court of Appeals rendered its Decision, 11 finding that
although petitioner corporation timely filed its Petitions for Review with the CTA, it still failed to
substantiate its claims for the refund/credit of its input VAT for the last three quarters of 1990. In its
Resolution,12 dated 27 June 2001, the appellate court denied the motion for reconsideration of
petitioner corporation, finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763, raising the following issues –

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-
88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-RATING TO
APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT
CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO

BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were
consolidated pursuant to a Resolution, dated 4 September 2006, issued by this Court. The ruling of
this Court in these cases hinges on how it will resolve the following key issues: (1) prescription of the
claims of petitioner corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating
of its sales, the burden of proving that the buyer companies were not just BOI-registered but also
exporting 70% of their total annual production; (3) sufficiency of evidence presented by petitioner
corporation to establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for
granting the motion of petitioner corporation for re-opening of its cases or holding of new trial before
the CTA so it could be given the opportunity to present the required evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales
made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as
amended, which provided that –

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by

paragraph (a) above, whose sales are zero-rated may, within two years after the close of the
quarter when such sales were made, apply for the issuance of a tax credit certificate or
refund of the input taxes attributable to such sales to the extent that such input tax has not
been applied against output tax.

xxxx

(e) Period within which refund of input taxes may be made by the Commissioner. – The
Commissioner shall refund input taxes within 60 days from the date the application for refund
was filed with him or his duly authorized representative. No refund of input taxes shall be
allowed unless the VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application
for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter
when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from
the close of the quarter when the zero-rated sales were made, but from the date of filing of the
quarterly VAT return and payment of the tax due 20 days thereafter, in accordance with Section
110(b) of the Tax Code of 1977, as amended, quoted as follows –

SEC. 110. Return and payment of value-added tax. – x x x.

(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid
within 20 days following the end of each quarter specifically prescribed for a VAT-registered
person under regulations to be promulgated by the Secretary of Finance: Provided,
however, That any person whose registration is cancelled in accordance with paragraph (e)
of Section 107 shall file a return within 20 days from the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for
recovery of corporate income tax erroneously or illegally paid under Section 230 13 of the Tax Code of
1977, as amended, was to be counted from the filing of the final adjustment return. This Court
already set out in ACCRA Investments Corporation v. Court of Appeals, 14 the rationale for such a
rule, thus –

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch
as the respondent Commissioner by his own rules and regulations mandates that the
 corporate taxpayer opting to ask for a refund must show in its final adjustment return the
income it received from all sources and the amount of withholding taxes remitted by its
withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final
adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April
10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia Express,
Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a
refund commences to run, at the earliest, on the date of the filing of the adjusted final tax
return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim
for refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the
respondent Commissioner who failed to take any action thereon and considering further that
the non-resolution of its claim for refund with the said Commissioner prompted ACCRAIN to
reiterate its claim before the Court of Tax Appeals through a petition for review on April 13,
1984, the respondent appellate court manifestly committed a reversible error in affirming the
holding of the tax court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive
period with respect to the petitioner corporation's claim for refund from the time it filed its final
adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it
made profits or incurred losses in its business operations. The "date of payment", therefore,
in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final
adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further

expounded on the same matter –

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is

warranted under the circumstances to lay down a categorical pronouncement on the
question as to when the two-year prescriptive period in cases of quarterly corporate income
tax commences to run. A full-blown decision in this regard is rendered more imperative in the
light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in
the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted
in relation to the other provisions of the Tax Code in order to give effect the legislative intent
and to avoid an application of the law which may lead to inconvenience and absurdity. In the
case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes should receive
a sensible construction, such as will give effect to the legislative intention and so as to avoid
an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER
FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity,
such interpretation as will avoid inconvenience and absurdity is to be adopted. Furthermore,
courts must give effect to the general legislative intent that can be discovered from or is
unraveled by the four corners of the statute, and in order to discover said intent, the whole
statute, and not only a particular provision thereof, should be considered. (Manila Lodge No.
761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause
of the statute must be expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be ascertained from the
whole text of the law and every part of the act is to be taken into view. (Chartered Bank vs.
Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz
Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).
 Thus, in resolving the instant case, it is necessary that we consider not only Section 292
(now Section 230) of the National Internal Revenue Code but also the other provisions of the
Tax Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86
(now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax
Payment and Section 321 (now Section 232) on keeping of books of accounts. All these
provisions of the Tax Code should be harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68)
and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be
considered mere installments of the annual tax due. These quarterly tax payments which are
computed based on the cumulative figures of gross receipts and deductions in order to arrive
at a net taxable income, should be treated as advances or portions of the annual income tax
due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87
(now Section 69) which provides for the filing of adjustment returns and final payment of
income tax. Consequently, the two-year prescriptive period provided in Section 292 (now
Section 230) of the Tax Code should be computed from the time of filing the Adjustment
Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this
Court held that when a tax is paid in installments, the prescriptive period of two years
provided in Section 306 (Section 292) of the National Internal Revenue Code should be
counted from the date of the final payment. This ruling is reiterated in Commissioner of
Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that
where the tax account was paid on installment, the computation of the two-year prescriptive
period under Section 306 (Section 292) of the Tax Code, should be from the date of the last
installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the
two-year prescriptive period should be counted from the filing of the Adjustment Return on
April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period
for claims for refund of illegally or erroneously collected income tax may also apply to the Petitions at
bar involving the same prescriptive period for claims for refund/credit of input VAT on zero-rated
sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter,
but is eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and
paid on a purely quarterly basis without need for a final adjustment at the end of the taxable year.
However, it is also equally true that until and unless the VAT-registered taxpayer prepares and
submits to the BIR its quarterly VAT return, there is no way of knowing with certainty just how much
input VAT16 the taxpayer may apply against its output VAT;17 how much output VAT it is due to pay
for the quarter or how much excess input VAT it may carry-over to the following quarter; or how
much of its input VAT it may claim as refund/credit. It should be recalled that not only may a VAT-
registered taxpayer directly apply against his output VAT due the input VAT it had paid on its
importation or local purchases of goods and services during the quarter; the taxpayer is also given
the option to either (1) carry over any excess input VAT to the succeeding quarters for application
against its future output VAT liabilities, or (2) file an application for refund or issuance of a tax credit
certificate covering the amount of such input VAT.18 Hence, even in the absence of a final adjustment
return, the determination of any output VAT payable necessarily requires that the VAT-registered
taxpayer make adjustments in its VAT return every quarter, taking into consideration the input VAT
which are creditable for the present quarter or had been carried over from the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it
does have refundable or creditable input VAT, and the same has not been applied against its output
VAT liabilities – information which are supposed to be reflected in the taxpayer's VAT returns. Thus,
an application for refund/credit must be accompanied by copies of the taxpayer's VAT return/s for
the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally
or erroneously collected, its refund/credit is a privilege extended to qualified and registered
taxpayers by the very VAT system adopted by the Legislature. Such input VAT, the same as any
illegally or erroneously collected national internal revenue tax, consists of monetary amounts which
are currently in the hands of the government but must rightfully be returned to the taxpayer.
Therefore, whether claiming refund/credit of illegally or erroneously collected national internal
revenue tax, or input VAT, the taxpayer must be given equal opportunity for filing and pursuing its
claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive
period for filing a claim for refund/credit of input VAT on zero-rated sales from the date of filing of the
return and payment of the tax due which, according to the law then existing, should be made within
20 days from the end of each quarter. Having established thus, the relevant dates in the instant
cases are summarized and reproduced below –

Period Covered Date of Date of Date of Filing (Case

Filing (Return w/ Filing (Application w/ w/ CTA)
BIR) BIR)

2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992

4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993

1st Quarter, 1992 20 April 1992 -- 20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for
refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within
the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT
on its zero-rated sales for the first quarter of 1992. Even though it may seem that petitioner
corporation filed in time its judicial claim with the CTA, there is no showing that it had previously filed
an administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended, explicitly
provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an
application for refund with respondent Commissioner within the two-year prescriptive period. The
application of petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was
not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla, Manager-Finance
and Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly
received the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102,
made the following observations –
 This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of
VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the petitioner on
account of the fact that it does not bear the BIR stamp showing the date when such
application was filed together with the signature or initial of the receiving officer of
respondent's Bureau. Worse still, it does not show the date of application and the signature
of a certain Ma. Paz R. Semilla indicated in the form who appears to be petitioner's
authorized filer.

A review of the records reveal that the original of the aforecited application was lost during
the time petitioner transferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt
was made to prove that petitioner exerted efforts to recover the original copy, but to no avail.
Despite this, however, We observe that petitioner completely failed to establish the missing
dates and signatures abovementioned. On this score, said application has no probative
value in demonstrating the fact of its filing within two years after the [filing of the VAT return
for the quarter] when petitioner's sales of goods were made as prescribed under Section
106(b) of the Tax Code. We believe thus that petitioner failed to file an application for refund
in due form and within the legal period set by law at the administrative level. Hence, the case
at bar has failed to satisfy the requirement on the prior filing of an application for refund with
the respondent before the commencement of a judicial claim for refund, as prescribed under
Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not
granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation
timely filed its administrative claim for refund of its input VAT for the first quarter of 1992, but also
whether petitioner corporation actually filed such administrative claim in the first place. For failing to
prove that it had earlier filed with the BIR an application for refund/credit of its input VAT for the first
quarter of 1992, within the period prescribed by law, then the case instituted by petitioner corporation
with the CTA for the refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross
selling price or gross value in money of goods sold, bartered or exchanged. Yet, the same provision
subjected the following sales made by VAT-registered persons to 0% VAT –

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero-
rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to
a foreign country, irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the goods so exported, or foreign
currency denominated sales. "Foreign currency denominated sales", means sales to
nonresidents of goods assembled or manufactured in the Philippines, for delivery to
residents in the Philippines and paid for in convertible foreign currency remitted through the
banking system in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for
VAT purposes, although the VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods
and/or services taxed at 0% shall not result in any output VAT, while the input VAT on its purchases
of goods or services related to such zero-rated sale shall be available as tax credit or refund. 20

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said
regulations imposed additional requirements, not found in the law itself, for the zero-rating of its
sales to Philippine Smelting and Refining Corporation (PASAR) and Philippine Phosphate, Inc.
(PHILPHOS), both of which are registered not only with the BOI, but also with the then Export
Processing Zone Authority (EPZA).21

The contentious provisions of Revenue Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw
materials to export-oriented BOI-registered enterprises whose export sales, under rules and
regulations of the Board of Investments, exceed seventy percent (70%) of total annual
production, shall be subject to zero-rate under the following conditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for
zero-rating for each and every separate buyer, in accordance with Section 8(d) of
Revenue Regulations No. 5-87. The application should be accompanied with a
favorable recommendation from the Board of Investments."

"(2) The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales
invoice. The exporter (buyer) can no longer claim from the Bureau of Internal
Revenue or any other government office tax credits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign
buyer for delivery to a resident local export-oriented BOI-registered enterprise to be used in
manufacturing, processing or repacking of the said buyer's goods and paid for in foreign
currency, inwardly remitted in accordance with Central Bank rules and regulations shall be
subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals,
that Section 2 of Revenue Regulations No. 2-88 should be applied in the cases at bar; and to be
entitled to the zero-rating of its sales to PASAR and PHILPHOS, petitioner corporation, as a VAT-
registered seller, must be able to prove not only that PASAR and PHILPHOS are BOI-registered
corporations, but also that more than 70% of the total annual production of these corporations are
actually exported. Revenue Regulations No. 2-88 merely echoed the requirement imposed by the
BOI on export-oriented corporations registered with it.

While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds
that its application must be limited and placed in the proper context. Note that Section 2 of Revenue
Regulations No. 2-88 referred only to the zero-rated sales of raw materials to export-oriented BOI-
registered enterprises whose export sales, under BOI rules and regulations, should exceed seventy
percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the
sales made by petitioner corporation to PASAR and PHILPHOS. At the onset, it must be
emphasized that PASAR and PHILPHOS, in addition to being registered with the BOI, were also
registered with the EPZA and located within an export-processing zone. Petitioner corporation does
not claim that its sales to PASAR and PHILPHOS are zero-rated on the basis that said sales were
made to export-oriented BOI-registered corporations, but rather, on the basis that the sales were
made to EPZA-registered enterprises operating within export processing zones. Although sales to
export-oriented BOI-registered enterprises and sales to EPZA-registered enterprises located within
export processing zones were both deemed export sales, which, under Section 100(a) of the Tax
Code of 1977, as amended, shall be subject to 0% VAT distinction must be made between these two
types of sales because each may have different substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and
shipment or exportation of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, or foreign currency denominated sales." Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987 - which, in the years concerned
(i.e., 1990 and 1992), governed enterprises registered with both the BOI and EPZA, provided a more
comprehensive definition of export sales, as quoted below:

"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from
invoices, bills of lading, inward letters of credit, landing certificates, and other commercial
documents, of export products exported directly by a registered export producer or the net
selling price of export product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to another producer
or to an export trader shall only be deemed export sales when actually exported by the latter,
as evidenced by landing certificates of similar commercial documents: Provided, further,
That without actual exportation the following shall be considered constructively exported for
purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones; (3) sales to registered export traders
operating bonded trading warehouses supplying raw materials used in the manufacture of
export products under guidelines to be set by the Board in consultation with the Bureau of
Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic
missions and other agencies and/or instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products whether paid for in foreign currency or not:
Provided, further, That export sales of registered export trader may include commission
income; and Provided, finally, That exportation of goods on consignment shall not be
deemed export sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to
Filipinos abroad and other non-residents of the Philippines as well as returning Overseas
Filipinos under the Internal Export Program of the government and paid for in convertible
foreign currency inwardly remitted through the Philippine banking systems shall also be
considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the
sales of export products to another producer or to an export trader, provided that the export products
are actually exported. For purposes of VAT zero-rating, such producer or export trader must be
registered with the BOI and is required to actually export more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation specifically
identified by the said provision are sales to export processing zones. Sales to export processing
zones are subjected to special tax treatment. Article 77 of the same Code establishes the tax
treatment of goods or merchandise brought into the export processing zones. Of particular relevance
herein is paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise
from the customs territory and subsequently brought into the zone, shall be considered as export
sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the
Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres.
According to the Destination Principle, 22 goods and services are taxed only in the country where
these are consumed. In connection with the said principle, the Cross Border Doctrine 23 mandates
that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside
the territorial border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT, while those destined for use or consumption
within the Philippines shall be imposed with 10% VAT.24 Export processing zones25 are to be
managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes,
are effectively considered as foreign territory. For this reason, sales by persons from the Philippine
customs territory to those inside the export processing zones are already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export sales, which,
under the Tax Code of 1977, as amended, were subject to 0% VAT. It is on this ground that
petitioner corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and
PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to
export-oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises
operating within export processing zones is actually supported by subsequent development in tax
laws and regulations. In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as
amended,26 the BIR defined with more precision what are zero-rated export sales –

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose
export sales exceed seventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the
preceding taxable year shall be considered an export-oriented enterprise upon accreditation
as such under the provisions of the Export Development Act (R.A. 7844) and its
implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g.
 Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of
1992.

The Tax Code of 1997, as amended, 27 later adopted the foregoing definition of export sales, which
are subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which
applied to zero-rated export sales to export-oriented BOI-registered enterprises, should not be
applied to the applications for refund/credit of input VAT filed by petitioner corporation since it based
its applications on the zero-rating of export sales to enterprises registered with the EPZA and
located within export processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual
bases of its claim for tax credit or refund, but once it has submitted all the required documents, it is
the function of the BIR to assess these documents with purposeful dispatch. 28 It therefore falls upon
herein petitioner corporation to first establish that its sales qualify for VAT zero-rating under the
existing laws (legal basis), and then to present sufficient evidence that said sales were actually
made and resulted in refundable or creditable input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover only
input VAT on its purportedly zero-rated sales to PASAR and PHILPHOS; however, a more thorough
perusal of its applications, VAT returns, pleadings, and other records of these cases would reveal
that it is also claiming refund/credit of its input VAT on purchases of capital goods and sales of gold
to the Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient
legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the
Tax Code of 1977, as amended, allowed the refund/credit of input VAT on export sales to
enterprises operating within export processing zones and registered with the EPZA, since such
export sales were deemed to be effectively zero-rated sales.29 The fact that PASAR and PHILPHOS,
to whom petitioner corporation sold its products, were operating inside an export processing zone
and duly registered with EPZA, was never raised as an issue herein. Moreover, the same fact was
already judicially recognized in the case Atlas Consolidated Mining & Development Corporation v.
Commissioner of Internal Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-
registered taxpayer to apply for refund/credit of the input VAT paid on capital goods imported or
locally purchased to the extent that such input VAT has not been applied against its output VAT.
Meanwhile, the effective zero-rating of sales of gold to the CBP from 1989 to 1991 31 was already
affirmed by this Court in Commissioner of Internal Revenue v. Benguet Corporation,32 wherein it
ruled that –

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. x x x.
This Court now comes to the question of whether petitioner corporation has sufficiently established
the factual bases for its applications for refund/credit of input VAT. It is in this regard that petitioner
corporation has failed, both in the administrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue
regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the
applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said
applications must have been in accordance with Revenue Regulations No. 3-88, amending Section
16 of Revenue Regulations No. 5-87, which provided as follows –

SECTION 16. Refunds or tax credits of input tax. –

xxxx

(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. In addition, the following documents shall be attached whenever
applicable:

xxxx

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the
sale of goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered.

"iii) evidence of actual receipt of goods or services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase
price, amount of value-added tax paid and description of the capital
equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import entry
document for internal revenue tax purposes and the confirmation receipt
issued by the Bureau of Customs for the payment of the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies,
a statement therefrom showing the amount and description of sale of goods and services,
 name of persons or entities (except in case of exports) to whom the goods or services were
sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the
amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated
transaction during the period covered by the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods
and services, and the VAT paid (inputs) on purchases of goods and services cannot be
directly attributed to any of the aforementioned transactions, the following formula shall be
used to determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

X
Total Amount of Input Taxes
=
Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the
BIR, and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file
a Petition for Review before the CTA. If the taxpayer's claim is supported by voluminous documents,
such as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be
governed by CTA Circular No. 1-95, as amended, reproduced in full below –

In the interest of speedy administration of justice, the Court hereby promulgates the following
rules governing the presentation of voluminous documents and/or long accounts, such as
receipts, invoices and vouchers, as evidence to establish certain facts pursuant to Section
3(c), Rule 130 of the Rules of Court and the doctrine enunciated in Compania Maritima vs.
Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after
motion and approval by the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers,

dates and amounts covered by the invoices or receipts and the amount/s of tax paid;
and (b) a Certification of an independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an examination, evaluation
and audit of the voluminous receipts and invoices. The name of the accountant or
partner of the firm in charge must be stated in the motion so that he/she can be
commissioned by the Court to conduct the audit and, thereafter, testify in Court
relative to such summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for
marking, identification and comparison with the originals thereof need not be done before the
Court or Clerk of Court anymore after the introduction of the summary and CPA certification.
It is enough that the receipts, invoices, vouchers or other documents covering the said
accounts or payments to be introduced in evidence must be pre-marked by the party
concerned and submitted to the Court in order to be made accessible to the adverse party
who desires to check and verify the correctness of the summary and CPA certification.
Likewise, the originals of the voluminous receipts, invoices or accounts must be ready for
 verification and comparison in case doubt on the authenticity thereof is raised during the
hearing or resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944, 33 and 5102,34 were still pending before the CTA when the
said Circular was issued, then petitioner corporation must have complied therewith during the course
of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of
therein respondent, Manila Mining Corporation, for refund of the input VAT on its supposed zero-
rated sales of gold to the CBP because it was unable to substantiate its claim. In the same case, this
Court emphasized the importance of complying with the substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales, to wit –

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a
VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts.

This respondent failed to do.

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

xxxx

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before
it are litigated de novo, party litigants should prove every minute aspect of their cases. No
evidentiary value can be given the purchase invoices or receipts submitted to the BIR as the
rules on documentary evidence require that these documents must be formally offered
before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output
tax but this does not ipso fact mean that [the seller] is entitled to the amount of refund
sought as it is required by law to present evidence showing the input taxes it paid
during the year in question. What is being claimed in the instant petition is the refund
of the input taxes paid by the herein petitioner on its purchase of goods and services.
Hence, it is necessary for the Petitioner to show proof that it had indeed paid the
input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this
duty. It did not adduce in evidence the sales invoice, receipts or other documents
showing the input value added tax on the purchase of goods and services.

xxx

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
categorically that the Court of Tax Appeals shall be a court of record and as such it is
required to conduct a formal trial (trial de novo) where the parties must present their
evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)
 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.

These sales invoices or receipts issued by the supplier are necessary to substantiate the
actual amount or quantity of goods sold and their selling price, and taken collectively are the
best means to prove the input VAT payments.36

Although the foregoing decision focused only on the proof required for the applicant for refund/credit
to establish the input VAT payments it had made on its purchases from suppliers, Revenue
Regulations No. 3-88 also required it to present evidence proving actual zero-rated VAT sales to
qualified buyers, such as (1) photocopy of the approved application for zero-rate if filing for the first
time; (2) sales invoice or receipt showing the name of the person or entity to whom the goods or
services were delivered, date of delivery, amount of consideration, and description of goods or
services delivered; and (3) the evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the certification by the
independent certified public accountant (CPA), thus –

Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers' invoices or receipts which were
examined, evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as
amended by CTA Circular No. 10-97 should substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-
97, which either expressly or impliedly suggests that summaries and schedules of input VAT
payments, even if certified by an independent CPA, suffice as evidence of input VAT
payments.

xxxx

The circular, in the interest of speedy administration of justice, was promulgated to avoid the
time-consuming procedure of presenting, identifying and marking of documents before the
Court. It does not relieve respondent of its imperative task of pre-marking photocopies of
sales receipts and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals. Without presenting these pre-
marked documents as evidence – from which the summary and schedules were based, the
court cannot verify the authenticity and veracity of the independent auditor's conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by the CTA
in order to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation,
No. 5-87, all purchases covered by invoices other than a VAT invoice shall not be entitled to
a refund of input VAT.

xxxx
 While the CTA is not governed strictly by technical rules of evidence, as rules of procedure
are not ends in themselves but are primarily intended as tools in the administration of justice,
the presentation of the purchase receipts and/or invoices is not mere procedural technicality
which may be disregarded considering that it is the only means by which the CTA may
ascertain and verify the truth of the respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input
VAT refund for the first semester of 1991. Except for the summary and schedules of input
VAT payments prepared by respondent itself, no other evidence was adduced in support of
its claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed
the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.)
executed a certification that:

We have examined the information shown below concerning the input tax payments
made by the Makati Office of Manila Mining Corporation for the period from July 1 to
December 31, 1991. Our examination included inspection of the pertinent suppliers'
invoices and official receipts and such other auditing procedures as we considered
necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary"
and not auditing procedures which are in accordance with generally accepted auditing
principles and standards, and that the examination was made on "input tax payments by the
Manila Mining Corporation," without specifying that the said input tax payments are
attributable to the sales of gold to the Central Bank, this Court cannot rely thereon and
regard it as sufficient proof of the respondent's input VAT payments for the second
semester.37

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-
rated sales in the first quarter of 1992, this Court already found that the petitioner corporation failed
to comply with Section 106(b) of the Tax Code of 1977, as amended, imposing the two-year
prescriptive period for the filing of the application for refund/credit thereof. This bars the grant of the
application for refund/credit, whether administratively or judicially, by express mandate of Section
106(e) of the same Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT
on its zero-rated sales in the first quarter of 1992 was actually and timely filed, petitioner corporation
still failed to present together with its application the required supporting documents, whether before
the BIR or the CTA. As the Court of Appeals ruled –

In actions involving claims for refund of taxes assessed and collected, the burden of proof
rests on the taxpayer. As clearly discussed in the CTA's decision, petitioner failed to
substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue
Regulations No. 2-88 in determining compliance with the documentary requirements
for a successful refund or issuance of tax credit. Unmentioned is the applicable and
specific amendment later introduced by Revenue Regulations No. 3-88 dated April 7,
1988 (issued barely after two months from the promulgation of Revenue Regulations
No. 2-88 on February 15, 1988), which amended Section 16 of Revenue Regulations
No. 5-87 on refunds or tax credits of input tax. x x x.
xxxx

"A thorough examination of the evidence submitted by the petitioner before this
court reveals outright the failure to satisfy documentary requirements laid down
under the above-cited regulations. Specifically, petitioner was not able to present the
following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment

locally purchased; and

"f) photocopy of import entry document and confirmation receipt on imported

capital equipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the
actual amount or quantity of goods sold and their selling price. Without them, this
Court cannot verify the correctness of petitioner's claim inasmuch as the regulations
require that the input taxes being sought for refund should be limited to the portion
that is directly and entirely attributable to the particular zero-rated transaction. In this
instance, the best evidence of such transaction are the said sales invoices or
receipts.

"Also, even if sales invoices are produced, there is the further need to submit
evidence that such goods were actually received by the buyer, in this case, by CBP,
Philp[h]os and PASAR.

xxxx

"Lastly, this Court cannot determine whether there were actual local and imported
purchase of capital goods as well as domestic purchase of non-capital goods without
the required purchase invoice or receipt, as the case may be, and confirmation
receipts.

"There is, thus, the imperative need to submit before this Court the original or
attested photocopies of petitioner's invoices or receipts, confirmation receipts and
import entry documents in order that a full ascertainment of the claimed amount may
be achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing
documentsabovementioned. Cases filed before this Court are litigated de novo. This
means that party litigants should endeavor to prove at the first instance every minute
aspect of their cases strictly in accordance with the Rules of Court, most especially
on documentary evidence." (pp. 37-42, Rollo)
 Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or entity
claiming the exemption. The taxpayer who claims for exemption must justify his claim by the
clearest grant of organic or statute law and should not be permitted to stand on vague
implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v.
Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co.,
Inc. v. Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-
destructive", as it finds comfort in the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the
Company. We make no presentation regarding the sufficiency of these procedures
for such purpose. We did not compare the total of the input tax claimed each quarter
against the pertinent VAT returns and books of accounts. The above procedures do
not constitute an audit made in accordance with generally accepted auditing
standards. Accordingly, we do not express an opinion on the company's claim for
input VAT refund or credit. Had we performed additional procedures, or had we
made an audit in accordance with generally accepted auditing standards, other
matters might have come to our attention that we would have accordingly reported
on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent

auditor. Indeed, SGV expressed that it "did not compare the total of the input tax claimed
each quarter against the VAT returns and books of accounts." 38

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on
its zero-rated sales in the second, third, and fourth quarters of 1990, the appellate court likewise
found that petitioner corporation failed to sufficiently establish its claims. Already disregarding the
declarations made by the Court of Appeals on its erroneous application of Revenue Regulations No.
2-88, quoted hereunder is the rest of the findings of the appellate court after evaluating the evidence
submitted in accordance with the requirements under Revenue Regulations No. 3-88 –

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to
Sec. 245 of the National Internal Revenue Code, which recognized his power to "promulgate
all needful rules and regulations for the effective enforcement of the provisions of this Code."
Thus, it is incumbent upon a taxpayer intending to file a claim for refund of input VATs or the
issuance of a tax credit certificate with the BIR x x x to prove sales to such buyers as
required by Revenue Regulations No. 3-98. Logically, the same evidence should be
presented in support of an action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing
sales of gold, copper concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS],
respectively, and the dates and amounts of the same, nor any evidence of actual receipt by
the said buyers of the mineral products. It merely presented receipts of purchases from
suppliers on which input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly
denied the claims for refund of input VATs or the issuance of tax credit certificates of
petitioner [corporation]. Significantly, in the resolution, dated 7 June 2000, this Court directed
the parties to file memoranda discussing, among others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the
 parties, including the petitioner, failed to address this issue, thereby necessitating the
affirmance of the ruling of the Court of Tax Appeals on this point. 39

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-
settled is the general rule that the jurisdiction of this Court in cases brought before it from the Court
of Appeals, by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court, is limited to reviewing or revising errors of law; findings of fact of the latter are
conclusive.40 This Court is not a trier of facts. It is not its function to review, examine and evaluate or
weigh the probative value of the evidence presented. 41

The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is
on a certain state of facts; there is a question of fact when the doubt or difference arises as to the
truth or falsehood of alleged facts."42

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these
sales in the amount it had declared in its returns; whether all the input VAT subject of its applications
for refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied
the input VAT against its output VAT liabilities, are all questions of fact which could only be
answered after reviewing, examining, evaluating, or weighing the probative value of the evidence it
presented, and which this Court does not have the jurisdiction to do in the present Petitions for
Review on Certiorari under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact
under particular circumstances,43 none of these exist in the instant cases. The Court of Appeals, in
both cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of
petitioner corporation, and the records bear out this finding. Petitioner corporation itself cannot
dispute its non-compliance with the requirements set forth in Revenue Regulations No. 3-88 and
CTA Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the
substantiation requirements under Revenue Regulations No. 2-88 should not have applied to it,
while being conspicuously silent on the evidentiary requirements mandated by other relevant
regulations.

Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening
of its cases or holding of new trial before the CTA for the reception of additional evidence, may be
granted. Petitioner corporation prays that the Court exercise its discretion on the matter in its favor,
consistent with the policy that rules of procedure be liberally construed in pursuance of substantive
justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered
in accordance with Section 1, Rule 37 of the revised Rules of Court, which provides –

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within
the period for taking an appeal, the aggrieved party may move the trial court to set aside the
judgment or final order and grant a new trial for one or more of the following causes
materially affecting the substantial rights of said party:
 (a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not
have guarded against and by reason of which such aggrieved party has probably been
impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial, and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the
grounds that the damages awarded are excessive, that the evidence is insufficient to justify
the decision or final order, or that the decision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its
cases and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to
adduce the necessary evidence should be construed as excusable negligence or mistake which
should constitute basis for such re-opening of trial as for a new trial, as counsel was of the belief that
such evidence was rendered unnecessary by the presentation of unrebutted evidence indicating that
respondent [Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-
rated." 44 The CTA denied such motion on the ground that it was not accompanied by an affidavit of
merit as required by Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed
the denial of the motion, but apart from this technical defect, it also found that there was no
justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases
and/or holding of new trial based on the technicality that said motion was unaccompanied by an
affidavit of merit, this Court rules in favor of the petitioner corporation. The facts which should
otherwise be set forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial compliance with the formal
requirements of the law, provided, of course, that the movant, or other individual with personal
knowledge of the facts, take oath as to the truth thereof, in effect converting the entire motion for
new trial into an affidavit.45 The motion of petitioner corporation was prepared and verified by its
counsel, and since the ground for the motion was premised on said counsel's excusable negligence
or mistake, then the obvious conclusion is that he had personal knowledge of the facts relating to
such negligence or mistake. Hence, it can be said that the motion of petitioner corporation for the re-
opening of its cases and/or holding of new trial was in substantial compliance with the formal
requirements of the revised Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the
re-opening of its cases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution, 46 dated 20 July 1998, by the CTA
in another case, CTA Case No. 5296, involving the claim of petitioner corporation for refund/credit of
input VAT for the third quarter of 1993. The said Resolution allowed the re-opening of CTA Case No.
5296, earlier dismissed by the CTA, to give the petitioner corporation the opportunity to present the
missing export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court, 47 may
likewise be extended to the CTA. When the denial of the motion rests upon the discretion of a lower
court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof. 48

That the CTA granted the motion for re-opening of one case for the presentation of additional
evidence and, yet, deny a similar motion in another case filed by the same party, does not
necessarily demonstrate grave abuse of discretion or arbitrariness on the part of the CTA. Although
the cases involve identical parties, the causes of action and the evidence to support the same can
very well be different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No.
5296, petitioner corporation was claiming refund/credit of the input VAT on its zero-rated sales,
consisting of actual export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into
account the presentation by petitioner corporation of inward remittances of its export sales for the
quarter involved, its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report
showing its sales to the said foreign corporation, and its application for refund. In contrast, the
present Petitions involve the claims of petitioner corporation for refund/credit of the input VAT on
its purchases of capital goods and on its effectively zero-rated sales to CBP and EPZA-registered
enterprises PASAR and PHILPHOS for the second, third, and fourth quarters of 1990 and first
quarter of 1992. There being a difference as to the bases of the claims of petitioner corporation for
refund/credit of input VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting
variances as to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by
petitioner corporation, emphasizes that the decision of the CTA to allow petitioner corporation to
present evidence "is applicable pro hac vice or in this occasion only as it is the finding of [the CTA]
that petitioner [corporation] has established a few of the aforementioned material points regarding
the possible existence of the export documents together with the prior and succeeding returns for
the quarters involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot
be bound by its ruling in CTA Case No. 5296, when these cases do not involve the exact same
circumstances that compelled it to grant the motion of petitioner corporation for re-opening of CTA
Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the required documents was
due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute
excusable negligence or mistake which would warrant the re-opening of the cases and/or holding of
new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and
generally imputable to the party because if it is imputable to the counsel, it is binding on the client.
To follow a contrary rule and allow a party to disown his counsel's conduct would render proceedings
indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing the counsel. What
the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not
ask for the reversal of the court's ruling. 49

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action
of his counsel in the conduct of his case and he cannot therefore complain that the result of the
litigation might have been otherwise had his counsel proceeded differently. It has been held time and
again that blunders and mistakes made in the conduct of the proceedings in the trial court as a result
of the ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If
such were to be admitted as valid reasons for re-opening cases, there would never be an end to
litigation so long as a new counsel could be employed to allege and show that the prior counsel had
not been sufficiently diligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could
not have guarded against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988,
had been in effect more than two years prior to the filing by petitioner corporation of its earliest
application for refund/credit of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95
was issued only on 25 January 1995, after petitioner corporation had filed its Petitions before the
CTA, but still during the pendency of the cases of petitioner corporation before the tax court. The
counsel of petitioner corporation does not allege ignorance of the foregoing administrative regulation
and tax court circular, only that he no longer deemed it necessary to present the documents required
therein because of the presentation of alleged unrebutted evidence of the zero-rated sales of
petitioner corporation. It was a judgment call made by the counsel as to which evidence to present in
support of his client's cause, later proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the
required documentary evidence was due to the excusable mistake of its counsel, a ground under
Section 1, Rule 37 of the revised Rules of Court for the grant of a new trial. "Mistake," as it is
referred to in the said rule, must be a mistake of fact, not of law, which relates to the case. 52 In the
present case, the supposed mistake made by the counsel of petitioner corporation is one of law, for
it was grounded on his interpretation and evaluation that Revenue Regulations No. 3-88 and CTA
Circular No. 1-95, as amended, did not apply to his client's cases and that there was no need to
comply with the documentary requirements set forth therein. And although the counsel of petitioner
corporation advocated an erroneous legal position, the effects thereof, which did not amount to a
deprivation of his client's right to be heard, must bind petitioner corporation. The question is not
whether petitioner corporation succeeded in establishing its interests, but whether it had the
opportunity to present its side.53

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the
ground of mistake must show that ordinary prudence could not have guarded against it. A new trial is
not a refuge for the obstinate.54Ordinary prudence in these cases would have dictated the
presentation of all available evidence that would have supported the claims for refund/credit of input
VAT of petitioner corporation. Without sound legal basis, counsel for petitioner corporation
concluded that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended,
did not apply to its client's claims. The obstinacy of petitioner corporation and its counsel is
demonstrated in their failure, nay, refusal, to comply with the appropriate administrative regulations
and tax court circular in pursuing the claims for refund/credit, now subject of G.R. Nos. 141104 and
148763, even though these were separately instituted in a span of more than two years. It is also
evident in the failure of petitioner corporation to address the issue and to present additional evidence
despite being given the opportunity to do so by the Court of Appeals. As pointed out by the appellate
court, in its Decision, dated 15 September 2000, in CA-G.R. SP No. 46718 –

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file
memoranda discussing, among others, the submission of proof for "its [petitioner's] sales of
gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties, including the
petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of
the Court of Tax Appeals on this point. 55

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive
period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of
the quarterly VAT return, and that sales to EPZA-registered enterprises operating within economic
processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-
88, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of
capital goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990
and the first quarter of 1992, for not being established and substantiated by appropriate and
sufficient evidence. Petitioner corporation is also not entitled to the re-opening of its cases and/or
holding of new trial since the non-presentation of the required documentary evidence before the BIR
and the CTA by its counsel does not constitute excusable negligence or mistake as contemplated in
Section 1, Rule 37 of the revised Rules of Court.
WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the
Decisions, dated 6 July 1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos.
47607 and 46718, respectively, are hereby AFFIRMED. Costs against petitioner.

Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.

EN BANC

G.R. No. 187485               February 12, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
SAN ROQUE POWER CORPORATION, Respondent.

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

G.R. No. 196113

TAGANITO MINING CORPORATION, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Cases

G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March 2009 as
well as the Resolution3 promulgated on 24 April 2009 by the Court of Tax Appeals En Banc (CTA
EB) in CTA EB No. 408. The CTA EB affirmed the 29 November 2007 Amended Decision 4 as well as
the 11 July 2008 Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second
Division) in CTA Case No. 6647. The CTA Second Division ordered the Commissioner of Internal
Revenue (Commissioner) to refund or issue a tax credit for P483,797,599.65 to San Roque Power
Corporation (San Roque) for unutilized input value-added tax (VAT) on purchases of capital goods
and services for the taxable year 2001.

G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December 2010
as well as the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB No. 624. In its
Decision, the CTA EB reversed the 8 January 2010 Decision 9 as well as the 7 April 2010
Resolution10of the CTA Second Division and granted the CIR’s petition for review in CTA Case No.
7574. The CTA EB dismissed, for having been prematurely filed, Taganito Mining Corporation’s
(Taganito) judicial claim for P8,365,664.38 tax refund or credit.

G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December 2010
as well as the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB No. 569. The
CTA EB affirmed the 20 July 2009 Decision as well as the 10 November 2009 Resolution of the CTA
Second Division in CTA Case No. 7687. The CTA Second Division denied, due to prescription,
Philex Mining Corporation’s (Philex) judicial claim for P23,956,732.44 tax refund or credit.

On 3 August 2011, the Second Division of this Court resolved 14 to consolidate G.R. No. 197156 with
G.R. No. 196113, which were pending in the same Division, and with G.R. No. 187485, which was
assigned to the Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156 and
196113 to the Court En Banc, where G.R. No. 187485, the lower-numbered case, was assigned.

G.R. No. 187485

CIR v. San Roque Power Corporation

The Facts

The CTA EB’s narration of the pertinent facts is as follows:

[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to act
upon and approve claims for refund or tax credit, with office at the Bureau of Internal Revenue
("BIR") National Office Building, Diliman, Quezon City.

[San Roque] is a domestic corporation duly organized and existing under and by virtue of the laws of
the Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan. It was
incorporated in October 1997 to design, construct, erect, assemble, own, commission and operate
power-generating plants and related facilities pursuant to and under contract with the Government of
the Republic of the Philippines, or any subdivision, instrumentality or agency thereof, or any
governmentowned or controlled corporation, or other entity engaged in the development, supply, or
distribution of energy.

As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-017-501. It
is likewise registered with the Board of Investments ("BOI") on a preferred pioneer status, to engage
in the design, construction, erection, assembly, as well as to own, commission, and operate electric
power-generating plants and related activities, for which it was issued Certificate of Registration No.
97-356 on February 11, 1998.

On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with the
National Power Corporation ("NPC") to develop hydro-potential of the Lower Agno River and
generate additional power and energy for the Luzon Power Grid, by building the San Roque Multi-
Purpose Project located in San Manuel, Pangasinan. The PPA provides, among others, that [San
Roque] shall be responsible for the design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and maintain the same, subject to NPC
instructions. During the cooperation period of twenty-five (25) years commencing from the
completion date of the Power Station, NPC will take and pay for all electricity available from the
Power Station.

On the construction and development of the San Roque Multi- Purpose Project which comprises of
the dam, spillway and power plant, [San Roque] allegedly incurred, excess input VAT in the amount
of ₱559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the
same year. [San Roque] duly filed with the BIR separate claims for refund, in the total amount of
₱559,709,337.54, representing unutilized input taxes as declared in its VAT returns for taxable year
2001.

However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year 2001
since it increased its unutilized input VAT to the amount of ₱560,200,283.14. Consequently, [San
Roque] filed with the BIR on even date, separate amended claims for refund in the aggregate
amount of ₱560,200,283.14.

[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for Review with
the Court [of Tax Appeals] in Division on April 10, 2003.

Trial of the case ensued and on July 20, 2005, the case was submitted for decision. 15

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division initially denied San Roque’s claim. In its Decision 16 dated 8 March 2006, it
cited the following as bases for the denial of San Roque’s claim: lack of recorded zero-rated or
effectively zero-rated sales; failure to submit documents specifically identifying the purchased
goods/services related to the claimed input VAT which were included in its Property, Plant and
Equipment account; and failure to prove that the related construction costs were capitalized in its
books of account and subjected to depreciation.

The CTA Second Division required San Roque to show that it complied with the following
requirements of Section 112(B) of Republic Act No. 8424 (RA 8424) 17 to be entitled to a tax refund or
credit of input VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-
registered entity; (2) its input taxes claimed were paid on capital goods duly supported by VAT
invoices and/or official receipts; (3) it did not offset or apply the claimed input VAT payments on
capital goods against any output VAT liability; and (4) its claim for refund was filed within the two-
year prescriptive period both in the administrative and judicial levels.

The CTA Second Division found that San Roque complied with the first, third, and fourth
requirements, thus:

The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint
Stipulation of Facts, Records, p. 157). It was also established that the instant claim of
₱560,200,823.14 is already net of the ₱11,509.09 output tax declared by [San Roque] in its
amended VAT return for the first quarter of 2001. Moreover, the entire amount of ₱560,200,823.14
was deducted by [San Roque] from the total available input tax reflected in its amended VAT returns
for the last two quarters of 2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 & QQ-1).
This means that the claimed input taxes of ₱560,200,823.14 did not form part of the excess input
taxes of ₱83,692,257.83, as of the second quarter of 2002 that was to be carried-over to the
succeeding quarters. Further, [San Roque’s] claim for refund/tax credit certificate of excess input
VAT was filed within the two-year prescriptive period reckoned from the dates of filing of the
corresponding quarterly VAT returns.

For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on April 25,
2001, July 25, 2001, October 23, 2001 and January 24, 2002, respectively (Exhibits "H, J, L, and
N"). These returns were all subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O").
On the other hand, [San Roque] originally filed its separate claims for refund on July 10, 2001,
October 10, 2001, February 21, 2002, and May 9, 2002 for the first, second, third, and fourth
quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and subsequently filed amended
claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for
Review was filed on April 10, 2003. Counting from the respective dates when [San Roque] originally
filed its VAT returns for the first, second, third and fourth quarters of 2001, the administrative claims
for refund (original and amended) and the Petition for Review fall within the two-year prescriptive
period.18

San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29 November
2007 Amended Decision,19 the CTA Second Division found legal basis to partially grant San Roque’s
claim. The CTA Second Division ordered the Commissioner to refund or issue a tax credit in favor of
San Roque in the amount of ₱483,797,599.65, which represents San Roque’s unutilized input VAT
on its purchases of capital goods and services for the taxable year 2001. The CTA based the
adjustment in the amount on the findings of the independent certified public accountant. The
following reasons were cited for the disallowed claims: erroneous computation; failure to ascertain
whether the related purchases are in the nature of capital goods; and the purchases pertain to
capital goods. Moreover, the reduction of claims was based on the following: the difference between
San Roque’s claim and that appearing on its books; the official receipts covering the claimed input
VAT on purchases of local services are not within the period of the claim; and the amount of VAT
cannot be determined from the submitted official receipts and invoices. The CTA Second Division
denied San Roque’s claim for refund or tax credit of its unutilized input VAT attributable to its zero-
rated or effectively zero-rated sales because San Roque had no record of such sales for the four
quarters of 2001.

The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision reads:

WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY
GRANTED and this Court’s Decision promulgated on March 8, 2006 in the instant case is hereby
MODIFIED.

Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX
CREDIT CERTIFICATE in favor of [San Roque] in the reduced amount of Four Hundred Eighty
Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty
Five Centavos (₱483,797,599.65) representing unutilized input VAT on purchases of capital goods
and services for the taxable year 2001.

SO ORDERED.20

The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA
Second Division issued a Resolution dated 11 July 2008 which denied the CIR’s motion for lack of
merit.

The Court of Tax Appeals’ Ruling: En Banc

The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San
Roque’s claim for refund or tax credit in its entirety as well as for the setting aside of the 29
November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No. 6647.

The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision and
resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue
Memorandum Circular No. 49-03,22 as its bases for ruling that San Roque’s judicial claim was not
prematurely filed. The pertinent portions of the Decision state:

More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this wise:

It is true that Section 112(D) of the abovementioned provision applies to the present case.
However, what the petitioner failed to consider is Section 112(A) of the same provision. The
respondent is also covered by the two (2) year prescriptive period. We have repeatedly held that the
claim for refund with the BIR and the subsequent appeal to the Court of Tax Appeals must be filed
within the two-year period.

Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and Development
Corporation vs. Commissioner of Internal Revenue that the two-year prescriptive period for filing a
claim for input tax is reckoned from the date of the filing of the quarterly VAT return and payment of
the tax due. If the said period is about to expire but the BIR has not yet acted on the
application for refund, the taxpayer may interpose a petition for review with this Court within
the two year period.

In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now
Commissioner) 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 Court of Tax Appeals before the end of the two-year period
without awaiting the decision of the Collector.

Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue vs.
The Honorable Court of Tax Appeals and Planters Products, Inc., the Supreme Court held that the
taxpayer need not wait indefinitely for a decision or ruling which may or may not be
forthcoming and which he has no legal right to expect. It is disheartening enough to a taxpayer
to keep him waiting for an indefinite period of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It would make matters more
exasperating for the taxpayer if we were to close the doors of the courts of justice for such a relief
until after the Collector (now Commissioner) of Internal Revenue, would have, at his personal
convenience, given his go signal.

This Court ruled in several cases that once the petition is filed, the Court has already acquired
jurisdiction over the claims and the Court is not bound to wait indefinitely for no reason for whatever
action respondent (herein petitioner) may take. At stake are claims for refund and unlike
disputed assessments, no decision of respondent (herein petitioner) is required before one
can go to this Court. (Emphasis supplied and citations omitted)

Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-03
dated August 18, 2003, that [the CIR] knows that claims for VAT refund or tax credit filed with the
Court [of Tax Appeals] can proceed simultaneously with the ones filed with the BIR and that
taxpayers need not wait for the lapse of the subject 120-day period, to wit:

In response to [the] request of selected taxpayers for adoption of procedures in handling refund
cases that are aligned to the statutory requirements that refund cases should be elevated to the
Court of Tax Appeals before the lapse of the period prescribed by law, certain provisions of RMC
No. 42-2003 are hereby amended and new provisions are added thereto.

In consonance therewith, the following amendments are being introduced to RMC No. 42-2003, to
wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows:

In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals
involving a claim for refund/TCC that is pending at the administrative agency (Bureau of
Internal Revenue or OSS-DOF), the administrative agency and the tax court may act on the
case separately. While the case is pending in the tax court and at the same time is still under
process by the administrative agency, the litigation lawyer of the BIR, upon receipt of the summons
from the tax court, shall request from the head of the investigating/processing office for the docket
containing certified true copies of all the documents pertinent to the claim. The docket shall be
presented to the court as evidence for the BIR in its defense on the tax credit/refund case filed by
the taxpayer. In the meantime, the investigating/processing office of the administrative agency shall
continue processing the refund/TCC case until such time that a final decision has been reached by
either the CTA or the administrative agency.

If the CTA is able to release its decision ahead of the evaluation of the administrative agency,
the latter shall cease from processing the claim. On the other hand, if the administrative agency
is able to process the claim of the taxpayer ahead of the CTA and the taxpayer is amenable to the
findings thereof, the concerned taxpayer must file a motion to withdraw the claim with the
CTA.23 (Emphasis supplied)

G.R. No. 196113

Taganito Mining Corporation v. CIR

The Facts

The CTA Second Division’s narration of the pertinent facts is as follows:

Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal office at 4th Floor, Solid Mills Building, De La Rosa
St., Lega[s]pi Village, Makati City. It is duly registered with the Securities and Exchange Commission
with Certificate of Registration No. 138682 issued on March 4, 1987 with the following primary
purpose:

To carry on the business, for itself and for others, of mining lode and/or placer mining, developing,
exploiting, extracting, milling, concentrating, converting, smelting, treating, refining, preparing for
market, manufacturing, buying, selling, exchanging, shipping, transporting, and otherwise producing
and dealing in nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone,
and all kinds of ores, metals and their by-products and which by-products thereof of every kind and
description and by whatsoever process the same can be or may hereafter be produced, and
generally and without limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in
lands, mines, and mineral rights and claims and to conduct all business appertaining thereto, to
purchase, locate, lease or otherwise acquire, mining claims and rights, timber rights, water rights,
concessions and mines, buildings, dwellings, plants machinery, spare parts, tools and other
properties whatsoever which this corporation may from time to time find to be to its advantage to
mine lands, and to explore, work, exercise, develop or turn to account the same, and to acquire,
develop and utilize water rights in such manner as may be authorized or permitted by law; to
purchase, hire, make, construct or otherwise, acquire, provide, maintain, equip, alter, erect, improve,
repair, manage, work and operate private roads, barges, vessels, aircraft and vehicles, private
telegraph and telephone lines, and other communication media, as may be needed by the
corporation for its own purpose, and to purchase, import, construct, machine, fabricate, or otherwise
acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes, watercourses,
waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works, gasworks, electric
lights and power plants and compressed air plants, chemical works of all kinds, concentrators,
smelters, smelting plants, and refineries, matting plants, warehouses, workshops, factories, dwelling
houses, stores, hotels or other buildings, engines, machinery, spare parts, tools, implements and
other works, conveniences and properties of any description in connection with or which may be
directly or indirectly conducive to any of the objects of the corporation, and to contribute to, subsidize
or otherwise aid or take part in any operations;

and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN
8RC0000017494. Likewise, [Taganito] is registered with the Board of Investments (BOI) as an
exporter of beneficiated nickel silicate and chromite ores, with BOI Certificate of Registration No. EP-
88-306.

Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with
authority to exercise the functions of the said office, including inter alia, the power to decide refunds
of internal revenue taxes, fees and other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code (NIRC) or other laws administered by
Bureau of Internal Revenue (BIR) under Section 4 of the NIRC. He holds office at the BIR National
Office Building, Diliman, Quezon City.

[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period January 1,
2005 to December 31, 2005. For easy reference, a summary of the filing dates of the original and
amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as follows:

Exhibit(s) Quarter Nature of Mode of filing Filing Date

the Return
L to L-4 1st Original Electronic April 15, 2005
M to M-3 Amended Electronic July 20, 2005
N to N-4 Amended Electronic October 18, 2006
Q to Q-3 2nd Original Electronic July 20, 2005
R to R-4 Amended Electronic October 18, 2006
U to U-4 3rd Original Electronic October 19, 2005
V to V-4 Amended Electronic October 18, 2006
Y to Y-4 4th Original Electronic January 20, 2006
Z to Z-4 Amended Electronic October 18, 2006

As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated sales
amounting to P1,446,854,034.68; input VAT on its domestic purchases and importations of goods
(other than capital goods) and services amounting to P2,314,730.43; and input VAT on its domestic
purchases and importations of capital goods amounting to P6,050,933.95, the details of which are
summarized as follows:

Period Zero-Rated Sales Input VAT on Input VAT on Total Input VAT
Covered Domestic Domestic
Purchases and Purchases and
Importations Importations
 of Goods and of Capital
Services Goods
01/01/05 - P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78
03/31/05
04/01/05 - 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90
06/30/05
07/01/05 - 480,784,287.30 144,887.67 - 144,887.67
09/30/05
10/01/05 - 350,212,345.02 473,598.03 - 473,598.03
12/31/05
TOTAL P1,446,854,034.68 P2,314,730.43 P6,050,933.95 P8,365,664.38

On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers Audit and
Investigation Division II (LTAID II), a letter dated November 13, 2006 claiming a tax credit/refund of
its supposed input VAT amounting to ₱8,365,664.38 for the period covering January 1, 2004 to
December 31, 2004. On the same date, [Taganito] likewise filed an Application for Tax
Credits/Refunds for the period covering January 1, 2005 to December 31, 2005 for the same
amount.

On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the CIR],
to correct the period of the above claim for tax credit/refund in the said amount of ₱8,365,664.38 as
actually referring to the period covering January 1, 2005 to December 31, 2005.

As the statutory period within which to file a claim for refund for said input VAT is about to lapse
without action on the part of the [CIR], [Taganito] filed the instant Petition for Review on February 17,
2007.

In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:

4. [Taganito’s] alleged claim for refund is subject to administrative investigation/examination

by the Bureau of Internal Revenue (BIR);

5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged unutilized input VAT
on domestic purchases of goods and services and on importation of capital goods for the
period January 1, 2005 to December 31, 2005 is not properly documented;

6. [Taganito] must prove that it has complied with the provisions of Sections 112 (A) and (D)
and 229 of the National Internal Revenue Code of 1997 (1997 Tax Code) on the prescriptive
period for claiming tax refund/credit;

7. Proof of compliance with the prescribed checklist of requirements to be submitted

involving claim for VAT refund pursuant to Revenue Memorandum Order No. 53-
98, otherwise there would be no sufficient compliance with the filing of administrative
claim for refund, the administrative claim thereof being mere proforma, which is a
condition sine qua non prior to the filing of judicial claim in accordance with the
provision of Section 229 of the 1997 Tax Code. Further, Section 112 (D) of the Tax Code, as
amended, requires the submission of complete documents in support of the application
filed with the BIR before the 120-day audit period shall apply, and before the taxpayer
 could avail of judicial remedies as provided for in the law. Hence, [Taganito’s] failure to
submit proof of compliance with the above-stated requirements warrants immediate
dismissal of the petition for review.

8. [Taganito] must prove that it has complied with the invoicing requirements mentioned in
Sections 110 and 113 of the 1997 Tax Code, as amended, in relation to provisions of
Revenue Regulations No. 7-95.

9. In an action for refund/credit, 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/credit (Asiatic
Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of Internal Revenue vs. Manila
Jockey Club, Inc., 98 Phil. 670);

10. Claims for refund are construed strictly against the claimant for the same partake the
nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31
SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs.
Commissioner of Internal Revenue, 124 SCRA 1211).

SPECIAL AND AFFIRMATIVE DEFENSES

11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for failure
on the part of [Taganito] to comply with the provision of Section 112 (D) of the 1997 Tax Code which
provides, thus:

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

x x x           x x x          x x x

(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 (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 cases of full or partial denial 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 dayperiod, appeal the decision or the unacted claim
with the Court of Tax Appeals. (Emphasis supplied.)

12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal Revenue
on November 14, 2006. Subsequently on February 14, 2007, the instant petition was filed. Obviously
the 120 days given to the Commissioner to decide on the claim has not yet lapsed when the petition
was filed. The petition was prematurely filed, hence it must be dismissed for lack of jurisdiction.

During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at proving
its supposed entitlement to the refund in the amount of ₱8,365,664.38, representing input taxes for
the period covering January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not
to present evidence. Thus, in the Resolution promulgated on January 22, 2009, this case was
submitted for decision as of such date, considering [Taganito’s] "Memorandum" filed on January 19,
2009 and [the CIR’s] "Memorandum" filed on December 19, 2008. 24
The Court of Tax Appeals’ Ruling: Division

The CTA Second Division partially granted Taganito’s claim. In its Decision 25 dated 8 January 2010,
the CTA Second Division found that Taganito complied with the requirements of Section 112(A) of
RA 8424, as amended, to be entitled to a tax refund or credit of input VAT attributable to zero-rated
or effectively zero-rated sales.26

The pertinent portions of the CTA Second Division’s Decision read:

Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006, which was
amended on November 29, 2006, and the Petition for Review filed with this Court on February 14,
2007 are well within the two-year prescriptive period, reckoned from March 31, 2005, June 30, 2005,
September 30, 2005, and December 31, 2005, respectively, the close of each taxable quarter
covering the period January 1, 2005 to December 31, 2005.

In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount of
₱8,249,883.33 representing unutilized input VAT for the four taxable quarters of 2005.

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the amount of
EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE
PESOS AND THIRTY THREE CENTAVOS (P8,249,883.33) representing its unutilized input taxes
attributable to zero-rated sales from January 1, 2005 to December 31, 2005.

SO ORDERED.27

The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito, in turn,
filed a Comment/Opposition on the Motion for Partial Reconsideration on 15 February 2010.

In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The CTA
Second Division ruled that the legislature did not intend that Section 112 (Refunds or Tax Credits of
Input Tax) should be read in isolation from Section 229 (Recovery of Tax Erroneously or Illegally
Collected) or vice versa. The CTA Second Division applied the mandatory statute of limitations in
seeking judicial recourse prescribed under Section 229 to claims for refund or tax credit under
Section 112.

The Court of Tax Appeals’ Ruling: En Banc

On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing the 8
January 2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and praying that
Taganito’s entire claim for refund be denied.

In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and reversed
and set aside the challenged decision and resolution.

The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the reckoning
of the two-year prescriptive period for filing a claim for tax refund or credit over input VAT to be the
close of the taxable quarter when the sales were made. The CTA EB also relied on this Court’s
rulings in the cases of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.
(Aichi)30 and Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period to file a refund for input
VAT arising from zero-rated sales should be reckoned from the close of the taxable quarter when the
sales were made. Aichi further emphasized that the failure to await the decision of the
Commissioner or the lapse of 120-day period prescribed in Section 112(D) amounts to a premature
filing.

The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which was well
within the period prescribed under Section 112(A) and (B) of the 1997 Tax Code. However, the CTA
EB found that Taganito’s judicial claim was prematurely filed. Taganito filed its Petition for Review
before the CTA Second Division on 14 February 2007. The judicial claim was filed after the lapse of
only 92 days from the filing of its administrative claim before the CIR, in violation of the 120-day
period prescribed in Section 112(D) of the 1997 Tax Code.

The dispositive portion of the Decision states:

WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated
January 8, 2010 and Resolution dated April 7, 2010 of the Special Second Division of this Court are
hereby REVERSED and SET ASIDE. Another one is hereby entered DISMISSING the Petition for
Review filed in CTA Case No. 7574 for having been prematurely filed.

SO ORDERED.32

In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim before
the CTA. Justice Bautista read Section 112(C) of the 1997 Tax Code (Period within which Refund or
Tax Credit of Input Taxes shall be Made) in conjunction with Section 229 (Recovery of Tax
Erroneously or Illegally Collected). Justice Bautista also relied on this Court’s ruling in Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas),34 which stated that refundable or creditable input VAT and illegally or erroneously collected
national internal revenue tax are the same, insofar as both are monetary amounts which are
currently in the hands of the government but must rightfully be returned to the taxpayer. Justice
Bautista concluded:

Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund or
tax credit of excess or unutilized input tax with this Court, either within 30 days from receipt of the
denial of its claim, or after the lapse of the 120-day period in the event of inaction by the
Commissioner, provided that both administrative and judicial remedies must be undertaken within
the 2-year period.35

Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed an
Opposition on 26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in a
Resolution36 dated 14 March 2011. The CTA EB did not see any justifiable reason to depart from this
Court’s rulings in Aichi and Mirant.

G.R. No. 197156

Philex Mining Corporation v. CIR

The Facts

The CTA EB’s narration of the pertinent facts is as follows:

[Philex] is a corporation duly organized and existing under the laws of the Republic of the
Philippines, which is principally engaged in the mining business, which includes the exploration and
operation of mine properties and commercial production and marketing of mine products, with office
address at 27 Philex Building, Fairlaine St., Kapitolyo, Pasig City.

[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the government
entity tasked with the duties/functions of assessing and collecting all national internal revenue taxes,
fees, and charges, and enforcement of all forfeitures, penalties and fines connected therewith,
including the execution of judgments in all cases decided in its favor by [the Court of Tax Appeals]
and the ordinary courts, where she can be served with court processes at the BIR Head Office, BIR
Road, Quezon City.

On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable year 2005
and Amended VAT Return for the same quarter on December 1, 2005.

On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of ₱23,956,732.44 with
the One Stop Shop Center of the Department of Finance. However, due to [the CIR’s] failure to act
on such claim, on October 17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as
amended, [Philex] filed a Petition for Review, docketed as C.T.A. Case No. 7687.

In [her] Answer, respondent CIR alleged the following special and affirmative defenses:

4. Claims for refund are strictly construed against the taxpayer as the same partake the
nature of an exemption;

5. The taxpayer has the burden to show that the taxes were erroneously or illegally paid.
Failure on the part of [Philex] to prove the same is fatal to its cause of action;

6. [Philex] should prove its legal basis for claiming for the amount being refunded. 37

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to
prescription. The CTA Second Division ruled that the two-year prescriptive period specified in
Section 112(A) of RA 8424, as amended, applies not only to the filing of the administrative claim with
the BIR, but also to the filing of the judicial claim with the CTA. Since Philex’s claim covered the 3rd
quarter of 2005, its administrative claim filed on 20 March 2006 was timely filed, while its judicial
claim filed on 17 October 2007 was filed late and therefore barred by prescription.

On 10 November 2009, the CTA Second Division denied Philex’s Motion for Reconsideration.

The Court of Tax Appeals’ Ruling: En Banc

Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009
Decision and the 10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687.

The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed the CTA
Second Division’s Decision and Resolution.

The pertinent portions of the Decision read:

In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed within
the two-year prescriptive period; however, as to its judicial claim for refund/credit, records show that
on March 20, 2006, [Philex] applied the administrative claim for refund of unutilized input VAT in the
amount of ₱23,956,732.44 with the One Stop Shop Center of the Department of Finance, per
Application No. 52490. From March 20, 2006, which is also presumably the date [Philex] submitted
supporting documents, together with the aforesaid application for refund, the CIR has 120 days, or
until July 18, 2006, within which to decide the claim. Within 30 days from the lapse of the 120-day
period, or from July 19, 2006 until August 17, 2006, [Philex] should have elevated its claim for refund
to the CTA. However, [Philex] filed its Petition for Review only on October 17, 2007, which is 426
days way beyond the 30- day period prescribed by law.

Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the Petition
for Review in CTA Case No. 7687 should have been dismissed on the ground that the Petition for
Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the
CTA in Division; and not due to prescription.

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE
COURSE, and accordingly, DISMISSED. The assailed Decision dated July 20, 2009, dismissing the
Petition for Review in CTA Case No. 7687 due to prescription, and Resolution dated November 10,
2009 denying [Philex’s] Motion for Reconsideration are hereby AFFIRMED, with modification that the
dismissal is based on the ground that the Petition for Review in CTA Case No. 7687 was filed way
beyond the 30-day prescribed period to appeal.

SO ORDERED.39

G.R. No. 187485

CIR v. San Roque Power Corporation

The Commissioner raised the following grounds in the Petition for Review:

I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund
was not prematurely filed.

II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court of
Tax Appeals (Second Division) granting [San Roque’s] claim for refund of alleged unutilized
input VAT on its purchases of capital goods and services for the taxable year 2001 in the
amount of P483,797,599.65. 40

G.R. No. 196113

Taganito Mining Corporation v. CIR

Taganito raised the following grounds in its Petition for Review:

I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of
discretion tantamount to lack or excess of jurisdiction in erroneously applying
the Aichi doctrine in violation of [Taganito’s] right to due process.

II. The Court of Tax Appeals committed serious error and acted with grave abuse of
discretion amounting to lack or excess of jurisdiction in erroneously interpreting the
provisions of Section 112 (D).41

G.R. No. 197156

Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:

I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is that
the petition was filed with the CTA within the period set by prevailing court rulings at the time
it was filed.

II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition in
this instant case.42

The Court’s Ruling

For ready reference, the following are the provisions of the Tax Code applicable to the present
cases:

Section 105:

Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods, properties or services at the time of the
effectivity of Republic Act No. 7716.

xxxx

Section 110(B):

Sec. 110. Tax Credits. —

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters: [Provided,
That the input tax inclusive of input VAT carried over from the previous quarter that may be credited
in every quarter shall not exceed seventy percent (70%) of the output VAT:] 43 Provided, however,
That any input tax attributable to zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal revenue taxes, subject to the provisions
of Section 112.

Section 112:44

Sec. 112. Refunds or Tax Credits of Input Tax. —

(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-registered person, whose

sales are zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied against
output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)
(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange
 proceeds thereof had been duly accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of
goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.

(B) Capital Goods.- A VAT — registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may
be made only within two (2) years after the close of the taxable quarter when the importation
or purchase was made.

(C) Cancellation of VAT Registration. — A person whose registration has been cancelled
due to retirement from or cessation of business, or due to changes in or cessation of status
under Section 106(C) of this Code may, within two (2) years from the date of cancellation,
apply for the issuance of a tax credit certificate for any unused input tax which may be used
in payment of his other internal revenue taxes

(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 Subsection (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.

(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit, the provisions of the Administrative
Code of 1987 to the contrary notwithstanding: Provided, that refunds under this paragraph
shall be subject to post audit by the Commission on Audit.

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 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.
(All emphases supplied)

I. Application of the 120+30 Day Periods

a. G.R. No. 187485 - CIR v. San Roque Power Corporation

On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the
Commissioner on 28 March 2003, San Roque filed a Petition for Review with the CTA docketed as
CTA Case No. 6647. From this we gather two crucial facts: first, San Roque did not wait for the 120-
day period to lapse before filing its judicial claim; second, San Roque filed its judicial claim more
than four (4) years before the Atlas45 doctrine, which was promulgated by the Court on 8 June 2007.

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law
to the Commissioner to decide whether to grant or deny San Roque’s application for tax refund or
credit. It is indisputable that compliance with the 120-day waiting period is mandatory and
jurisdictional. The waiting period, originally fixed at 60 days only, was part of the provisions of the
first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting period was
extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of
1997. Thus, the waiting period has been in our statute books for more than fifteen (15)
years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates
the doctrine of exhaustion of administrative remedies and renders the petition premature and thus
without a cause of action, with the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and reiterating these
doctrinal principles.46

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of
the Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue
taxes."47 When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA
without waiting for the decision of the Commissioner, there is no "decision" of the Commissioner to
review and thus the CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the Commissioner fails to decide within "a specific
period" required by law, such "inaction shall be deemed a denial"48 of the application for tax
refund or credit. It is the Commissioner’s decision, or inaction "deemed a denial," that the taxpayer
can take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.49

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with
the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized "except when the law itself authorizes [its]
validity." There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his
own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions which are against the law or which infringe
upon the rights of others."50 For violating a mandatory provision of law in filing its petition with the
CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition
with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-
day period just because the Commissioner merely asserts that the case was prematurely filed with
the CTA and does not question the entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or
excessively collected from him, does not entitle him as a matter of right to a tax refund or credit.
Strict compliance with the mandatory and jurisdictional conditions prescribed by law to claim such
tax refund or credit is essential and necessary for such claim to prosper. Well-settled is the rule
that tax refunds or credits, just like tax exemptions, are strictly construed against the
taxpayer.51 The burden is on the taxpayer to show that he has strictly complied with the conditions
for the grant of the tax refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a taxpayer’s
claim for tax refund or credit, whether or not the Commissioner questions the numerical correctness
of the claim of the taxpayer. This Court should not establish the precedent that non-compliance with
mandatory and jurisdictional conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance
with mandatory and jurisdictional requirements, for then every tax refund case will have to be
decided on the numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to
comply with the 120- day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse
for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely stated
that the two-year prescriptive period should be counted from the date of payment of the output VAT,
not from the close of the taxable quarter when the sales involving the input VAT were
made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 52 day periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited by the
Court in Atlas as the applicable provision of the law did not yet provide for the 30-day period for the
taxpayer to appeal to the CTA from the decision or inaction of the Commissioner. 53 Thus,
the Atlas doctrine cannot be invoked by anyone to disregard compliance with the 30-day
mandatory and jurisdictional period. Also, the difference between the Atlas doctrine on one hand,
and the Mirant54 doctrine on the other hand, is a mere 20 days. The Atlas doctrine counts the two-
year prescriptive period from the date of payment of the output VAT, which means within 20 days
after the close of the taxable quarter. The output VAT at that time must be paid at the time of filing of
the quarterly tax returns, which were to be filed "within 20 days following the end of each quarter."

Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the
administrative claims filed with the Commissioner, and the petitions for review filed with the CTA,
were all filed within two years from the date of payment of the output VAT, following Section 229:

Date of Filing Return Date of Filing Date of Filing

Period Covered
& Payment of Tax Administrative Claim Petition With CTA
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992
Close of Quarter
30 June 1990
 3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992
Close of Quarter
30 September 1990
4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993
Close of Quarter
31 December 1990

Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th
day after the close of the taxable quarter. Had the twoyear prescriptive period been counted from
the "close of the taxable quarter" as expressly stated in the law, the tax refund claims of Atlas would
have already prescribed. In contrast, the Mirant doctrine counts the two-year prescriptive period from
the "close of the taxable quarter when the sales were made" as expressly stated in the law, which
means the last day of the taxable quarter. The 20-day difference55 between the Atlas doctrine
and the later Mirant doctrine is not material to San Roque’s claim for tax refund.

Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because

what is at issue in the present case is San Roque’s non-compliance with the 120-day mandatory and
jurisdictional period, which is counted from the date it filed its administrative claim with the
Commissioner. The 120-day period may extend beyond the two-year prescriptive period, as long as
the administrative claim is filed within the two-year prescriptive period. However, San Roque’s fatal
mistake is that it did not wait for the Commissioner to decide within the 120-day period, a mandatory
period whether the Atlas or the Mirant doctrine is applied.

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods
were already in the law. Section 112(C)56 expressly grants the Commissioner 120 days within which
to decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the Commissioner
shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of complete documents." Following the verba
legis doctrine, this law must be applied exactly as worded since it is clear, plain, and unequivocal.
The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction
because there will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA
to review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after it filed its
administrative claim with the Commissioner. Indisputably, San Roque knowingly violated the
mandatory 120-day period, and it cannot blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision
or inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law
should be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the
taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from
receipt of the Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s claim
within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of
the 120-day period.

b. G.R. No. 196113 - Taganito Mining Corporation v. CIR

Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120-
day period to lapse. Also, like San Roque, Taganito filed its judicial claim before the promulgation of
the Atlas doctrine. Taganito filed a Petition for Review on 14 February 2007 with the CTA. This is
almost four months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is similarly
situated as San Roque - both cannot claim being misled, misguided, or confused by
the Atlas doctrine.

However, Taganito can invoke BIR Ruling No. DA-489-03 57 dated 10 December 2003, which
expressly ruled that the "taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review." Taganito filed its
judicial claim after the issuance of BIR Ruling No. DA-489-03 but before the adoption of
the Aichi doctrine. Thus, as will be explained later, Taganito is deemed to have filed its judicial claim
with the CTA on time.

c. G.R. No. 197156 – Philex Mining Corporation v. CIR

Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable year 2005;
(2) filed on 20 March 2006 its administrative claim for refund or credit; (3) filed on 17 October 2007
its Petition for Review with the CTA. The close of the third taxable quarter in 2005 is 30 September
2005, which is the reckoning date in computing the two-year prescriptive period under Section
112(A).

Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period.
Even if the two-year prescriptive period is computed from the date of payment of the output VAT
under Section 229, Philex still filed its administrative claim on time. Thus, the Atlas doctrine is
immaterial in this case. The Commissioner had until 17 July 2006, the last day of the 120-day
period, to decide Philex’s claim. Since the Commissioner did not act on Philex’s claim on or before
17 July 2006, Philex had until 17 August 2006, the last day of the 30-day period, to file its judicial
claim. The CTA EB held that 17 August 2006 was indeed the last day for Philex to file its
judicial claim. However, Philex filed its Petition for Review with the CTA only on 17 October 2007,
or four hundred twenty-six (426) days after the last day of filing. In short, Philex was late by one
year and 61 days in filing its judicial claim. As the CTA EB correctly found:

Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus, the
Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the
Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was
acquired by the CTA Division; x x x58 (Emphasis supplied)

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex
did not file any petition with the CTA within the 120-day period. Philex did not also file any petition
with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial
claim long after the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day
period. In any event, whether governed by jurisprudence before, during, or after
the Atlas case, Philex’s judicial claim will have to be rejected because of late filing. Whether
the two-year prescriptive period is counted from the date of payment of the output VAT following
the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input
VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably
filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the
Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed
a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its
judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the
Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a
denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The
exercise of such statutory privilege requires strict compliance with the conditions attached by the
statute for its exercise.59 Philex failed to comply with the statutory conditions and must thus bear the
consequences.

II. Prescriptive Periods under Section 112(A) and (C)

There are three compelling reasons why the 30-day period need not necessarily fall within the two-
year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive
period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer
"may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of the creditable input
tax due or paid to such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which means at anytime
within two years. Thus, the application for refund or credit may be filed by the taxpayer with
the Commissioner on the last day of the two-year prescriptive period and it will still strictly
comply with the law. The twoyear prescriptive period is a grace period in favor of the
taxpayer and he can avail of the full period before his right to apply for a tax refund or credit
is barred by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to the period within
which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise,
the two-year prescriptive period does not refer to the filing of the judicial claim with
the CTA but to the filing of the administrative claim with the Commissioner. As held
in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or
refund’ refers to applications for refund/credit with the CIR and not to appeals made to
the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days60), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the
filing of the administrative claim beyond the first 610 days will result in the appeal to
the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files
his administrative claim on the 611th day, the Commissioner, with his 120-day period, will
have until the 731st day to decide the claim. If the Commissioner decides only on the 731st
day, or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA becomes utterly
useless, even if the taxpayer complied with the law by filing his administrative claim within
the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition
that is not found in the law. It results in truncating 120 days from the 730 days that the law grants the
taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law
to defeat, wholly or even partly, a remedy that the law expressly grants in clear, plain, and
unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language.
The taxpayer can file his administrative claim for refund or credit at anytime within the two-year
prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is
still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer
still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also the
only logical interpretation of Section 112(A) and (C).

III. "Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229 because at the time
the input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability
of, and legally paid by, a VAT-registered seller 61 of goods, properties or services used as input by
another VAT-registered person in the sale of his own goods, properties, or services. This tax liability
is true even if the seller passes on the input VAT to the buyer as part of the purchase price. The
second VAT-registered person, who is not legally liable for the input VAT, is the one who applies the
input VAT as credit for his own output VAT.62 If the input VAT is in fact "excessively" collected as
understood under Section 229, then it is the first VAT-registered person - the taxpayer who is legally
liable and who is deemed to have legally paid for the input VAT - who can ask for a tax refund or
credit under Section 229 as an ordinary refund or credit outside of the VAT System. In such event,
the second VAT-registered taxpayer will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the
input VAT is not "excessively" collected as understood under Section 229. At the time of payment of
the input VAT the amount paid is the correct and proper amount. Under the VAT System, there is no
claim or issue that the input VAT is "excessively" collected, that is, that the input VAT paid is more
than what is legally due. The person legally liable for the input VAT cannot claim that he overpaid the
input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply
means that the input VAT available as credit exceeds the output VAT, not that the input VAT is
excessively collected because it is more than what is legally due. Thus, the taxpayer who legally
paid the input VAT cannot claim for refund or credit of the input VAT as "excessively" collected under
Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the
date of payment of the tax "erroneously, x x x illegally, x x x excessively or in any manner wrongfully
collected." The prescriptive period is reckoned from the date the person liable for the tax pays the
tax. Thus, if the input VAT is in fact "excessively" collected, that is, the person liable for the tax
actually pays more than what is legally due, the taxpayer must file a judicial claim for refund within
two years from his date of payment. Only the person legally liable to pay the tax can file the
judicial claim for refund. The person to whom the tax is passed on as part of the purchase
price has no personality to file the judicial claim under Section 229.63

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for
"excess" input VAT is two years from the close of the taxable quarter when the sale was made by
the person legally liable to pay the output VAT. This prescriptive period has no relation to the date
of payment of the "excess" input VAT. The "excess" input VAT may have been paid for more than
two years but this does not bar the filing of a judicial claim for "excess" VAT under Section 112(A),
which has a different reckoning period from Section 229. Moreover, the person claiming the refund
or credit of the input VAT is not the person who legally paid the input VAT. Such person seeking the
VAT refund or credit does not claim that the input VAT was "excessively" collected from him, or that
he paid an input VAT that is more than what is legally due. He is not the taxpayer who legally paid
the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the
chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on
the value added by the taxpayer, but on the entire selling price of his goods, properties or services.
However, the taxpayer is allowed a refund or credit on the VAT previously paid by those who sold
him the inputs for his goods, properties, or services. The net effect is that the taxpayer pays the VAT
only on the value that he adds to the goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like
companies generating power through renewable sources of energy. 64 Thus, a non zero-rated VAT-
registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund or
credit of his unused input VAT under the VAT System. Even if the taxpayer has sales but his input
VAT exceeds his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT under
the VAT System. He can only carry-over and apply his "excess" input VAT against his future
output VAT. If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be
able to seek a refund or credit for such "excess" input VAT whether or not he has output VAT. The
VAT System does not allow such refund or credit. Such "excess" input VAT is not an "excessively"
collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax.
However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax
imposed only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected
under Section 229, then it is the person legally liable to pay the input VAT, not the person to whom
the tax was passed on as part of the purchase price and claiming credit for the input VAT under the
VAT System, who can file the judicial claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax
under Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT
under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section
229, mere payment of a tax beyond what is legally due can be claimed as a refund or credit. There is
no requirement under Section 229 for an output VAT or subsequent sale of goods, properties, or
services using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is
"erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." In short,
there must be a wrongful payment because what is paid, or part of it, is not legally due. As the
Court held in Mirant, Section 229 should "apply only to instances of erroneous payment or
illegal collection of internal revenue taxes." Erroneous or wrongful payment includes excessive
payment because they all refer to payment of taxes not legally due. Under the VAT System,
there is no claim or issue that the "excess" input VAT is "excessively or in any manner wrongfully
collected." In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then
the taxpayer claiming to apply such "excessively" collected input VAT to offset his output VAT may
have no legal basis to make such offsetting. The person legally liable to pay the input VAT can claim
a refund or credit for such "excessively" collected tax, and thus there will no longer be any "excess"
input VAT. This will upend the present VAT System as we know it.

IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-
year prescriptive period under Section 229, should be effective only from its promulgation on 8
June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was
limited to the reckoning of the two-year prescriptive period from the date of payment of the output
VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or credit of input
VAT should be governed by Section 112(A) following the verba legis rule. The Mirant ruling, which
abandoned the Atlas doctrine, adopted the verba legis rule, thus applying Section 112(A) in
computing the two-year prescriptive period in claiming refund or credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the
application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day
periods was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day
periods are mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and
unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue the
tax credit within one hundred twenty (120) days from the date of submission of complete
documents," the law clearly gives the Commissioner 120 days within which to decide the taxpayer’s
claim. Resort to the courts prior to the expiration of the 120-day period is a patent violation of the
doctrine of exhaustion of administrative remedies, a ground for dismissing the judicial suit due to
prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the doctrine of
exhaustion of administrative remedies.65 Such doctrine is basic and elementary.

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of
the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal
the decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30
day periods optional just because the law uses the word "may." The word "may" simply means that
the taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt
of the decision, or within 30 days from the expiration of the 120-day period. Certainly, by no stretch
of the imagination can the word "may" be construed as making the 120+30 day periods optional,
allowing the taxpayer to file a judicial claim one day after filing the administrative claim with the
Commissioner.

The old rule66 that the taxpayer may file the judicial claim, without waiting for the Commissioner’s
decision if the two-year prescriptive period is about to expire, cannot apply because that rule was
adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to
do away with the old rule, so that under the VAT System the taxpayer will always have 30
days to file the judicial claim even if the Commissioner acts only on the 120th day, or does
not act at all during the 120-day period. With the 30-day period always available to the taxpayer,
the taxpayer can no longer file a judicial claim for refund or credit of input VAT without waiting for the
Commissioner to decide until the expiration of the 120-day period.

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against
the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with
the 120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the
effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03
on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again
reinstated the 120+30 day periods as mandatory and jurisdictional.

V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003

There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not wait for
the 120-day period to expire before filing a judicial claim with the CTA. RMC 49-03 merely authorizes
the BIR to continue processing the administrative claim even after the taxpayer has filed its judicial
claim, without saying that the taxpayer can file its judicial claim before the expiration of the 120-day
period. RMC 49-03 states: "In cases where the taxpayer has filed a ‘Petition for Review’ with the
Court of Tax Appeals involving a claim for refund/TCC that is pending at the administrative agency
(either the Bureau of Internal Revenue or the One- Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance), the administrative agency and the court may act on
the case separately." Thus, if the taxpayer files its judicial claim before the expiration of the 120-day
period, the BIR will nevertheless continue to act on the administrative claim because such premature
filing cannot divest the Commissioner of his statutory power and jurisdiction to decide the
administrative claim within the 120-day period.

On the other hand, if the taxpayer files its judicial claim after the 120- day period, the Commissioner
can still continue to evaluate the administrative claim. There is nothing new in this because even
after the expiration of the 120-day period, the Commissioner should still evaluate internally the
administrative claim for purposes of opposing the taxpayer’s judicial claim, or even for purposes of
determining if the BIR should actually concede to the taxpayer’s judicial claim. The internal
administrative evaluation of the taxpayer’s claim must necessarily continue to enable the BIR to
oppose intelligently the judicial claim or, if the facts and the law warrant otherwise, for the BIR to
concede to the judicial claim, resulting in the termination of the judicial proceedings.

What is important, as far as the present cases are concerned, is that the mere filing by a
taxpayer of a judicial claim with the CTA before the expiration of the 120-day period cannot
operate to divest the Commissioner of his jurisdiction to decide an administrative claim
within the 120-day mandatory period, unless the Commissioner has clearly given cause for
equitable estoppel to apply as expressly recognized in Section 246 of the Tax Code.67

VI. BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the
Tax Code. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait
for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of
Petition for Review." Prior to this ruling, the BIR held, as shown by its position in the Court of
Appeals,68 that the expiration of the 120-day period is mandatory and jurisdictional before a judicial
claim can be filed.

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does
not acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period.
There are, however, two exceptions to this rule. The first exception is if the Commissioner, through a
specific ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA. Such
specific ruling is applicable only to such particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued under Section 4 of the Tax Code,
misleads all taxpayers into filing prematurely judicial claims with the CTA. In these cases, the
Commissioner cannot be allowed to later on question the CTA’s assumption of jurisdiction over such
claim since equitable estoppel has set in as expressly authorized under Section 246 of the Tax
Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the
Commissioner the power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. — The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws
or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers
acting in good faith should not be made to suffer for adhering to general interpretative rules of the
Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and be
reversed by the Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly
provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in
good faith relied on the BIR regulation or ruling prior to its reversal. Section 246 provides as follows:

Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal of any of

the rules and regulations promulgated in accordance with the preceding Sections or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial to the taxpayers, except in the
following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or 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 from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith. (Emphasis supplied)

Thus, a general interpretative rule issued by the Commissioner may be relied upon by taxpayers
from the time the rule is issued up to its reversal by the Commissioner or this Court. Section 246 is
not limited to a reversal only by the Commissioner because this Section expressly states,
"Any revocation, modification or reversal" without specifying who made the revocation, modification
or reversal. Hence, a reversal by this Court is covered under Section 246.

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly

on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi69 is proof
that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question
of law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly
situated, being made to return the tax refund or credit they received or could have received
under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent
fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued
by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. As held by this Court in CIR v. Philippine Health Care Providers, Inc.:70

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under Section 246 of
the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from adopting a
position contrary to one previously taken where injustice would result to the taxpayer. Hence,
where an assessment for deficiency withholding income taxes was made, three years after a new
BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment
was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets
of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.  in the later cases
1âwphi1

of Commissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal Revenue v. Mega

Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,
and Commissioner of Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have
no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer,
as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the taxpayer
was entitled to tax refunds or credits based on the BIR’s own issuances but later was suddenly
saddled with deficiency taxes due to its subsequent ruling changing the category of the taxpayer’s
transactions for the purpose of paying its VAT, this Court ruled that applying such ruling retroactively
would be prejudicial to the taxpayer. (Emphasis supplied)

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable
to all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds
and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the
Department of Finance. This government agency is also the addressee, or the entity responded to,
in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in
fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is
admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that the
120-day period was mandatory and jurisdictional, which is the correct interpretation of the law; third,
prior to its issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial claim
prematurely; and fourth, a claim for tax refund or credit, like a claim for tax exemption, is strictly
construed against the taxpayer.

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial
claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003. To repeat, San Roque cannot claim that it was misled by the BIR into filing its
judicial claim prematurely because BIR Ruling No. DA-489-03 was issued only after San Roque filed
its judicial claim. At the time San Roque filed its judicial claim, the law as applied and administered
by the BIR was that the Commissioner had 120 days to act on administrative claims. This was in fact
the position of the BIR prior to the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque
never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court,
the CTA, or before the Commissioner.

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of
BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial
claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No.
DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the
filing of its judicial claim from the vice of prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of late filing,
indeed very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which
means non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim.
Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial
claim prematurely but filed it long after the lapse of the 30-day period following the expiration of
the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day
period.

VII. Existing Jurisprudence

There is no basis whatsoever to the claim that in five cases this Court had already made a ruling that
the filing dates of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period. The effect of the claim of the dissenting opinions is that San
Roque’s failure to wait for the 120-day mandatory period to lapse is inconsequential, thus allowing
San Roque to claim the tax refund or credit. However, the five cases cited by the dissenting opinions
do not support even remotely the claim that this Court had already made such a ruling. None of
these five cases mention, cite, discuss, rule or even hint that compliance with the 120-day
mandatory period is inconsequential as long as the administrative and judicial claims are
filed within the two-year prescriptive period.

In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output VAT was
actually passed on to Toshiba that it could claim as input VAT subject to tax credit or refund. The
Commissioner argued that "although Toshiba may be a VAT-registered taxpayer, it is not engaged in
a VAT-taxable business." The Commissioner cited Section 4.106-1 of Revenue Regulations No. 75
that "refund of input taxes on capital goods shall be allowed only to the extent that such capital
goods are used in VAT-taxable business." In the words of the Court, "Ultimately, however, the issue
still to be resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of
its input VAT on its purchases of capital goods and services, to which this Court answers in the
affirmative." Nowhere in this case did the Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period.

In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in the
instant case are (1) whether the absence of the BIR authority to print or the absence of the TIN-V in
petitioner’s export sales invoices operates to forfeit its entitlement to a tax refund/credit of its
unutilized input VAT attributable to its zero-rated sales; and (2) whether petitioner’s failure to indicate
"TIN-V" in its sales invoices automatically invalidates its claim for a tax credit certification." Again,
nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative
and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA First
Division, conceding that petitioner’s transactions fall under the classification of zero-rated sales,
nevertheless denied petitioner’s claim ‘for lack of substantiation,’ x x x." The Court quoted the
ruling of the First Division that "valid VAT official receipts, and not mere sale invoices, should
have been submitted" by petitioner to substantiate its claim. The Court further stated: "x x x the
CTA En Banc, x x x affirmed x x x the CTA First Division," and "petitioner’s motion for
reconsideration having been denied x x x, the present petition for review was filed." Clearly, the sole
issue in this case is whether petitioner complied with the substantiation requirements in claiming for
tax refund or credit. Again, nowhere in this case did the Court discuss, state, or rule that the filing
dates of the administrative and judicial claims are inconsequential, as long as they are within the
two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this manner:
"Simply put, the sole issue the petition raises is whether or not the CTA erred in granting respondent
Ironcon’s application for refund of its excess creditable VAT withheld." The Commissioner argued
that "since the NIRC does not specifically grant taxpayers the option to refund excess creditable
VAT withheld, it follows that such refund cannot be allowed." Thus, this case is solely about whether
the taxpayer has the right under the NIRC to ask for a cash refund of excess creditable VAT
withheld. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period.

In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject to
VAT. Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court explained:

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and
local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC.
Thus, they contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on
input taxes it previously paid as provided under Section 4.103-1 of Revenue Regulations No. 7-95,
notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was
erroneous and did not confer upon the respondent any right to claim recognition of the input tax
credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years
from August 7, 1995 making it exempt from income tax but not from other taxes such as
VAT. Hence, according to respondent, its export sales are not exempt from VAT, contrary to
petitioner’s claim, but its export sales is subject to 0% VAT. Moreover, it argues that it was able
to establish through a report certified by an independent Certified Public Accountant that the input
taxes it incurred from April 1, 1996 to December 31, 1997 were directly attributable to its export
sales. Since it did not have any output tax against which said input taxes may be offset, it had the
option to file a claim for refund/tax credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of
merit.

Petitioner’s contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had
two options with respect to its tax burden. It could avail of an income tax holiday pursuant to
provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not from
other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes,
including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No.
7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of the
income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and
1997 Annual Corporate Income Tax Returns, where respondent specified that it was availing of the
tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly
registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt
transactions. (Emphasis supplied)

Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or subject to
VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund or credit of its input
VAT. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the
administrative and judicial claims are inconsequential, as long as they are within the two-year
prescriptive period.

While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother to wait
for the Resolution of its (administrative) claim by the CIR" before filing its judicial claim with the CTA,
this issue was not raised before the Court. Certainly, this statement of the Court is not a binding
precedent that the taxpayer need not wait for the 120-day period to lapse.

Any issue, whether raised or not by the parties, but not passed upon by the Court, does not
have any value as precedent. As this Court has explained as early as 1926:

It is contended, however, that the question before us was answered and resolved against the
contention of the appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no
question was raised nor was it even suggested that said section 216 did not apply to a public officer.
That question was not discussed nor referred to by any of the parties interested in that case. It has
been frequently decided that the fact that a statute has been accepted as valid, and invoked and
applied for many years in cases where its validity was not raised or passed on, does not prevent a
court from later passing on its validity, where that question is squarely and properly raised and
presented. Where a question passes the Court sub silentio, the case in which the question
was so passed is not binding on the Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor
should it be considered as a precedent. (U.S. vs. Noriega and Tobias, 31 Phil. 310; Chicote vs.
Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310,
319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in the case of McGirr vs. Hamilton and
Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra, can have no binding force in
the interpretation of the question presented here. 76 (Emphasis supplied)

In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not even
raised as an issue by any of the parties. The Court never passed upon this issue. Thus, Cebu
Toyo does not constitute binding precedent on the nature of the 120-day period.

There is also the claim that there are numerous CTA decisions allegedly supporting the argument
that the filing dates of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute
precedents, and do not bind this Court or the public. That is why CTA decisions are appealable to
this Court, which may affirm, reverse or modify the CTA decisions as the facts and the law may
warrant. Only decisions of this Court constitute binding precedents, forming part of the Philippine
legal system.77 As held by this Court in The Philippine Veterans Affairs Office v. Segundo:78

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or
the Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their
own right because they interpret what the laws say or mean. Unlike rulings of the lower courts,
which bind the parties to specific cases alone, our judgments are universal in their scope and
application, and equally mandatory in character. Let it be warned that to defy our decisions is to
court contempt. (Emphasis supplied)

The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils.,
Inc.:79

The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil Code, to wit:

ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the
legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a rule already
established in a final decision of the Supreme Court. That decision becomes a judicial precedent
to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis is based
on the principle that once a question of law has been examined and decided, it should be deemed
settled and closed to further argument. (Emphasis supplied)

VIII. Revenue Regulations No. 7-95 Effective 1 January 1996

Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if the
taxpayer files the judicial claim "after" the lapse of the 60-day period, a period with which San Roque
failed to comply. Under Section 4.106-2(c), the 60-day period is still mandatory and
jurisdictional.

Moreover, it is a hornbook principle that a prior administrative regulation can never prevail over a

later contrary law, more so in this case where the later law was enacted precisely to amend the prior
administrative regulation and the law it implements.

The laws and regulation involved are as follows:

1977 Tax Code, as amended by Republic Act No. 7716 (1994)

Sec. 106. Refunds or tax credits of creditable input tax. —

(a) x x x x

(d) Period within which refund or tax credit of input tax shall be made - In proper cases, the
Commissioner shall grant a refund or issue the tax credit for creditable input taxes within
sixty (60) days from the date of submission of complete documents in support of the
application filed in accordance with subparagraphs (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 receipt of the decision denying the
claim or after the expiration of the sixty-day period, appeal the decision or the unacted
claim with the Court of Tax Appeals.

Revenue Regulations No. 7-95 (1996)

Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x x x

xxxx

(c) Period within which refund or tax credit of input taxes shall be made. — In proper cases, the
Commissioner shall grant a tax credit/refund for creditable input taxes within sixty (60) days from the
date of submission of complete documents in support of the application filed in accordance with
subparagraphs (a) and (b) above.

In case of full or partial denial of the claim for tax credit/refund as decided by the Commissioner of
Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from
the receipt of said denial, otherwise the decision will become final. However, if no action on the
claim for tax credit/refund has been taken by the Commissioner of Internal Revenue after the
sixty (60) day period from the date of submission of the application but before the lapse of
the two (2) year period from the date of filing of the VAT return for the taxable quarter, the
taxpayer may appeal to the Court of Tax Appeals.

xxxx

1997 Tax Code

Section 112. Refunds or Tax Credits of Input Tax —

(A) x x x

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be made. — In proper cases, the
Commissioner shall grant the 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 hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.

There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA 7716,
the Commissioner has a 60-day period to act on the administrative claim. This 60-day period is
mandatory and jurisdictional.

Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day period is no
longer mandatory and jurisdictional? The obvious answer is no.

Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the
Commissioner fails to act on the administrative claim, the taxpayer may file the judicial claim even
"before the lapse of the two (2) year period." Thus, under Section 4.106-2(c) the 60-day period is
still mandatory and jurisdictional.

Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely implemented
it, for two reasons. First, Section 4.106-2(c) still expressly requires compliance with the 60-day
period. This cannot be disputed. 1âwphi1

Second, under the novel amendment introduced by RA 7716, mere inaction by the Commissioner
during the 60-day period is deemed a denial of the claim. Thus, Section 4.106-2(c) states that "if no
action on the claim for tax refund/credit has been taken by the Commissioner after the sixty (60)
day period," the taxpayer "may" already file the judicial claim even long before the lapse of the two-
year prescriptive period. Prior to the amendment by RA 7716, the taxpayer had to wait until the two-
year prescriptive period was about to expire if the Commissioner did not act on the claim.80 With the
amendment by RA 7716, the taxpayer need not wait until the two-year prescriptive period is about to
expire before filing the judicial claim because mere inaction by the Commissioner during the 60-day
period is deemed a denial of the claim. This is the meaning of the phrase "but before the lapse
of the two (2) year period" in Section 4.106-2(c). As Section 4.106- 2(c) reiterates that the judicial
claim can be filed only "after the sixty (60) day period," this period remains mandatory and
jurisdictional. Clearly, Section 4.106-2(c) did not amend Section 106(d) but merely faithfully
implemented it.

Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No. 7-95,
an administrative issuance, amended Section 106(d) of the Tax Code to make the period given to
the Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated the original
intent and provision of Section 106(d) by extending the 60-day period to 120 days and re-adopting
the original wordings of Section 106(d). Thus, Section 4.106-2(c), a mere administrative
issuance, becomes inconsistent with Section 112(D), a later law. Obviously, the later law prevails
over a prior inconsistent administrative issuance.

Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the Commissioner
has 120 days to act on an administrative claim. The taxpayer can file the judicial claim (1) only
within thirty days after the Commissioner partially or fully denies the claim within the 120- day
period, or (2) only within thirty days from the expiration of the 120- day period if the
Commissioner does not act within the 120-day period.

There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998, or more
than five years before San Roque filed its administrative claim on 28 March 2003, the law has
been clear: the 120- day period is mandatory and jurisdictional. San Roque’s claim, having been
filed administratively on 28 March 2003, is governed by the 1997 Tax Code, not the 1977 Tax Code.
Since San Roque filed its judicial claim before the expiration of the 120-day mandatory and
jurisdictional period, San Roque’s claim cannot prosper.

San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer can
only file the judicial claim "after" the lapse of the 60-day period from the filing of the administrative
claim. San Roque filed its judicial claim just 13 days after filing its administrative claim. To
recall, San Roque filed its judicial claim on 10 April 2003, a mere 13 days after it filed its
administrative claim.

Even if, contrary to all principles of statutory construction as well as plain common sense, we
gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot
recover any refund or credit because San Roque did not wait for the 60-day period to lapse,
contrary to the express requirement in Section 4.106-2(c). In short, San Roque does not even
comply with Section 4.106-2(c). A claim for tax refund or credit is strictly construed against the
taxpayer, who must prove that his claim clearly complies with all the conditions for granting the tax
refund or credit. San Roque did not comply with the express condition for such statutory grant.

A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to improve its
tax efficiency collection for the longest time with minimal success. Consequently, the Philippines has
suffered the economic adversities arising from poor tax collections, forcing the government to
continue borrowing to fund the budget deficits. This Court cannot turn a blind eye to this economic
malaise by being unduly liberal to taxpayers who do not comply with statutory requirements for tax
refunds or credits. The tax refund claims in the present cases are not a pittance. Many other
companies stand to gain if this Court were to rule otherwise. The dissenting opinions will turn on its
head the well-settled doctrine that tax refunds are strictly construed against the taxpayer.

WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal Revenue

in G.R. No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San Roque Power
Corporation; (2) GRANTS the petition of Taganito Mining Corporation in G.R. No. 196113 for a tax
refund or credit of P8,365,664.38; and (3) DENIES the petition of Philex Mining Corporation in G.R.
No. 197156 for a tax refund or credit of P23,956,732.44.
SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

I join the disent of J. Velasco; but I partly 

(source document unreadable)
separate Dissenting Opinion)
MARIA LOURDES P. A. SERENO
Chief Justice

I dissent
(Please Dissenting Opinion) TERESITA J. LEONARDO-DE CASTRO
PRESBITERO J. VELASCO, JR. Associate Justice
Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

I join J. Leonen in his separate opinion

LUCAS P. BERSAMIN
MARIANO C. DEL CASTILLO
Associate Justice
Associate Justice

ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

I join the dissent of J. Velasco

JOSE PORTUGAL PEREZ
JOSE C. MENDOZA
Associate Justice
Associate Justice

I join the dissent of J. Velasco

BIENVENIDO L. REYES
ESTELA M. PERLAS-BERNABE
Associate Justice
Associate Justice

See separate opinion

MARVIC MARIO VICTOR F. LEONEN
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion
of the Court.

MARIA LOURDES P. A. SERENO

Chief Justice
 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 Decision3 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 x x;

(2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x

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. 7-95 7 (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 x x

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.

xxx

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. 9337 10 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.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice

ROBERTO A. ABAD JOSE CATRAL MENDOZA

 Associate Justice Associate Justice

MARIA LOURDES P. A. SERENO*

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

RENATO C. CORONA
Chief Justice
 SECOND DIVISION

G.R. No. 222428, February 19, 2018

COCA-COLA BOTTLERS PHILIPPINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to reverse
and set aside the Resolution1 dated January 14, 2016 and Decision2 dated August 12, 2015 of the Court of
Tax Appeals (CTA) En Banc in CTA EB No. 1111, which affirmed the Decision 3 dated September 16, 2013
and Resolution4 dated December 4, 2013 of the CTA Division in CTA Case No. 8099 denying petitioner's
claim for refund or issuance of tax credit.

The antecedent facts are as follows:

On April 24, 2008, petitioner Coca-Cola Bottlers Philippines, Inc., a Value-Added Tax (VAT)-registered,
domestic corporation engaged in the business of manufacturing and selling beverages, filed its Quarterly
VAT Return for the period of January 1, 2008 to March 31, 2008 and amended the same a few times
thereafter.5 On May 27, 2009, the Bureau of Internal Revenue (BIR) issued a Letter of Authority to examine
petitioner's books of accounts for all internal revenue taxes for the period January 1, 2008 to December 31,
2008. Subsequently, on April 20, 2010, petitioner filed with the BIR's Large Taxpayers Service an
administrative claim for refund or tax credit of its alleged over/erroneous payment of VAT for the quarter
ended March 31, 2008 in the total amount of P123,459,647.70. 6 Three (3) days thereafter, or on April 23,
2010, petitioner filed with the CTA a judicial claim for refund or issuance of tax credit certificate presenting
its financial employees as witnesses in support of its case. According to the witnesses, all of petitioner's
records and documents, including invoices and official receipts for the period January 1 to March 31, 2008
subject of the instant claim were completely destroyed. They were, however, able to determine petitioner's
input and output VAT through its computerized accounting system. 7

In a Decision dated September 16, 2013 and Resolution dated December 4, 2013, the CTA Division denied
petitioner's claim for lack of merit.8 Subsequently, the CTA En Banc affirmed the ruling of the CTA Division in
its Decision dated August 12, 2015. According to the CTA En Banc, Section 110 (B)9 of the 1997 National
Internal Revenue Code (NIRC), as amended, is clear that when input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarters. But when input tax, attributable to zero-rated sales,
exceeds the output tax, it may be refunded or credited. 10 Section 11211 is also categorical that there are only
two (2) instances when excess input taxes may be claimed for refund and/or issuance of tax credit
certificate: (1) when the claimant is a VAT-registered person, whose sales are zero-rated or effectively zero-
rated under Section 112(A); and (2) when the VAT registration of the claimant has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section 112(B).
But since the amount sought to be credited or refunded in the instant case essentially represents undeclared
input taxes for the first quarter of 2008, and not erroneously paid VAT or understatement of VAT
overpayment, then it does not fall under the instances enumerated in Section 112 which pertain to excess
taxes only.12

In addition, the CTA En Banc also cited jurisprudence which provide that Sections 204(C)13 and 22914 of the
NIRC similarly apply only to instances of erroneous payment or illegal collection of internal revenue taxes. In
claims for refund or credit of excess input VAT under Sections 110(B) and 112 (A), the input VAT is not
"excessively" collected as understood under Section 229. The term "excess" input VAT simply means that
the input VAT available as credit exceeds the output VAT, not that the input VAT is excessively collected
because it is more than what is legally due.15 Section 229, therefore, is inapplicable to the instant claim for
refund or credit.
The CTA En Banc further held that for input taxes to be available as tax credits, they must be substantiated
and reported in the VAT Return of the taxpayer. 16 Petitioner, being well-aware of the law allowing the
amendment of a VAT Return within three (3) years from its filing provided that an LOA has not yet been
served on the taxpayer, was not prompt enough to include the alleged omitted input VAT in this
case.17 Moreover, even if the substantiated input taxes were declared in the VAT Return for the first (1st)
quarter of 2008, the same would still be not enough to offset petitioner's output tax liabilities for the same
period leaving no balance that may be refunded.18

When the CTA En Banc denied its Motion for Reconsideration in a Resolution dated January 14, 2016,
petitioner filed the instant petition invoking the following arguments:

I.

THE CTA EN BANC GRAVELY ERRED IN RULING THAT PETITIONER'S CLAIM FOR REFUND/TAX CREDIT DOES
NOT FALL WITHIN THE PURVIEW OF SECTION 229 OF THE NIRC OF 1997, AS AMENDED, IN RELATION TO
SECTION 204(C) OF THE SAME CODE.

II.

THE CTA EN BANC GRAVELY ERRED IN RULING THAT THE UNDECLARED INPUT VAT IN THE AMOUNT OF
P123,459,674.70 FOR THE QUARTER ENDED MARCH 31, 2008 IS REQUIRED TO BE REPORTED IN THE
QUARTERLY VAT RETURN AS A REQUISITE FOR PETITIONER'S CLAIM FOR REFUND OF TAX UNDER SECTION
229 OF THE NIRC OF 1997, AS AMENDED, IN RELATION TO SECTION 204(C) OF THE SAME CODE.

III.

THE CTA EN BANC GRAVELY ERRED IN FAILING TO CONSIDER THAT PETITIONER'S CLAIM FOR REFUND
SHALL NOT BE CONSTRUED IN STRICTISSIMI JURIS AGAINST THE PETITIONER.

IV.

THE CTA EN BANC GRAVELY ERRED IN FAILING TO CONSIDER THAT THE OMITTED INPUT VAT IN THE
AMOUNT OF P123,459,674.70 MAY BE INCLUDED IN THE CURRENT AND AVAILABLE INPUT VAT OF THE
PETITIONER FOR THE QUARTER ENDED MARCH 31, 2008 IN ORDER TO PREVENT UNJUST ENRICHMENT OF
THE GOVERNMENT TO THE DETRIMENT OF HEREIN PETITIONER.

Petitioner posits that its claim for refund/tax credit is hinged not on the basis of "excess" input tax per sebut
on the basis of the inadvertence of applying the undeclared input tax against the output VAT. It asserts that
through relevant evidence, it has substantially proven that due to its employees' inadvertence, the input tax
amounting to P123,459,674.70 was not credited against the corresponding output tax during the quarter.
Thus, by virtue of Section 229 of the 1997 NIRC, petitioner may claim for refund/tax credit of its erroneous
payment of output VAT due to its failure to apply the P123,459,674.70 input VAT in the computation of its
excess allowable input VAT.19

Petitioner also avers that since it is already barred from amending its VAT Return due to the fact that the
BIR had already issued an LOA, it is left with no other recourse but to apply for a claim for refund for the
undeclared input VAT, still, under Section 229. But contrary to the CTA En Banc, its claim for refund or
issuance of tax credit under Sections 229 and 204(C) of the NIRC only requires that the same be in writing
and filed with the Commissioner within two (2) years after the payment of tax or penalty, and that the claim
must categorically demand for reimbursement and show proof of payment of the tax. 20Nowhere is it
provided in said provisions a mandatory requirement that a VAT Return must show the undeclared input tax
in order to claim a refund.21 In support of its assertion, petitioner cites the ruling in Fort Bonifacio
Development Corporation v. CIR22 which adopts the principle that input taxes not reported in the VAT Return
may still be credited against output tax due for as long as the same were properly substantiated. 23

Furthermore, petitioner maintains that its claim for refund, being based on erroneous payment of output
VAT, should not be construed against it and, in fact, necessitates only a preponderance of evidence for its
approbation like any other ordinary civil case.24 In the end, it is only just and proper to allow petitioner's
claim for refund so as not to violate the principle of unjust enrichment as enshrined in our laws. 25

The petition is devoid of merit.

Petitioner, in advancing its claim for refund or tax credit, cannot rely on Section 229 of the 1997 NIRC, as
amended. Time and again, the Court had consistently ruled on the inapplicability of Section 229 to claims for
the recovery of unutilized input VAT. 26 In Commissioner of Internal Revenue v. San Roque Power
Corporation (San Roque),27 the Court explained that input VAT is not "excessively" collected as understood
under Section 229 because at the time the input VAT is collected, the amount paid is correct and proper. If
said input VAT is in fact "excessively" collected as understood under Section 229, then it is the person
legally liable to pay the input VAT, and not the person to whom the tax is passed on and who is applying the
input VAT as credit for his own output VAT, who can file the judicial claim for refund or credit outside the
VAT system. The Court, in San Roque, explained as follows:

III. "Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229 because at the time
the input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of,
and legally paid by, a VAT-registered seller of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax liability is true even if the
seller passes on the input VAT to the buyer as part of the purchase price. The second VAT-registered person,
who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his own output
VAT. If the input VAT is in fact "excessively" collected as understood under Section 229, then it is
the first VAT-registered person - the taxpayer who is legally liable and who is deemed to have
legally paid for the input VAT - who can ask for a tax refund or credit under Section 229 as an
ordinary refund or credit outside of the VAT System. In such event, the second VAT-registered
taxpayer will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT
is not "excessively" collected as understood under Section 229. At the time of payment of the input VAT the
amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue that
the input VAT is "excessively" collected, that is, that the input VAT paid is more than what is
legally due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the
mere existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT
available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is more
than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund
or credit of the input VAT as "excessively" collected under Section 229.

xxxx

x x x Only the person legally liable to pay the tax can file the judicial claim for refund. The person
to whom the tax is passed on as part of the purchase price has no personality to file the judicial
claim under Section 229.

xxxx

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected
tax under Section 229 may lead taxpayers to file a claim for refund or credit for such "excess"
input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under
Section 229, mere payment of a tax beyond what is legally due can be claimed as a refund or credit. There
is no requirement under Section 229 for an output VAT or subsequent sale of goods, properties, or services
using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that
is "erroneously, xxx illegally, xxx excessively or in any manner wrongfully collected." In short,
there must be a wrongful payment because what is paid, or part of it, is not legally due. As the
Court held in  Mirant, Section 229 should "apply only to instances of erroneous payment or illegal
collection of internal revenue taxes." Erroneous or wrongful payment includes excessive payment
because they all refer to payment of taxes not legally due. Under the VAT System, there is no
claim or issue that the "excess" input VAT is "excessively or in any manner wrongfully collected."
In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then the
taxpayer claiming to apply such "excessively" collected input VAT to offset his output VAT may
have no legal basis to make such offsetting. The person legally liable to pay the input VAT can
claim a refund or credit for such "excessively" collected tax, and thus there will no longer be any
"excess" input VAT. This will upend the present VAT System as we know it. 28

Thus, the CTA En Banc and CTA Division are correct in holding that, based on the San Roque doctrine above,
Section 229 of the 1997 NIRC is inapplicable to the instant claim for refund or issuance of tax credit. In
addition, neither can petitioner advance its claim for refund or tax credit under Sections 110 (B) and 112 (A)
of the 1997 NIRC. For clarity and reference, said Sections are reproduced below:

SEC. 110. Tax Credits.-

xxxx

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax,
the excess shall be paid by the Vat-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. Provided, however, That any
input tax attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section
112.

xxxx

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

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: Provided, however, That in the
case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of
sales. Provided, finally, That for a person making sales that are zero-rated under Section 108(B) (6), the
input taxes shall be allocated rateably between his zero-rated and non-zero-rated sales. 29

A plain and simple reading of the aforequoted provisions reveals that if and when the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters. It is only when the sales
of a VAT-registered person are zero-rated or effectively zero-rated that he may have the option of applying
for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales. Such is the clear import of the Court's ruling in San Roque, to wit:

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law,
like companies generating power through renewable sources of energy. Thus, a non zero-rated VAT-
registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund or
credit of his unused input VAT under the VAT System. Even if the taxpayer has sales but his input
VAT exceeds his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT
under the VAT System. He can only carry-over and apply his "excess" input VAT against his
future output VAT. If such "excess" input VAT is an "excessively" collected tax, the taxpayer
should be able to seek a refund or credit for such "excess" input VAT whether or not he has
output VAT. The VAT System does not allow such refund or credit. Such "excess" input VAT is not an
"excessively" collected tax under Section 229. The "excess" input VAT is a correctly and properly collected
tax. However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax
imposed only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected under
Section 229, then it is the person legally liable to pay the input VAT, not the person to whom the tax was
passed on as part of the purchase price and claiming credit for the input VAT under the VAT System, who
can file the judicial claim under Section 229.30

It is clear, based on the foregoing, that neither the law nor jurisprudence authorize petitioner's claim for
refund or issuance of tax credit. In asserting its alleged right to said claim, petitioner unfortunately failed to
convince the Court that it is entitled to the refund or credit of input VAT in the amount of P123,459,647.70 it
inadvertently failed to include in its VAT Return. This is because as shown above, petitioner's claim is not
governed by Section 229 as an ordinary refund or credit outside of the VAT System as the same does not
involve a tax that is "erroneously, illegally, excessively, or in any manner wrongfully collected." Neither is
said claim authorized under Sections 110(B) and 112(A) as the same does not seek to refund or credit input
tax due or paid attributable to zero-rated or effectively zero-rated sales.

On this score, the Court notes that when the law is clear and free from any doubt or ambiguity, there is no
room for construction or interpretation; there is only room for application. 31 Only when the law is ambiguous
or of doubtful meaning may the court interpret or construe its true intent. Ambiguity is a condition of
admitting two or more meanings, of being understood in more than one way, or of referring to two or more
things at the same time. A statute is ambiguous if it is admissible of two or more possible meanings, in
which case, the Court is called upon to exercise one of its judicial functions, which is to interpret the law
according to its true intent.32 It is the first and fundamental duty of the Court to apply the law in such a way
that in the course of such application or construction, it should not make or supervise legislation, or under
the guise of interpretation, modify, revise, amend, distort, remodel, or rewrite the law, or give the law a
construction which is repugnant to its terms.33 The Court should apply the law in a manner that would give
effect to their letter and spirit, especially when the law is clear as to its intent and purpose. 34

Even assuming, for argument's sake, that petitioner's application for refund or issuance of tax credit is
permitted under case law as well as the provisions of the tax code, said claim must nonetheless fail in view
of petitioner's failure to properly substantiate the same. Because of said failure, moreover, the issue of
whether input taxes must first be reported in a taxpayer's VAT Return before they can be refunded or
credited becomes irrelevant to petitioner's plight. As petitioner itself asserted, input taxes not reported in
the VAT Return may still be credited against output tax due for as long as the same were properly
substantiated. But as duly found by both the CTA En Banc and CTA Division, the substantiated amount is not
even enough to offset petitioner's output tax liabilities leaving no balance that may be refunded. In this
regard, the CTA En Banc held:

In this case, only P48,509,474.01 was properly supported by official receipts (ORs) out of the
claimed P123,459,647.70. The said amount was also recorded in petitioner's books of accounts but was
not reported in its VAT Return due to alleged inadvertence. In the assailed Decision, the CTA Division made
a pronouncement that even if the substantiated input taxes were declared in the VAT Return for the
First (1st) Quarter of 2008, still it would not be enough to offset the output taxes payable for the
same taxable period. Pertinent portions of the assailed Decision are reiterated with approval, as follows:

Petitioner's Quarterly VAT Return for the first quarter of 2008 shows the following output taxes due in the
amount of P1,269,933,934.95. Had Petitioner declared the substantiated input taxes of
P48,509,474.01 in its Quarterly VAT Return for the first quarter of 2008, considering its output
taxes and substantiated input taxes for the first quarter of 2008 per ICPA examination, it would
not have had enough input taxes to offset against its output taxes for the same taxable periods.

xxxx

In this case, We emphasize that "the substantiated amount is not even enough to offset petitioner's
output tax liabilities for the same period leaving no balance that may be refunded." Consequently,
petitioner's claim for its alleged understatement of overpayment of VAT (excess input taxes) due to
undeclared input taxes for the first quarter of 2008 is denied. 35

In fact, such was the conclusion likewise reached by CTA Justice Roman G. Del Rosario, in his separate
concurring opinion often cited by petitioner, which stated that as found by the Independent CPA and the
Court in Division, petitioner's substantiated input VAT is not enough to offset its output VAT liability.
Considering that petitioner did not pay any VAT for the 1st quarter of 2008, it did not overpay its taxes due
for the 1st quarter of 2008. Thus, there is no basis for petitioner to ask for refund of erroneously paid output
VAT.36

It bears stressing that the Court accords findings and conclusions of the CTA with the highest respect. 37As a
specialized court dedicated exclusively to the resolution of tax problems, the CTA has accordingly developed
an expertise on the subject of taxation. Thus, its decisions are presumed valid in every aspect and will not
be overturned on appeal, unless the Court finds that the questioned decision is not supported by substantial
evidence or there has been an abuse or improvident exercise of authority on the part of the tax
court.38 Upon careful review of the instant case, the Court finds no cogent reason to reverse or modify the
findings of the CTA Division, as affirmed by the CTA En Banc.

Petitioner's assertion, therefore, in its petition, that its claim deserves a greater weight of evidence for the
same necessitates only a preponderance of evidence must certainly fail. It cannot be allowed, at this stage
of the proceedings, to seek a review by the Court of the factual findings of the CTA Division, as affirmed by
the CTA En Banc, as well as a re-examination of the evidence it presented, taking into account the quantum
of proof required in the instant case. Settled is the rule that this Court is not a trier of facts and does not
normally embark in the evaluation of evidence adduced during trial. 39 It is not this Court's function to
analyze or weigh all over again the evidence already considered in the proceedings below. 40 In a petition for
review on certiorari under Rule 45 of the Rules of Court, moreover, only questions of law may be raised, the
Court's jurisdiction being limited to reviewing only errors of law that may have been committed by the lower
court.41 Thus, the Court shall not undertake the re-examination of the evidence presented by petitioner
especially since the findings of facts of the CTA Division are affirmed by the CTA En Banc.

On a final note, the Court reiterates its consistent ruling that actions for tax refund or credit, as in the
instant case, are in the nature of a claim for exemption and the law is not only construed in strictissimi
juris  against the taxpayer, but also the pieces of evidence presented entitling a taxpayer to an exemption
is strictissimi  scrutinized and must be duly proven.42 The burden is on the taxpayer to show that he has
strictly complied with the conditions for the grant of the tax refund or credit. 43 Since taxes are the lifeblood
of the government, tax laws must be faithfully and strictly implemented as they are not intended to be
liberally construed.44 Thus, in view of petitioner's failure to prove, to the satisfaction of the Court, its
entitlement to the grant of tax refund or issuance of tax credit of input VAT in the amount of
P123,459,647.70 it inadvertently failed to include in its VAT Return, the Court deems it necessary to deny
the same.

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Resolution dated January
14, 2016 and Decision dated August 12, 2015 of the Court of Tax Appeals En Banc in CTA EB No. 1111,
which affirmed the Decision dated September 16, 2013 and Resolution dated December 4, 2013 of the CTA
Division denying petitioner's claim for refund or issuance of tax credit, are AFFIRMED.

SO ORDERED.

Carpio, J., (Chairperson), Perlas-Bernabe,  and Reyes, Jr., JJ.,  concur. 

Caguioa, J., on official business.