1.

Concept, characteristics/elements of VAT-taxable transactions

[G.R. No. 168056]

ABAKADA GURO

FACTS:

Petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition, They question the constitutionality of Sections 4, 5 and 6 of
R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).

Section 4 imposes a 10% VAT on sale of goods and properties,

Section 5 imposes a 10% VAT on importation of goods, and

Section 6 imposes a 10% VAT on sale of services and use or lease of properties.

These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of
taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

Sen. Aquilino Q. Pimentel, Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on
the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to 12%
contingent on any of the two conditions being satisfied violates the due process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on the people, in that:

(1) the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no
longer satisfied;

(2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the
VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous
year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is a
violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (P1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax
to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of
goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.

Petitioners' argument is premised on the constitutional right of non-deprivation of life, liberty

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Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section 1
of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not based on real and substantial differences to meet a valid
classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and
that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out
whatever meager margins the petitioners make.

RESPONDENTS' COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No. 9337
enjoys the presumption of constitutionality and petitioners failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA 630 (1994), respondents argue that the procedural issues raised by
petitioners, i.e., legality of the bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any of the
two conditions provided therein arise.

Respondents also refute petitioners' argument that the increase to 12%, as well as the 70% limitation on the creditable input tax, the 60-
month amortization on the purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation,
among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government's fiscal reform agenda. A reform in the value-added
system of taxation is the core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary for
economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

1. Article VI, Section 24, and

2. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions
of the Constitution:
1. Article VI, Section 28(1), and
2. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
1. Article VI, Section 28(1), and
2. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the confusion and
inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties
and services Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to
the buyer, with the seller acting merely as a tax collectorThe burden of VAT is intended to fall on the immediate buyers
and ultimately, the end-consumers.

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In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring
the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes.

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the
system was a single-stage tax computed under the "cost deduction method" and was payable only by the original sellers. The single-
stage system was subsequently modified, and a mixture of the "cost deduction method" and "tax credit method" was used to determine
the value-added tax payable.[13] Under the "tax credit method," an entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports

PROCEDURAL ISSUE

I. Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. NO

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the certification of the
Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A review of cases reveals the Court's
consistent adherence to the rule. The Court finds no reason to deviate from the salutary rule in this case where the
irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2 nd or 3rd
Bicameral Conference Committee by the House. This Court is not the proper forum for the enforcement of these internal
rules of Congress, whether House or Senate. Parliamentary rules are merely procedural and with their observance the
courts have no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
its favor.

in the case of Tolentino vs. Secretary of Finance, the Court already made the pronouncement that "[i]f a change is desired in the
practice [of the Bicameral Conference Committee] it must be sought in Congress since this question is not covered by
any constitutional provision but is only an internal rule of each house." To date, Congress has not seen it fit to make such
changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee to be
very useful for purposes of prompt and efficient legislative action.

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to be
imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on
to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and distribution companies
and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what
manner input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and
excise taxes should be amended.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference Committee is
mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill. The term "settle" is
synonymous to "reconcile" and "harmonize." To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b) decide that neither
provisions in the House bill or the provisions in the Senate bill would be carried into the final form of the bill, and/or (c)
try to arrive at a compromise between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to
reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced
by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such time
that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the
difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the subject of
what rate of VAT should be imposed on taxpayers.

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise on
the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference
Committee was totally within the intent of both houses to put a cap on input tax that may be redited against the output tax. From the
inception of the subject revenue bill in the House of Representatives, one of the major objectives was to "plug a glaring loophole in the
tax policy and administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations
on the claiming of tax credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage." [28]

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As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said provisions
were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee.

B. NO

Petitioners' argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill
and the Senate bill after these had passed three readings is in effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of
the 1987 Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three readings in each of the two
houses. If that be the case, there would be no end to negotiation since each house may seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either house of
Congress, not to the conference committee report. [32] (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each house of
Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house
for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one
house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its
constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean
that the introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills that
have been acted upon by both houses of Congress is prohibited.

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that House Bill
No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed
amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate
amended but which amendments were not found in the House bills are not intended to be amended by the House of Representatives.
Hence, they argue that since the proposed amendments did not originate from the House, such amendments are a violation of Article VI,
Section 24 of the Constitution.

The argument does not hold water.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending provisions
of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate
Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on
other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind
of tax being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or
concur with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative
process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with
respect to bills which are required by the Constitution to originate in the House.

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate
income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or
limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in
furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first
House bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the country's serious financial
problems. To do this, government expenditures must be strictly monitored and controlled and revenues must be significantly increased.
This may be easier said than done, but our fiscal authorities are still optimistic the government will be operating on a balanced budget by
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the year 2009. In fact, several measures that will result to significant expenditure savings have been identified by the administration. It
is supported with a credible package of revenue measures that include measures to improve tax administration and
control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of
corporations are germane to the purpose of the house bills which is to raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT
system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods and services
which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened
more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften
the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the
effect of a VAT on this product.

SUBSTANTIVE ISSUES

I. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people.
Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue
that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the
President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor
does it empower the President to so revert if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP of
the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1½%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners'
argument is, at best, purely speculative. There is no basis for petitioners' fear of a fluctuating VAT rate because the law itself does not
provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that
where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the
law must be taken as it is, devoid of judicial addition or subtraction

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection to
at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national
government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action will also be ineffectual.

2.
3. Nat'l Gov't Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a
relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the
VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is
indeed a need to increase the VAT rate.[62]

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long
as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated
the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation
(1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people

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 as little as possible over and above what it brings into the public treasury of the state.

It simply means that sources of revenues must be adequate to meet government expenditures and their variations.

II.Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending
Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that
may be credited against the output tax. It states, in part: "[ P]rovided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: …"

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local purchase of good and services, including lease or use of property,
in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale
or lease of taxable goods or properties or services by any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of
the input tax that has already been paid cannot now be credited against the output tax.

Petitioners' argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess
of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is
still creditable.

More importantly, the excess input tax, if any, is retained in a business's books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a
VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the
extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in
payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners' arguments must be rejected.

Garcia failed to comprehend the operation of the 70% limitation on the input tax. According to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the principle that tax
collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output
tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios
may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid
and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to
the Bureau of Internal Revenue (BIR); and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes
shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer's option.

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Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the
extent of 70% of the output tax. In layman's term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller
can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax
collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such
input tax to the BIR. The party directly liable for the payment of the tax is the seller. What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-
registered person's entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights
in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it
may not take away property, which was vested by virtue of such rights.

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable,
although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a
10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation of goods and services by
VAT-registered persons against the output tax was introduced. This was adopted by the Expanded VAT Law (R.A. No. 7716), and The
Tax Reform Act of 1997 (R.A. No. 8424).The right to credit input tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this case, limit.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different
articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. [86]

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods
and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate
on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax,
5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be
stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.[87]

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to
sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00. [88] Also, basic marine and agricultural food
products in their original state are still not subject to the tax,[89] thus ensuring that prices at the grassroots level will remain accessible. As
was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher
input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer's ability to pay. This principle was also lifted from Adam Smith's Canons of
Taxation, and it states:

· The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under
the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected. [98]

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation
has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by a person or profit margin marked by a business, such
that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A

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converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is
really the lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that
Congress shall "evolve a progressive system of taxation."

CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to
resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have
the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional
simply because of its yokes.

8
2. Concept, characteristics/elements of VAT-taxable transactions

[G.R. No. 146984             July 28, 2006]

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.

TINGA, J.:

FACTS: Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly owned
subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships.
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was
that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." On 3 June 1988, private respondent
Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels. The bid was made by Magsaysay Lines, purportedly
for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in
Hongkong (collectively, private respondents).

The implementing Contract of Sale was executed. A formal request for a ruling on whether or not the sale of the vessels was subject to
VAT had already been filed with the Bureau of Internal Revenue (BIR).

Private respondents through counsel received VAT Ruling No. 568-88 from the BIR, holding that the sale of the vessels was subject to the
10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT
registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects which are
appropriable or transferable are subject to the 10% [VAT]."

Private respondents moved for the reconsideration but the same was denied. It then filed an appeal with the CTA with a prayer of
reversal of the VAT ruling.

 The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT.

CTA Ruling: The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC’s business,
and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business.
The CTA further held that the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall
under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which
implemented VAT is not an exemption provision, but a classification provision which warranted the resolution of doubts in favor of the
taxpayer.

CA Ruling: (initially reversed CTA but reversed itself later on) On 11 March 1997, rendered a Decision reversing the CTA. While the
appellate court agreed that the sale was an isolated transaction, not made in the course of NDC’s regular trade or business, it
nonetheless found that the transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of the
vessels together with the NMC shares brought about a change of ownership in NMC. The Court of Appeals also applied the principle
governing tax exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the government.
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February 2001. This time, the
appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.

PETITIONER’S ARGUMENTS:
The CIR defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-
87, which provided that "[VAT] is imposed on any sale or transactions ‘deemed sale’ of taxable goods (including capital goods,
irrespective of the date of acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed sale," as
enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which
classified "change of ownership of business" as a circumstance that gave rise to a transaction "deemed sale."

ISSUE: Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. 

RULING:
No. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It
is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users
by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they
9
receive from the final consumer (or output VAT). The final purchase by the end consumer represents the final link in a production chain
that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection
of taxes on every level of consumption, yet assuages the manufacturers or providers of goods and services by enabling them to pass on
their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in
the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the
sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of
accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or
services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have
definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not
subject to VAT.

What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of "in the course of trade or business," but instead
the identification of the transactions which may be deemed as sale. It would become necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in
the first place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the purpose of determining
VAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or
business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale
may hew to those transactions deemed sale as defined under Section 100.

10
 3. Concept, characteristics/elements of VAT-taxable transactions

[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.

CARPIO, J.:

DOCTRINE:

Sec 105 explanation:

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.

Regarding the period for filing of claims:

(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 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.

NATURE OF THE CASE:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the Resolution3 promulgated
on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September
2008 Decision4 as well as the 26 June 2009 Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in
CTA Case Nos. 7227, 7287, and 7317. The CTA First Division denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for
refund or tax credit for the first and second quarters of taxable year 2003 for being filed out of time (CTA Case Nos. 7227 and 7287). The
CTA First Division, however, ordered the

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

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

FACTS:
Mindanao I and II (Mindanao), partnerships registered with SECare value-added taxpayers, and Block Power Production Facilities
accredited by the Department of Energy, and Theyhad a Build-Operate-Transfer contract with the Philippine National Oil Corporation–
Energy Development Company (PNOC-EDC),whereby Mindanao converts steam supplied to it by PNOC-EDC into electricity, and then
delivers the electricity to the National Power Corporation (NPC) in behalf of PNOC-EDC.

The Electric Power Industry Reform Act of 2000 (EPIRA, RA 9136), amended the Tax Reform Act of 1997 (RA 8424), when it
decreed that sales of power by generation companies shall be subjected to a zero rate of VAT. Pursuant to EPIRA, Mindanao I and II filed
their claims for the issuance of tax credit certificates on unutilized or excess input taxes from their sales of generated power and delivery
of electric capacity and energy to NPC.

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

11
RA No. 9136, [Mindanao II’s] input tax credits remain unutilized.

Pursuant to EPIRA, Mindanao I and II filed their claims for the issuance of tax credit certificates on unutilized or excess input
taxes from their sales of generated power and delivery of electric capacity and energy to NPC.

The following are relevant dates:

CTA Period Close of Last day for Actual date Last day for Actual Date
Case Covered by quarter filingapplication of filing filing case of filing case
No. VAT Sales in when sales of taxrefund/tax application with CTA with
2003 were credit for tax CTA(judicial
made certificate with refund/ claim)
the CIR credit
(adminclaim)

MINDANAO II
7227 1st Quarter 31 March 2003 31 March 2005 13 April 2005 12 Sept2005 22 April 2005
7287 2nd Quarter 30 June 2003 30 June 2005 13 April 2005 12 Sept 2005 7 July 2005
7317 3rd and 4th 30 Sept2003 30 Sept2005 13 April 2005 12 Sept2005 9 Sept2005
Quarters
31 Dec. 2003 2 Jan. 2006 (31
Dec. 2005 being a
Saturday)
MINDANAO I
7228 1st Quarter 31 March 2003 31 March 2005 4 April 2005 1 Sept2005 22 April 2005

7286 2nd Quarter 30 June 2003 30 June 2005 4 April 2005 1 Sept2005 7 July 2005
7318 3rd and 4th 30 Sept2003 30 Sept2005 4 April 2005 1 Sept2005 9 Sept2005
Quarters
31 Dec. 2003 2 January 2006
(31 Dec. 2005
being a Saturday)

The application for refund by Mindanao II remained 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.
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.

CTA 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. Hence, pet. For review was partially
granted.

CTA En Banc:
The CTA En Banc denied Mindanao II’s claims for refund tax credit for the first and second quarters of 2003, and Mindanao I’s claims for
refund/tax credit for the first, second, third, and fourth quarters of 2003, for being filed out of time.

Mindanao II’s judicial claims were filed beyond the period allowed in Sec. 112(A), by which 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 (regardless of whether the tax was actually paid),
according to CIR v. Mirant Pagbilao Corporation (Mirant). Also, the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao
II’s VAT zero-rated transactions and is VATable pursuant to Sec. 105.
Mindanao I’s claims for the first, second, third and fourth quarters of 2003 were filed out of time. Section 229 is inapplicable in
light of Mirant. Moreover, the procedure prescribed under Section 112(C) should be followed first before the CTA En Banc can act on
Mindanao I’s claim.

Mindanao I and II went up to the Supreme Court arguing that their claims were timely filed pursuant to the case of Atlas, which
was then the controlling ruling at the time of the filing. 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 to their prejudice.

[1] ISSUE: Whether the reckoning date for counting the two-year prescriptive period in Section 112 should be counted from the end of
the taxable quarter when the sales were made (Mirant) or the date of filing the return (Atlas)?

HELD:Neither Atlas nor Mirant applies, because when Mindanao II and Mindanao I filed their respective administrative and judicial claims
in 2005, neither case had been promulgated. Atlas was promulgated on 8 June 2007, Mirant on 12 September 2008. Besides, Atlas
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
12
the taxable quarter when the sales involving the input VAT were made. The Atlas doctrine did not interpret, expressly or impliedly, the
120+30 day periods.

Prescriptive Period for the Filing of Administrative Claims

Section 112(A) of the 1997 Tax Code was the applicable law at the time of filing of the claims in issue, therefore the claims
needed to have been filed within two (2) years after the close of the taxable quarter when the sales were made. Mindanao I and II’s
administrative claims for the first quarter of 2003 had prescribed, but their claims for the second, third and fourth quarters of 2003 were
filed on time.

Prescriptive Period for the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 had been properly appealed, there is still
see no need to refer to either Atlas or Mirant, or even to Sec. 229. The second paragraph of Sect. 112(C) is clear that the taxpayer can
appeal to the CTA “within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period.”
The 120+30 day periods are mandatory and jurisdictional. The taxpayer cannot simply file a petition with the CTA without
waiting for the Commissioner’s decision within the 120-day period, because otherwise there would be no “decision” or “deemed a denial”
decision for the CTA to review. Moreover, Sec. 112(C) expressly grants a 30-day period to appeal to the CTA, and this period need not
necessarily fall within the two-year prescriptive period, as long as the administrative claim is filed within such time. The said prescriptive
period does not refer to the filing of the judicial claim with the CTA, but to the administrative claim with the Commissioner.

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

BIR Ruling No. DA-489-03 provided that the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could
seek judicial relief with the CTA.” In the consolidated cases of CIR v. San Roque, however, the Supreme Court En Bancheld that the
taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day jurisdictional
period. Notwithstanding, the Court also held in San RoquethatBIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of
taxpayers. Being a general interpretative rule, it can be relied on by all taxpayers from the time of its issuance on 10 December 2003 up
to its reversal by the Court in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi) on 6 October 2010, where
this Court held that the 120+30 day periods are mandatory and jurisdictional.”

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 (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
could not be filed earlier than 11 August 2005, which was the expiration of the 120-day period for the Commissioner to act.
Mindanao II filed its judicial claim for the second quarter before the expiration of the 120-day period; it was thus
prematurely filed. However, pursuant to San Roque, the claim qualifies under the exception to the strict application of the 120+30
day periods. Its judicial claims for the third quarter and fourth quarter of 2003 were filed on time.
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, the last day
for filing a judicial claim 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.Mindanao I prematurely filed its judicial claim for the
second quarter of 2003 but claim qualifies under the exception in San Roque. Its judicial claims for the third and fourth quarters of
2003, however, were filed after the prescriptive period.

[2] ISSUE: Whether the sale of the fully-depreciated Nissan Patrol is a one-time transaction not incidental to the VAT zero-rated
operation of Mindanao II, thus not VATable?

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an isolated transaction
cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would
show that a transaction “in the course of trade or business” includes “transactions incidental thereto.” Mindanao II’s
business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its
business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property,
plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business
which should be liable for VAT.

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its business
but an isolated transaction that should not have been subject to 10% VAT. It does not follow that an isolated transaction cannot be an
incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 would show that a transaction “in the course of trade
or business” includes “transactions incidental thereto.” 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.

13
DISPOSITION: Petitions partially granted.The claim of Mindanao II for the first quarter of 2003 is DENIED, while its claims for the
second, third, and fourth quarters of 2003 are GRANTED. The claims of Mindanao I for the first, third, and fourth quarters of 2003 are
DENIED while its claim for the second quarter of 2003 is GRANTED.

Re Mirant (not important, but just in case asked)

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 CIR had 120 days, or until 2 August 2005, to act on Mindanao I’s claim. At the time of filing of Mindanao I’s appeal with the CTA,
Mindanao I’s application for refund remained unacted upon. Rollo (G.R. No. 194637), p. 234. 47 Mindanao I had 30 days from the receipt
of the CIR’s denial of its claim or after the expiration of the 120-day period to appeal the decision or the unacted claim before the CTA.
Thus, Mindanao II had until 1 September 2005 to file its judicial claim.

14
 4. Destination Principle/Cross Border Doctrine

CIR V. TOSHIBA

5. Destination Principle/Cross Border Doctrine

[G.R. No. 153205 January 22, 2007]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Respondent.

FACTS: [Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines. It is
represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark) entered into a
contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCOR’s] two power barges.

The actual operation and maintenance of NAPOCOR’s two power barges as well as the performance of other duties and acts which
necessarily have to be done in the Philippines. NPC paid the foreign consortium a mixture of currencies while the consortium, in turn,
paid Burmeister foreign currency inwardly remitted into the Philippines.

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

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-
007556 was issued in favor of [respondent]. [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among
others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14.

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

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

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT
representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996.

The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its
1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996.

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

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

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

CTA, ruled in favor of the respondent and ordered the petitioner to issue a tax credit certificate. On appeal CA affirmed the CTA’s
decision.

ISSUE: WON THE RESPONDENT IS ENTITLED TO THE REFUND AS ERRONEOUSLY PAID OUTPUT VAT FOR THE YEAR 1996.

HELD: PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the filing of CIR’s Answer in
the CTA.

The Court declares that the denial of the instant petition is not on the ground that respondent’s services are subject to 0% VAT. Rather,
it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95 17 and VAT Ruling No. 003-99, 18 which held that
respondent’s services are subject to 0% VAT and which respondent invoked in applying for refund of the output VAT.

15
Section 102(b) of the Tax Code, 19 the applicable provision in 1996 when respondent rendered the services and paid the VAT in question,
enumerates which services are zero-rated.

(b) Transactions subject to zero-rate .

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero
rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable
foreign currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was
in accordance with BSP rules.

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for
such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification
to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this
requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section
102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other persons doing
business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to
the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines.

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing business in the Philippines.
While the Consortium’s principal members are non-resident foreign corporations, the Consortium itself is doing business in the
Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a
15-year term.

The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium, not being supplied to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the Philippines. NAPOCOR pays
the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays
respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not
entitle respondent to 0% VAT.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated whereas imports
are taxed). However, as the Court stated in American Express, there is an exception to this rule. 25 This exception refers to the 0% VAT on
services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of
the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section
102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for in accordance with BSP rules.

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the Philippines. Hence, American
Express’ services were subject to 0% VAT, while respondent’s services should be subject to 10% VAT.

Nevertheless, the refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-rating of its sales to foreign
consortium. However, the ruling is only valid until the time that CIR filed its Answer in the CTA which is deemed revocation of the
previously-issued ruling. The Court said the revocation can not retroact since none of the instances in Section 246 (bad faith, omission of
facts, etc.) are present.WHEREFORE, the Court DENIES the petition.

16
6. Imposition of Vat - c. on services

[G.R. No. 152609 June 29, 2005]

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:

As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT law itself provides for a clear
exception, under which the supply of service shall be zero-rated when the following requirements are met:

(1) the service is performed in the Philippines;

(2) the service falls under any of the categories provided in Section 102(b) of the Tax Code; and

(3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko Sentral
ng Pilipinas. Since respondent’s services meet these requirements, they are zero-rated. Petitioner’s Revenue Regulations that alter or
revoke the above requirements are ultra vires and invalid.

FACTS

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly organized and existing under and by
virtue of the laws of the State of Delaware, U.S.A., with office in the Philippines. It is a servicing unit of American Express International,
Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR). For the period January 1, 1997 to December 31, 1997,
[respondent] filed with the BIR its quarterly VAT returns

[respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of ₱3,751,067.04, which
amount was arrived at after deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only for the third
and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively.

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on April 15, 1999.

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

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

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

(1) x x x

17
(2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for in acceptable foreign currency
which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the BSP. x x x.’

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of which reads as follows:

‘In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable foreign currency which is remitted
inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central [B]ank of the Philippines, your
service income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended].4 For this, there is
no need to file an application for zero-rate.’

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues are available as tax refund in
accordance with Section 106 (now Section 112) of the [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:

‘Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by paragraph (a) above, whose sales
are zero-rated or are effectively zero-rated, may, within two (2) years after the close of the taxable quarter when such sales were made,
apply for the issuance of tax credit certificate or refund of the input taxes due or attributable to such sales, to the extent that such input
tax has not been applied against output tax. x x x. [Section 106(a) of the Tax Code]’5

‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added tax purposes. A sale by a VAT-
registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these
Regulations. x x x.’ [Section 8(a), [RR] 5-87].’6

"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses that:

7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;

8. Taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not refundable. Claims for
tax refund are construed strictly against the claimant as they partake of the nature of tax exemption from tax and it is incumbent upon
the [respondent] to prove that it is entitled thereto under the law and he who claims exemption must be able to justify his claim by the
clearest grant of organic or statu[t]e law. An exemption from the common burden [cannot] be permitted to exist upon vague
implications;

9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to tax recovery or refund, which are
found in Sections 204(c) and 229 of the Tax Code, as amended, which are quoted as follows:

‘Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue
stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax or
penalty: Provided, however, That a return filed with an overpayment shall be considered a written claim for credit or refund.’

‘Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be maintained in any court for the recovery of
any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even
without written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.’

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision7 in favor of the herein respondent
holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96, the decretal portion of which reads as follows:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance with law. Accordingly, [petitioner]
is hereby ORDERED to REFUND to [respondent] the amount of ₱3,352,406.59 representing the latter’s excess input VAT paid for the year
1997.’"8

Court of Appeals

18
In affirming the CTA, the CA held that respondent’s services fell under the first type enumerated in Section 4.102-2(b)(2) of RR 7-95, as
amended by RR 5-96. More particularly, its "services were not of the same class or of the same nature as project studies, information, or
engineering and architectural designs" for non-resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines." The consideration in both types of service,
however, was paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas.

Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring that respondent’s services be
consumed abroad in order to be zero-rated, petitioner went beyond the sphere of interpretation and into that of legislation. Even granting
that it is valid, the ruling cannot be given retroactive effect, for it will be harsh and oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.

Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of the amount of
₱3,352,406.59 allegedly representing excess input VAT for the year 1997."10

Ruling: NO

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base of tax. -- There shall be levied,
assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or rendered by x x x persons engaged in milling, processing, manufacturing or
repacking goods for others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment
of x x x any such knowledge or information as is mentioned in subparagraph (3);

xxxxxxxxx

‘(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any x x
x commercial undertaking, venture, project or scheme;

xxxxxxxxx

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

"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the Philippines by VAT-registered persons
shall be subject to zero percent (0%) rate[:]

‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);

19
‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP];’"

xxxxxxxxx

Zero Rating of "Other" Services

The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered persons in the Philippines (other
than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated.

Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-
resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same category
as "processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In reply to a query of
respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent earned from its parent company’s
regional operating centers (ROCs) was automatically zero-rated effective January 1, 1988.

Service has been defined as "the art of doing something useful for a person or company for a fee" or "useful labor or
work rendered or to be rendered by one person to another." For facilitating in the Philippines the collection and payment
of receivables belonging to its Hong Kong-based foreign client, and getting paid for it in duly accounted acceptable
foreign currency, respondent renders service falling under the category of zero rating. Pursuant to the Tax Code, a VAT
of zero percent should, therefore, be levied upon the supply of that service.

VAT Requirements for the Supply of Service

The VAT is a tax on consumption "expressed as a percentage of the value added to goods or services" purchased by the producer or
taxpayer. As an indirect tax on services, its main object is the transaction46 itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the Philippines.4These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;" for a valuable consideration; and not exempt under the Tax Code, other
special laws, or any international agreement.

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these requirements.

First, respondent regularly renders in the Philippines the service of facilitating the collection and payment of receivables
belonging to a foreign company that is a clearly separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period of time; on a significant scale; with a
reasonable degree of frequency; and not at random, fortuitous or attenuated.

Third, for this service, respondent definitely receives consideration in foreign currency that is accounted for in
conformity with law.

Finally, respondent is not an entity exempt under any of our laws or international agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are
taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its
output abroad. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the
outcome of such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments located here in the country and
forwarding them to the ROCs abroad. The consumption contemplated by law, contrary to petitioner’s administrative interpretation, does
not imply that the service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in the performer’s release from any past or future liability x x x." The
services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the
Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can
only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." Respondent’s
facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under
the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

20
Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are
performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the [BSP]." Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed
in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed
in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than
"processing, manufacturing or repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets the
statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-
rated.

Performance of Service versus Product Arising from Performance

Again, contrary to petitioner’s stand, for the cost of respondent’s service to be zero-rated, it need not be tacked in as part of the cost of
goods exported.58 The law neither imposes such requirement nor associates services with exported goods. It simply states that the
services performed by VAT-registered persons in the Philippines -- services other than the processing, manufacturing or repacking of
goods for persons doing business outside this country -- if paid in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different from the product that arises from
the rendition of such service. The activity that creates the income must not be confused with the main business in the course of which
that income is realized.59

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction60 to impose the VAT. Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65 much less is the place where the output of the service will be further or ultimately used.

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative level, rendered by the BIR
commissioner upon request of a taxpayer to clarify certain provisions of the VAT law. As correctly held by the CA, when this ruling states
that the service must be "destined for consumption outside of the Philippines" in order to qualify for zero rating, it contravenes both the
law and the regulations issued pursuant to it. This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts," this interpretation is not conclusive and will have to be "ignored if judicially found to be
erroneous" and "clearly absurd x x x or improper." An administrative issuance that overrides the law it merely seeks to interpret, instead
of remaining consistent and in harmony with it, will not be countenanced by this Court.

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its zero rating. Changing this status will
certainly deprive respondent of a refund of the substantial amount of excess input taxes to which it is entitled.

Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such revocation could not be given retroactive
effect if the application of the latter ruling would only be prejudicial to respondent. Section 246 of the Tax Code categorically declares
that "[a]ny revocation x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be given retroactive application if
the revocation x x x will be prejudicial to the taxpayers."

It is also basic in law that "no x x x rule x x x shall be given retrospective effect unless explicitly stated." No indication of such retroactive
application to respondent does the Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section 246 of the Tax
Code apply.

Though vested with the power to interpret the provisions of the Tax Code and not bound by predecessors’ acts or rulings, the BIR
commissioner may render a different construction to a statute89 only if the new interpretation is in congruence with the law. Otherwise,
no amount of interpretation can ever revoke, repeal or modify what the law says.

21
7. Imposition of Vat - c. on services

[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.:

FACTS:
Commonwealth Management and Services Corporation (COMASERCO) is a corporation affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the latter to perform collection, consultative and other technical services, including functioning as an internal
auditor of Philamlife and its other affiliates.

The BIR issued an assessment to COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988 .
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.

COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VA T, but the CIR still sent a collection letter
to COMASERCO demanding payment of the deficiency VAT.

COMASERCO filed with the CTA a petition for review contesting the Commissioner's assessment, asserting that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor,
were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged id the business of providing services to
Philamlife and its affiliates. It was established to ensure operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services. It 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. It averred that since it was not engaged in business, it was not liable to pay
VAT.

CTA rendered decision in favor of the CIR. Court of Appeals reversed, hence this petition for review on certiorari.

ISSUE: COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon. YES to both.

RULING:

Re: “In the Course of Trade or Business”

Petitioner: to "engage in business" and to "engage in the sale of services" are two different things ; 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. J

COMASERCO: the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood;
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.

SC: We agree with the Commissioner. Sec. 99 of the NIRC of 1986, as amended by E.O. No. 273 in 1988, provides that: “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."

22
On May 28, 1994, Congress enacted R.A. 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: “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 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.”

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

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

Re: “Sale of Services”

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

The CIR issued BIR Ruling No. 010-98 emphasizing that a domestic corporation that provided technical, research, management and
technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of
realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention of
realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax.

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

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

Both the CIR and the CTA correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT.
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 CIR, in the absence of any showing that it is
plainly wrong, is entitled to great weight. Also, it has been the long standing policy and practice of this Court to respect the conclusions
of quasi-judicial agencies, such as the CTA.

23
8. VAT-exempt Transactions; in general; enumeration

[G.R. No. 153866 February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs. SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
PANGANIBAN, J.:
Doctrine:
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.
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.
Facts
1. Respondent CIR(a VAT registered entity)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. [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;

3.Respondentfiled 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;
4."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] in order to toll the running of the two-year prescriptive period.
CIR’s defense:
 the claim for tax refund/credit is subject to administrative routinary investigation/examination by the BIR.
 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;
 Claims for tax refund/tax credit are construed in ‘strictissimijuris’ against the taxpayer. This is due to the fact that claims for
refund/credit [partake of] the nature of an exemption from tax.;
 Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered Ecozone Enterprise,
then its business is not subject to VAT. As such, the capital goods and services it purchased are considered not used in VAT
taxable business. Thus, it 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.
 [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.’

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 5. CTA- granted the claim for or issuance of a tax credit certificate (TCC) in favor of respondent in the reduced amount of
P12,122,922.66.
6.CA-affirmed
7.Hence, CIR filed a petition for review

ISSUE:
Whether Seagate, a VAT-Registered PEZA Enterprise is entitled to the refund.

RULING:
YES. 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.
It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal
revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a
VAT-registered person,] however, is entitled to their credits.
“WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.

Nature of the VAT and the Tax Credit Method

VAT is a uniform 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.

It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. [32] As
such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in
terms of its nature as a tax on consumption.[33] In either case, though, the same conclusion is arrived at.

If at the end of a taxable quarter the output taxes [38] charged by a seller[39] are equal to the input taxes [40] passed on by the
suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. [41] If, however, the
input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. [42] Should the input taxes
result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, [43] any excess over the output taxes
shall instead be refunded[44] to the taxpayer or credited[45] against other internal revenue taxes.[46]

Zero-Rated vs. Effectively Zero-Rated Transactions (in effect – similar ; As to source – different)

Zero-rated transactions Effectively Zero-rated transactions

As to source export sale of goods and sale of goods[50] or supply of services [51] to persons or entities
supply of services.[47] The tax whose exemption under special laws or international
rate is set at zero.[48] agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate

In effect
results in no tax chargeable against the purchaser. The seller of such transactions
charges no output tax,[49] but can claim a refund of or a tax credit certificate for the
VAT previously charged by suppliers.

Zero Rating and Exemption (In terms of the VAT computation – same; the extent of relief – different)
Automatic Zero-rating Effective zero rating In exemption there is
only partial relief
intended to be enjoyed by the seller who is intended to benefit the purchaser
directly and legally liable for the VAT, who, not being directly and legally because the
making such seller internationally competitive liable for the payment of the VAT, will purchaser is not allowed
by allowing the refund or credit of input taxes ultimately bear the burden of the tax any tax refund of or
that are attributable to export sales shifted by the suppliers. credit for input taxes
paid.[58]
In both, there is total relief for the purchaser from the burden of the tax

Exempt Transaction vs. Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction. [59]

exempt transaction exempt party

involves goods or services which are expressly person or entity granted VAT exemption under the
exempted from the VAT under the Tax Code, without Tax Code, a special law or an international agreement
regard to the tax status -- VAT-exempt or not -- of the

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party to the transaction

such transaction is not subject to the VAT, but the Such party is also not subject to the VAT, but may
seller is not allowed any tax refund of or credit for be allowed a tax refund of or credit for input taxes
any input taxes paid. paid, depending on its registration as a VAT or non-VAT
taxpayer.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimijuris[102] against the taxpayer[103] and liberally in favor of the
taxing authority.[104]

Tax refunds are in the nature of such exemptions.

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law. [131] Petitioner alleges that respondent did register for VAT purposes
with the appropriate Revenue District Office. However, it is now too late in the day for petitioner to challenge the VAT-registered status
of respondent, given the latter’s prior representation before the lower courts and the mode of appeal taken by petitioner before this
Court.

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.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit. [150]

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that
the petitioner therein was registered as a non-VAT taxpayer. [151]Hence, for being merely VAT-exempt, the petitioner in that case cannot
claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset
against any output taxes.

LAWS MENTIONED IN THIS CASE:

PD 66 = exemption from internal revenue laws and regulations for raw materials, etc. brough into the zone to be stored, broken up, etc.

Despite availment of PD 66 benefits, the following will still apply: net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses.

EO 226 = 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, and real property
taxes.

Despite availment of EO 226 benefits, the following will still apply: net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses.

RA 7227 = tax and duty-free importation of raw materials, capital and equipment. Availment of RA 7227 benefits does not stop the
ecozone benefits under RA 7916.

RA 7227 = no local or national taxes shall be imposed in the zone. Banking and finance shall also be liberalized under minimum
BangkoSentral regulation with the establishment of foreign currency depository units of local commercial banks and offshore banking
units of foreign banks.

RA 7844 = negotiable tax credits for locally-produced materials used as inputs

PD 1853 = preferential credit facilities

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