DESTINATION PRINCIPLE AND CROSS

BORDER DOCTRINE
G.R. NO. 150154 : August 9, 2005]
COMMISSIONER OF INTERNAL
REVENUE, Petitioners, v. TOSHIBA INFORMATION
EQUIPMENT (PHILS.), INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review under Rule 45 of
the Rules of Court, petitioner Commissioner
of Internal Revenue (CIR) prays for the
reversal of the decision of the Court of
Appeals in CA-G.R. SP No. 59106,1 affirming
the order of the Court of Tax Appeals (CTA) in
CTA Case No. 5593,2 which ordered said
petitioner CIR to refund or, in the alternative,
to issue a tax credit certificate to respondent
Toshiba Information Equipment (Phils.), Inc.
(Toshiba), in the amount of P16,188,045.44,
representing unutilized input value-added tax
(VAT) payments for the first and second
quarters of 1996.
There is hardly any dispute as to the facts
giving rise to the present Petition.
Respondent Toshiba was organized and
established as a domestic corporation, duly-
registered with the Securities and Exchange
Commission on 07 July 1995,3 with the
primary purpose of engaging in the business
of manufacturing and exporting of electrical
and mechanical machinery, equipment,
systems, accessories, parts, components,
materials and goods of all kinds, including,
without limitation, to those relating to office
automation and information technology, and
all types of computer hardware and software,
such as HDD, CD-ROM and personal computer
printed circuit boards.4
On 27 September 1995, respondent Toshiba
also registered with the Philippine Economic
Zone Authority (PEZA) as an ECOZONE Export
Enterprise, with principal office in Laguna
Technopark, Biñan, Laguna.5 Finally, on 29
December 1995, it registered with the Bureau
of Internal Revenue (BIR) as a VAT
taxpayer and a withholding agent.6
Respondent Toshiba filed its VAT returns for
the first and second quarters of taxable year
1996, reporting input VAT in the amount
of P13,118,542.007 and P5,128,761.94,8 resp
ectively, or a total of P18,247,303.94. It
alleged that the said input VAT was from its
purchases of capital goods and services which
remained unutilized since it had not yet
engaged in any business activity or
transaction for which it may be liable for
any output VAT.9 Consequently, on 27
March 1998, respondent Toshiba filed with
the One-Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center of the Department
of Finance (DOF) applications for tax
credit/refund of its unutilized input VAT for 01
January to 31 March 1996 in the amount
of P14,176,601.28,10 and for 01 April to 30
June 1996 in the amount
of P5,161,820.79,11 for a total
of P19,338,422.07. To toll the running of the
two-year prescriptive period for judicially
claiming a tax credit/refund, respondent
Toshiba, on 31 March 1998, filed with the CTA
a Petition for Review. It would subsequently
file an Amended Petition for Review on 10
November 1998 so as to conform to the
evidence presented before the CTA during the
hearings.
In his Answer to the Amended Petition for
Review before the CTA, petitioner CIR raised
several Special and Affirmative Defenses, to
wit'
5. Assuming without admitting that petitioner
filed a claim for refund/tax credit, the same is
subject to investigation by the Bureau of
Internal Revenue.
6. Taxes are presumed to have been collected
in accordance with law. Hence, petitioner
must prove that the taxes sought to be
refunded were erroneously or illegally
collected.
7. Petitioner must prove the allegations
supporting its entitlement to a refund.
8. Petitioner must show that it has complied
with the provisions of Sections 204(c) and
229 of the 1997 Tax Code on the filing of a
written claim for refund within two (2) years
from the date of payment of the tax.
9. Claims for refund of taxes are construed
strictly against claimants, the same being in
the nature of an exemption from taxation.12
After evaluating the evidence submitted by
respondent Toshiba,13 the CTA, in its Decision
dated 10 March 2000, ordered petitioner CIR
to refund, or in the alternative, to issue a tax
credit certificate to respondent Toshiba in the
amount of P16,188,045.44.14
In a Resolution, dated 24 May 2000, the CTA
denied petitioner CIR's Motion for
Reconsideration for lack of merit.15
The Court of Appeals, in its Decision dated 27
September 2001, dismissed petitioner CIR's
Petition for Review and affirmed the CTA
Decision dated 10 March 2000.
Comes now petitioner CIR before this Court
assailing the above-mentioned Decision of the
Court of Appeals based on the following
grounds'
1. The Court of Appeals erred in holding that
petitioner's failure to raise in the Tax Court
the arguments relied upon by him in the
petition, is fatal to his cause.
2. The Court of Appeals erred in not holding
that respondent being registered with the
Philippine Economic Zone Authority (PEZA) as
an Ecozone Export Enterprise, its business is
not subject to VAT pursuant to Section 24 of
Republic Act No. 7916 in relation to Section
103 (now 109) of the Tax Code.
3. The Court of Appeals erred in not holding
that since respondent's business is not
subject to VAT, the capital goods and services
it purchased are considered not used in VAT
taxable business, and, therefore, it is not
entitled to refund of input taxes on such
capital goods pursuant to Section 4.106-1 of
Revenue Regulations No. 7-95 and of input
taxes on services pursuant to Section 4.103-1
of said Regulations.
4. The Court of Appeals erred in holding that
respondent is entitled to a refund or tax credit
of input taxes it paid on zero-rated
transactions.16
Ultimately, however, the issue still to be
resolved herein shall be whether respondent
Toshiba is entitled to the tax credit/refund of
its input VAT on its purchases of capital goods
and services, to which this Court answers in
the affirmative.
I
An ECOZONE enterprise is a VAT-exempt
entity. Sales of goods, properties, and
services by persons from the Customs
Territory to ECOZONE enterprises shall
be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax
credit/refund on Section 106(b) of the Tax
Code of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable
input tax. '
(b) Capital goods. - A VAT-registered person
may apply for the issuance of a tax credit
certificate or refund of input taxes paid on
capital goods imported or locally purchased,
to the extent that such input taxes have not
been applied against output taxes. The
application may be made only within two (2)
years after the close of the taxable quarter
when the importation or purchase was
made.17
Petitioner CIR, on the other hand, opposes
such claim on account of Section 4.106-1(b)
of Revenue Regulations (RR) No. 7-95,
otherwise known as the VAT Regulations, as
amended, which provides as follows'
Sec. 4.106-1. Refunds or tax credits of input
tax. '
...
(b) Capital Goods. - - Only a VAT-registered
person may apply for issuance of a tax credit
certificate or refund of input taxes paid on
capital goods imported or locally purchased.
The refund shall be allowed to the extent that
such input taxes have not been applied
against output taxes. The application should
be made within two (2) years after the close
of the taxable quarter when the importation
or purchase was made.
Refund of input taxes on capital goods shall
be allowed only to the extent that such capital
goods are used in VAT taxable business. If it
is also used in exempt operations, the input
tax refundable shall only be the ratable
portion corresponding to the taxable
operations.
"Capital goods or properties" refer to goods or
properties with estimated useful life greater
than one year and which are treated as
depreciable assets under Section 29(f), used
directly or indirectly in the production or sale
of taxable goods or services. (Underscoring
ours.)
Petitioner CIR argues that although
respondent Toshiba may be a VAT-registered
taxpayer, it is not engaged in a VAT-
taxable business. According to petitioner
CIR, respondent Toshiba is actually VAT-
exempt, invoking the following provision
of the Tax Code of 1977, as amended'
SEC. 103. Exempt transactions. - The
following shall be exempt from value-added
tax.
(q) Transactions which are exempt under
special laws, except those granted under
Presidential Decree No. 66, 529, 972, 1491,
and 1590, and non-electric cooperatives
under Republic Act No. 6938, or international
agreements to which the Philippines is a
signatory.18
Since respondent Toshiba is a PEZA-
registered enterprise, it is subject to the five
percent (5%) preferential tax rate imposed
under Chapter III, Section 24 of Republic Act
No. 7916, otherwise known as The Special
Economic Zone Act of 1995, as amended.
According to the said section, "[e]xcept for
real property taxes on land owned by
developers, no taxes, local and national, shall
be imposed on business establishments
operating within the ECOZONE. In lieu
thereof, five percent (5%) of the gross
income earned by all business enterprises
within the ECOZONE shall be paid' " The five
percent (5%) preferential tax rate imposed on
the gross income of a PEZA-registered
enterprise shall be in lieu of all national taxes,
including VAT. Thus, petitioner CIR contends
that respondent Toshiba is VAT-exempt by
virtue of a special law, Rep. Act No. 7916, as
amended.
It would seem that petitioner CIR failed to
differentiate between VAT-exempt
transactions from VAT-exempt entities. In the
case of Commissioner of Internal Revenue v.
Seagate Technology (Philippines),19 this Court
already made such distinction'
An exempt transaction, on the one
hand, involves goods or services which, by
their nature, are specifically listed in and
expressly exempted from the VAT under
the Tax Code, without regard to the tax
status - VAT-exempt or not - of the party
to the transaction'
An exempt party, on the other hand, is a
person or entity granted VAT exemption
under the Tax Code, a special law or an
international agreement to which the
Philippines is a signatory, and by virtue of
which its taxable transactions become exempt
from VAT'
Section 103(q) of the Tax Code of 1977,
as amended, relied upon by petitioner CIR,
relates to VAT-exempt transactions. These
are transactions exempted from VAT by
special laws or international agreements to
which the Philippines is a signatory. Since
such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the
purchasers of goods, properties, or services,
and they may not claim tax credit/refund of
the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as
amended, cannot apply to transactions of
respondent Toshiba because although the
said section recognizes that transactions
covered by special laws may be exempt from
VAT, the very same section provides that
those falling under Presidential Decree No. 66
are not. Presidential Decree No. 66, creating
the Export Processing Zone Authority (EPZA),
is the precursor of Rep. Act No. 7916, as
amended,20 under which the EPZA evolved
into the PEZA. Consequently, the exception of
Presidential Decree No. 66 from Section
103(q) of the Tax Code of 1977, as amended,
extends likewise to Rep. Act No. 7916, as
amended.
This Court agrees, however, that PEZA-
registered enterprises, which would
necessarily be located within ECOZONES, are
VAT-exempt entities, not because of Section
24 of Rep. Act No. 7916, as amended, which
imposes the five percent (5%) preferential
tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather,
because of Section 8 of the same statute
which establishes the fiction that ECOZONES
are foreign territory.
It is important to note herein that respondent
Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has
been described as'
. . . [S]elected areas with highly developed or
which have the potential to be developed into
agro-industrial, industrial, tourist,
recreational, commercial, banking,
investment and financial centers whose metes
and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may
contain any or all of the following: industrial
estates (IEs), export processing zones
(EPZs), free trade zones and
tourist/recreational centers.21
The national territory of the Philippines
outside of the proclaimed borders of the
ECOZONE shall be referred to as the Customs
Territory.22
Section 8 of Rep. Act No. 7916, as
amended, mandates that the PEZA shall
manage and operate the ECOZONES as a
separate customs territory;23 thus, creating
the fiction that the ECOZONE is a foreign
territory.24 As a result, sales made by a
supplier in the Customs Territory to a
purchaser in the ECOZONE shall be treated as
an exportation from the Customs Territory.
Conversely, sales made by a supplier from
the ECOZONE to a purchaser in the Customs
Territory shall be considered as an
importation into the Customs Territory.
Given the preceding discussion, what would
be the VAT implication of sales made by a
supplier from the Customs Territory to an
ECOZONE enterprise?
chanroblesvirtualawlibrary
The Philippine VAT system adheres to
the Cross Border Doctrine, according to
which, no VAT shall be imposed to form
part of the cost of goods destined for
consumption outside of the territorial
border of the taxing authority. Hence,
actual export of goods and services from
the Philippines to a foreign country must
be free of VAT; while, those destined for
use or consumption within the
Philippines shall be imposed with ten
percent (10%) VAT.2 5
Applying said doctrine to the sale of goods,
properties, and services to and from the
ECOZONES,26 the BIR issued Revenue
Memorandum Circular (RMC) No. 74-99, on
15 October 1999. Of particular interest to the
present Petition is Section 3 thereof, which
reads'
SECTION 3. Tax Treatment Of Sales Made
By a VAT Registered Supplier from The
Customs Territory, To a PEZA Registered
Enterprise.'
(1) If the Buyer is a PEZA registered
enterprise which is subject to the 5% special
tax regime, in lieu of all taxes, except real
property tax, pursuant to R.A. No. 7916, as
amended:
(a) Sale of goods (i.e., merchandise).
'This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916, in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of service. 'This shall be treated
subject to zero percent (0%) VAT under
the "cross border doctrine" of the VAT
System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise
which is not embraced by the 5% special tax
regime, hence, subject to taxes under the
NIRC, e.g., Service Establishments which are
subject to taxes under the NIRC rather than
the 5% special tax regime:
(a) Sale of goods (i.e., merchandise).
'This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and
Sec. 23 of R.A. No. 7916 in relation to ART.
77(2) of the Omnibus Investments Code.
(b) Sale of Service. 'This shall be treated
subject to zero percent (0%) VAT under
the "cross border doctrine" of the VAT
System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods,
property or services made by a VAT
registered supplier from the Customs
Territory to any registered enterprise
operating in the ecozone, regardless of the
class or type of the latter's PEZA registration,
is actually qualified and thus legally entitled
to the zero percent (0%) VAT. Accordingly, all
sales of goods or property to such enterprise
made by a VAT registered supplier from the
Customs Territory shall be treated subject to
0% VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC, in relation to ART. 77(2) of the
Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT
registered suppliers from the Customs
Territory, shall be treated effectively subject
to the 0% VAT, pursuant to Section 108(B)
(3), NIRC, in relation to the provisions of R.A.
No. 7916 and the "Cross Border Doctrine" of
the VAT system.
This Circular shall serve as a sufficient basis
to entitle such supplier of goods, property or
services to the benefit of the zero percent
(0%) VAT for sales made to the
aforementioned ECOZONE enterprises and
shall serve as sufficient compliance to the
requirement for prior approval of zero-rating
imposed by Revenue Regulations No. 7-95
effective as of the date of the issuance of this
Circular.
Indubitably, no output VAT may be passed on
to an ECOZONE enterprise since it is a VAT-
exempt entity. The VAT treatment of sales to
it, however, varies depending on whether the
supplier from the Customs Territory is VAT-
registered or not.
Sales of goods, properties and services by a
VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be
treated as export sales. If such sales are
made by a VAT-registered supplier, they shall
be subject to VAT at zero percent (0%). In
zero-rated transactions, the VAT-registered
supplier shall not pass on any output VAT to
the ECOZONE enterprise, and at the same
time, shall be entitled to claim tax
credit/refund of its input VAT attributable to
such sales. Zero-rating of export sales
primarily intends to benefit the exporter
(i.e., the supplier from the Customs
Territory), who is directly and legally liable for
the VAT, making it internationally competitive
by allowing it to credit/refund the input VAT
attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise
made by a non-VAT or unregistered supplier
would only be exempt from VAT and the
supplier shall not be able to claim
credit/refund of its input VAT.
Even conceding, however, that respondent
Toshiba, as a PEZA-registered enterprise, is a
VAT-exempt entity that could not have
engaged in a VAT-taxable business, this Court
still believes, given the particular
circumstances of the present case, that it is
entitled to a credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-
registered enterprises availing of the
income tax holiday under Executive
Order No. 226, as amended, were
deemed subject to VAT.
In his Petition, petitioner CIR opposed the
grant of tax credit/refund to respondent
Toshiba, reasoning thus'
In the first place, respondent could not have
paid input taxes on its purchases of goods
and services from VAT-registered suppliers
because such purchases being zero-rated,
that is, no output tax was paid by the
suppliers, no input tax was shifted or passed
on to respondent. The VAT is an indirect tax
and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee
of the goods, properties or services (Section
105, 1997 Tax Code).
Secondly, Section 4.100-2 of Revenue
Regulations No. 7-95 provides:
"SEC. 4.100-2. Zero-rated sales. A zero-rated
sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall
not result in any output tax. However, the
input tax on his purchases of goods,
properties or services related to such zero-
rated sale shall be available as tax credit or
refund in accordance with these regulations."
From the foregoing, the VAT-registered
person who can avail as tax credit or
refund of the input tax on his purchases
of goods, services or properties is the
seller whose sale is zero-rated.
Applying the foregoing provision to the case
at bench, the VAT-registered supplier, whose
sale of goods and services to respondent is
zero-rated, can avail as tax credit or refund
the input taxes on its (supplier) own
purchases of goods and services related to its
zero-rated sale of goods and services to
respondent. On the other hand, respondent,
as the buyer in such zero-rated sale of goods
and services, could not have paid input taxes
for which it can claim as tax credit or
refund.27
Before anything else, this Court wishes to
point out that petitioner CIR is working on the
erroneous premise that respondent Toshiba is
claiming tax credit or refund of input VAT
based on Section 4.100-2,28 in relation to
Section 4.106-1(a),29 of RR No. 7-95, as
amended, which allows the tax credit/refund
of input VAT on zero-rated sales of goods,
properties or services. Instead, respondent
Toshiba is basing its claim for tax credit or
refund on Sec. 4.106-1(b) of the same
regulations, which allows a VAT-registered
person to apply for tax credit/refund of the
input VAT on its capital goods. While in the
former, the seller of the goods, properties or
services is the one entitled to the tax
credit/refund; in the latter, it is the purchaser
of the capital goods.
Nevertheless, regardless of his mistake as to
the basis for respondent Toshiba's application
for tax credit/refund, petitioner CIR validly
raised the question of whether any output
VAT was actually passed on to respondent
Toshiba which it could claim as input VAT
subject to credit/refund. If the VAT-registered
supplier from the Customs Territory did not
charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is
subject to zero-rated VAT, then respondent
Toshiba did not pay any input VAT on its
purchase of capital goods and it could not
claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered
supplier from the Customs Territory to a
PEZA-registered enterprise shall be
considered an export sale and subject to zero
percent (0%) VAT was clearly established
only on 15 October 1999, upon the issuance
of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered
enterprise was VAT-exempt depended on the
type of fiscal incentives availed of by the said
enterprise. This old rule on VAT-exemption or
liability of PEZA-registered enterprises,
followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals,
and even this Court,30 cannot be lightly
disregarded considering the great number of
PEZA-registered enterprises which did rely on
it to determine its tax liabilities, as well as, its
privileges.
According to the old rule, Section 23 of Rep.
Act No. 7916, as amended, gives the PEZA-
registered enterprise the option to choose
between two sets of fiscal incentives: (a) The
five percent (5%) preferential tax rate on its
gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday
provided under Executive Order No. 226,
otherwise known as the Omnibus Investment
Code of 1987, as amended.31
The five percent (5%) preferential tax rate on
gross income under Rep. Act No. 7916, as
amended, is in lieu of all taxes. Except for
real property taxes, no other national or local
tax may be imposed on a PEZA-registered
enterprise availing of this particular fiscal
incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226,
as amended, grants income tax holiday to
registered pioneer and non-pioneer
enterprises for six-year and four-year periods,
respectively.32 Those availing of this incentive
are exempt only from income tax, but shall be
subject to all other taxes, including the ten
percent (10%) VAT.
This old rule clearly did not take into
consideration the Cross Border Doctrine
essential to the VAT system or the fiction of
the ECOZONE as a foreign territory. It relied
totally on the choice of fiscal incentives of the
PEZA-registered enterprise. Again, for
emphasis, the old VAT rule for PEZA-
registered enterprises was based on their
choice of fiscal incentives: (1) If the PEZA-
registered enterprise chose the five percent
(5%) preferential tax on its gross income, in
lieu of all taxes, as provided by Rep. Act No.
7916, as amended, then it would be VAT-
exempt; (2) If the PEZA-registered enterprise
availed of the income tax holiday under Exec.
Order No. 226, as amended, it shall be
subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99,
which categorically declared that all sales of
goods, properties, and services made by a
VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be
subject to VAT, at zero percent (0%) rate,
regardless of the latter's type or class of PEZA
registration; and, thus, affirming the nature
of a PEZA-registered or an ECOZONE
enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from
the Customs Territory to respondent Toshiba
in the present Petition took place during the
first and second quarters of 1996, way before
the issuance of RMC No. 74-99, and when the
old rule was accepted and implemented by no
less than the BIR itself. Since respondent
Toshiba opted to avail itself of the income tax
holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the
ten percent (10%) VAT. It was very likely
therefore that suppliers from the Customs
Territory had passed on output VAT to
respondent Toshiba, and the latter, thus,
incurred input VAT. It bears emphasis that
the CTA, with the help of SGV & Co., the
independent accountant it commissioned to
make a report, already thoroughly reviewed
the evidence submitted by respondent
Toshiba consisting of receipts, invoices, and
vouchers, from its suppliers from the Customs
Territory. Accordingly, this Court gives due
respect to and adopts herein the CTA's
findings that the suppliers of capital goods
from the Customs Territory did pass on
output VAT to respondent Toshiba and the
amount of input VAT which respondent
Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue
Memorandum Circular (RMC) No. 42-2003,
issued on 15 July 2003, the BIR answered the
following question'
Q-5: Under Revenue Memorandum Circular
(RMC) No. 74-99, purchases by PEZA-
registered firms automatically qualify as zero-
rated without seeking prior approval from the
BIR effective October 1999.
1) Will the OSS-DOF Center still accept
applications from PEZA-registered claimants
who were allegedly billed VAT by their
suppliers before and during the effectivity of
the RMC by issuing VAT invoices/receipts?
chanroblesvirtualawlibrary
A-5(1): If the PEZA-registered enterprise is
paying the 5% preferential tax in lieu of all
other taxes, the said PEZA-registered
taxpayer cannot claim TCC or refund for the
VAT paid on purchases. However, if the
taxpayer is availing of the income tax holiday,
it can claim VAT credit provided:
A. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices
or receipts, whichever is applicable, with
shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99;
andcralawlibrary
c. The supplier issues a sworn statement
under penalties of perjury that it shifted the
VAT and declared the sales to the PEZA-
registered purchaser as taxable sales in its
VAT returns.
For invoices/receipts issued upon the
effectivity of RMC No. 74-99, the claims for
input VAT by PEZA-registered companies,
regardless of the type or class of PEZA
registration, should be denied.
Under RMC No. 42-2003, the DOF would still
accept applications for tax credit/refund filed
by PEZA-registered enterprises, availing of
the income tax holiday, for input VAT on their
purchases made prior to RMC No. 74-99.
Acceptance of applications essentially implies
processing and possible approval thereof
depending on whether the given conditions
are met. Respondent Toshiba's claim for tax
credit/refund arose from the very same
circumstances recognized by Q-5(1) and A-
5(1) of RMC No. 42-2003. It therefore seems
irrational and unreasonable for petitioner CIR
to oppose respondent Toshiba's application
for tax credit/refund of its input VAT, when
such claim had already been determined and
approved by the CTA after due hearing, and
even affirmed by the Court of Appeals; while
it could accept, process, and even approve
applications filed by other similarly-situated
PEZA-registered enterprises at the
administrative level.
III
Findings of fact by the CTA are respected
and adopted by this Court.
Finally, petitioner CIR, in a last desperate
attempt to block respondent Toshiba's claim
for tax credit/refund, challenges the
allegation of said respondent that it availed of
the income tax holiday under Exec. Order No.
226, as amended, rather than the five
percent (5%) preferential tax rate under Rep.
Act No. 7916, as amended. Undoubtedly, this
is a factual matter that should have been
raised and threshed out in the lower courts.
Giving it credence would belie petitioner CIR's
assertion that it is raising only issues of law in
its Petition that may be resolved without need
for reception of additional evidences. Once
more, this Court respects and adopts the
finding of the CTA, affirmed by the Court of
Appeals, that respondent Toshiba had indeed
availed of the income tax holiday under Exec.
Order No. 226, as amended.
WHEREFORE, based on the foregoing, this
Court AFFIRMS the decision of the Court of
Appeals in CA-G.R. SP. No. 59106, and the
order of the CTA in CTA Case No. 5593,
ordering said petitioner CIR to refund or, in
the alternative, to issue a tax credit certificate
to respondent Toshiba, in the amount
of P16,188,045.44, representing unutilized
input VAT for the first and second quarters of
1996.
SO ORDERED.
Puno, (Chairman), Austria-Martinez,
Callejo, Sr., and Tinga, JJ., concur.
Endnotes:
1
 Penned by Associate Justice Wenceslao I.
Agnir with Associate Justices Salvador J.
Valdez, Jr. and Mariano C. Del Castillo,
concurring; Rollo, pp. 26-36.
2
 Penned by Associate Judge Amancio Q. Saga
with Presiding Judge Ernesto D. Acosta and
Associate Judge Ramon O. De Veyra,
concurring; Id., pp. 37-48.
3
 Securities and Exchange Commission (SEC)
Certificate of Registration No. AS095-006536,
CTA Records, p. 75.
4
 Articles of Incorporation, Id., p. 76; Petition
for Review, Id., pp. 1-2.
5
 Philippine Economic Zone Authority (PEZA)
Certificate of Registration No. 95-99, Id., p.
88.
6
 Bureau of Internal Revenue (BIR) Certificate
of Registration No. 95-570-001544, Id., p.
99.
7
 Id., p. 90.
8
 Id., p. 91.
9
 Amended Petition for Review, Id., pp. 42-
43.
10
 Id., pp. 98-99.
11
 Id., pp. 100-101.
12
 Id., p. 58.
13
 During the hearing before the CTA on 27
May 1999, counsel for petitioner
Commissioner manifested that there was no
report of investigation from the One-Stop
Shop of the DOF and moved for the
submission of the case for decision without
presenting any evidence, which was granted
by the CTA, Id., p. 124.
14
 The CTA computed the amount as follows-
Should be Subject
Per Claim Per Return of the Claim
Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
CIR vs Toshiba Information Equipment (Phil.) G.R.
No. 150154, 9 August 2005
Facts:
Toshiba was claiming a refund for the input tax it paid on 
unutilized capital goods purchased. However, the CIR sai
d that it cannot because the capital goods and services it p
urchased are considered not used in VAT taxable business 
and therefore, it is not entitled to refund of input taxes. To
shiba, on the other hand, contended that it is PEZA-
registered and located within the ecozone and therefore fo
r, VAT-exempt entity. M

Issue:

Whether or not Toshiba is entitled to refund for the input t
ax it paid on unutilized capital goods purchased consideri
ng that it is registered with PEZA and located within the e
cozone.

Ruling:

Yes. CIR failed to differentiate between VAT-exempt tran
sactions from VAT-exempt entities. An exempt transactio
ns are transactions specifically listed in and expressly exe
mpted from VAT under the Tax Code without regard to th
e tax status, VAT
exempt or not, of the taxpayer. An exempt party, on the ot
her hand, is a person or entity granted VATexemption und
er the Tax Code, special law or an international agreement 
to which the Philippines is a signatory and by virtue of wh
ich its taxable transactions become exempt from VAT.

Toshiba, a PEZAregistered and located within a ecozone i
s a VATexempt entity because of Sec 8 of Ta 7916 which 
establishes the fiction that ecozones are foreign territory. 
Therefore, a supplier from the custom territory cannot pas
s on output VAT to an ecozone enterprise, like Toshiba, si
nce it is exempt

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO,
INC., Respondent.

DECISION
CARPIO, J.:
The Case
This petition for review1 seeks to set aside the 16
April 2002 Decision2 of the Court of Appeals in CA-
G.R. SP No. 66341 affirming the 8 August 2001
Decision3 of the Court of Tax Appeals (CTA). The
CTA ordered the Commissioner of Internal Revenue
(petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain
Scandinavian Contractor Mindanao, Inc.
(respondent).
The Antecedents
The CTA summarized the facts, which the Court of
Appeals adopted, as follows:
[Respondent] is a domestic corporation duly
organized and existing under and by virtue of the
laws of the Philippines with principal address located
at Daruma Building, Jose P. Laurel Avenue, Lanang,
Davao City.
It is represented that a foreign consortium composed
of Burmeister and Wain Scandinavian Contractor
A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered
into a contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium
appointed BWSC-Denmark as its coordination
manager.
BWSC-Denmark established [respondent] which
subcontracted the actual operation and maintenance
of NAPOCOR’s two power barges as well as the
performance of other duties and acts which
necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the
Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso
component is deposited directly to the Consortium’s
bank accounts in Denmark and Japan, while the
Peso-denominated component is deposited in a
separate and special designated bank account in the
Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to
the Philippines through the banking system.
In order to ascertain the tax implications of the
above transactions, [respondent] sought a ruling
from the BIR which responded with BIR Ruling No.
023-95 dated February 14, 1995, declaring therein
that if [respondent] chooses to register as a VAT
person and the consideration for its services is
paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the 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] by the Revenue
District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its
quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales
of P147,317,189.62 with VAT input taxes
of P3,361,174.14, detailed as follows:

Exh Date Zero-Rated VAT Input

Qtr.
. Filed Sales Tax

04- P 33,019,651.0
1st E P608,953.48
18-96 7
07-
2nd F 37,108,863.33 756,802.66
16-96
10-
3rd G 34,196,372.35 930,279.14
14-96
01-
4th H 42,992,302.87 1,065,138.86
20-97

Total P147,317,189.6 P3,361,174.1

s 2 4

On December 29, 1997, [respondent] availed of the

Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No.
5-96 dated February 20, 1996 to be applicable to its
case. Revenue Regulations No. 5-96 provides in
part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
Revenue Regulations No. 7-95 are hereby amended
to read as follows:
Section 4.102-2(b)(2) – "Services other than
processing, manufacturing or repacking for other
persons doing business outside the Philippines for
goods which are subsequently exported, as well as
services by a resident to a non-resident foreign
client such as project studies, information services,
engineering and architectural designs and other
similar services, the consideration for which is paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue
Regulations, [respondent] subjected its sale of
services to the Consortium to the 10% VAT in the
total amount of P103,558,338.11 representing April
to December 1996 sales since said Revenue
Regulations No. 5-96 became effective only on April
1996. The sum of P43,893,951.07, representing
January to March 1996 sales was subjected to zero
rate. Consequently, [respondent] filed its 1996
amended VAT return consolidating therein the VAT
output and input taxes for the four calendar quarters
of 1996. It paid the amount of P6,994,659.67
through BIR’s collecting agent, PCIBank, as its
output tax liability for the year 1996, computed as
follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure
VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-
95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero
percent (0%)."
On the strength of the aforementioned rulings,
[respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue
District No. 113 of the BIR. [Respondent] believed
that it erroneously paid the output VAT for 1996 due
to its availment of the Voluntary Assessment
Program (VAP) of the BIR.4
On 27 December 1999, respondent filed a petition
for review with the CTA in order to toll the running of
the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered
petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTA’s
ruling stated:
[Respondent’s] sale of services to the Consortium
[was] paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted
for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established
by various BPI Credit Memos showing remittances in
Danish Kroner (DKK) and US dollars (US$) as
payments for the specific invoices billed by
[respondent] to the consortium. These remittances
were further certified by the Branch Manager x x x of
BPI-Davao Lanang Branch to represent payments
for sub-contract fees that came from Den Danske
Aktieselskab Bank-Denmark for the account of
[respondent]. Clearly, [respondent’s] sale of services
to the Consortium is subject to VAT at 0% pursuant
to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to
the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February
15, 1995, and later by VAT Ruling No. 003-99 dated
January 7,1999, x x x.
Since it is apparent that the payments for the
services rendered by [respondent] were indeed
subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of services.
xxx
x x x Considering the principle of solutio
indebiti which requires the return of what has been
delivered by mistake, the [petitioner] is obligated to
issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the Court of
Appeals, which dismissed the petition for lack of
merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected
petitioner’s view that since respondent’s services are
not destined for consumption abroad, they are not of
the same nature as project studies, information
services, engineering and architectural designs, and
other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject
to 0% VAT. Thus, according to petitioner,
respondent’s services cannot legally qualify for 0%
VAT but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s
contention that under VAT Ruling No. 040-98,
respondent’s services should be destined for
consumption abroad to enjoy zero-rating. Contrary
to petitioner’s interpretation, there are two kinds of
transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a)
services other than repacking goods for other
persons doing business outside the Philippines
which goods are subsequently exported; and (b)
services by a resident to a non-resident foreign
client, such as project studies, information
services, engineering and architectural designs
and other similar services, the consideration for
which is paid for in acceptable foreign currency
and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng
Pilipinas (BSP).9
The Court of Appeals stated that "only the first
classification is required by the provision to be
consumed abroad in order to be taxed at zero rate.
In x x x the absence of such express or implied
stipulation in the statute, the second classification
need not be consumed abroad."10
The Court of Appeals further held that assuming
petitioner’s interpretation of Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment
to the Tax Code. Petitioner went beyond merely
providing the implementing details by adding
another requirement to zero-rating. "This is indicated
by the additional phrase ‘as well as services by a
resident to a non-resident foreign client, such as
project studies, information services and engineering
and architectural designs and other similar services.’
In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a
resident to a non-resident; and (b) these must be in
the nature of project studies, information services,
etc."11
The Court of Appeals explained that under Section
108(b)(2) of the Tax Code,12 for services which were
performed in the Philippines to enjoy zero-rating,
these must comply only with two requisites, to wit:
(1) payment in acceptable foreign currency and (2)
accounted for in accordance with the rules of the
BSP. Section 108(b)(2) of the Tax Code does not
provide that services must be "destined for
consumption abroad" in order to be VAT zero-
rated.13
The Court of Appeals disagreed with petitioner’s
argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if
indeed the ‘destination principle’ underlies and is the
basis of the VAT laws, then petitioner’s proper
remedy would be to recommend an amendment of
Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the
terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in
this case."15
The Issue
The lone issue for resolution is whether respondent
is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of
the instant petition is not on the ground that
respondent’s services are subject to 0% VAT.
Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-9517 and
VAT Ruling No. 003-99,18 which held that
respondent’s services are subject to 0% VAT and
which respondent invoked in applying for refund of
the output VAT.
Section 102(b) of the Tax Code,19 the applicable
provision in 1996 when respondent rendered the
services and paid the VAT in question, enumerates
which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The
following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services are
paid for in acceptable foreign currency and
accounted for in accordance with the rules and
 regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those mentioned in
the preceding sub-paragraph, the
consideration for which is paid for in
acceptable foreign currency and accounted
for in accordance with the rules and
regulations of the Bangko Sentral ng
Pilipinas (BSP);
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects the
supply of such services to zero rate;
(4) Services rendered to vessels engaged
exclusively in international shipping; and
(5) Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of
total annual production. (Emphasis supplied)
In insisting that its services should be zero-rated,
respondent claims that it complied with the
requirements of the Tax Code for zero rating under
the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its
service fees was in acceptable foreign currency, (2)
there was inward remittance of the foreign currency
into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules.
Moreover, respondent contends that its services
which "constitute the actual operation and
management of two (2) power barges in Mindanao"
are not "even remotely similar to project studies,
information services and engineering and
architectural designs under Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96." As such,
respondent’s services need not be "destined to be
consumed abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be
other than "processing, manufacturing or repacking
of goods" and that payment for such services be in
acceptable foreign currency accounted for in
accordance with BSP rules. Another essential
condition for qualification to zero-rating under
Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines.
While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b)
where the listed services must be "for other persons
doing business outside the Philippines." The phrase
"for other persons doing business outside the
Philippines" not only refers to the services
enumerated in the first paragraph of Section 102(b),
but also pertains to the general term "services"
appearing in the second paragraph of Section
102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise
be performed for persons doing business outside the
Philippines.
This can only be the logical interpretation of Section
102(b)(2). If the provider and recipient of the "other
services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant.
Otherwise, those subject to the regular VAT under
Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly
remitted by the recipient of services. To interpret
Section 102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to make
the payment of the regular VAT under Section
102(a) dependent on the generosity of the taxpayer.
The provider of services can choose to pay the
regular VAT or avoid it by stipulating payment in
foreign currency inwardly remitted by the payer-
recipient. Such interpretation removes Section
102(a) as a tax measure in the Tax Code, an
interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in
"acceptable foreign currency" under BSP rules,
the law clearly envisions the payer-recipient of
services to be doing business outside the
Philippines. Only those not doing business in the
Philippines can be required under BSP rules20 to pay
in acceptable foreign currency for their purchase of
goods or services from the Philippines.
In a domestic transaction, where the provider and
recipient of services are both doing business in the
Philippines, the BSP cannot require any party to
make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are
in the nature of export sales since the payer-
recipient of services is doing business outside the
Philippines. Under BSP rules,21 the proceeds of
export sales must be reported to the Bangko Sentral
ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2)
to account for the foreign currency proceeds to the
BSP. The same rationale does not apply if the
provider and recipient of the services are both doing
business in the Philippines since their transaction is
not in the nature of an export sale even if payment is
denominated in foreign currency.
Further, when the provider and recipient of services
are both doing business in the Philippines, their
transaction falls squarely under Section 102(a)
governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of
services subject to the regular VAT, unless of course
the transaction falls under the other provisions of
Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices
other than those mentioned in the preceding
subparagraph," the legislative intent is that only the
services are different between subparagraphs 1 and
2. The requirements for zero-rating, including the
essential condition that the recipient of services is
doing business outside the Philippines, remain the
same under both subparagraphs.
Significantly, the amended Section
108(b)22 [previously Section 102(b)] of the present
Tax Code clarifies this legislative intent. Expressly
included among the transactions subject to 0% VAT
are "[s]ervices other than those mentioned in the
[first] paragraph [of Section 108(b)] rendered to a
person engaged in business conducted outside
the Philippines or to a nonresident person not
engaged in business who is outside the
Philippines when the services are performed, the
consideration for which is paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the BSP."
In this case, the payer-recipient of respondent’s
services is the Consortium which is a joint-
venture doing business in the Philippines. While
the Consortium’s principal members are non-
resident foreign corporations, the Consortium
itself is doing business in the Philippines. This is
shown clearly in BIR Ruling No. 023-95 which states
that the contract between the Consortium and
NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994
requesting for a clarification of the tax implications of
a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S
("BWSC"), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred
to hereinafter as the "Consortium", and the National
Power Corporation ("NAPOCOR") for the operation
and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR
for a 15-year term.23 (Emphasis supplied)
Considering this length of time, the Consortium’s
operation and maintenance of NAPOCOR’s power
barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of
the services must be a person doing business
outside the Philippines. Therefore, respondent’s
services to the Consortium, not being supplied to a
person doing business outside the Philippines,
cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium,
operates and maintains NAPOCOR’s power barges
in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign
currency outwardly remitted. In turn, the Consortium
pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP
rules. This payment scheme does not entitle
respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch),24 the
place of payment is immaterial, much less is the
place where the output of the service is ultimately
used. An essential condition for entitlement to 0%
VAT under Section 102(b)(1) and (2) is that the
recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of
the services is the Consortium, which is doing
business not outside, but within the Philippines
because it has a 15-year contract to operate and
maintain NAPOCOR’s two 100-megawatt power
barges in Mindanao.
The Court recognizes the rule that the VAT system
generally follows the "destination principle" (exports
are zero-rated whereas imports are taxed).
However, as the Court stated in American Express,
there is an exception to this rule.25 This exception
refers to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For
services covered by Section 102(b)(1) and (2), the
recipient of the services must be a person doing
business outside the Philippines. Thus, to be exempt
from the destination principle under Section 102(b)
(1) and (2), the services must be (a) performed in
the Philippines; (b) for a person doing business
outside the Philippines; and (c) paid in acceptable
foreign currency accounted for in accordance with
BSP rules.
Respondent’s reliance on the ruling in American
Express26 is misplaced. That case involved a
recipient of services, specifically American Express
International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court
stated:
Respondent [American Express International, Inc.
(Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables
belonging to its non-resident foreign client [American
Express International, Inc. (Hongkong Branch)], for
which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in accordance
with BSP rules and regulations. x x x x27 (Emphasis
supplied)
In contrast, this case involves a recipient of services
– the Consortium – which is doing business in the
Philippines. Hence, American Express’ services
were subject to 0% VAT, while respondent’s
services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess
output tax, respondent relied on VAT Ruling No.
003-99,28 which reconfirmed BIR Ruling No. 023-
9529 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero
percent (0%)." Respondent’s reliance on these BIR
rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA
challenging respondent’s claim for refund effectively
serves as a revocation of VAT Ruling No. 003-99
and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it
will prejudice respondent. Changing respondent’s
status will deprive respondent of a refund of a
substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any
revocation of a ruling by the Commissioner of
Internal Revenue shall not be given retroactive
application if the revocation will prejudice the
taxpayer. Further, there is no showing of the
existence of any of the exceptions enumerated in
Section 246 of the Tax Code for the retroactive
application of such revocation.
However, upon the filing of petitioner’s Answer dated
2 March 2000 before the CTA contesting
respondent’s claim for refund, respondent’s services
shall be subject to the regular 10% VAT.31 Such filing
is deemed a revocation of VAT Ruling No. 003-99
and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
DANTE O.
CONCHITA CARPIO
TINGA
MORALES
Asscociate
Associate Justice
Justice
PRESBITERO J. VELASCO, JR.
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision
had been reached in consultation before the case
was assigned to the writer of the opinion of the
Court’s Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the
Constitution, and the Division Chairperson’s
Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before
the case was assigned to the writer of the opinion of
the Court’s Division.
REYNATO S. PUNO
Chief Justice

Footnotes
1
 Under Rule 45 of the Rules of Court.
2
 Penned by Associate Justice Bernardo P.
Abesamis, with the concurrence of Associate
Justices Eubulo G. Verzola and Perlita J. Tria
Tirona. Rollo, pp. 22-37.
 Penned by Presiding Judge Ernesto D. Acosta,
3

with the concurrence of Associate Judge

Amancio Q. Saga. Id. at 38-47.
4
 Id. at 38-41.
5
 Id. at 43-46.
6
 Id. at 37.
7
 This provision reads:
(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.
8
 Rollo, p. 28.
9
 Id. at 29-30.
10
 Id. at 30.
11
 Id. at 33, 35.
12
 Refers to Republic Act No. 8424 otherwise
known as the Tax Reform Act of 1997 which
took effect on 1 January 1998.
13
 Rollo, p. 34.
14
 Id. at 35.
15
 Id. at 36.
16
 Id. at 12.
  Issued by then
17
Commissioner Liwayway
Vinzons-Chato.
 Issued by then Commissioner of Internal
18

Revenue Beethoven L. Rualo.

19
 In this case, the applicable Tax Code refers to
the National Internal Revenue Code (NIRC) of
1986 as amended by Executive Order No. 273
and Republic Act No. 7716 dated 25 July 1987
and 5 May 1994, respectively. At the time
respondent secured BIR Ruling No. 023-95
dated 14 February 1995, Section 108 of the Tax
Code was numbered Section 102. The
renumbering took effect on 1 January 1998
pursuant to Republic Act No. 8424, otherwise
known as the Tax Reform Act of 1997.
 See Chapter II (B) on Export Trade
20

Transactions, BSP Circular No. 1389 dated 13

April 1993, otherwise known as the
Consolidated Foreign Exchange Rules and
Regulations.
 Id.
21

 As amended by Republic Act No. 9337 (AN

22

ACT AMENDING SECTIONS 27, 28, 34, 106,

107, 108, 109, 110, 111, 112, 113, 114, 116,
117, 119, 121, 148, 151, 236, 237 AND 288 OF
THE NATIONAL INTERNAL REVENUE CODE
OF 1997, AS AMENDED, AND FOR OTHER
PURPOSES) which took effect on 1 July 2005.
 Rollo, p. 92.
23

 G.R. No. 152609, 29 June 2005, 462 SCRA

24

197.
 Id.
25

26
 Id. Respondent relied on the ruling of the
Court of Appeals in the American Express case
since at the time there was yet no Supreme
Court ruling on the case.
 Id. at 208.
27

 Rollo, pp. 95-96.

28

 Id. at 92-94.
29

 See Commissioner of Internal Revenue v.

30

American Express International, Inc. (Philippine

Branch), supra note 24.
31
 The Tax Code, as amended by Republic Act
No. 9337 which took effect on 1 July 2005,
increased the rate of the VAT from 10% to 12%.
The relevant provisions of Republic Act No.
9337 (AN ACT AMENDING SECTIONS 27, 28,
34, 106, 107, 108, 109, 110, 111, 112, 113, 114,
116, 117, 119, 121, 148, 151, 236, 237 AND 288
OF THE NATIONAL INTERNAL REVENUE
CODE OF 1997, AS AMENDED, AND FOR
OTHER PURPOSES) state:
SEC. 6. Section 108 of the same Code, as
amended, is hereby further amended to read
as follows:
"SEC. 108. Value-added Tax on Sale of
Services and Use or Lease of Properties. —
"(A) Rate and Base of Tax. — There
shall be levied, assessed and collected,
a value-added tax equivalent to ten
percent (10%) of gross receipts derived
from the sale or exchange of services,
including the use or lease of properties:
Provided, That the President, upon
the recommendation of the Secretary
of Finance, shall, effective January 1,
2006, raise the rate of value-added
tax to twelve percent (12%), after any
of the following conditions has been
satisfied:
"(i) Value-added tax collection as a
percentage of Gross Domestic
 Product (GDP) of the previous year
exceeds two and four-fifth percent
(2 4/5%); or
"(ii) National government deficit as a
percentage of GDP of the previous
year exceeds one and one-half
percent (1 ½%).
x x x x (Emphasis supplied)
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
PERSONS LIABLE TO VAT
G.R. No. 193301               March 11, 2013
MINDANAO II GEOTHERMAL
PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL
PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing
the Decision2 promulgated on 10 March 2010 as well
as the Resolution3 promulgated on 28 July 2010 by
the Court of Tax Appeals En Banc (CTA En Banc) in
CTA EB No. 513. The CTA En Banc affirmed the 22
September 2008 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 (CT A Case No.
7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered
with the Securities and Exchange Commission,
value added taxpayers registered with the Bureau of
Internal Revenue (BIR), and Block Power Production
Facilities accredited by the Department of Energy.
Republic Act No. 9136, or the Electric Power
Industry Reform Act of 2000 (EPIRA), effectively
amended Republic Act No. 8424, or the Tax Reform
Act of 1997 (1997 Tax Code),9 when it decreed that
sales of power by generation companies shall be
subjected to a zero rate of VAT.10 Pursuant to
EPIRA, Mindanao I and II filed with the CIR claims
for refund or tax credit of accumulated unutilized
and/or excess input taxes due to VAT zero-rated
sales in 2003. Mindanao I and II filed their claims in
2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division
cases, CTA Case Nos. 7227, 7287, and 7317, which
were consolidated as CTA EB No. 513. CTA Case
Nos. 7227, 7287, and 7317 claim a tax refund or
credit of Mindanao II’s alleged excess or unutilized
input taxes due to VAT zero-rated sales. In CTA
Case No. 7227, Mindanao II claims a tax refund or
credit of ₱3,160,984.69 for the first quarter of 2003.
In CTA Case No. 7287, Mindanao II claims a tax
refund or credit of ₱1,562,085.33 for the second
quarter of 2003. In CTA Case No. 7317, Mindanao II
claims a tax refund or credit of ₱3,521,129.50 for the
third and fourth quarters of 2003.
The CTA First Division’s narration of the pertinent
facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered
into a Built (sic)-Operate-Transfer (BOT) contract
with the Philippine National Oil Corporation – Energy
Development Company (PNOC-EDC) for finance,
engineering, supply, installation, testing,
commissioning, operation, and maintenance of a
48.25 megawatt geothermal power plant, provided
that PNOC-EDC shall supply and deliver steam to
Mindanao II at no cost. In turn, Mindanao II shall
convert the steam into electric capacity and energy
for PNOC-EDC and shall deliver the same to the
National Power Corporation (NPC) for and in
behalf of PNOC-EDC. Mindanao II alleges that its
sale of generated power and delivery of electric
capacity and energy of Mindanao II to NPC for and
in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT
zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997
modified the VAT rate applicable to sales of
generated power by generation companies from ten
(10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes
domestic purchases of goods and services and
accumulates therefrom creditable input taxes.
Pursuant to the provisions of the National Internal
Revenue Code (NIRC), Mindanao II alleges that it
can use its accumulated input tax credits to offset its
output tax liability. Considering, however that its only
revenue-generating activity is VAT zero-rated under
RA No. 9136, Mindanao II’s input tax credits remain
unutilized.
Thus, on the belief that its sales qualify for VAT
zero-rating, Mindanao II adopted the VAT zero-
rating of the EPIRA in computing for its VAT payable
when it filed its Quarterly VAT Returns on the
following dates:

CTA Period Date of Filing

Case Covered Original Amended
No. (2003) Return Return
7227 1st April 23, July 3,
Quarter 2003 2002 (sic),
April 1,
2004 &
October
22, 2004
7287 2nd July 22, April 1,
Quarter 2003 2004
7317 3rd Oct. 27, April 1,
Quarter 2003 2004
7317 4th Jan. 26, April 1,
Quarter 2004 2204

Considering that it has accumulated unutilized

creditable input taxes from its only income-
generating activity, Mindanao II filed an application
for refund and/or issuance of tax credit certificate
with the BIR’s Revenue District Office at Kidapawan
City on April 13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for
refund by Mindanao II remains unacted upon by the
CIR. Hence, these three petitions filed on April 22,
2005 covering the 1st quarter of 2003; July 7, 2005
for the 2nd quarter of 2003; and September 9, 2005
for the 3rd and 4th quarters of 2003. At the instance
of Mindanao II, these petitions were consolidated on
March 15, 2006 as they involve the same parties
and the same subject matter. The only difference
lies with the taxable periods involved in each
petition.11
The Court of Tax Appeals’ Ruling: Division
In its 22 September 2008 Decision, 12 the CTA First
Division found that Mindanao II satisfied the twin
requirements for VAT zero rating under EPIRA: (1) it
is a generation company, and (2) it derived sales
from power generation. The CTA First Division also
stated that Mindanao II complied with five
requirements to be entitled to a refund:
1. There must be zero-rated or effectively zero-
rated sales;
 2. That input taxes were incurred or paid;
3. That such input VAT payments are directly
attributable to zero-rated sales or effectively
zero-rated sales;
4. That the input VAT payments were not
applied against any output VAT liability; and
5. That the claim for refund was filed within the
two-year prescriptive period.13
With respect to the fifth requirement, the CTA First
Division tabulated the dates of filing of Mindanao II’s
return as well as its administrative and judicial
claims, and concluded that Mindanao II’s
administrative and judicial claims were timely filed in
compliance with this Court’s ruling in Atlas
Consolidated Mining and Development Corporation
v. Commissioner of Internal Revenue (Atlas). 14 The
CTA First Division declared that the two-year
prescriptive period for filing a VAT refund claim
should not be counted from the close of the quarter
but from the date of the filing of the VAT return. As
ruled in Atlas, VAT liability or entitlement to a refund
can only be determined upon the filing of the
quarterly VAT return.

CT Perio Date Filing

 A d Origi Amen Administr Judic
Ca Cove nal ded ative ial
se red Retu Return Return Clai
No. (2003 rn m
)
72 1st 23 1 April 13 April 22
27 Quart April 2004 2005 April
er 2003 2005
72 2nd 22 1 April 13 April 7
87 Quart July 2004 2005 July
er 2003 2005
73 3rd 25 1 April 13 April 9
17 Quart Oct. 2004 2005 Sept.
er 2003 2005
73 4th 26 1 April 13 April 9
17 Quart Jan. 2004 2005 Sept.
er 2004 2005
15

Thus, counting from 23 April 2003, 22 July 2003, 25

October 2003, and 26 January 2004, when
Mindanao II filed its VAT returns, its administrative
claim filed on 13 April 2005 and judicial claims filed
on 22 April 2005, 7 July 2005, and 9 September
2005 were timely filed in accordance with Atlas.
The CTA First Division found that Mindanao II is
entitled to a refund in the modified amount of
₱7,703,957.79, after disallowing ₱522,059.91 from
input VAT16 and deducting ₱18,181.82 from
Mindanao II’s sale of a fully depreciated
₱200,000.00 Nissan Patrol. The input taxes
amounting to ₱522,059.91 were disallowed for
failure to meet invoicing requirements, while the
input VAT on the sale of the Nissan Patrol was
reduced by ₱18,181.82 because the output VAT for
the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Division’s 22
September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of
SEVEN MILLION SEVEN HUNDRED THREE
THOUSAND NINE HUNDRED FIFTY SEVEN AND
79/100 PESOS (₱7,703,957.79) representing its
unutilized input VAT for the four (4) quarters of the
taxable year 2003.
SO ORDERED.17
MOTION FOR RECONSIDERATION
Mindanao II filed a motion for partial
reconsideration.18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction
and is not incidental to its VAT zero-rated
operations. Moreover, the disallowed input taxes
substantially complied with the requirements for
refund or tax credit.
The CIR also filed a motion for partial
reconsideration. It argued that the judicial claims for
the first and second quarters of 2003 were filed
beyond the period allowed by law, as stated in
Section 112(A) of the 1997 Tax Code. The CIR
further stated that Section 229 is a general
provision, and governs cases not covered by
Section 112(A). The CIR countered the CTA First
Division’s 22 September 2008 decision by citing this
Court’s ruling in Commisioner of Internal Revenue v.
Mirant Pagbilao Corporation (Mirant),19 which stated
that unutilized input VAT payments must be claimed
within two years reckoned from the close of the
taxable quarter when the relevant sales were made
regardless of whether said tax was paid.
The CTA First Division denied Mindanao II’s motion
for partial reconsideration, found the CIR’s motion
for partial reconsideration partly meritorious, and
rendered an Amended Decision20 on 26 June 2009.
The CTA First Division stated that the claim for
refund or credit with the BIR and the subsequent
appeal to the CTA must be filed within the two-year
period prescribed under Section 229. The two-year
prescriptive period in Section 229 was denominated
as a mandatory statute of limitations. Therefore,
Mindanao II’s claims for refund for the first and
second quarters of 2003 had already prescribed.
The CTA First Division found that the records of
Mindanao II’s case are bereft of evidence that the
sale of the Nissan Patrol is not incidental to
Mindanao II’s VAT zero-rated operations. Moreover,
Mindanao II’s submitted documents failed to
substantiate the requisites for the refund or credit
claims.
The CTA First Division modified its 22 September
2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal
Partnership in the modified amount of TWO
MILLION NINE HUNDRED EIGHTY THOUSAND
EIGHT HUNDRED EIGHTY SEVEN AND 77/100
PESOS (₱2,980,887.77) representing its unutilized
input VAT for the third and fourth quarters of the
taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as
CTA EB No. 513, before the CTA En Banc.
The Court of Tax Appeals’ Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its
Decision23 in CTA EB No. 513 and denied Mindanao
II’s petition. The CTA En Banc ruled that (1) Section
112(A) clearly provides that the reckoning of the
two-year prescriptive period for filing the application
for refund or credit of input VAT attributable to zero-
rated sales or effectively zero-rated sales shall be
counted from the close of the taxable quarter when
the sales were made; (2) the Atlas and Mirant cases
applied different tax codes: Atlas applied the 1977
Tax Code while Mirant applied the 1997 Tax Code;
(3) the sale of the fully-depreciated Nissan Patrol is
incidental to Mindanao II’s VAT zero-rated
transactions pursuant to Section 105; (4) Mindanao
II failed to comply with the substantiation
requirements provided under Section 113(A) in
relation to Section 237 of the 1997 Tax Code as
implemented by Section 4.104-1, 4.104-5, and
4.108-1 of Revenue Regulation No. 7-95; and (5) the
doctrine of strictissimi juris on tax exemptions cannot
be relaxed in the present case.
The dispositive portion of the CTA En Banc’s 10
March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing
considerations, the Petition for Review en banc is
DISMISSED for lack of merit. Accordingly, the
Decision dated September 22, 2008 and the
Amended Decision dated June 26, 2009 issued by
the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July
2010 denying for lack of merit Mindanao II’s Motion
for Reconsideration.26 The CTA En Banc highlighted
the following bases of their previous ruling:
1. The Supreme Court has long decided that the
claim for refund of unutilized input VAT must be
filed within two (2) years after the close of the
taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter
whose decisions all other courts should take
bearings.
 3. The words of the law are clear, plain, and free
from ambiguity; hence, it must be given its literal
meaning and applied without any
interpretation. 27

G.R. No. 194637

Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by
the CTA EB: CTA EB Case Nos. 476 and 483. Both
CTA EB cases consolidate three cases from the
CTA Second Division: CTA Case Nos. 7228, 7286,
and 7318. CTA Case Nos. 7228, 7286, and 7318
claim a tax refund or credit of Mindanao I’s
accumulated unutilized and/or excess input taxes
due to VAT zero-rated sales. In CTA Case No. 7228,
Mindanao I claims a tax refund or credit of
₱3,893,566.14 for the first quarter of 2003. In CTA
Case No. 7286, Mindanao I claims a tax refund or
credit of ₱2,351,000.83 for the second quarter of
2003. In CTA Case No. 7318, Mindanao I claims a
tax refund or credit of ₱7,940,727.83 for the third
and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The
CTA Second Division’s narration of the pertinent
facts is as follows:
xxxx
In December 1994, Mindanao I entered into a
contract of Build-Operate-Transfer (BOT) with the
Philippine National Oil Corporation – Energy
Development Corporation (PNOC-EDC) for the
finance, design, construction, testing,
commissioning, operation, maintenance and repair
of a 47-megawatt geothermal power plant. Under
the said BOT contract, PNOC-EDC shall supply and
deliver steam to Mindanao I at no cost. In turn,
Mindanao I will convert the steam into electric
capacity and energy for PNOC-EDC and shall
subsequently supply and deliver the same to the
National Power Corporation (NPC), for and in behalf
of PNOC-EDC.
Mindanao I’s 47-megawatt geothermal power plant
project has been accredited by the Department of
Energy (DOE) as a Private Sector Generation
Facility, pursuant to the provision of Executive Order
No. 215, wherein Certificate of Accreditation No. 95-
037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136
took effect, and the relevant provisions of the
National Internal Revenue Code (NIRC) of 1997
were deemed modified. R.A. No. 9136, also known
as the "Electric Power Industry Reform Act of 2001
(EPIRA), was enacted by Congress to ordain
reforms in the electric power industry, highlighting,
among others, the importance of ensuring the
reliability, security and affordability of the supply of
electric power to end users. Under the provisions of
this Republic Act and its implementing rules and
regulations, the delivery and supply of electric
energy by generation companies became VAT zero-
rated, which previously were subject to ten percent
(10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the
VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to
zero percent (0%). Thus, Mindanao I adopted the
VAT zero-rating of the EPIRA in computing for its
VAT payable when it filed its VAT Returns, on the
belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess
creditable input taxes in its Quarterly VAT Returns
for the first, second, third, and fourth quarters of
taxable year 2003, which were subsequently
amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR
separate administrative claims for the issuance of
tax credit certificate on its alleged unutilized or
excess input taxes for taxable year 2003, in the
accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I
elevated its claims before this Court on April 22,
2005, July 7, 2005, and September 9, 2005
docketed as CTA Case Nos. 7228, 7286, and 7318,
respectively. However, on October 10, 2005,
Mindanao I received a copy of the letter dated
September 30, 2003 (sic) of the BIR denying its
application for tax credit/refund.28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division
rendered its Decision29 in CTA Case Nos. 7228,
7286, and 7318. The CTA Second Division found
that (1) pursuant to Section 112(A), Mindanao I can
only claim 90.27% of the amount of substantiated
excess input VAT because a portion was not
reported in its quarterly VAT returns; (2) out of the
₱14,185,294.80 excess input VAT applied for
refund, only ₱11,657,447.14 can be considered
substantiated excess input VAT due to
disallowances by the Independent Certified Public
Accountant, adjustment on the disallowances per
the CTA Second Division’s further verification, and
additional disallowances per the CTA Second
Division’s further verification;
(3) Mindanao I’s accumulated excess input VAT for
the second quarter of 2003 that was carried over to
the third quarter of 2003 is net of the claimed input
VAT for the first quarter of 2003, and the same
procedure was done for the second, third, and fourth
quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year
prescriptive period reckoned from the respective
dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Division’s
24 October 2008 Decision reads:
WHEREFORE, premises considered, the
consolidated Petitions for Review are hereby
PARTIALLY GRANTED. Accordingly, the CIR is
hereby ORDERED TO ISSUE A TAX CREDIT
CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED TWENTY
THREE THOUSAND ONE HUNDRED SEVENTY
SEVEN PESOS AND 53/100 (₱10,523,177.53)
representing Mindanao I’s unutilized input VAT for
the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration
with motion for Clarification31 on 11 November 2008.
It claimed that the CTA Second Division should not
have allocated proportionately Mindanao I’s
unutilized creditable input taxes for the taxable year
2003, because the proportionate allocation of the
amount of creditable taxes in Section 112(A) applies
only when the creditable input taxes due cannot be
directly and entirely attributed to any of the zero-
rated or effectively zero-rated sales. Mindanao I
claims that its unreported collection is directly
attributable to its VAT zero-rated sales. The CTA
Second Division denied Mindanao I’s motion and
maintained the proportionate allocation because
there was a portion of the gross receipts that was
undeclared in Mindanao I’s gross receipts.
The CIR also filed a motion for partial
reconsideration32 on 11 November 2008. It claimed
that Mindanao I failed to exhaust administrative
remedies before it filed its petition for review. The
CTA Second Division denied the CIR’s motion, and
cited Atlas33 as the basis for ruling that it is more
practical and reasonable to count the two-year
prescriptive period for filing a claim for refund or
credit of input VAT on zero-rated sales from the date
of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second Division’s
10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s
Motion for Partial Reconsideration and Mindanao I’s
Motion for Partial Reconsideration with Motion for
Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its
Decision35 in CTA EB Case Nos. 476 and 483 and
denied the petitions filed by the CIR and Mindanao I.
The CTA En Banc found no new matters which have
not yet been considered and passed upon by the
CTA Second Division in its assailed decision and
resolution.
The dispositive portion of the CTA En Banc’s 31
May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions
for Review are hereby DISMISSED for lack of merit.
Accordingly, the October 24, 2008 Decision and
March 10, 2009 Resolution of the CTA Former
Second Division in CTA Case Nos. 7228, 7286, and
7318, entitled "Mindanao I Geothermal Partnership
vs. Commissioner of Internal Revenue" are hereby
AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for
Reconsideration of the CTA En Banc’s 31 May 2010
Decision. In an Amended Decision promulgated on
24 November 2010, the CTA En Banc agreed with
the CIR’s claim that Section 229 of the NIRC of 1997
is inapplicable in light of this Court’s ruling in Mirant.
The CTA En Banc also ruled that the procedure
prescribed under Section 112(D) now 112(C)37 of the
1997 Tax Code should be followed first before the
CTA En Banc can act on Mindanao I’s claim. The
CTA En Banc reconsidered its 31 May 2010
Decision in light of this Court’s ruling in
Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Banc’s 24
November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with
the BIR its Quarterly VAT Returns for the First
Quarter of 2003. Pursuant to Section 112(A) of
the NIRC of 1997, as amended, Mindanao I has
two years from March 31, 2003 or until March
 31, 2005 within which to file its administrative
claim for refund;
(2) On April 4, 2005, Mindanao I applied for an
administrative claim for refund of unutilized input
VAT for the first quarter of taxable year 2003
with the BIR, which is beyond the two-year
prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with
the BIR its Quarterly VAT Returns for the
second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as
amended, Mindanao I has two years from June
30, 2003, within which to file its administrative
claim for refund for the second quarter of 2003,
or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an
administrative claim for refund of unutilized input
VAT for the second quarter of taxable year 2003
with the BIR, which is within the two-year
prescriptive period, provided under Section 112
(A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005
(presumably the date Mindanao I submitted the
 supporting documents together with the
application for refund) or until August 2, 2005, to
decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day
period or from August 3, 2005 to September 1,
2005, Mindanao I should have elevated its claim
for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed
its Petition for Review with this Court, docketed
as CTA Case No. 7286, even before the 120-
day period for the CIR to decide the claim for
refund had lapsed on August 2, 2005. The
Petition for Review was, therefore, prematurely
filed and there was failure to exhaust
administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with
the BIR its Quarterly VAT Returns for the third
and fourth quarters of 2003. Pursuant to Section
112(A) of the NIRC of 1997, as amended,
Mindanao I therefore, has two years from
September 30, 2003 and December 31, 2003, or
until September 30, 2005 and December 31,
2005, respectively, within which to file its
 administrative claim for the third and fourth
quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an
administrative claim for refund of unutilized input
VAT for the third and fourth quarters of taxable
year 2003 with the BIR, which is well within the
two-year prescriptive period, provided under
Section 112(A) of the NIRC of 1997, as
amended;
(3) From April 4, 2005, which is also presumably
the date Mindanao I submitted supporting
documents, together with the aforesaid
application for refund, the CIR has 120 days or
until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the
120-day period or from August 3, 2005 until
September 1, 2005 Mindanao I should have
elevated its claim for refund to the CTA;
(5) However, Mindanao I filed its Petition for
Review with the CTA in Division only on
September 9, 2005, which is 8 days beyond the
30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way
beyond the 30-day prescribed period. Thus, the
Petition for Review should have been dismissed for
being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already
prescribed for having been filed beyond the two-
year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be
dismissed for Mindanao I’s failure to comply with
a condition precedent when it failed to exhaust
administrative remedies by filing its Petition for
Review even before the lapse of the 120-day
period for the CIR to decide the administrative
claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day
prescribed period to appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner
of Internal Revenue’s Motion for Reconsideration is
hereby GRANTED; Mindanao I’s Motion for Partial
Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is
hereby REVERSED.
Accordingly, the Petition for Review of the
Commissioner of Internal Revenue in CTA EB No.
476 is hereby GRANTED and the entire claim of
Mindanao I Geothermal Partnership for the first,
second, third and fourth quarters of 2003 is hereby
DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its
Petition for Review:
I. The Honorable Court of Tax Appeals erred in
holding that the claim of Mindanao II for the 1st
and 2nd quarters of year 2003 has already
prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have
conflicting interpretations of the law as to the
 reckoning date of the two year prescriptive
period for filing claims for VAT refund.
B. The Atlas case was not and cannot be
superseded by the Mirant case in light of
Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses
the close of the taxable quarter when the
sales were made as the reckoning date in
counting the two-year prescriptive period
cannot be applied retroactively in the case of
Mindanao II.
II. The Honorable Court of Tax Appeals erred in
interpreting Section 105 of the 1997 Tax Code,
as amended in that the sale of the fully
depreciated Nissan Patrol is a one-time
transaction and is not incidental to the VAT zero-
rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in
denying the amount disallowed by the
Independent Certified Public Accountant as
Mindanao II substantially complied with the
requisites of the 1997 Tax Code, as amended,
for refund/tax credit.
 A. The amount of ₱2,090.16 was brought
about by the timing difference in the
recording of the foreign currency deposit
transaction.
B. The amount of ₱2,752.00 arose from the
out-of-pocket expenses reimbursed to SGV
& Company which is substantially
suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was
unapplied and/or was not included in
Mindanao II’s claim for refund or tax credit
for the year 2004 subject matter of CTA
Case No. 7507.
IV. The doctrine of strictissimi juris on tax
exemptions should be relaxed in the present
case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its
Petition for Review:
I. The administrative claim and judicial claim in
CTA Case No. 7228 were timely filed pursuant
to the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of
 Internal Revenue, which was then the controlling
ruling at the time of filing.
A. The recent ruling in the Commissioner of
Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the
taxable quarter when the sales were made
as the reckoning date in counting the two-
year prescriptive period, cannot be applied
retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third
Division of this Honorable Court on June 8,
2007 was not and cannot be superseded by
the Mirant Pagbilao case promulgated by
the Second Division of this Honorable Court
on September 12, 2008 in light of the explicit
provision of Section 4(3), Article VIII of the
1987 Constitution.
II. Likewise, the recent ruling of this Honorable
Court in Commissioner of Internal Revenue vs.
Aichi Forging Company of Asia, Inc., cannot be
applied retroactively to Mindanao I in the present
case.41
In a Resolution dated 14 December 2011,42 this
Court resolved to consolidate G.R. Nos. 193301 and
194637 to avoid conflicting rulings in related cases.
The Court’s Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the
question of the determination of the prescriptive
period, or the interpretation of Section 112 of the
1997 Tax Code, in light of our rulings in Atlas and
Mirant.
Mindanao II’s unutilized input VAT tax credit for the
first and second quarters of 2003, in the amounts of
₱3,160,984.69 and ₱1,562,085.33, respectively, are
covered by G.R. No. 193301, while Mindanao I’s
unutilized input VAT tax credit for the first, second,
third, and fourth quarters of 2003, in the amounts of
₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83,
respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the
law applicable at the time of Mindanao II’s and
Mindanao I’s administrative and judicial claims,
provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A)
Zero-rated or Effectively Zero-rated Sales. - Any
VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not
been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1)
and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-
rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due
or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of
Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of
submission of complete documents in support of the
application filed in accordance with Subsections (A)
and (B) hereof.
In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax
Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao
II) are:

C Period Close Last Actual Last Actual

TA covered of day date of day Date
Ca by quart for filing for of
se VAT er filing applicati filing filing
No Sales in when applic on for case case
. 2003 sales ation tax with with
and were of tax refund/ CTA45 CTA
amount made refun credit (judici
d/tax with the al
credit CIR claim)
certifi (admini
 cate strative
with claim)44
the
CIR
72 1st 31 31 13 April 12 22
27 Quarter, March March 2005 Septe April
₱3,160, 2003 2005 mber 2005
984.69 2005
72 2nd 30 30 13 April 12 7 July
87 Quarter, June June 2005 Septe 2005
₱1,562, 2003 2005 mber
085.33 2005
73 3rd and 30 30 13 April 12 9
17 4th Septe Septe 2005 Septe Septe
Quarter mber mber mber mber
s, 2003 2005 2005 2005
₱3,521, 31 2
129.50 Dece Janua
mber ry
2003 2006
(31
Dece
mber
2005
being
a
 Satur
day)

The relevant dates for G.R. No. 194637 (Minadanao

I) are:

C Period Close Last Actual Last Actual

TA covered of day date of day Date
Ca by quart for filing for of
se VAT er filing applicati filing filing
No Sales in when applic on for case case
. 2003 sales ation tax with with
and were of tax refund/ CTA47 CTA
amount made refun credit (judici
d/tax with the al
credit CIR claim)
certifi (admini
cate strative
with claim)46
the
CIR
72 1st 31 31 4 April 1 22
27 Quarter, March March 2005 Septe April
₱3,893, 2003 2005 mber 2005
566.14 2005
72 2nd 30 30 4 April 1 7 July
87 Quarter, June June 2005 Septe 2005
 ₱2,351, 2003 2005 mber
000.83 2005
73 3rd 30 30 4 April 1 9
17 and 4th Septe Septe 2005 Septe Septe
Quarter mber mber mber mber
s, 2003 2005 2005 2005
₱7,940, 31 2
727.83 Dece Janua
mber ry
2003 2006
(31
Dece
mber
2005
being
a
Satur
day)

When Mindanao II and Mindanao I filed their

respective administrative and judicial claims in 2005,
neither Atlas nor Mirant has been promulgated. Atlas
was promulgated on 8 June 2007, while Mirant was
promulgated on 12 September 2008. It is therefore
misleading to state that Atlas was the controlling
doctrine at the time of filing of the claims. The 1997
Tax Code, which took effect on 1 January 1998, was
the applicable law at the time of filing of the claims in
issue. As this Court explained in the recent
consolidated cases of Commissioner of Internal
Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of
Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-
day waiting period, the time expressly given by law
to the Commissioner to decide whether to grant or
deny San Roque’s application for tax refund or
credit. It is indisputable that compliance with the
120-day waiting period is mandatory and
jurisdictional. The waiting period, originally fixed at
60 days only, was part of the provisions of the first
VAT law, Executive Order No. 273, which took effect
on 1 January 1988. The waiting period was
extended to 120 days effective 1 January 1998
under RA 8424 or the Tax Reform Act of 1997.
Thus, the waiting period has been in our statute
books for more than fifteen (15) years before San
Roque filed its judicial claim.
Failure to comply with the 120-day waiting period
violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies
and renders the petition premature and thus without
a cause of action, with the effect that the CTA does
not acquire jurisdiction over the taxpayer’s petition.
Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its
jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases
involving x x x refunds of internal revenue taxes."
When a taxpayer prematurely files a judicial claim for
tax refund or credit with the CTA without waiting for
the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus
the CTA as a court of special jurisdiction has no
jurisdiction over the appeal. The charter of the CTA
also expressly provides that if the Commissioner
fails to decide within "a specific period" required by
law, such "inaction shall be deemed a denial" of the
application for tax refund or credit. It is the
Commissioner’s decision, or inaction "deemed a
denial," that the taxpayer can take to the CTA for
review. Without a decision or an "inaction x x x
deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.
San Roque’s failure to comply with the 120-day
mandatory period renders its petition for review with
the CTA void. Article 5 of the Civil Code provides,
"Acts executed against provisions of mandatory or
prohibitory laws shall be void, except when the law
itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA
or this Court because Article 5 of the Civil Code
states that such void petition cannot be legitimized
"except when the law itself authorizes its validity."
There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a
void act contrary to a mandatory provision of law
cannot claim or acquire any right from his void act. A
right cannot spring in favor of a person from his own
void or illegal act. This doctrine is repeated in Article
2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions
which are against the law or which infringe upon the
rights of others." For violating a mandatory provision
of law in filing its petition with the CTA, San Roque
cannot claim any right arising from such void
petition. Thus, San Roque’s petition with the CTA is
a mere scrap of paper.
This Court cannot brush aside the grave issue of the
mandatory and jurisdictional nature of the 120-day
period just because the Commissioner merely
asserts that the case was prematurely filed with the
CTA and does not question the entitlement of San
Roque to the refund. The mere fact that a taxpayer
has undisputed excess input VAT, or that the tax
was admittedly illegally, erroneously or excessively
collected from him, does not entitle him as a matter
of right to a tax refund or credit. Strict compliance
with the mandatory and jurisdictional conditions
prescribed by law to claim such tax refund or credit
is essential and necessary for such claim to prosper.
Well-settled is the rule that tax refunds or credits,
just like tax exemptions, are strictly construed
against the taxpayer.
The burden is on the taxpayer to show that he has
strictly complied with the conditions for the grant of
the tax refund or credit.
This Court cannot disregard mandatory and
jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the
numerical correctness of the claim for tax refund or
credit of the taxpayer. Non-compliance with
mandatory periods, non-observance of prescriptive
periods, and non-adherence to exhaustion of
administrative remedies bar a taxpayer’s claim for
tax refund or credit, whether or not the
Commissioner questions the numerical correctness
of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with
mandatory and jurisdictional conditions can be
excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such
precedent will render meaningless compliance with
mandatory and jurisdictional requirements, for then
every tax refund case will have to be decided on the
numerical correctness of the amounts claimed,
regardless of non-compliance with mandatory and
jurisdictional conditions.
San Roque cannot also claim being misled,
misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with
the CTA more than four years before Atlas was
promulgated. The Atlas doctrine did not exist at the
time San Roque failed to comply with the 120-day
period. Thus, San Roque cannot invoke the Atlas
doctrine as an excuse for its failure to wait for the
120-day period to lapse. In any event, the Atlas
doctrine merely stated that the two-year prescriptive
period should be counted from the date of payment
of the output VAT, not from the close of the taxable
quarter when the sales involving the input VAT were
made. The Atlas doctrine does not interpret,
expressly or impliedly, the 120+30 day
periods.49 (Emphases in the original; citations
omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of
Mindanao I and Mindanao II for 2003 have
prescribed, we see no need to rely on either Atlas or
Mirant. Section 112(A) of the 1997 Tax Code is
clear: "Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due
or paid attributable to such sales x x x."
We rule on Mindanao I and II’s administrative claims
for the first, second, third, and fourth quarters of
2003 as follows:
(1) The last day for filing an application for tax
refund or credit with the CIR for the first quarter
of 2003 was on 31 March 2005. Mindanao II
filed its administrative claim before the CIR on
13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April
2005. Both claims have prescribed, pursuant to
Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax
refund or credit with the CIR for the second
 quarter of 2003 was on 30 June 2005. Mindanao
II filed its administrative claim before the CIR on
13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April
2005. Both claims were filed on time, pursuant
to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax
refund or credit with the CIR for the third quarter
of 2003 was on 30 September 2005. Mindanao
II filed its administrative claim before the CIR on
13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April
2005. Both claims were filed on time, pursuant
to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax
refund or credit with the CIR for the fourth
quarter of 2003 was on 2 January 2006.
Mindanao II filed its administrative claim before
the CIR on 13 April 2005, while Mindanao I filed
its administrative claim before the CIR on 4 April
2005. Both claims were filed on time, pursuant
to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second,
third and fourth quarters of 2003 have been properly
appealed, we still see no need to refer to either Atlas
or Mirant, or even to Section 229 of the 1997 Tax
Code. The second paragraph of Section 112(C) of
the 1997 Tax Code is clear: "In case of full or partial
denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the
application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period,
appeal the decision or the unacted claim with the
Court of Tax Appeals."
The mandatory and jurisdictional nature of the
120+30 day periods was explained in San Roque:
At the time San Roque filed its petition for review
with the CTA, the 120+30 day mandatory periods
were already in the law. Section 112(C) expressly
grants the Commissioner 120 days within which to
decide the taxpayer’s claim. The law is clear, plain,
and unequivocal: "x x x the Commissioner shall
grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty
(120) days from the date of submission of complete
documents." Following the verba legis doctrine, this
law must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for
the Commissioner’s decision within the 120-day
mandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San
Roque’s case, it filed its petition with the CTA a
mere 13 days after it filed its administrative claim
with the Commissioner. Indisputably, San Roque
knowingly violated the mandatory 120-day period,
and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a
30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30)
days from the receipt of the decision denying the
claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following
the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain,
and unequivocal. As this law states, the taxpayer
may, if he wishes, appeal the decision of the
Commissioner to the CTA within 30 days from
receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim
within the 120-day period, the taxpayer may appeal
to the CTA within 30 days from the expiration of the
120-day period.
xxxx
There are three compelling reasons why the 30-day
period need not necessarily fall within the two-year
prescriptive period, as long as the administrative
claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and
unequivocally provides that the taxpayer "may,
within two (2) years after the close of the taxable
quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of the
creditable input tax due or paid to such sales." In
short, the law states that the taxpayer may apply
with the Commissioner for a refund or credit "within
two (2) years," which means at anytime within two
years. Thus, the application for refund or credit may
be filed by the taxpayer with the Commissioner on
the last day of the two-year prescriptive period and it
will still strictly comply with the law. The two-year
prescriptive period is a grace period in favor of the
taxpayer and he can avail of the full period before
his right to apply for a tax refund or credit is barred
by prescription.
Second, Section 112(C) provides that the
Commissioner shall decide the application for refund
or credit "within one hundred twenty (120) days from
the date of submission of complete documents in
support of the application filed in accordance with
Subsection (A)." The reference in Section 112(C) of
the submission of documents "in support of the
application filed in accordance with Subsection A"
means that the application in Section 112(A) is the
administrative claim that the Commissioner must
decide within the 120-day period. In short, the two-
year prescriptive period in Section 112(A) refers to
the period within which the taxpayer can file an
administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not
refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase ‘within
two years x x x apply for the issuance of a tax credit
or refund’ refers to applications for refund/credit with
the CIR and not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is
required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer
must file his administrative claim for refund or credit
within the first 610 days of the two-year prescriptive
period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the
appeal to the CTA being filed beyond the two-year
prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have
until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or
does not decide at all, the taxpayer can no longer
file his judicial claim with the CTA because the two-
year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the
taxpayer to file an appeal before the CTA becomes
utterly useless, even if the taxpayer complied with
the law by filing his administrative claim within the
two-year prescriptive period.
The theory that the 30-day period must fall within the
two-year prescriptive period adds a condition that is
not found in the law. It results in truncating 120 days
from the 730 days that the law grants the taxpayer
for filing his administrative claim with the
Commissioner. This Court cannot interpret a law to
defeat, wholly or even partly, a remedy that the law
expressly grants in clear, plain, and unequivocal
language.
Section 112(A) and (C) must be interpreted
according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative
claim for refund or credit at anytime within the two-
year prescriptive period. If he files his claim on the
last day of the two-year prescriptive
period, his claim is still filed on time. The
Commissioner will have 120 days from such filing to
decide the claim. If the Commissioner decides the
claim on the 120th day, or does not decide it on that
day, the taxpayer still has 30 days to file his judicial
claim with the CTA. This is not only the plain
meaning but also the only logical interpretation of
Section 112(A) and (C).50 (Emphases in the original;
citations omitted)
In San Roque, this Court ruled that "all taxpayers
can rely on BIR Ruling No. DA-489-03 from the time
of its issuance on 10 December 2003 up to its
reversal in Aichi on 6 October 2010, where this
Court held that the 120+30 day periods are
mandatory and jurisdictional."51 We shall discuss
later the effect of San Roque’s recognition of BIR
Ruling No. DA-489-03 on claims filed between 10
December 2003 and 6 October 2010. Mindanao I
and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the
second, third, and fourth quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the
second, third, and fourth quarters of 2003 on 13
April 2005. Counting 120 days after filing of the
administrative claim with the CIR (11 August 2005)
and 30 days after the CIR’s denial by inaction, the
last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 12
September 2005. However, the judicial claim cannot
be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the
Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the
second quarter of 2003 before the CTA on 7
July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao II’s judicial claim for the
second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition
of the effect of BIR Ruling No. DA-489-03, we
 rule that Mindanao II’s judicial claim for the
second quarter of 2003 qualifies under the
exception to the strict application of the 120+30
day periods.
(2) Mindanao II filed its judicial claim for the third
quarter of 2003 before the CTA on 9 September
2005. Mindanao II’s judicial claim for the third
quarter of 2003 was thus filed on time, pursuant
to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the
fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for
the fourth quarter of 2003 was thus filed on time,
pursuant to Section 112(C) of the 1997 Tax
Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the
second, third, and fourth quarters of 2003 on 4 April
2005. Counting 120 days after filing of the
administrative claim with the CIR (2 August 2005)
and 30 days after the CIR’s denial by inaction, 52 the
last day for filing a judicial claim with the CTA for the
second, third, and fourth quarters of 2003 was on 1
September 2005. However, the judicial claim cannot
be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the
Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the
second quarter of 2003 before the CTA on 7
July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao I’s judicial claim for the
second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition
of the effect of BIR Ruling No. DA-489-03, we
rule that Mindanao I’s judicial claim for the
second quarter of 2003 qualifies under the
exception to the strict application of the 120+30
day periods.
(2) Mindanao I filed its judicial claim for the third
quarter of 2003 before the CTA on 9 September
2005. Mindanao I’s judicial claim for the third
quarter of 2003 was thus filed after the
prescriptive period, pursuant to Section 112(C)
of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the
fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao I’s judicial claim for
the fourth quarter of 2003 was thus filed after the
 prescriptive period, pursuant to Section 112(C)
of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-
03
In the consolidated cases of San Roque, the Court
En Banc53 examined and ruled on the different
claims for tax refund or credit of three different
companies. In San Roque, we reiterated that
"following the verba legis doctrine, Section 112(C)
must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply
file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day
mandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no
‘decision’ or ‘deemed a denial decision’ of the
Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for
tax exemption or refund, the Court in San Roque
recognized that BIR Ruling No. DA-489-03
constitutes equitable estoppel54 in favor of taxpayers.
BIR Ruling No. DA-489-03 expressly states that the
"taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief
with the CTA by way of Petition for Review." This
Court discussed BIR Ruling No. DA-489-03 and its
effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a
difficult question of law. The abandonment of the
Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT
tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in
Atlas, or other taxpayers similarly situated, being
made to return the tax refund or credit they received
or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and
Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a
general interpretative rule issued by the
Commissioner, like the reversal of a specific BIR
ruling under Section 246, should also apply
prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-
489-03 is a general interpretative rule applicable to
all taxpayers or a specific ruling applicable only to a
particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative
rule because it was a response to a query made, not
by a particular taxpayer, but by a government
agency tasked with processing tax refunds and
credits, that is, the One Stop Shop Inter-Agency Tax
Credit and Drawback Center of the Department of
Finance. This government agency is also the
addressee, or the entity responded to, in BIR Ruling
No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the
administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim
of Lazi Bay Resources Development, Inc., where the
taxpayer did not wait for the lapse of the 120-day
period.
Clearly, BIR Ruling No. DA-489-03 is a general
interpretative rule. Thus, all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this
Court held that the 120+30 day periods are
mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the
CTA on 14 February 2007, after the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. Truly,
Taganito can claim that in filing its judicial claim
prematurely without waiting for the 120-day period to
expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling
No. DA-489-03, which shields the filing of its judicial
claim from the vice of prematurity. (Emphasis in the
original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR

  Administrative Judicial Action on

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

G.R. No. 194637

Mindanao I v. CIR

  Administrative Judicial Action on

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

Summary of Rules on Prescriptive Periods Involving

VAT
We summarize the rules on the determination of the
prescriptive period for filing a tax refund or credit of
unutilized input VAT as provided in Section 112 of
the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the
CIR within two years after the close of the
taxable quarter when the zero-rated or
effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of
submission of complete documents in support of
the administrative claim within which to decide
whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend
beyond the two-year period from the filing of the
administrative claim if the claim is filed in the
later part of the two-year period. If the 120-day
period expires without any decision from the
CIR, then the administrative claim may be
considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA
within 30 days from the receipt of the CIR’s
 decision denying the administrative claim or
from the expiration of the 120-day period without
any action from the CIR.
(4) All taxpayers, however, can rely on BIR
Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and
jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully
depreciated Nissan Patrol is not an incidental
transaction in the course of its business; hence, it is
an isolated transaction that should not have been
subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support
Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the
course of trade or business, sells barters,
exchanges, leases goods or properties, renders
services, and any person who imports goods shall
be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise
apply to existing contracts of sale or lease of
goods, properties or services at the time of the
effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business"
means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and
whether or not it sells exclusively to members or
their guests), or government entity.
The rule of regularity, to the contrary
notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign
persons shall be considered as being rendered in
the course of trade or business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal
Revenue v. Magsaysay Lines, Inc.
(Magsaysay)55 and Imperial v. Collector of Internal
Revenue (Imperial)56 to justify its position.
Magsaysay, decided under the NIRC of 1986,
involved the sale of vessels of the National
Development Company (NDC) to Magsaysay Lines,
Inc. We ruled that the sale of vessels was not in the
course of NDC’s trade or business as it was
involuntary and made pursuant to the Government’s
policy for privatization. Magsaysay, in quoting from
the CTA’s decision, imputed upon Imperial the
definition of "carrying on business." Imperial,
however, is an unreported case that merely stated
that "‘to engage’ is to embark in a business or to
employ oneself therein."57
Mindanao II’s sale of the Nissan Patrol is said to be
an isolated transaction.1âwphi1 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.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a
total amount of ₱492,198.09 is improper as it has
substantially complied with the substantiation
requirements of Section 113(A)58 in relation to
Section 23759 of the 1997 Tax Code, as
implemented by Section 4.104-1, 4.104-5 and 4.108-
1 of Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao II’s
compliance with the substantiation requirements is a
finding of fact. The CTA En Banc evaluated the
records of the case and found that the transactions
in question are purchases for services and that
Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding
of fact, which in turn affirmed the finding of the CTA
First Division. We see no reason to overturn their
findings.
WHEREFORE, we PARTIALLY GRANT the
petitions. The Decision of the Court of Tax Appeals
En Bane in CT A EB No. 513 promulgated on 10
March 2010, as well as the Resolution promulgated
on 28 July 2010, and the Decision of the Court of
Tax Appeals En Bane in CTA EB Nos. 476 and 483
promulgated on 31 May 2010, as well as the
Amended Decision promulgated on 24 November
2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II
Geothermal Partnership for the first quarter of 2003
is DENIED while its claims for the second, third, and
fourth quarters of 2003 are GRANTED. For G.R. No.
19463 7, the claims of Mindanao I Geothermal
Partnership for the first, third, and fourth quarters of
2003 are DENIED while its claim for the second
quarter of 2003 is GRANTED.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
ARTURO D. BRION
Associate Justice
MARIANO C. DEL MARTIN S.
CASTILLO VILLARAMA, JR.*
Associate Justice Associate Justice
ESTELA M. PERLAS BERNABE
Associate Justice
ATTESTATION
I attest that the. conclusions in the above Decision
had been reached in consultation before the case
was assigned to the writer of the opinion of the
Court's Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the
Constitution, and the I Division Chairperson's
Attestation, I certify that the conclusions in the above
Decision had: been reached in consultation before
the case was assigned to the write of the opinion of
the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
* Designated acting member per Special Order
No. 1426 dated 8 March 2013.
 Under Rule 45 of the 1997 Rules of Civil
1

Procedure.
 Rollo (G.R. No. 193301), pp. 11-32. Penned by
2

Associate Justice Juanito C. Castañeda, Jr. with

Associate Justices Erlinda P. Uy, Olga Palanca
Enriquez, Esperanza R. Fabon-Victorino, Cielito
N. Mindanao-Grulla and Amelia P. Colangco-
Manalastas, concurring, Presiding Justice
Ernesto D. Acosta and Associate Justice Lovell
R. Bautista penned Separate Concurring and
Dissenting Opinions. Associate Justice Caesar
A. Casanova concurred with Associate Justice
Bautista’s Opinion.
3
 Id. at 47-54. Penned by Associate Justice
Juanito C. Castañeda, Jr., with Associate
Justices Erlinda P. Uy, Olga Palanca-Enriquez,
Esperanza R. Fabon-Victorino, and Cielito N.
Mindaro-Grulla, concurring. Presiding Justice
Ernesto D. Acosta and Associate Justice Lovell
R. Bautista penned Separate Concurring and
Dissenting Opinions. Associate Justice Caesar
A. Casanova concurred with Associate Justice
Bautista’s Opinion. Associate Justice Amelia R.
Cotangco-Manalastas was on leave.
4
 Id. at 179-198. Penned by Associate Justice
Caesar A. Casanova, with Presiding
JusticeErnesto D. Acosta and Associate Justice
Lovell R. Bautista, concurring.
5
 Id. at 209-218. Penned by Associate Justice
Caesar A. Casanova, with Associate Justice
Lovell R. Bautista, concurring. Presiding Justice
Ernesto D. Acosta penned a Separate
Concurring andDissenting Opinion.
 Under Rule 45 of the 1997 Rules of Civil
6

Procedure.
7
 Rollo (G.R. No. 194637), pp. 14-26. Penned by
Associate Justice Caesar A. Casanova,
withAssociate Justices Lovell R. Bautista, Cielito
N. Mindaro-Grulla and Amelia C. Cotangco-
Manalastas, concurring. Associate Justice Olga
Palanca-Enriquez penned a Separate
Concurringand Dissenting Opinion, with
Associate Justices Juanito C. Castañeda, Jr.
and Erlinda P. Uy,concurring. Associate Justice
Esperanza R. Fabon-Victorino penned a
Dissenting Opinion.Presiding Justice Ernesto D.
Acosta was on leave.
 Id. at 41-51. Penned by Associate Justice
8

Caesar A. Casanova, with Presiding Justice

Ernesto D. Acosta, Associate Justices Juanito
C. Castañeda, Jr., Erlinda P. Uy, Olga Palanca-
Enriquez, Esperanza R. Fabon-Victorino, Cielito
N. Mindaro-Grulla and Amelia C. Cotangco-
Manalastas, concurring. Associate Justice Lovell
R. Bautista penned a Separate Concurring and
Dissenting Opinion.
9
 The short title of Republic Act No. 8424 is Tax
Reform Act of 1997. It is also sometimes
referred to as the National Internal Revenue
Code (NIRC) of 1997. In this ponencia, we refer
to RA 8424 as 1997 Tax Code.
10
 Section 6 of EPIRA provides:
Generation Sector. — Generation of electric
power, a business affected with public
interest shall be competitive and open.
Upon the effectivity of this Act, any new
generation company shall, before it
operates, secure from the Energy
Regulatory Commission (ERC) a certificate
of compliance pursuant to the standards set
forth in this Act, as well as health, safety and
environmental clearances from the
appropriate government agencies under
existing laws.
 Any law to the contrary notwithstanding,
power generation shall not be considered a
public utility operation. For this purpose, any
person or entity engaged or which shall
engage in power generation and supply of
electricity shall not be required to secure a
national franchise.
Upon the implementation of retail
competition and open access, the prices
charged by a generation company for the
supply of electricity shall not be subject to
regulation by the ERC except as otherwise
provided in this Act.
Pursuant to the objective of lowering
electricity rates to end-users, sales of
generated power by generation companies
shall be value added tax zero-rated.
The ERC shall, in determining the existence
of market power abuse or anti-competitive
behavior, require from generation
companies the submission of their financial
statements. (Emphasis supplied)
 Rollo (G.R. No. 193301), pp. 180-183.
11

 Id. at 179-198.
12
  Id. at 191.
13

 G.R. Nos. 141104 and 148763, 8 June 2007,

14

524 SCRA 73.

 See rollo (G.R. No. 193301), pp. 192-193.
15

 The commissioned independent Certified

16

Public Accountant found the following:

Annex D.1: ₱2,090.16, discrepancy between
the input VAT paid to and acknowledged by
the Government Service Insurance System
and the amount claimed by Mindanao II;
Annex D.2: ₱29,861.82, input VAT claims
from Tokio Marine Malayan and Citibank NA
Manila which were supported by billing
statements but not by official receipts;
Annex D.3: ₱2,752.00, out-of-pocket
expenses reimbursed to SGV & Company
not supported by valid invoices or official
receipts; and
Annex D.4: ₱487,355.93, input VAT claims
from purchases of services supported by
valid 2003 invoices but are paid in 2004.
 Rollo (G.R. No. 193301), p. 198.
17
  Id. at 199-207.
18

 G.R. No. 172129, 12 September 2008, 565

19

SCRA 154.
 Rollo (G.R. No. 193301), pp. 209-218.
20

 Id. at 218.
21

 Id. at 231-256. Pursuant to Section 4(b), Rule

22

8 of the Revised Rules of the Court of Tax

Appeals.
 Id. at 11-32.
23

 Id. at 31.
24

 Id. at 47-54.
25

 Id. at 285-307.
26

 Id. at 50.
27

 Rollo (G.R. No. 194637), pp. 231-235.

28

 Id. at 230-245. Penned by Associate Justice

29

Juanito C. Castañeda, Jr., with Associate

Justices Erlinda P. Uy and Olga Palanca-
Enriquez, concurring.
 Id. at 244.
30

 Id. at 246-254.
31
  Id. at 256-269.
32

 Supra note 14.

33

 Rollo (G.R. No. 194637), p. 278.

34

 Id. at 14-26.
35

 Id. at 25.
36

37
 RA 9337 renumbered Section 112(D) of the
1997 Tax Code to 112(C). In this Decision, we
refer to Section 112(D) under the 1997 Tax
Code as it is currently numbered, 112(C).
 G.R. No. 184823, 6 October 2010, 632 SCRA
38

422.
 Rollo (G.R. No. 194637), pp. 47-50.
39

 Rollo (G.R. No. 193301), pp. 83-84.

40

 Rollo (G.R. No. 194637), pp. 70-71.

41

 Rollo (G.R. No. 193301), p. 738; id. at 704.

42

 See note 37.

43

 The CIR had 120 days, or until 11 August

44

2005, to act on Mindanao II’s claim. At the time

of filing of Mindanao II’s appeal with the CTA,
Mindanao II’s application for refund remained
unacted upon. Rollo (G.R. No. 193301), p. 183.
45
 Mindanao II 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.
The 30th day after 11 August 2005, 10
September 2005, fell on a Saturday. Thus,
Mindanao II had until 12 September 2005 to file
its judicial claim. See Section 1, Rule 22, The
1997 Rules of Civil Procedure.
46
 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.
 G.R. Nos. 187485, 196113, and 197156, 12
48

February 2013.
 Id.
49
  Id.
50

 Id.
51

52
 On 10 October 2005, Mindanao I received a
copy of the letter dated 30 September 2005 from
the CIR denying its application for tax refund or
credit. Rollo (G.R. No. 194637), p. 235.
53
 The Court En Banc voted in San Roque, thus:
Associate Justice Antonio T. Carpio penned the
Decision, with Associate Justices Teresita J.
Leonardo-De Castro, Arturo D. Brion, Diosdado
M. Peralta, Lucas P. Bersamin, Roberto A.
Abad, Martin S. Villarama, Jr., Jose P. Perez,
and Bienvenido L. Reyes, concurring. Chief
Justice Maria Lourdes P.A. Sereno penned a
Dissenting Opinion. Associate Justice Presbitero
J. Velasco, Jr., penned a Dissenting Opinion,
and is joined by Associate Justices Jose C.
Mendoza and Estela M. Perlas-Bernabe.
Associate Justice Marvic Mario Victor F. Leonen
penned a Separate Opinion, and is joined by
Associate Justice Mariano C. Del Castillo.
54
 See Section 246 of the 1997 Tax Code, which
states:
Non-Retroactivity of Rulings. - Any
revocation, modification or reversal of any of
 the rules and regulations promulgated in
accordance with the preceding Sections or
any of the rulings or circulars promulgated
by the Commissioner shall not be given
retroactive application if the revocation,
modification or reversal will be prejudicial to
the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately
misstates or omits material facts from his
return or any document required of him by
the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered
by the Bureau of Internal Revenue are
materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith.
 529 Phil. 64 (2006).
55

 97 Phil. 992 (1955).

56

 Id.
57

 Section 113. Invoicing and Accounting

58

Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-
registered person shall, for every sale, issue
 an invoice or receipt. In addition to the
information required under Section 237, the
following information shall be indicated in
the invoice or receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his taxpayer’s
identification number (TIN); and
(2) The total amount which the purchaser
pays or is obligated to pay to the seller with
the indication that such amount includes the
value-added tax.
59
 Section 237. Issuance of Receipts or Sales or
Commercial Invoices. - All persons subject to an
internal revenue tax shall, for each sale or
transfer of merchandise or for services rendered
valued at Twenty-five pesos (₱25.00) or more,
issue duly registered receipts or sales or
commercial invoices, prepared at least in
duplicate, showing the date of transaction,
quantity, unit cost and description of
merchandise or nature of service: Provided,
however, That in the case of sales, receipts or
transfers in the amount of One hundred pesos
(₱100.00) or more, or regardless of the amount,
where the sale or transfer is made by a person
liable to value-added tax to another person also
liable to value-added tax; or where the receipt is
issued to cover payment made as rentals,
commissions, compensations or fees, receipts
or invoices shall be issued which shall show the
name, business style, if any, and address of the
purchaser, customer or client: Provided, further,
That where the purchaser is a VAT-registered
person, in addition to the information herein
required, the invoice or receipt shall further show
the Taxpayer Identification Number (TIN) of the
purchaser.
The original of each receipt or invoice shall
be issued to the purchaser, customer or
client at the time the transaction is effected,
who, if engaged in business or in the
exercise of profession, shall keep and
preserve the same in his place of business
for a period of three (3) years from the close
of the taxable year in which such invoice or
receipt was issued, while the duplicate shall
be kept and preserved by the issuer, also in
his place of business, for a like period.
The Commissioner may, in meritorious
cases, exempt any person subject to internal
revenue tax from compliance with the
provisions of this Section.
60
 Section 4.104-1. Credits for input tax. – Any
input tax evidenced by a VAT invoice or official
receipt issued by a VAT-registered person in
accordance with Section 108 of the Code, on the
following transactions, shall be creditable
against the output tax:
(a) Purchase or importation of goods
1. For sale; or
2. For conversion into or intended to
form part of a finished product for sale,
including packaging materials; or
3. For use as supplies in the course of
business; or
4. For use as raw materials supplied in
the sale of services; or
5. For use in trade or business for which
deduction for depreciation or
amortization is allowed under the Code,
except automobiles, aircraft and yachts.
(b) Purchase of real properties for which a
VAT has actually been paid;
(c) Purchase of services in which a VAT has
actually been paid;
(d) Transactions "deemed sale" under
Section 100 (b) of the Code;
(e) Presumptive input tax allowed to be
carried over as provided for in Section
4.105-1 of these Regulations;
(f) A VAT-registered person who is also
engaged in transactions not subject to VAT
shall be allowed input tax credit as follows:
1. Total input which can be directly
attributed to transactions subject to
VAT; and
2. A ratable portion of any input tax
which cannot be directly attributed to
either activity.
Section 4.104-5. Substantiation of claims for
input tax credit. – (a) Input taxes shall be
allowed only if the domestic purchase of
goods, properties or services is made in the
course of trade or business. The input tax
should be supported by an invoice or receipt
showing the information as required under
Sections 108 (a) and 238 of the Code. Input
tax on purchases of real property should be
supported by a copy of the public instrument
i.e. deed of absolute sale, deed of
conditional sale, contract/agreement to sell,
etc., together with the VAT receipt issued by
the seller.
A cash-register machine tape issued to a
VAT-registered buyer by a VAT-registered
seller from a machine duly registered with
the BIR in lieu of the regular sales invoice,
shall constitute valid proof of substantiation
of tax credit only if the name and TIN of the
purchaser is indicated in the receipt and
authenticated by a duly authorized
representative of the seller.
(b) Input tax on importation shall be
supported with the import entry or other
equivalent document showing actual
payment of VAT on the imported goods.
(c) Presumptive input tax shall be
supported by an inventory of goods as
shown in a detailed list to be submitted
to the BIR.
(d) Input tax on "deemed sale"
transactions shall be substantiated with
the required invoices.
(e) Input tax from payments made to
non-readers shall be supported by a
 copy of the VAT declaration/return filed
by the resident licensee/lessee in behalf
of the non-resident licensor/lessor
evidencing remittance of the VAT due.
Section 4.108-1. Invoicing Requirements. ‒
All VAT-registered persons shall, for every
sale or lease of goods or properties or
services, issue duly registered receipts or
sales or commercial invoices which must
show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of
merchandise or nature of service;
4. the name, TIN, business style, if any,
and address of the VAT-registered
purchaser, customer or client;
5. the word "zero rated" imprinted on the
invoice covering zero-rated sales; and
6. the invoice value or consideration.
In the case of sale of real property subject to
VAT and where the zonal or market value is
higher than the actual consideration, the
 VAT shall be separately indicated in the
invoice or receipt.
Only VAT -registered persons are required
to print their TIN followed by the word "VAT"
in their invoice or receipts and this shall be
considered as a "VAT Invoice." All
purchases covered by invoices other than
"VAT Invoice" shall not give rise to any input
tax.
If the taxable person is also engaged in
exempt operations, he should issue
separate invoices or receipts for the taxable
and exempt operations. A "VAT Invoice"
shall be issued only for sales of goods,
properties or services subject to VAT
imposed in Sections I 00 and 102 of the
Code.
The invoice or receipt shall be prepared at
least in duplicate, the original to be given to
the buyer and the duplicate to be retained by
the seller as part of his accounting records.
XXXXXXXXXXXXXXXXXXXXX
MINDANAO II GEOTHERMAL PARTNERSHIP vs.
COMMISSIONER OF INTERNAL REVENUE
March 10, 2018

MINDANAO II GEOTHERMAL PARTNERSHIP vs.

COMMISSIONER OF INTERNAL REVENUE
G.R. No. 193301 March 11, 2013
Facts:
1. Mindanao II allegedly entered into a BOT contract
with the Philippine National Oil Corporation – Energy
Development Company (PNOCEDC) for finance,
engineering, supply, installation, testing, commissioning,
operation, and maintenance of a 48.25 megawatt
geothermal power plant.
2. Mindanao II alleges that its sale of generated power
and delivery of electric capacity and energy of Mindanao
II to NPC for and in behalf of PNOCEDC is its only revenue
generating activity which is in the ambit of VAT zero-
rated sales under the EPIRA Law.
3. The amendment of the NIRC of 1997 modified the
VAT rate applicable to sales of generated power by
generation companies from 10% to 0%.
4. Mindanao II makes domestic purchases of goods and
services and accumulates therefrom creditable input
taxes.
5. Pursuant to NIRC, Mindanao II alleges that it can use
its accumulated input tax credits to offset its output tax
liability.
6. Mindanao II filed an application for refund and/or
issuance of tax credit certificate with the BIR
7. The application for refund by Mindanao II remains
unacted upon by the CIR.
8. Hence, these three petitions.
9. The Court of Tax Appeals’ Ruling: found that
Mindanao II satisfied the twin requirements for VAT zero
rating under EPIRA: (1) it is a generation company, and
(2) it derived sales from power generation.
10. The CTA First Division found that Mindanao II is
entitled to a refund in the modified amount of
P7,703,957.79, after disallowing P522,059.91 from input
VAT and deducting P18,181.82 from Mindanao II’s sale of
a fully depreciated P200,000.00 Nissan Patrol.
11. The input taxes amounting to P522,059.91 were
disallowed for failure to meet invoicing requirements,
while the input VAT on the sale of the Nissan Patrol was
reduced by P18,181.82 because the output VAT for the
sale was not included in the VAT declarations.
12. Mindanao II filed a motion for partial
reconsideration.
13. It stated that the sale of the fully depreciated Nissan
Patrol is a onetime transaction and is not incidental to its
VAT zero-rated operations.

Issue:
Whether the sale of the fully depreciated Nissan
Patrol is a onetime transaction and is not incidental to
the VAT zero rated operation of Mindanao II

Ruling:
Section 105 of the 1997 Tax Code does not
support Mindanao II’s position:
SEC. 105. Persons Liable. Any person who, in the course
of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person
who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 106 to 108 of this Code.
The phrase "in the course of trade or business" means
the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental
thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or
business.
Mindanao II relies on Commissioner of Internal Revenue
v. Magsaysay Lines, Inc. (Magsaysay) and Imperial v.
Collector of Internal Revenue (Imperial) to justify its
position. Magsaysay, decided under the NIRC of 1986,
involved the sale of vessels of the National Development
Company (NDC) to Magsaysay Lines, Inc. We ruled that
the sale of vessels was not in the course of NDC’s trade
or business as it was involuntary and made pursuant to
the Government’s policy for privatization. Magsaysay, in
quoting from the CTA’s decision, imputed upon Imperial
the definition of "carrying on business." Imperial,
however, is an unreported case that merely stated that
"‘to engage’ is to embark in a business or to employ
oneself therein."
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 PNOCEDC 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.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
ON THE SALE OF SERVICES OR LEASE OF PROPERTIES
CIR V AMERICAN EXPRESS INTERNATIONAL, INC. (Phil.
Branch)
20
JUN
GR 152609 | June 29, 2005 | J. Panganiban

Facts:

Respondent, a VAT taxpayer, is the Philippine Branch of

AMEX USA and was tasked with servicing a unit of
AMEX-Hongkong Branch and facilitating the collections
of AMEX-HK receivables from card members situated in
the Philippines and payment to service establishments
in the Philippines.

It filed with BIR a letter-request for the refund of its

1997 excess input taxes, citing as basis Section 110B of
the 1997 Tax Code, which held that “xxx Any input tax
attributable to the purchase of capital goods or to zero-
rated sales by a VAT-registered person may at his
option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.”

In addition, respondent relied on VAT Ruling No. 080-

89, which read, “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 Philippine and accounted for in accordance with
the rules and regulations of the Central Bank of the
Philippines, your service income is automatically zero
rated xxx”

Petitioner claimed, among others, that the claim for

refund should be construed strictly against the claimant
as they partake of the nature of tax exemption.

CTA rendered a decision in favor of respondent, holding

that its services are subject to zero-rate. CA affirmed
this decision and further held that respondent’s services
were “services other than the processing,
manufacturing or repackaging of goods for persons
doing business outside the Philippines” and paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of BSP.

Issue:

W/N AMEX Phils is entitled to refund

Held:

Yes. Section 102 of the Tax Code provides for the VAT
on sale of services and use or lease of properties.
Section 102B particularly provides for the services or
transactions subject to 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 BSP;
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(2) Services other than those mentioned in the

preceding subparagraph, e.g. those rendered by hotels
and other service establishments, the consideration for
which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP

Under subparagraph 2, services performed by VAT-

registered persons in the Philippines (other than the
processing, manufacturing or repackaging of goods for
persons doing business outside the Philippines), when
paid in acceptable foreign currency and accounted for in
accordance with the R&R of BSP, are zero-rated.
Respondent renders service falling under the category
of zero rating.

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.

In the present case, the facilitation of the collection of

receivables is different from the utilization of
consumption of the outcome of such service. While the
facilitation is done in the Philippines, the consumption
is not. The services rendered by respondent are
performed upon its sending to its foreign client the
drafts and bulls it has gathered from service
establishments here, and are therefore, services also
consumed in the Philippines. Under the destination
principle, such service is subject to 10% VAT.

However, the law clearly provides for an exception to

the destination principle; that is 0% VAT rate for
services that are performed in the Philippines, “paid for
in acceptable foreign currency and accounted for in
accordance with the R&R of BSP.” The respondent
meets the following requirements for exemption, and
thus should be zero-rated:
(1) Service be performed in the Philippines

(2) The service fall under any of the categories in

Section 102B of the Tax Code

(3) It be paid in acceptable foreign currency accounted

for in accordance with BSP R&R.
XXXXX
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.
The Case
Before us is a Petition for Review1 under Rule 45 of
the Rules of Court, assailing the February 28, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP
No. 62727. The assailed Decision disposed as
follows:
"WHEREFORE, premises considered, the petition is
hereby DISMISSED for lack of merit. The assailed
decision of the Court of Tax Appeals (CTA)
is AFFIRMED in toto."3
The Facts
Quoting the CTA, the CA narrated the undisputed
facts as follows:
"[Respondent] is a Philippine branch of American
Express International, Inc., a corporation duly
organized and existing under and by virtue of the
laws of the State of Delaware, U.S.A., with office in
the Philippines at the Ground Floor, ACE Building,
corner Rada and de la Rosa Streets, Legaspi
Village, Makati City. It is a servicing unit of American
Express International, Inc. - Hongkong Branch
(Amex-HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card
members situated in the Philippines and payment to
service establishments in the Philippines.
"Amex Philippines registered itself with the Bureau
of Internal Revenue (BIR), Revenue District Office
No. 47 (East Makati) as a value-added tax (VAT)
taxpayer effective March 1988 and was issued VAT
Registration Certificate No. 088445 bearing VAT
Registration No. 32A-3-004868. For the period
January 1, 1997 to December 31, 1997,
[respondent] filed with the BIR its quarterly VAT
returns as follows:

Period
Exhibit Date Filed
Covered
1997 1st April 18,
D
Qtr. 1997
July 21,
F 2nd Qtr.
1997
 October 2,
G 3rd Qtr.
1997
January 20,
H 4th Qtr.
1998

"On March 23, 1999, however, [respondent]

amended the aforesaid returns and declared the
following:

Ex Taxabl Output Zero- Domestic Input

h e Sales VAT rated Purchase VAT
19 Sales s
97
I
1s ₱59,59 ₱5,95 ₱17,513, ₱6,778,1 ₱677,81
t 7.20 9.72 801.11 82.30 8.23
qtr
J
2n 67,517. 6,751. 17,937,3 9,333,24 933,324.
d 20 72 61.51 2.90 29
qtr
K
3r 51,936. 5,193. 19,627,2 8,438,35 843,835.
d 60 66 45.36 7.00 70
qtr
L 67,994. 6,799. 25,231,2 13,080,8 1,308,08
 4t
h 30 43 25.22 22.10 2.21
qtr

To ₱247,0 ₱24,7 ₱80,309, ₱37,630, ₱3,763,

tal 45.30 04.53 633.20 604.30 060.43

"On April 13, 1999, [respondent] filed with the BIR a

letter-request for the refund of its 1997 excess input
taxes in the amount of ₱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. [Respondent] cites as basis therefor,
Section 110 (B) of the 1997 Tax Code, to state:
‘Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end of
any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding
quarter or quarters. Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be
refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.’
"There being no immediate action on the part of the
[petitioner], [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
(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
Ruling of the Court of Appeals
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.
Hence, this Petition.9
The Issue
Petitioner raises this sole issue for our
consideration:
"Whether or not the Court of Appeals committed
reversible error in holding that respondent is entitled
to the refund of the amount of ₱3,352,406.59
allegedly representing excess input VAT for the year
1997."10
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code11 provides:
"Sec. 102. Value-added tax on sale of services and
use or lease of properties. -- (a) Rate and base of
tax. -- There shall be levied, assessed and collected,
a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of
services x x x.
"The phrase 'sale or exchange of services' means
the performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration, including those performed or
rendered by x x x persons engaged in milling,
processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial
intermediaries and finance companies; x x x and
similar services regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:
xxxxxxxxx
‘(3) The supply of x x x commercial knowledge or
information;
‘(4) The supply of any assistance that is ancillary
and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any
such knowledge or information as is mentioned in
subparagraph (3);
xxxxxxxxx
‘(6) The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any x x x
commercial undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts’ means the total amount of
money or its equivalent representing the contract
price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied
with the services and deposits and advanced
payments actually or constructively received during
the taxable quarter for the services performed or to
be performed for another person, excluding value-
added tax.
"(b) Transactions subject to zero percent (0%) rate.
-- The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate[:]
‘(1) Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
‘(2) Services other than those mentioned in the
preceding subparagraph, the consideration for which
is paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the [BSP];’"
xxxxxxxxx
Zero Rating of "Other" Services
The law is very clear. Under the last paragraph
quoted above, services performed by VAT-
registered persons in the Philippines (other than the
processing, manufacturing or repacking of goods for
persons doing business outside the Philippines),
when paid in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that
facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which
it gets paid in acceptable foreign currency inwardly
remitted and accounted for in conformity with BSP
rules and regulations. Certainly, the service it
renders in the Philippines is not in the same
category as "processing, manufacturing or repacking
of goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined in
VAT Ruling No. 080-89 that the income respondent
earned from its parent company’s regional operating
centers (ROCs) was automatically zero-rated
effective January 1, 1988.12
Service has been defined as "the art of doing
something useful for a person or company for a
fee"13 or "useful labor or work rendered or to be
rendered by one person to another."14 For facilitating
in the Philippines the collection and payment of
receivables belonging to its Hong Kong-based
foreign client, and getting paid for it in duly
accounted acceptable foreign currency, respondent
renders service falling under the category of zero
rating. Pursuant to the Tax Code, a VAT of zero
percent should, therefore, be levied upon the supply
of that service.15
The Credit Card System and Its Components
For sure, the ancillary business of facilitating the
said collection is different from the main business of
issuing credit cards.16 Under the credit card system,
the credit card company extends credit
accommodations to its card holders for the purchase
of goods and services from its member
establishments, to be reimbursed by them later on
upon proper billing. Given the complexities of
present-day business transactions, the components
of this system can certainly function as separate
billable services.
Under RA 8484,17 the credit card that is issued by
banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device
existing for the purpose of obtaining x x x goods x x
x or services x x x on credit;" 19 and is being used
"usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between
the issuer and the holder of the credit card enables
the latter to procure goods or services "on a
continuing basis as long as the outstanding balance
does not exceed a specified limit."21 The card holder
is, therefore, given "the power to obtain present
control of goods or service on a promise to pay for
them in the future."22
Business establishments may extend credit sales
through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of
uncollectible accounts from their customers. Under
this system, the establishments do not deposit in
their bank accounts the credit card drafts23 that arise
from the credit sales. Instead, they merely record
their receivables from the credit card company and
periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as
payment to these business establishments, but it
does not redeem the drafts at full price. The
agreement between them usually provides for
discounts to be taken by the company upon its
redemption of the drafts.24 At the end of each month,
it then bills its credit card holders for their respective
drafts redeemed during the previous month. If the
holders fail to pay the amounts owed, the company
sustains the loss.25
In the present case, respondent’s role in the
consumer credit26 process described above primarily
consists of gathering the bills and credit card drafts
of different service establishments located in the
Philippines and forwarding them to the ROCs
outside the country. Servicing the bill is not the same
as billing. For the former type of service alone,
respondent already gets paid.
The parent company -- to which the ROCs and
respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending
the checks to the service establishments, but also of
billing the credit card holders for their respective
drafts that it has redeemed. While it usually imposes
finance charges27 upon the holders, none may be
exacted by respondent upon either the ROCs or the
card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are
operated as branches. This means that each of
them is a unit, "an offshoot, lateral extension, or
division"28 located at some distance from the home
office29 of the parent company; carrying separate
inventories; incurring their own expenses; and
generating their respective incomes. Each may
conduct sales operations in any locality as an
extension of the principal office.30
The extent of accounting activity at any of these
branches depends upon company policy,31 but the
financial reports of the entire business enterprise --
the credit card company to which they all belong --
must always show its financial position, results of
operation, and changes in its financial position as a
single unit.32 Reciprocal accounts are reconciled or
eliminated, because they lose all significance when
the branches and home office are viewed as a single
entity.33 In like manner, intra-company profits or
losses must be offset against each other for
accounting purposes.
Contrary to petitioner’s assertion,34 respondent can
sell its services to another branch of the same
parent company.35 In fact, the business concept of a
transfer price allows goods and services to be sold
between and among intra-company units at cost or
above cost.36 A branch may be operated as a
revenue center, cost center, profit center or
investment center, depending upon the policies and
accounting system of its parent
company.37 Furthermore, the latter may choose not
to make any sale itself, but merely to function as a
control center, where most or all of its expenses are
allocated to any of its branches.38
Gratia argumenti that the sending of drafts and bills
by service establishments to respondent is
equivalent to the act of sending them directly to its
parent company abroad, and that the parent
company’s subsequent redemption of these drafts
and billings of credit card holders is also attributable
to respondent, then with greater reason should the
service rendered by respondent be zero-rated under
our VAT system. The service partakes of the nature
of export sales as applied to goods,39 especially
when rendered in the Philippines by a VAT-
registered person40 that gets paid in acceptable
foreign currency accounted for in accordance with
BSP rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption41 "expressed as a
percentage of the value added to goods or
services"42 purchased by the producer or
taxpayer.43 As an indirect tax44 on services,45 its main
object is the transaction46 itself or, more concretely,
the performance of all kinds of services 47 conducted
in the course of trade or business in the
Philippines.48 These services must be regularly
conducted in this country; undertaken in "pursuit of a
commercial or an economic activity;"49 for a valuable
consideration; and not exempt under the Tax Code,
other special laws, or any international agreement.50
Without doubt, the transactions respondent entered
into with its Hong Kong-based client meet all these
requirements.
First, respondent regularly renders in the
Philippines the service of facilitating the
collection and payment of receivables belonging
to a foreign company that is a clearly separate
and distinct entity.
Second, such service is commercial in nature;
carried on over a sustained period of time; on a
significant scale; with a reasonable degree of
 frequency; and not at random, fortuitous or
attenuated.
Third, for this service, respondent definitely
receives consideration in foreign currency that is
accounted for in conformity with law.
Finally, respondent is not an entity exempt under
any of our laws or international agreements.
Services Subject to Zero VAT
As a general rule, the VAT system uses the
destination principle as a basis for the jurisdictional
reach of the tax.51 Goods and services are taxed
only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner
equates the performance of a particular type of
service with the consumption of its output abroad. In
the present case, the facilitation of the collection of
receivables is different from the utilization or
consumption of the outcome of such service. While
the facilitation is done in the Philippines,
the consumption is not. Respondent renders
assistance to its foreign clients -- the ROCs outside
the country -- by receiving the bills of service
establishments located here in the country and
forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to
petitioner’s administrative interpretation,52 does not
imply that the service be done abroad in order to be
zero-rated.
Consumption is "the use of a thing in a way that
thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of
a contractual duty, usually resulting in the
performer’s release from any past or future liability x
x x."54 The services rendered by respondent are
performed or successfully completed upon its
sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its
services, having been performed in the Philippines,
are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in
or bound for a specific place when their destination
is determined. Instead, there can only be a
"predetermined end of a course"55 when determining
the service "location or position x x x for legal
purposes."56 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.
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]."57 Thus, for the supply of
service to be zero-rated as an exception, the law
merely requires that first, the service be performed in
the Philippines; second, the service fall under any of
the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from
the destination principle are met by respondent. Its
facilitation service is performed in the Philippines. It
falls under the second category found in Section
102(b) of the Tax Code, because it is a service other
than "processing, manufacturing or repacking of
goods" as mentioned in the provision. Undisputed is
the fact that such service meets the statutory
condition that it be paid in acceptable foreign
currency duly accounted for in accordance with BSP
rules. Thus, it should be zero-rated.
Performance of Service versus Product Arising
from Performance
Again, contrary to 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.61 Performed in the Philippines,
such service is necessarily subject to its
jurisdiction,62 for the State necessarily has to have "a
substantial connection"63 to it, in order to enforce a
zero rate.64 The place of payment is
immaterial;65 much less is the place where the output
of the service will be further or ultimately used.
Statutory Construction or Interpretation
Unnecessary
As mentioned at the outset, Section 102(b)(2) of the
Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground
that only Congress may tread upon.
The Court may not construe a statute that is free
from doubt.66 "[W]here the law speaks in clear and
categorical language, there is no room for
interpretation. There is only room for
application."67 The Court has no choice but to "see to
it that its mandate is obeyed."68
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax
Code, RR 5-87 provides for the zero rating of
services other than the processing, manufacturing or
repacking of goods -- in general and without
qualifications -- when paid for by the person to
whom such services are rendered in acceptable
foreign currency inwardly remitted and duly
accounted for in accordance with the BSP (then
Central Bank) regulations. Section 8 of RR 5-87
states:
"SECTION 8. Zero-rating. -- (a) In general. -- A zero-
rated sale is a taxable transaction for value-added
tax purposes. A sale by a VAT-registered person of
goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his
purchases of goods or services related to such zero-
rated sale shall be available as tax credit or
refundable in accordance with Section 16 of these
Regulations.
xxxxxxxxx
" (c) Zero-rated sales of services. -- The following
services rendered by VAT-registered persons are
zero-rated:
‘(1) Services in connection with the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines, where such
goods are actually shipped out of the Philippines to
said persons or their assignees and the services are
paid for in acceptable foreign currency inwardly
remitted and duly accounted for under the
regulations of the Central Bank of the Philippines.
xxxxxxxxx
‘(3) Services performed in the Philippines other than
those mentioned in subparagraph (1) above which
are paid for by the person or entity to whom the
service is rendered in acceptable foreign currency
inwardly remitted and duly accounted for in
accordance with Central Bank regulations. Where
the contract involves payment in both foreign and
local currency, only the service corresponding to that
paid in foreign currency shall enjoy zero-rating. The
portion paid for in local currency shall be subject to
VAT at the rate of 10%.’"
RR 7-95 Broad Enough
RR 7-95, otherwise known as the "Consolidated
VAT Regulations,"69 reiterates the above-quoted
provision and further presents as examples only the
services performed in the Philippines by VAT-
registered hotels and other service establishments.
Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with the
rules and regulations of the BSP. The term "other
service establishments" is obviously broad enough
to cover respondent’s facilitation service. Section
4.102-2 of RR 7-95 provides thus:
"SECTION 4.102-2. Zero-Rating. -- (a) In general. --
A zero-rated sale by a VAT registered person, which
is a taxable transaction for VAT purposes, shall not
result in any output tax. However, the input tax on
his purchases of goods, properties or services
related to such zero-rated sale shall be available as
tax credit or refund in accordance with these
regulations.
"(b) Transaction subject to zero-rate. -- The following
services performed in the Philippines by VAT-
registered persons shall be subject to 0%:
‘(1) Processing, manufacturing or repacking
goods for other persons doing business outside
the Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP;
‘(2) Services other than those mentioned in the
preceding subparagraph, e.g. those rendered by
hotels and other service establishments, the
consideration for which is paid for in acceptable
foreign currency and accounted for in
 accordance with the rules and regulations of the
BSP;’"
xxxxxxxxx
Meaning of "as well as" in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently
amended by RR 5-96 to read as follows:
"Section 4.102-2(b)(2) -- ‘Services other than
processing, manufacturing or repacking for other
persons doing business outside the Philippines for
goods which are subsequently exported, as well as
services by a resident to a non-resident foreign
client such as project studies, information services,
engineering and architectural designs and other
similar services, the consideration for which is paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
BSP.’"
Aside from the already scopious coverage of
services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further
enumerates specific services entitled to zero rating.
Although superfluous, these sample services are
meant to be merely illustrative. In this provision, the
use of the term "as well as" is not restrictive. As a
prepositional phrase with an adverbial relation to
some other word, it simply means "in addition to,
besides, also or too."70
Neither the law nor any of the implementing revenue
regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for
a fee, remuneration or consideration. Rather, both
merely enumerate the items of service that fall under
the term "sale or exchange of services."71
Ejusdem Generis
Inapplicable
The canon of statutory construction known
as ejusdem generis or "of the same kind or specie"
does not apply to Section 4.102-2(b)(2) of RR 7-95
as amended by RR 5-96.
First, although the regulatory provision contains
an enumeration of particular or specific words,
followed by the general phrase "and other
similar services," such words do not constitute a
readily discernible class and are patently not of
the same kind.72 Project studies involve
investments or marketing; information services
focus on data technology; engineering and
architectural designs require creativity. Aside
from calling for the exercise or use of mental
faculties or perhaps producing written technical
 outputs, no common denominator to the
exclusion of all others characterizes these three
services. Nothing sets them apart from other
and similar general services that may involve
advertising, computers, consultancy, health
care, management, messengerial work -- to
name only a few.
Second, there is the regulatory intent to give the
general phrase "and other similar services" a
broader meaning.73 Clearly, the preceding
phrase "as well as" is not meant to limit the
effect of "and other similar services."
Third, and most important, the statutory
provision upon which this regulation is based is
by itself not restrictive. The scope of the word
"services" in Section 102(b)(2) of the Tax Code
is broad; it is not susceptible of narrow
interpretation.741avvphi1.zw+
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a
less general interpretation at the administrative
level,75 rendered by the BIR commissioner upon
request of a taxpayer to clarify certain provisions of
the VAT law. As correctly held by the CA, when this
ruling states that the service must be "destined for
consumption outside of the Philippines"76 in order to
qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it.77 This
portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.78
Although "[i]t is widely accepted that the
interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to
great respect by the courts,"79 this interpretation is
not conclusive and will have to be "ignored if
judicially found to be erroneous"80 and "clearly
absurd x x x or improper."81 An administrative
issuance that overrides the law it merely seeks to
interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this
Court.82
In the present case, respondent has relied upon
VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly
deprive respondent of a refund of the substantial
amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No.
040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the
application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax
Code categorically declares that "[a]ny revocation x
x x of x x x any of the rulings x x x promulgated by
the Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial
to the taxpayers."84
It is also basic in law that "no x x x rule x x x shall be
given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive
application to respondent does the Court find in VAT
Ruling No. 040-98. Neither do the exceptions
enumerated in Section 24687 of the Tax Code apply.
Though vested with the power to interpret the
provisions of the Tax Code88 and not bound by
predecessors’ acts or rulings, the BIR commissioner
may render a different construction to a
statute89 only if the new interpretation is in
congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what
the law says.
"Consumed Abroad" Not Required by
Legislature
Interpellations on the subject in the halls of the
Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being
"consumed abroad" in order for services performed
in the Philippines by a VAT-registered person to be
zero-rated. We quote the relevant portions of the
proceedings:
"Senator Maceda: Going back to Section 102 just
for the moment. Will the Gentleman kindly explain to
me - I am referring to the lower part of the first
paragraph with the ‘Provided’. Section
102. ‘Provided that the following services performed
in the Philippines by VAT registered persons shall
be subject to zero percent.’ There are three here.
What is the difference between the three here which
is subject to zero percent and Section 103 which is
exempt transactions, to being with?
"Senator Herrera: Mr. President, in the case of
processing and manufacturing or repacking goods
for persons doing business outside the Philippines
which are subsequently exported, and where the
services are paid for in acceptable foreign
currencies inwardly remitted, this is considered as
subject to 0%. But if these conditions are not
complied with, they are subject to the VAT.
"In the case of No. 2, again, as the Gentleman
pointed out, these three are zero-rated and the other
one that he indicated are exempted from the very
beginning. These three enumerations under Section
102 are zero-rated provided that these conditions
indicated in these three paragraphs are also
complied with. If they are not complied with, then
they are not entitled to the zero ratings. Just like in
the export of minerals, if these are not exported,
then they cannot qualify under this provision of zero
rating.
"Senator Maceda: Mr. President, just one small item
so we can leave this. Under the proviso, it is
required that the following services be performed in
the Philippines.
"Under No. 2, services other than those mentioned
above includes, let us say, manufacturing computers
and computer chips or repacking goods for persons
doing business outside the Philippines. Meaning to
say, we ship the goods to them in Chicago or
Washington and they send the payment inwardly to
the Philippines in foreign currency, and that is, of
course, zero-rated.lawphil.net
"Now, when we say ‘services other than those
mentioned in the preceding subsection[,’] may I have
some examples of these?
"Senator Herrera: Which portion is the Gentleman
referring to?
"Senator Maceda: I am referring to the second
paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages
something here and he sends it abroad and they pay
him, that is covered. That is clear to me. The second
paragraph says ‘Services other than those
mentioned in the preceding subparagraph, the
consideration of which is paid for in acceptable
foreign currency…’
"One example I could immediately think of -- I do not
know why this comes to my mind tonight -- is for
tourism or escort services. For example, the services
of the tour operator or tour escort -- just a good
name for all kinds of activities -- is made here at the
Midtown Ramada Hotel or at the Philippine Plaza,
but the payment is made from outside and remitted
into the country.
"Senator Herrera: What is important here is that
these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.
"Senator Maceda: Yes, Mr. President. Like those
Japanese tours which include $50 for the services of
a woman or a tourist guide, it is zero-rated when it is
remitted here.
"Senator Herrera: I guess it can be interpreted that
way, although this tourist guide should also be
considered as among the professionals. If they earn
more than ₱200,000, they should be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino
citizens outside the Philippines are subject to VAT,
and I am talking of all services. Do big contractual
engineers in Saudi Arabia pay VAT?
"Senator Herrera: This provision applies to a VAT-
registered person. When he performs services in the
Philippines, that is zero-rated.
"Senator Maceda: That is right."90
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which
substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the
Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly
obtains. This principle means that "the reenactment
of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior
executive construction."91
The legislature is presumed to have reenacted the
law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT,
and to have approved or confirmed them because
they would carry out the legislative purpose. The
particular provisions of the regulations we have
mentioned earlier are, therefore, re-enforced. "When
a statute is susceptible of the meaning placed upon
it by a ruling of the government agency charged with
its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial
change, such action is to some extent confirmatory
that the ruling carries out the legislative purpose."92
In sum, having resolved that transactions of
respondent are zero-rated, the Court upholds the
former’s entitlement to the refund as determined by
the appellate court. Moreover, there is no conflict
between the decisions of the CTA and CA. This
Court respects the findings and conclusions of a
specialized court like the CTA "which, by the nature
of its functions, is dedicated exclusively to the study
and consideration of tax cases and has necessarily
developed an expertise on the subject."93
Furthermore, under a zero-rating scheme, the sale
or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to
recover, by way of a refund or as an input tax credit,
the tax that is included in the cost of purchases
attributable to the sale or exchange.94 "[T]he tax paid
or withheld is not deducted from the tax
base."95 Having been applied for within the
reglementary period,96 respondent’s refund is in
order.
WHEREFORE, the Petition is hereby DENIED, and
the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division
WE CONCUR:

ANGELINA
RENATO C.
SANDOVAL-
CORONA
GUTIERREZ
Associate Justice
Associate Justice
CONCHITA CARPIO
CANCIO C. GARCIA
MORALES
Associate Justice
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision
had been reached in consultation before the case
was assigned to the writer of the opinion of the
Court’s Division.
ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the
Constitution, and the Division Chairman’s
Attestation, it is hereby certified that the conclusions
in the above Decision had been reached in
consultation before the case was assigned to the
writer of the opinion of the Court’s Division.
HILARIO G. DAVIDE, JR.
Chief Justice

Footnotes
1
 Rollo, pp. 8-23.
2
 Id., pp. 25-39. Fifth Division. Penned by Justice
Josefina Guevara-Salonga, with the
concurrence of Justices Godardo A. Jacinto
(Division chair) and Eloy R. Bello Jr. (member,
now retired).
3
 CA Decision, p. 15; rollo, p. 38.
4
 Outer brackets copied verbatim.
5
 Ibid.
6
 Ibid.
7
 CTA Decision, pp. 1-15; rollo, pp. 40-54.
Penned by then Presiding Judge (now Presiding
Justice) Ernesto D. Acosta, with the concurrence
of then Judges Ramon O. de Veyra and
Amancio Q. Saga (both retired).
8
 CA Decision pp. 2-7; rollo, pp. 26-31. Boldface
characters, underscoring and italics copied
verbatim.
9
 This case was deemed submitted for decision
on July 23, 2003, upon this Court’s receipt of
petitioner’s Memorandum, signed by Solicitor
General Alfredo L. Benipayo, Assistant Solicitor
General Fernanda Lampas Peralta and
Associate Solicitor Romeo D. Galzote.
Respondent’s Memorandum -- signed by Attys.
Rolando V. Medalla Jr., Ramon G. Songco, and
Ma. Elizabeth E. Peralta-Loriega -- was received
by this Court on May 16, 2003.
10
 Petitioner’s Memorandum, p. 9; temporary
rollo, p. 9. Original in upper case.
11
 In the case at bar, the applicable Tax Code
refers to the National Internal Revenue Code
(NIRC) of 1986 as amended by Executive Order
(EO) No. 273 and Republic Act (RA) Nos. 7716
and 8241 dated July 25, 1987, May 5, 1994, and
December 20, 1996, respectively.
Today, the Tax Code refers to RA 8424 as
amended, otherwise known as the "Tax
Reform Act of 1997," which took effect on
January 1, 1998 (Commissioner of Internal
Revenue v. CA, 385 Phil. 875, 883, March
30, 2000).
12
 In fact, per VAT Ruling No. 080-89 addressed
to Spencer F. Lenhart, vice-president and
general manager of American Express
International, Inc. (AEII Philippines), BIR Deputy
Commissioner Eufracio D. Santos wrote that
"there is no need to file an application" for zero
rating.
 Garner
13
(ed. in chief), Black’s Law
Dictionary (8th ed., 1999), p. 1399.
  Smith, West’s Law Dictionary (1993), p. 737.
14

15
 §99 [now §105] and §102(b)(2) [now §108(B)
(2)] of the Tax Code. See footnote 11; and
Deoferio Jr. and Mamalateo, The Value Added
Tax in the Philippines (2000), p. 33.
16
 These are unlike some widely used credit
cards, such as Visa and MasterCard, that are
issued by banks. See Meigs and
Meigs, Accounting: The Basis for Business
Decisions (5th ed., 1982), pp. 355-356.
 This is also known as the "Access Devices
17

Regulation Act of 1998" approved on February

11, 1998.
18
 For example, "Visa and MasterCard are
complex entities in that they are owned by their
member banks, provide network services to their
member banks, and provide currency
conversion as part of the network services, but
have no contracts with cardholders." Schwartz
v. Visa International Corp., 2003 WL 1870370
(Cal. Superior), p. 50, April 7, 2003, per
Sabraw, J.
 §3(f) of RA 8484.
19

 Garner (ed. in chief), supra, p. 396.

20
  Ibid.
21

22
 Editorial staff of Prentice-Hall,
Inc., Encyclopedic Dictionary of Business
Finance (1960), p. 181.
23
 Credit card drafts are multi-part business
forms signed by customers who make
purchases using credit cards. These forms are
similar to checks that are drawn upon the funds
of credit card companies rather than upon the
personal bank accounts of customers. Meigs
and Meigs, supra, p. 355.
 Id., p. 356.
24

 Id., p. 355.
25

26
 Consumer credit refers to the credit granted
"to an individual to facilitate the purchase of
consumer goods and services." Garner (ed. in
chief), supra, p. 396.
Also known as personal credit, it "may be
extended by means of a charge account, an
installment sale, or by a personal loan."
Editorial staff of Prentice-Hall, Inc., supra, p.
164.
  In general, this term refers to amounts paid on
27

a percentage basis "for the privilege of making

purchases on a deferred payment basis." Smith,
supra, p. 314.
Under §3(h) of RA 8484, more specifically,
these are amounts "to be paid by the debtor
incident to the extension of credit such as
interest or discounts, collection fees, credit
investigation fees, and other service
charges."
 Garner (ed. in chief), supra, p. 199.
28

 In general, a home office refers to "the use of

29

a residence for business purposes." Smith,

supra, p. 389.
More specifically, it is the "principal place of
business" where the main office is located
as appearing in the corporation’s articles of
incorporation. 5th paragraph, §4.107-1 of
RR 7-95, dated December 9, 1995.
 4th paragraph, §4.107-1 of RR 7-95, dated
30

December 9, 1995.
 Meigs,
31
Mosich, and Larsen, Modern
Advanced Accounting (2nd ed., 1979), p. 145.
 "Indeed, accounting operations x x x are
inevitable, and have to be effected in the
ordinary course of business, wherever the
home office x x x extends its trade to
another land through a branch office x x
x." Koppel (Philippines), Inc. v. Yatco, 77
Phil. 496, 512, October 10, 1946, per
Hilado, J.
 Meigs, Mosich, and Larsen, supra, p. 148.
32

33
 "Reciprocal accounts" are account titles found
in the books of accounts of a home office and its
branches that may be likened to two sides of the
same coin. When one account -- the Investment
in Branch account -- is debited by the home
office in its own books for a particular
transaction with a branch, the other account --
the Home Office account -- is credited by the
latter, also in its own books to show how that
transaction affected it. Thus, if reciprocal
accounts are offset against each other at the
end of the financial reporting period of the entire
business enterprise, an intra-company transfer
of assets will show neither an increase nor a
decrease in total assets, precisely because the
transferred assets merely changed location from
one unit of the same entity to another; that is,
from the home office to any of its branches or
vice versa. In this scenario, there is obviously no
change in ownership. See Meigs, Mosich, and
Larsen, supra, pp. 144-146, 149-150, 165.
34
 Petitioner’s Memorandum, p. 27; temporary
rollo, p. 27.
 For financial accounting purposes, the parent
35

company in Delaware is a single entity

composed of its home office, the various ROCs
and respondent.
Though viewed as one, the parent company
and respondent are, in law, separate and
distinct juridical entities. Applying Art. 44 of
the Civil Code, each is a corporation for
private interest or purpose to which the law
grants a juridical personality, separate and
distinct from that of each shareholder. While
the former is duly organized and existing
under and by virtue of the laws of Delaware,
the latter is registered and operates under
Philippine laws.
"The act of one corporation crediting or
debiting the other for certain items x x x is
perfectly compatible with the idea of the
domestic entity being or acting as a mere
 branch x x x of the parent organization.
Such operations were called for [anyway] by
the exigencies or convenience of the entire
business." Koppel (Philippines), Inc. v.
Yatco, supra, pp. 511-512.
 A "transfer price" is "[t]he price charged by
36

one segment of an organization for a product or

service supplied to another segment of the same
organization x x x." Garner (ed. in chief), supra,
p. 1227.
There are three general methods for
determining transfer prices; namely, market-
based, cost-based, and negotiated. The
method chosen must lead each sub-unit
manager to make optimal decisions for the
organization as a whole, in order to meet the
three criteria of goal congruence,
managerial effort, and sub-unit autonomy.
Horngren & Foster, Cost Accounting: A
Managerial Emphasis (7th ed., 1991), pp.
855-856 & 860.
37
 Under a responsibility accounting system in
which the plans and actions of each
responsibility center is measured, a manager
may be held accountable for sales only (of a
revenue center); or for expenses only (of a cost
center); or for both revenues and costs (of a
profit center); or for revenues, costs and
investments (of an investment center). Horngren
& Foster, id., p. 186.
 Meigs, Mosich, and Larsen, supra, p. 146.
38

39
 Under §100 of the Tax Code, "export sales" as
applied to goods "means the sale and shipment
or exportation of goods from the Philippines to a
foreign country x x x or foreign currency
denominated sales." "Foreign currency
denominated sales" refers to "sales to non-
residents of goods assembled or manufactured
in the Philippines, for delivery to residents in the
Philippines and paid for in convertible foreign
currency remitted through the banking system in
the Philippines."
 Commissioner of Internal Revenue v. Cebu
40

Toyo Corp., GR No. 149073, February 16, 2005.

 Deoferio Jr. and Mamalateo, supra, pp. 33 &
41

67.
 Smith, supra, p. 892.
42

 See Kapatiran ng mga Naglilingkod sa

43

Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA

371, 378-379, June 30, 1988.
44
 An indirect tax "is imposed upon goods
[before] reaching the consumer who ultimately
pays for it, not as a tax, but as a part of the
purchase price." Maceda v. Macaraig Jr., 223
SCRA 217, 235, June 8, 1993, per Nocon, J.;
referring to Paras, Taxation
Fundamentals (1966), pp. 24-
25. See Guzman, Crisis Under Arroyo Rages:
People Bear the Brunt, IBON Birdtalk: Economic
and Political Briefing, PSSC Auditorium, PSSC
Bldg., Commonwealth Ave., Quezon City,
January 13, 2005, p. 14.
45
 See Tolentino v. Secretary of Finance, 235
SCRA 630, 657, August 25, 1994, and Tolentino
v. Secretary of Finance, 319 Phil. 755, 792 &
797, October 30, 1995.
 Deoferio Jr. and Mamalateo, supra, pp. 49 &
46

89.
 Commissioner of Internal Revenue v. CA,
47

supra, pp. 883-884.

 2nd paragraph of §102(a) [now 2nd paragraph
48

of §108(A)] of the Tax Code. See Deoferio Jr.

and Mamalateo, supra, pp. 89-90.
 Commissioner of Internal Revenue v. CA,
49

supra, p. 884, per Pardo, J.

  Deoferio Jr. and Mamalateo, supra, pp. 81,
50

82, 91, 92 & 204.

 Deoferio Jr. and Mamalateo, id., pp. 43 & 93.
51

 Per VAT Ruling No. 040-98, relied upon by

52

petitioner. See Petition, p. 9; rollo, p. 16.

 Garner (ed. in chief), supra, p. 336.
53

 Id., p. 1173.
54

 Id., p. 479.
55

 Id., p. 1421.
56

 §102(b)(2) of the Tax Code.

57

 See 5th paragraph of item 1 in the reply

58

portion of VAT Ruling No. 040-98, dated

November 23, 1998.
 See Alexander Howden & Co., Ltd. v. The
59

Collector (Now Commissioner) of Internal

Revenue, 121 Phil. 579, 583-584, April 14,
1965.
60
 "[N]o state may tax anything not within its
jurisdiction without violating the due process
clause of the [C]onstitution." Manila Gas Corp.
v. Collector of Internal Revenue, 62 Phil. 895,
900, January 17, 1936, per Malcolm, J.
  Deoferio Jr. and Mamalateo, supra, p. 93.
61

 Alejandro, The Law on Taxation (1966 rev.

62

ed.), p. 33.
 Garner (ed. in chief), supra, p. 1503.
63

 De Leon, The Fundamentals of Taxation (12th

64

ed., 1998), p. 3.
 Deoferio Jr. and Mamalateo, supra, pp. 93.
65

 Agpalo, Statutory
66
Construction (2nd ed.,
1990), p. 45.
 Cebu Portland Cement Co. v. Municipality of
67

Naga, Cebu, 133 Phil. 695, 699, August 22,

1968, per Fernando, J. (later CJ.).
 Luzon Surety Co., Inc. v. De Garcia, 30 SCRA
68

111, 116, October 31, 1969, per

Fernando, J. (later CJ.).
 Contex Corp. v. Commissioner of Internal
69

Revenue, 433 SCRA 376, 387, July 2, 2004.

 Gove (ed. in chief) and the Merriam-Webster
70

editorial staff, Webster’s Third New International

Dictionary of the English Language
Unabridged (1976), p. 136.
  2nd paragraph of §102(a) [now 2nd paragraph
71

of §108(A)] of the Tax Code.

 See Agpalo, supra, pp. 153-160.
72

 Ibid.
73

 See Regalado v. Yulo, 61 Phil. 173, 179,

74

February 15, 1935.

 De Leon, supra, p. 83.
75

 See 5th paragraph of item 1 in the reply

76

portion of VAT Ruling No. 040-98, dated

November 23, 1998.
 CA Decision, p. 11; rollo, p. 34.
77

 See Hilado v. Collector of Internal Revenue,

78

100 Phil. 288, 295, October 31, 1956.

 Philippine Bank of Communications v.
79

Commissioner of Internal Revenue, 361 Phil.

916, 929, January 28, 1999, per Quisumbing, J.
 Ibid, (citing People v. Hernandez, 59 Phil. 272,
80

276, December 22, 1933, and Molina v. Rafferty,

37 Phil. 545, 555, February 1, 1918.)
 Commissioner of Internal Revenue v. Central
81

Luzon Drug Corp., GR No. 159647, April 15,

2005, p. 26, per Panganiban, J.
  See Commissioner of Internal Revenue v. CA,
82

240 SCRA 368, 372, January 20, 1995.

83
 See Commissioner of Internal Revenue v. CA,
335 Phil. 219, 226-227, February 6, 1997
(citing Commissioner of Internal Revenue v.
Telefunken Semiconductor Philippines, Inc., 319
Phil. 523, 530, October 23, 1995; Bank of
America NT & SA v. CA, 234 SCRA 302, 306-
307, July 21, 1994; Commissioner of Internal
Revenue v. CTA, 195 SCRA 444, 460-461,
March 20, 1991; Commissioner of Internal
Revenue v. Mega General Merchandising Corp.,
166 SCRA 166, 172, September 30,
1988; Commissioner of Internal Revenue v.
Burroughs Ltd., 226 Phil. 236, 240-241, June 19,
1986; and ABS-CBN Broadcasting Corp. v.
CTA, 195 Phil. 33, 41 & 44, October 12, 1981).
 This section has been retained in RA 8424 as
84

amended, with a slight modification: "preceding

section" was changed to "preceding Sections."
 The Municipality Government of Pagsanjan,
85

Laguna v. Reyes, 98 Phil. 654, 658, March 23,

1956.
 Dueñas v. Santos Subdivision Homeowners
86

Association, 431 SCRA 76, 89, June 4, 2004,

per Quisumbing, J. (quoting Republic v.
Sandiganbayan, 355 Phil. 181, 198, July 31,
1998, per Panganiban, J.). See Home
Development Mutual Fund v. COA, GR No.
157001, October 19, 2004, per Carpio, J.
 §246 of the Tax Code provides:
87

"Non-retroactivity of rulings. -- Any

revocation, modification, or reversal of x x x
the rulings x x x promulgated by the
Commissioner shall not be given retroactive
application if the revocation, modification, or
reversal will be prejudicial to the taxpayers
except in the following cases: (a) where the
taxpayer deliberately misstates or omits
material facts from his return or in any
document required of him by the [BIR]; (b)
where the facts subsequently gathered by
the [BIR] are materially different from the
facts on which the ruling is based; or (c)
where the taxpayer acted in bad faith."
 1st paragraph of §4 of RA 8424, the Tax Code
88

now in effect.
 Hilado v. Collector of Internal Revenue, supra,
89

p. 294.
90
 Interpellations during the second reading of
Committee Report No. 349 on Senate Bill No.
1630 - VAT Refinements, Record of the Senate,
2nd Regular Session (February 21, 1994 to April
20, 1994), Vol. IV, No. 65, Monday, March 21,
1994, pp. 536-537. Italics and boldface copied
verbatim, but underscoring ours. See Journal of
the Senate, 2nd Regular Session (1993-1994),
Vol. III, Monday, March 21, 1994, p. 70.
 ABS-CBN Broadcasting Corp. v. CTA, supra,
91

p. 43, per Melencio-Herrera, J. (citing Alexander

Howden & Co., Ltd. v. Collector of Internal
Revenue, 121 Phil. 579, 587, April 14, 1965,
and Biddle v. Commissioner of Internal
Revenue, 302 U.S., 573, 582, 58 S.Ct. 379, 383,
January 10, 1938). See In re R. Mcculloch Dick,
38 Phil. 41, 77-78, April 16, 1918, per
Carson, J. (quoting Sutherland, Statutory
Construction, Vol. II, [2nd ed.], sections 403 and
404).
 Commissioner of Internal Revenue v.
92

Solidbank Corp., 416 SCRA 436, 455,

November 25, 2003, per
Panganiban, J. (footnoting Alexander Howden &
Co., Ltd. v. The Collector [Now Commissioner]
of Internal Revenue, supra, p. 587, per
 Bengzon, J.P., J.); the latter case
citing Laxamana v. Baltazar, 92 Phil. 32, 34-35,
September 19, 1952, and Mead Corporation v.
Commissioner of Internal Revenue, 116 F.2d.
187, 194, November 29, 1940, per
Jones, Circuit J.
93
 Commissioner of Internal Revenue v. CA,
supra, pp. 885-886, (citing Commissioner of
Internal Revenue v. CA, 204 SCRA 182, 189-
190, November 21, 1991).
 Commissioner of Internal Revenue v. Cebu
94

Toyo Corp., supra. §110(B) of the Tax Code.

 Bank of America NT & SA v. CA, supra, p.
95

307, per Vitug, J.

96
 "x x x within two (2) years after the close of the
taxable quarter x x x," per §106 (now §112) of
the Tax Code.
XXXXXXXXXXX
VALUE ADDED TAX EXEMPT TRANSACTIONS
GR 153866
CIR vs. Seagate Technology
Commissioner of Internal Revenue vs. Seagate
Technology (Philippines)
G.R. NO. 153866, February 11, 2005

FACTS:
Respondent, Seagate Technology is registered with the
Philippine Export Zone Authority (PEZA) under
Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in
computers for export. Also a VAT-registered entity, it
filed VAT returns for the period 1 April 1998 to 30 June
1999. However, on 4 October 1999 it filed an
administrative claim for refund of VAT input taxes in the
amount of P28,369,226.38 representing the value of the
taxes of the capital goods and services it had purchased.
This application for refund was not acted upon by the CIR
on the ground that Seagate failed to prove that it was
entitled to the refund/credit sought so the latter filed a
Petition for Review with the CTA.
CTA’s decision: Granted the claim for refund.
CA’s decision: Affirmed the grant of refund in the
reduced amount. Seagate had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226
(otherwise known as the Omnibus Investment Code of
1987), not of those under both Presidential Decree No.
(PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from
the payment of income tax when it opted for the income
tax holiday in lieu of the 5% preferential tax on gross
income earned. As a VAT-registered entity, though, it
was still subject to the payment of other national internal
revenue taxes, like the VAT.
ISSUE:
Whether or not Seagate Technology is entitled to the
refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing its unutilized input VAT
paid on capital goods purchased for the period April 1,
1998 to June 30, 1999.
RULING:
Yes, it is entitled to a refund of or credit for input VAT.
Respondent, as a PEZA-registered enterprise within a
special economic zone, is entitled to the fiscal incentives
and benefits provided for in PD 66. It shall also enjoy all
privileges, benefits, advantages or exemptions under both
Republic Act Nos. (RA) 7227 and 7844.
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% 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 VAT refund or credit.
NOTES:
Preferential Tax Treatment Under Special Laws
Petitioner enjoys preferential tax treatment. 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.
A “VAT-registered person” is a taxable person who has
registered for VAT purposes under §236 of the Tax Code.
VAT-registered persons shall pay the VAT on a monthly
basis.
Nature of the VAT and the Tax Credit Method
The Tax Credit Method relies on invoices wherein 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. If at the end of a taxable
quarter the output taxes charged by a seller are equal to
the input taxes 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. If, however, 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 or from the acquisition of capital goods, any
excess over the output taxes shall instead be refunded to
the taxpayer or credited against other internal revenue
taxes.
Indirect tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.
While the liability is imposed on one person,
the burden may be passed on to another.
“Output taxes” refer to the VAT due on the sale or lease
of taxable goods, properties or services by a VAT-
registered or VAT-registrable person.
By “input taxes” is meant the VAT due from or paid by a
VAT-registered person in the course of trade or business
on the importation of goods or local purchases of goods or
services, including the lease or use of property from a
VAT-registered person.
Destination Principle
Under this principle, goods and services are taxed only in
the country where these are consumed. Thus, exports are
zero-rated, but imports are taxed.
Distinction between Exempt Transaction and Exempt
Party
An exempt transaction involves goods or services which,
by their nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code, without
regard to the tax status –VAT-exempt or not — of the
party to the transaction. Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax
refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity
granted VAT exemption under the Tax Code, a special
law or an international agreement to which the Philippines
is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT. Such party is
also not subject to the VAT, but may be allowed a tax
refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.
A “customs territory” means the national territory of the
Philippines outside of the proclaimed boundaries of the
ecozones, except those areas specifically declared by
other laws and/or presidential proclamations to have the
status of special economic zones and/or free ports.
Under the cross-border principle of the VAT system
being enforced by the Bureau of Internal Revenue (BIR),
no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free
of the VAT, then the same rule holds for such exports
from the national territory — except specifically declared
areas — to an ecozone.
An ecozone — indubitably a geographical territory of the
Philippines — is, however, regarded in law as foreign
soil.
Full text: CIR vs. Seagate Technology G.R. NO. 153866,
February 11, 2005
XXX
G.R. No. 153866             February 11, 2005
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY
(PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating
from the Special Economic Zone in Naga, Cebu --
like herein respondent -- are entities exempt from all
internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or
VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-
rated. Hence, in the present case, the distinction
between exempt entities and
exempt transactions has little significance, because
the net result is that the taxpayer is not liable for the
VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund
of or credit for the input VAT it paid on capital goods
it purchased. Thus, the Court of Tax Appeals and
the Court of Appeals did not err in ruling that it is
entitled to such refund or credit.
The Case
Before us is a Petition for Review1 under Rule 45 of
the Rules of Court, seeking to set aside the May 27,
2002 Decision2 of the Court of Appeals (CA) in CA-
GR SP No. 66093. The decretal portion of the
Decision reads as follows:
"WHEREFORE, foregoing premises considered, the
petition for review is DENIED for lack of merit."3
The Facts
The CA quoted the facts narrated by the Court of
Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent
facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation
duly registered with the Securities and Exchange
Commission to do business in the Philippines, with
principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an,
Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having
been duly appointed and empowered to perform the
duties of his office, including, among others, the duty
to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine
Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to engage
in the manufacture of recording components
primarily used in computers for export. Such
registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-
registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April
1997;
5. VAT returns for the period 1 April 1998 to 30 June
1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input
taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this
Petition for Review), was filed on 4 October 1999
with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent]
from [petitioner] on [respondent’s] claim for VAT
refund.
"The administrative claim for refund by the
[respondent] on October 4, 1999 was not acted upon
by the [petitioner] prompting the [respondent] to
elevate the case to [the CTA] on July 21, 2000 by
way of Petition for Review in order to toll the running
of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following
Special and Affirmative Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit
is subject to administrative routinary
investigation/examination by [petitioner’s] Bureau;
2. Since ‘taxes are presumed to have been collected
in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes
sought to be refunded were erroneously or illegally
collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA
459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in
‘strictissimi juris’ against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the
nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is
fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the
clearest grant of organic or statutory law. An
exemption from the common burden cannot be
permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a
Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is
not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As
[respondent’s] business is not subject to VAT, the
capital goods and services it alleged to have
purchased are considered not used in VAT taxable
business. As such, [respondent] is not entitled to
refund of input taxes on such capital goods pursuant
to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant
to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the
provisions of Section 204 (C) and 229 of the 1997
Tax Code on filing of a written claim for refund within
two (2) years from the date of payment of tax.’
"On July 19, 2001, the Tax Court rendered a
decision granting the claim for refund."4
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting
the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the
reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input
VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had
availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as
the Omnibus Investment Code of 1987), not of those
under both Presidential Decree No. (PD) 66, as
amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the
payment of income tax when it opted for the income
tax holiday in lieu of the 5 percent preferential tax on
gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other
national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of
the Tax Code nor Sections 4.106-1 and 4.103-1 of
RR 7-95 were applicable. Having paid the input VAT
on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims
for its refund within the two-year prescriptive period.
Such payments were -- to the extent of the
refundable value -- duly supported by VAT invoices
or official receipts, and were not yet offset against
any output VAT liability.
Hence this Petition.5
Sole Issue
Petitioner submits this sole issue for our
consideration:
"Whether or not respondent is entitled to the refund
or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized
input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999."6
The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a
special economic zone,7 respondent is entitled to the
fiscal incentives and benefits8 provided for in either
PD 669 or EO 226.10 It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions
under both Republic Act Nos. (RA) 722711 and
7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the
provisions of other laws to the contrary, respondent
shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares,
except those prohibited by law, brought into the
zone to be stored, broken up, repacked, assembled,
installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or
used directly or indirectly in such activities.13 Even
so, respondent would enjoy a net-operating loss
carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption
from export taxes, local taxes and licenses.14
Comparatively, the same exemption from internal
revenue laws and regulations applies if EO 22615 is
chosen. Under this law, respondent shall further be
entitled to an income tax holiday; additional
deduction for labor expense; simplification of
customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing
warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital
equipment, as well as for taxes and duties on raw
materials; and exemption from contractors’ taxes,
wharfage dues, taxes and duties on imported capital
equipment and spare parts, export taxes, duties,
imposts and fees,16 local taxes and licenses, and real
property taxes.17
A privilege available to respondent under the
provision in RA 7227 on tax and duty-free
importation of raw materials, capital and
equipment18 -- is, ipso facto, also accorded to the
zone19 under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and
regulations to the contrary -- extends20 to that zone
the provision stating that no local or national taxes
shall be imposed therein.21 No exchange control
policy shall be applied; and free markets for foreign
exchange, gold, securities and future shall be
allowed and maintained.22 Banking and finance shall
also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency
depository units of local commercial banks and
offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA
7844 from negotiable tax credits24 for locally-
produced materials used as inputs. Aside from the
other incentives possibly already granted to it by the
Board of Investments, it also enjoys preferential
credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear
that petitioner enjoys preferential tax treatment.27 It is
not subject to internal revenue laws and regulations
and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt,
petitioner as a VAT-registered person,28 however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at
present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the
course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or
properties or on each rendition of services in the
course of trade or business29 as they pass along the
production and distribution chain, the tax being
limited only to the value added30 to such goods,
properties or services by the seller, transferor or
lessor.31 It is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the
goods, properties or services.32 As such, it should be
understood not in the context of the person or entity
that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same
conclusion is arrived at.
The law34 that originally imposed the VAT in the
country, as well as the subsequent amendments of
that law, has been drawn from the tax credit
method.35 Such method adopted the mechanics and
self-enforcement features of the VAT as first
implemented and practiced in Europe and
subsequently adopted in New Zealand and
Canada.36 Under the present method that relies on
invoices, an entity can credit against or subtract from
the VAT charged on its sales or outputs the VAT
paid on its purchases, inputs and imports.37
If at the end of a taxable quarter the output
taxes38 charged by a seller39 are equal to the input
taxes40 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 refunded44 to
the taxpayer or credited45 against other internal
revenue taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-
rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export
sale of goods and supply of services. 47 The tax rate
is set at zero.48 When applied to the tax base, such
rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions
charges no output tax,49 but can claim a refund of or
a tax credit certificate for the VAT previously
charged by suppliers.
Effectively zero-rated transactions, however, refer to
the sale of goods50 or supply of services51 to persons
or entities whose exemption under special laws or
international agreements to which the Philippines is
a signatory effectively subjects such transactions to
a zero rate.52 Again, as applied to the tax base, such
rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax
on such transactions can also claim a refund of or a
tax credit certificate for the VAT previously charged
by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and
exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle53 to the exportation
of goods, automatic zero rating54 is primarily
intended to be enjoyed by the seller who is directly
and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or
credit of input taxes that are attributable to export
sales.55 Effective zero rating, on the contrary, is
intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by
the suppliers.
In both instances of zero rating, there is total
relief for the purchaser from the burden of the
tax.56 But in an exemption there is only partial
relief,57 because the purchaser is not allowed any tax
refund of or credit for input taxes paid.58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be
the transaction itself or any of the parties to the
transaction.59
An exempt transaction, on the one hand, involves
goods or services which, by their nature, are
specifically listed in and expressly exempted from
the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any
tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or
entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which
the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the
VAT.61 Such party is also not subject to the VAT, but
may be allowed a tax refund of or credit for input
taxes paid, depending on its registration as a VAT or
non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on
consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the
goods, properties or services.62 While the liability is
imposed on one person, the burden may be passed
on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for
payment of the VAT, but does not relieve the same
party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the
purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase
transactions entered into by respondent are not
VAT-exempt.
Special laws may certainly exempt transactions from
the VAT.63 However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which
respondent was registered. The
purchase transactions it entered into are, therefore,
not VAT-exempt. These are subject to the VAT;
respondent is required to register.
Its sales transactions, however, will either be zero-
rated or taxed at the standard rate of 10
percent,64 depending again on the application of
the destination principle.65
If respondent enters into such sales transactions
with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these
shall be subject to 0 percent.66 If entered into with a
purchaser for use or consumption in the Philippines,
then these shall be subject to 10 percent, 67 unless
the purchaser is exempt from the indirect burden of
the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt
from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916
effectively subjects such transactions to a zero
rate,68 because the ecozone within which it is
registered is managed and operated by the PEZA as
a separate customs territory.69 This means that in
such zone is created the legal fiction of foreign
territory.70 Under the cross-border principle71 of the
VAT system being enforced by the Bureau of
Internal Revenue (BIR),72 no VAT shall be imposed
to form part of the cost of goods destined for
consumption outside of the territorial border of the
taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of
the VAT,73 then the same rule holds for such exports
from the national territory -- except specifically
declared areas -- to an ecozone.
Sales made by a VAT-registered person in the
customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely,
sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are
deemed imports from a foreign country.74 An
ecozone -- indubitably a geographical territory of the
Philippines -- is, however, regarded in law as foreign
soil.75 This legal fiction is necessary to give
meaningful effect to the policies of the special law
creating the zone.76 If respondent is located in an
export processing zone77 within that ecozone, sales
to the export processing zone, even without being
actually exported, shall in fact be viewed
as constructively exported under EO
226. Considered as export sales, such purchase
78  79 

transactions by respondent would indeed be subject

to a zero rate.80
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed,
respondent as an entity is exempt from internal
revenue laws and regulations.
This exemption covers both direct and indirect taxes,
stemming from the very nature of the VAT as a tax
on consumption, for which the direct liability is
imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt
entity, can neither be directly charged for the VAT on
its sales nor indirectly made to bear, as added cost
to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Moreover, the exemption is both express and
pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and
national, shall be imposed on business
establishments operating within the
ecozone."81 Since this law does not exclude the VAT
from the prohibition, it is deemed included. Exceptio
firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a
thing not being excepted must be regarded as
coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on
the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon
business establishments operating within the
ecozone under RA 7916 also means that no VAT
may be passed on and imposed indirectly. Quando
aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is
also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA
7916, the same prohibition applied, except for real
property taxes that presently are imposed on land
owned by developers.82 This similar and repeated
prohibition is an unambiguous ratification of the
law’s intent in not imposing local or national taxes on
business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw
materials, equipment and the like "shall not be
subject to x x x internal revenue laws and
regulations" under PD 6683 -- the original charter of
PEZA (then EPZA) that was later amended by RA
7916.84 No provisions in the latter law modify such
exemption.
Although this exemption puts the government at an
initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national
economy by enticing more business investments
and creating more employment opportunities.85
Fourth, even the rules implementing the PEZA law
clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x"86 if
brought to the ecozone’s restricted area87 for
manufacturing by registered export enterprises,88 of
which respondent is one. These rules also apply to
all enterprises registered with the EPZA prior to the
effectivity of such rules.89
Fifth, export processing zone enterprises
registered90 with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from
national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used
for the manufacture of their products;91 on required
supplies and spare part for consigned
equipment;92 and on foreign and domestic
merchandise, raw materials, equipment and the like
-- except those prohibited by law -- brought into the
zone for manufacturing.93 In addition, they are given
credits for the value of the national internal revenue
taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the
manufacture of their products,94 as well as for the
value of such taxes imposed on domestic raw
materials and supplies that are used in the
manufacture of their export products and that form
part thereof.95
Sixth, the exemption from local and national taxes
granted under RA 722796 are ipso facto accorded to
ecozones.97 In case of doubt, conflicts with respect to
such tax exemption privilege shall be resolved in
favor of the ecozone.98
And seventh, the tax credits under RA 7844 -- given
for imported raw materials primarily used in the
production of export goods,99 and for locally
produced raw materials, capital equipment and
spare parts used by exporters of non-traditional
products100 -- shall also be continuously enjoyed by
similar exporters within the ecozone.101 Indeed, the
latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are
construed strictissimi juris102 against the
taxpayer and liberally in favor of the taxing
103 

authority.104
Tax refunds are in the nature of such
exemptions.105 Accordingly, the claimants of those
refunds bear the burden of proving the factual basis
of their claims;106 and of showing, by words too plain
to be mistaken, that the legislature intended to
exempt them.107 In the present case, all the cited
legal provisions are teeming with life with respect to
the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the
challenge.
Respondent, which as an entity is exempt, is
different from its transactions which are not exempt.
The end result, however, is that it is not subject to
the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to
the tax exemption conferred by law upon it as an
entity, not upon the transactions
themselves. Nonetheless, its exemption as an
108 

entity and the non-exemption of its transactions lead

to the same result for the following considerations:
First, the contemporaneous construction of our tax
laws by BIR authorities who are called upon to
execute or administer such laws109 will have to be
adopted. Their prior tax issuances have held
inconsistent positions brought about by their
probable failure to comprehend and fully appreciate
the nature of the VAT as a tax on consumption and
the application of the destination
principle.110 Revenue Memorandum Circular No.
(RMC) 74-99, however, now clearly and correctly
provides that any VAT-registered supplier’s sale of
goods, property or services from the customs
territory to any registered enterprise operating in the
ecozone -- regardless of the class or type of the
latter’s PEZA registration -- is legally entitled to a
zero rate.111
Second, the policies of the law should prevail. Ratio
legis est anima. The reason for the law is its very
soul.
In PD 66, the urgent creation of the EPZA which
preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and
promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the
development of the country."112
RA 7916, as amended by RA 8748, declared that by
creating the PEZA and integrating the special
economic zones, "the government shall actively
encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social
development of the country x x x through the
establishment, among others, of special economic
zones x x x that shall effectively attract legitimate
and productive foreign investments."113
Under EO 226, the "State shall encourage x x x
foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,]
accelerate development of less developed regions of
the country[,] and result in increased volume and
value of exports for the economy."114 Fiscal
incentives that are cost-efficient and simple to
administer shall be devised and extended to
significant projects "to compensate for market
imperfections, to reward performance contributing to
economic development,"115 and "to stimulate the
establishment and assist initial operations of the
enterprise."116
Wisely accorded to ecozones created under RA
7916117 was the government’s policy -- spelled out
earlier in RA 7227 -- of converting into alternative
productive uses118 the former military reservations
and their extensions,119 as well as of providing them
incentives120 to enhance the benefits that would be
derived from them121 in promoting economic and
social development.122
Finally, under RA 7844, the State declares the need
"to evolve export development into a national
effort"123 in order to win international markets. By
providing many export and tax incentives, 124 the
State is able to drive home the point that exporting is
indeed "the key to national survival and the means
through which the economic goals of increased
employment and enhanced incomes can most
expeditiously be achieved."125
The Tax Code itself seeks to "promote sustainable
economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for
business to enable firms to compete better in the
regional as well as the global market."126 After all,
international competitiveness requires economic and
tax incentives to lower the cost of goods produced
for export. State actions that affect global
competition need to be specific and selective in the
pricing of particular goods or services.127
All these statutory policies are congruent to the
constitutional mandates of providing incentives to
needed investments,128 as well as of promoting the
preferential use of domestic materials and locally
produced goods and adopting measures to help
make these competitive.129 Tax credits for domestic
inputs strengthen backward linkages. Rightly so,
"the rule of law and the existence of credible and
efficient public institutions are essential prerequisites
for sustainable economic development."130
VAT Registration, Not Application for Effective Zero
Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under
our VAT law.131 Petitioner alleges that respondent did
register for VAT purposes with the appropriate
Revenue District Office. However, it is now too late
in the day for petitioner to challenge the VAT-
registered status of respondent, given the latter’s
prior representation before the lower courts and the
mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of
the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment --
including capital goods -- that registered enterprises
will use, directly or indirectly, in manufacturing. 132 EO
226 even reiterates this privilege among the
incentives it gives to such enterprises.133 Petitioner
merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not
subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not
considered used in the VAT business, and no VAT
refund or credit is due.134 This is a non sequitur. By
the VAT’s very nature as a tax on consumption, the
capital goods and services respondent has
purchased are subject to the VAT, although at zero
rate. Registration does not determine taxability
under the VAT law.
Moreover, the facts have already been determined
by the lower courts. Having failed to present
evidence to support its contentions against
the income tax holiday privilege of
respondent,135 petitioner is deemed to have
conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought
below cannot be raised for the first time on
appeal."136 This is a "matter of procedure"137 and a
"question of fairness."138 Failure to assert "within a
reasonable time warrants a presumption that the
party entitled to assert it either has abandoned or
declined to assert it."139
The BIR regulations additionally requiring an
approved prior application for effective zero
rating140 cannot prevail over the clear VAT nature of
respondent’s transactions. The scope of such
regulations is not "within the statutory authority x x x
granted by the legislature.141
First, a mere administrative issuance, like a BIR
regulation, cannot amend the law; the former cannot
purport to do any more than interpret the
latter.142 The courts will not countenance one that
overrides the statute it seeks to apply and
implement.143
Other than the general registration of a taxpayer the
VAT status of which is aptly determined, no
provision under our VAT law requires an additional
application to be made for such taxpayer’s
transactions to be considered effectively zero-rated.
An effectively zero-rated transaction does not and
cannot become exempt simply because an
application therefor was not made or, if made, was
denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a
valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its
officials or agents.144
Second, grantia argumenti that such an application
is required by law, there is still the presumption of
regularity in the performance of official
duty. Respondent’s registration carries with it the
145 

presumption that, in the absence of contradictory

evidence, an application for effective zero rating was
also filed and approval thereof given. Besides, it is
also presumed that the law has been obeyed 146 by
both the administrative officials and the applicant.
Third, even though such an application was not
made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but
also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in
ecozones is an imperative, precisely to spur
economic growth in the country and attain global
competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with
the invoicing requirements,147 is sufficient for the
effective zero rating of the transactions of a
taxpayer. The nature of its business and
transactions can easily be perused from, as already
clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its
transactions cannot be exempted by its mere failure
to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by
their nature, but by the taxpayer’s negligence -- a
result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondent’s purchase
transactions are subject to a zero VAT rate, the tax
refund or credit is in order.
As correctly held by both the CA and the Tax Court,
respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for
the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a
simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These
two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While
EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt,
not from the VAT, but only from the payment of
income tax for a certain number of years, depending
on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid
5 percent of gross income earned in lieu of local and
national taxes imposable upon business
establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then
be refunded or credited.
Even if it is argued that respondent is subject to the
5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One
can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on
business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent
as an entity is exempt, the transactions it enters into
are not necessarily so. The VAT payments made in
excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or
Credit
As further enunciated by the Tax Court, respondent
complied with all the requisites for claiming a VAT
refund or credit.150
First, respondent is a VAT-registered entity. This fact
alone distinguishes the present case from Contex, in
which this Court held that the petitioner therein was
registered as a non-VAT taxpayer.151 Hence, for
being merely VAT-exempt, the petitioner in that case
cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of
respondent are duly supported by VAT invoices and
have not been offset against any output taxes.
Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax
credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of
EO 226152 -- starting January 1, 1996, respondent
would still have the same benefit under a general
and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the
ecozones by RA 7916.
There was a very clear intent on the part of our
legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them
tax credits. This fact was revealed by the
sponsorship speeches in Congress during the
second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this
bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x
x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in
encouraging investments and creating an
environment conducive for investors, the bill offers
incentives such as the exemption from local and
national taxes, x x x tax credits for locally sourced
inputs x x x."153
And third, no question as to either the filing of such
claims within the prescriptive period or the validity of
the VAT returns has been raised. Even if such a
question were raised, the tax exemption under all
the special laws cited above is broad enough to
cover even the enforcement of internal revenue
laws, including prescription.154
Summary
To summarize, special laws expressly grant
preferential tax treatment to business
establishments registered and operating within an
ecozone, which by law is considered as a separate
customs territory. As such, respondent is exempt
from all internal revenue taxes, including the VAT,
and regulations pertaining thereto. It has opted for
the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law
and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its
sales transactions intended for export may not be
exempt, but like its purchase transactions, they are
zero-rated. No prior application for the effective zero
rating of its transactions is necessary. Being VAT-
registered and having satisfactorily complied with all
the requisites for claiming a tax refund of or credit for
the input VAT paid on capital goods purchased,
respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the
Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and
Garcia, JJ., concur.

Footnotes
Rollo, pp. 8-20.
1 

Id., pp. 21-30. Thirteenth Division. Penned by

2 

Justice Mercedes Gozo-Dadole, with the

concurrence of Justices Salvador J. Valdez Jr.
(chair) and Amelita G. Tolentino (member).
CA Decision, p. 10; rollo, p. 30. Bold types and
3 

caps in the original.

CA Decision, pp. 2-4; rollo, pp. 22-24. Citations
4 

omitted.
The Petition was deemed submitted for
5 

decision on April 3, 2003, upon receipt by the

Court of petitioner’s Memorandum, signed by
Assistant Solicitors General Cecilio O. Estoesta
and Fernanda Lampas Peralta and Associate
Solicitor Romeo D. Galzote. Respondent’s
Memorandum, signed by Attys. Dennis G.
Dimagiba and Franklin A. Prestousa, was filed
on March 7, 2003.
Petitioner’s Memorandum, p. 5; rollo, p. 99.
6 

Original in upper case.

7 
Referred to as ecozone, it is a selected area
with highly developed, or which has the potential
to be developed into, agro-industrial, industrial,
tourist/recreational, commercial, banking,
investment and financial centers. §4(a), Chapter
I of RA 7916, otherwise known as "The Special
Economic Zone Act of 1995."
§35, Chapter III of RA 7916.
8 

PD 66 is the law creating the Export

9 

Processing Zone Authority or EPZA. See 1st

paragraph of §23, Chapter III of RA 7916.
EO 226, in Article 1 thereof, is also known as
10 

the "Omnibus Investments Code" of

1987. See 1st paragraph of §23, Chapter III of
RA 7916.
RA 7227, in §1 thereof, is also known as the
11 

"Bases Conversion and Development Act of

1992." See §51, Chapter VI of RA 7916.
 RA 7844, in §1 thereof, is also known as the
12 

"Export Development Act of 1994." See 2nd

paragraph of §23, Chapter III of RA 7916.
13 
§17(1) of PD 66.
14 
§18 of PD 66.
15 
Article 77(1), Book VI of EO 226.
Article 39 of EO 226, certain paragraphs of
16 

which are expressly repealed by the 2nd

paragraph of §20 of RA 7716, otherwise known
as the "Expanded Value Added Tax Law,"
deemed effective May 27, 1994.
See Commissioner of Internal Revenue v.
Michel J. Lhuillier Pawnshop, Inc., 406 SCRA
178, 187, July 15, 2003.
17 
Article 78 of EO 226.
18 
(b) of the 2nd paragraph of §12 of RA 7227.
19 
§51, Chapter VI of RA 7916.
20 
§51, Chapter VI of RA 7916.
21 
(c) of the 2nd paragraph of §12 of RA 7227.
22 
(d) of the 2nd paragraph of §12 of RA 7227.
 Referred to as the Central Bank under (e) of
23 

the 2nd paragraph of §12 of RA 7227.

24 
§17 of RA 7844.
§16 of RA 7844. See 2nd paragraph of §23,
25 

Chapter III of RA 7916.

PD 1853 was the law that took effect in 1983,
26 

requiring deposits of duties upon the opening of

letters of credit to cover imports.
27 
2nd paragraph of §4, Chapter I of RA 7916.
A "VAT-registered person" is a taxable person
28 

who has registered for VAT purposes under

§236 of the Tax Code. Deoferio and
Mamalateo, The Value Added Tax in the
Philippines (1st ed., 2000), p. 265. See 9th
paragraph of §4.107-1(a) of Revenue
Regulations No. (RR) 7-95, implemented
beginning January 1, 1996, as amended by §6
of RR 6-97, effective January 1, 1997.
§§105 to 109 of RA 8424, as amended,
29 

otherwise known as the Tax Code.

Kapatiran
30 
ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc., 163 SCRA 371,
378-379, June 30, 1988.
 De Leon, The Fundamentals of Taxation (12th
31 

ed., 1998), p. 131.

32 
2nd paragraph of §105 of the Tax Code.
Deoferio Jr. and Mamalateo, The Value Added
33 

Tax in the Philippines (1st ed., 2000), pp. 33 &

36.
34 
EO 273.
Vitug, J.
35 
and Acosta, Tax Law and
Jurisprudence (2nd ed., 2000), p. 227.
See §193(d) of the National Internal Revenue
Code of 1977 as further amended by §1 of Pres.
Decree No. 1358 dated April 21, 1978, wherein
the tax credit method, instead of the cost
deduction method, was mandated to be applied
in computing the VAT due.
36 
Deoferio Jr. and Mamalateo, supra, p. 34.
37 
Id., pp. 34-35.
"Output taxes" refer to the VAT due on the
38 

sale or lease of taxable goods, properties or

services by a VAT-registered or VAT-registrable
person. See last paragraph of §110(A)(3) and
§236 of the Tax Code.
39 
Presumed to be VAT-registered.
By "input taxes" is meant the VAT due from or
40 

paid by a VAT-registered person in the course of

trade or business on the importation of goods or
local purchases of goods or services, including
the lease or use of property from a VAT-
registered person. See penultimate paragraph of
§110(A)(3) of the Tax Code.
41 
§110(B) of the Tax Code.
VAT-registered persons shall pay the VAT on a
monthly basis. §114(A) of the Tax Code.
42 
§110(B) of the Tax Code.
These are goods or properties with estimated
43 

useful lives greater than one year and which are

treated as depreciable assets under §34(F)
[formerly §29(f)] of the Tax Code, used directly
or indirectly in the production or sale of taxable
goods or services. 3rd paragraph of §4.106-1(b)
of RR 7-95.
These goods also refer to "capital assets" as this
term is defined in §39(A)(1) of the Tax Code.
44 
De Leon, p. 135.
45 
Deoferio Jr. and Mamalateo, supra, p. 244.
 Subject to the provisions of §§106, 108 and
46 

112 of the Tax Code.

47 
De Leon, p. 133.
48 
Deoferio Jr. and Mamalateo, supra, p. 190.
49 
De Leon, p. 133.
50 
§106(A)(2)(c) of the Tax Code.
51 
§108(B)(3) of the Tax Code.
52 
Deoferio Jr. and Mamalateo, supra, p. 215.
Under this principle, goods and services are
53 

taxed only in the country where these are

consumed. Thus, exports are zero-rated, but
imports are taxed. Id., p. 43.
In business parlance, "automatic zero rating"
54 

refers to the standard zero rating as provided for

in the Tax Code.
55 
Deoferio Jr. and Mamalateo, supra, p. 189.
56 
Id., p. 43.
57 
Id., p. 121.
58 
De Leon, pp. 133 & 135.
59 
Deoferio Jr. and Mamalateo, supra, p. 118.
60 
Id., p. 132.
61 
Id., pp. 132-133.
62
 De Leon, p. 132.
63
 §109(q) of the Tax Code.
64
 Deoferio Jr. and Mamalateo, supra, p. 187.
65
 Id., p. 69.
66
 §106(A)(2) of the Tax Code.
67
 §106(A)(1) of the Tax Code.
68
 §106(A)(2)(c) of the Tax Code.
69
 1st paragraph of §8, Chapter I of RA 7916.
A "customs territory" means the national territory
of the Philippines outside of the proclaimed
boundaries of the ecozones, except those areas
specifically declared by other laws and/or
presidential proclamations to have the status of
special economic zones and/or free ports. §2.g,
Rule 1, Part I of the "Rules and Regulations to
Implement Republic Act No. 7916, otherwise
known as ‘The Special Economic Zone Act of
1995.’"
70
 Deoferio Jr. and Mamalateo, supra, p. 227.
  This principle is not clearly defined by any law
71

or administrative issuance. See Id., p. 227.

 §2 of Revenue Memorandum Circular No.
72

(RMC) 74-99 dated October 15, 1999.

This circular is an example of an agency
statement of general applicability that takes the
form of a revenue tax issuance "bearing on
internal revenue tax rules and
regulations." Commissioner of Internal Revenue
v. CA, 329 Phil. 987, 1009, August 29, 1996, per
Vitug, J., citing RMC 10-86. See §2(2), Chapter
1, Book VII of Executive Order No. (EO) 292,
otherwise known as the "Administrative Code of
1987" dated July 25, 1987.
 §106(A)(2)(a) of the Tax Code.
73

 See Deoferio Jr. and Mamalateo, supra, p.

74

201.
75
 This zone is akin to the former army bases or
installations within the Philippines. Saura Import
and Export Co., Inc. v. Meer, 88 Phil. 199, 202,
February 26, 1951.
 Deoferio Jr. and Mamalateo, supra, p. 199.
76
77
 An "export processing zone" is a specialized
industrial estate located physically and/or
administratively outside customs territory,
predominantly oriented to export production, and
may be contained in an ecozone. §4(a) and (d),
Chapter I of RA 7916.
 Article 23, Chapter I, Title I, Book I of EO
78

226. See §2.mm.2), Rule I, Part I of the "Rules

and Regulations to Implement Republic Act No.
7916, otherwise known as ‘The Special
Economic Zone Act of 1995.’"
 Article 77(2), Book VI of EO 226.
79

 §106(A)(2)(a)(5) of the Tax Code.

80

 §24, Chapter III of RA 7916.

81

 §24, Chapter III of RA 7916, as amended by

82

§4 of RA 8748 dated June 1, 1999.

 §17(1) of PD 66.
83

 Estate of Salud Jimenez v. Philippine Export

84

Processing Zone, 349 SCRA 240, 260-261,

January 16, 2001. See 4th paragraph, §11,
Chapter II of RA 7916.
  Commissioner of Customs v. Philippine
85

Phosphate Fertilizer Corp., GR No. 144440,

September 1, 2004, p. 7.
 §1, Rule VIII, Part V and Rule XV of the
86

"Rules and Regulations to Implement Republic

Act No. 7916, otherwise known as ‘The Special
Economic Zone Act of 1995.’"
87
 A "restricted area" is a specific area within an
ecozone that is classified and/or fenced-in as an
export processing zone. §2.h, Rule I, Part I of
the "Rules and Regulations to Implement
Republic Act No. 7916, otherwise known as ‘The
Special Economic Zone Act of 1995.’"
88
 A "registered export enterprise" is one that is
registered with the PEZA, and that engages in
manufacturing activities within the purview of the
PEZA law for the exportation of its production.
§2.i, Rule I, Part I of the "Rules and Regulations
to Implement Republic Act No. 7916, otherwise
known as ‘The Special Economic Zone Act of
1995.’"
 §1, Rule XXV of the "Rules and Regulations to
89

Implement Republic Act No. 7916, otherwise

known as ‘The Special Economic Zone Act of
1995.’" See §56, Chapter VI of RA 7916.
90
 Article 11, Chapter I, Book I of EO 226.
91
 Article 39(c), Title III, Book I of EO 226,
expressly repealed by the 2nd paragraph of §20
of RA 7716. Consequently, enterprises
registered with the BOI after December 31, 1994
will no longer enjoy the incentives provided
under said article starting January 1, 1996.
92
 Article 39(m), Title III, Book I of EO 226.
93
 Article 77(1), Book VI of EO 226.
94
 Article 39(d), Title III, Book I of EO 226, also
expressly repealed by the 2nd paragraph of §20
of RA 7716. Consequently, enterprises
registered with the BOI after December 31, 1994
will no longer enjoy the incentives provided
under said article starting January 1, 1996.
95
 Article 39(k), Title III, Book I of EO 226.
96
 1st paragraph of §12(c) of RA 7227.
97
 §51, Chapter VI of RA 7916.
98
 2nd paragraph of §12(c) of RA 7227.
99
 §16(c), Article III of RA 7844.
100
 §16(e), Article III of RA 7844.
101
 2nd paragraph of §23, Chapter III of RA 7916.
 Commissioner of Internal Revenue v.
102

General Foods (Phils.), Inc., 401 SCRA 545,

550, April 24, 2003.
 Commissioner of Internal Revenue v.
103

Solidbank Corp., 416 SCRA 436, 461,

November 25, 2003
 Agpalo, Statutory
104
Construction (2nd ed.,
1990), p. 217.
 BPI Leasing Corp. v. CA, 416 SCRA 4, 14,
105

November 18, 2003.

 Paseo Realty & Development Corp. v. CA,
106

GR No. 119286, October 13, 2004, p. 14.

 Surigao Consolidated Mining Co., Inc. v.
107

Collector of Internal Revenue, 119 Phil. 33, 37,

December 26, 1963.
108
 Deoferio Jr. and Mamalateo, supra, p. 155.
109
 Agpalo, supra, pp. 82-83.
110
 Deoferio Jr. and Mamalateo, supra, p. 218.
 §3(3) of Revenue Memorandum Circular No.
111

(RMC) 74-99.
112
 §§1 and 2 of PD 66.
113
 2nd paragraph of §2, Chapter I of RA 7916.
114
 Article 2.1, Chapter I of EO 226.
115
 Article 2.3, Chapter I of EO 226.
116
 Article 2.8, Chapter I of EO 226.
117
 §51, Chapter VI of RA 7916.
 Tiu v. CA, 361 Phil. 229, 242, January 20,
118

1999.
119
 1st paragraph of §2, RA 7227.
120
 §§12 and 15 of RA 7227.
 John Hay Peoples Alternative Coalition v.
121

Lim, 414 SCRA 356, 369, October 24, 2003.

122
 2nd paragraph of §2, RA 7227.
123
 1st paragraph of §2, Article I of RA 7844.
124
 §§4(c) of Article I , 16, and 17 of RA 7844.
125
 2nd paragraph of §2, Article I of RA 7844.
 §2 of the Tax Code, as amended by RA 8761
126

effective January 1, 2000; and by RA 9010, the

effectivity of which has been retroacted to
January 1, 2001.
 American Society of International Law
127

Proceedings, "Indigenous People and the

Global Trade Regime," 96 Asilproc 279, 281,
March 16, 2002.
128
 §20 of Article II of the 1987 Constitution.
 2nd paragraph of §1 and §12 of Article XII of
129

the 1987 Constitution.

 Schwab, extract from the Preface of
130

the Global Competitiveness Report 2003-

2004, www.weforum.org, last visited January 27,
2005, 9:05am PST.
131
 §236 of the Tax Code.
 §17(1) of PD 66 and §56, Chapter VI of RA
132

7916.
133
 Article 77(1), Book VI of EO 226.
134
 Petitioner’s Memorandum, p. 9; rollo, p. 103.
 CA Decision, p. 7; rollo, p. 27; and CTA
135

Decision, p. 5, rollo, p. 35.

 Magnolia Dairy Products Corp. v. NLRC, 322
136

Phil. 508, 517, per Francisco, J.

  Commissioner of Internal Revenue v. Procter
137

& Gamble Philippine Manufacturing Corp., 204

SCRA 377, 383, December 2, 1991, per
Feliciano, J.
 Ibid. See Advertising Associates, Inc. v.
138

Collector of Internal Revenue, 97 Phil. 636, 641,

September 30, 1955.
 Atlas Consolidated Mining & Development
139

Corp. v. Commissioner of Internal Revenue, 102

SCRA 246, 259, January 27, 1981, per De
Castro, J.
140
 §4.107-1(d) of RR 7-95.
 Commissioner of Internal Revenue v.
141

Solidbank Corp., supra, p. 448, per

Panganiban, J.
142
 Vitug and Acosta, supra, p. 56.
143
 Id., p. 57.
 Spouses Morandarte v. CA, GR No. 123586,
144

August 12, 2004, p. 15.

145
 §3(m) of Rule 131 of the Rules of Court.
146
 §3(ff) of Rule 131 of the Rules of Court.
147
 §113(A) of the Tax Code.
  §24, Chapter III of RA 7916, as amended by
148

§4 of RA 8748.
149
 1st paragraph, §23, Chapter III of RA 7916.
 As a matter of principle, it is inadvisable to set
150

aside such a conclusion, because by the very

nature of its functions and sans abuse or
improvident exercise of its authority, the Tax
Court is "dedicated exclusively to the study and
consideration of tax problems and has
necessarily developed an expertise on the
subject x x x." Paseo Realty & Development
Corp. v. CA; supra, per Tinga, J., p. 8.
 Contex Corp. v. Hon. Commissioner of
151

Internal Revenue, GR No. 151135, July 2, 2004,

p. 11.
 This provision has been expressly repealed
152

by the 2nd paragraph of §20 of RA 7716. See

note 94.
 Legislative Archives, Committee Report No.
153

01027, House of Representatives, December

14, 1994, pp. 00132 & 00141.
 Commissioner of Customs v. Philippine
154

Phosphate Fertilizer Corp.; supra, pp. 9-10.

XXXXXXX
G.R. No. 154028. July 29, 2005
PHILIPPINE GEOTHERMAL, INC., Petitioners,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
QUISUMBING, J.:
The present petition for review on certiorari assails
the September 14, 2001 Decision1 and June 14,
2002 Resolution2 of the Court of Appeals in CA-
G.R. SP No. 54730, which affirmed the April 21,
1999 Decision3 of the Court of Tax Appeals in
C.T.A. Case No. 5541.
The facts of the case as found by the Court of
Appeals and Court of Tax Appeals are as follows:
Petitioner is a resident foreign corporation licensed
by the Securities and Exchange Commission (SEC)
to engage in the exploration, development and
exploitation of geothermal energy and resources in
the Philippines. In September 1971, it entered into a
service contract with the National Power Corporation
(NPC) to supply steam to the latter.
From September 1995 to February 1996, petitioner
billed NPC, Value Added Tax (VAT) computed at ten
percent of the service fee charged on the supply of
steam. NPC did not pay the VAT. To avoid any
possible tax deficiency, petitioner remitted VAT
equivalent to 1/11 of the fees received from NPC or
₱39,328,775.41, broken down as follows:
Exhibit Period Payment VAT Paid
covered Date
C 7/95 to 9/95 10/18/95 P 8,977,117.26
H 10/95 to 1/18/96 11,248,194.31
12/95
M 11/95 12/13/95 8,243,090.27
S 1/96 2/19/96 5,213,400.45
W 2/96 3/18/96 5,646,973.12
      P 39,328,775.41
Petitioner filed an administrative claim for refund
with the Bureau of Internal Revenue on July 10,
1996. According to petitioner, the sale of steam to
NPC is a VAT-exempt transaction under Sec. 103 of
the Tax Code.4 Petitioner claimed that Fiscal
Incentives Review Board (FIRB) Resolution No. 17-
87, approved by President Aquino pursuant to
Executive Order No. 93,5 expressly exempted NPC
from VAT.
Since respondent failed to act on the claim, on July
2, 1997, petitioner filed a petition to toll the running
of the two-year prescriptive period before the Court
of Tax Appeals.
Respondent, in his Answer,6 averred:
...
4. The claim of petitioner Philippine Geothermal
Incorporated (PGI for short) for Value-Added Tax
refund has no legal basis.
...
6. Fiscal Incentives Review Board (FIRB) Resolution
17-87 specifically restored the tax and duty
exemption privileges of the NPC, including those
pertaining to its domestic purchases of petroleum
and petroleum products granted under the terms
and conditions of Commonwealth Act 120 as
amended, effective March 10, 1987.
However, the restoration of the tax and duty
exemption privileges does not apply to importations
of fuel oil (crude equivalents) and coal,
commercially-funded importations (i.e. importations
which include but are not limited to those foreign-
based private financial institutions, etc.) and interest
income derived from any source. Such exemption
also does not include purchases of goods and
services. Hence, any contracting services of NPC is
not qualified for zero-rated VAT (VAT Ruling 250-89,
October, 1989).
7. It is clear from the aforecited FIRB resolution that
the tax exemption privilege granted to NPC does not
include purchases of goods and services, such as
the supply of steam to NPC.
...
10. The subject taxes have been paid and collected
in accordance with law and regulation.
11. In a claim for refund, it is incumbent upon
petitioner to show that it is indubitably entitled
thereto. Petitioner’s failure to establish the same is
fatal to its claim for refund.
12. .The present case is no exception to the basic
rule that claims for refund are construed strictly
against claimant for the same partake of the nature
of exemption from taxation.
Simply put, the sole issue in this case is whether
petitioner’s supply of steam to NPC is a VAT-exempt
transaction.
FIRB Resolution No. 17-87 dated June 24, 1987, on
which petitioner anchors its claim for tax exemption,
provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED,
That the tax and duty exemption privileges of the
National Power Corporation, including those
pertaining to its domestic purchases of petroleum
and petroleum products, granted under the terms
and conditions of Commonwealth Act No. 120
(Creating the National Power Corporation, defining
its powers, objectives and functions, and for other
purposes), as amended, are restored effective
March 10, 1987, subject to the following conditions:
1. The restoration of the tax and duty exemption
privileges does not apply to the following:
1.1 Importation of fuel oil (crude equivalent) and
coal;
1.2 Commercially-funded importations (i.e.,
importations which include but are not limited to
those financed by the NPC’s own internal funds,
domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial
institutions, etc.); and
1.3 Interest income derived from any source.7
This Supreme Court has confirmed this exemption.
In Maceda v. Macaraig, Jr.,8 this Court ruled that
Republic Act No. 3589 exempts the NPC from all
taxes, duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, and its
provinces, cities and municipalities. This exemption
is broad enough to include both direct and indirect
taxes the NPC may be required to pay. To limit the
exemption granted the NPC to direct taxes,
notwithstanding the general and broad language of
the statute, will be to thwart the legislative intention
in giving exemption from all forms of taxes and
impositions, without distinguishing between those
that are direct and those that are not.
A chronological review of the NPC laws will show
that it has been the lawmakers’ intention that the
NPC is to be completely tax exempt from all forms of
taxes - both direct and indirect.10
The ruling dated March 15, 1996, issued to
petitioner by Assistant Commissioner Alicia P.
Clemeno of the Bureau of Internal Revenue, likewise
confirms this exemption:
In view of the foregoing, this Office is of the opinion
as it hereby holds, that the supply of steam by your
client, Philippine Geothermal, Inc. (PGI) to National
Power Corporation NPC/NAPOCOR to be used in
generating electricity is exempt from the value-
added tax. (BIR Ruling No. 078-95 dated April 26,
1995)11
On April 21, 1999, the CTA ruled that the supply of
steam to NPC by petitioner being a VAT-exempt
transaction, neither petitioner nor NPC is liable to
pay VAT. Petitioner, therefore, may rightfully claim
for a refund of the value-added tax paid. The CTA
held,
WHEREFORE, in the light of the foregoing,
RESPONDENT is hereby ORDERED to REFUND or
in the alternative, ISSUE A TAX CREDIT
CERTIFICATE to PETITIONER the sum of
P9,012,310.26 representing erroneously paid value
added tax.
SO ORDERED.12
According to the CTA, based on the evidence
presented by petitioner, out of the refund claim of
₱39,328,775.41, only ₱9,012,310.2613 or that
pertaining to output tax paid for September 1995
and the interest on late payment on peso cash call,
were not paid by NPC. As to the rest of petitioner’s
claim, it appears that the official receipts petitioner
issued to NPC included the VAT payable shown in
the Summary of Payments Received from NPC for
each production period.
Petitioner raised the matter before the Court of
Appeals praying that the respondent be ordered to
refund the sum of ₱39,328,775.41 or issue a tax
credit certificate representing erroneous payments of
VAT from September 1995 to February 1996.
The Court of Appeals denied the petition and
affirmed the assailed decision of the Court of Tax
Appeals.
Hence this appeal. Petitioner assigns the following
errors to the appellate court:
THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN AFFIRMING IN
TOTO THE DECISION OF THE COURT OF TAX
APPEALS, BECAUSE:
A). THE DECISION OF THE COURT OF TAX
APPEALS WAS BASED ON A
MISAPPREHENSION OF FACTS, NAMELY, THAT
THE NPC PAID ₱30,316,465.15 AS VAT;
B). THE PETITIONER HAD ESTABLISHED BY
UNDISPUTABLE EVIDENCE THAT IT PAID THE
VAT ON THE SUPPLY OF STEAM TO NPC;
ACCORDINGLY, IT IS ENTITLED TO THE
REIMBURSEMENT OF THE FULL AMOUNT OF
VAT ERRONEOUSLY PAID.14
The CTA Decision stated categorically that the
supply of steam to NPC is exempt from VAT.
However, it only granted a partial VAT refund of
₱9,012,310.26, believing that only this amount was
not reimbursed by NPC. The CTA ruled that
petitioner was no longer entitled to a refund of the
remaining balance of ₱30,316,465.15, since it
appears that the official receipts petitioner issued to
NPC included the VAT payable shown in the
Summary of Payments Received from NPC for each
production period.
We disagree with the CTA. In this case, the only
issue is the amount of refund to be granted based
on the amount of tax erroneously paid. Tax refunds
are in the nature of tax exemptions, and are to be
construed strictissimi juris against the entity claiming
the same.15 Thus, the burden of proof rests upon the
taxpayer to establish by sufficient and competent
evidence, its entitlement to a claim for refund. In the
Bureau of Internal Revenue’s Ruling dated March
15, 1996, that the supply of steam by petitioner to
NPC is exempt from VAT, petitioner has indubitably
established its basis for claiming a refund.
That NPC may have reimbursed petitioner the 10%
VAT is not a ground for the denial of the claim for
refund. The CTA overlooked the fact that it was
petitioner who paid the VAT out of its own service
fee. The erroneous payments of the VAT were only
discontinued when the BIR issued its Ruling No. DA-
111-96 in favor of petitioner on March 15, 1996. By
then, petitioner had already remitted a sizeable
amount of ₱39,328,775.41 to the Government. The
only recourse of petitioner is the complete restitution
of the erroneous payments of taxes.
The amount of refund should have been based on
the VAT Returns filed by the taxpayer. Whether NPC
had reimbursed petitioner is not the concern of the
CTA. It is solely a matter between petitioner and
NPC.16 For indirect taxes like VAT, the proper party
to question or seek a refund of the tax is the
statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even when
he shifts the burden thereof to another.17
Petitioner has the legal personality to apply for a
refund since it is the one who made the erroneous
VAT payments and who will suffer financially by
paying in good faith what it had believed to be its
potential VAT liability.
Under the principle of solutio indebiti,18 the
government has to restore to petitioner the sums
representing erroneous payments of taxes.19 It is of
no moment whether NPC had already reimbursed
petitioner or not because in this case, there should
have been no VAT paid at all.
The Summary of Payments and Official Receipts
issued by a supplier is not a reliable basis for
determining the VAT payments of said supplier. The
CTA grossly misappreciated the evidence and
erroneously concluded in this case that NPC paid
the VAT. The CTA should have relied on the VAT
Returns filed by the taxpayer to determine the actual
amount remitted to the BIR for the purpose of
ascertaining the refund due. The presentation of the
VAT Returns is considered sufficient to ascertain the
amount of the refund. Thus, upon finding that the
supply of steam to NPC is exempt from VAT, the
CTA should have ordered respondent to reimburse
petitioner the full amount of ₱39,328,775.41 as
erroneously paid VAT.
WHEREFORE, the petition is hereby GRANTED.
Respondent is ORDERED to refund or in the
alternative, issue a Tax Credit Certificate to
petitioner in the sum of ₱39,328,775.41 as
erroneously paid VAT.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago,
Carpio, and Azcuna, JJ., concur.

Footnotes
1
 Rollo, pp. 74-83. Penned by Associate Justice
Eloy R. Bello, Jr., with Associate Justices
Eugenio S. Labitoria, and Perlita J. Tria Tirona
concurring.
2
 Id. at 85.
3
 Id. at 304-325.
4
 Now Republic Act No. 8424 which provides
Sec. 109. Exempt Transactions. – The following
shall be exempt from the value-added tax:
...
(q) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special laws,
except those under Presidential Decree Nos. 66,
529 and 1590;
...
5
 Withdrawing All Tax and Duty Incentives,
Subject to Certain Exceptions, Expanding the
Powers of the Fiscal Incentives Review Board
and for Other Purposes (17 December 1986).
6
 Rollo, pp. 75-76.
7
 Id. at 308-309.
8
 G.R. No. 88291, 8 June 1993, 223 SCRA 217,
223.
9
 SEC. 2. To facilitate payment of its
indebtedness, the National Power Corporation
shall be exempt from all taxes, duties, fees,
imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities
and municipalities (Effective 4 June 1949).
10
 Republic Act No. 6395 (10 September 1971)
enumerated the details covered by the
exemptions by stating under Sec. 13 that "The
Corporation shall be non-profit and shall devote
all its returns from its capital investment, as well
as excess revenues from its operation, for
expansion…the Corporation is hereby declared
exempt from the payment of all taxes, duties,
fees, imposts, charges, costs and service fees
in any court or administrative proceedings in
which it may be a party, restrictions and duties
to the Republic of the Philippines, its provinces,
cities, municipalities and other government
agencies and instrumentalities . . ."
Subsequently, Presidential Decree No. 380 (22
January 1974), Sec. 10 made even more
specific the details of the exemption of NPC to
cover, among others, both direct and indirect
taxes on all petroleum products used in its
operation. Presidential Decree No. 938 (27
May 1976), Sec. 13 amended the tax exemption
by simplifying the same law in general terms. It
succinctly exempts service fees, including filing
fees, appeal bonds, supersedeas bonds, in any
court or administrative proceedings. The use of
the phrase "all forms" of taxes demonstrate the
intention of the law to give NPC all the
exemption it has been enjoying before. The
rationale for this exemption is that being non-
profit, the NPC "shall devote all its return from its
capital investment as well as excess revenues
from its operation, for expansion. . ." (Emphasis
supplied).
 Rollo, p. 154.
11

 Id. at 312.
12
  ₱9,012,310.11 in some parts of the records.
13

 Rollo, p. 44.
14

 Commissioner of Internal Revenue v.

15

Solidbank Corporation, G.R. No. 148191, 25

November 2003, 416 SCRA 436, 461.
 See Commissioner of Internal Revenue v.
16

American Rubber Co., No. L-19667, 29

November 1966, 18 SCRA 842, 853.
17
 See Cebu Portland Cement Co. v. Collector of
Internal Revenue, No. L-20563, 29 October
1968, 25 SCRA 789, 797 and Commissioner of
Internal Revenue v. American Rubber Co., ibid.
18
 new civil code, Art. 2154. If something is
received when there is no right to demand it,
and it was unduly delivered through mistake, the
obligation to return it arises.
 National Development Company v. Cebu City,
19

G.R. No. 51593, 5 November 1992, 215 SCRA

382, 396 citing Ramie Textiles, Inc. v. Mathay,
Sr., No. L-32364, 30 April 1979, 89 SCRA 586,
592.
XXXXXXXXXXXXXXXX
FORT BONIFACIO DEVELOPMENT CORPORATION
v. CIR, ET. AL., G.R. No. 173425, January 22, 2013
Taxation; Transitional input tax credit; Prior
payment of taxes is not a prerequisite before a
taxpayer could avail of the transitional input tax
credit. To reiterate, prior payment of taxes is not
necessary before a taxpayer could avail of the 8%
transitional input tax credit. This position is solidly
supported by law and jurisprudence, viz:

First. Section 105 of the old National Internal

Revenue Code (NIRC) clearly provides that for a
taxpayer to avail of the 8% transitional input tax
credit, all that is required from the taxpayer is to
file a beginning inventory with the Bureau of
Internal Revenue (BIR). It was never mentioned in
Section 105 that prior payment of taxes is a
requirement.

Second. Since the law (Section 105 of the NIRC)

does not provide for prior payment of taxes, to
require it now would be tantamount to judicial
legislation which, to state the obvious, is not
allowed.
Third. A transitional input tax credit is not a tax
refund per se but a tax credit. Logically, prior
payment of taxes is not required before a
taxpayer could avail of transitional input tax
credit. As we have declared in our September 4,
2012 Decision, “[t]ax credit is not synonymous to
tax refund. Tax refund is defined as the money
that a taxpayer overpaid and is thus returned by
the taxing authority. Tax credit, on the other
hand, is an amount subtracted directly from one’s
total tax liability. It is any amount given to a
taxpayer as a subsidy, a refund, or an incentive to
encourage investment.”

XXXX
G.R. No. 173425               September 4, 2012
FORT BONIFACIO DEVELOPMENT
CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and
REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.
DECISION
DEL CASTILLO, J.:
Courts cannot limit the application or coverage of a
law, nor can it impose conditions not provided
therein. To do so constitutes judicial legislation.
This Petition for Review on Certiorari under Rule 45
of the Rules of Court assails the July 7, 2006
Decision1 of the Court of Appeals (CA) in CA-G.R.
SP No. 61436, the dispositive portion of which
reads.
WHEREFORE, the instant petition is
hereby DISMISSED. ACCORDINGLY, the Decision
dated October 12, 2000 of the Court of Tax Appeals
in CTA Case No. 5735, denying petitioner’s claim for
refund in the amount of Three Hundred Fifty-Nine
Million Six Hundred Fifty-Two Thousand Nine Pesos
and Forty-Seven Centavos (₱ 359,652,009.47), is
hereby AFFIRMED.
SO ORDERED.2
Factual Antecedents
Petitioner Fort Bonifacio Development Corporation
(FBDC) is a duly registered domestic corporation
engaged in the development and sale of real
property.3 The Bases Conversion Development
Authority (BCDA), a wholly owned government
corporation created under Republic Act (RA) No.
7227,4 owns 45% of petitioner’s issued and
outstanding capital stock; while the Bonifacio Land
Corporation, a consortium of private domestic
corporations, owns the remaining 55%.5
On February 8, 1995, by virtue of RA 7227 and
Executive Order No. 40,6 dated December 8, 1992,
petitioner purchased from the national government a
portion of the Fort Bonifacio reservation, now known
as the Fort Bonifacio Global City (Global City).7
On January 1, 1996, RA 77168 restructured the
Value-Added Tax (VAT) system by amending certain
provisions of the old National Internal Revenue
Code (NIRC). RA 7716 extended the coverage of
VAT to real properties held primarily for sale to
customers or held for lease in the ordinary course of
trade or business.9
On September 19, 1996, petitioner submitted to the
Bureau of Internal Revenue (BIR) Revenue District
No. 44, Taguig and Pateros, an inventory of all its
real properties, the book value of which aggregated
₱ 71,227,503,200.10 Based on this value, petitioner
claimed that it is entitled to a transitional input tax
credit of ₱ 5,698,200,256,11 pursuant to Section
10512 of the old NIRC.
In October 1996, petitioner started selling Global
City lots to interested buyers.13
For the first quarter of 1997, petitioner generated a
total amount of ₱ 3,685,356,539.50 from its sales
and lease of lots, on which the output VAT payable
was ₱ 368,535,653.95.14 Petitioner paid the output
VAT by making cash payments to the BIR totalling ₱
359,652,009.47 and crediting its unutilized input tax
credit on purchases of goods and services of ₱
8,883,644.48.15
Realizing that its transitional input tax credit was not
applied in computing its output VAT for the first
quarter of 1997, petitioner on November 17, 1998
filed with the BIR a claim for refund of the amount of
₱ 359,652,009.47 erroneously paid as output VAT
for the said period.16
Ruling of the Court of Tax Appeals
On February 24, 1999, due to the inaction of the
respondent Commissioner of Internal Revenue
(CIR), petitioner elevated the matter to the Court of
Tax Appeals (CTA) via a Petition for Review.17
In opposing the claim for refund, respondents
interposed the following special and affirmative
defenses:
xxxx
8. Under Revenue Regulations No. 7-95,
implementing Section 105 of the Tax Code as
amended by E.O. 273, the basis of the presumptive
input tax, in the case of real estate dealers, is the
improvements, such as buildings, roads, drainage
systems, and other similar structures, constructed on
or after January 1, 1988.
9. Petitioner, by submitting its inventory listing of real
properties only on September 19, 1996, failed to
comply with the aforesaid revenue regulations
mandating that for purposes of availing the
presumptive input tax credits under its Transitory
Provisions, "an inventory as of December 31, 1995,
of such goods or properties and improvements
showing the quantity, description, and amount
should be filed with the RDO no later than January
31, 1996. x x x"18
On October 12, 2000, the CTA denied petitioner’s
claim for refund. According to the CTA, "the benefit
of transitional input tax credit comes with the
condition that business taxes should have been paid
first."19 In this case, since petitioner acquired the
Global City property under a VAT-free sale
transaction, it cannot avail of the transitional input
tax credit.20 The CTA likewise pointed out that under
Revenue Regulations No. (RR) 7-95, implementing
Section 105 of the old NIRC, the 8% transitional
input tax credit should be based on the value of the
improvements on land such as buildings, roads,
drainage system and other similar structures,
constructed on or after January 1, 1998, and not on
the book value of the real property.21 Thus, the CTA
disposed of the case in this manner:
WHEREFORE, in view of all the foregoing, the claim
for refund representing alleged overpaid value-
added tax covering the first quarter of 1997 is
hereby DENIED for lack of merit.
SO ORDERED.22
Ruling of the Court of Appeals
Aggrieved, petitioner filed a Petition for
Review under Rule 43 of the Rules of Court before
23 

the CA.
On July 7, 2006, the CA affirmed the decision of the
CTA. The CA agreed that petitioner is not entitled to
the 8% transitional input tax credit since it did not
pay any VAT when it purchased the Global City
property.24 The CA opined that transitional input tax
credit is allowed only when business taxes have
been paid and passed-on as part of the purchase
price.25 In arriving at this conclusion, the CA relied
heavily on the historical background of transitional
input tax credit.26 As to the validity of RR 7-95, which
limited the 8% transitional input tax to the value of
the improvements on the land, the CA said that it is
entitled to great weight as it was issued pursuant to
Section 24527 of the old NIRC.28
Issues
Hence, the instant petition with the principal issue of
whether petitioner is entitled to a refund of ₱
359,652,009.47 erroneously paid as output VAT for
the first quarter of 1997, the resolution of which
depends on:
3.05.a. Whether Revenue Regulations No. 6-97
effectively repealed or repudiated Revenue
Regulations No. 7-95 insofar as the latter limited the
transitional/presumptive input tax credit which may
be claimed under Section 105 of the National
Internal Revenue Code to the "improvements" on
real properties.
3.05.b. Whether Revenue Regulations No. 7-95 is a
valid implementation of Section 105 of the National
Internal Revenue Code.
3.05.c. Whether the issuance of Revenue
Regulations No. 7-95 by the Bureau of Internal
Revenue, and declaration of validity of said
Regulations by the Court of Tax Appeals and Court
of Appeals, were in violation of the fundamental
principle of separation of powers.
3.05.d. Whether there is basis and necessity to
interpret and construe the provisions of Section 105
of the National Internal Revenue Code.
3.05.e. Whether there must have been previous
payment of business tax by petitioner on its land
before it may claim the input tax credit granted by
Section 105 of the National Internal Revenue Code.
3.05.f. Whether the Court of Appeals and Court of
Tax Appeals merely speculated on the purpose of
the transitional/presumptive input tax provided for in
Section 105 of the National Internal Revenue Code.
3.05.g. Whether the economic and social objectives
in the acquisition of the subject property by petitioner
from the Government should be taken into
consideration.29
Petitioner’s Arguments
Petitioner claims that it is entitled to recover the
amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the first quarter of 1997 since its
transitional input tax credit of ₱ 5,698,200,256 is
more than sufficient to cover its output VAT liability
for the said period.30
Petitioner assails the pronouncement of the CA that
prior payment of taxes is required to avail of the 8%
transitional input tax credit.31 Petitioner contends that
there is nothing in Section 105 of the old NIRC to
support such conclusion.32
Petitioner further argues that RR 7-95, which limited
the 8% transitional input tax credit to the value of the
improvements on the land, is invalid because it goes
against the express provision of Section 105 of the
old NIRC, in relation to Section 10033 of the same
Code, as amended by RA 7716.34
Respondents’ Arguments
Respondents, on the other hand, maintain that
petitioner is not entitled to a transitional input tax
credit because no taxes were paid in the acquisition
of the Global City property.35 Respondents assert
that prior payment of taxes is inherent in the nature
of a transitional input tax.36 Regarding RR 7-95,
respondents insist that it is valid because it was
issued by the Secretary of Finance, who is
mandated by law to promulgate all needful rules and
regulations for the implementation of Section 105 of
the old NIRC.37
Our Ruling
The petition is meritorious.
The issues before us are no longer new or novel as
these have been resolved in the related case of Fort
Bonifacio Development Corporation v.
Commissioner of Internal Revenue.38
Prior payment of taxes is not required
for a taxpayer to avail of the 8%
transitional input tax credit
Section 105 of the old NIRC reads:
SEC. 105. Transitional input tax credits. – A person
who becomes liable to value-added tax or any
person who elects to be a VAT-registered person
shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on
his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such
inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher,
which shall be creditable against the output tax.
(Emphasis supplied.)
Contrary to the view of the CTA and the CA, there is
nothing in the above-quoted provision to indicate
that prior payment of taxes is necessary for the
availment of the 8% transitional input tax credit.
Obviously, all that is required is for the taxpayer to
file a beginning inventory with the BIR.
To require prior payment of taxes, as proposed in
the Dissent is not only tantamount to judicial
legislation but would also render nugatory the
provision in Section 105 of the old NIRC that the
transitional input tax credit shall be "8% of the value
of [the beginning] inventory or the actual [VAT] paid
on such goods, materials and supplies, whichever is
higher" because the actual VAT (now 12%) paid on
the goods, materials, and supplies would always be
higher than the 8% (now 2%) of the beginning
inventory which, following the view of Justice Carpio,
would have to exclude all goods, materials, and
supplies where no taxes were paid. Clearly, limiting
the value of the beginning inventory only to goods,
materials, and supplies, where prior taxes were paid,
was not the intention of the law. Otherwise, it would
have specifically stated that the beginning inventory
excludes goods, materials, and supplies where no
taxes were paid. As retired Justice Consuelo
Ynares-Santiago has pointed out in her Concurring
Opinion in the earlier case of Fort Bonifacio:
If the intent of the law were to limit the input tax to
cases where actual VAT was paid, it could have
simply said that the tax base shall be the actual
value-added tax paid. Instead, the law as framed
contemplates a situation where a transitional input
tax credit is claimed even if there was no actual
payment of VAT in the underlying transaction. In
such cases, the tax base used shall be the value of
the beginning inventory of goods, materials and
supplies.39
Moreover, prior payment of taxes is not required to
avail of the transitional input tax credit because it is
not a tax refund per se but a tax credit. Tax credit is
not synonymous to tax refund. Tax refund is defined
as the money that a taxpayer overpaid and is thus
returned by the taxing authority.40 Tax credit, on the
other hand, is an amount subtracted directly from
one’s total tax liability.41 It is any amount given to a
taxpayer as a subsidy, a refund, or an incentive to
encourage investment. Thus, unlike a tax refund,
prior payment of taxes is not a prerequisite to avail
of a tax credit. In fact, in Commissioner of Internal
Revenue v. Central Luzon Drug Corp.,42 we declared
that prior payment of taxes is not required in order to
avail of a tax credit.43 Pertinent portions of the
Decision read:
While a tax liability is essential to the availment or
use of any tax credit, prior tax payments are not. On
the contrary, for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is
needed. The Tax Code is in fact replete with
provisions granting or allowing tax credits, even
though no taxes have been previously paid.
For example, in computing the estate tax due,
Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar
provision for donor’s taxes -- again when paid to a
foreign country -- in computing for the donor’s tax
due. The tax credits in both instances allude to the
prior payment of taxes, even if not made to our
government.
Under Section 110, a VAT (Value-Added Tax) -
registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed
a tax credit that includes a ratable portion of any
input tax not directly attributable to either activity.
This input tax may either be the VAT on the
purchase or importation of goods or services that is
merely due from -- not necessarily paid by -- such
VAT-registered person in the course of trade or
business; or the transitional input tax determined in
accordance with Section 111(A). The latter type may
in fact be an amount equivalent to only eight percent
of the value of a VAT-registered person’s beginning
inventory of goods, materials and supplies, when
such amount -- as computed -- is higher than the
actual VAT paid on the said items. Clearly from this
provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison
with the VAT actually paid -- then later prorated. No
tax is actually paid prior to the availment of such
credit.
In Section 111(B), a one and a half percent input tax
credit that is merely presumptive is allowed. For the
purchase of primary agricultural products used as
inputs -- either in the processing of sardines,
mackerel and milk, or in the manufacture of refined
sugar and cooking oil -- and for the contract price of
public works contracts entered into with the
government, again, no prior tax payments are
needed for the use of the tax credit.
More important, a VAT-registered person whose
sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax
credit certificate for the amount of creditable input
taxes merely due -- again not necessarily paid to --
the government and attributable to such sales, to the
extent that the input taxes have not been applied
against output taxes. Where a taxpayer is engaged
in zero-rated or effectively zero-rated sales and also
in taxable or exempt sales, the amount of creditable
input taxes due that are not directly and entirely
attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume
of sales. Indeed, in availing of such tax credit for
VAT purposes, this provision -- as well as the one
earlier mentioned -- shows that the prior payment of
taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax
Code is another illustration of a tax credit allowed,
even though no prior tax payments are not required.
Specifically, in this provision, the imposition of a final
withholding tax rate on cash and/or property
dividends received by a nonresident foreign
corporation from a domestic corporation is subjected
to the condition that a foreign tax credit will be given
by the domiciliary country in an amount equivalent to
taxes that are merely deemed paid. Although true,
this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate,
not as a deduction from the corresponding tax
liability. Besides, it is not our government but the
domiciliary country that credits against the income
tax payable to the latter by the foreign corporation,
the tax to be foregone or spared.
In contrast, Section 34(C)(3), in relation to Section
34(C)(7)(b), categorically allows as credits, against
the income tax imposable under Title II, the amount
of income taxes merely incurred -- not necessarily
paid -- by a domestic corporation during a taxable
year in any foreign country. Moreover, Section 34(C)
(5) provides that for such taxes incurred but not
paid, a tax credit may be allowed, subject to the
condition precedent that the taxpayer shall simply
give a bond with sureties satisfactory to and
approved by petitioner, in such sum as may be
required; and further conditioned upon payment by
the taxpayer of any tax found due, upon petitioner’s
redetermination of it.
In addition to the above-cited provisions in the Tax
Code, there are also tax treaties and special laws
that grant or allow tax credits, even though no prior
tax payments have been made.
Under the treaties in which the tax credit method is
used as a relief to avoid double taxation, income that
is taxed in the state of source is also taxable in the
state of residence, but the tax paid in the former is
merely allowed as a credit against the tax levied in
the latter. Apparently, payment is made to the state
of source, not the state of residence. No tax,
therefore, has been previously paid to the latter.
Under special laws that particularly affect
businesses, there can also be tax credit incentives.
To illustrate, the incentives provided for in Article 48
of Presidential Decree No. (PD) 1789, as amended
by Batas Pambansa Blg. (BP) 391, include tax
credits equivalent to either five percent of the net
value earned, or five or ten percent of the net local
content of export. In order to avail of such credits
under the said law and still achieve its objectives, no
prior tax payments are necessary.
From all the foregoing instances, it is evident that
prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held
that the availment under RA 7432 did not require
prior tax payments by private establishments
concerned. However, we do not agree with its
finding that the carry-over of tax credits under the
said special law to succeeding taxable periods, and
even their application against internal revenue taxes,
did not necessitate the existence of a tax liability.
The examples above show that a tax liability is
certainly important in the availment or use, not the
existence or grant, of a tax credit. Regarding this
matter, a private establishment reporting a net loss
in its financial statements is no different from
another that presents a net income. Both are entitled
to the tax credit provided for under RA 7432, since
the law itself accords that unconditional benefit.
However, for the losing establishment to
immediately apply such credit, where no tax is due,
will be an improvident usance.44
In this case, when petitioner realized that its
transitional input tax credit was not applied in
computing its output VAT for the 1st quarter of 1997,
it filed a claim for refund to recover the output VAT it
erroneously or excessively paid for the 1st quarter of
1997. In filing a claim for tax refund, petitioner is
simply applying its transitional input tax credit
against the output VAT it has paid. Hence, it is
merely availing of the tax credit incentive given by
law to first time VAT taxpayers. As we have said in
the earlier case of Fort Bonifacio, the provision on
transitional input tax credit was enacted to benefit
first time VAT taxpayers by mitigating the impact of
VAT on the taxpayer.45 Thus, contrary to the view of
Justice Carpio, the granting of a transitional input tax
credit in favor of petitioner, which would be paid out
of the general fund of the government, would be an
appropriation authorized by law, specifically Section
105 of the old NIRC.
The history of the transitional input tax credit
likewise does not support the ruling of the CTA and
CA. In our Decision dated April 2, 2009, in the
related case of Fort Bonifacio, we explained that:
If indeed the transitional input tax credit is integrally
related to previously paid sales taxes, the purported
causal link between those two would have been
nonetheless extinguished long ago. Yet Congress
has reenacted the transitional input tax credit
several times; that fact simply belies the absence of
any relationship between such tax credit and the
long-abolished sales taxes.
Obviously then, the purpose behind the transitional
input tax credit is not confined to the transition from
sales tax to VAT.
There is hardly any constricted definition of
"transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime.
Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person
to becoming a VAT-registered person. Such
transition does not take place merely by operation of
law, E.O. No. 273 or Rep. Act No. 7716 in particular.
It could also occur when one decides to start a
business. Section 105 states that the transitional
input tax credits become available either to (1) a
person who becomes liable to VAT; or (2) any
person who elects to be VAT-registered. The clear
language of the law entitles new trades or
businesses to avail of the tax credit once they
become VAT-registered. The transitional input tax
credit, whether under the Old NIRC or the New
NIRC, may be claimed by a newly-VAT registered
person such as when a business as it commences
operations. If we view the matter from the
perspective of a starting entrepreneur, greater clarity
emerges on the continued utility of the transitional
input tax credit.
Following the theory of the CTA, the new enterprise
should be able to claim the transitional input tax
credit because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials
and supplies in its beginning inventory.
Consequently, as the CTA held below, if the new
enterprise has not paid VAT in its purchases of such
goods, materials and supplies, then it should not be
able to claim the tax credit. However, it is not always
true that the acquisition of such goods, materials
and supplies entail the payment of taxes on the part
of the new business. In fact, this could occur as a
matter of course by virtue of the operation of various
provisions of the NIRC, and not only on account of a
specially legislated exemption.
Let us cite a few examples drawn from the New
NIRC. If the goods or properties are not acquired
from a person in the course of trade or business, the
transaction would not be subject to VAT under
Section 105. The sale would be subject to capital
gains taxes under Section 24 (D), but since capital
gains is a tax on passive income it is the seller, not
the buyer, who generally would shoulder the tax.
If the goods or properties are acquired through
donation, the acquisition would not be subject to
VAT but to donor’s tax under Section 98 instead. It is
the donor who would be liable to pay the donor’s tax,
and the donation would be exempt if the donor’s
total net gifts during the calendar year does not
exceed ₱ 100,000.00.
If the goods or properties are acquired through
testate or intestate succession, the transfer would
not be subject to VAT but liable instead for estate
tax under Title III of the New NIRC. If the net estate
does not exceed ₱ 200,000.00, no estate tax would
be assessed.
The interpretation proffered by the CTA would
exclude goods and properties which are acquired
through sale not in the ordinary course of trade or
business, donation or through succession, from the
beginning inventory on which the transitional input
tax credit is based. This prospect all but highlights
the ultimate absurdity of the respondents’ position.
Again, nothing in the Old NIRC (or even the New
NIRC) speaks of such a possibility or qualifies the
previous payment of VAT or any other taxes on the
goods, materials and supplies as a pre-requisite for
inclusion in the beginning inventory.
It is apparent that the transitional input tax credit
operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the
acquisition of their beginning inventory of goods,
materials and supplies. During that period of
transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the
impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to
remit a significant portion of the income it derived
from its sales as output VAT. The transitional input
tax credit mitigates this initial diminution of the
taxpayer's income by affording the opportunity to
offset the losses incurred through the remittance of
the output VAT at a stage when the person is yet
unable to credit input VAT payments.
There is another point that weighs against the CTA’s
interpretation. Under Section 105 of the Old NIRC,
the rate of the transitional input tax credit is "8% of
the value of such inventory or the actual value-
added tax paid on such goods, materials and
supplies, whichever is higher." If indeed the
transitional input tax credit is premised on the
previous payment of VAT, then it does not make
sense to afford the taxpayer the benefit of such
credit based on "8% of the value of such inventory"
should the same prove higher than the actual VAT
paid. This intent that the CTA alluded to could have
been implemented with ease had the legislature
shared such intent by providing the actual VAT paid
as the sole basis for the rate of the transitional input
tax credit.46
In view of the foregoing, we find petitioner entitled to
the 8% transitional input tax credit provided in
Section 105 of the old NIRC. The fact that it
acquired the Global City property under a tax-free
transaction makes no difference as prior payment of
taxes is not a pre-requisite.
Section 4.105-1 of RR 7-95 is
inconsistent with Section 105 of the old
NIRC
As regards Section 4.105-147 of RR 7-95 which
limited the 8% transitional input tax credit to the
value of the improvements on the land, the same
contravenes the provision of Section 105 of the old
NIRC, in relation to Section 100 of the same Code,
as amended by RA 7716, which defines "goods or
properties," to wit:
SEC. 100. Value-added tax on sale of goods or
properties. – (a) Rate and base of tax. – There shall
be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-
added tax equivalent to 10% of the gross selling
price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to
be paid by the seller or transferor.
(1) The term "goods or properties" shall mean all
tangible and intangible objects which are capable of
pecuniary estimation and shall include:
(A) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business; x x x
In fact, in our Resolution dated October 2, 2009, in
the related case of Fort Bonifacio, we ruled that
Section 4.105-1 of RR 7-95, insofar as it limits the
transitional input tax credit to the value of the
improvement of the real properties, is a
nullity.48 Pertinent portions of the Resolution read:
As mandated by Article 7 of the Civil Code, an
administrative rule or regulation cannot contravene
the law on which it is based. RR 7-95 is inconsistent
with Section 105 insofar as the definition of the term
"goods" is concerned. This is a legislative act
beyond the authority of the CIR and the Secretary of
Finance. The rules and regulations that
administrative agencies promulgate, which are the
product of a delegated legislative power to create
new and additional legal provisions that have the
effect of law, should be within the scope of the
statutory authority granted by the legislature to the
objects and purposes of the law, and should not be
in contradiction to, but in conformity with, the
standards prescribed by law.
To be valid, an administrative rule or regulation must
conform, not contradict, the provisions of the
enabling law.1âwphi1 An implementing rule or
regulation cannot modify, expand, or subtract from
the law it is intended to implement. Any rule that is
not consistent with the statute itself is null and void.
While administrative agencies, such as the Bureau
of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit
the scope of the statute to less than what it provides,
or extend or expand the statute beyond its terms, or
in any way modify explicit provisions of the law.
Indeed, a quasi-judicial body or an administrative
agency for that matter cannot amend an act of
Congress. Hence, in case of a discrepancy between
the basic law and an interpretative or administrative
ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the
definition of "goods" as basis of transitional input tax
credit under Section 105 is a nullity.49
As we see it then, the 8% transitional input tax credit
should not be limited to the value of the
improvements on the real properties but should
include the value of the real properties as well.
In this case, since petitioner is entitled to a
transitional input tax credit of ₱ 5,698,200,256,
which is more than sufficient to cover its output VAT
liability for the first quarter of 1997, a refund of the
amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the said quarter is in order.
WHEREFORE, the petition is hereby GRANTED.
The assailed Decision dated July 7, 2006 of the
Court of Appeals in CA-G.R. SP No. 61436
is REVERSED and SET ASIDE. Respondent
Commissioner of Internal Revenue is ordered to
refund to petitioner Fort Bonifacio Development
Corporation the amount of ₱ 359,652,009.47 paid as
output VAT for the first quarter of 1997 in light of the
transitional input tax credit available to petitioner for
the said quarter, or in the alternative, to issue a tax
credit certificate corresponding to such amount.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice

ANTONIO T. PRESBITERO J.
CARPIO VELASCO, JR.
Associate Justice Associate Justice
TERESITA J. ARTURO D. BRION
 LEONARDO-DE
CASTRO Associate Justice
Associate Justice
DIOSDADO M. LUCAS P.
PERALTA BERSAMIN
Associate Justice Associate Justice
MARTIN S.
ROBERTO A. ABAD
VILLARAMA, JR.
Associate Justice
Associate Justice
JOSE PORTUGAL JOSE CATRAL
PEREZ MENDOZA
Associate Justice Associate Justice
BIENVENDIO L. ESTELA M.
REYES PERLAS-BERNABE
Associate Justice Associate Justice

CERTIFICATION
I certify that the conclusions in the above Decision
had been reached in consultation before the case
was assigned to the writer of the opinion of the
Court.
MARIA LOURDES P. A. SERENO
Chief Justice
Footnotes
Rollo, pp. 317-333; penned by Associate
1 

Justice Monina Arevalo-Zenarosa and concurred

in by Associate Justices Renato C. Dacudao
and Rosmari D. Carandang.
Id. at 332.
2 

Id. at 318.
3 

BASES CONVERSION AND DEVELOPMENT

4 

ACT OF 1992.
Rollo, p. 318.
5 

IMPLEMENTING THE PROVISIONS OF

6 

REPUBLIC ACT NO. 7227 AUTHORIZING THE

BASES CONVERSION AND DEVELOPMENT
AUTHORITY (BCDA) TO RAISE FUNDS
THROUGH THE SALE OF METRO MANILA
MILITARY CAMPS TRANSFERRED TO BCDA
TO FORM PART OF ITS CAPITALIZATION
AND TO BE USED FOR THE PURPOSES
STATED IN SAID ACT.
Rollo, p. 319.
7 
 AN ACT RESTRUCTURING THE VALUE
8 

ADDED TAX (VAT) SYSTEM, WIDENING ITS

TAX BASE AND ENHANCING ITS
ADMINISTRATION AND FOR THESE
PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
Section 2 of Republic Act No. 7716 provides:
9 

Sec. 2. Section 100 of the National Internal

Revenue Code, as amended, is hereby further
amended to read as follows:
"Section 100. Value-added-tax on sale of
goods or properties. – (a) Rate and base of
tax. – There shall be levied, assessed and
collected on every sale, barter or exchange
of goods or properties, a value-added tax
equivalent to 10% of the gross selling price
or gross value in money of the goods, or
properties sold, bartered or exchanged,
such tax to be paid by the seller or
transferor.
"(1) The term ‘goods or properties’ shall
mean all tangible and intangible objects
 which are capable of pecuniary estimation
and shall include:
(A) Real properties held primarily for
sale to customers or held for lease in
the ordinary course of trade or
business."
xxxx
10 
Rollo, p. 320.
11 
CTA rollo, p. 4.
Now Section 111(A) of the NATIONAL
12 

INTERNAL REVENUE CODE OF 1997 which

provides:
SEC 111. Transitional/Presumptive Input
Tax Credits. –
(A) Transitional Input Tax Credits. – A
person who becomes liable to value added
tax or any person who elects to be a VAT-
registered person shall, subject to the filing
of an inventory according to rules and
regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, be allowed input tax on his
beginning inventory of goods, materials and
 supplies equivalent to two percent (2%) of
the value of such inventory or the actual
value-added tax paid on such goods,
materials and supplies, whichever is higher,
which shall be creditable against the output
tax. [As amended by Republic Act No. 9337-
An Act Amending Sections 27, 28, 34, 106,
107, 108, 109, 110, 111, 112, 113, 114, 116,
117, 119, 121, 148, 151, 236, 237 and 288
of the National Internal Revenue Code of
1997, as amended, and for other purposes.
13 
Rollo, p. 319.
14 
Id. at 320.
15 
Id. at 320-321.
16 
CTA rollo, p. 5.
17 
Id. at 1-12.
18 
Id. at 44.
19 
Rollo, p. 148.
20 
Id. at 149.
21 
Id. at 149-150.
22 
Id. at 150.
23 
CA rollo, pp. 7-66.
24 
Rollo, p. 330.
25 
Id. at 329.
26 
Id. at 325-328.
SEC. 245. Authority of Secretary of Finance to
27 

promulgate rules and regulations. — The

Secretary of Finance, upon recommendation of
the Commissioner, shall promulgate all needful
rules and regulations for the effective
enforcement of the provisions of this Code. x x x
(Now Section 244 of the National Internal
Revenue Code of 1997.)
28 
Rollo, pp. 331-332.
29 
Id. at 23-24.
30 
Id. at 82.
31 
Id. at 84.
32 
Id. at 87.
Now Section 106 of the National Internal
33 

Revenue Code of 1997.

34 
Rollo, pp. 47-61.
35 
Id. at 367.
36 
Id. at 357.
37 
Id. at 378.
G.R. Nos. 158885 & 170680, April 2, 2009,
38 

583 SCRA 168.

39 
Id. at 201.
Garner, Black’s Law Dictionary, 7th Edition, p.
40 

1475.
41 
Id. at 1473.
42 
496 Phil. 307 (2005).
43 
Id. at 322.
44 
Id. at 322-325.
45 
Supra note 38 at 192-193.
46 
Id. at 190-193.
Sec. 4.105-1. Transitional input tax on
47 

beginning inventories. – Taxpayers who became

VAT-registered persons upon effectivity of RA
No. 7716 who have exceeded the minimum
turnover of
₱ 500,000.00 or who voluntarily register
even if their turnover does not exceed ₱
500,000.00 shall be entitled to a
presumptive input tax on the inventory on
hand as of December 31, 1995 on the
following:
(a) goods purchased for resale in their
present condition; (b) materials purchased
for further processing, but which have not
yet undergone processing; (c) goods which
have been manufactured by the taxpayer;
(d) goods in process and supplies, all of
which are for sale or for use in the course of
the taxpayer’s trade or business as a VAT-
registered person.
However, in the case of real estate dealers,
the basis of the presumptive input tax shall
be the improvements, such as buildings,
roads, drainage systems, and other similar
structures, constructed on or after the
effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the
value of the inventory or actual VAT paid,
whichever is higher, which amount may be
allowed as tax credit against the output tax
 of the VAT-registered person. x x x
(Emphasis supplied.)
Fort Bonifacio Development Corporation v.
48 

Commissioner of Internal Revenue, G.R. Nos.

158885 & 170680, October 2, 2009, 602 SCRA
159.
49 
Id. at 166-167.

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION
CARPIO, J.:
I dissent. I reiterate my view that petitioner is not
entitled to a refund or credit of any input VAT, as
explained in my dissenting opinions in Fort Bonifacio
Development Corporation v. Commissioner of
Internal Revenue,1 involving an input VAT refund of
₱ 347,741,695.74 and raising the same legal issue
as that raised in the present case.
The majority grants petitioner an 8o/o transitional
input VAT refund or credit of ₱ 359,652,009.47 in
relation to petitioner's output VAT for the first quarter
of 1997. Petitioner argues that there is nothing in
Section 105 of the old National Internal Revenue
Code (NIRC) to support the Court of Appeals'
conclusion that prior payment of VAT is required to
avail of a refund or credit of the 8% transitional input
VAT.
Petitioner's argument has no merit.
It is hornbook doctrine that a taxpayer cannot claim
a refund or credit of a tax that was never paid
because the law never imposed the tax in the first
place, as in the present case. A tax refund or credit
assumes a tax was previously paid, which means
there was a law that imposed the tax. The source of
the tax refund or credit is the tax that was previously
paid, and this previously paid tax is simply being
returned to the taxpayer due to double, excessive,
erroneous, advance or creditable tax payment.
Without such previous tax payment as source, the
tax refund or credit will be an expenditure of public
funds for the exclusive benefit of a specific private
individual or entity. This violates the fundamental
principle, as ruled by this Court in several
cases,2 that public funds can be used only for a
public purpose. Section 4(2) of the Government
Auditing Code of the
Philippines mandates that "Government funds or
property shall be spent or used solely for public
purposes." Any tax refund or credit in favor of a
specific taxpayer for a tax that was never paid will
have to be sourced from government funds. This is
clearly an expenditure of public funds for a private
purpose. Congress cannot validly enact a law
transferring government funds, raised through
taxation, to the pocket of a private individual or
entity. A well-recognized inherent limitation on the
constitutional power of the State to levy taxes is that
taxes can only be used for a public purpose.3
Even if only a tax credit is granted, it will still be an
expenditure of public funds for the benefit of a
private purpose in the absence of a prior tax
payment as source of the tax credit. The tax due
from a taxpayer is a public fund. If the taxpayer is
allowed to keep a part of the tax as a tax credit even
in the absence of a prior tax payment as source, it is
in fact giving a public fund to a private person for a
private benefit. This is a clear violation of the
constitutional doctrine that taxes can only be used
for a public purpose.
Moreover, such refund or credit without prior tax
payment is an expenditure of public funds without an
appropriation law. This violates Section 29(1), Article
VI of the Constitution, which mandates that "No
money shall be paid out of the Treasury except in
pursuance of an appropriation made by law."
Without any previous tax payment as source, a tax
refund or credit will be paid out of the general funds
of the government, a payment that requires an
appropriation law. The Tax Code, particularly its
provisions on the VAT, is a revenue measure, not an
appropriation law.
The VAT is a tax on transactions. The VAT is levied
on the value that is added to goods and services at
every link in the chain of transactions. However, a
tax credit is allowed for taxes previously paid when
the same goods and services are sold further in the
chain of transactions. The purpose of this tax
crediting system is to prevent double taxation in the
subsequent sale of the same product and services
that were already previously taxed. Taxes previously
paid are thus allowed as input VAT credits, which
may be deducted from the output VAT liability.
The VAT is paid by the seller of goods and services,
but the amount of the VAT is passed on to the buyer
as part of the purchase price. Thus, the tax burden
actually falls on the buyer who is allowed by law a
tax credit or refund in the subsequent sale of the
same goods and services. The 8% transitional input
VAT was introduced to ease the transition from the
old VAT to the expanded VAT system that included
more goods and services, requiring new
documentation not required under the old VAT
system. To simplify the transition, the law allows an
8% presumptive input VAT on goods and services
newly covered by the expanded VAT system. In
short, the law grants the taxpayer an 8% input VAT
without need of substantiating the same, on the legal
presumption that the VAT imposed by law prior to
the expanded VAT system had been paid,
regardless of whether it was actually paid.
Under the VAT system, a tax refund or credit
requires that a previous tax was paid by a taxpayer,
or in the case of the transitional input tax, that the
tax imposed by law is presumed to have been paid.
Not a single centavo of VAT was paid, or could have
been paid, by anyone in the sale by the National
Government to petitioner of the Global City land for
two basic reasons. First, the National Government is
not subject to any tax, including VAT, when the law
authorizes it to sell government property like the
Global City land. Second, in 1995 the old VAT law
did not yet impose VAT on the sale of land and thus
no VAT on the sale of land could have been paid by
anyone.
Petitioner bought the Global City land from the
National Government in 1995, and this sale was of
course exempt from any kind of tax, including VAT.
The National Government did not pass on to
petitioner any previous sales tax or VAT as part of
the purchase price of the Global City land. Thus,
petitioner is not entitled to claim any transitional
input VAT refund or credit when petitioner
subsequently sells the Global City land. In short,
since petitioner will not be subject to double taxation
on its subsequent sale of the Global City land,
petitioner is not entitled to a tax refund or credit
under the VAT system.
Section 105 of the old NIRC provides that a taxpayer
is "allowed input tax on his beginning inventory x x x
equivalent to 8% x x x, or the actual value-added tax
paid x x x, whichever is higher." The 8% transitional
input VAT in Section 105 assumes that a previous
tax was imposed by law, whether or not it was
actually paid. This is clear from the phrase "or the
actual value-added tax paid, whichever is higher,"
which necessarily means that the VAT was already
imposed on the previous sale. The law creates a
presumption of payment of the transitional input VAT
without need of substantiating the same, provided
the VAT is imposed on the previous sale. Thus, in
order to be entitled to a tax refund or credit,
petitioner must point to the existence of a law
imposing the tax for which a refund or credit is
sought. Since land was not yet subject to VAT or
any other input business tax at the time of the sale
of the Global City land in 1995, the 8% transitional
input VAT could never be presumed to have been
paid. Hence, petitioner’s argument must fail since
the transitional input VAT requires a transaction
where a tax has been imposed by law.
Moreover, the ponente insists that no prior payment
of tax is required to avail of the transitional input tax
since it is not a tax refund per se but a tax credit.
The ponente claims that in filing a claim for tax
refund the petitioner is simply applying its
transitional input tax credit against the output VAT it
has paid.
I disagree.
Availing of a tax credit and filing for a tax refund are
alternative options allowed by the Tax Code. The
choice of one option precludes the other. A taxpayer
may either (1) apply for a tax refund by filing for a
written claim with the BIR within the prescriptive
period, or (2) avail of a tax credit subject to
verification and approval by the BIR. A claim for tax
credit requires that a person who becomes liable to
VAT for the first time must submit a list of his
inventories existing on the date of commencement
of his status as a VAT-registered taxable person.
Both claims for a tax refund and credit are in the
nature of a claim for exemption and should be
construed in strictissimi juris against the person or
entity claiming it. The burden of proof to establish
the factual basis or the sufficiency and competency
of the supporting documents of the claim for tax
refund or tax credit rests on the claimant.
In the present case, petitioner actually filed with the
BIR a claim for tax refund in the amount of ₱
347,741,695.74. In filing a claim for tax refund,
petitioner has the burden to show that prior tax
payments were made, or at the very least, that there
is an existing law imposing the input tax. Similarly, in
a claim for input tax credit, a VAT taxpayer must
submit his beginning inventory showing previously
paid business taxes on his purchase of goods,
materials and supplies. In both claims, prior tax
payments should have been made. Thus, in claiming
for a tax refund or credit, prior tax payment must be
clearly established and duly proven by a VAT
taxpayer in order to be entitled to the claim. In a
claim for transitional input tax credit, as in the
present case, the VAT taxpayer must point to a law
imposing the input VAT, without need of proving
such input VAT was actually paid.Petitioner further
argues that RR 7-95 is invalid since the Revenue
Regulation (1) limits the 8% transitional input VAT to
the value of the improvements on the land, and (2)
violates the express provision of Section 105 of the
old NIRC, in relation to Section 100, as amended by
RA 7716.
Petitioner’s contention must again fail.
Section 4.105-1 of RR 7-954 and its Transitory
Provisions5 provide that the basis of the 8%
transitional input VAT is the value of
the improvements on the land and not the value of
the taxpayer’s land or real properties. This Revenue
Regulation finds statutory basis in Section 105 of the
old NIRC, which provides that input VAT is allowed
on the taxpayer’s "beginning inventory of goods,
materials and supplies." Thus, the presumptive input
VAT refers to the input VAT paid on "goods,
materials or supplies" sold by suppliers to the
taxpayer, which the taxpayer used to introduce
improvements on the land.
Under RA 7716 or the Expanded Value-Added Tax
Law, the VAT was expanded to include land or real
properties held primarily for sale to customers or
held for lease in the ordinary course of trade or
business. Before this law was enacted, only
improvements on land were subject to VAT. Since
the Global City land was not yet subject to VAT at
the time of the sale in 1995, the Global City land
cannot be considered as part of the beginning
inventory under Section 105. Clearly, the 8%
transitional input tax credit should only be applied to
improvements on the land but not to the land itself.
There is no dispute that if the National Government
sells today a parcel of land, the sale is completely
tax-exempt. The sale is not subject to VAT, and the
buyer cannot claim any input VAT from the sale.
Stated otherwise, a taxpayer like petitioner cannot
claim any input VAT on its purchase today of land
from the National Government, even when VAT on
land for real estate dealers is already in effect. With
greater reason, petitioner cannot claim any input
VAT for its 1995 purchase of government land when
VAT on land was still non-existent and petitioner, as
a real estate dealer, was still not subject to VAT on
its sale of land. In short, if petitioner cannot claim a
tax refund or credit if the same transaction
happened today when there is already a VAT on
sales of land by real estate developers, then with
more reason petitioner cannot claim a tax refund or
credit when the transaction happened in 1995 when
there was still no VAT on sales of land by real estate
developers.
In sum, granting 80/0 transitional input VAT in the
amount of ₱ 359,652,009.47 to petitioner is fraught
with grave legal infirmities, namely: ( 1) violation of
Section 4(2) of the Government Auditing Code of the
Philippines, which mandates that public funds shall
be used only for a public purpose; (2) violation of
Section 29( 1 ), Article VI of the Constitution, which
mandates that no money in the National Treasury,
which includes tax collections, shall be spent unless
there is an appropriation law authorizing such
expenditure; and (3) violation of the fundamental
concept of the VAT system, as found in Section 1 05
of the old NIRC, that before there can be a VAT
refund or credit there must be a previously paid input
VAT that can be deducted from the output VAT
because the purpose of the VAT crediting system is
to prevent double taxation.
Accordingly, I vote to DENY the petition
and AFFIRM the 7 July 2006 Decision of the Court
of Appeals in CA-G.R. SP No. 61436.
ANTONIO T. CARPIO
Associate Justice

Footnotes
 G.R. Nos. 158885 & 170680, 2 April 2009, 583
1 

SCRA 168; G.R. Nos. 158885 & 170680, 2

October 2009, 602 SCRA 159.
Francisco v. Toll Regulatory Board, G.R. No.
2 

166910, 19 October 2010, 633 SCRA 470; Ya p

v. Commission on Audit, G.R. No. 158562, 23
April 2010, 619 SCRA 154; Strategic Alliance
Development Corporation v. Radstock Securities
Limited, G.R. No. 178158, 4 December 2009,
607 SCRA 412; Pascual v. Secretary of Public
Works, 110 Phil. 331 (1960).
Planters Product, Inc. v. Fertiphil Corporation,
3 

G.R. No. 166006, 14 March 2008, 548 SCRA

485; Pascual v. Secretary of Public Works, 110
Phil. 331 (1960).
SEC. 4.105-1. Transitional
4 
input tax on
beginning inventories. – x x x
However, in the case of real estate dealers,
the basis of the presumptive input tax shall
be the improvements, such as buildings,
roads, drainage systems, and other similar
structures, constructed on or after the
effectivity of E.O. 273 (1 January 1988). x x
x
TRANSITORY PROVISIONS. x x x
5 
 (b) Presumptive Input Tax Credits – x x x
(iii) For real estate dealers, the presumptive
input tax of 8% of the book value of
improvements constructed on or after
January 1, 1988 (the effectivity of E.O. 273)
shall be allowed. x x x

The Lawphil Project - Arellano Law Foundation

CONCURRING OPINION
ABAD, J.:
I fully concur in Justice Mariano C. Del Castillo's
ponencia and disagree with Justice Antonio T.
Carpio's points of dissent. In 1992 Congress
enacted Republic Act (R.A.) 7227 creating the
Bases Conversion Development Authority (BCDA)
for the purpose of raising funds through the sale to
private investors of military lands in Metro Manila. To
do this, the BCDA established the Fort Bonifacio
Development Corp. (FBDC), a registered
corporation, to enable the latter to develop the 214-
hectare military camp in Fort Bonifacio, Taguig, for
mix residential and commercial purposes. On
February 8, 1995 the Government of the Republic of
the Philippines ceded the land by deed of absolute
sale to FBDC for ₱ 71.2 billion. Subsequently,
cashing in on the sale, BCDA sold at a public
bidding 55o/o of its shares in FBDC to private
investors, retaining ownership of the remaining 45%.
In October 1996, after the National Internal Revenue
Code (NIRC) subjected the sale and lease of real
properties to VAT, FBDC began selling and leasing
lots in Fort Bonifacio. FBDC filed its first VAT return
covering those sales and leases and subsequently
made cash payments for output VAT due. After
which, FBDC filed a claim for refund representing
transitional input tax credit based on 8o/o of the
value of its beginning inventory of lands or actual
value-added tax paid on its goods, whichever is
higher, that Section 105 of the NIRC grants to first-
time VAT payers like FBDC.
Because of the inaction of the Commissioner of
Internal Revenue (CIR) on its claim for refund, FBDC
filed a petition for review before the Court of Tax
Appeals (CTA), which court denied the petition. On
appeal, the Court of
Appeals (CA) affirmed the denial. Both the CTA and
the CA premised their actions on the fact that FBDC
paid no tax on the Government’s sale of the lands to
it as to entitle it to the transitional input tax credit.
Likewise, citing Revenue Regulations 7-95, which
implemented Section 105 of the NIRC, the CTA and
the CA ruled that such tax credit given to real estate
dealers is essentially based on the value of
improvements they made on their land holdings after
January 1, 1988, rather than on the book value of
the same as FBDC proposed.
FBDC subsequently appealed the CA decision to
this Court by petition for review in G.R. 158885,
"Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue." Meantime,
similar actions involving subsequent FBDC sales
subject to VAT, including the present action, took the
same route—CTA, CA, and lastly this Court—
because of the CIR’s refusal to honor FBDC’s claim
to transitional input tax credit.
On April 2, 2009 the Court En Banc rendered
judgment in G.R. 158885,1 declaring FBDC entitled
to the transitional input tax credit that Section 105 of
the NIRC granted. In the same decision, the Court
also disposed of G.R. 170680, "Fort Bonifacio
Development Corporation v. Commissioner of
Internal Revenue," which was consolidated with
G.R. 158885. The Court directed the CIR in that
case to refund to FBDC the VAT which it paid for the
third quarter of 1997. Justice Tinga penned the
decision with the concurrence of Justices Martinez,
Corona, Nazario, Velasco, Jr., De Castro, Peralta,
and Santiago. Justices Carpio, Quisumbing,
Morales, and Brion dissented. Chief Justice Puno
and Justice Nachura took no part.
The CIR filed a motion for reconsideration but the
Court denied the same with finality on October 2,
2009.2 Justice De Castro penned the resolution of
denial with the concurrence of Justices Santiago,
Corona, Nazario, Velasco, Jr., Nachura, Peralta,
Bersamin, Del Castillo, and Abad. Justices Carpio
and Morales dissented. Chief Justice Puno took no
part. Justices Quisumbing and Brion were on leave.
Since the Court’s April 2, 2009 decision and October
2, 2009 resolution in G.R. 158885 and G.R. 170680
had long become final and executory, they should
foreclose the identical issue in the present cases
(G.R. 173425 and G.R. 181092) of whether or not
FBDC is entitled to the transitional input tax credit
granted in Section 105 of the NIRC. Indeed, the
rulings in those previous cases may be regarded as
the law of the case and can no longer be changed.
Justice Del Castillo’s ponencia in the present case
reiterates the Court’s rulings on exactly the same
issue between the same parties. But Justice
Carpio’s dissent would have the Court flip from its
landmark ruling, take FBDC’s tax credit back, and
hold that the Court grossly erred in allowing FBDC,
still 45% government-owned, to get an earlier refund
of the VAT payments it made from the sale of Fort
Bonifacio lands.
A value added tax is a form of indirect sales tax paid
on products and services at each stage of
production or distribution, based on the value added
at that stage and included in the cost to the ultimate
consumer.3
To illustrate how VAT works, take a lumber store
that sells a piece of lumber to a carpentry shop for ₱
100.00. The lumber store must pay a 12% VAT or ₱
12.00 on such sale but it may charge the carpentry
shop ₱ 112.00 for the piece of lumber, passing on to
the latter the burden of paying the ₱ 12.00 VAT.
When the carpentry shop makes a wooden stool out
of that lumber and sells the stool to a furniture
retailer for ₱ 150.00 (which would now consists of
the ₱ 100.00 cost of the lumber, the ₱ 50.00 cost of
shaping the lumber into a stool, and profit), the
carpentry shop must pay a 12% VAT of ₱ 6.00 on
the ₱ 50.00 value it added to the piece of lumber
that it made into a stool. But it may charge the
furniture retailer the VAT of ₱ 12.00 passed on to it
by the lumber store as well as the VAT of ₱ 6.00 that
the carpentry shop itself has to pay. Its buyer, the
furniture retailer, will pay ₱ 150.00, the price of the
wooden stool, and ₱ 18.00 (₱ 12.00 + ₱ 6.00), the
passed-on VAT due on the same.
When the furniture retailer sells the wooden stool to
a customer for ₱ 200.00, it would have added to its
₱ 150.00 acquisition cost of the stool its mark-up of
₱ 50.00 to cover its overhead and profit. The
furniture retailer must, however, pay an additional
12% VAT of ₱ 6.00 on the ₱ 50.00 add-on value of
the stool. But it could charge its customer all the
accumulated VAT payments: the ₱ 12.00 paid by the
lumber store, the ₱ 6.00 paid by the carpentry shop,
and the other ₱ 6.00 due from the furniture retailer,
for a total of ₱ 24.00. The customer will pay ₱
200.00 for the stool and ₱ 24.00 in passed-on 12%
VAT.
Now, would the furniture retailer pay to the BIR the ₱
24.00 VAT that it passed on to its customer and
collected from him at the store’s counter? Not all of
the ₱ 24.00. The furniture retailer could claim a
credit for the ₱ 12.00 and the ₱ 6.00 in input VAT
payments that the lumber store and the carpentry
shop passed on to it and that it paid for when it
bought the wooden stool. The furniture retailer would
just have to pay to the BIR the output VAT of ₱ 6.00
covering its ₱ 50.00 mark-up. This payment rounds
out the 12% VAT due on the final sale of the stool
for ₱ 200.00.
When the VAT law first took effect, it would have
been unfair for a furniture retailer to pay all of the
10% VAT (the old rate) on the wooden stools in its
inventory at that time and not be able to claim
deduction for any tax on sale that the lumber store
and the carpentry shop presumably passed on to it
when it bought those wooden stools. To remedy this
unfairness, Section 105 of the NIRC granted those
who must pay VAT for the first time a transitional
input tax credit of 8% of the value of the inventory of
goods they have or actual value-added tax paid on
such goods when the VAT law took effect. The
furniture retailer would thus have to pay only a 2%
VAT on the wooden stools in that inventory, given
the transitional input VAT tax credit of 8% allowed it
under the old 10% VAT rate.
In the case before the Court, FBDC had an inventory
of Fort Bonifacio lots when the VAT law was made
to cover the sale of real properties for the first time.
FBDC registered as new VAT payer and submitted
to the BIR an inventory of its lots. FBDC sought to
apply the 8% transitional input tax credit that Section
105 grants first-time VAT payers like it but the CIR
would not allow it. The dissenting opinion of Justice
Carpio echoes the CIR’s reason for such
disallowance. When the Government sold the Fort
Bonifacio lands to FBDC, the Government paid no
sales tax whatsoever on that sale. Consequently, it
could not have passed on to FBDC what could be
the basis for the 8% transitional input tax credit that
Section 105 provides.
The reasoning appears sound at first glance. But
Section 105 grants all first-time VAT payers such
transitional input tax credit of 8% without any
precondition. It does not say that a taxpayer has to
prove that the seller, from whom he bought the
goods or the lands, paid sales taxes on them.
Consequently, the CIR has no authority to insist that
sales tax should have been paid beforehand on
FBDC’s inventory of lands before it could claim the
8% transitional input tax credit. The Court’s decision
in G.R. 158885 and G.R. 170680 more than amply
explains this point and such explanation need not be
repeated here.
But there is a point that has apparently been missed.
When the Government sold the military lands to
FBDC for development into mixed residential and
commercial uses, the presumption is that in fixing
their price the Government took into account the
price that private lands similarly situated would have
fetched in the market place at that time. The clear
intent was to privatize ownership of those former
military lands. It would make no sense for the
Government to sell the same to intended private
investors at a price lesser than the price of
comparable private lands. The presumption is that
the sale did not give undue benefit to the buyers in
violation of the anti-graft and corrupt practices act.
Moreover, there is one clear evidence that the
former military lands were sold to private investors at
market price. After the Government sold the lands to
FBDC, then wholly owned by BCDA, the latter sold
55% of its shares in FBDC to private investors in a
public bidding where many competed. Since FBDC
had no assets other than the lands it bought from
the Government, the bidding was essentially for
those lands. There can be no better way of
determining the market price of such lands than a
well-publicized bidding for them, joined in by
interested bona fide bidders.
Thus, since the Government sold its lands to
investors at market price like they were private
lands, the price FBDC paid to it already factored in
the cost of sales tax that prices of ordinary private
lands included. This means that FBDC, which
bought the lands at private-land price, should be
allowed like other real estate dealers holding private
lands to claim the 8% transitional input tax credit that
Section 105 grants with no precondition to first-time
VAT payers. Otherwise, FBDC would be put at a
gross disadvantage compared to other real estate
dealers. It will have to sell at higher prices than
market price, to cover the 10% VAT that the BIR
insists it should pay. Whereas its competitors will
pay only a 2% VAT, given the 8% transitional input
tax credit of Section 105. To deny such tax credit to
FBDC would amount to a denial of its rights to
fairness aqd to equal protection.
The Court was correct in allowing FBDC the right to
be refunded the VAT that it already paid, applying
instead to the VAT tax due on its sales the
transitional input VAT that Section 105 provides.
Justice Carpio also argues that ifFBDC will be given
a tax refund, it would be sourced from public funds,
which violates Section 4(2) of the Govenm1ent
Auditing Code that govemment funds or property
cannot be used in order to benefit private individuals
or entities. They shall only be spent or used solely
for public purposes.
But the records show that FBDC actually paid to the
BIR the amounts for which it seeks a BIR tax refund.
The CIR does not deny this fact. FBDC was forced
to pay cash on the VAT due on its sales because the
BIR refused to apply the 8% transitional input VAT
tax credits that the law allowed it. Since such tax
credits were sufficient to cover the VAT due, FBDC
is entitled to a refund of the VAT it already paid.
And, contrary to the dissenting opinion, if FBDC will
be given a tax refund, it would be sourced, not from
public funds, but from the VAT payments which
FBDC itself paid to the BIR.
Like the previous cases before the Court, the BIR
has the option to refund what FBDC paid it with
equivalent tax credits. Such tax credits have never
been regarded as needing appropriation out of
government funds. Indeed, FBDC concedes in its
prayers that it may get its refund in the form of a Tax
Credit Certificate.
For the above reasons, I concur with Justice Del
Castillo's ponencia.
ROBERTO A. ABAD
Associate Justice

Footnotes
 Fort
1 
Bonifacio Development Corp. v.
Commissioner of Internal Revenue, 583 SCRA
168.
Fort
2 
Bonifacio Development Corp. v.
Commissioner of Internal Revenue, G.R. Nos.
158885 and 170680, 602 SCRA 159.
Webster’s New World College Dictionary, Third
3 

edition, p. 1474.
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