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FIRST DIVISION

[G.R. No. 125355. March 30, 2000.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and


COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

The Solicitor General for petitioner.

Benilda V. Quevedo-Santos and Anita A. Diomalanta-Arcinue for private respondent.

SYNOPSIS

Commonwealth Management and Services Corporation (COMASERCO) is a corporation duly organized and existing under the
laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the latter to perform
collection, consultative and other technical services, including functioning as an internal auditor of Philamlife and its other
affiliates. The Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-
added tax (VAT) amounting to P351,851.01, for taxable year 1988. COMASERCO filed with the Court of Tax Appeals a petition
for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and
its affiliates were on a "no-profit, reimbursement-of-cost-only" basis, thus they were not engaged in business. In fact, it did not
generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it
was not liable to pay VAT. The Court of Tax Appeals rendered a decision in favor of the Commissioner of Internal Revenue.
Respondent filed with the Court of Appeals a petition for review of the decision of the Court of Tax Appeals. After due
proceedings, the Court of Appeals rendered a decision reversing that of the Court of Tax Appeals. The Commissioner of
Internal Revenue filed with the Supreme Court a petition for review on certiorariassailing the decision of the Court of Appeals.
At issue in this case was whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

The Supreme Court agreed with the Commissioner of Internal Revenue. Contrary to COMASERCO's contention, Sec. 105 of
the National Internal Revenue Code of 1997 clarifies that even a non-stock, non-profit organization or government entity is
liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. There was no merit to respondent's contention that the Court of Appeals' decision declaring the
COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The
issue in the appellate court is different from the present case, which involves COMASERCO's liability for VAT. Every person
who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.
The Court reversed the decision of the Court of Appeals and reinstated the decision of the Court of Tax Appeals.

SYLLABUS

1. TAXATION; REPUBLIC ACT NO. 7716 (EXPANDED VAT LAW); CLARIFIES THAT EVEN A NON-STOCK, NON-PROFIT
ORGANIZATION OR GOVERNMENT ENTITY IS LIABLE TO PAY VAT ON THE SALE OF GOODS OR SERVICES. On May 28,
1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99
of the Tax Code.On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. Contrary to
COMASERCO's contention the amended law clarifies that even a non-stock, non-profit, organization or government entity, is
liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an
economic activity, regardless of whether or not the entity is profit-oriented. The definition of the term "in the course of trade or
business" incorporated in the present law applies to all transactions even to those made prior to its enactment. Executive
Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services,
was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods and services. Section 108 of the National Internal Revenue Code of
1997 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking or project."
2. ID.; ID.; BIR RULING NO. 010-98; EMPHASIZED THAT AS LONG AS THE ENTITY PROVIDES SERVICE FOR A FEE,
REMUNERATION OR CONSIDERATION, THEN THE SERVICE RENDERED IS SUBJECT TO VALUE ADDED TAX (VAT). On
February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered.
In fact, even if such corporation was organized without any intention of realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a
corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service
for a fee, remuneration or consideration, then the service rendered is subject to VAT.

3. ID.; TAXES; EXEMPTION FROM THE PAYMENT THEREOF CONSTRUED STRICTLY AGAINST THE GRANTEE AND
LIBERALLY IN FAVOR OF THE GOVERNMENT; APPLICATION IN CASE AT BAR. It is a rule that because taxes are the
lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it
cannot be merely implied therefrom. In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions
exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions.

4. REMEDIAL LAW; EVIDENCE; CONCLUSIONS OF QUASI-JUDICIAL AGENCIES; RESPECTED ON APPEAL; CASE AT BAR.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by
COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all
kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As
government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the
absence of any showing that it is plainly wrong, is entitled to great weight. Also, it has been the long standing policy and
practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject, unless there has been and abuse or improvident exercise of its authority. aITDAE

DECISION

PARDO, J p:

What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals, 1 reversing that of the
Court of Tax Appeals, 2which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that
Commonwealth Management and Services Corporation, is liable for value added tax for services to clients during taxable year
1988. Cdpr

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

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for
deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:

"Taxable sale/receipt P1,679,155.00

===========

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01" 3

===========
COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the
amount of P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On
August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the
deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for review contesting the
Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its
affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business.
In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not
engaged in business, it was not liable to pay VAT. cdasia

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the
dispositive portion of which reads:

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

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

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals,
the dispositive portion of which reads:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE
the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for
the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for
lack of legal and factual basis." 6

The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties, 7 where it was
held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The
Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife
and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not
engaged in the business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorari assailing the
decision of the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996,
COMASERCO complied with the resolution. 8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner
maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to
VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from
rendering the service. cdasia

We agree with the Commissioner.

Section 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.O.) No. 273 in 1988, provides
that:
"SECTION 99. Persons liable. Any person who, in the course of trade or business, sells, barters or
exchanges goods, renders services, or engages in similar transactions and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code." 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view
to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not
motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who
to tax for purposes of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections,
Section 99 of the Tax Code.On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect.
The amended law provides that:

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

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

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

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

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

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

Section 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all
kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or
services rendered in connection with technical management or administration of any scientific, industrial or commercial
undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered.
In fact, even if such corporation was organized without any intention of realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax.

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

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

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by
COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all
kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the
absence of any showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy and
practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the
COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The
issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT. As heretofore
stated, every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by
law, is subject to VAT. cdtai

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No. 37930.
The Court hereby REINSTATES the decision of the Court of Tax Appeals in C.T.A. Case No. 4853.

No costs.

SO ORDERED.

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

||| (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 125355, [March 30, 2000], 385 PHIL 875-886)

THIRD DIVISION

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MAGSAYSAY LINES, INC., BALIWAG


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

DECISION

TINGA, J p:

The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its vessels to
the private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then
prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not
subject to VAT. We affirm, though on a more unequivocal rationale than that utilized by the rulings under review. The fact that
the sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as outside the coverage
of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly-
owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its
ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. 1 The vessels were constructed for the NDC between
1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a bareboat basis, to the NMC. 2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public
auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." 3 On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00.
The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private respondents). 4 The bid was
approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines,
Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that "[v]alue-added tax, if any,
shall be for the account of the PURCHASER." 5Per arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on
whether or not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by
the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed
that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written
demand the amount needed for the payment of the VAT on the stipulated due date, 20 December 1988. 6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988 from the
BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered
enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing out personal property including
sale of its own assets that are movable, tangible objects which are appropriable or transferable are subject to the 10%
[VAT]." 7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88 (dated 18
August 1988), which made a similar ruling on the sale of the same vessels in response to an inquiry from the Chairman of the
Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February
1989, reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of
P15,120,000.00 in taxes was paid on 16 March 1989. HDITCS

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a Supplemental
Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as the
refund of the VAT payment made amounting to P15,120,000.00. 8 The Commissioner of Internal Revenue (CIR) opposed the
petition, first arguing that private respondents were not the real parties in interest as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then Tax Code.The CIR also squarely defended the VAT rulings holding the sale of
the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that
"[VAT] is imposed on any sale or transactions 'deemed sale' of taxable goods (including capital goods, irrespective of the date
of acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed sale," as enumerated in
Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified
"change of ownership of business" as a circumstance that gave rise to a transaction "deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIR's arguments and granted the petition. 9 The CTA ruled that the
sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC's business, and was thus not subject to
VAT, which under Section 99 of the Tax Code,was applied only to sales in the course of trade or business. The CTA further
held that the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code,or Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since Section 99 of the Tax
Code which implemented VAT is not an exemption provision, but a classification provision which warranted the resolution of
doubts in favor of the taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals, 10 which on 11 March 1997, rendered a Decision reversing the
CTA. 11 While the appellate court agreed that the sale was an isolated transaction, not made in the course of NDC's regular
trade or business, it nonetheless found that the transaction fell within the classification of those "deemed sale" under R.R. No.
5-87, since the sale of the vessels together with the NMC shares brought about a change of ownership in NMC. The Court of
Appeals also applied the principle governing tax exemptions that such should be strictly construed against the taxpayer, and
liberally in favor of the government. 12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February
2001. 13 This time, the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5-87
must be a consequence of the "retirement from or cessation of business" by the owner of the goods, as provided for in Section
100 of the Tax Code.The Court of Appeals also agreed with the CTA that the classification of transactions "deemed sale" was
a classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer. 14

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and refuted in
the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is
sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts on the
applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant. CTSAaH

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed percentage. 15 It is the end user of consumer goods or
services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these
goods or services 16 who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT). 17 The final purchase by the end consumer represents the final link in a production chain that
itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the
collection of taxes on every level of consumption, 18 yet assuages the manufacturers or providers of goods and services by
enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the
entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer's role
or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, 19 the tax is
levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of
trade or business. These transactions outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course
of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit
any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first
place only through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the CTA and
the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered. 20 We cite with approval the
CTA's explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term "carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally incident
thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the
time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v.
Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale
which was involuntary and made pursuant to the declared policy of Government for privatization could no
longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property. 21

This finding is confirmed by the Revised Charter 22 of the NDC which bears no indication that the NDC was created for the
primary purpose of selling real property. 23

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this
Court, 24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT. cDHCAE

Section 100 of the Tax Code,which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is captioned
"Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied, assessed and collected on every sale,
barter or exchange of goods, a value added tax . . . ." Section 100 should be read in light of Section 99, which lays down the
general rule on which persons are liable for VAT in the first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code,the Title that covers VAT in the law. Before any portion of
Section 100, or the rest of the law for that matter, may be applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for VAT in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or business" as
expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a means of ascertaining
whether the sale of the vessels was "in the course of trade or business," and thus subject to VAT. But that is not the case.
What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of "in the course of trade or business,"
but instead the identification of the transactions which may be deemed as sale. It would become necessary to ascertain
whether under those two provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in
the course of trade or business in the first place. If the transaction transpired outside the course of trade or business, it would
be irrelevant for the purpose of determining VAT liability whether the transaction may be deemed sale, since it anyway is not
subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of
trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code,no matter
how the said sale may hew to those transactions deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds the
discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those involving "change of ownership of
business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of theTax Code,clarifies that such "change of
ownership" is only an attending circumstance to "retirement from or cessation of business[,] with respect to all goods on hand
[as] of the date of such retirement or cessation." 25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the "change
of ownership of business" as only a "circumstance" that attends those transactions "deemed sale," which are otherwise stated
in the same section. 26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

Quisumbing, Carpio, Carpio Morales and Velasco Jr., JJ., concur.

||| (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., G.R. No. 146984, [July 28, 2006], 529 PHIL 64-77)

SECOND DIVISION

[G.R. No. 178697. November 17, 2010.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SONY PHILIPPINES, INC., respondent.

DECISION

MENDOZA, J p:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution
of the Court of Tax Appeals En Banc 1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the
CTA-First Division 2 which, in turn, partially granted the petition for review of respondent Sony Philippines, Inc. (Sony). The
CTA-First Division decision cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of P1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount of
P1,269,593.90. 3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain
revenue officers to examine Sony's books of accounts and other accounting records regarding revenue taxes for "the
period 1997 and unverified prior years." On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and
penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies. 4 Said details of the deficiency taxes and penalties
for late remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE-ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P3,157,314.41
Compromise 25,000.00 3,182,314.41

Deficiency VAT Due P11,141,014.41
=========
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P550,485.82
Compromise 25,000.00 575,485.82

Deficiency EWT Due P1,992,462.72
=========
DEFICIENCY OF VAT ON ROYALTY PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14

Penalties Due P462,758.14
========
LATE REMITTANCE OF FINAL WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78

Penalties Due P2,288,473.78
=========
LATE REMITTANCE OF INCOME PAYMENTS
(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25% Surcharge P8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60

Penalties Due P10,923.60
=======
GRAND TOTAL P15.895,632.65 5
============
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony
submitted relevant documents in support of its protest on the 16th of that same month. 6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting
documents to the CIR, Sony filed a petition for review before the CTA. 7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising
expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the EWT, the
CTA-First Division maintained the deficiency EWT assessment on Sony's motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to sales agents as commissions with five percent
(5%) EWT pursuant to Section 1 (g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the
EWT assessment on rental expense since it found that the total rental deposit of P10,523,821.99 was incurred from
January to March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise penalties, the
CTA-First Division also upheld the penalties for the late payment of VAT on royalties, for late remittance of final withholding
tax on royalty as of December 1997 and for the late remittance of EWT by some of Sony's branches. 8 In sum, the CTA-
First Division partly granted Sony's petition by cancelling the deficiency VAT assessment but upheld a modified deficiency
EWT assessment as well as the penalties. Thus, the dispositive portion reads: ICDSca
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to
CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit.
However, the deficiency assessments for expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the
amount of P1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the
sum of P1,269,593.90:

1. VAT on Royalty P429,242.07


2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63

Total P1,269,593.90
===========
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of
the 1997 Tax Code.

SO ORDERED. 9

The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency
VAT in the amount of P11,141,014.41;

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

C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with
respect to the 5% withholding tax on rental deposit in the amount of P10,523,821.99 should be
cancelled; and

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

On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR filed a petition
for review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41; DHCSTa

2. Whether or not the commission expense in the amount of P2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;

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

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

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR's petition
on May 17, 2007. CIR's motion for reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the
CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE
PETITION

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

II

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


PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF
THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT
PROPER. ECcaDT

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME. 12
Upon filing of Sony's comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a
manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the pleadings filed. 13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998. 14 The Court cannot agree.
Based on Section 13 of the Tax Code,a Letter of Authority or LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the
books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of
tax. 15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant authority
to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement.

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

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment.
Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such
an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR
acting through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment they
arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31, 1998. As
pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should have done so by
including it in the LOA or issuing another LOA. TaISEH
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified
prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent
portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of
issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be specifically indicated in the
L/A. 16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR's
argument, that Sony's advertising expense could not be considered as an input VAT credit because the same was
eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony's advertising expense was reimbursed by SIS, the former never incurred any
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising
expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony's
deficiency VAT assessment stemmed from the CIR's disallowance of the input VAT credits that should have been realized
from the advertising expense of the latter. 18 It is evident under Section 110 19 of the 1997 Tax Code that an advertising
expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no less than CIR's own
witness, Revenue Officer Antonio Aluquin. 20 There is also no denying that Sony incurred advertising expense. Aluquin
testified that advertising companies issued invoices in the name of Sony and the latter paid for the same. 21 Indubitably,
Sony incurred and paid for advertising expense/services. Where the money came from is another matter all together but
will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable.
In support of this, the CIR cited a portion of Sony's protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy
equivalent to the latter's advertising expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit
further that our client is not subject to VAT on the subsidy income as this was not derived from the sale of
goods or services. 22 cIACaT
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with,
the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony's advertising expense
for it was but an assistance or aid in view of Sony's dire or adverse economic conditions, and was only "equivalent to the
latter's (Sony's) advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.

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

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in
payment for goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA), 23 the Court had the occasion to rule that services rendered for a fee
even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid
the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without
profit. This is not true in the present case. Sony did not render any service to SIS at all. The services rendered by the
advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony
in the amount equivalent to the latter's advertising expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony's commission expense, the CIR insists that
said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue
Regulation No. 2-98 dated April 17, 1998. 24 The said revenue regulation provides that the 10% rate is applied when the
recipient of the commission income is a natural person. According to the CIR, Sony's schedule of Selling, General and
Administrative expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing the
word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1 (g)
of Revenue Regulations No. 6-85 which provides: ScCEIA
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real estate
and commercial brokers and agents of professional entertainers five per centum (5%). 25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:
. . ., commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not
justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is composed of
"Commission Expense" in the amount of P10,200.00 and 'Broker Dealer' of P2,894,797.00. 26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is
Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule during the
subject period of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR,
was only adopted in April 1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-
2001. 27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the amount of
P10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIR's deficiency EWT assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of
December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First Division
when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 3 28 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58 (A) (2)
(a) 29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March
of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony and
Sony-Japan, particularly in the payment of royalties. cdasiajur
The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax
on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when the royalty is
paid or is payable. After which, the corresponding return and remittance must be made within 10 days after the end of
each month. The question now is when does the royalty become payable?
Under Article X (5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were
agreed upon:
(5) Within two (2) months following each semi-annual period ending June 30 and December 31, the
LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing
quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective
semi-annual period and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall
pay the royalty hereunder to the LICENSOR concurrently with the furnishing of the above statement. 30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in
June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the end of
December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted by Sony to
the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling
that the FWT for the royalty from January to March 1998 was seasonably filed. Although the royalty from January to March
1998 was well within the semi-annual period ending June 30, which meant that the royalty may be payable until August
1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual
at the end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB. IEaCDH
WHEREFORE, the petition is DENIED.
SO ORDERED.
Carpio, Leonardo-de Castro, * Peralta and Abad, JJ., concur.

||| (Commissioner of Internal Revenue v. Sony Philippines, Inc., G.R. No. 178697, [November 17, 2010], 649 PHIL 519-537)

FIRST DIVISION

[G.R. No. 172378. January 17, 2011.]

SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, INC.), petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

DEL CASTILLO, J p:

The burden of proving entitlement to a refund lies with the claimant.


This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the September 30,
2005 Decision 1 and the April 20, 2006 Resolution 2 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, is engaged in the business of designing, developing, manufacturing and exporting advance
and large-scale integrated circuit components or "IC's." 3 Petitioner is registered with the Bureau of Internal Revenue (BIR)
as a Value Added Tax (VAT) taxpayer 4 and with the Board of Investments (BOI) as a preferred pioneer enterprise. 5
On May 21, 1999, petitioner filed with the respondent Commissioner of Internal Revenue (CIR), through the One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an application for
credit/refund of unutilized input VAT for the period October 1, 1998 to December 31, 1998 in the amount of
P31,902,507.50, broken down as follows:

Amount

Tax Paid on Imported/Locally Purchased

Capital Equipment P15,170,082.00

Total VAT paid on Purchases per Invoices

Received During the Period for which

this Application is Filed 16,732,425.50

Amount of Tax Credit/Refund Applied For P31,902,507.50 6

===========

Proceedings before the CTA Division


On December 27, 2000, due to the inaction of the respondent, petitioner filed a Petition for Review with the CTA
Division, docketed as CTA Case No. 6212. Petitioner alleged that for the 4th quarter of 1998, it generated and recorded
zero-rated export sales in the amount of P3,027,880,818.42, paid to petitioner in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; 7 and that for the said
period, petitioner paid input VAT in the total amount of P31,902,507.50, 8 which have not been applied to any output
VAT. 9 THSaEC
To this, respondent filed an Answer 10 raising the following special and affirmative defenses, to wit:
8. The petition states no cause of action as it does not allege the dates when the taxes sought to be
refunded/credited were actually paid;

9. It is incumbent upon herein petitioner to show that it complied with the provisions of Section 229 of
the Tax Code as amended;

10. Claims for refund are construed strictly against the claimant, the same being in the nature of exemption
from taxes (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95; Manila Electric Co. vs.
Commissioner of Internal Revenue, 67 SCRA 35);

11. One who claims to be exempt from payment of a particular tax must do so under clear and
unmistakable terms found in the statute (Asiatic Petroleum vs. Llanes, 49 Phil. 466;Union Garment Co. vs.
Court of Tax Appeals, 4 SCRA 304);

12. In an action for refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure
to sustain the same is fatal to the action for refund. Furthermore, as pointed out in the case of William Li
Yao vs. Collector (L-11875, December 28, 1963), amounts sought to be recovered or credited should be
shown to be taxes which are erroneously or illegally collected; that is to say, their payment was an
independent single act of voluntary payment of a tax believed to be due and collectible and accepted by
the government, which had therefor become part of the State moneys subject to expenditure and perhaps
already spent or appropriated; and

13. Taxes paid and collected are presumed to have been made in accordance with the law and
regulations, hence not refundable. 11

On November 18, 2003, the CTA Division rendered a Decision 12 partially granting petitioner's claim for refund of
unutilized input VAT on capital goods. Out of the amount of P15,170,082.00, only P9,898,867.00 was allowed to be
refunded because training materials, office supplies, posters, banners, T-shirts, books, and other similar items purchased
by petitioner were not considered capital goods under Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95
(Consolidated Value-Added Tax Regulations). 13 With regard to petitioner's claim for credit/refund of input VAT
attributable to its zero-rated export sales, the CTA Division denied the same because petitioner failed to present an
Authority to Print (ATP) from the BIR; 14 neither did it print on its export sales invoices the ATP and the word "zero-
rated." 15 Thus, the CTA Division disposed of the case in this wise:
WHEREFORE, in view of the foregoing the instant petition for review is hereby PARTIALLY GRANTED.
Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced
amount of P9,898,867.00 representing input VAT on importation of capital goods. However, the claim for
refund of input VAT attributable to petitioner's alleged zero-rated sales in the amount of P16,732,425.50 is
hereby DENIED for lack of merit.

SO ORDERED. 16

Not satisfied with the Decision, petitioner moved for reconsideration. 17 It claimed that it is not required to secure
an ATP since it has a "Permit to Adopt Computerized Accounting Documents such as Sales Invoice and Official Receipts"
from the BIR. 18 Petitioner further argued that because all its finished products are exported to its mother
company, Intel Corporation, a non-resident corporation and a non-VAT registered entity, the printing of the word "zero-
rated" on its export sales invoices is not necessary. 19
On its part, respondent filed a Motion for Partial Reconsideration 20 contending that petitioner is not entitled to a
credit/refund of unutilized input VAT on capital goods because it failed to show that the goods imported/purchased are
indeed capital goods as defined in Section 4.106-1 of RR No. 7-95. 21
The CTA Division denied both motions in a Resolution 22 dated August 10, 2004. It noted that:
[P]etitioner's request for Permit to Adopt Computerized Accounting Documents such as Sales Invoice and
Official Receipt was approved on August 31, 2001 while the period involved in this case was October 31,
1998 to December 31, 1998 . . . . While it appears that petitioner was previously issued a permit by the BIR
Makati Branch, such permit was only limited to the use of computerized books of account . . . . It was only
on August 31, 2001 that petitioner was permitted to generate computerized sales invoices and official
receipts [provided that the BIR Permit Number is printed] in the header of the document . . . .

xxx xxx xxx

Thus, petitioner's contention that it is not required to show its BIR permit number on the sales invoices
runs counter to the requirements under the said "Permit." This court also wonders why petitioner was
issuing computer generated sales invoices during the period involved (October 1998 to December 1998)
when it did not have an authority or permit. Therefore, we are convinced that such documents lack
probative value and should be treated as inadmissible, incompetent and immaterial to prove petitioner's
export sales transaction. HcaDIA

xxx xxx xxx

ACCORDINGLY, the Motion for Reconsideration and the Supplemental Motion for Reconsideration filed
by petitioner as well as the Motion for Partial Reconsideration of respondent are hereby DENIED for lack of
merit. The pronouncement in the assailed decision is REITERATED.

SO ORDERED. 23

Ruling of the CTA En Banc


Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for Review, 24 docketed as EB Case
No. 23.
On September 30, 2005, the CTA En Banc issued the assailed Decision 25 denying the petition for lack of merit.
Pertinent portions of the Decision read:
This Court notes that petitioner raised the same issues which have already been thoroughly discussed in
the assailed Decision, as well as, in the Resolution denying petitioner's Motion for Partial Reconsideration.

With regard to the first assigned error, this Court reiterates that, the requirement of [printing] the BIR permit
to print on the face of the sales invoices and official receipts is a control mechanism adopted by the
Bureau of Internal Revenue to safeguard the interest of the government.

This requirement is clearly mandated under Section 238 of the 1997 National Internal Revenue Code,
which provides that:

SEC. 238. Printing of Receipts or Sales or Commercial Invoice. All persons who are engaged in
business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales
or commercial invoices before a printer can print the same.

The above mentioned provision seeks to eliminate the use of unregistered and double or multiple sets of
receipts by striking at the very root of the problem the printer (H. S. de Leon, The National Internal
Revenue Code Annotated, 7th Ed., p. 901). And what better way to prove that the required permit to print
was secured from the Bureau of Internal Revenue than to show or print the same on the face of the
invoices. There can be no other valid proof of compliance with the above provision than to show the
Authority to Print Permit number [printed] on the sales invoices and official receipts.

With regard to petitioner's failure to print the word "zero-rated" on the face of its export sales invoices, it
must be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires that all
value-added tax registered persons shall, for every sale or lease of goods or properties or services, issue
duly registered invoices which must show the word "zero-rated" [printed] on the invoices covering zero-
rated sales.

It is not enough that petitioner prove[s] that it is entitled to its claim for refund by way of substantial
evidence. Well settled in our jurisprudence [is] that tax refunds are in the nature of tax exemptions and as
such, they are regarded as in derogation of sovereign authority (Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95). Thus, tax refunds are construed in strictissimi juris against the person or entity
claiming the same(Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing
Corporation, 204 SCRA 377; Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA
332).

In this case, not only should petitioner establish that it is entitled to the claim but it must most importantly
show proof of compliance with the substantiation requirements as mandated by law or
regulations. DHcESI

The rest of the assigned errors pertain to the alleged errors of the First Division: in finding that the
petitioner failed to comply with the substantiation requirements provided by law in proving its claim for
refund; in reducing the amount of petitioner's tax credit for input vat on importation of capital goods; and
in denying petitioner's claim for refund of input vat attributable to petitioner's zero-rated sales.

It is petitioner's contention that it has clearly established its right to the tax credit or refund by way of
substantial evidence in the form of material and documentary evidence and it would be improper to set
aside with haste the claimed input VAT on capital goods expended for training materials, office supplies,
posters, banners, t-shirts, books and the like because Revenue Regulations No. 7-95 defines capital
goods as to include even those goods which are indirectly used in the production or sale of taxable goods
or services.

Capital goods or properties, as defined under Section 4.106-1(b) of Revenue Regulations No. 7-95, refer
"to goods or properties with estimated useful life greater than one year and which are treated as
depreciable assets under Section 29 (f), used directly or indirectly in the production or sale of taxable
goods or services."

Considering that the items (training materials, office supplies, posters, banners, t-shirts, books and the like)
purchased by petitioner as reflected in the summary were not duly proven to have been used, directly or
indirectly[,] in the production or sale of taxable goods or services, the same cannot be considered as
capital goods as defined above[. Consequently,] the same may not . . . then [be] claimed as such.

WHEREFORE, in view of the foregoing, this instant Petition for Review is hereby DENIED DUE
COURSE and hereby DISMISSED for lack of merit. This Court's Decision of November 18, 2003 and
Resolution of August 10, 2004 are hereby AFFIRMED in all respects.

SO ORDERED. 26

Petitioner sought reconsideration of the assailed Decision but the CTA En Banc denied the Motion 27 in a
Resolution 28 dated April 20, 2006.
Issues
Hence, the instant Petition raising the following issues for resolution:
(1) whether the CTA En Banc erred in denying petitioner's claim for credit/ refund of input VAT attributable
to its zero-rated sales in the amount of P16,732,425.00 due to its failure:

(a) to show that it secured an ATP from the BIR and to indicate the same in its export sales
invoices; and

(b) to print the word "zero-rated" in its export sales invoices. 29

(2) whether the CTA En Banc erred in ruling that only the amount of P9,898,867.00 can be classified as
input VAT paid on capital goods. 30

Petitioner's Arguments
Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT attributable to its zero-
rated sales has no legal basis because the printing of the ATP and the word "zero-rated" on the export sales invoices are
not required under Sections 113 and 237 of theNational Internal Revenue Code (NIRC). 31 And since there is no law
requiring the ATP and the word "zero-rated" to be indicated on the sales invoices, 32 the absence of such information in
the sales invoices should not invalidate the petition 33 nor result in the outright denial of a claim for tax
credit/refund. 34 To support its position, petitioner cites Intel Technology Philippines, Inc. v. Commissioner of Internal
Revenue, 35 whereIntel's failure to print the ATP on the sales invoices or receipts did not result in the outright denial of its
claim for tax credit/refund. 36 Although the cited case only dealt with the printing of the ATP, petitioner submits that the
reasoning in that case should also apply to the printing of the word "zero-rated." 37 Hence, failure to print of the word
"zero-rated" on the sales invoices should not result in the denial of a claim.
As to the claim for refund of input VAT on capital goods, petitioner insists that it has sufficiently proven through
testimonial and documentary evidence that all the goods purchased were used in the production and manufacture of its
finished products which were sold and exported. 38 aHDTAI
Respondent's Arguments
To refute petitioner's arguments, respondent asserts that the printing of the ATP on the export sales invoices,
which serves as a control mechanism for the BIR, is mandated by Section 238 of the NIRC;39 while the printing of the
word "zero-rated" on the export sales invoices, which seeks to prevent purchasers of zero-rated sales or services from
claiming non-existent input VAT credit/refund, 40 is required under RR No. 7-95, promulgated pursuant to Section 244 of
the NIRC. 41 With regard to the unutilized input VAT on capital goods, respondent counters that petitioner failed to show
that the goods it purchased/imported are capital goods as defined in Section 4.106-1 of RR No. 7-95. 42
Our Ruling
The petition is bereft of merit.
Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable to zero-rated sales
under Section 112 (A) of theNIRC, and the other is a credit/refund of input VAT on capital goods pursuant to Section 112
(B) of the same Code.
Credit/refund of input VAT on zero-rated sales
In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A) 43 of the NIRC lays down
four requisites, to wit:
1) the taxpayer must be VAT-registered;

2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;

3) the claim must be filed within two years after the close of the taxable quarter when such sales were
made; and

4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax,
to the extent that such input tax has not been applied against the output tax.

To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices, certifications of inward
remittance, export declarations, and airway bills of lading for the fourth quarter of 1998. The CTA Division, however, found
the export sales invoices of no probative value in establishing petitioner's zero-rated sales for the purpose of claiming
credit/refund of input VAT because petitioner failed to show that it has an ATP from the BIR and to indicate the ATP and
the word "zero-rated" in its export sales invoices. 44 The CTA Division cited as basis Sections 113, 45 237 46 and
238 47 of the NIRC, in relation to Section 4.108-1 of RR No. 7-95. 48
We partly agree with the CTA.
Printing the ATP on the invoices or receipts is not required
It has been settled in Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue 49 that the ATP need
not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring it. 50 Thus, in the
absence of such law or regulation, failure to print the ATP on the invoices or receipts should not result in the outright
denial of a claim or the invalidation of the invoices or receipts for purposes of claiming a refund. 51
ATP must be secured from the BIR
But while there is no law requiring the ATP to be printed on the invoices or receipts, Section 238 of
the NIRC expressly requires persons engaged in business to secure an ATP from the BIR prior to printing invoices or
receipts. Failure to do so makes the person liable under Section 264 52 of the NIRC.
This brings us to the question of whether a claimant for unutilized input VAT on zero-rated sales is required to
present proof that it has secured an ATP from the BIR prior to the printing of its invoices or receipts. TAECaD
We rule in the affirmative.
Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or effectively zero-
rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented. However, since
the ATP is not indicated in the invoices or receipts, the only way to verify whether the invoices or receipts are duly
registered is by requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or receipts would
have no probative value for the purpose of refund. In the case of Intel, we emphasized that:
It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations
implementing them require entities engaged in business to secure a BIR authority to print invoices or
receipts and to issue duly registered invoices or receipts, it is not specifically required that the BIR
authority to print be reflected or indicated therein. Indeed, what is important with respect to the BIR
authority to print is that it has been secured or obtained by the taxpayer, and that invoices or
receipts are duly registered. 53 (Emphasis supplied)

Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of input VAT
Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for credit/refund
of input VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine
Corporation of the Philippines) v. Commissioner of Internal Revenue, 54 we upheld the denial of Panasonic's claim for tax
credit/refund due to the absence of the word "zero-rated" in its invoices. We explained that compliance with Section
4.108-1 of RR 7-95, requiring the printing of the word "zero rated" on the invoice covering zero-rated sales, is essential as
this regulation proceeds from the rule-making authority of the Secretary of Finance under Section 244 55 of the NIRC.
All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in the invoices or
receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales. The failure to indicate the ATP in the sales
invoices or receipts, on the other hand, is not. In this case, petitioner failed to present its ATP and to print the word "zero-
rated" on its export sales invoices. Thus, we find no error on the part of the CTA in denying outright petitioner's claim for
credit/refund of input VAT attributable to its zero-rated sales.
Credit/refund of input VAT on capital goods
Capital goods are defined under Section 4.106-1 (b) of RR No. 7-95
To claim a refund of input VAT on capital goods, Section 112 (B) 56 of the NIRC requires that:
1. the claimant must be a VAT registered person;

2. the input taxes claimed must have been paid on capital goods;

3. the input taxes must not have been applied against any output tax liability; and

4. the administrative claim for refund must have been filed within two (2) years after the close of the taxable
quarter when the importation or purchase was made.

Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year
and which are treated as depreciable assets under Section 29 (f), 57 used directly or indirectly in the
production or sale of taxable goods or services.

Based on the foregoing definition, we find no reason to deviate from the findings of the CTA that training
materials, office supplies, posters, banners, T-shirts, books, and the other similar items reflected in petitioner's Summary
of Importation of Goods are not capital goods. A reduction in the refundable input VAT on capital goods from
P15,170,082.00 to P9,898,867.00 is therefore in order.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated September 30, 2005 and the
Resolution dated April 20, 2006 of the Court of Tax Appeals En Banc are hereby AFFIRMED. acAESC
SO ORDERED.
Corona, C.J., Velasco, Jr., Leonardo-de Castro and Perez, JJ., concur.

Footnotes
||| (Silicon Phil., Inc. v. Commissioner of Internal Revenue, G.R. No. 172378, [January 17, 2011], 654 PHIL 492-510)
FIRST DIVISION

[G.R. No. 184823. October 6, 2010.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AICHI FORGING COMPANY OF ASIA,


INC., respondent.

DECISION

DEL CASTILLO, J p:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or
incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally collected.
In both cases, a taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due
process as non-observance of the prescriptive periods within which to file the administrative and the judicial claims would
result in the denial of his claim.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30, 2008
Decision 1 and the October 6, 2008 Resolution 2 of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, is engaged in the manufacturing, producing, and processing of steel and its by-products. 3 It
is registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) entity 4 and its products, "close
impression die steel forgings" and "tool and dies," are registered with the Board of Investments (BOI) as a pioneer
status. 5
On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1, 2002 to
September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner of Internal Revenue (CIR),
through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center. 6 cAaDHT
Proceedings before the Second Division of the CTA
On even date, respondent filed a Petition for Review 7 with the CTA for the refund/credit of the same input VAT.
The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the CTA.
In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it generated
and recorded zero-rated sales in the amount of P131,791,399.00, 8 which was paid pursuant to Section 106 (A) (2) (a) (1),
(2) and (3) of the National Internal Revenue Code of 1997 (NIRC); 9 that for the said period, it incurred and paid input VAT
amounting to P3,912,088.14 from purchases and importation attributable to its zero-rated sales; 10 and that in its
application for refund/credit filed with the DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, it only
claimed the amount of P3,891,123.82. 11
In response, petitioner filed his Answer 12 raising the following special and affirmative defenses, to wit:
4. Petitioner's alleged claim for refund is subject to administrative investigation by the Bureau;

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

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

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in Section 229 of
the Tax Code;

8. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure
to sustain the burden is fatal to the claim for refund; and

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

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision partially
granting respondent's claim for refund/credit. Pertinent portions of the Decision read:
For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the
NIRC of 1997, as amended, provides:

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

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

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer is
engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the
claim must be filed within two years after the close of the taxable quarter when such sales were made; and
(4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax,
to the extent that such input tax has not been applied against the output tax.

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

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

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

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

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

xxx xxx xxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate
representing unutilized excess input VAT payments for the period July 1, 2002 to September 30, 2002,
which are attributable to its zero-rated sales for the same period, but in the reduced amount of
P3,239,119.25, computed as follows:

Amount of Claimed Input VAT P3,891,123.82

Less:

Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT P3,850,103.45

Less:

Output VAT Due 610,984.20

Excess Creditable Input VAT P3,239,119.25


WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in
favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED THIRTY NINE THOUSAND
ONE HUNDRED NINETEEN AND 25/100 PESOS (P3,239,119.25), representing the unutilized input VAT
incurred for the months of July to September 2002.

SO ORDERED. 14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial Reconsideration, 15 insisting that
the administrative and the judicial claims were filed beyond the two-year period to claim a tax refund/credit provided for
under Sections 112 (A) and 229 of the NIRC. He reasoned that since the year 2004 was a leap year, the filing of the claim
for tax refund/credit on September 30, 2004 was beyond the two-year period, which expired on September 29,
2004. 16 He cited as basis Article 13 of the Civil Code, 17 which provides that when the law speaks of a year, it is
equivalent to 365 days. In addition, petitioner argued that the simultaneous filing of the administrative and the judicial
claims contravenes Sections 112 and 229 of the NIRC. 18 According to the petitioner, a prior filing of an administrative
claim is a "condition precedent" 19before a judicial claim can be filed. He explained that the rationale of such requirement
rests not only on the doctrine of exhaustion of administrative remedies but also on the fact that the CTA is an appellate
body which exercises the power of judicial review over administrative actions of the BIR. 20
The Second Division of the CTA, however, denied petitioner's Motion for Partial Reconsideration for lack of merit.
Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review. 21
Ruling of the CTA En Banc
On July 30, 2008, the CTA En Banc affirmed the Second Division's Decision allowing the partial tax refund/credit
in favor of respondent. However, as to the reckoning point for counting the two-year period, the CTA En Banc ruled:
Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by law
and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further contends
that respondent's filing of the administrative and judicial [claims] effectively eliminates the authority of the
honorable Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

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

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

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

[x x x x ]

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

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

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

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled out in
the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second Division. What
the instant petition seeks is for the Court En Banc to view and appreciate the evidence in their own
perspective of things, which unfortunately had already been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of
merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second
Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs. Commissioner
of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED. 22

Petitioner sought reconsideration but the CTA En Banc denied 23 his Motion for Reconsideration.
Issue
Hence, the present recourse where petitioner interposes the issue of whether respondent's judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided in Sections 112 (A)
and 229 of the NIRC. 24
Petitioner's Arguments
Petitioner maintains that respondent's administrative and judicial claims for tax refund/credit were filed in
violation of Sections 112 (A) and 229 of the NIRC. 25 He posits that pursuant to Article 13 of the Civil Code, 26 since the
year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was beyond the two-year
period, which expired on September 29, 2004. 27
Petitioner further argues that the CTA En Banc erred in applying Section 114 (A) of the NIRC in determining the
start of the two-year period as the said provision pertains to the compliance requirements in the payment of VAT. 28 He
asserts that it is Section 112, paragraph (A), of the same Code that should apply because it specifically provides for the
period within which a claim for tax refund/credit should be made. 29
Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim with the
CTA were filed on the same day. 30 He opines that the simultaneous filing of the administrative and the judicial claims
contravenes Section 229 of the NIRC, which requires the prior filing of an administrative claim. 31 He insists that such
procedural requirement is based on the doctrine of exhaustion of administrative remedies and the fact that the CTA is an
appellate body exercising judicial review over administrative actions of the CIR. 32
Respondent's Arguments
For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the period July 1,
2002 to September 30, 2002 as a matter of right because it has substantially complied with all the requirements provided
by law. 33 Respondent likewise defends the CTAEn Banc in applying Section 114 (A) of the NIRC in computing the
prescriptive period for the claim for tax refund/credit. Respondent believes that Section 112 (A) of the NIRC must be read
together with Section 114 (A) of the same Code. 34
As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it first filed
an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the DOF before it
filed a judicial claim with the CTA. 35 To prove this, respondent points out that its Claimant Information Sheet No.
49702 36 and BIR Form No. 1914 for the third quarter of 2002, 37 which were filed with the DOF, were attached as
Annexes "M" and "N," respectively, to the Petition for Review filed with the CTA. 38 Respondent further contends that the
non-observance of the 120-day period given to the CIR to act on the claim for tax refund/credit in Section 112 (D) is not
fatal because what is important is that both claims are filed within the two-year prescriptive period. 39 In support thereof,
respondent citesCommissioner of Internal Revenue v. Victorias Milling Co., Inc. 40 where it was ruled that "[i]f, however,
the [CIR] takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be
started in the [CTA] before the end of the two-year period without awaiting the decision of the [CIR]." 41 Lastly,
respondent argues that even if the period had already lapsed, it may be suspended for reasons of equity considering that
it is not a jurisdictional requirement. 42
Our Ruling
The petition has merit.
Unutilized input VAT must be claimed within two
years after the close of the taxable quarter when
the sales were made
In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the Second
Division of the CTA applied Section 112 (A) of the NIRC, which states:
SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the 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. (Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which read:
SEC. 114. Return and Payment of Value-Added Tax.

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

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

xxx xxx xxx

SEC. 229. Recovery of tax erroneously or illegally collected.

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

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

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for refund/credit of
unutilized input VAT should start from the date of payment of tax and not from the close of the taxable quarter when the
sales were made. 43
The pivotal question of when to reckon the running of the two-year prescriptive period, however, has already
been resolved inCommissioner of Internal Revenue v. Mirant Pagbilao Corporation, 44 where we ruled that Section 112 (A)
of the NIRC is the applicable provision in determining the start of the two-year period for claiming a refund/credit of
unutilized input VAT, and that Sections 204 (C) and 229 of the NIRC are inapplicable as "both provisions apply only to
instances of erroneous payment or illegal collection of internal revenue taxes." 45 We explained that:
The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized input
VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within
two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to
the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously
applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from the close of the taxable
quarter when the sales were made and not from the time the input VAT was paid nor from the time the
official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the
pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized
creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales
or transaction was made, regardless when the input VAT was paid. Be that as it may, and given that the
last creditable input VAT due for the period covering the progress billing of September 6, 1996 is the third
quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input VAT refund or tax
credit for said quarter prescribed two years after September 30, 1996 or, to be precise, on September 30,
1998. Consequently, MPC's claim for refund or tax credit filed on December 10, 1999 had already
prescribed.

Reckoning for prescriptive period under


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

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

xxx xxx xxx


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

xxx xxx xxx


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

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

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

MPC's creditable input VAT not erroneously paid

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

xxx xxx xxx

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

In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114 (A) and 229 of the NIRC
in computing the two-year prescriptive period for claiming refund/credit of unutilized input VAT. To be clear, Section 112 of
the NIRC is the pertinent provision for the refund/credit of input VAT. Thus, the two-year period should be reckoned from
the close of the taxable quarter when the sales were made.
The administrative claim was timely filed
Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely filed.
Relying on Article 13 of the Civil Code, 47 which provides that a year is equivalent to 365 days, and taking into
account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to file a claim for tax
refund/ credit for the period July 1, 2002 to September 30, 2002 expired on September 29, 2004. 48
We do not agree.
In Commissioner of Internal Revenue v. Primetown Property Group, Inc., 49 we said that as between the Civil
Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987, which states that a year
is composed of 12 calendar months, it is the latter that must prevail following the legal maxim, Lex posteriori derogat
priori. 50 Thus:
Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987
deal with the same subject matter the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987,
however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of
1987, the number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil
Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I
of the Administrative Code of 1987, being the more recent law, governs the computation of legal
periods. Lex posteriori derogat priori.

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

Year 1 1st calendar month April 15, 1998 to May 14, 1998

2nd calendar month May 15, 1998 to June 14, 1998

3rd calendar month June 15, 1998 to July 14, 1998

4th calendar month July 15, 1998 to August 14, 1998

5th calendar month August 15, 1998 to September 14, 1998

6th calendar month September 15, 1998 to October 14, 1998

7th calendar month October 15, 1998 to November 14, 1998

8th calendar month November 15, 1998 to December 14, 1998

9th calendar month December 15, 1998 to January 14, 1999

10th calendar month January 15, 1999 to February 14, 1999

11th calendar month February 15, 1999 to March 14, 1999

12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999

14th calendar month May 15, 1999 to June 14, 1999

15th calendar month June 15, 1999 to July 14, 1999

16th calendar month July 15, 1999 to August 14, 1999

17th calendar month August 15, 1999 to September 14, 1999

18th calendar month September 15, 1999 to October 14, 1999

19th calendar month October 15, 1999 to November 14, 1999

20th calendar month November 15, 1999 to December 14, 1999

21st calendar month December 15, 1999 to January 14, 2000

22nd calendar month January 15, 2000 to February 14, 2000

23rd calendar month February 15, 2000 to March 14, 2000

24th calendar month March 15, 2000 to April 14, 2000


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

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period July 1,
2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent's administrative claim was timely filed.
The filing of the judicial claim was premature
However, notwithstanding the timely filing of the administrative claim, we are constrained to deny respondent's
claim for tax refund/credit for having been filed in violation of Section 112 (D) of the NIRC, which provides that:
SEC. 112. Refunds or Tax Credits of Input Tax.

xxx xxx xxx

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

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

Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission of the
complete documents in support of the application [for tax refund/credit]," within which to grant or deny the claim. In case
of full or partial denial by the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from receipt of
the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the
remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days.
In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this reason, we find
the filing of the judicial claim with the CTA premature.
Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial claim
as long as both the administrative and the judicial claims are filed within the two-year prescriptive period 52 has no legal
basis.
There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the said provision
states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two years after
the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales." The phrase "within two (2) years . . . apply for the
issuance of a tax credit certificate or refund" refers to applications for refund/credit filed with the CIR and not to appeals
made to the CTA. This is apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR
has "120 days from the submission of complete documents in support of the application filed in accordance
with Subsections (A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the NIRC, which
already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The
second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before
the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the
taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing
an appeal with the CTA.
With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc. 53 relied upon by respondent, we
find the same inapplicable as the tax provision involved in that case is Section 306, now Section 229 of the NIRC. And as
already discussed, Section 229 does not apply to refunds/credits of input VAT, such as the instant case.
In fine, the premature filing of respondent's claim for refund/credit of input VAT before the CTA warrants a
dismissal inasmuch as no jurisdiction was acquired by the CTA.
WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October 6, 2008
Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The Court of Tax Appeals Second
Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed.
SO ORDERED.
Corona, C.J., Velasco, Jr., Leonardo-de Castro and Perez, JJ., concur.

Footnotes
||| (Commissioner of Internal Revenue v. Aichi Forging Co. of Asia, Inc., G.R. No. 184823, [October 6, 2010], 646 PHIL 710-732)

SECOND DIVISION
[G.R. No. 183505. February 26, 2010.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SM PRIME HOLDINGS, INC. and FIRST
ASIA REALTY DEVELOPMENT CORPORATION, respondents.

DECISION

DEL CASTILLO, J p:

When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity
or injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of the
law, 1 the deliberations during the enactment,2 as well as prior laws on the same subject matter 3 to ascertain the true
intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No.
9282, 4 seeks to set aside the April 30, 2008 Decision 5 and the June 24, 2008 Resolution 6 of the Court of Tax Appeals
(CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are
domestic corporations duly organized and existing under the laws of the Republic of the Philippines. Both are engaged in
the business of operating cinema houses, among others. 7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice
(PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40 for taxable year
2000. 8 In response, SM Prime filed a letter-protest dated December 15, 2003. 9
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency, which
the latter protested in a letter dated January 14, 2004. 10
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency for
taxable year 2000 in the amount of P124,035,874.12. 11 SAcCIH
On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079. 12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on cinema ticket sales for taxable year 1999 in
the total amount of P35,823,680.93. 13 First Asia protested the PAN in a letter dated July 9, 2002. 14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by
First Asia in a letter dated December 12, 2002. 15
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the
amount of P35,823,680.93 for VAT deficiency for taxable year 1999. 16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case
No. 7085. 17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year
2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004. 18
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency. 19 First Asia protested the
same in a letter dated July 9, 2004. 20
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount of
P35,840,895.78 for taxable year 2000. 21
This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was
docketed as CTA Case No. 7111. 22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of P32,802,912.21
was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The BIR
then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004. 23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003
was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal
Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter dated
November 11, 2004. 24 cECaHA
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts of
P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively. 25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7272. 26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and First
Asia. 27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA Case No.
7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First Asia.
The motion was granted. 28
Upon submission of the parties' respective memoranda, the consolidated cases were submitted for decision on
the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are
subject to VAT. 29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review.
Resorting to the language used and the legislative history of the law, it ruled that the activity of showing cinematographic
films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as amended, but an
activity subject to amusement tax under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Citing
House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with Respect to the
Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the State's Policy to Have a Viable,
Sustainable and Competitive Theater and Film Industry as One of its Partners in National Development," 30 the CTA First
Division held that the House of Representatives resolved that there should only be one business tax applicable to theaters
and movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it
held that consistent with the State's policy to have a viable, sustainable and competitive theater and film industry, the
national government should be precluded from imposing its own business tax in addition to that already imposed and
collected by local government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No.
28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect
because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86. 31 Thus, it disposed
of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent's
Decisions denying petitioners' protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122,
003-03 and 008-02 are ORDERED cancelled and set aside.

SO ORDERED. 32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated
December 14, 2006. 33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc. 34 The case was docketed as CTA EB No. 244. 35 The CTA En
Banc however denied 36 the Petition for Review and dismissed 37 as well petitioner's Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what
services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by
cinema operators or proprietors is not among the enumerated activities contemplated in the phrase "sale or exchange of
services," then gross receipts derived by cinema/theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films,
or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the
CTAEn Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with RMC
No. 20-86. TaSEHD
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from
admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING


PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO
VAT UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS
UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE


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

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


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

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY
THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

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

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

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

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets are subject to VAT. AEIHaS
Petitioner's Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive
because it covers all sales of services unless exempted by law. He claims that the CTA erred in applying the rules on
statutory construction and in using extrinsic aids in interpreting Section 108 because the provision is clear and
unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or proprietors to the paying public,
being a sale of service, is subject to VAT.
Respondents' Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the
gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not among the services
subject to VAT. Respondents insist that gross receipts from cinema/theater admission tickets were never intended to be
subject to any tax imposed by the national government. According to them, the absence of gross receipts from
cinema/theater admission tickets from the list of services which are subject to the national amusement tax under Section
125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on
which the deficiency assessments were based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.

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

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

xxx xxx xxx

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

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

xxx xxx xxx (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of
services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise include," indicate
that the enumeration is by way of example only. 39
Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This,
however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc:
"Exhibition" in Black's Law Dictionary is defined as "To show or display. . . . To produce anything in public
so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract
by which one owning such property grants to another the right to possess, use and enjoy it on specified
period of time in exchange for periodic payment of a stipulated price, referred to as rent (Black's Law
Dictionary, 6th ed., p. 889). . . . 40

Since the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors is not
included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase
"similar services." The intent of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939 41 the national government imposed amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement,
including cockpits, race tracks, and cabaret. 42 In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts
were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 11 43 of the Local Tax Code, 44 however, amended this provision by transferring the
power to impose amusement tax 45 on admission from theaters, cinematographs, concert halls, circuses and other places
of amusements exclusively to the local government. Thus, when the NIRC of 1977 46 was enacted, the national
government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai
and race tracks. 47 ADTCaI
On January 1, 1988, the VAT Law 48 was promulgated. It amended certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain
services. It imposed VAT on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied,
assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds
of services for others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar services regardless of
whether or not the performance thereof calls for the exercise or use of the physical or mental faculties:
Provided That the following services performed in the Philippines by VAT-registered persons shall be
subject to 0%:

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

xxx xxx xxx

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

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

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

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage of
VAT. 49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the
power to impose amusement tax on gross receipts derived from admission tickets was exclusive with the local
government units and that only the gross receipts of amusement places derived from sources other than from admission
tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88
read: DAEaTS
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross
receipts arising from admission to places of amusement has been transferred to the local governments to
the exclusion of the national government.

xxx xxx xxx

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

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

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

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to impose
amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees under
Section 140 thereof. 50 In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the local government before the gross receipts are divided between said proprietors,
lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local Tax
Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included. DEaCSA
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three
years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 1997 51 was signed into law. Several
amendments 52 were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or
proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to
amusement tax 53 under the NIRC of 1997 are exempt from the coverage of VAT. 54 Based on the foregoing, the following
facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or
proprietors has always been considered as a form of entertainment subject to amusement tax.

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

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

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

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax
on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under
the NIRC from the coverage of VAT.

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

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

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

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This
holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit
and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts
derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the local government. EIAScH
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors,
who would be paying an additional 10% 55 VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of
1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be
in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must
be rejected if it will operate unjustly or lead to absurd results. 56 Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals, 57 to wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the
general public's trust and confidence in the Government this power must be used justly and not
treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under
Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of
1939, computed on the amount paid for admission. With the enactment of theLocal Tax
Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross
receipts from admission of persons to cinema/theater and other places of amusement had, thereafter,
been transferred to the provincial government, to the exclusion of the national or municipal government
(Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the
provincial government to impose amusement tax, had also been repealed and/or deleted by Republic Act
(RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on October 10,
1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of persons to places
of amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section
108) of the old Tax Code, as amended by theExpanded VAT Law (RA No. 7716) and which was
implemented beginning January 1, 1996. 58 (Emphasis supplied)

We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under
the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. 59 As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local government. IDSaTE
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or
proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to
cinema houses must be struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the
law, but must remain consistent and in harmony with, the law they seek to apply and implement. 60
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the procedural due
process for tax issuances as prescribed under RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from
the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the
taxpayer is clearly subject to the tax being levied against him. 61 The reason is obvious: it is both illogical and impractical
to determine who are exempted without first determining who are covered by the provision. 62 Thus, unless a statute
imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a
tax cannot be presumed. 63 In fact, in case of doubt, tax laws must be construed strictly against the government and in
favor of the taxpayer. 64
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax
Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures,
films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as
amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.
SO ORDERED.
Carpio, Brion, Abad and Perez, JJ., concur.

||| (Commissioner of Internal Revenue v. SM Prime Holdings, Inc., G.R. No. 183505, [February 26, 2010])

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