Tax 2

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision
of the Court of Appeals,1 reversing that of the Court of Tax Appeals,2 which
affirmed with modification the decision of the Commissioner of Internal
Revenue ruling that Commonwealth Management and Services
Corporation, is liable for value added tax for services to clients during
taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO,

for brevity), is a corporation duly organized and existing under the laws of
the Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and
other technical services, including functioning as an internal auditor, of
Philamlife and its other affiliates.1âwphi1.nêt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an

assessment to private respondent COMASERCO for deficiency value-
added tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:
P1,679,155.00
Taxable sale/receipt ===========
=
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
3
TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01
============
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

Appeals4 a petition for review contesting the Commissioner's assessment.
COMASERCO asserted that the services it rendered to Philamlife and its
affiliates, relating to collections, consultative and other technical assistance,
including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the
business of providing services to Philamlife and its affiliates. COMASERCO
was established to ensure operational orderliness and administrative
efficiency of Philamlife and its affiliates, and not in the sale of services.
COMASERCO stressed that it was not profit-motivated, thus not engaged
in business. In fact, it did not generate profit but suffered a net loss in
taxable year 1988. COMASERCO averred that since it was not engaged in
business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of
the Commissioner of Internal Revenue, the dispositive portion of which
reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue

assessing petitioner deficiency value-added tax for the taxable year
1988 is AFFIRMED with slight modifications. Accordingly, petitioner is
ordered to pay respondent Commissioner of Internal Revenue the
amount of P335,831.01 inclusive of the 25% surcharge and interest
plus 20% interest from January 24, 1992 until fully paid pursuant to
Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in

her assessment letter shall not be included in the payment as there
was no compromise agreement entered into between petitioner and
respondent with respect to the value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for
review of the decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered
decision reversing that of the Court of Tax Appeals, the dispositive portion
of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered

REVERSING and SETTING ASIDE the questioned Decision
promulgated on 22 June 1995. The assessment for deficiency value-
added tax for the taxable year 1988 inclusive of surcharge, interest
and penalty charges are ordered CANCELLED for lack of legal and
factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another

tax case involving the same parties,7where it was held that COMASERCO
was not liable to pay fixed and contractor's tax for services rendered to
Philamlife and its affiliates. The Court of Appeals, in that case, reasoned
that COMASERCO was not engaged in business of providing services to
Philamlife and its affiliates. In the same manner, the Court of Appeals held
that COMASERCO was not liable to pay VAT for it was not engaged in the
business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this
Court a petition for review on certiorariassailing the decision of the Court of
Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment

on the petition, and on September 26, 1996, COMASERCO complied with
the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of

services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of

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

Sec. 99 of the National Internal Revenue Code of 1986, as amended by
Executive Order (E. O.) No. 273 in 1988, provides that:
Sec. 99. Persons liable. — Any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or
engages in similar transactions and any person who, imports goods
shall be subject to the value-added tax (VAT) imposed in Sections
100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business"
requires that the "business" is carried on with a view to profit or livelihood. It
avers that the activities of the entity must be profit-oriented. COMASERCO
submits that it is not motivated by profit, as defined by its primary purpose
in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private respondent argues
that profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded
VAT Law (EVAT), amending among other sections, Section 99 of the Tax
Code. On January 1, 1998, Republic Act 8424, the National Internal
Revenue Code of 1997, took effect. The amended law provides that:
Sec. 105. Persons Liable. — Any person who, in the course of trade
or business, sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 106 and 108 of this
Code.
The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular
conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members of their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as

defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being rendered in the course
of trade or business.
Contrary to COMASERCO's contention the above provision clarifies that

even a non-stock, non-profit, organization or government entity, is liable to
pay VAT on the sale of goods or services. VAT is a tax on transactions,
imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even
in the absence of profit attributable thereto. The term "in the course of trade
or business" requires the regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law
applies to all transactions even to those made prior to its enactment.
Executive Order No. 273 stated that any person who, in the course of trade
or business, sells, barters or exchanges goods and services, was already
liable to pay VAT. The present law merely stresses that even a nonstock,
nonprofit organization or government entity is liable to pay VAT for the sale
of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the
phrase "sale of services" as the "performance of all kinds of services for
others for a fee, remuneration or consideration." It includes "the supply of
technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR

Ruling No. 010-98 12 emphasizing that a domestic corporation that
provided technical, research, management and technical assistance to its
affiliated companies and received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, was subject to VAT on
services rendered. In fact, even if such corporation was organized without
any intention realizing profit, any income or profit generated by the entity in
the conduct of its activities was subject to income tax.
Hence, it is immaterial whether the primary purpose of a corporation

indicates that it receives payments for services rendered to its affiliates on
a reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity
provides service for a fee, remuneration or consideration, then the service
rendered is subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation,
statutes that allow exemptions are construed strictly against the grantee
and liberally in favor of the government. Otherwise stated, any exemption
from the payment of a tax must be clearly stated in the language of the law;
it cannot be merely implied therefrom. 13 In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the transactions exempted from
VAT. The services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals
correctly ruled that the services rendered by COMASERCO to Philamlife
and its affiliates are subject to VAT. As pointed out by the Commissioner,
the performance of all kinds of services for others for a fee, remuneration or
consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of
the Commissioner of Internal Revenue, in the absence of any showing that
it is plainly wrong, is entitled to great weight. 14 Also, it has been the long
standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the
nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of its
authority. 15
There is no merit to respondent's contention that the Court of Appeals'

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

decision of the Court of Appeals in CA-G.R. SP No. 37930. The Court
hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A.
Case No. 4853.
No costs.
.nêt
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO,
INC., Respondent.
DECISION
CARPIO, J.:
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as
follows:
[Respondent] is a domestic corporation duly organized and existing under

and by virtue of the laws of the Philippines with principal address located at
Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and

Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering
and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with
the National Power Corporation (NAPOCOR) for the operation and
maintenance of [NAPOCOR’s] two power barges. The Consortium
appointed BWSC-Denmark as its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the actual

operation and maintenance of NAPOCOR’s two power barges as well as
the performance of other duties and acts which necessarily have to be
done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of
currencies (Mark, Yen, and Peso). The freely convertible non-Peso
component is deposited directly to the Consortium’s bank accounts in
Denmark and Japan, while the Peso-denominated component is deposited
in a separate and special designated bank account in the Philippines. On
the other hand, the Consortium pays [respondent] in foreign currency
inwardly remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions,

[respondent] sought a ruling from the BIR which responded with BIR Ruling
No. 023-95 dated February 14, 1995, declaring therein that if [respondent]
chooses to register as a VAT person and the consideration for its services
is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas, the
aforesaid services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the

Certificate of Registration bearing RDO Control No. 95-113-007556 was
issued in favor of [respondent] by the Revenue District Office No. 113 of
Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added
Tax Returns reflecting, among others, a total zero-rated sales
of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as
follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment
Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations
No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue
Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-

95 are hereby amended to read as follows:
Section 4.102-2(b)(2) – "Services other than processing, manufacturing or

repacking for other persons doing business outside the Philippines for
goods which are subsequently exported, as well as services by a resident
to a non-resident foreign client such as project studies, information
services, engineering and architectural designs and other similar services,
the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent]

subjected its sale of services to the Consortium to the 10% VAT in the total
amount of P103,558,338.11 representing April to December 1996 sales
since said Revenue Regulations No. 5-96 became effective only on April
1996. The sum of P43,893,951.07, representing January to March 1996
sales was subjected to zero rate. Consequently, [respondent] filed its 1996
amended VAT return consolidating therein the VAT output and input taxes
for the four calendar quarters of 1996. It paid the amount of P6,994,659.67
through BIR’s collecting agent, PCIBank, as its output tax liability for the
year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-
99 from the VAT Review Committee which reconfirmed BIR Ruling No.
023-95 "insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April

22,1999, filed a claim for the issuance of a tax credit certificate with
Revenue District No. 113 of the BIR. [Respondent] believed that it
erroneously paid the output VAT for 1996 due to its availment of the
Voluntary Assessment Program (VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA
in order to toll the running of the two-year prescriptive period under the Tax
Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax
credit certificate for P6,994,659.67 in favor of respondent. The CTA’s ruling
stated:
[Respondent’s] sale of services to the Consortium [was] paid for in

acceptable foreign currency inwardly remitted to the Philippines and
accounted for in accordance with the rules and regulations of Bangko
Sentral ng Pilipinas. These were established by various BPI Credit Memos
showing remittances in Danish Kroner (DKK) and US dollars (US$) as
payments for the specific invoices billed by [respondent] to the consortium.
These remittances were further certified by the Branch Manager x x x of
BPI-Davao Lanang Branch to represent payments for sub-contract fees
that came from Den Danske Aktieselskab Bank-Denmark for the account of
[respondent]. Clearly, [respondent’s] sale of services to the Consortium is
subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the Consortium was

even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February
15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by

[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying output
tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return
of what has been delivered by mistake, the [petitioner] is obligated to issue
the tax credit certificate prayed for by [respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals, which
dismissed the petition for lack of merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s view that
since respondent’s services are not destined for consumption abroad, they
are not of the same nature as project studies, information services,
engineering and architectural designs, and other similar services
mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as
subject to 0% VAT. Thus, according to petitioner, respondent’s services
cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s contention that under

VAT Ruling No. 040-98, respondent’s services should be destined for
consumption abroad to enjoy zero-rating. Contrary to petitioner’s
interpretation, there are two kinds of transactions or services subject to
zero percent VAT under VAT Ruling No. 040-98. These are (a) services
other than repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported; and (b) services by a
resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by
the provision to be consumed abroad in order to be taxed at zero rate. In x
x x the absence of such express or implied stipulation in the statute, the
second classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioner’s interpretation

of Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code.
Petitioner went beyond merely providing the implementing details by
adding another requirement to zero-rating. "This is indicated by the
additional phrase ‘as well as services by a resident to a non-resident
foreign client, such as project studies, information services and engineering
and architectural designs and other similar services.’ In effect, this phrase
adds not just one but two requisites: (a) services must be rendered by a
resident to a non-resident; and (b) these must be in the nature of project
studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of the Tax
Code,12 for services which were performed in the Philippines to enjoy zero-
rating, these must comply only with two requisites, to wit: (1) payment in
acceptable foreign currency and (2) accounted for in accordance with the
rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that
services must be "destined for consumption abroad" in order to be VAT
zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that our VAT
law generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the ‘destination
principle’ underlies and is the basis of the VAT laws, then petitioner’s
proper remedy would be to recommend an amendment of Section
108(b)(2) to Congress. Without such amendment, however, petitioner
should apply the terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not
on the ground that respondent’s services are subject to 0% VAT. Rather, it
is based on the non-retroactivity of the prejudicial revocation of BIR Ruling
No. 023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s
services are subject to 0% VAT and which respondent invoked in applying
for refund of the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question,
enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed

in the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons

doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas(BSP);
(2) Services other than those mentioned in the preceding sub-

paragraph, the consideration for which is paid for in acceptable
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international

shipping; and
(5) Services performed by subcontractors and/or contractors in

processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it

complied with the requirements of the Tax Code for zero rating under the
second paragraph of Section 102(b). Respondent asserts that (1) the
payment of its service fees was in acceptable foreign currency, (2) there
was inward remittance of the foreign currency into the Philippines, and (3)
accounting of such remittance was in accordance with BSP rules.
Moreover, respondent contends that its services which "constitute the
actual operation and management of two (2) power barges in Mindanao"
are not "even remotely similar to project studies, information services and
engineering and architectural designs under Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96." As such, respondent’s services need not
be "destined to be consumed abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than
"processing, manufacturing or repacking of goods" and that payment for
such services be in acceptable foreign currency accounted for in
accordance with BSP rules. Another essential condition for qualification to
zero-rating under Section 102(b)(2) is that the recipient of such services is
doing business outside the Philippines. While this requirement is not
expressly stated in the second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b) where the listed services
must be "for other persons doing business outside the Philippines." The
phrase "for other persons doing business outside the Philippines" not only
refers to the services enumerated in the first paragraph of Section 102(b),
but also pertains to the general term "services" appearing in the second
paragraph of Section 102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise be performed for
persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the

provider and recipient of the "other services" are both doing business in the
Philippines, the payment of foreign currency is irrelevant. Otherwise, those
subject to the regular VAT under Section 102(a) can avoid paying the VAT
by simply stipulating payment in foreign currency inwardly remitted by the
recipient of services. To interpret Section 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make the
payment of the regular VAT under Section 102(a) dependent on the
generosity of the taxpayer. The provider of services can choose to pay the
regular VAT or avoid it by stipulating payment in foreign currency inwardly
remitted by the payer-recipient. Such interpretation removes Section 102(a)
as a tax measure in the Tax Code, an interpretation this Court cannot
sanction. A tax is a mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign

currency" under BSP rules, the law clearly envisions the payer-recipient of
services to be doing business outside the Philippines. Only those not doing
business in the Philippines can be required under BSP rules20 to pay in
acceptable foreign currency for their purchase of goods or services from
the Philippines. In a domestic transaction, where the provider and recipient
of services are both doing business in the Philippines, the BSP cannot
require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules,21 the proceeds of export sales must be
reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to
require the provider of services under Section 102(b) (1) and (2) to account
for the foreign currency proceeds to the BSP. The same rationale does not
apply if the provider and recipient of the services are both doing business in
the Philippines since their transaction is not in the nature of an export sale
even if payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing
business in the Philippines, their transaction falls squarely under Section
102(a) governing domestic sale or exchange of services. Indeed, this is a
purely local sale or exchange of services subject to the regular VAT, unless
of course the transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those

mentioned in the preceding subparagraph," the legislative intent is
that only the services are different between subparagraphs 1 and 2. The
requirements for zero-rating, including the essential condition that the
recipient of services is doing business outside the Philippines, remain the
same under both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section 102(b)] of

the present Tax Code clarifies this legislative intent. Expressly included
among the transactions subject to 0% VAT are "[s]ervices other than those
mentioned in the [first] paragraph [of Section 108(b)] rendered to a person
engaged in business conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP."
In this case, the payer-recipient of respondent’s services is the Consortium

which is a joint-venture doing business in the Philippines. While the
Consortium’s principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. This is shown clearly
in BIR Ruling No. 023-95 which states that the contract between the
Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a consortium
composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"),
Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.
("MITSUI"), all referred to hereinafter as the "Consortium", and the National
Power Corporation ("NAPOCOR") for the operation and maintenance of
two 100-Megawatt power barges ("Power Barges") acquired by
NAPOCOR for a 15-year term.23 (Emphasis supplied)
Considering this length of time, the Consortium’s operation and

maintenance of NAPOCOR’s power barges cannot be classified as a single
or isolated transaction. The Consortium does not fall under Section
102(b)(2) which requires that the recipient of the services must be a person
doing business outside the Philippines. Therefore, respondent’s services to
the Consortium, not being supplied to a person doing business outside the
Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains

NAPOCOR’s power barges in the Philippines. NAPOCOR pays the
Consortium, through its non-resident partners, partly in foreign currency
outwardly remitted. In turn, the Consortium pays respondent also in foreign
currency inwardly remitted and accounted for in accordance with BSP
rules. This payment scheme does not entitle respondent to 0% VAT. As the
Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch),24 the place of payment is immaterial,
much less is the place where the output of the service is ultimately used.
An essential condition for entitlement to 0% VAT under Section 102(b)(1)
and (2) is that the recipient of the services is a person doing business
outside the Philippines. In this case, the recipient of the services is the
Consortium, which is doing business not outside, but within the Philippines
because it has a 15-year contract to operate and maintain NAPOCOR’s
two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to
this rule.25 This exception refers to the 0% VAT on services enumerated in
Section 102 and performed in the Philippines. For services covered by
Section 102(b)(1) and (2), the recipient of the services must be a person
doing business outside the Philippines. Thus, to be exempt from the
destination principle under Section 102(b)(1) and (2), the services must be
(a) performed in the Philippines; (b) for a person doing business outside the
Philippines; and (c) paid in acceptable foreign currency accounted for in
accordance with BSP rules.
Respondent’s reliance on the ruling in American Express26 is misplaced.

That case involved a recipient of services, specifically American Express
International, Inc. (Hongkong Branch), doing business outside the
Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a

VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client [American Express
International, Inc. (Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with
BSP rules and regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the Consortium –

which is doing business in the Philippines. Hence, American Express’
services were subject to 0% VAT, while respondent’s services should be
subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent

relied on VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-
9529 "insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR
rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging respondent’s

claim for refund effectively serves as a revocation of VAT Ruling No. 003-
99 and BIR Ruling No. 023-95. However, such revocation cannot be given
retroactive effect since it will prejudice respondent. Changing respondent’s
status will deprive respondent of a refund of a substantial amount
representing excess output tax.30 Section 246 of the Tax Code provides
that any revocation of a ruling by the Commissioner of Internal Revenue
shall not be given retroactive application if the revocation will prejudice the
taxpayer. Further, there is no showing of the existence of any of the
exceptions enumerated in Section 246 of the Tax Code for the retroactive
application of such revocation.
However, upon the filing of petitioner’s Answer dated 2 March 2000 before
the CTA contesting respondent’s claim for refund, respondent’s services
shall be subject to the regular 10% VAT.31 Such filing is deemed a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
vs.
PLACER DOME TECHNICAL SERVICES (PHILS.), INC., respondent.
DECISION
TINGA, J.:
Two years ago, the Court in Commissioner of Internal Revenue v.

American Express International, Inc. (Philippine Branch)1 definitively ruled
that under the National Internal Revenue Code of 1986, as
amended,2 "services performed by VAT-registered persons in the
Philippines (other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines), when paid in
and regulations of the [Bangko Sentral ng Pilipinas], are zero-rated."3 The
grant of the present petition entails the extreme step of rejecting American
Express as precedent, a recourse which the Court is unwilling to take.
The facts, as culled from the recital in the assailed Decision4 dated 30 June
2004 of the Court of Appeals, follow.
On 24 March 1996, at the San Antonio Mines in Marinduque owned by

Marcopper Mining Corporation (Marcopper), mine tailings from the Taipan
Pit started to escape through the Makulapnit Tunnel and Boac Rivers,
causing the cessation of mining and milling operations, and causing
potential environmental damage to the rivers and the immediate area. To
contain the damage and prevent the further spread of the tailing leak,
Placer Dome, Inc. (PDI), the owner of 39.9% of Marcopper, undertook to
perform the clean-up and rehabilitation of the Makalupnit and Boac Rivers,
through a subsidiary. To accomplish this, PDI engaged Placer Dome
Technical Services Limited (PDTSL), a non-resident foreign corporation
with office in Canada, to carry out the project. In turn, PDTSL engaged the
services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added Tax
(VAT) entity, to implement the project in the Philippines.
PDTSL and respondent thus entered into an Implementation Agreement

signed on 15 November 1996. Due to the urgency and potentially
significant damage to the environment, respondent had agreed to
immediately implement the project, and the Implementation Agreement
stipulated that all implementation services rendered by respondent even
prior to the agreement’s signing shall be deemed to have been provided
pursuant to the said Agreement. The Agreement further stipulated that
PDTSL was to pay respondent "an amount of money, in U.S. funds, equal
to all Costs incurred for Implementation Services performed under the
Agreement,"5 as well as "a fee agreed to one percent (1%) of such Costs."6
In August of 1998, respondent amended its quarterly VAT returns for the
last two quarters of 1996, and for the four quarters of 1997. In the amended
returns, respondent declared a total input VAT payment of P43,015,461.98
for the said quarters, and P42,837,933.60 as its total excess input VAT for
the same period. Then on 11 September 1998, respondent filed an
administrative claim for the refund of its reported total input VAT payments
in relation to the project it had contracted from PDTSL, amounting
to P43,015,461.98. In support of this claim for refund, respondent argued
that the revenues it derived from services rendered to PDTSL, pursuant to
the Agreement, qualified as zero-rated sales under Section 102(b)(2) of the
then Tax Code, since it was paid in foreign currency inwardly remitted to
the Philippines. When the Commissioner of Internal Revenue (CIR) did not
act on this claim, respondent duly filed a Petition for Review with the Court
of Tax Appeals (CTA), praying for the refund of its total reported excess
input VAT totaling P42,837,933.60. In its Answer to the Petition, the CIR
merely invoked the presumption that taxes are collected in accordance with
law, and that claims for refund of taxes are construed strictly against
claimants, as the same was in the nature of an exemption from taxation.7
In its Decision dated 19 March 2002,8 the CTA supported respondent’s

legal position that its sale of services to PDTSL constituted a zero-rated
transaction under the Tax Code, as these services were paid for in
acceptable foreign currency which had been inwardly remitted to the
Philippines in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP). At the same time, the CTA pointed out that of
the US$27,544,707.00 paid by PDTSL to respondent, only
US$14,750,473.00 was inwardly remitted and accounted for in accordance
with the BSP.9 The CTA also noted that not all the reported total input VAT
payments of respondent were properly supported by VAT invoices and/or
official receipts,10 and that not all of the allowable input VAT of the
respondent could be directly attributed to its zero-rated sales.11 In the end,
the CTA found that only the resulting input VAT of P17,178,373.12 could be
refunded the respondent.12
The CIR filed a Motion for Reconsideration where he invoked Section
4.102-2(b)(2) of Revenue Regulation No. 5-96,13 and especially VAT Ruling
No. 040-98 dated 23 November 1998, which had interpreted the aforecited
provision.
The CTA remained unpersuaded despite the cited issuances. In fact, the
CTA Resolution14 dated 20 June 2002, denying the CIR’s motion for
reconsideration, noted that petitioner’s argument was not novel as it had
debunked the same when first raised before it, referring to its decision
dated 19 April 2002 in CTA Case No. 6099, American Express
International, Inc. – Philippine Branch v. Commissioner of Internal
Revenue.15 The CTA reiterated its pronouncement in said case, thus: "x x x
it is very clear that VAT Ruling No. 040-98 not only expands the language
of Section (108)(B)(2) but also of Revenue Regulation No. 5-96 which
interprets the said statute. The same cannot be countenanced. It is a
settled rule of legal hermeneutics that the implementing rules and
regulations cannot amend the act of Congress x x x for administrative rules
and regulations are intended to carry out, not supplant or modify, the law."16
The rulings of the CTA were elevated by petitioner to the Court of Appeals
on Petition for Review. In a Decision17dated 30 June 2004, the appellate
court affirmed the CTA rulings. As a consequence, the present petition is
now before us.
Our evaluation of the petition must begin with the statutory scope of the
"services performed in the Philippines by VAT-registered
persons,"18 referred to in the law applicable at the time of the subject
incidents, the National Internal Revenue Code of 1986, as
amended19 (1986 NIRC). Section 102(b) of the 1986 NIRC reads:
Section 102. Value-Added Tax on Sale of Services and Use or Lease

of Properties.
(a) x x x
(b) Transactions Subject to Zero Percent (0%) Rate. ─ The following

services performed in the Philippines by VAT-registered persons shall
be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other

persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those mentioned in the preceding

subparagraph, the consideration for which is paid for in
with the rules and regulations of the [BSP].
x x x 20
It is Section 102(b)(2) which finds special relevance to this case. As

explicitly provided in the law, a zero-rated VAT transaction includes
services by VAT-registered persons other than processing, manufacturing
or repacking goods for other persons doing business outside the
Philippines, which goods are subsequently exported, the consideration for
which is paid in foreign currency and accounted for in accordance with the
rules and regulations of the BSP.
Still, this provision was interpreted by the Bureau of Internal Revenue

through Revenue Regulation No. 5-96, Section 4.102-2(b)(2) of which
states:
Section 4.102(b)(2)- Services other than processing, manufacturing

or repacking for other persons doing business outside the Philippines
for goods which are subsequently exported, as well as services by a
resident to a non-resident foreign client such as project studies,
similar services, the consideration for which is paid for in acceptable
regulations of the BSP.
Although there is nothing in Section 4.102-2(b)(2) that is expressly fatal to

respondent’s claim, VAT Ruling No. 040-98 interpreted the provision in
such fashion. The relevant portion of the ruling reads:
The sales of services subject to zero percent (0%) VAT under Section
108(B)(2), of the Tax Code of 1997, are limited to such sales which
are destined for consumption outside of the Philippines in that such
services are tacked-in as part of the cost of goods exported. The
zero-rating also extends to project studies, information services,
engineering and architectural designs and other similar services sold
by a resident of the Philippines to a non-resident foreign client
because these services are likewise destined to be consumed
abroad. The phrase ‘project studies, information services,
engineering and architectural designs and other similar services’
does not include services rendered by travel agents to foreign tourists
in the Philippines following the doctrine of ejusdem generis, since
such services by travel agents are not of the same class or of the
same nature as those enumerated under the aforesaid section.
Considering that the services by your client to foreign tourists are

basically and substantially rendered within the Philippines, it follows
that the onus of taxation of the revenue arising therefrom, for VAT
purposes, is also within the Philippines. For this reason, it is our
considered opinion that the tour package services of your client to
foreign tourists in the Philippines cannot legally qualify for zero-rated
(0%) VAT but rather subject to the regular VAT rate of 10%.
Petitioner argues that following Section 4.102-2(b)(2) of Revenue

Regulation No. 5-96, there are only two categories of services that are
subject to zero percent VAT, namely: services other than processing,
manufacturing or repacking for other persons doing business outside the
Philippines for goods which are subsequently exported; and services by a
resident to a non-resident foreign client, such as project studies,
similar services.21 Petitioner explains that the services rendered by
respondent were not for goods which were subsequently exported.
Likewise, it is argued that the services rendered by respondent were not
similar to "project studies, information services, engineering and
architectural designs" which were destined to be consumed abroad by non-
resident foreign clients.
These views, petitioner points out, were reiterated in VAT Ruling No. 040-
98. It is clear from that issuance that the location or "destination" where the
services were destined for consumption was determinative of whether the
zero-rating availed when such services were sold by a resident of the
Philippines to a non-resident foreign client. VAT Ruling No. 040-98
expresses that the zero-rating may apply only when the services are
destined for consumption abroad. This view aligns with the theoretical
principle that the VAT is ultimately levied on consumption.22 If the service
were destined for consumption in the Philippines, the service provider
would have the faculty to pass on its VAT liability to the end-user, thus
avoiding having to shoulder the tax itself.
Unfortunately for petitioner, his arguments are no longer fresh. The Court
spurned them in Commissioner of Internal Revenue v. American Express.23
American Express involved transactions invoked as "zero-rated" by a "VAT-

registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations."24 The CIR in that case relied
extensively on the same VAT Ruling No. 040-98 now cited before us.
However, the Court would conclude in American Express that the opinion
therein that the service must be destined for consumption outside of the
Philippines was "clearly ultra vires and invalid."25
The discussion of the issues in American Express was comprehensive

enough as to address each issue now presently raised before us.
American Express explained the nature of VAT imposed on services in this

manner:
The VAT is a tax on consumption "expressed as a percentage of the

value added to goods or services" purchased by the producer or
taxpayer. As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the
Philippines. These services must be regularly conducted in this
country; undertaken in "pursuit of a commercial or an economic
activity;" for a valuable consideration; and not exempt under the Tax
Code, other special laws, or any international agreement.26
Yet even as services may be subject to VAT, our tax laws extend the
benefit of zero-rating the VAT due on certain services. The aforementioned
Section 102(b) of the 1986 NIRC activates such zero-rating on two
categories of transactions: (1) Processing, manufacturing or repacking
goods for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid for in
and regulations of the BSP; and (2) services other than those mentioned in
the preceding subparagraph, the consideration for which is paid for in
and regulations of the BSP.27
Obviously, it is the second category that begs for further explication, owing
to its apparently broad scope, covering as it does "services other than
those mentioned in the preceding subparagraph." Yet, as found by the
Court in American Express, such broad scope did not mean that Section
102(b) is vague, thus:
The law is very clear. Under the last paragraph [of Section 102(b)],
services performed by VAT-registered persons in the Philippines
(other than the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines), when paid in
acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP, are zero-rated.28
Since Section 102(b) is, in fact, "very clear," the Court declared that any
resort to statutory construction or interpretation was unnecessary.
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very

clear. Therefore, no statutory construction or interpretation is needed.
Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
The Court may not construe a statute that is free from doubt.
"[W]here the law speaks in clear and categorical language, there is
no room for interpretation. There is only room for application." The
Court has no choice but to "see to it that its mandate is obeyed."29
It was from the awareness that Section 102(b) is free from ambiguity in
providing so broad an extension of the zero-rated benefit on VAT-
registered persons performing services that the Court in American
Express proceeded to consider the same Section 4.102-2(b)(2) of Revenue
Regulation No. 5-96 now cited by petitioner. The Court in American
Express explained that Revenue Regulation No. 5-96 had amended
Revenue Regulation No. 7-95, Section 4.102-2 of which had retained the
broad language of Section 102(b) in defining "transactions subject to zero-
rate," adding only, by way of specific example, the phrase "those [services]
rendered by hotels and other service establishments."30 However, the
amendatory Revenue Regulation No. 5-96 opted for a more specific
approach, providing, by way of example, an enumeration of those services
contemplated as zero-rated.31 In the present case, it is because of such
enumeration that petitioner now argues that "respondent’s services likewise
do not fall under the second category mentioned in Section 4.102-2(b)(2)
[as amended by Revenue Regulation No. 5-96], because they are not
similar to ‘project studies, information services, engineering and
architectural designs’ which are destined to be consumed abroad by non-
resident foreign clients."32
However, the Court in American Express clearly rebuffed a similar

contention.
Aside from the already scopious coverage of services in Section

4.102-2(b)(2) of RR 7-95, the amendment introduced by RR 5-96
further enumerates specific services entitled to zero rating. Although
superfluous, these sample services are meant to be merely
illustrative. In this provision, the use of the term "as well as" is
not restrictive. As a prepositional phrase with an adverbial
relation to some other word, it simply means "in addition to,
besides, also or too."
Neither the law nor any of the implementing revenue regulations

aforequoted categorically defines or limits the services that may
be sold or exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate the items of service
that fall under the term "sale or exchange of services."
xxxx
The canon of statutory construction known as ejusdem generis or "of

the same kind or specie" does not apply to Section 4.102-2(b)(2) of
RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration

of particular or specific words, followed by the general phrase
"and other similar services," such words do not constitute a
readily discernible class and are patently not of the same kind.
Project studies involve investments or marketing; information services
focus on data technology; engineering and architectural designs
require creativity. Aside from calling for the exercise or use of mental
faculties or perhaps producing written technical outputs, no common
denominator to the exclusion of all others characterizes these three
services. Nothing sets them apart from other and similar general
services that may involve advertising, computers, consultancy, health
care, management, messengerial work — to name only a few.
Second, there is the regulatory intent to give the general phrase "and
other similar services" a broader meaning. Clearly, the preceding
phrase "as well as" is not meant to limit the effect of "and other
similar services."
Third, and most important, the statutory provision upon which

this regulation is based is by itself not restrictive. The scope of
the word "services" in Section 102(b)(2) of the [1986 NIRC] is
broad; it is not susceptible of narrow interpretation. (Emphasis
supplied)33
The Court in American Express recognized the existence of the contrary

holding in VAT Ruling No. 040-98, now relied upon by petitioner especially
as he states that the zero-rating applied only when the services are
destined for consumption abroad. American Express minced no words in
criticizing said ruling.
VAT Ruling No. 040-98 relied upon by petitioner is a less general

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

upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts," this
interpretation is not conclusive and will have to be "ignored if
judicially found to be erroneous" and "clearly absurd x x x or
improper." An administrative issuance that overrides the law it
merely seeks to interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this
Court.(Emphasis supplied)34
Petitioner presently invokes the "destination principle," citing that

[r]espondent’s services, while rendered to a non-resident foreign
corporation, are not destined to be consumed abroad. Hence, the onus of
taxation of the revenue arising therefrom, for VAT purposes, is also within
the Philippines. Yet the Court in American Express debunked this argument
when it rebutted the theoretical underpinnings of VAT Ruling No. 040-98,
particularly its reliance on the "destination principle" in taxation:
As a general rule, the VAT system uses the destination principle

as a basis for the jurisdictional reach of the tax. Goods and
services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the

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

exhausts it." Applied to services, the term means the
performance or "successful completion of a contractual duty,
usually resulting in the performer's release from any past or
future liability x x x" The services rendered by respondent are
performed or successfully completed upon its sending to its foreign
client the drafts and bills it has gathered from service establishments
here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound
for a specific place when their destination is determined.
Instead, there can only be a "predetermined end of a course"
when determining the service "location or position x x x for legal
purposes." Respondent's facilitation service has no physical
existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle, as
petitioner asserts, such service is subject to VAT at the rate of 10
percent.
xxxx
However, the law clearly provides for an exception to the

destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines, "paid for in
with the rules and regulations of the [BSP]." Thus, for the supply
of service to be zero-rated as an exception, the law merely requires
that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the Tax
Code; and, third, it be paid in acceptable foreign currency accounted
for in accordance with BSP rules and regulations. (Emphasis
supplied)35
xxxx
Again, contrary to petitioner's stand, for the cost of respondent's

service to be zero-rated, it need not be tacked in as part of the
cost of goods exported. The law neither imposes such
requirement nor associates services with exported goods. It
simply states that the services performed by VAT-registered
persons in the Philippines — services other than the processing,
manufacturing or repacking of goods for persons doing
business outside this country — if paid in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. The service rendered by
respondent is clearly different from the product that arises from
the rendition of such service. The activity that creates the income
must not be confused with the main business in the course of which
that income is realized. (Emphasis supplied)36
xxxx
The law neither makes a qualification nor adds a condition in

determining the tax situs of a zero-rated service. Under this criterion,
the place where the service is rendered determines the jurisdiction to
impose the VAT. Performed in the Philippines, such service is
necessarily subject to its jurisdiction, for the State necessarily
has to have "a substantial connection" to it, in order to enforce a
zero rate. The place of payment is immaterial; much less is the
place where the output of the service will be further or ultimately
used.37
Finally, the Court in American Express found support from the legislative
record that revealed that consumption abroad is not a pertinent factor to
imbue the zero-rating on services by VAT-registered persons performed in
the Philippines.
Interpellations on the subject in the halls of the Senate also reveal a

clear intent on the part of the legislators not to impose the condition of
being "consumed abroad" in order for services performed in the
Philippines by a VAT-registered person to be zero-rated. We quote
the relevant portions of the proceedings:
"Senator Maceda: Going back to Section 102 just for the

moment. Will the Gentleman kindly explain to me — I am
referring to the lower part of the first paragraph with the
'Provided'. Section 102. 'Provided that the following services
performed in the Philippines by VAT registered persons shall be
subject to zero percent.' There are three here. What is the
difference between the three here which is subject to zero
percent and Section 103 which is exempt transactions, to being
with?
"Senator Herrera: Mr. President, in the case of processing and

manufacturing or repacking goods for persons doing business
outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies
inwardly remitted, this is considered as subject to 0%. But if
these conditions are not complied with, they are subject to the
VAT.
"In the case of No. 2, again, as the Gentleman pointed out,
these three are zero-rated and the other one that he indicated
are exempted from the very beginning. These three
enumerations under Section 102 are zero-rated provided that
these conditions indicated in these three paragraphs are also
complied with. If they are not complied with, then they are not
entitled to the zero ratings. Just like in the export of minerals, if
these are not exported, then they cannot qualify under this
provision of zero rating.
"Senator Maceda: Mr. President, just one small item so we can

leave this. Under the proviso, it is required that the following
services be performed in the Philippines.
"Under No. 2, services other than those mentioned above

includes, let us say, manufacturing computers and computer
chips or repacking goods for persons doing business outside
the Philippines. Meaning to say, we ship the goods to them in
Chicago or Washington and they send the payment inwardly to
the Philippines in foreign currency, and that is, of course, zero-
rated.
"Now, when we say 'services other than those mentioned in the

preceding subsection[,'] may I have some examples of these?
"Senator Herrera: Which portion is the Gentleman referring to?
"Senator Maceda: I am referring to the second paragraph, in

the same Section 102. The first paragraph is when one
manufactures or packages something here and he sends it
abroad and they pay him, that is covered. That is clear to me.
The second paragraph says 'Services other than those
mentioned in the preceding subparagraph, the consideration of
which is paid for in acceptable foreign currency. . . .'
"One example I could immediately think of—I do not know why

this comes to my mind tonight—is for tourism or escort
services. For example, the services of the tour operator or tour
escort—just a good name for all kinds of activities—is made
here at the Midtown Ramada Hotel or at the Philippine Plaza,
but the payment is made from outside and remitted into the
country.
"Senator Herrera: What is important here is that these services

are paid in acceptable foreign currency remitted inwardly to the
Philippines.
"Senator Maceda: Yes, Mr. President. Like those Japanese

tours which include $50 for the services of a woman or a tourist
guide, it is zero-rated when it is remitted here.
"Senator Herrera: I guess it can be interpreted that way,

although this tourist guide should also be considered as among
the professionals. If they earn more than P200,000, they should
be covered.
xxxx
Senator Maceda: So, the services by Filipino citizens outside

the Philippines are subject to VAT, and I am talking of all
services. Do big contractual engineers in Saudi Arabia pay
VAT?
"Senator Herrera: This provision applies to a VAT-registered

person. When he performs services in the Philippines, that is
zero-rated.
"Senator Maceda: That is right."38
It is indubitable that petitioner’s arguments cannot withstand the Court’s

ruling in American Express, a precedent warranting stare
decisis application and one which, in any event, we are disinclined to revisit
at this juncture.
WHEREFORE, the petition is DENIED. No pronouncement as to costs.
SO ORDERED.
PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE
PHILIPPINES (formerly MATSUSHITA BUSINESS MACHINE
CORPORATION OF THE PHILIPPINES), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
ABAD, J.:
This petition for review puts in issue the May 23, 2007 Decision1 of the
Court of Tax Appeals (CTA) en banc in CTA EB 239, entitled "Panasonic
Communications Imaging Corporation of the Philippines v. Commissioner
of Internal Revenue," which affirmed the denial of petitioner’s claim for
refund.
The Facts and the Case
Petitioner Panasonic Communications Imaging Corporation of the

Philippines (Panasonic) produces and exports plain paper copiers and their
sub-assemblies, parts, and components. It is registered with the Board of
Investments as a preferred pioneer enterprise under the Omnibus
Investments Code of 1987. It is also a registered value-added tax (VAT)
enterprise.
From April 1 to September 30, 1998 and from October 1, 1998 to March 31,
1999, petitioner Panasonic generated export sales amounting to
US$12,819,475.15 and US$11,859,489.78, respectively, for a total of
US$24,678,964.93. Believing that these export sales were zero-rated for
VAT under Section 106(A)(2)(a)(1) of the 1997 National Internal Revenue
Code as amended by Republic Act (R.A.) 8424 (1997 NIRC),2 Panasonic
paid input VAT of ₱4,980,254.26 and ₱4,388,228.14 for the two periods or
a total of ₱9,368,482.40 attributable to its zero-rated sales.
Claiming that the input VAT it paid remained unutilized or unapplied, on

March 12, 1999 and July 20, 1999 petitioner Panasonic filed with the
Bureau of Internal Revenue (BIR) two separate applications for refund or
tax credit of what it paid. When the BIR did not act on the same, Panasonic
filed on December 16, 1999 a petition for review with the CTA, averring the
inaction of the respondent Commissioner of Internal Revenue (CIR) on its
applications.
After trial or on August 22, 2006 the CTA’s First Division rendered
judgment,3 denying the petition for lack of merit. The First Division said that,
while petitioner Panasonic’s export sales were subject to 0% VAT under
Section 106(A)(2)(a)(1) of the 1997 NIRC, the same did not qualify for zero-
rating because the word "zero-rated" was not printed on Panasonic’s export
invoices. This omission, said the First Division, violates the invoicing
requirements of Section 4.108-1 of Revenue Regulations (RR) 7-95.4
Its motion for reconsideration having been denied, on January 5, 2007

petitioner Panasonic appealed the First Division’s decision to the CTA en
banc. On May 23, 2007 the CTA en banc upheld the First Division’s
decision and resolution and dismissed the petition. Panasonic filed a
motion for reconsideration of the en banc decision but this was denied.
Thus, petitioner filed the present petition in accordance with R.A. 9282.5
The Issue Presented
The sole issue presented in this case is whether or not the CTA en banc
correctly denied petitioner Panasonic’s claim for refund of the VAT it paid
as a zero-rated taxpayer on the ground that its sales invoices did not state
on their faces that its sales were "zero-rated."
The Court’s Ruling
The VAT is a tax on consumption, an indirect tax that the provider of goods
or services may pass on to his customers. Under the VAT method of
taxation, which is invoice-based, an entity can subtract from the VAT
charged on its sales or outputs the VAT it paid on its purchases, inputs and
imports.6 For example, when a seller charges VAT on its sale, it issues an
invoice to the buyer, indicating the amount of VAT he charged. For his part,
if the buyer is also a seller subjected to the payment of VAT on his sales,
he can use the invoice issued to him by his supplier to get a reduction of
his own VAT liability. The difference in tax shown on invoices passed and
invoices received is the tax paid to the government. In case the tax on
invoices received exceeds that on invoices passed, a tax refund may be
claimed.
Under the 1997 NIRC, if at the end of a taxable quarter the seller charges
output taxes7 equal to the input taxes8that his suppliers passed on to him,
no payment is required of him. It is when his output taxes exceed his input
taxes that he has to pay the excess to the BIR. If the input taxes exceed
the output taxes, however, the excess payment shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-
rated or effectively zero-rated transactions or from the acquisition of capital
goods, any excess over the output taxes shall instead be refunded to the
taxpayer.9
Zero-rated transactions generally refer to the export sale of goods and

services. The tax rate in this case is set at zero. When applied to the tax
base or the selling price of the goods or services sold, such zero rate
results in no tax chargeable against the foreign buyer or customer. But,
although the seller in such transactions charges no output tax, he can claim
a refund of the VAT that his suppliers charged him. The seller thus enjoys
automatic zero rating, which allows him to recover the input taxes he paid
relating to the export sales, making him internationally competitive.10
For the effective zero rating of such transactions, however, the taxpayer
has to be VAT-registered and must comply with invoicing
requirements.11 Interpreting these requirements, respondent CIR ruled that
under Revenue Memorandum Circular (RMC) 42-2003, the taxpayer’s
failure to comply with invoicing requirements will result in the disallowance
of his claim for refund. RMC 42-2003 provides:
A-13. Failure by the supplier to comply with the invoicing requirements on

the documents supporting the sale of goods and services will result to the
disallowance of the claim for input tax by the purchaser-claimant.1avvphi1
If the claim for refund/TCC is based on the existence of zero-rated sales by

the taxpayer but it fails to comply with the invoicing requirements in the
issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax
credit/refund of VAT on its purchases shall be denied considering that the
invoice it is issuing to its customers does not depict its being a VAT-
registered taxpayer whose sales are classified as zero-rated sales.
Nonetheless, this treatment is without prejudice to the right of the taxpayer
to charge the input taxes to the appropriate expense account or asset
account subject to depreciation, whichever is applicable. Moreover, the
case shall be referred by the processing office to the concerned BIR office
for verification of other tax liabilities of the taxpayer.
Petitioner Panasonic points out, however, that in requiring the printing on

its sales invoices of the word "zero-rated," the Secretary of Finance unduly
expanded, amended, and modified by a mere regulation (Section 4.108-1
of RR 7-95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC,
prior to their amendment by R.A. 9337.12Panasonic argues that the 1997
NIRC, which applied to its payments—specifically Sections 113 and 237—
required the VAT-registered taxpayer’s receipts or invoices to indicate only
the following information:
(1) A statement that the seller is a VAT-registered person, followed by

his taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay
to the seller with the indication that such amount includes the value-
added tax;
(3) The date of transaction, quantity, unit cost and description of the
goods or properties or nature of the service; and
(4) The name, business style, if any, address and taxpayer’s

identification number (TIN) of the purchaser, customer or client.
Petitioner Panasonic points out that Sections 113 and 237 did not require
the inclusion of the word "zero-rated" for zero-rated sales covered by its
receipts or invoices. The BIR incorporated this requirement only after the
enactment of R.A. 9337 on November 1, 2005, a law that did not yet exist
at the time it issued its invoices.
But when petitioner Panasonic made the export sales subject of this case,
i.e., from April 1998 to March 1999, the rule that applied was Section
4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added
Tax Regulations, which the Secretary of Finance issued on December 9,
1995 and took effect on January 1, 1996. It already required the printing of
the word "zero-rated" on the invoices covering zero-rated sales. When R.A.
9337 amended the 1997 NIRC on November 1, 2005, it made this
particular revenue regulation a part of the tax code. This conversion from
regulation to law did not diminish the binding force of such regulation with
respect to acts committed prior to the enactment of that law.
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority

granted to the Secretary of Finance under Section 245 of the 1977 NIRC
(Presidential Decree 1158) for the efficient enforcement of the tax code and
of course its amendments.13 The requirement is reasonable and is in
accord with the efficient collection of VAT from the covered sales of goods
and services. As aptly explained by the CTA’s First Division, the
appearance of the word "zero-rated" on the face of invoices covering zero-
rated sales prevents buyers from falsely claiming input VAT from their
purchases when no VAT was actually paid. If, absent such word, a
successful claim for input VAT is made, the government would be refunding
money it did not collect.14
Further, the printing of the word "zero-rated" on the invoice helps segregate
sales that are subject to 10% (now 12%) VAT from those sales that are
zero-rated.15 Unable to submit the proper invoices, petitioner Panasonic
has been unable to substantiate its claim for refund.
Petitioner Panasonic’s citation of Intel Technology Philippines, Inc. v.

Commissioner of Internal Revenue16 is misplaced. Quite the contrary, it
strengthens the position taken by respondent CIR. In that case, the CIR
denied the claim for tax refund on the ground of the taxpayer’s failure to
indicate on its invoices the "BIR authority to print." But Sec. 4.108-1
required only the following to be reflected on the invoice:
1. The name, taxpayer’s identification number (TIN) and address of

seller;
2. Date of transaction;
3. Quantity, unit cost and description of merchandise or nature of

service;
4. The name, TIN, business style, if any, and address of the VAT-
registered purchaser, customer or client;
5. The word "zero-rated" imprinted on the invoice covering zero-rated

sales; and
6. The invoice value or consideration.
This Court held that, since the "BIR authority to print" is not one of the
items required to be indicated on the invoices or receipts, the BIR erred in
denying the claim for refund. Here, however, the ground for denial of
petitioner Panasonic’s claim for tax refund—the absence of the word "zero-
rated" on its invoices—is one which is specifically and precisely included in
the above enumeration. Consequently, the BIR correctly denied
Panasonic’s claim for tax refund.
This Court will not set aside lightly the conclusions reached by the CTA
which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise on
the subject, unless there has been an abuse or improvident exercise of
authority.17 Besides, statutes that grant tax exemptions are
construed strictissimi juris against the taxpayer and liberally in favor of the
taxing authority. Tax refunds in relation to the VAT are in the nature of such
exemptions. The general rule is that claimants of tax refunds bear the
burden of proving the factual basis of their claims. Taxes are the lifeblood
of the nation. Therefore, statutes that allow exemptions are construed
strictly against the grantee and liberally in favor of the government.18
WHEREFORE, the petition is DENIED for lack of merit.
Costs against petitioner.
SO ORDERED.
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR,
REVENUE REGION NO. 8, and CHIEF, ASSESSMENT DIVISION,
REVENUE REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT
OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS,
BUREAU OF INTERNAL REVENUE. Respondents.
RESOLUTION
LEONARDO-DE CASTRO, J.:
Before us is respondents’ Motion for Reconsideration of our Decision dated

April 2, 2009 which granted the consolidated petitions of petitioner Fort
Bonifacio Development Corporation, the dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the

Court of Tax Appeals and the Court of Appeals are REVERSED and SET
ASIDE. Respondents are hereby (1) restrained from collecting from
petitioner the amount of ₱28,413,783.00 representing the transitional input
tax credit due it for the fourth quarter of 1996; and (2) directed to refund to
petitioner the amount of ₱347,741,695.74 paid as output VAT for the third
quarter of 1997 in light of the persisting transitional input tax credit available
to petitioner for the said quarter, or to issue a tax credit corresponding to
such amount. No pronouncement as to costs.
The Motion for Reconsideration raises the following arguments:
SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE

(OLD NIRC), AS AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD
NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT
OF REAL PROPERTIES OR REAL ESTATE DEALERS ON THE ONE
HAND, AND THE TREATMENT OF TRANSACTIONS INVOLVING
OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID
DISTINCTION IS FOUND IN SECTION 105 AND, SUBSEQUENTLY,
REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX
CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT
TO VAT FOR THE FIRST TIME.
II
SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY

PROVISIONS OF REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT
THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON
REAL PROPERTIES.
III
REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE

REGULATIONS NO. 7-95.
The instant motion for reconsideration lacks merit.
The first VAT law, found in Executive Order (EO) No. 273 [1987], took
effect on January 1, 1988. It amended several provisions of the National
Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise
accommodated the potential burdens of the shift to the VAT system by
allowing newly VAT-registered persons to avail of a transitional input tax
credit as provided for in Section 105 of the Old NIRC. Section 105 as
amended by EO 273 reads:
Sec. 105. Transitional Input Tax Credits. — A person who becomes liable
to value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory as prescribed by regulations, be
allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher,
which shall be creditable against the output tax.
RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old
NIRC by imposing for the first time value-added-tax on sale of real
properties. The amendment reads:
Sec. 100. Value-added-tax on sale of goods or properties. — (a) Rate and
base of tax. — There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-added tax equivalent to
10% of the gross selling price or gross value in money of the goods, or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.1avvph!1
(1) The term 'goods or properties' shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business; xxx
The provisions of Section 105 of the NIRC, on the transitional input tax
credit, remain intact despite the enactment of RA 7716. Section 105
however was amended with the passage of the new National Internal
Revenue Code of 1997 (New NIRC), also officially known as Republic Act
(RA) 8424. The provisions on the transitional input tax credit are now
embodied in Section 111(A) of the New NIRC, which reads:
Section 111. Transitional/Presumptive Input Tax Credits. –
(A) Transitional Input Tax Credits. - A person who becomes liable to value-
added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules and regulations
prescribed by the Secretary of finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent for 8% of the value of such
inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output
tax. [Emphasis ours.]
The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio

Development Corporation’s (FBDC) presumptive input tax credit arising
from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95)
and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section
4.105-1 of RR 7-95 provides:
Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers

who became VAT-registered persons upon effectivity of RA No. 7716 who
have exceeded the minimum turnover of ₱500,000.00 or who voluntarily
register even if their turnover does not exceed ₱500,000.00 shall be
entitled to a presumptive input tax on the inventory on hand as of
December 31, 1995 on the following: (a) goods purchased for resale in
their present condition; (b) materials purchased for further processing, but
which have not yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies, all of
which are for sale or for use in the course of the taxpayer’s trade or
business as a VAT-registered person.
However, in the case of real estate dealers, the basis of the presumptive
input tax shall be the improvements, such as buildings, roads, drainage
systems, and other similar structures, constructed on or after the effectivity
of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or actual
VAT paid, whichever is higher, which amount may be allowed as tax credit
against the output tax of the VAT-registered person.
In the April 2, 2009 Decision sought to be reconsidered, the Court struck

down Section 4.105-1 of RR 7-95 for being in conflict with the law. It held
that the CIR had no power to limit the meaning and coverage of the term
"goods" in Section 105 of the Old NIRC sans statutory authority or basis
and justification to make such limitation. This it did when it restricted the
application of Section 105 in the case of real estate dealers only to
improvements on the real property belonging to their beginning inventory.
A law must not be read in truncated parts; its provisions must be read in
relation to the whole law. It is the cardinal rule in statutory construction that
a statute’s clauses and phrases must not be taken as detached and
isolated expressions, but the whole and every part thereof must be
considered in fixing the meaning of any of its parts in order to produce a
harmonious whole. Every part of the statute must be interpreted with
reference to the context, i.e., that every part of the statute must be
considered together with other parts of the statute and kept subservient to
the general intent of the whole enactment.1
In construing a statute, courts have to take the thought conveyed by the

statute as a whole; construe the constituent parts together; ascertain the
legislative intent from the whole act; consider each and every provision
thereof in the light of the general purpose of the statute; and endeavor to
make every part effective, harmonious and sensible.2
The statutory definition of the term "goods or properties" leaves no room for
doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and
base of tax. – xxx.
(1) The term ‘goods or properties’ shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business; xxx.
The amendatory provision of Section 105 of the NIRC, as introduced by RA

7716, states:
Sec. 105. Transitional Input tax Credits. – A person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person
shall, subject to the filing of an inventory as prescribed by regulations, be
allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher,
which shall be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100

includes "real properties held primarily for sale to costumers or held for
lease in the ordinary course of business." Having been defined in Section
100 of the NIRC, the term "goods" as used in Section 105 of the same
code could not have a different meaning. This has been explained in the
Decision dated April 2, 2009, thus:
Under Section 105, the beginning inventory of "goods" forms part of the
valuation of the transitional input tax credit. Goods, as commonly
understood in the business sense, refers to the product which the VAT-
registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods."
Such real properties are the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods
or properties" such "real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business." Said definition
was taken from the very statutory language of Section 100 of the Old NIRC.
By limiting the definition of goods to "improvements" in Section 4.105-1, the
BIR not only contravened the definition of "goods" as provided in the Old
NIRC, but also the definition which the same revenue regulation itself has
provided.
Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:
of EO 273 (January 1, 1988).
As mandated by Article 7 of the Civil Code,3 an administrative rule or

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

contradict, the provisions of the enabling law. An implementing rule or
regulation cannot modify, expand, or subtract from the law it is intended to
implement. Any rule that is not consistent with the statute itself is null and
void. 4
While administrative agencies, such as the Bureau of Internal Revenue,

may issue regulations to implement statutes, they are without authority to
limit the scope of the statute to less than what it provides, or extend or
expand the statute beyond its terms, or in any way modify explicit
provisions of the law. Indeed, a quasi-judicial body or an administrative
agency for that matter cannot amend an act of Congress. Hence, in case of
a discrepancy between the basic law and an interpretative or administrative
ruling, the basic law prevails.5
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as

basis of transitional input tax credit under Section 105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal

Revenue. RR 6-97 was basically a reiteration of the same Section 4.105-1
of RR 7-95, except that the RR 6-97 deleted the following paragraph:
of E.O. 273 (January 1, 1988).
It is clear, therefore, that under RR 6-97, the allowable transitional input tax
credit is not limited to improvements on real properties. The particular
provision of RR 7-95 has effectively been repealed by RR 6-97 which is
now in consonance with Section 100 of the NIRC, insofar as the definition
of real properties as goods is concerned. The failure to add a specific
repealing clause would not necessarily indicate that there was no intent to
repeal RR 7-95. The fact that the aforequoted paragraph was deleted
created an irreconcilable inconsistency and repugnancy between the
provisions of RR 6-97 and RR 7-95.
We now address the points raised in the dissenting opinion of the

Honorable Justice Antonio T. Carpio.
At the outset, it must be stressed that FBDC sought the refund of the total
amount of ₱347,741,695.74 which it had itself paid in cash to the BIR. It is
argued that the transitional input tax credit applies only when taxes were
previously paid on the properties in the beginning inventory and that there
should be a law imposing the tax presumed to have been paid. The thesis
is anchored on the argument that without any VAT or other input business
tax imposed by law on the real properties at the time of the sale, the 8%
transitional input tax cannot be presumed to have been paid.
The language of Section 105 is explicit. It precludes reading into the law
that the transitional input tax credit is limited to the amount of VAT
previously paid. When the aforesaid section speaks of "eight percent (8%)
of the value of such inventory" followed by the clause "or the actual value-
added tax paid on such goods, materials and supplies," the implication is
clear that under the first clause, "eight percent (8%) of the value of such
inventory," the law does not contemplate the payment of any prior tax on
such inventory. This is distinguished from the second clause, "the actual
value-added tax paid on the goods, materials and supplies" where actual
payment of VAT on the goods, materials and supplies is assumed. Had the
intention of the law been to limit the amount to the actual VAT paid, there
would have been no need to explicitly allow a claim based on 8% of the
value of such inventory.
The contention that the 8% transitional input tax credit in Section 105
presumes that a previous tax was paid, whether or not it was actually paid,
requires a transaction where a tax has been imposed by law, is utterly
without basis in law. The rationale behind the provisions of Section 105
was aptly elucidated in the Decision sought to be reconsidered, thus:
It is apparent that the transitional input tax credit operates to benefit newly
VAT-registered persons, whether or not they previously paid taxes in the
acquisition of their beginning inventory of goods, materials and supplies.
During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At
the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT.
The transitional input tax credit mitigates this initial diminution of the
taxpayer’s income by affording the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage when the person is yet
unable to credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a

restrictive construction that transitional input tax credit applies only when
taxes were previously paid on the properties in the beginning inventory and
there is a law imposing the tax which is presumed to have been paid, is to
impose conditions or requisites to the application of the transitional tax
input credit which are not found in the law. The courts must not read into
the law what is not there. To do so will violate the principle of separation of
powers which prohibits this Court from engaging in judicial legislation.6
WHEREFORE, premises considered, the Motion for Reconsideration is

DENIED WITH FINALITY for lack of merit.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SONY PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007
Decision and the July 5, 2007 Resolution of the Court of Tax Appeals – En
Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004
Decision of the CTA-First Division2 which, in turn, partially granted the
petition for review of respondent Sony Philippines, Inc. (Sony). The CTA-
First Division decision cancelled the deficiency assessment issued by
petitioner Commissioner of Internal Revenue (CIR) against Sony for Value
Added Tax (VAT) but upheld the deficiency assessment for expanded
withholding tax (EWT) in the amount of ₱1,035,879.70 and the penalties for
late remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No.

000019734 (LOA 19734) authorizing certain revenue officers to examine
Sony’s books of accounts and other accounting records regarding revenue
taxes for "the period 1997 and unverified prior years." On December 6,
1999, a preliminary assessment for 1997 deficiency taxes and penalties
was issued by the CIR which Sony protested. Thereafter, acting on the
protest, the CIR issued final assessment notices, the formal letter of
demand and the details of discrepancies.4 Said details of the deficiency
taxes and penalties for late remittance of internal revenue taxes are as
follows:
DEFICIENCY VALUE -ADDED

TAX (VAT)
(Assessment No. ST-VAT-97-
0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41
DEFICIENCY EXPANDED
WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-
0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72
DEFICIENCY OF VAT ON
ROYALTY PAYMENTS
(Assessment No. ST-LR1-97-
0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14
LATE REMITTANCE OF FINAL

WITHHOLDING TAX
0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78
LATE REMITTANCE OF INCOME

PAYMENTS
0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60
GRAND TOTAL P 15,895,632.655
Sony sought re-evaluation of the aforementioned assessment by filing a

protest on February 2, 2000. Sony submitted relevant documents in
support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a
petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT
assessment because the subsidized advertising expense paid by Sony
which was duly covered by a VAT invoice resulted in an input VAT credit.
As regards the EWT, the CTA-First Division maintained the deficiency EWT
assessment on Sony’s motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to
sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on rental expense since it found
that the total rental deposit of ₱10,523,821.99 was incurred from January to
March 1998 which was again beyond the coverage of LOA 19734. Except
for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of
final withholding tax on royalty as of December 1997 and for the late
remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency EWT assessment as well as
the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.

Respondent is ORDERED to CANCEL and WITHDRAW the deficiency
assessment for value-added tax for 1997 for lack of merit. However, the
deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency

expanded withholding tax in the amount of ₱1,035,879.70 and the following
penalties for late remittance of internal revenue taxes in the sum of
₱1,269,593.90:
1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid
pursuant to Section 249(C)(3) of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that

petitioner is not liable for the deficiency VAT in the amount of
₱11,141,014.41;
B. The Honorable court committed reversible error in holding that the

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

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

remittance of final withholding tax on royalties covering the period
January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for review with
the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT

in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount of

₱2,894,797.00 should be subjected to 10% withholding tax instead of
the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5%

withholding tax on rental deposit in the amount of ₱10,523,821.99 is
proper; and
4. Whether or not the remittance of final withholding tax on royalties

covering the period January to March 1998 was filed outside of
time.11
Finding no cogent reason to reverse the decision of the CTA-First Division,
the CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for
reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB.
The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT

LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX

IN THE AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE

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

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

WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court
that it would no longer file a reply. Thus, on December 3, 2008, the Court
resolved to give due course to the petition and to decide the case on the
basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and
unverified prior years," should be understood to mean the fiscal year
ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the

authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.15 The very provision
of the Tax Code that the CIR relies on is unequivocal with regard to its
power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe

Additional Requirements for Tax Administration and Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return

has been filed as required under the provisions of this Code, the
Commissioner or his duly authorized representative may authorize the
examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. x x x
[Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the
revenue officer so authorized must not go beyond the authority given. In
the absence of such an authority, the assessment or examination is a
nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior
years." For said reason, the CIR acting through its revenue officers went
beyond the scope of their authority because the deficiency VAT
assessment they arrived at was based on records from January to March
1998 or using the fiscal year which ended in March 31, 1998. As pointed
out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew
which period should be covered by the investigation. Thus, if CIR wanted or
intended the investigation to include the year 1998, it should have done so
by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase "and unverified prior years," violated Section C of
Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one

taxable year. The practice of issuing L/As covering audit of "unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include more
than one taxable period, the other periods or years shall be specifically
indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIR’s argument, that Sony’s advertising
expense could not be considered as an input VAT credit because the same
was eventually reimbursed by Sony International Singapore (SIS), is also
erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed
by SIS, the former never incurred any advertising expense. As a result,
Sony is not entitled to a tax credit. At most, the CIR continues, the said
advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sony’s deficiency VAT assessment stemmed
from the CIR’s disallowance of the input VAT credits that should have been
realized from the advertising expense of the latter.18 It is evident under
Section 11019 of the 1997 Tax Code that an advertising expense duly
covered by a VAT invoice is a legitimate business expense. This is
confirmed by no less than CIR’s own witness, Revenue Officer Antonio
Aluquin.20 There is also no denying that Sony incurred advertising expense.
Aluquin testified that advertising companies issued invoices in the name of
Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid
for advertising expense/ services. Where the money came from is another
matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable. In support of this, the CIR cited a
portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has
granted to our client a subsidy equivalent to the latter’s advertising
expenses will not affect the validity of the input taxes from such expenses.
Thus, at the most, this is an additional income of our client subject to
income tax. We submit further that our client is not subject to VAT on the
subsidy income as this was not derived from the sale of goods or
services.22
Insofar as the above-mentioned subsidy may be considered as income

and, therefore, subject to income tax, the Court agrees. However, the Court
does not agree that the same subsidy should be subject to the 10% VAT.
To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was
but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only "equivalent to the latter’s (Sony’s) advertising
expenses."
Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected
on every sale, barter or exchange of goods or properties, value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to
be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties

before any VAT may be levied. Certainly, there was no such sale, barter or
exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS
and not in payment for goods or properties sold, bartered or exchanged by
Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion
to rule that services rendered for a fee even on reimbursement-on-cost
basis only and without realizing profit are also subject to VAT. The case,
however, is not applicable to the present case. In that case, COMASERCO
rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense
that it incurred although without profit. This is not true in the present case.
Sony did not render any service to SIS at all. The services rendered by the
advertising companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount equivalent to
the latter’s advertising expense but never received any goods, properties or
service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s

commission expense, the CIR insists that said deficiency EWT assessment
is subject to the ten percent (10%) rate instead of the five percent (5%)
citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said
revenue regulation provides that the 10% rate is applied when the recipient
of the commission income is a natural person. According to the CIR, Sony’s
schedule of Selling, General and Administrative expenses shows the
commission expense as "commission/dealer salesman incentive,"
emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-
First Division is based on Section 1(g) of Revenue Regulations No. 6-85
which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to

customs, insurance, real estate and commercial brokers and agents of
professional entertainers – five per centum (5%).25
In denying the very same argument of the CIR in its motion for
reconsideration, the CTA-First Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but

payments made to broker is subject to 5% withholding tax pursuant to
Section 1(g) of Revenue Regulations No. 6-85. While the commission
expense in the schedule of Selling, General and Administrative expenses
submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer
salesman incentive" the same does not justify the automatic imposition of
flat 10% rate. As itemized by petitioner, such expense is composed of
"Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as
amended by Revenue Regulations No. 12-94, which was the applicable
rule during the subject period of examination and assessment as specified
in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only
adopted in April 1998 and, therefore, cannot be applied in the present case.
Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No.
6-2001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit.
According to their findings, Sony incurred the subject rental deposit in the
amount of ₱10,523,821.99 only from January to March 1998. As stated
earlier, in the absence of the appropriate LOA specifying the coverage, the
CIR’s deficiency EWT assessment from January to March 1998, is not valid
and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated
remittance of its FWT on royalties (i) as of December 1997; and (ii) for the
period from January to March 1998. Again, the Court agrees with the CTA-
First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82
and Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue Regulations No. 2-98,
Sony should also be made liable for the FWT on royalties from January to
March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan,
particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding

remittance as well as the payment of final tax on royalty. Based on the
same, Sony is required to deduct and withhold final taxes on royalty
payments when the royalty is paid or is payable. After which, the
corresponding return and remittance must be made within 10 days after the
end of each month. The question now is when does the royalty become
payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following
terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30
and December 31, the LICENSEE shall furnish to the LICENSOR a
statement, certified by an officer of the LICENSEE, showing quantities of
the MODELS sold, leased or otherwise disposed of by the LICENSEE
during such respective semi-annual period and amount of royalty due
pursuant this ARTICLE X therefore, and the LICENSEE shall pay the
royalty hereunder to the LICENSOR concurrently with the furnishing of the
above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after
every semi-annual period which ends in June 30 and December 31.
However, the CTA-First Division found that there was accrual of royalty by
the end of December 1997 as well as by the end of June 1998. Given this,
the FWTs should have been paid or remitted by Sony to the CIR on
January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First
Division and the CTA-EB in ruling that the FWT for the royalty from January
to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which
meant that the royalty may be payable until August 1998 pursuant to the
MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or
10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the

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

unutilized input value-added tax (VAT) for the third and fourth quarters of
taxable year 2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the

Decision7 promulgated on 31 May 2010 as well as the Amended
Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA
EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed
its 31 May 2010 Decision and granted the CIR’s petition for review in CTA
Case No. 476. The CTA En Banc denied Mindanao I Geothermal
Partnership’s (Mindanao I) claims for refund or tax credit for the first (CTA
Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters
(CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and
Exchange Commission, value added taxpayers registered with the Bureau
of Internal Revenue (BIR), and Block Power Production Facilities
accredited by the Department of Energy. Republic Act No. 9136, or the
Electric Power Industry Reform Act of 2000 (EPIRA), effectively amended
Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax
Code),9 when it decreed that sales of power by generation companies shall
be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II
filed with the CIR claims for refund or tax credit of accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I
and II filed their claims in 2005.
G.R. No. 193301

Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos.
7227, 7287, and 7317, which were consolidated as CTA EB No. 513. CTA
Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of Mindanao
II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In
CTA Case No. 7227, Mindanao II claims a tax refund or credit of
₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287,
Mindanao II claims a tax refund or credit of ₱1,562,085.33 for the second
quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund or
credit of ₱3,521,129.50 for the third and fourth quarters of 2003.
The CTA First Division’s narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-
Operate-Transfer (BOT) contract with the Philippine National Oil
Corporation – Energy Development Company (PNOC-EDC) for finance,
engineering, supply, installation, testing, commissioning, operation, and
maintenance of a 48.25 megawatt geothermal power plant, provided that
PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In
turn, Mindanao II shall convert the steam into electric capacity and energy
for PNOC-EDC and shall deliver the same to the National Power
Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges
that its sale of generated power and delivery of electric capacity and energy
of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT zero-rated sales under the
EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate
applicable to sales of generated power by generation companies from ten
(10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of

goods and services and accumulates therefrom creditable input taxes.
Pursuant to the provisions of the National Internal Revenue Code (NIRC),
Mindanao II alleges that it can use its accumulated input tax credits to
offset its output tax liability. Considering, however that its only revenue-
generating activity is VAT zero-rated under RA No. 9136, Mindanao II’s
input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II
adopted the VAT zero-rating of the EPIRA in computing for its VAT payable
when it filed its Quarterly VAT Returns on the following dates:
CTA Case Period Date of Filing

No. Covered
Original Amended
(2003)
Return Return
7227 1st Quarter April 23, July 3, 2002
2003 (sic),
April 1, 2004 &
October 22,
2004
7287 2nd Quarter July 22, April 1, 2004
2003
7317 3rd Quarter Oct. 27, April 1, 2004
2003
7317 4th Quarter Jan. 26, April 1, 2204
2004
Considering that it has accumulated unutilized creditable input taxes from
its only income-generating activity, Mindanao II filed an application for
refund and/or issuance of tax credit certificate with the BIR’s Revenue
District Office at Kidapawan City on April 13, 2005 for the four quarters of
2003.
To date (September 22, 2008), the application for refund by Mindanao II

remains unacted upon by the CIR. Hence, these three petitions filed on
April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd
quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of
2003. At the instance of Mindanao II, these petitions were consolidated on
March 15, 2006 as they involve the same parties and the same subject
matter. The only difference lies with the taxable periods involved in each
petition.11
The Court of Tax Appeals’ Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that
Mindanao II satisfied the twin requirements for VAT zero rating under
EPIRA: (1) it is a generation company, and (2) it derived sales from power
generation. The CTA First Division also stated that Mindanao II complied
with five requirements to be entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-

rated sales or effectively zero-rated sales;
4. That the input VAT payments were not applied against any output
VAT liability; and
5. That the claim for refund was filed within the two-year prescriptive
period.13
With respect to the fifth requirement, the CTA First Division tabulated the
dates of filing of Mindanao II’s return as well as its administrative and
judicial claims, and concluded that Mindanao II’s administrative and judicial
claims were timely filed in compliance with this Court’s ruling in Atlas
Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue (Atlas).14 The CTA First Division declared that the two-
year prescriptive period for filing a VAT refund claim should not be counted
from the close of the quarter but from the date of the filing of the VAT
return. As ruled in Atlas, VAT liability or entitlement to a refund can only be
determined upon the filing of the quarterly VAT return.
CTA Period Date Filing

Case Covered
Original Amended Administrative Judicial
No. (2003)
Return Return Return Claim
7227 1st 23 April 1 April 13 April 2005 22
Quarter 2003 2004 April
2005
7287 2nd 22 July 1 April 13 April 2005 7 July
Quarter 2003 2004 2005
7317 3rd 25 Oct. 1 April 13 April 2005 9 Sept.
Quarter 2003 2004 2005
7317 4th 26 Jan. 1 April 13 April 2005 9 Sept.
Quarter 2004 2004 200515
Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26
January 2004, when Mindanao II filed its VAT returns, its administrative
claim filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July
2005, and 9 September 2005 were timely filed in accordance with Atlas.
The CTA First Division found that Mindanao II is entitled to a refund in the
modified amount of ₱7,703,957.79, after disallowing ₱522,059.91 from
input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully
depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to
₱522,059.91 were disallowed for failure to meet invoicing requirements,
while the input VAT on the sale of the Nissan Patrol was reduced by
₱18,181.82 because the output VAT for the sale was not included in the
VAT declarations.
The dispositive portion of the CTA First Division’s 22 September 2008

Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.

Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of SEVEN MILLION
SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN
AND 79/100 PESOS (₱7,703,957.79) representing its unutilized input VAT
for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration.18 It stated that the

sale of the fully depreciated Nissan Patrol is a one-time transaction and is
not incidental to its VAT zero-rated operations. Moreover, the disallowed
input taxes substantially complied with the requirements for refund or tax
credit.
The CIR also filed a motion for partial reconsideration. It argued that the
judicial claims for the first and second quarters of 2003 were filed beyond
the period allowed by law, as stated in Section 112(A) of the 1997 Tax
Code. The CIR further stated that Section 229 is a general provision, and
governs cases not covered by Section 112(A). The CIR countered the CTA
First Division’s 22 September 2008 decision by citing this Court’s ruling in
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant),19 which stated that unutilized input VAT payments must be
claimed within two years reckoned from the close of the taxable quarter
when the relevant sales were made regardless of whether said tax was
paid.
The CTA First Division denied Mindanao II’s motion for partial
reconsideration, found the CIR’s motion for partial reconsideration partly
meritorious, and rendered an Amended Decision20 on 26 June 2009. The
CTA First Division stated that the claim for refund or credit with the BIR and
the subsequent appeal to the CTA must be filed within the two-year period
prescribed under Section 229. The two-year prescriptive period in Section
229 was denominated as a mandatory statute of limitations. Therefore,
Mindanao II’s claims for refund for the first and second quarters of 2003
had already prescribed.
The CTA First Division found that the records of Mindanao II’s case are
bereft of evidence that the sale of the Nissan Patrol is not incidental to
Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s
submitted documents failed to substantiate the requisites for the refund or
credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as
follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.

Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the
modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND
EIGHT HUNDRED EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77)
representing its unutilized input VAT for the third and fourth quarters of the
taxable year 2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513,

before the CTA En Banc.
The Court of Tax Appeals’ Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB

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

reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for

Review en banc is DISMISSED for lack of merit. Accordingly, the Decision
dated September 22, 2008 and the Amended Decision dated June 26,
2009 issued by the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack
of merit Mindanao II’s Motion for Reconsideration.26 The CTA En Banc
highlighted the following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of
unutilized input VAT must be filed within two (2) years after the close
of the taxable quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all

other courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity;
hence, it must be given its literal meaning and applied without any
interpretation.27
G.R. No. 194637

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

narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-

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

accredited by the Department of Energy (DOE) as a Private Sector
Generation Facility, pursuant to the provision of Executive Order No. 215,
wherein Certificate of Accreditation No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the
relevant provisions of the National Internal Revenue Code (NIRC) of 1997
were deemed modified. R.A. No. 9136, also known as the "Electric Power
Industry Reform Act of 2001 (EPIRA), was enacted by Congress to ordain
reforms in the electric power industry, highlighting, among others, the
importance of ensuring the reliability, security and affordability of the supply
of electric power to end users. Under the provisions of this Republic Act
and its implementing rules and regulations, the delivery and supply of
electric energy by generation companies became VAT zero-rated, which
previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to
sales of generated power by generation companies from ten (10%) percent
to zero percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the
EPIRA in computing for its VAT payable when it filed its VAT Returns, on
the belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its

Quarterly VAT Returns for the first, second, third, and fourth quarters of
taxable year 2003, which were subsequently amended and filed with the
BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative

claims for the issuance of tax credit certificate on its alleged unutilized or
excess input taxes for taxable year 2003, in the accumulated amount of
₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its claims before
this Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed
as CTA Case Nos. 7228, 7286, and 7318, respectively. However, on
October 10, 2005, Mindanao I received a copy of the letter dated
September 30, 2003 (sic) of the BIR denying its application for tax
credit/refund.28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in

CTA Case Nos. 7228, 7286, and 7318. The CTA Second Division found
that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27% of
the amount of substantiated excess input VAT because a portion was not
reported in its quarterly VAT returns; (2) out of the ₱14,185,294.80 excess
input VAT applied for refund, only ₱11,657,447.14 can be considered
substantiated excess input VAT due to disallowances by the Independent
Certified Public Accountant, adjustment on the disallowances per the CTA
Second Division’s further verification, and additional disallowances per the
CTA Second Division’s further verification;
(3) Mindanao I’s accumulated excess input VAT for the second quarter of
2003 that was carried over to the third quarter of 2003 is net of the claimed
input VAT for the first quarter of 2003, and the same procedure was done
for the second, third, and fourth quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year prescriptive period
reckoned from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Division’s 24 October 2008

Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review

are hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao
I in the reduced amount of TEN MILLION FIVE HUNDRED TWENTY
THREE THOUSAND ONE HUNDRED SEVENTY SEVEN PESOS AND
53/100 (₱10,523,177.53) representing Mindanao I’s unutilized input VAT
for the four quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for
Clarification31 on 11 November 2008. It claimed that the CTA Second
Division should not have allocated proportionately Mindanao I’s unutilized
creditable input taxes for the taxable year 2003, because the proportionate
allocation of the amount of creditable taxes in Section 112(A) applies only
when the creditable input taxes due cannot be directly and entirely
attributed to any of the zero-rated or effectively zero-rated sales. Mindanao
I claims that its unreported collection is directly attributable to its VAT zero-
rated sales. The CTA Second Division denied Mindanao I’s motion and
maintained the proportionate allocation because there was a portion of the
gross receipts that was undeclared in Mindanao I’s gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November

2008. It claimed that Mindanao I failed to exhaust administrative remedies
before it filed its petition for review. The CTA Second Division denied the
CIR’s motion, and cited Atlas33 as the basis for ruling that it is more
practical and reasonable to count the two-year prescriptive period for filing
a claim for refund or credit of input VAT on zero-rated sales from the date
of filing of the return and payment of the tax due.
The dispositive portion of the CTA Second Division’s 10 March 2009

Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial

Reconsideration and Mindanao I’s Motion for Partial Reconsideration with
Motion for Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB

Case Nos. 476 and 483 and denied the petitions filed by the CIR and
Mindanao I. The CTA En Banc found no new matters which have not yet
been considered and passed upon by the CTA Second Division in its
assailed decision and resolution.
The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby

DISMISSED for lack of merit. Accordingly, the October 24, 2008 Decision
and March 10, 2009 Resolution of the CTA Former Second Division in CTA
Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal
Partnership vs. Commissioner of Internal Revenue" are hereby AFFIRMED
in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA
En Banc’s 31 May 2010 Decision. In an Amended Decision promulgated on
24 November 2010, the CTA En Banc agreed with the CIR’s claim that
Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling
in Mirant. The CTA En Banc also ruled that the procedure prescribed under
Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed first
before the CTA En Banc can act on Mindanao I’s claim. The CTA En Banc
reconsidered its 31 May 2010 Decision in light of this Court’s ruling in
Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.
(Aichi).38
The pertinent portions of the CTA En Banc’s 24 November 2010 Amended

Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly
VAT Returns for the First Quarter of 2003. Pursuant to Section
112(A) of the NIRC of 1997, as amended, Mindanao I has two years
from March 31, 2003 or until March 31, 2005 within which to file its
administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim

for refund of unutilized input VAT for the first quarter of taxable year
2003 with the BIR, which is beyond the two-year prescriptive period
mentioned above.
VAT Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has

two years from June 30, 2003, within which to file its administrative
claim for refund for the second quarter of 2003, or until June 30,
2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for

refund of unutilized input VAT for the second quarter of taxable year
2003 with the BIR, which is within the two-year prescriptive period,
provided under Section 112 (A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date
Mindanao I submitted the supporting documents together with the
application for refund) or until August 2, 2005, to decide the
administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or from
August 3, 2005 to September 1, 2005, Mindanao I should have
elevated its claim for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review
with this Court, docketed as CTA Case No. 7286, even before the
120-day period for the CIR to decide the claim for refund had lapsed
on August 2, 2005. The Petition for Review was, therefore,
prematurely filed and there was failure to exhaust administrative
remedies;
xxxx
VAT Returns for the third and fourth quarters of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I
therefore, has two years from September 30, 2003 and December 31,
2003, or until September 30, 2005 and December 31, 2005,
respectively, within which to file its administrative claim for the third
and fourth quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for

refund of unutilized input VAT for the third and fourth quarters of
taxable year 2003 with the BIR, which is well within the two-year
prescriptive period, provided under Section 112(A) of the NIRC of
1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I
submitted supporting documents, together with the aforesaid
application for refund, the CIR has 120 days or until August 2, 2005,
to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or
from August 3, 2005 until September 1, 2005 Mindanao I should have
elevated its claim for refund to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in
Division only on September 9, 2005, which is 8 days beyond the 30-
day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day
prescribed period. Thus, the Petition for Review should have been
dismissed for being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having
been filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for

Mindanao I’s failure to comply with a condition precedent when it
failed to exhaust administrative remedies by filing its Petition for
Review even before the lapse of the 120-day period for the CIR to
decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to
appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s
Motion for Reconsideration is hereby GRANTED; Mindanao I’s Motion for
Partial Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal

Revenue in CTA EB No. 476 is hereby GRANTED and the entire claim of
Mindanao I Geothermal Partnership for the first, second, third and fourth
quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim
of Mindanao II for the 1st and 2nd quarters of year 2003 has already
prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting

interpretations of the law as to the reckoning date of the two
year prescriptive period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the

Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses the close of the
taxable quarter when the sales were made as the reckoning
date in counting the two-year prescriptive period cannot be
applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section

105 of the 1997 Tax Code, as amended in that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount
disallowed by the Independent Certified Public Accountant as
Mindanao II substantially complied with the requisites of the 1997 Tax
Code, as amended, for refund/tax credit.
A. The amount of ₱2,090.16 was brought about by the timing

difference in the recording of the foreign currency deposit
transaction.
B. The amount of ₱2,752.00 arose from the out-of-pocket

expenses reimbursed to SGV & Company which is substantially
suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was unapplied and/or was not

included in Mindanao II’s claim for refund or tax credit for the
year 2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be

relaxed in the present case.40
G.R. No. 194637

Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228
were timely filed pursuant to the case of Atlas Consolidated Mining
and Development Corporation vs. Commissioner of Internal Revenue,
which was then the controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue

vs. Mirant Pagbilao Corporation, which uses the end of the
taxable quarter when the sales were made as the reckoning
date in counting the two-year prescriptive period, cannot be
applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this

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

Commissioner of Internal Revenue vs. Aichi Forging Company of
Asia, Inc., cannot be applied retroactively to Mindanao I in the
present case.41
In a Resolution dated 14 December 2011,42 this Court resolved to

consolidate G.R. Nos. 193301 and 194637 to avoid conflicting rulings in
related cases.
The Court’s Ruling
Determination of Prescriptive Period
G.R. Nos. 193301 and 194637 both raise the question of the determination
of the prescriptive period, or the interpretation of Section 112 of the 1997
Tax Code, in light of our rulings in Atlas and Mirant.
Mindanao II’s unutilized input VAT tax credit for the first and second
quarters of 2003, in the amounts of ₱3,160,984.69 and ₱1,562,085.33,
respectively, are covered by G.R. No. 193301, while Mindanao I’s
unutilized input VAT tax credit for the first, second, third, and fourth
quarters of 2003, in the amounts of ₱3,893,566.14, ₱2,351,000.83, and
₱7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time
of Mindanao II’s and Mindanao I’s administrative and judicial claims,
provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or

Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of
a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and
(B) and Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.
- In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days
from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA Period Close of Last day Actual date Last day Actual
Cas covered by quarter for filing of for Date
e VAT Sales when applicatio filing filing of filing
No. in sales n application case case
2003 and were of tax for with with CTA
45
amount made refund/ta tax refund/ CTA (judicial
x credit with claim)
credit the
certificat CIR
e (administrati
with the ve
CIR claim)44
722 1st Quarter, 31 March 31 March 13 April 12 22 April
7 ₱3,160,984. 2003 2005 2005 Septemb 2005
69 er
2005
728 2nd Quarter, 30 June 30 June 13 April 12 7 July
7 ₱1,562,085. 2003 2005 2005 Septemb 2005
33 er
2005
731 3rd and 4th 30 30 13 April 12 9
7 Quarters, Septemb Septemb 2005 Septemb Septemb
₱3,521,129. er er er er
50 2003 2005 2005 2005
31 2
Decemb January
er 2006
2003 (31
Decemb
er
2005
being
a
Saturday
)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA Period Close of Last day Actual date Last day Actual
Cas covered by quarter for filing of for Date
e VAT Sales when applicatio filing filing of filing
No. in sales n application case case
2003 and were of tax for with with CTA
amount made refund/ta tax refund/ CTA47 (judicial
x credit with claim)
credit the
certificat CIR
e (administrati
with the ve
CIR claim)46
722 1st Quarter, 31 March 31 March 4 April 2005 1 22 April
7 ₱3,893,566. 2003 2005 Septemb 2005
14 er
2005
728 2nd Quarter, 30 June 30 June 4 April 2005 1 7 July
7 ₱2,351,000. 2003 2005 Septemb 2005
83 er
2005
731 3rd 30 30 4 April 2005 1 9
7 and 4th Septemb Septemb Septemb Septemb
Quarters, er er er er
₱7,940,727. 2003 2005 2005 2005
83
31 2
Decemb January
er 2006
2003 (31
Decemb
er
2005
being
a
Saturday
)
When Mindanao II and Mindanao I filed their respective administrative and

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

provision of law. It violates the doctrine of exhaustion of administrative
remedies and renders the petition premature and thus without a cause of
action, with the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with cases upholding
and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review
on appeal "decisions of the Commissioner of Internal Revenue in cases
involving x x x refunds of internal revenue taxes." When a taxpayer
prematurely files a judicial claim for tax refund or credit with the CTA
without waiting for the decision of the Commissioner, there is no "decision"
of the Commissioner to review and thus the CTA as a court of special
jurisdiction has no jurisdiction over the appeal. The charter of the CTA also
expressly provides that if the Commissioner fails to decide within "a specific
period" required by law, such "inaction shall be deemed a denial" of the
application for tax refund or credit. It is the Commissioner’s decision, or
inaction "deemed a denial," that the taxpayer can take to the CTA for
review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.
San Roque’s failure to comply with the 120-day mandatory period renders
its petition for review with the CTA void. Article 5 of the Civil Code provides,
"Acts executed against provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity." San Roque’s void
petition for review cannot be legitimized by the CTA or this Court because
Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no
law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a
mandatory provision of law cannot claim or acquire any right from his void
act. A right cannot spring in favor of a person from his own void or illegal
act. This doctrine is repeated in Article 2254 of the Civil Code, which states,
"No vested or acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others." For violating a
mandatory provision of law in filing its petition with the CTA, San Roque
cannot claim any right arising from such void petition. Thus, San Roque’s
petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and
jurisdictional nature of the 120-day period just because the Commissioner
merely asserts that the case was prematurely filed with the CTA and does
not question the entitlement of San Roque to the refund. The mere fact that
a taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him
as a matter of right to a tax refund or credit. Strict compliance with the
mandatory and jurisdictional conditions prescribed by law to claim such tax
refund or credit is essential and necessary for such claim to prosper. Well-
settled is the rule that tax refunds or credits, just like tax exemptions, are
strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the
conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions

mandated by law simply because the Commissioner chose not to contest
the numerical correctness of the claim for tax refund or credit of the
taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative
remedies bar a taxpayer’s claim for tax refund or credit, whether or not the
Commissioner questions the numerical correctness of the claim of the
taxpayer. This Court should not establish the precedent that non-
compliance with mandatory and jurisdictional conditions can be excused if
the claim is otherwise meritorious, particularly in claims for tax refunds or
credit. Such precedent will render meaningless compliance with mandatory
and jurisdictional requirements, for then every tax refund case will have to
be decided on the numerical correctness of the amounts claimed,
regardless of non-compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the
Atlas doctrine because San Roque filed its petition for review with the CTA
more than four years before Atlas was promulgated. The Atlas doctrine did
not exist at the time San Roque failed to comply with the 120-day period.
Thus, San Roque cannot invoke the Atlas doctrine as an excuse for its
failure to wait for the 120-day period to lapse. In any event, the Atlas
doctrine merely stated that the two-year prescriptive period should be
counted from the date of payment of the output VAT, not from the close of
the taxable quarter when the sales involving the input VAT were made. The
Atlas doctrine does not interpret, expressly or impliedly, the 120+30 day
periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for

the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and

Mindanao II for 2003 have prescribed, we see no need to rely on either
Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "Any VAT-
registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such sales x x x."
We rule on Mindanao I and II’s administrative claims for the first, second,
third, and fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with
the CIR for the first quarter of 2003 was on 31 March 2005. Mindanao
II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April
2005. Both claims have prescribed, pursuant to Section 112(A) of the
1997 Tax Code.
the CIR for the second quarter of 2003 was on 30 June 2005.
Mindanao II filed its administrative claim before the CIR on 13 April
2005, while Mindanao I filed its administrative claim before the CIR
on 4 April 2005. Both claims were filed on time, pursuant to Section
112(A) of the 1997 Tax Code.
the CIR for the third quarter of 2003 was on 30 September 2005.
the CIR for the fourth quarter of 2003 was on 2 January 2006.
Prescriptive Period for

the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters
of 2003 have been properly appealed, we still see no need to refer to either
Atlas or Mirant, or even to Section 229 of the 1997 Tax Code. The second
paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full
or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was
explained in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30
day mandatory periods were already in the law. Section 112(C) expressly
grants the Commissioner 120 days within which to decide the taxpayer’s
claim. The law is clear, plain, and unequivocal: "x x x the Commissioner
shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of
complete documents." Following the verba legis doctrine, this law must be
applied exactly as worded since it is clear, plain, and unequivocal. The
taxpayer cannot simply file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day mandatory and jurisdictional
period. The CTA will have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the Commissioner for the CTA
to review. In San Roque’s case, it filed its petition with the CTA a mere 13
days after it filed its administrative claim with the Commissioner.
Indisputably, San Roque knowingly violated the mandatory 120-day period,
and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to

appeal to the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court
of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba
legis doctrine, this law should be applied exactly as worded since it is clear,
plain, and unequivocal. As this law states, the taxpayer may, if he wishes,
appeal the decision of the Commissioner to the CTA within 30 days from
receipt of the Commissioner’s decision, or if the Commissioner does not act
on the taxpayer’s claim within the 120-day period, the taxpayer may appeal
to the CTA within 30 days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not
necessarily fall within the two-year prescriptive period, as long as the
administrative claim is filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the
taxpayer "may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate
or refund of the creditable input tax due or paid to such sales." In short, the
law states that the taxpayer may apply with the Commissioner for a refund
or credit "within two (2) years," which means at anytime within two years.
Thus, the application for refund or credit may be filed by the taxpayer with
the Commissioner on the last day of the two-year prescriptive period and it
will still strictly comply with the law. The two-year prescriptive period is a
grace period in favor of the taxpayer and he can avail of the full period
before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the
application for refund or credit "within one hundred twenty (120) days from
the date of submission of complete documents in support of the application
filed in accordance with Subsection (A)." The reference in Section 112(C)
of the submission of documents "in support of the application filed in
accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide
within the 120-day period. In short, the two-year prescriptive period in
Section 112(A) refers to the period within which the taxpayer can file an
administrative claim for tax refund or credit. Stated otherwise, the two-year
prescriptive period does not refer to the filing of the judicial claim with the
CTA but to the filing of the administrative claim with the Commissioner. As
held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a
tax credit or refund’ refers to applications for refund/credit with the CIR and
not to appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-
year prescriptive period (equivalent to 730 days), then the taxpayer must
file his administrative claim for refund or credit within the first 610 days of
the two-year prescriptive period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the appeal to the CTA being
filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day
period, will have until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or does not decide at all, the
taxpayer can no longer file his judicial claim with the CTA because the two-
year prescriptive period (equivalent to 730 days) has lapsed. The 30-day
period granted by law to the taxpayer to file an appeal before the CTA
becomes utterly useless, even if the taxpayer complied with the law by
filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive
period adds a condition that is not found in the law. It results in truncating
120 days from the 730 days that the law grants the taxpayer for filing his
administrative claim with the Commissioner. This Court cannot interpret a
law to defeat, wholly or even partly, a remedy that the law expressly grants
in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain,
and unequivocal language. The taxpayer can file his administrative claim
for refund or credit at anytime within the two-year prescriptive period. If he
files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days
from such filing to decide the claim. If the Commissioner decides the claim
on the 120th day, or does not decide it on that day, the taxpayer still has 30
days to file his judicial claim with the CTA. This is not only the plain
meaning but also the only logical interpretation of Section 112(A) and
(C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling
No. DA-489-03 from the time of its issuance on 10 December 2003 up to its
reversal in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional."51 We shall discuss later the
effect of San Roque’s recognition of BIR Ruling No. DA-489-03 on claims
filed between 10 December 2003 and 6 October 2010. Mindanao I and II
filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second, third, and
fourth quarters of 2003 as follows:
G.R. No. 193301

Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth
quarters of 2003 on 13 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (11 August 2005) and 30 days after the
CIR’s denial by inaction, the last day for filing a judicial claim with the CTA
for the second, third, and fourth quarters of 2003 was on 12 September
2005. However, the judicial claim cannot be filed earlier than 11 August
2005, which is the expiration of the 120-day period for the Commissioner to
act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003
before the CTA on 7 July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao
II’s judicial claim for the second quarter of 2003 was prematurely
filed.
However, pursuant to San Roque’s recognition of the effect of BIR

Ruling No. DA-489-03, we rule that Mindanao II’s judicial claim for the
second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003
before the CTA on 9 September 2005. Mindanao II’s judicial claim for
the third quarter of 2003 was thus filed on time, pursuant to Section
112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003
before the CTA on 9 September 2005. Mindanao II’s judicial claim for
the fourth quarter of 2003 was thus filed on time, pursuant to Section
112(C) of the 1997 Tax Code.
G.R. No. 194637

Mindanao I v. CIR
Mindanao I filed its administrative claims for the second, third, and fourth
quarters of 2003 on 4 April 2005. Counting 120 days after filing of the
administrative claim with the CIR (2 August 2005) and 30 days after the
CIR’s denial by inaction,52 the last day for filing a judicial claim with the CTA
for the second, third, and fourth quarters of 2003 was on 1 September
2005. However, the judicial claim cannot be filed earlier than 2 August
2005, which is the expiration of the 120-day period for the Commissioner to
act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003
before the CTA on 7 July 2005, before the expiration of the 120-day
period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao
I’s judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR
Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim for the
second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003
before the CTA on 9 September 2005. Mindanao I’s judicial claim for
the third quarter of 2003 was thus filed after the prescriptive period,
pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003
before the CTA on 9 September 2005. Mindanao I’s judicial claim for
the fourth quarter of 2003 was thus filed after the prescriptive period,
pursuant to Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc53 examined

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

refund, the Court in San Roque recognized that BIR Ruling No. DA-489-03
constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-
489-03 expressly states that the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the CTA
by way of Petition for Review." This Court discussed BIR Ruling No. DA-
489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the

Commissioner, particularly on a difficult question of law. The abandonment
of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question
of law. The abandonment of the Atlas doctrine did not result in Atlas, or
other taxpayers similarly situated, being made to return the tax refund or
credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively.
Absent fraud, bad faith or misrepresentation, the reversal by this Court of a
general interpretative rule issued by the Commissioner, like the reversal of
a specific BIR ruling under Section 246, should also apply prospectively. x
x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a specific ruling applicable
only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but by a
government agency tasked with processing tax refunds and credits, that is,
the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the
Department of Finance. This government agency is also the addressee, or
the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the
administrative claim of Lazi Bay Resources Development, Inc., the agency
was in fact asking the Commissioner what to do in cases like the tax claim
of Lazi Bay Resources Development, Inc., where the taxpayer did not wait
for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6
October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February
2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December
2003. Truly, Taganito can claim that in filing its judicial claim prematurely
without waiting for the 120-day period to expire, it was misled by BIR Ruling
No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-
489-03, which shields the filing of its judicial claim from the vice of
prematurity. (Emphasis in the original)
Summary of Administrative and Judicial Claims
G.R. No. 193301

Mindanao II v. CIR
Administrative Judicial Claim Action on Claim

Claim
1st Quarter, Filed late -- Deny, pursuant to
2003 Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-
489-03
3rd Quarter, Filed on time Filed on time Grant, pursuant to
2003 Section 112(C) of the
1997 Tax Code
4th Quarter, Filed on time Filed on time Grant, pursuant to
1997 Tax Code
G.R. No. 194637

Mindanao I v. CIR
Administrative Judicial Claim Action on Claim

Claim
1st Quarter, Filed late -- Deny, pursuant to
2003 Section 112(A) of the
1997 Tax Code
2nd Quarter, Filed on time Prematurely Grant, pursuant to
2003 filed BIR Ruling No. DA-
489-03
3rd Quarter, Filed on time Filed late Grant, pursuant to
1997 Tax Code
4th Quarter, Filed on time Filed late Grant, pursuant to
1997 Tax Code
Summary of Rules on Prescriptive Periods Involving VAT
We summarize the rules on the determination of the prescriptive period for

filing a tax refund or credit of unutilized input VAT as provided in Section
112 of the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years
after the close of the taxable quarter when the zero-rated or
effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete
documents in support of the administrative claim within which to
decide whether to grant a refund or issue a tax credit certificate. The
120-day period may extend beyond the two-year period from the filing
of the administrative claim if the claim is filed in the later part of the
two-year period. If the 120-day period expires without any decision
from the CIR, then the administrative claim may be considered to be
denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the
receipt of the CIR’s decision denying the administrative claim or from
the expiration of the 120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not
an incidental transaction in the course of its business; hence, it is an
isolated transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or
business, sells barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be subject to the value-
added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease
of goods, properties or services at the time of the effectivity of Republic Act
No. 7716.
The phrase "in the course of trade or business" means the regular conduct
or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective
of the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined

in this Code rendered in the Philippines by nonresident foreign persons
shall be considered as being rendered in the course of trade or business.
(Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay

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

transaction.1âwphi1 However, it does not follow that an isolated transaction
cannot be an incidental transaction for purposes of VAT liability. Indeed, a
reading of Section 105 of the 1997 Tax Code would show that a transaction
"in the course of trade or business" includes "transactions incidental
thereto."
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC

into electricity and to deliver the electricity to NPC. In the course of its
business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to
the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao II’s business which should be
liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a total amount of

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

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

Court of Tax Appeals En Bane in CT A EB No. 513 promulgated on 10
March 2010, as well as the Resolution promulgated on 28 July 2010, and
the Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and
483 promulgated on 31 May 2010, as well as the Amended Decision
promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for
the first quarter of 2003 is DENIED while its claims for the second, third,
and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the
claims of Mindanao I Geothermal Partnership for the first, third, and fourth
quarters of 2003 are DENIED while its claim for the second quarter of 2003
is GRANTED.
SO ORDERED.
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED
OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT
COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National
Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale.
The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled
that the sale is not subject to VAT. We affirm, though on a more
unequivocal rationale than that utilized by the rulings under review. The fact
that the sale was not in the course of the trade or business of NDC is
sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to

private enterprise all of its shares in its wholly-owned subsidiary the
National Marine Corporation (NMC). The NDC decided to sell in one lot its
NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker,
"Kloeckner" type vessels.1 The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary. Subsequently, the vessels
were transferred and leased, on a bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among
the stipulated terms and conditions for the public auction was that the
winning bidder was to pay "a value added tax of 10% on the value of the
vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc.
(Magsaysay Lines) offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly
for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).4 The bid was approved by the
Committee on Privatization, and a Notice of Award dated 1 July 1988 was
issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed

between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation,
and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
that "[v]alue-added tax, if any, shall be for the account of the
PURCHASER."5 Per arrangement, an irrevocable confirmed Letter of
Credit previously filed as bidders bond was accepted by NDC as security
for the payment of VAT, if any. By this time, a formal request for a ruling on
whether or not the sale of the vessels was subject to VAT had already been
filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip
Salazar Hernandez & Gatmaitan, presumably in behalf of private
respondents. Thus, the parties agreed that should no favorable ruling be
received from the BIR, NDC was authorized to draw on the Letter of Credit
upon written demand the amount needed for the payment of the VAT on
the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT

Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the
sale of the vessels was subject to the 10% VAT. The ruling cited the fact
that NDC was a VAT-registered enterprise, and thus its "transactions
incident to its normal VAT registered activity of leasing out personal
property including sale of its own assets that are movable, tangible objects
which are appropriable or transferable are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-
88, as well as VAT Ruling No. 395-88 (dated 18 August 1988), which made
a similar ruling on the sale of the same vessels in response to an inquiry
from the Chairman of the Senate Blue Ribbon Committee. Their motion
was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24
February 1989, reiterating the earlier VAT rulings. At this point, NDC drew
on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for

Refund with the CTA, followed by a Supplemental Petition for Review on 14
July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-88
and 007-89, as well as the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed
the petition, first arguing that private respondents were not the real parties
in interest as they were not the transferors or sellers as contemplated in
Sections 99 and 100 of the then Tax Code. The CIR also squarely
defended the VAT rulings holding the sale of the vessels liable for VAT,
especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87),
which provided that "[VAT] is imposed on any sale or transactions ‘deemed
sale’ of taxable goods (including capital goods, irrespective of the date of
acquisition)." The CIR argued that the sale of the vessels were among
those transactions "deemed sale," as enumerated in Section 4 of R.R. No.
5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation, which classified "change of ownership of business" as a
circumstance that gave rise to a transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the 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.
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 services16 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 Charter22 of the NDC which bears
no indication that the NDC was created for the primary purpose of selling
real property.23
The conclusion that the sale was not in the course of trade or business,
which the CIR does not dispute before this Court,24 should have definitively
settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of

R.R. No. 5-87 now relied upon by the CIR, is captioned "Value-added tax
on sale of goods," and it expressly states that "[t]here shall be levied,
assessed and collected on every sale, barter or exchange of goods, a
value added tax x x x." Section 100 should be read in light of Section 99,
which lays down the general rule on which persons are liable for VAT in the
first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code, the Title
that covers VAT in the law. Before any portion of Section 100, or the rest of
the law for that matter, may be applied in order to subject a transaction to
VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the
phrase "in the course of trade or business" as expressed in Section 99. If
that were so, reference to Section 100 would have been necessary as a
means of ascertaining whether the sale of the vessels was "in the course of
trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R.
No. 5-87 elaborate on is not the meaning of "in the course of trade or
business," but instead the identification of the transactions which may be
deemed as sale. It would become necessary to ascertain whether under
those two provisions the transaction may be deemed a sale, only if it is
settled that the transaction occurred in the course of trade or business in
the first place. If the transaction transpired outside the course of trade or
business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject
to VAT.
Accordingly, the Court rules that given the undisputed finding that the
transaction in question was not made in the course of trade or business of
the seller, NDC that is, the sale is not subject to VAT pursuant to Section
99 of the Tax Code, no matter how the said sale may hew to those
transactions deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point
by the CTA and the Court of Appeals (in its subsequent Resolution)
essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among
the transactions deemed sale those involving "change of ownership of
business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100
of the Tax Code, clarifies that such "change of ownership" is only an
attending circumstance to "retirement from or cessation of business[, ] with
respect to all goods on hand [as] of the date of such retirement or
cessation."25 Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes
the "change of ownership of business" as only a "circumstance" that
attends those transactions "deemed sale," which are otherwise stated in
the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.

Tax 2

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COMMISSIONER OF INTERNAL REVENUE, petitioner,

Commonwealth Management and Services Corporation (COMASERCO,

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest

On September 29, 1992, COMASERCO filed with the Court of Tax

WHEREFORE, the decision of the Commissioner of Internal Revenue

The compromise penalty of P16,000.00 imposed by the respondent in

WHEREFORE, in view of the foregoing, judgment is hereby rendered

The Court of Appeals anchored its decision on the ratiocination in another

On August 7, 1996, we required respondent COMASERCO to file comment

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of

Petitioner avers that to "engage in business" and to "engage in the sale of

We agree with the Commissioner.

The rule of regularity, to the contrary notwithstanding, services as

Contrary to COMASERCO's contention the above provision clarifies that

On February 5, 1998, the Commissioner of Internal Revenue issued BIR

Hence, it is immaterial whether the primary purpose of a corporation

There is no merit to respondent's contention that the Court of Appeals'

WHEREFORE, the Court GRANTS the petition and REVERSES the

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

[Respondent] is a domestic corporation duly organized and existing under

It is represented that a foreign consortium composed of Burmeister and

BWSC-Denmark established [respondent] which subcontracted the actual

In order to ascertain the tax implications of the above transactions,

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the

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

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

Totals P147,317,189.62 P3,361,174.14

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or

In [conformity] with the aforecited Revenue Regulations, [respondent]

Amount subject to 10% VAT P103,558,338.11

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On the strength of the aforementioned rulings, [respondent] on April

The Ruling of the Court of Tax Appeals

[Respondent’s] sale of services to the Consortium [was] paid for in

The zero-rating of [respondent’s] sale of services to the Consortium was

Since it is apparent that the payments for the services rendered by

Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals found untenable petitioner’s contention that under

The Court of Appeals further held that assuming petitioner’s interpretation

The Ruling of the Court

We deny the petition.

(b) Transactions subject to zero-rate. ― The following services performed

(1) Processing, manufacturing or repacking goods for other persons

(2) Services other than those mentioned in the preceding sub-

(3) Services rendered to persons or entities whose exemption under

(4) Services rendered to vessels engaged exclusively in international

(5) Services performed by subcontractors and/or contractors in

In insisting that its services should be zero-rated, respondent claims that it

This can only be the logical interpretation of Section 102(b)(2). If the

When Section 102(b)(2) stipulates payment in "acceptable foreign

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of

In this case, the payer-recipient of respondent’s services is the Consortium

Considering this length of time, the Consortium’s operation and

Respondent, as subcontractor of the Consortium, operates and maintains

Respondent’s reliance on the ruling in American Express26 is misplaced.

Respondent [American Express International, Inc. (Philippine Branch)] is a