Tax 2 Cases On VAT

1
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.

ALCANTARA and ED VINCENT S. ALBANO vs.
HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR.
The expenses of government, having for their object the interest of all, should be borne
by everyone, and the more man enjoys the advantages of society, the more he ought to
hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for

education, increased emoluments for health workers, and wider coverage for full value-
added tax benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337)[1]
was enacted. Reasons, the wisdom of which, the Court even with its extensive
constitutional power of review, cannot probe. The petitioners in these cases, however,
question not only the wisdom of the law, but also perceived constitutional infirmities in
its passage.
Every law enjoys in its favor the presumption of constitutionality. Their

arguments notwithstanding, petitioners failed to justify their call for the invalidity of the
law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill
Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 3555[2] was introduced on first reading on January 7, 2005.
The House Committee on Ways and Means approved the bill, in substitution of House
Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8,
2004. The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and third
reading.
House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105
introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep.
Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee on Ways
and Means approved the bill on February 2, 2005. The President also certified it as
urgent on February 8, 2005. The House of Representatives approved the bill on second
and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill
No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838 and 1873,
taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto
sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The
President certified the bill on March 11, 2005, and was approved by the Senate on
second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the
House of Representatives for a committee conference on the disagreeing provisions of
the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of

House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having met
and discussed in full free and conference, recommended the approval of its report,
which the Senate did on May 10, 2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate
version was transmitted to the President, who signed the same into law on May 24,
2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came,
the Court issued a temporary restraining order, effective immediately and continuing
until further orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing,
the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for
its issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let
me just tell you a little background. You know when the law took effect on
July 1, 2005, the Court issued a TRO at about 5 oclock in the afternoon. But
before that, there was a lot of complaints aired on television and on radio.
Some people in a gas station were complaining that the gas prices went up
by 10%. Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were complaining that
the prices that theyll have to pay would have to go up by 10%. While all that
was being aired, per your presentation and per our own understanding of the
law, thats not true. Its not true that the e-vat law necessarily increased prices
by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order
that granted the Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . .
interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would

be the elimination of the Excise Tax and the import duties. That is why, it is
not correct to say that the VAT as to petroleum dealers increased prices by
10%.
J. PANGANIBAN : And therefore, there is no justification for increasing the

retail price by 10% to cover the E-Vat tax. If you consider the excise tax and
the import duties, the Net Tax would probably be in the neighborhood of 7%?
We are not going into exact figures I am just trying to deliver a point that
different industries, different products, different services are hit differently. So
its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr.

Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat law
took effect the Sales Tax was also removed as a mitigating measure. So,
therefore, there is no justification to increase the fares by 10% at best 7%,
correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining
on that first day, were being increased arbitrarily by 10%. And thats one
reason among many others this Court had to issue TRO because of the
confusion in the implementation. Thats why we added as an issue in this
case, even if its tangentially taken up by the pleadings of the parties, the
confusion in the implementation of the E-vat. Our people were subjected to
the mercy of that confusion of an across the board increase of 10%, which
you yourself now admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in some cases it should be
6% depending on these mitigating measures and the location and situation of
each product, of each service, of each company, isnt it?
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO

pending the clarification of all these and we wish the government will take
time to clarify all these by means of a more detailed implementing rules, in
case the law is upheld by this Court. . . .[6]
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et
al., filed a petition for prohibition on May 27, 2005. They question the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10%
VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of
goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniform proviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to
12%, effective January 1, 2006, after any of the following conditions have been
satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of

Finance, shall, effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product

(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year

exceeds one and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes

abandonment by Congress of its exclusive authority to fix the rate of taxes under Article
VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for
certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to
increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of
legislative power, petitioners also contend that the increase in the VAT rate to 12%
contingent on any of the two conditions being satisfied violates the due process clause
embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and
additional tax burden on the people, in that: (1) the 12% increase is ambiguous because
it does not state if the rate would be returned to the original 10% if the conditions are no
longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5
of the GDP of the previous year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the
President by the Bicameral Conference Committee is a violation of the no-amendment
rule upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the
Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of
R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the
input tax on depreciable goods shall be amortized over a 60-month
period, if the acquisition, excluding the VAT components, exceeds
One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit
on the amount of input tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the
Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are subject to 10%
VAT under Sections 106 (sale of goods and properties) and 108 (sale
of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being

arbitrary, oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation

of life, liberty or property without due process of law under Article III, Section 1 of the
Constitution. According to petitioners, the contested sections impose limitations on the
amount of input tax that may be claimed. Petitioners also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like any other property or
property right, the input tax credit may be transferred or disposed of, and that by limiting
the same, the government gets to tax a profit or value-added even if there is no profit or
value-added.
Petitioners also believe that these provisions violate the constitutional

guarantee of equal protection of the law under Article III, Section 1 of the Constitution,
as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax;
or (2) invests in capital equipment; or (3) has several transactions with the government,
is not based on real and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive,
violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller
businesses with higher input tax to output tax ratio that will suffer the consequences
thereof for it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph

G. Escudero filed this petition for certiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of

legislative power, in violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting

the no pass on provisions present in Senate Bill No. 1950 and House Bill No.
3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34,

116, 117, 119, 121, 125,[7] 148, 151, 236, 237 and 288, which were present in
Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which
provides that all appropriation, revenue or tariff bills shall originate exclusively in
the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari
and prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground
that the limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, thus violating the principle
that tax collection and revenue should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that allowing these establishments to
pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1)
of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of
respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the
presumption of constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive origination of revenue measures and
the power of the Senate concomitant thereto, have already been settled. With regard to
the issue of undue delegation of legislative power to the President, respondents
contend that the law is complete and leaves no discretion to the President but to
increase the rate to 12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well
as the 70% limitation on the creditable input tax, the 60-month amortization on the
purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final
withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and
that it violates the constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the
governments fiscal reform agenda. A reform in the value-added system of taxation is the
core revenue measure that will tilt the balance towards a sustainable macroeconomic
environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following
provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108 of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2)

and 110(B) of the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and
concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds
from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter,

exchange or lease of goods or properties and services.[8] Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid to the
buyer,[9] with the seller acting merely as a tax collector.[10] The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in, without transferring the burden to someone else.
[11] Examples are individual and corporate income taxes, transfer taxes, and residence
taxes.[12]
In the Philippines, the value-added system of sales taxation has long been in
existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax
computed under the cost deduction method and was payable only by the original
sellers. The single-stage system was subsequently modified, and a mixture of the cost
deduction method and tax credit method was used to determine the value-added tax
payable.[13] Under the tax credit method, an entity can credit against or subtract from
the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[14]
It was only in 1987, when President Corazon C. Aquino issued Executive

Order No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate
of 0% or 10% on all sales using the tax credit method.[15]
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,[16]
R.A. No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or the Tax Reform Act of
1997,[18] and finally, the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral
Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections

4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House

and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input

tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950

regarding other kinds of taxes in addition to the value-added
tax.
Petitioners now beseech the Court to define the powers of the Bicameral
Conference Committee.
It should be borne in mind that the power of internal regulation and discipline
are intrinsic in any legislative body for, as unerringly elucidated by Justice Story, [i]f the
power did not exist, it would be utterly impracticable to transact the business of
the nation, either at all, or at least with decency, deliberation, and order.[19] Thus,
Article VI, Section 16 (3) of the Constitution provides that each House may determine
the rules of its proceedings. Pursuant to this inherent constitutional power to promulgate
and implement its own rules of procedure, the respective rules of each house of
Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives

provides as follows:
Sec. 88. Conference Committee. In the event that the

House does not agree with the Senate on the amendment to
any bill or joint resolution, the differences may be settled by the
conference committees of both chambers.
In resolving the differences with the Senate, the

House panel shall, as much as possible, adhere to and support
the House Bill. If the differences with the Senate are so
substantial that they materially impair the House Bill, the panel
shall report such fact to the House for the latters appropriate
action.
Sec. 89. Conference Committee Reports. . . . Each

report shall contain a detailed, sufficiently explicit statement of
the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be

interpellated on the Conference Committee Report prior to the
voting thereon. The House shall vote on the Conference
Committee Report in the same manner and procedure as it
votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree
with the House of Representatives on the provision of any bill
or joint resolution, the differences shall be settled by a
conference committee of both Houses which shall meet within
ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference
committee with the approval of the Senate.
Each Conference Committee Report shall contain a

detailed and sufficiently explicit statement of the changes in, or
amendments to the subject measure, and shall be signed by a
majority of the members of each House panel, voting
separately.
A comparative presentation of the conflicting House

and Senate provisions and a reconciled version thereof with
the explanatory statement of the conference committee shall
be attached to the report.
...
The creation of such conference committee was apparently in response to a

problem, not addressed by any constitutional provision, where the two houses of
Congress find themselves in disagreement over changes or amendments introduced by
the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to
discipline its members, may the Court then delve into the details of how Congress
complies with its internal rules or how it conducts its business of passing legislation?
Note that in the present petitions, the issue is not whether provisions of the rules of both
houses creating the bicameral conference committee are unconstitutional, but whether
the bicameral conference committee has strictly complied with the rules of both
houses, thereby remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,[20] the Court En
Banc, unanimously reiterated and emphasized its adherence to the enrolled bill
doctrine, thus, declining therein petitioners plea for the Court to go behind the enrolled
copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said committees proceedings, the alleged
violation of said committees of the rules of both houses, and the disappearance or
deletion of one of the provisions in the compromise bill submitted by the bicameral
conference committee. It was argued that such irregularities in the passage of the law
nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the
Senate President and the certification of the Secretaries of both Houses of Congress
that it was passed are conclusive of its due enactment. A review of cases reveals the
Courts consistent adherence to the rule. The Court finds no reason to deviate from
the salutary rule in this case where the irregularities alleged by the petitioners
mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd
Bicameral Conference Committee by the House. This Court is not the proper
forum for the enforcement of these internal rules of Congress, whether House or
Senate. Parliamentary rules are merely procedural and with their observance the
courts have no concern. Whatever doubts there may be as to the formal validity
of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in
Arroyo vs. De Venecia, viz.:
But the cases, both here and

abroad, in varying forms of expression,
all deny to the courts the power to inquire
into allegations that, in enacting a law, a
House of Congress failed to comply with
its own rules, in the absence of showing
that there was a violation of a
constitutional provision or the rights of
private individuals. In Osmea v. Pendatun,
it was held: At any rate, courts have declared
that the rules adopted by deliberative bodies
are subject to revocation, modification or
waiver at the pleasure of the body adopting
them. And it has been said that
Parliamentary rules are merely
procedural, and with their observance,
the courts have no concern. They may be
waived or disregarded by the legislative
body. Consequently, mere failure to
conform to parliamentary usage will not
invalidate the action (taken by a
deliberative body) when the requisite
number of members have agreed to a
particular measure.[21] (Emphasis
supplied)
The foregoing declaration is exactly in point with the present cases, where
petitioners allege irregularities committed by the conference committee in introducing
changes or deleting provisions in the House and Senate bills. Akin to the Farias case,
[22] the present petitions also raise an issue regarding the actions taken by the
conference committee on matters regarding Congress compliance with its own internal
rules. As stated earlier, one of the most basic and inherent power of the legislature is
the power to formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business expeditiously and
in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference
committee if it believes that said members violated any of its rules of proceedings. Even
the expanded jurisdiction of this Court cannot apply to questions regarding only the
internal operation of Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of
Tolentino vs. Secretary of Finance,[23] the Court already made the pronouncement that
[i]f a change is desired in the practice [of the Bicameral Conference Committee] it
must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house. [24] To date,
Congress has not seen it fit to make such changes adverted to by the Court. It seems,
therefore, that Congress finds the practices of the bicameral conference committee to
be very useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the
proceedings of the bicameral conference committees, the Court deems it necessary to
dwell on the issue. The Court observes that there was a necessity for a conference
committee because a comparison of the provisions of House Bill Nos. 3555 and 3705
on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said disagreements were as follows:
House Bill No. House Bill No.3705 Senate Bill No.
3555 1950
With regard to Stand-By Authority in favor of President
Provides for 12% VAT Provides for 12% VAT in Provides for a single rate
on every sale of goods general on sales of goods of 10% VAT on sale of
or properties (amending or properties and reduced goods or properties
Sec. 106 of NIRC); rates for sale of certain (amending Sec. 106 of
12% VAT on locally manufactured goods NIRC), 10% VAT on sale
importation of goods and petroleum products of services including sale
(amending Sec. 107 of and raw materials to be of electricity by
NIRC); and 12% VAT used in the manufacture generation companies,
on sale of services and thereof (amending Sec. 106 transmission and
use or lease of of NIRC); 12% VAT on distribution companies,
properties (amending importation of goods and and use or lease of
Sec. 108 of NIRC) reduced rates for certain properties (amending
imported products including Sec. 108 of NIRC)
petroleum products
(amending Sec. 107 of
NIRC); and 12% VAT on
sale of services and use or
lease of properties and a
reduced rate for certain
services including power
generation (amending Sec.
108 of NIRC)
With regard to the no pass-on provision
No similar provision Provides that the VAT Provides that the VAT
imposed on power imposed on sales of
generation and on the sale electricity by generation
of petroleum products shall companies and services
be absorbed by generation of transmission
companies or sellers, companies and
respectively, and shall not distribution companies,
be passed on to consumers as well as those of
franchise grantees of
electric utilities shall not
apply to residential
end-users. VAT shall be
absorbed by generation,
transmission, and
distribution companies.
With regard to 70% limit on input tax credit
Provides that the input No similar provision Provides that the input
tax credit for capital tax credit for capital
goods on which a VAT goods on which a VAT
has been paid shall be has been paid shall be
equally distributed over equally distributed over 5
5 years or the years or the depreciable
depreciable life of such life of such capital
capital goods; the input goods; the input tax
tax credit for goods and credit for goods and
services other than services other than
capital goods shall not capital goods shall not
exceed 5% of the total exceed 90% of the
amount of such goods output VAT.
and services; and for
persons engaged in
retail trading of goods,
the allowable input tax
credit shall not exceed
11% of the total amount
of goods purchased.
With regard to amendments to be made to NIRC provisions regarding income and

excise taxes
No similar provision No similar provision Provided for amendments
to several NIRC provisions
regarding corporate
income, percentage,
franchise and excise taxes
The disagreements between the provisions in the House bills and the Senate
bill were with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT
imposed on electricity generation, transmission and distribution companies should not
be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on
electricity generation, transmission and distribution companies and the VAT imposed on
sale of petroleum products should not be passed on to consumers, as proposed in the
House bill; (3) in what manner input tax credits should be limited; (4) and whether the
NIRC provisions on corporate income taxes, percentage, franchise and excise taxes
should be amended.
There being differences and/or disagreements on the foregoing provisions of

the House and Senate bills, the Bicameral Conference Committee was mandated by the
rules of both houses of Congress to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the disagreeing
provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would

appear from the Conference Committee Report that the Bicameral Conference
Committee tried to bridge the gap in the difference between the 10% VAT rate proposed
by the Senate, and the various rates with 12% as the highest VAT rate proposed by the
House, by striking a compromise whereby the present 10% VAT rate would be retained
until certain conditions arise, i.e., the value-added tax collection as a percentage of
gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the previous year exceeds 1%, when the
President, upon recommendation of the Secretary of Finance shall raise the rate of VAT
to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on

electricity generation, transmission and distribution companies should not be passed on
to consumers or whether both the VAT imposed on electricity generation, transmission
and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be

limited or not, the Bicameral Conference Committee decided to adopt the position of the
House by putting a limitation on the amount of input tax that may be credited against the
output tax, although it crafted its own language as to the amount of the limitation on
input tax credits and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in
trade or business for which deduction for depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the
estimated useful life of the capital good is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the VAT-
registered person. If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters: PROVIDED
that the input tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any
input tax attributable to zero-rated sales by a VAT-registered person
may at his option be refunded or credited against other internal revenue
taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate
income tax, franchise, percentage and excise taxes, the conference committee decided
to include such amendments and basically adopted the provisions found in Senate Bill
No. 1950, with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and
Senate Rules, the Bicameral Conference Committee is mandated to settle the
differences between the disagreeing provisions in the House bill and the Senate bill.
The term settle is synonymous to reconcile and harmonize.[25] To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a)
adopt the specific provisions of either the House bill or Senate bill, (b) decide that
neither provisions in the House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between
the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference

Committee on disagreeing provisions were meant only to reconcile and harmonize the
disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the
subject embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of
10% VAT wanted by the Senate is retained until such time that certain conditions arise
when the 12% VAT wanted by the House shall be imposed, appears to be a
compromise to try to bridge the difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such compromise is still totally within the subject of
what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the

proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph
Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-on
provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were
thinking that no sector should be a beneficiary of legislative grace, neither should any
sector be discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep
it plain and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds
of the world have a VAT system and in this two-thirds of the globe, I have yet to see a
VAT with a no pass-though provision. So, the thinking of the Senate is basically simple,
lets keep the VAT simple.[26] (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on
provision never really enjoyed the support of either House.[27]
With regard to the amount of input tax to be credited against output tax, the
Bicameral Conference Committee came to a compromise on the percentage rate of the
limitation or cap on such input tax credit, but again, the change introduced by the
Bicameral Conference Committee was totally within the intent of both houses to put a
cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the
House of Representatives, one of the major objectives was to plug a glaring loophole in
the tax policy and administration by creating vital restrictions on the claiming of input
VAT tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are
capping a major leakage that has placed our collection efforts at an apparent
disadvantage.[28]
As to the amendments to NIRC provisions on taxes other than the value-added

tax proposed in Senate Bill No. 1950, since said provisions were among those referred
to it, the conference committee had to act on the same and it basically adopted the
version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference

Committee were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of
discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine Judges Association vs.
Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-
standing legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House. Thus, in the Tolentino
case, it was held that:
. . . it is within the power of a conference committee to include in its report

an entirely new provision that is not found either in the House bill or in the
Senate bill. If the committee can propose an amendment consisting of one or
two provisions, there is no reason why it cannot propose several provisions,
collectively considered as an amendment in the nature of a substitute, so
long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both
houses of Congress to become valid as an act of the legislative department.
The charge that in this case the Conference Committee acted as a third
legislative chamber is thus without any basis.[31] (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the
No-Amendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law

unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to
its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading
of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas
and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference

committee is allowed to add or delete provisions in the House bill and the Senate bill
after these had passed three readings is in effect a circumvention of the no amendment
rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate
from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the

Committees Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there
would be no end to negotiation since each house may seek
modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced
for the first time in either house of Congress, not to the conference committee
report.[32] (Emphasis supplied)
The Court reiterates here that the no-amendment rule refers only to the
procedure to be followed by each house of Congress with regard to bills initiated
in each of said respective houses, before said bill is transmitted to the other
house for its concurrence or amendment. Verily, to construe said provision in a way
as to proscribe any further changes to a bill after one house has voted on it would lead
to absurdity as this would mean that the other house of Congress would be deprived of
its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26
(2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in
bills that have been acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on
Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the
NIRC provisions on corporate income taxes and percentage, excise taxes. Petitioners
refer to the following provisions, to wit:
Section 27 R a t e s o f I n c o m e Ta x o n D o m e s t i c
Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the NIRC did not
at all originate from the House. They aver that House Bill No. 3555 proposed
amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while
House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110
and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended
but which amendments were not found in the House bills are not intended to be
amended by the House of Representatives. Hence, they argue that since the proposed
amendments did not originate from the House, such amendments are a violation of
Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills

authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with
amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555
and 3705 that initiated the move for amending provisions of the NIRC dealing mainly
with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate
came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions
on the value-added tax but also amendments to NIRC provisions on other kinds of
taxes. Is the introduction by the Senate of provisions not dealing directly with the value-
added tax, which is the only kind of tax being amended in the House bills, still within the
purview of the constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case,
wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill

which is required by the Constitution to originate exclusively in
the House of Representatives. It is important to emphasize
this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to
note is that, as a result of the Senate action, a distinct bill may
be produced. To insist that a revenue statute and not only
the bill which initiated the legislative process culminating
in the enactment of the law must substantially be the same
as the House bill would be to deny the Senates power not
only to concur with amendments but also to propose
amendments. It would be to violate the coequality of
legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
Given, then, the power of the Senate to propose amendments, the Senate can
propose its own version even with respect to bills which are required by the
Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the

initiative for filing revenue, tariff or tax bills, bills authorizing an
increase of the public debt, private bills and bills of local
application must come from the House of Representatives on
the theory that, elected as they are from the districts, the
members of the House can be expected to be more
sensitive to the local needs and problems. On the other
hand, the senators, who are elected at large, are expected
to approach the same problems from the national
perspective. Both views are thereby made to bear on the
enactment of such laws.[33] (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the
House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes, percentage,
excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC

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

administration is the urgent and daunting task of solving the
countrys serious financial problems. To do this, government
expenditures must be strictly monitored and controlled and
revenues must be significantly increased. This may be easier
said than done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget by the year
2009. In fact, several measures that will result to significant
expenditure savings have been identified by the administration.
It is supported with a credible package of revenue
measures that include measures to improve tax
administration and control the leakages in revenues from
income taxes and the value-added tax (VAT). (Emphasis
supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555,
declared that:
In the budget message of our President in the year

2005, she reiterated that we all acknowledged that on top of
our agenda must be the restoration of the health of our fiscal
system.
In order to considerably lower the consolidated public

sector deficit and eventually achieve a balanced budget by the
year 2009, we need to seize windows of opportunities
which might seem poignant in the beginning, but in the
long run prove effective and beneficial to the overall
status of our economy. One such opportunity is a review
of existing tax rates, evaluating the relevance given our
present conditions.[34] (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration
and control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the measures
from the point of national perspective, can introduce amendments within the purposes
of those bills. It can provide for ways that would soften the impact of the VAT measure
on the consumer, i.e., by distributing the burden across all sectors instead of putting it
entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph
Recto on why the provisions on income tax on corporation were included is worth
quoting:
All in all, the proposal of the Senate Committee on

Ways and Means will raise P64.3 billion in additional revenues
annually even while by mitigating prices of power, services and
petroleum products.
However, not all of this will be wrung out of VAT. In

fact, only P48.7 billion amount is from the VAT on twelve goods
and services. The rest of the tab P10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing

between corporate Philippines and the consumer. Why should
the latter bear all the pain? Why should the fiscal salvation be
only on the burden of the consumer?
The corporate worlds equity is in form of the increase

in the corporate income tax from 32 to 35 percent, but up to
2008 only. This will raise P10.5 billion a year. After that, the
rate will slide back, not to its old rate of 32 percent, but two
notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay,

corporations, to bear with this emergency provision that will be
in effect for 1,200 days, while we put our fiscal house in order.
This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits

them. We intend to keep the length of their sacrifice brief. We
would like to assure them that not because there is a light at
the end of the tunnel, this government will keep on making the
tunnel long.
The responsibility will not rest solely on the weary
shoulders of the small man. Big business will be there to share
the burden.[35]
As the Court has said, the Senate can propose amendments and in fact, the
amendments made on provisions in the tax on income of corporations are germane to
the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise
taxes germane to the reforms to the VAT system, as these sections would cushion the
effects of VAT on consumers. Considering that certain goods and services which were
subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer
would be burdened more as they would be paying the VAT in addition to these taxes.
Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his
sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax
on bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the

franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the

VAT on oil products, so as not to destroy the VAT chain, we will
however bring down the excise tax on socially sensitive
products such as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not

contortions of giving to the left hand what was taken from the
right. Rather, these sprang from our concern of softening the
impact of VAT, so that the people can cushion the blow of
higher prices they will have to pay as a result of VAT.[36]
The other sections amended by the Senate pertained to matters of tax

administration which are necessary for the implementation of the changes in the VAT
system.
To reiterate, the sections introduced by the Senate are germane to the subject
matter and purposes of the house bills, which is to supplement our countrys fiscal
deficit, among others. Thus, the Senate acted within its power to propose those
amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of
the NIRC, violate the following provisions of the Constitution:
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and
Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the
stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is
met, constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further

amended to read as follows:
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, a 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: provided, that the
President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied.
(i) value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the

previous year exceeds one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further

SEC. 107. Value-Added Tax on Importation of Goods.

(A) In General. There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining
tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of
such goods from customs custody: Provided, That where the customs
duties are determined on the basis of the quantity or volume of the goods,
the value-added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%) after any of the
following conditions has been satisfied.

percent (2 4/5%) or
previous year exceeds one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further

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

Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services: provided, that the President,
upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been
satisfied.

percent (2 4/5%) or
previous year exceeds one and one-half percent (1 %). (Emphasis
supplied)
Petitioners allege that the grant of the stand-by authority to the President to
increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax
because such delegation is not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national development program of the
government.
They argue that the VAT is a tax levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services, which cannot be
included within the purview of tariffs under the exempted delegation as the latter refers
to customs duties, tolls or tribute payable upon merchandise to the government and
usually imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating
to the President the legislative power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate the actions of Congress
and they should not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the Presidents power of control, which
includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause,
influence or create the conditions provided by the law to bring about either or both the
conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the
situation that the imposition of the 12% rate would be subject to the whim of the
Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation
without representation. They submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even give his recommendation.
Moreover, they allege that no guiding standards are provided in the law on what basis
and as to how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great
branches of government has exclusive cognizance of and is supreme in matters falling
within its own constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of
powers, as expressed in the Latin maxim: potestas delegata non delegari potest which
means what has been delegated, cannot be delegated.[38] This doctrine is based on
the ethical principle that such as delegated power constitutes not only a right but a duty
to be performed by the delegate through the instrumentality of his own judgment and
not through the intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of the Constitution
provides that the Legislative power shall be vested in the Congress of the Philippines
which shall consist of a Senate and a House of Representatives. The powers which
Congress is prohibited from delegating are those which are strictly, or inherently and
exclusively, legislative. Purely legislative power, which can never be delegated, has
been described as the authority to make a complete law complete as to the time
when it shall take effect and as to whom it shall be applicable and to determine
the expediency of its enactment.[40] Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature that is, one appertaining
exclusively to the legislative department. It is the nature of the power, and not the
liability of its use or the manner of its exercise, which determines the validity of its
delegation.
Nonetheless, the general rule barring delegation of legislative powers is

subject to the following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI
of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the

delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth
therein the policy to be executed, carried out, or implemented by the delegate;[41] and
(b) fixes a standard the limits of which are sufficiently determinate and determinable to
which the delegate must conform in the performance of his functions.[42] A sufficient
standard is one which defines legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it. It indicates the circumstances under which
the legislative command is to be effected.[43] Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is not allowed to step into the
shoes of the legislature and exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel,
expounded on the concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue

delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and
provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or
delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to
make the law, which necessarily involves a discretion as to what it shall be, and
conferring an authority or discretion as to its execution, to be exercised under
and in pursuance of the law. The first cannot be done; to the latter no valid
objection can be made.
...
It is contended, however, that a legislative act may be

made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain
contingencies, as by proclamation of the executive or the
adoption by the people of a particular community. In Wayman
vs. Southard, the Supreme Court of the United States ruled
that the legislature may delegate a power not legislative which
it may itself rightfully exercise. The power to ascertain facts
is such a power which may be delegated. There is nothing
essentially legislative in ascertaining the existence of
facts or conditions as the basis of the taking into effect of
a law. That is a mental process common to all branches of
the government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative
authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in
the following language speaking of declaration of legislative
power to administrative agencies: The principle which
permits the legislature to provide that the administrative
agent may determine when the circumstances are such as
require the application of a law is defended upon the
ground that at the time this authority is granted, the rule of
public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the
legislature, as it is its duty to do, determines that, under
given circumstances, certain executive or administrative
action is to be taken, and that, under other circumstances,
different or no action at all is to be taken. What is thus left
to the administrative official is not the legislative
determination of what public policy demands, but simply
the ascertainment of what the facts of the case require to
be done according to the terms of the law by which he is
governed. The efficiency of an Act as a declaration of
legislative will must, of course, come from Congress, but
the ascertainment of the contingency upon which the Act
shall take effect may be left to such agencies as it may
designate. The legislature, then, may provide that a law
shall take effect upon the happening of future specified
contingencies leaving to some other person or body the
power to determine when the specified contingency has
arisen. (Emphasis supplied).[46]
In Edu vs. Ericta,[47] the Court reiterated:
What cannot be delegated is the authority under the

Constitution to make laws and to alter and repeal them; the
test is the completeness of the statute in all its terms and
provisions when it leaves the hands of the legislature. To
determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and
definiteness of the measure enacted. The legislative does
not abdicate its functions when it describes what job must
be done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the only way
in which the legislative process can go forward. A distinction
has rightfully been made between delegation of power to
make the laws which necessarily involves a discretion as
to what it shall be, which constitutionally may not be done,
and delegation of authority or discretion as to its
execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The
Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).[48]
Clearly, the legislature may delegate to executive officers or bodies the power
to determine certain facts or conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the legislature must
prescribe sufficient standards, policies or limitations on their authority.[49] While the
power to tax cannot be delegated to executive agencies, details as to the enforcement
and administration of an exercise of such power may be left to them, including the
power to determine the existence of facts on which its operation depends.[50]
The rationale for this is that the preliminary ascertainment of facts as basis for
the enactment of legislation is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and making recommendations is the
kind of subsidiary activity which the legislature may perform through its members, or
which it may delegate to others to perform. Intelligent legislation on the complicated
problems of modern society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such information is
proper.[51] The Constitution as a continuously operative charter of government does not
require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself
detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself
properly to investigate.[52]
In the present case, the challenged section of R.A. No. 9337 is the common
proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of

Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic

percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous

year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has made the operation of the
12% rate effective January 1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12% rate upon factual matters
outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of

discretion is the fact that the word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion.[53] Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice
but to see to it that the mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to immediately impose the 12%
rate upon the existence of any of the conditions specified by Congress. This is a duty
which cannot be evaded by the President. Inasmuch as the law specifically uses the
word shall, the exercise of discretion by the President does not come into play. It is a
clear directive to impose the 12% VAT rate when the specified conditions are present.
The time of taking into effect of the 12% VAT rate is based on the happening of a certain
specified contingency, or upon the ascertainment of certain facts or conditions by a
person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO

Party List, et al. that the law effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the
phrase upon the recommendation of the Secretary of Finance. Neither does the Court
find persuasive the submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the President since the
former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the
President, it simply means that as head of the Department of Finance he is the assistant
and agent of the Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and through the executive
departments, and the acts of the secretaries of such departments, such as the
Department of Finance, performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of
the Chief Executive. The Secretary of Finance, as such, occupies a political position
and holds office in an advisory capacity, and, in the language of Thomas Jefferson,
"should be of the President's bosom confidence" and, in the language of Attorney-
General Cushing, is subject to the direction of the President."[55]
In the present case, in making his recommendation to the President on the

existence of either of the two conditions, the Secretary of Finance is not acting as the
alter ego of the President or even her subordinate. In such instance, he is not subject to
the power of control and direction of the President. He is acting as the agent of the
legislative department, to determine and declare the event upon which its expressed will
is to take effect.[56] The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present. His
personality in such instance is in reality but a projection of that of Congress. Thus, being
the agent of Congress and not of the President, the President cannot alter or modify or
nullify, or set aside the findings of the Secretary of Finance and to substitute the
judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain

the existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1%). If
either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must
be imposed by the President effective January 1, 2006. There is no undue delegation
of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.[57] Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only way in
which the legislative process can go forward.[58]
As to the argument of petitioners ABAKADA GURO Party List, et al. that

delegating to the President the legislative power to tax is contrary to the principle of
republicanism, the same deserves scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law. The intent and will to increase the
VAT rate to 12% came from Congress and the task of the President is to simply execute
the legislative policy. That Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret the law.[59]
The insinuation by petitioners Pimentel, et al. that the President has ample powers to
cause, influence or create the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is highly speculative. The Court
does not rule on allegations which are manifestly conjectural, as these may not exist at
all. The Court deals with facts, not fancies; on realities, not appearances. When the
Court acts on appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional
Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an
unfair and additional tax burden on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in the contested provisions, is
ambiguous because it does not state if the VAT rate would be returned to the original
10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair
and unreasonable, as the people are unsure of the applicable VAT rate from year to
year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of
the two conditions set forth therein are satisfied, the President shall increase the VAT
rate to 12%. The provisions of the law are clear. It does not provide for a return to the
10% rate nor does it empower the President to so revert if, after the rate is increased to
12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the
national government deficit as a percentage of GDP of the previous year does not
exceed 1%.
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.[60]
Thus, in the absence of any provision providing for a return to the 10% rate,
which in this case the Court finds none, petitioners argument is, at best, purely
speculative. There is no basis for petitioners fear of a fluctuating VAT rate because the
law itself does not provide that the rate should go back to 10% if the conditions provided
in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the
law is clear and unambiguous, so that there is no occasion for the court's seeking the
legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.
[61]
Petitioners also contend that the increase in the VAT rate, which was allegedly
an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of
the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only
condition. There is another condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have

economic or fiscal meaning. If VAT/GDP is less than 2.8%, it
means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the function
of the tax collection. Therefore, there is no value to increase it
to 12% because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP

is 1.5% or less means the fiscal condition of government has
reached a relatively sound position or is towards the direction
of a balanced budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.[62]
That the first condition amounts to an incentive to the President to increase the
VAT collection does not render it unconstitutional so long as there is a public purpose for
which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was

originally stated by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep
out of the pockets of the people as little as possible
over and above what it brings into the public treasury
of the state.[63]
It simply means that sources of revenues must be adequate to meet

government expenditures and their variations.[64]
The dire need for revenue cannot be ignored. Our country is in a quagmire of
financial woe. During the Bicameral Conference Committee hearing, then Finance
Secretary Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines

finds itself in right now. We are in a position where 90 percent
of our revenue is used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt service. Thats
interest plus amortization of our debt. So clearly, this is not a
sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way

out of line compared to other peer countries that borrow money
from that international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that
this is not a sustainable situation.
The third thing that Id like to point out is the

environment that we are presently operating in is not as benign
as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we

were operating in a period of basically global growth and low
interest rates. The past few months, we have seen an inching
up, in fact, a rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability to borrow at
reasonable prices is going to be challenged. In fact, ultimately,
the question is our ability to access the financial markets.
When the President made her speech in July last
year, the environment was not as bad as it is now, at least
based on the forecast of most financial institutions. So, we
were assuming that raising 80 billion would put us in a position
where we can then convince them to improve our ability to
borrow at lower rates. But conditions have changed on us
because the interest rates have gone up. In fact, just within this
room, we tried to access the market for a billion dollars
because for this year alone, the Philippines will have to borrow
4 billion dollars. Of that amount, we have borrowed 1.5 billion.
We issued last January a 25-year bond at 9.7 percent cost. We
were trying to access last week and the market was not as
favorable and up to now we have not accessed and we might
pull back because the conditions are not very good.
So given this situation, we at the Department of

Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of
the debt and we are in what we call a debt spiral. The more
debt you have, the more deficit you have because interest and
debt service eats and eats more of your revenue. We need to
get out of this debt spiral. And the only way, I think, we can get
out of this debt spiral is really have a front-end adjustment in
our revenue base.[65]
The image portrayed is chilling. Congress passed the law hoping for rescue
from an inevitable catastrophe. Whether the law is indeed sufficient to answer the states
economic dilemma is not for the Court to judge. In the Farias case, the Court refused to
consider the various arguments raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court.

Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to
look into the wisdom or propriety of legislative determination.
Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best means
to achieve the desired results, whether, in short, the legislative
discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the
legislature, and the serious conflict of opinions does not suffice
to bring them within the range of judicial cognizance.[66]
In the same vein, the Court in this case will not dawdle on the purpose of
Congress or the executive policy, given that it is not for the judiciary to "pass upon
questions of wisdom, justice or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:

b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section
8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No.
9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right against deprivation
of life, liberty of property without due process of law, as embodied in Article III, Section 1
of the Constitution.
Petitioners also contend that these provisions violate the constitutional

guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.[68]
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output tax. It
states, in part: [P]rovided, that the input tax inclusive of the input VAT carried over from
the previous quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT:
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added
tax due from or paid by a VAT-registered person on the importation of goods or local
purchase of good and services, including lease or use of property, in the course of trade
or business, from a VAT-registered person, and Output Tax is the value-added tax due
on the sale or lease of taxable goods or properties or services by any person registered
or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount
of input tax that may be claimed. In effect, a portion of the input tax that has already
been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds
70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited.
However, to the extent that the input tax is less than 70% of the output tax, then 100%
of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books
of accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed
by Section 110(B), which provides that if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. In addition, Section
112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate
or refund for any unused input taxes, to the extent that such input taxes have not been
applied against the output taxes. Such unused input tax may be used in payment of his
other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad

infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70%
limitation is incomplete and one-sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the
fact that such unapplied/unutilized input tax may be credited in the subsequent periods
as allowed by the carry-over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the
operation of the 70% limitation on the input tax. According to petitioner, the limitation on
the creditable input tax in effect allows VAT-registered establishments to retain a portion
of the taxes they collect, which violates the principle that tax collection and revenue
should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by
the seller, when he buys goods. Output tax meanwhile is the tax due to the person when
he sells goods. In computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller
are equal to the input taxes that he paid and passed on by the suppliers, then no
payment is required;
Second, when the output taxes exceed the input taxes, the person shall be
liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR);[69]
and
Third, if the input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter or quarters. Should the input taxes result from zero-
rated or effectively zero-rated transactions, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other internal revenue taxes, at
the taxpayers option.[70]
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax.
Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In
laymans term, the value-added taxes that a person/taxpayer paid and passed on to him
by a seller can only be credited up to 70% of the value-added taxes that is due to him
on a taxable transaction. There is no retention of any tax collection because the person/
taxpayer has already previously paid the input tax to a seller, and the seller will
subsequently remit such input tax to the BIR. The party directly liable for the payment of
the tax is the seller.[71] What only needs to be done is for the person/taxpayer to apply
or credit these input taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the
input tax partakes the nature of a property that may not be confiscated, appropriated, or
limited without due process of law.
The input tax is not a property or a property right within the constitutional
purview of the due process clause. A VAT-registered persons entitlement to the
creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in
mind for persons have no vested rights in statutory privileges. The state may change or
take away rights, which were created by the law of the state, although it may not take
away property, which was vested by virtue of such rights.[72]
Under the previous system of single-stage taxation, taxes paid at every level of
distribution are not recoverable from the taxes payable, although it becomes part of the
cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No.
273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the
input tax paid on purchase or importation of goods and services by VAT-registered
persons against the output tax was introduced.[73] This was adopted by the Expanded
VAT Law (R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).[75] The
right to credit input tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory,

Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar month for
use in trade or business for which deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the
estimated useful life of the capital goods is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over such a shorter period:
Provided, finally, That in the case of purchase of services, lease or use of properties,
the input tax shall be creditable to the purchaser, lessee or license upon payment of the
compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the
creditable input tax on purchase or importation of capital goods with acquisition cost of
P1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay
in the crediting of the input tax. Petitioners argument is without basis because the
taxpayer is not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the

creditable input tax in this case amounts to a 4-year interest-free loan to the
government.[76] In the same breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6 billion.[77] The legislature
also dispelled the fear that the provision will fend off foreign investments, saying that
foreign investors have other tax incentives provided by law, and citing the case of
China, where despite a 17.5% non-creditable VAT, foreign investments were not
deterred.[78] Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot
intervene.
With regard to the 5% creditable withholding tax imposed on payments made

by the government for taxable transactions, Section 12 of R.A. No. 9337, which
amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government

or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106 and
108 of this Code, deduct and withhold a final value-added tax
at the rate of five percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall

be remitted within ten (10) days following the end of the month
the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by

respondents, a more simplified VAT withholding system. The government in this case is
constituted as a withholding agent with respect to their payments for goods and
services.
Prior to its amendment, Section 114(C) provided for different rates of value-
added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on
gross payments for services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by public work contractors;
or 10% on payment for the lease or use of properties or property rights to nonresident
owners. Under the present Section 114(C), these different rates, except for the 10% on
lease or property rights payment to nonresidents, were deleted, and a uniform rate of
5% is applied.
The Court observes, however, that the law the used the word final. In tax
usage, final, as opposed to creditable, means full. Thus, it is provided in Section 114(C):
final value-added tax at the rate of five percent (5%).
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax
Reform Act of 1997), the concept of final withholding tax on income was explained, to
wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding

tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of
the income tax due from the payee on the said income. The
liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the
tax or in case of underwithholding, the deficiency tax shall be
collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable

withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax
due of the payee on said income. Taxes withheld on income
payments covered by the expanded withholding tax (referred to
in Sec. 2.57.2 of these regulations) and compensation income
(referred to in Sec. 2.78 also of these regulations) are
creditable in nature.
As applied to value-added tax, this means that taxable transactions with the
government are subject to a 5% rate, which constitutes as full payment of the tax
payable on the transaction. This represents the net VAT payable of the seller. The other
5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the
actual input VAT directly or attributable to the taxable transaction.[79]
The Court need not explore the rationale behind the provision. It is clear that
Congress intended to treat differently taxable transactions with the government.[80] This
is supported by the fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax.

The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment
on account of each purchase of goods from sellers and
services rendered by contractors which are subject to the
value-added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold the value-added tax due at the rate
of three percent (3%) of the gross payment for the purchase of
goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax
liability of the seller or contractor: Provided, however, That
in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of
properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of
payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable
exhibits Congresss intention to treat transactions with the government differently. Since
it has not been shown that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It
applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners
believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax
Regulations 2005 issued by the BIR, provides that should the actual input tax exceed
5% of gross payments, the excess may form part of the cost. Equally, should the actual
input tax be less than 5%, the difference is treated as income.[81]
Petitioners also argue that by imposing a limitation on the creditable input tax,
the government gets to tax a profit or value-added even if there is no profit or value-
added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided.

The Court will not engage in a legal joust where premises are what ifs, arguments,
theoretical and facts, uncertain. Any disquisition by the Court on this point will only be,
as Shakespeare describes life in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the proposition that there is no

profit or value-added. It need not take an astute businessman to know that it is a matter
of exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that no person or
class of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances.[83]
The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the
methods of assessment, valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent
a clear showing of unreasonableness, discrimination, or arbitrariness.[84]
Petitioners point out that the limitation on the creditable input tax if the entity
has a high ratio of input tax, or invests in capital equipment, or has several transactions
with the government, is not based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does not make any
classification in the subject of taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear different consequences. While the
implementation of the law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the legislature has laid down
and interfere with the affairs of business.
The equal protection clause does not require the universal application of the
laws on all persons or things without distinction. This might in fact sometimes result in
unequal protection. What the clause requires is equality among equals as determined
according to a valid classification. By classification is meant the grouping of persons or
things similar to each other in certain particulars and different from all others in these
same particulars.[85]
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by
Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House
Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the
70% limitation by increasing the same to 90%. This, according to petitioners, supports
their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it
to say that these are still proposed legislations. Until Congress amends the law, and
absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable.

The Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class everywhere with all people
at all times.[86]
In this case, the tax law is uniform as it provides a standard rate of 0% or 10%
(or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or
12%) on sale of goods and properties, importation of goods, and sale of services and
use or lease of properties. These same sections also provide for a 0% rate on certain
sales and transaction.
Neither does the law make any distinction as to the type of industry or trade
that will bear the 70% limitation on the creditable input tax, 5-year amortization of input
tax paid on purchase of capital goods or the 5% final withholding tax by the government.
It must be stressed that the rule of uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only demands uniformity within the particular
class.[87]
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin.
The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with
gross annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and
agricultural food products in their original state are still not subject to the tax,[89] thus
ensuring that prices at the grassroots level will remain accessible. As was stated in
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]
The disputed sales tax is also equitable. It is imposed

only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt from the tax are
sales of farm and marine products, so that the costs of basic
food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and
within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit
margins, and unduly favors those with high profit margins. Congress was not oblivious
to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This
acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage
and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the

imposition of the tax on those previously exempt. Excise taxes on petroleum
products[91] and natural gas[92] were reduced. Percentage tax on domestic carriers
was removed.[93] Power producers are now exempt from paying franchise tax.[94]
Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-
resident corporations are now subject to a 35% income tax rate, from a previous 32%.
[95] Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporations domicile was
increased to 20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR)
is not exempt from income taxes anymore.[97] Even the sale by an artist of his works or
services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation,
which would otherwise rest largely on the consumers. It cannot therefore be gainsaid
that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is
anything but regressive. It is the smaller business with higher input tax-output tax ratio
that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This
principle was also lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of

the government, as nearly as possible, in proportion
to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up depending on the resources of
the person affected.[98]
The VAT is an antithesis of progressive taxation. By its very nature, it is

regressive. The principle of progressive taxation has no relation with the VAT system
inasmuch as the VAT paid by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small.
The disparity lies in the income earned by a person or profit margin marked by a
business, such that the higher the income or profit margin, the smaller the portion of the
income or profit that is eaten by VAT. A converso, the lower the income or profit margin,
the bigger the part that the VAT eats away. At the end of the day, it is really the lower
income group or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect
taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the

imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall evolve a
progressive system of taxation. The constitutional provision
has been interpreted to mean simply that direct taxes are . . .
to be preferred [and] as much as possible, indirect taxes
should be minimized. (E. FERNANDO, THE CONSTITUTION
OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the
mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, 17 (1) of the 1973
Constitution from which the present Art. VI, 28 (1) was taken.
Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not
avoided entirely because it is difficult, if not impossible, to avoid
them by imposing such taxes according to the taxpayers' ability
to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No.
7716, 4 amending 103 of the NIRC)[99]
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it
is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is
neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have
the panacea for the malady that the law seeks to remedy. As in other cases, the Court
cannot strike down a law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for

every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many
wrongs the judicature may not correct, for instance, those
involving political questions. . . .
Let us likewise disabuse our minds from the notion

that the judiciary is the repository of remedies for all political or
social ills; We should not forget that the Constitution has
judiciously allocated the powers of government to three distinct
and separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either by
impeachment, trial or by the ballot box.[100]
The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds
true now. All things considered, there is no raison d'tre for the unconstitutionality of R.A.
No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions
in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and

implementation of R.A. No. 9337, the temporary restraining order issued by the Court
on July 1, 2005 is LIFTED upon finality of herein decision. SO ORDERED.
2
MINDANAO II GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL
REVENUE March 11, 2013 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 No. Period Covered Date of Filing
(2003)
Original Return Amended Return
7227 1st Quarter April 23, 2003 July 3, 2002 (sic),

April 1, 2004 &
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204
Considering that it has accumulated unutilized creditable input taxes from its only
income-generating activity, Mindanao II filed an application for refund and/or issuance of
tax credit certificate with the BIR’s Revenue District Office at Kidapawan City on April
13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains
unacted upon by the CIR. Hence, these three petitions filed on April 22, 2005 covering
the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9,
2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao II, these petitions
were consolidated on March 15, 2006 as they involve the same parties and the same
subject matter. The only difference lies with the taxable periods involved in each
petition.11
The Court of Tax Appeals’ Ruling:

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 No. Covered
(2003) Original Amended Administrative Judicial Claim
Return Return Return
7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005
7287 2nd Quarter 22 July 2003 1 April 2004 13 April 2005 7 July 2005
7317 3rd Quarter 25 Oct. 2003 1 April 2004 13 April 2005 9 Sept. 2005
7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 2005
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.
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.
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.
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.
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.
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.
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).
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.
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
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.
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.
G.R. No. 194637

Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed
pursuant to the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the controlling ruling at the time of
filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made as
the reckoning date in counting the two-year prescriptive period, cannot be applied
retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8,
2007 was not and cannot be superseded by the Mirant Pagbilao case promulgated by
the Second Division of this Honorable Court on September 12, 2008 in light of the
explicit provision of Section 4(3), Article VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal
Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied retroactively to
Mindanao I in the present case.41
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R.
Nos. 193301 and 194637 to avoid conflicting rulings in related cases.
The Court’s Ruling
Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the
prescriptive period, or the interpretation of Section 112 of the 1997 Tax Code, in light of
our rulings in Atlas and Mirant.
Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in
the amounts of ₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R.
No. 193301, while Mindanao I’s unutilized input VAT tax credit for the first, second, third,
and fourth quarters of 2003, in the amounts of ₱3,893,566.14, ₱2,351,000.83, and
₱7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao
II’s and Mindanao I’s administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated
Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: Provided, however, That in the
case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)
(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated proportionately on
the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of submission
of complete documents in support of the application filed in accordance with
Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA Period Close of Last day Actual date of Last day Actual
Case covered by quarter for filing filing for Date
No. VAT Sales in when applicatio application for filing case of filing
2003 and sales n tax refund/ with CTA45 case
amount were of tax credit with the with CTA
made refund/tax CIR (judicial
credit (administrativ claim)
certificate e
with the claim)44
CIR
7227 1st Quarter, 31 March 31 March 13 April 2005 12 22 April

₱3,160,984.6 2003 2005 September 2005
9 2005
7287 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July

₱1,562,085.3 2003 2005 September 2005
3 2005
7317 3rd and 4th 30 30 13 April 2005 12 9

Quarters, Septembe Septembe September Septembe
₱3,521,129.5 r r 2005 r
0 2003 2005 2005
31 2 January
December 2006
2003 (31
December
2005
being
a
Saturday)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA Period Close of Last day Actual date of Last day for Actual Date
Cas covered by quarter for filing filing filing case of filing case
e VAT Sales in when application application for with CTA47 with CTA
No. 2003 and sales of tax tax refund/ (judicial
amount were refund/tax credit with the claim)
made credit CIR
certificate (administrativ
with the e
CIR claim)46
7227 1st Quarter, 31 March 31 March 4 April 2005 1 22 April

₱3,893,566.1 2003 2005 September 2005
4 2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 7 July 2005

₱2,351,000.8 2003 2005 September
3 2005
7317 3rd 30 30 4 April 2005 1 9

and 4th Septembe September September September
Quarters, r 2005 2005 2005
₱7,940,727.8 2003
3
31 2 January
December 2006
2003 (31
December
2005
being
a
Saturday)
When Mindanao II and Mindanao I filed their respective administrative and judicial
claims in 2005, neither Atlas nor Mirant has been promulgated. Atlas was promulgated
on 8 June 2007, while Mirant was promulgated on 12 September 2008. It is therefore
misleading to state that Atlas was the controlling doctrine at the time of filing of the
claims. The 1997 Tax Code, which took effect on 1 January 1998, was the applicable
law at the time of filing of the claims in issue. As this Court explained in the recent
consolidated cases of Commissioner of Internal Revenue v. San Roque Power
Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and
Philex Mining Corporation v. Commissioner of Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly
given by law to the Commissioner to decide whether to grant or deny San Roque’s
application for tax refund or credit. It is indisputable that compliance with the 120-day
waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60
days only, was part of the provisions of the first VAT law, Executive Order No. 273,
which took effect on 1 January 1988. The waiting period was extended to 120 days
effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the
waiting period has been in our statute books for more than fifteen (15) years before San
Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law.
It violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with
cases upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund
or credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special
jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly
provides that if the Commissioner fails to decide within "a specific period" required by
law, such "inaction shall be deemed a denial" of the application for tax refund or credit. It
is the Commissioner’s decision, or inaction "deemed a denial," that the taxpayer can
take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of
the Commissioner, the CTA has no jurisdiction over a petition for review.
San Roque’s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roque’s void petition for review cannot be legitimized by
the CTA or this Court because Article 5 of the Civil Code states that such void petition
cannot be legitimized "except when the law itself authorizes its validity." There is no law
authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory

provision of law cannot claim or acquire any right from his void act. A right cannot spring
in favor of a person from his own void or illegal act. This doctrine is repeated in Article
2254 of the Civil Code, which states, "No vested or acquired right can arise from acts or
omissions which are against the law or which infringe upon the rights of others." For
violating a mandatory provision of law in filing its petition with the CTA, San Roque
cannot claim any right arising from such void petition. Thus, San Roque’s petition with
the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional
nature of the 120-day period just because the Commissioner merely asserts that the
case was prematurely filed with the CTA and does not question the entitlement of San
Roque to the refund. The mere fact that a taxpayer has undisputed excess input VAT, or
that the tax was admittedly illegally, erroneously or excessively collected from him, does
not entitle him as a matter of right to a tax refund or credit. Strict compliance with the
mandatory and jurisdictional conditions prescribed by law to claim such tax refund or
credit is essential and necessary for such claim to prosper. Well-settled is the rule that
tax refunds or credits, just like tax exemptions, are strictly construed against the
taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions
for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law
simply because the Commissioner chose not to contest the numerical correctness of the
claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods,
non-observance of prescriptive periods, and non-adherence to exhaustion of
administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not
the Commissioner questions the numerical correctness of the claim of the taxpayer. This
Court should not establish the precedent that non-compliance with mandatory and
jurisdictional conditions can be excused if the claim is otherwise meritorious, particularly
in claims for tax refunds or credit. Such precedent will render meaningless compliance
with mandatory and jurisdictional requirements, for then every tax refund case will have
to be decided on the numerical correctness of the amounts claimed, regardless of non-
compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque
failed to comply with the 120-day period. Thus, San Roque cannot invoke the Atlas
doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event,
the Atlas doctrine merely stated that the two-year prescriptive period should be counted
from the date of payment of the output VAT, not from the close of the taxable quarter
when the sales involving the input VAT were made. The Atlas doctrine does not
interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the original;
citations omitted)
Prescriptive Period for

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

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

the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have
been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997
Tax Code is clear: "In case of full or partial denial of the claim for tax refund or tax credit,
or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in
San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the taxpayer’s claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from
the date of submission of complete documents." Following the verba legis doctrine, this
law must be applied exactly as worded since it is clear, plain, and unequivocal. The
taxpayer cannot simply file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day mandatory and jurisdictional period. The
CTA will have no jurisdiction because there will be no "decision" or "deemed a denial"
decision of the Commissioner for the CTA to review. In San Roque’s case, it filed its
petition with the CTA a mere 13 days after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day
period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA
the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine,
this law should be applied exactly as worded since it is clear, plain, and unequivocal. As
this law states, the taxpayer may, if he wishes, appeal the decision of the Commissioner
to the CTA within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the
taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day
period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily fall
within the two-year prescriptive period, as long as the administrative claim is filed within
the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may,
within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of the creditable input tax due
or paid to such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which means at anytime
within two years. Thus, the application for refund or credit may be filed by the taxpayer
with the Commissioner on the last day of the two-year prescriptive period and it will still
strictly comply with the law. The two-year prescriptive period is a grace period in favor of
the taxpayer and he can avail of the full period before his right to apply for a tax refund
or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection
(A)." The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to the period
within which the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the judicial
claim with the CTA but to the filing of the administrative claim with the Commissioner. As
held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or
refund’ refers to applications for refund/credit with the CIR and not to appeals made to
the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year
prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610
days will result in the appeal to the CTA being filed beyond the two-year prescriptive
period. Thus, if the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st day to decide the claim.
If the Commissioner decides only on the 731st day, or does not decide at all, the
taxpayer can no longer file his judicial claim with the CTA because the two-year
prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by
law to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the
taxpayer complied with the law by filing his administrative claim within the two-year
prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds
a condition that is not found in the law. It results in truncating 120 days from the 730
days that the law grants the taxpayer for filing his administrative claim with the
Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a
remedy that the law expressly grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime
within the two-year prescriptive period. If he files his claim on the last day of the two-
year prescriptive period, his claim is still filed on time. The Commissioner will have 120
days from such filing to decide the claim. If the Commissioner decides the claim on the
120th day, or does not decide it on that day, the taxpayer still has 30 days to file his
judicial claim with the CTA. This is not only the plain meaning but also the only logical
interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03
from the time of its issuance on 10 December 2003 up to its reversal in Aichi on 6
October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional."51 We shall discuss later the effect of San Roque’s recognition of BIR
Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010.
Mindanao I and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters
of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second, third, and fourth quarters of
2003 on 13 April 2005. Counting 120 days after filing of the administrative claim with the
CIR (11 August 2005) and 30 days after the CIR’s denial by inaction, the last day for
filing a judicial claim with the CTA for the second, third, and fourth quarters of 2003 was
on 12 September 2005. However, the judicial claim cannot be filed earlier than 11
August 2005, which is the expiration of the 120-day period for the Commissioner to act
on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7
July 2005, before the expiration of the 120-day period. Pursuant to Section 112(C) of
the 1997 Tax Code, Mindanao II’s judicial claim for the second quarter of 2003 was
prematurely filed.
However, pursuant to San Roque’s recognition of the effect of BIR Ruling No.
DA-489-03, we rule that Mindanao II’s judicial claim for the second quarter of 2003
qualifies under the exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for the third quarter of 2003 was thus filed
on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9
September 2005. Mindanao II’s judicial claim for the fourth quarter of 2003 was thus
filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R. No. 194637

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

In the consolidated cases of San Roque, the Court En 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, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to

BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to

Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to

1997 Tax Code
G.R. No. 194637
Mindanao I v. CIR
Administrative Judicial Claim Action on Claim
Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to

Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to

BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to

1997 Tax Code
4th Quarter, 2003 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."
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.
3
COMMISSIONER OF INTERNAL REVENUE vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY
July 28, 2006 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 CIRs 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 NDCs 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 NDCs 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 services[16] who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they receive from the final consumer (or
output VAT).[17] The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection of taxes
on every level of consumption,[18] yet assuages the manufacturers or providers of
goods and services by enabling them to pass on their respective VAT liabilities to the
next link of the chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears
direct relevance to the taxpayers 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 CTAs
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,
U P D AT E D N AT I O N A L I N T E R N A L R E V E N U E C O D E ( W I T H
ANNOTATIONS), p. 608-9 (1988)]. Course of business is what is usually
done in the management of trade or business. [Idmi v. Weeks & Russel, 99
So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is

that course of business or doing business connotes regularity of activity. In
the instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It
should be emphasized that the normal VAT-registered activity of NDC is
leasing personal property.[21]
This finding is confirmed by the Revised Charter[22] of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real property.[23]
The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court,[24] should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of trade or
business is not subject to VAT.
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.
4
COMMISSIONER OF INTERNAL REVENUE, vs. COURT OF APPEALS and
COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION
March 30, 2000 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.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988, computed as follows:
"Taxable sale/receipt P1,679,155.00
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3]
COMASERCO's annual corporate income tax return ending December 31, 1988
indicated a net loss in its operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the
latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal
Revenue sent a collection letter to COMASERCO demanding payment of the deficiency
VAT.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals[4] a petition
for review contesting the Commissioner's assessment. COMASERCO asserted that the
services it rendered to Philamlife and its affiliates, relating to collections, consultative
and other technical assistance, including functioning as an internal auditor, were on a
"no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged id 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, petition for review of the
decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision
reversing that of the Court of Tax Appeals, the dispositive portion of which reads:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered
REVERSING and SETTING ASIDE the questioned Decision promulgated on
22 June 1995. The assessment for deficiency value-added tax for the taxable
year 1988 inclusive of surcharge, interest and penalty charges are ordered
CANCELLED for lack of legal and factual basis."[6]
The Court of Appeals anchored its decision on the ratiocination in another tax case
involving the same parties,[7] where it was held that COMASERCO was not liable to
pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The
Court of Appeals, in that case, reasoned that COMASERCO was not engaged in
business of providing services to Philamlife and its affiliates. In the same manner, the
Court of Appeals held that COMASERCO was not liable to pay VAT for it was not
engaged in the business of selling services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition
for review on certiorari assailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the
petition, and on September 26, 1996, COMASERCO complied with the resolution.[8]
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and
thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are
two different things. Petitioner maintains that the services rendered by COMASERCO to
Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on
the value added by the performance of the service. It is immaterial whether profit is
derived from rendering the service. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of 1986, as amended by Executive
Order (E.O.) No. 273 in 1988, provides that:
"Section 99. Persons liable. - Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar transactions
and any person who imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 100 to 102 of this Code."[9]
COMASERCO contends that the term "in the course of trade or business" requires that
the "business" is carried on with a view to profit or livelihood. It avers that the activities
of the entity must be profit- oriented. COMASERCO submits that it is not motivated by
profit, as defined by its primary purpose in the articles of incorporation, stating that it is
operating "only on reimbursement-of-cost basis, without any profit." Private respondent
argues that profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law
(EVAT), amending among other sections, Section 99 of the Tax Code. On January 1,
1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The
amended law provides that:
"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. Jjj uris
"The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business."
Contrary to COMASERCO's contention the above provision clarifies that even a non-
stock, non-profit, organization or government entity, is liable to pay VAT on the sale of
goods or services. VAT is a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The term "in
the course of trade or business" requires the regular conduct or pursuit of a commercial
or an economic activity, regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" incorporated in the
present law applies to all transactions even to those made prior to its enactment.
Executive Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods and services.
Section 108 of the National Internal Revenue Code of 1997[10] defines the phrase "sale
of services" as the "performance of all kinds of services for others for a fee,
remuneration or consideration." It includes "the supply of technical advice, assistance or
services rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking or project."[11]
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No.
010-98[12] emphasizing that a domestic corporation that provided technical, research,
management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit,
was subject to VAT on services rendered. In fact, even if such corporation was
organized without any intention of realizing profit, any income or profit generated by the
entity in the conduct of its activities was subject to income tax. lex
Hence, it is immaterial whether the primary purpose of a corporation indicates that it

receives payments for services rendered to its affiliates on a reimbursement-on-cost
basis only, without realizing profit, for purposes of determining liability for VAT on
services rendered. As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that
allow exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be
clearly stated in the language of the law; it cannot be merely implied therefrom.[13] In
the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions
exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly
ruled that the services rendered by COMASERCO to Philamlife and its affiliates are
subject to VAT. As pointed out by the Commissioner, the performance of all kinds of
services for others for a fee, remuneration or consideration is considered as sale of
services subject to VAT. As the government agency charged with the enforcement of the
law, the opinion of the Commissioner of Internal Revenue, in the absence of any
showing that it is plainly wrong, is entitled to great weight.[14] Also, it has been the long
standing policy and practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority.[15]
There is no merit to respondent's contention that the Court of Appeals' decision in CA-
G. R. No. 34042, declaring the COMASERCO as not engaged in business and not
liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-
G. R. No. 34042 is different from the present case, which involves COMASERCO's
liability for VAT. As heretofore stated, every person who sells, barters, or exchanges
goods and services, in the course of trade or business, as defined by law, is subject to
VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the
Court of Appeals in CA-G. R. SP No. 37930. The Court hereby REINSTATES the
decision of the Court of Tax Appeals in C. T. A. Case No. 4853.
No costs. SO ORDERED.
5
COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES, INC.
November 17, 2010 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.
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
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
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.
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.
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.
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

I
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.
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.
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.
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.
6
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE
TECHNOLOGY (PHILIPPINES) February 11, 2005 PANGANIBAN, J.
Business companies registered in and operating from the Special Economic Zone in
Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue
taxes and the implementing rules relevant thereto, including the value-added taxes or
VAT. Although export sales are not deemed exempt transactions, they are nonetheless
zero-rated. Hence, in the present case, the distinction between exempt entities and
exempt transactions has little significance, because the net result is that the taxpayer is
not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods
it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in
ruling that it is entitled to such refund or credit.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set
aside the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No.
66093. The decretal portion of the Decision reads as follows:
WHEREFORE, foregoing premises considered, the petition for review is DENIED for
lack of merit.
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as
follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at
the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga,
Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to act
and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as
amended, to engage in the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38
with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of
this Petition for Review), was filed on 4 October 1999 with Revenue District Office No.
83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents]
claim for VAT refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the
CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of the
two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to
wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual basis of his or her claim for
tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer.
This is due to the fact that claims for refund/credit [partake of] the nature of an
exemption from tax. Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to
prove the same is fatal to its claim for tax credit. He who claims exemption must be able
to justify his claim by the clearest grant of organic or statutory law. An exemption from
the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority
(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant
to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code,
as amended. As [respondents] business is not subject to VAT, the capital goods and
services it alleged to have purchased are considered not used in VAT taxable business.
As such, [respondent] is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes
on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years from the
date of payment of tax.
On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.
Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a
tax credit certificate (TCC) in favor of respondent in the reduced amount of
P12,122,922.66. This sum represented the unutilized but substantiated input VAT paid
on capital goods purchased for the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal
incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus
Investment Code of 1987), not of those under both Presidential Decree No. (PD) 66, as
amended, and Section 24 of RA 7916. Respondent was, therefore, considered exempt
only from the payment of income tax when it opted for the income tax holiday in lieu of
the 5 percent preferential tax on gross income earned. As a VAT-registered entity,
though, it was still subject to the payment of other national internal revenue taxes, like
the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1
and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods
it purchased, respondent correctly filed the administrative and judicial claims for its
refund within the two-year prescriptive period. Such payments were -- to the extent of
the refundable value -- duly supported by VAT invoices or official receipts, and were not
yet offset against any output VAT liability.
Hence this Petition.
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate
in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on
capital goods purchased for the period April 1, 1998 to June 30, 1999.
The Courts Ruling

The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,[7]
respondent is entitled to the fiscal incentives and benefits[8] provided for in either PD
66[9] or EO 226.[10] It shall, moreover, enjoy all privileges, benefits, advantages or
exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12]
Preferential Tax Treatment

Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw
materials, supplies, articles, equipment, machineries, spare parts and wares, except
those prohibited by law, brought into the zone to be stored, broken up, repacked,
assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated,
manufactured, mixed or used directly or indirectly in such activities.[13] Even so,
respondent would enjoy a net-operating loss carry over; accelerated depreciation;
foreign exchange and financial assistance; and exemption from export taxes, local taxes
and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations applies
if EO 226[15] is chosen. Under this law, respondent shall further be entitled to an
income tax holiday; additional deduction for labor expense; simplification of customs
procedure; unrestricted use of consigned equipment; access to a bonded manufacturing
warehouse system; privileges for foreign nationals employed; tax credits on domestic
capital equipment, as well as for taxes and duties on raw materials; and exemption from
contractors taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and
real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to
the zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other
existing laws, rules and regulations to the contrary -- extends[20] to that zone the
provision stating that no local or national taxes shall be imposed therein.[21] No
exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.[22] Banking and finance shall
also be liberalized under minimum Bangko Sentral regulation with the establishment of
foreign currency depository units of local commercial banks and offshore banking units
of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for
locally-produced materials used as inputs. Aside from the other incentives possibly
already granted to it by the Board of Investments, it also enjoys preferential credit
facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] It is not subject to internal revenue laws and regulations and is even
entitled to tax credits. The VAT on capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although the transactions involving such tax are not
exempt, petitioner as a VAT-registered person,[28] however, is entitled to their credits.
Nature of the VAT and

the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10
percent levied on every importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of goods or properties or
on each rendition of services in the course of trade or business[29] as they pass along
the production and distribution chain, the tax being limited only to the value added[30] to
such goods, properties or services by the seller, transferor or lessor.[31] It is an indirect
tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.[32] As such, it should be understood not in the context of the
person or entity that is primarily, directly and legally liable for its payment, but in terms of
its nature as a tax on consumption.[33] In either case, though, the same conclusion is
arrived at.
The law[34] that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.[35] Such method
adopted the mechanics and self-enforcement features of the VAT as first implemented
and practiced in Europe and subsequently adopted in New Zealand and Canada.[36]
Under the present method that relies on invoices, an entity can credit against or subtract
from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[37]
If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal
to the input taxes[40] passed on by the suppliers, no payment is required. It is when the
output taxes exceed the input taxes that the excess has to be paid.[41] If, however, the
input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters.[42] Should the input taxes result from zero-rated or effectively zero-
rated transactions or from the acquisition of capital goods,[43] any excess over the
output taxes shall instead be refunded[44] to the taxpayer or credited[45] against other
internal revenue taxes.[46]
Zero-Rated and Effectively

Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from
effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax,[49] but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of

services[51] to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions
to a zero rate.[52] Again, as applied to the tax base, such rate does not yield any tax
chargeable against the purchaser. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.
Zero Rating and

Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the
extent of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic zero
rating[54] is primarily intended to be enjoyed by the seller who is directly and legally
liable for the VAT, making such seller internationally competitive by allowing the refund
or credit of input taxes that are attributable to export sales.[55] Effective zero rating, on
the contrary, is intended to benefit the purchaser who, not being directly and legally
liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of
the tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is
not allowed any tax refund of or credit for input taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the
parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status -- VAT-exempt or not -- of the party to the
transaction.[60] Indeed, such transaction is not subject to the VAT, but the seller is not
allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under
the Tax Code, a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt from the VAT.
[61] Such party is also not subject to the VAT, but may be allowed a tax refund of or
credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be
shifted or passed on by the seller to the purchaser of the goods, properties or services.
[62] While the liability is imposed on one person, the burden may be passed on to
another. Therefore, if a special law merely exempts a party as a seller from its direct
liability for payment of the VAT, but does not relieve the same party as a purchaser from
its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However, the Tax
Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA
7916 -- the special law under which respondent was registered. The purchase
transactions it entered into are, therefore, not VAT-exempt. These are subject to the
VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of
10 percent,[64] depending again on the application of the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a foreign
country -- for use or consumption outside the Philippines, these shall be subject to 0
percent.[66] If entered into with a purchaser for use or consumption in the Philippines,
then these shall be subject to 10 percent,[67] unless the purchaser is exempt from the
indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied
is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such
transactions to a zero rate,[68] because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs territory.[69] This means
that in such zone is created the legal fiction of foreign territory.[70] Under the cross-
border principle[71] of the VAT system being enforced by the Bureau of Internal
Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. If exports of
goods and services from the Philippines to a foreign country are free of the VAT,[73]
then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered

entity are considered exports to a foreign country; conversely, sales by a PEZA-
registered entity to a VAT-registered person in the customs territory are deemed imports
from a foreign country.[74] An ecozone -- indubitably a geographical territory of the
Philippines -- is, however, regarded in law as foreign soil.[75] This legal fiction is
necessary to give meaningful effect to the policies of the special law creating the zone.
[76] If respondent is located in an export processing zone[77] within that ecozone, sales
to the export processing zone, even without being actually exported, shall in fact be
viewed as constructively exported under EO 226.[78] Considered as export sales,[79]
such purchase transactions by respondent would indeed be subject to a zero rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt
from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of
the VAT as a tax on consumption, for which the direct liability is imposed on one person
but the indirect burden is passed on to another. Respondent, as an exempt entity, can
neither be directly charged for the VAT on its sales nor indirectly made to bear, as added
cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on
business establishments operating within the ecozone.[81] Since this law does not
exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in
casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a
thing not being excepted must be regarded as coming within the purview of the general
rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction,
it may still be passed on and, therefore, indirectly imposed on the same entity -- a
patent circumvention of the law. That no VAT shall be imposed directly upon business
establishments operating within the ecozone under RA 7916 also means that no VAT
may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo
prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited
indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition
applied, except for real property taxes that presently are imposed on land owned by
developers.[82] This similar and repeated prohibition is an unambiguous ratification of
the laws intent in not imposing local or national taxes on business enterprises within the
ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like
shall not be subject to x x x internal revenue laws and regulations under PD 66[83] --
the original charter of PEZA (then EPZA) that was later amended by RA 7916.[84] No
provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the
reduced tax collection ultimately redounds to the benefit of the national economy by
enticing more business investments and creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- shall not be subject to x x x internal
revenue laws and regulations x x x[86] if brought to the ecozones restricted area[87] for
manufacturing by registered export enterprises,[88] of which respondent is one. These
rules also apply to all enterprises registered with the EPZA prior to the effectivity of such
rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of
Investments (BOI) under EO 226 patently enjoy exemption from national internal
revenue taxes on imported capital equipment reasonably needed and exclusively used
for the manufacture of their products;[91] on required supplies and spare part for
consigned equipment;[92] and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for
manufacturing.[93] In addition, they are given credits for the value of the national
internal revenue taxes imposed on domestic capital equipment also reasonably needed
and exclusively used for the manufacture of their products,[94] as well as for the value
of such taxes imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA 7227[96] are
ipso facto accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax
exemption privilege shall be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials
primarily used in the production of export goods,[99] and for locally produced raw
materials, capital equipment and spare parts used by exporters of non-traditional
products[100] -- shall also be continuously enjoyed by similar exporters within the
ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax exemptions
and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris[102]
against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of
those refunds bear the burden of proving the factual basis of their claims;[106] and of
showing, by words too plain to be mistaken, that the legislature intended to exempt
them.[107] In the present case, all the cited legal provisions are teeming with life with
respect to the grant of tax exemptions too vivid to pass unnoticed. In addition,
respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are
not exempt. The end result, however, is that it is not subject to the VAT. The non-
taxability of transactions that are otherwise taxable is merely a necessary incident to the
tax exemption conferred by law upon it as an entity, not upon the transactions
themselves.[108] Nonetheless, its exemption as an entity and the non-exemption of its
transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are
called upon to execute or administer such laws[109] will have to be adopted. Their prior
tax issuances have held inconsistent positions brought about by their probable failure to
comprehend and fully appreciate the nature of the VAT as a tax on consumption and the
application of the destination principle.[110] Revenue Memorandum Circular No. (RMC)
74-99, however, now clearly and correctly provides that any VAT-registered suppliers
sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The reason
for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as
the establishment of export processing zones, seeks to encourage and promote foreign
commerce as a means of x x x strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing domestic unemployment, and of
accelerating the development of the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and
integrating the special economic zones, the government shall actively encourage,
promote, induce and accelerate a sound and balanced industrial, economic and social
development of the country x x x through the establishment, among others, of special
economic zones x x x that shall effectively attract legitimate and productive foreign
investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry x x
x which shall x x x meet the tests of international competitiveness[,] accelerate
development of less developed regions of the country[,] and result in increased volume
and value of exports for the economy.[114] Fiscal incentives that are cost-efficient and
simple to administer shall be devised and extended to significant projects to
compensate for market imperfections, to reward performance contributing to economic
development,[115] and to stimulate the establishment and assist initial operations of the
enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments
policy -- spelled out earlier in RA 7227 -- of converting into alternative productive
uses[118] the former military reservations and their extensions,[119] as well as of
providing them incentives[120] to enhance the benefits that would be derived from
them[121] in promoting economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export development
into a national effort[123] in order to win international markets. By providing many export
and tax incentives,[124] the State is able to drive home the point that exporting is
indeed the key to national survival and the means through which the economic goals of
increased employment and enhanced incomes can most expeditiously be achieved.
[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x

increase economic activity; and x x x create a robust environment for business to
enable firms to compete better in the regional as well as the global market.[126] After
all, international competitiveness requires economic and tax incentives to lower the cost
of goods produced for export. State actions that affect global competition need to be
specific and selective in the pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of
providing incentives to needed investments,[128] as well as of promoting the
preferential use of domestic materials and locally produced goods and adopting
measures to help make these competitive.[129] Tax credits for domestic inputs
strengthen backward linkages. Rightly so, the rule of law and the existence of credible
and efficient public institutions are essential prerequisites for sustainable economic
development.[130]
VAT Registration, Not Application

for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges
that respondent did register for VAT purposes with the appropriate Revenue District
Office. However, it is now too late in the day for petitioner to challenge the VAT-
registered status of respondent, given the latters prior representation before the lower
courts and the mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting
from internal revenue laws and regulations the equipment -- including capital goods --
that registered enterprises will use, directly or indirectly, in manufacturing.[132] EO 226
even reiterates this privilege among the incentives it gives to such enterprises.[133]
Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the
latter is not subject to the VAT. Consequently, the capital goods and services respondent
has purchased are not considered used in the VAT business, and no VAT refund or
credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are subject to
the VAT, although at zero rate. Registration does not determine taxability under the VAT
law.
Moreover, the facts have already been determined by the lower courts. Having failed to
present evidence to support its contentions against the income tax holiday privilege of
respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that issues
and arguments not adequately and seriously brought below cannot be raised for the first
time on appeal.[136] This is a matter of procedure[137] and a question of fairness.[138]
Failure to assert within a reasonable time warrants a presumption that the party entitled
to assert it either has abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for effective
zero rating[140] cannot prevail over the clear VAT nature of respondents transactions.
The scope of such regulations is not within the statutory authority x x x granted by the
legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the law;
the former cannot purport to do any more than interpret the latter.[142] The courts will
not countenance one that overrides the statute it seeks to apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is aptly
determined, no provision under our VAT law requires an additional application to be
made for such taxpayers transactions to be considered effectively zero-rated. An
effectively zero-rated transaction does not and cannot become exempt simply because
an application therefor was not made or, if made, was denied. To allow the additional
requirement is to give unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.[144]
Second, grantia argumenti that such an application is required by law, there is still
the presumption of regularity in the performance of official duty.[145] Respondents
registration carries with it the presumption that, in the absence of contradictory
evidence, an application for effective zero rating was also filed and approval thereof
given. Besides, it is also presumed that the law has been obeyed[146] by both the
administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have
tackled exempt respondent not only from internal revenue laws but also from the
regulations issued pursuant thereto. Leniency in the implementation of the VAT in
ecozones is an imperative, precisely to spur economic growth in the country and attain
global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,

[147] is sufficient for the effective zero rating of the transactions of a taxpayer. The
nature of its business and transactions can easily be perused from, as already clearly
indicated in, its VAT registration papers and photocopied documents attached thereto.
Hence, its transactions cannot be exempted by its mere failure to apply for their
effective zero rating. Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayers negligence -- a result not at all contemplated.
Administrative convenience cannot thwart legislative mandate.
Tax Refund or
Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT
rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax
holiday regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in
fact incompatible and cannot be availed of simultaneously by the same entity. While EO
226 merely exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the
payment of income tax for a certain number of years, depending on its registration as a
pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent
of gross income earned in lieu of local and national taxes imposable upon business
establishments within the ecozone cannot outrightly determine a VAT exemption. Being
subject to VAT, payments erroneously collected thereon may then be refunded or
credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in
RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore,
counterargue that such provision merely exempts respondent from taxes imposed on
business. To repeat, the VAT is a tax imposed on consumption, not on business.
Although respondent as an entity is exempt, the transactions it enters into are not
necessarily so. The VAT payments made in excess of the zero rate that is imposable
may certainly be refunded or credited.
Compliance with All Requisites

for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for
claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the
present case from Contex, in which this Court held that the petitioner therein was
registered as a non-VAT taxpayer.[151] Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes. Although
enterprises registered with the BOI after December 31, 1994 would no longer enjoy the
tax credit incentives on domestic capital equipment -- as provided for under Article
39(d), Title III, Book I of EO 226[152] -- starting January 1, 1996, respondent would still
have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the
ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax credits.
This fact was revealed by the sponsorship speeches in Congress during the second
reading of House Bill No. 14295, which later became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption from
national and local taxes; x x x tax credit for locally-sourced inputs x x x.
xxxxxxxxx
MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption
from local and national taxes, x x x tax credits for locally sourced inputs x x x.[153]
And third, no question as to either the filing of such claims within the prescriptive period
or the validity of the VAT returns has been raised. Even if such a question were raised,
the tax exemption under all the special laws cited above is broad enough to cover even
the enforcement of internal revenue laws, including prescription.[154]
Summary
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered
as a separate customs territory. As such, respondent is exempt from all internal revenue
taxes, including the VAT, and regulations pertaining thereto. It has opted for the income
tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law
and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero
rating of its transactions is necessary. Being VAT-registered and having satisfactorily
complied with all the requisites for claiming a tax refund of or credit for the input VAT
paid on capital goods purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No

pronouncement as to costs.
SO ORDERED.
7
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs.
COMMISSIONER OF INTERNAL REVENUE June 8, 2007 CHICO-NAZARIO, J.
Before this Court are the consolidated cases involving the unsuccessful claims of herein
petitioner Atlas Consolidated Mining and Development Corporation (petitioner
corporation) for the refund/credit of the input Value Added Tax (VAT) on its purchases of
capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and
1992, the denial of which by the Court of Tax Appeals (CTA), was affirmed by the Court
of Appeals.
Petitioner corporation is engaged in the business of mining, production, and sale of

various mineral products, such as gold, pyrite, and copper concentrates. It is a VAT-
registered taxpayer. It was initially issued VAT Registration No. 32-A-6-002224, dated 1
January 1988, but it had to register anew with the appropriate revenue district office
(RDO) of the Bureau of Internal Revenue (BIR) when it moved its principal place of
business, and it was re-issued VAT Registration No. 32-0-004622, dated 15 August
1990.1
G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992.2 It
alleged that it likewise filed with the BIR the corresponding application for the refund/
credit of its input VAT on its purchases of capital goods and on its zero-rated sales in the
amount of P26,030,460.00.3 When its application for refund/credit remained unresolved
by the BIR, petitioner corporation filed on 20 April 1994 its Petition for Review with the
CTA, docketed as CTA Case No. 5102. Asserting that it was a "zero-rated VAT person,"
it prayed that the CTA order herein respondent Commissioner of Internal Revenue
(respondent Commissioner) to refund/credit petitioner corporation with the amount of
P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992. The
respondent Commissioner opposed and sought the dismissal of the petition for review
of petitioner corporation for failure to state a cause of action. After due trial, the CTA
promulgated its Decision4 on 24 November 1997 with the following disposition –
WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED
on the ground of prescription, insufficiency of evidence and failure to comply with
Section 230 of the Tax Code, as amended. Accordingly, the petition at bar is hereby
DISMISSED for lack of merit.
The CTA denied the motion for reconsideration of petitioner corporation in a Resolution5
dated 15 April 1998.
When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the
appellate court, in its Decision,6 dated 6 July 1999, dismissed the appeal of petitioner
corporation, finding no reversible error in the CTA Decision, dated 24 November 1997.
The subsequent motion for reconsideration of petitioner corporation was also denied by
the Court of Appeals in its Resolution,7 dated 14 December 1999.
Thus, petitioner corporation comes before this Court, via a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, assigning the following errors
committed by the Court of Appeals –
I
THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF
REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE
[BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF
EXPORTS FOR ZERO-RATING TO APPLY.
II
THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO
SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF
VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.
III
THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS
FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS
FILED WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.
IV
THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-
OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE.
G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented
above, except that it relates to the claims of petitioner corporation for refund/credit of
input VAT on its purchases of capital goods and on its zero-rated sales made in the last
three taxable quarters of 1990.
Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth
quarters of 1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively.
It submitted separate applications to the BIR for the refund/credit of the input VAT paid
on its purchases of capital goods and on its zero-rated sales, the details of which are
presented as follows –
Date of Application Period Covered Amount Applied For
21 August 1990 2nd Quarter, 1990 P 54,014,722.04
21 November 1990 3rd Quarter, 1990 75,304,774.77
19 February 1991 4th Quarter, 1990 43,829,766.10
When the BIR failed to act on its applications for refund/credit, petitioner corporation
filed with the CTA the following petitions for review –
Date Filed Period Covered CTA Case No.
20 July 1992 2nd Quarter, 1990 4831
9 October 1992 3rd Quarter, 1990 4859
14 January 1993 4th Quarter, 1990 4944

which were eventually consolidated. The respondent Commissioner contested the
foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in favor of
respondent Commissioner and in its Decision,9 dated 30 October 1997, dismissed the
Petitions mainly on the ground that the prescriptive periods for filing the same had
expired. In a Resolution,10 dated 15 January 1998, the CTA denied the motion for
reconsideration of petitioner corporation since the latter presented no new matter not
already discussed in the court's prior Decision. In the same Resolution, the CTA also
denied the alternative prayer of petitioner corporation for a new trial since it did not fall
under any of the grounds cited under Section 1, Rule 37 of the Revised Rules of Court,
and it was not supported by affidavits of merits required by Section 2 of the same Rule.
Petitioner corporation appealed its case to the Court of Appeals, where it was docketed
as CA-G.R. SP No. 46718. On 15 September 2000, the Court of Appeals rendered its
Decision,11 finding that although petitioner corporation timely filed its Petitions for
Review with the CTA, it still failed to substantiate its claims for the refund/credit of its
input VAT for the last three quarters of 1990. In its Resolution,12 dated 27 June 2001,
the appellate court denied the motion for reconsideration of petitioner corporation,
finding no cogent reason to reverse its previous Decision.
Aggrieved, petitioner corporation filed with this Court another Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763,
raising the following issues –
A.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88
AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-
RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR
THE INSTANT CLAIM.
B.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS
NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.
There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and
148763 were consolidated pursuant to a Resolution, dated 4 September 2006, issued
by this Court. The ruling of this Court in these cases hinges on how it will resolve the
following key issues: (1) prescription of the claims of petitioner corporation for input VAT
refund/credit; (2) validity and applicability of Revenue Regulations No. 2-88 imposing
upon petitioner corporation, as a requirement for the VAT zero-rating of its sales, the
burden of proving that the buyer companies were not just BOI-registered but also
exporting 70% of their total annual production; (3) sufficiency of evidence presented by
petitioner corporation to establish that it is indeed entitled to input VAT refund/credit; and
(4) legal ground for granting the motion of petitioner corporation for re-opening of its
cases or holding of new trial before the CTA so it could be given the opportunity to
present the required evidence.
Prescription
The prescriptive period for filing an application for tax refund/credit of input VAT on zero-
rated sales made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax
Code of 1977, as amended, which provided that –
SEC. 106. Refunds or tax credits of input tax. – x x x.
(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by
paragraph (a) above, whose sales are zero-rated may, within two years after the close
of the quarter when such sales were made, apply for the issuance of a tax credit
certificate or refund of the input taxes attributable to such sales to the extent that such
input tax has not been applied against output tax.
xxxx
(e) Period within which refund of input taxes may be made by the Commissioner. – The
Commissioner shall refund input taxes within 60 days from the date the application for
refund was filed with him or his duly authorized representative. No refund of input taxes
shall be allowed unless the VAT-registered person files an application for refund within
the period prescribed in paragraphs (a), (b) and (c) as the case may be.
By a plain reading of the foregoing provision, the two-year prescriptive period for filing
the application for refund/credit of input VAT on zero-rated sales shall be determined
from the close of the quarter when such sales were made.
Petitioner contends, however, that the said two-year prescriptive period should be
counted, not from the close of the quarter when the zero-rated sales were made, but
from the date of filing of the quarterly VAT return and payment of the tax due 20 days
thereafter, in accordance with Section 110(b) of the Tax Code of 1977, as amended,
quoted as follows –
SEC. 110. Return and payment of value-added tax. – x x x.
(b) Time for filing of return and payment of tax. – The return shall be filed and the tax
paid within 20 days following the end of each quarter specifically prescribed for a VAT-
registered person under regulations to be promulgated by the Secretary of Finance:
Provided, however, That any person whose registration is cancelled in accordance with
paragraph (e) of Section 107 shall file a return within 20 days from the cancellation of
such registration.
It is already well-settled that the two-year prescriptive period for instituting a suit or
proceeding for recovery of corporate income tax erroneously or illegally paid under
Section 23013 of the Tax Code of 1977, as amended, was to be counted from the filing
of the final adjustment return. This Court already set out in ACCRA Investments
Corporation v. Court of Appeals,14 the rationale for such a rule, thus –
Clearly, there is the need to file a return first before a claim for refund can prosper
inasmuch as the respondent Commissioner by his own rules and regulations mandates
that the corporate taxpayer opting to ask for a refund must show in its final adjustment
return the income it received from all sources and the amount of withholding taxes
remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner
corporation filed its final adjustment return for its 1981 taxable year on April 15, 1982. In
our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v.
Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive
period within which to claim a refund commences to run, at the earliest, on the date of
the filing of the adjusted final tax return. Hence, the petitioner corporation had until April
15, 1984 within which to file its claim for refund.
Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with
the respondent Commissioner who failed to take any action thereon and considering
further that the non-resolution of its claim for refund with the said Commissioner
prompted ACCRAIN to reiterate its claim before the Court of Tax Appeals through a
petition for review on April 13, 1984, the respondent appellate court manifestly
committed a reversible error in affirming the holding of the tax court that ACCRAIN's
claim for refund was barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year prescriptive
period with respect to the petitioner corporation's claim for refund from the time it filed its
final adjustment return is the fact that it was only then that ACCRAIN could ascertain
whether it made profits or incurred losses in its business operations. The "date of
payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon
its filing of its final adjustment return on April 15, 1982.
In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court
further expounded on the same matter –
A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon
case is warranted under the circumstances to lay down a categorical pronouncement on
the question as to when the two-year prescriptive period in cases of quarterly corporate
income tax commences to run. A full-blown decision in this regard is rendered more
imperative in the light of the reversal by the Court of Tax Appeals in the instant case of
its previous ruling in the Pacific Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code should be
interpreted in relation to the other provisions of the Tax Code in order to give effect the
legislative intent and to avoid an application of the law which may lead to inconvenience
and absurdity. In the case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated
that statutes should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or an absurd conclusion.
INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR
INCONVENIENS ET ABSURDUM. Where there is ambiguity, such interpretation as will
avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give
effect to the general legislative intent that can be discovered from or is unraveled by the
four corners of the statute, and in order to discover said intent, the whole statute, and
not only a particular provision thereof, should be considered. (Manila Lodge No. 761, et
al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause of
the statute must be expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be ascertained from
the whole text of the law and every part of the act is to be taken into view. (Chartered
Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in
Aboitiz Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).
Thus, in resolving the instant case, it is necessary that we consider not only Section 292
(now Section 230) of the National Internal Revenue Code but also the other provisions
of the Tax Code, particularly Sections 84, 85 (now both incorporated as Section 68),
Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate
Income Tax Payment and Section 321 (now Section 232) on keeping of books of
accounts. All these provisions of the Tax Code should be harmonized with each other.
xxxx
Therefore, the filing of a quarterly income tax returns required in Section 85 (now
Section 68) and implemented per BIR Form 1702-Q and payment of quarterly income
tax should only be considered mere installments of the annual tax due. These quarterly
tax payments which are computed based on the cumulative figures of gross receipts
and deductions in order to arrive at a net taxable income, should be treated as
advances or portions of the annual income tax due, to be adjusted at the end of the
calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides
for the filing of adjustment returns and final payment of income tax. Consequently, the
two-year prescriptive period provided in Section 292 (now Section 230) of the Tax Code
should be computed from the time of filing the Adjustment Return or Annual Income Tax
Return and final payment of income tax.
In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]),
this Court held that when a tax is paid in installments, the prescriptive period of two
years provided in Section 306 (Section 292) of the National Internal Revenue Code
should be counted from the date of the final payment. This ruling is reiterated in
Commissioner of Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein
this Court stated that where the tax account was paid on installment, the computation of
the two-year prescriptive period under Section 306 (Section 292) of the Tax Code,
should be from the date of the last installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since
the two-year prescriptive period should be counted from the filing of the Adjustment
Return on April 15,1982, TMX Sales, Inc. is not yet barred by prescription.
The very same reasons set forth in the afore-cited cases concerning the two-year
prescriptive period for claims for refund of illegally or erroneously collected income tax
may also apply to the Petitions at bar involving the same prescriptive period for claims
for refund/credit of input VAT on zero-rated sales.
It is true that unlike corporate income tax, which is reported and paid on installment
every quarter, but is eventually subjected to a final adjustment at the end of the taxable
year, VAT is computed and paid on a purely quarterly basis without need for a final
adjustment at the end of the taxable year. However, it is also equally true that until and
unless the VAT-registered taxpayer prepares and submits to the BIR its quarterly VAT
return, there is no way of knowing with certainty just how much input VAT16 the
taxpayer may apply against its output VAT;17 how much output VAT it is due to pay for
the quarter or how much excess input VAT it may carry-over to the following quarter; or
how much of its input VAT it may claim as refund/credit. It should be recalled that not
only may a VAT-registered taxpayer directly apply against his output VAT due the input
VAT it had paid on its importation or local purchases of goods and services during the
quarter; the taxpayer is also given the option to either (1) carry over any excess input
VAT to the succeeding quarters for application against its future output VAT liabilities, or
(2) file an application for refund or issuance of a tax credit certificate covering the
amount of such input VAT.18 Hence, even in the absence of a final adjustment return,
the determination of any output VAT payable necessarily requires that the VAT-
registered taxpayer make adjustments in its VAT return every quarter, taking into
consideration the input VAT which are creditable for the present quarter or had been
carried over from the previous quarters.
Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to

establish that it does have refundable or creditable input VAT, and the same has not
been applied against its output VAT liabilities – information which are supposed to be
reflected in the taxpayer's VAT returns. Thus, an application for refund/credit must be
accompanied by copies of the taxpayer's VAT return/s for the taxable quarter/s
concerned.
Lastly, although the taxpayer's refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege extended
to qualified and registered taxpayers by the very VAT system adopted by the
Legislature. Such input VAT, the same as any illegally or erroneously collected national
internal revenue tax, consists of monetary amounts which are currently in the hands of
the government but must rightfully be returned to the taxpayer. Therefore, whether
claiming refund/credit of illegally or erroneously collected national internal revenue tax,
or input VAT, the taxpayer must be given equal opportunity for filing and pursuing its
claim.
For the foregoing reasons, it is more practical and reasonable to count the two-year
prescriptive period for filing a claim for refund/credit of input VAT on zero-rated sales
from the date of filing of the return and payment of the tax due which, according to the
law then existing, should be made within 20 days from the end of each quarter. Having
established thus, the relevant dates in the instant cases are summarized and
reproduced below –
Period Covered Date of Filing Date of Filing Date of Filing
(Return w/ BIR) (Application w/ BIR) (Case w/ CTA)
2nd Quarter, 20 July 1990 21 August 1990 20 July 1992

1990
3rd Quarter, 18 October 1990 21 November 1990 9 October 1992

1990
4th Quarter, 20 January 1991 19 February 1991 14 January 1993

1990
1st Quarter, 1992 20 April 1992 -- 20 April 1994
The above table readily shows that the administrative and judicial claims of petitioner
corporation for refund of its input VAT on its zero-rated sales for the last three quarters
of 1990 were all filed within the prescriptive period.
However, the same cannot be said for the claim of petitioner corporation for refund of its
input VAT on its zero-rated sales for the first quarter of 1992. Even though it may seem
that petitioner corporation filed in time its judicial claim with the CTA, there is no showing
that it had previously filed an administrative claim with the BIR. Section 106(e) of the
Tax Code of 1977, as amended, explicitly provided that no refund of input VAT shall be
allowed unless the VAT-registered taxpayer filed an application for refund with
respondent Commissioner within the two-year prescriptive period. The application of
petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was
not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla,
Manager-Finance and Treasury, but it was not dated, stamped, and initialed by the BIR
official who purportedly received the same. The CTA, in its Decision,19 dated 24
November 1997, in CTA Case No. 5102, made the following observations –
This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund
of VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the
petitioner on account of the fact that it does not bear the BIR stamp showing the date
when such application was filed together with the signature or initial of the receiving
officer of respondent's Bureau. Worse still, it does not show the date of application and
the signature of a certain Ma. Paz R. Semilla indicated in the form who appears to be
petitioner's authorized filer.
A review of the records reveal that the original of the aforecited application was lost
during the time petitioner transferred its office (TSN, p. 6, Hearing of December 9,
1994). Attempt was made to prove that petitioner exerted efforts to recover the original
copy, but to no avail. Despite this, however, We observe that petitioner completely failed
to establish the missing dates and signatures abovementioned. On this score, said
application has no probative value in demonstrating the fact of its filing within two years
after the [filing of the VAT return for the quarter] when petitioner's sales of goods were
made as prescribed under Section 106(b) of the Tax Code. We believe thus that
petitioner failed to file an application for refund in due form and within the legal period
set by law at the administrative level. Hence, the case at bar has failed to satisfy the
requirement on the prior filing of an application for refund with the respondent before the
commencement of a judicial claim for refund, as prescribed under Section 230 of the
Tax Code. This fact constitutes another one of the many reasons for not granting
petitioner's judicial claim.
As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner
corporation timely filed its administrative claim for refund of its input VAT for the first
quarter of 1992, but also whether petitioner corporation actually filed such administrative
claim in the first place. For failing to prove that it had earlier filed with the BIR an
application for refund/credit of its input VAT for the first quarter of 1992, within the period
prescribed by law, then the case instituted by petitioner corporation with the CTA for the
refund/credit of the very same tax cannot prosper.
Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed
on the gross selling price or gross value in money of goods sold, bartered or
exchanged. Yet, the same provision subjected the following sales made by VAT-
registered persons to 0% VAT –
(1) Export sales; and
(2) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to
zero-rate.
"Export Sales" means the sale and shipment or exportation of goods from the
Philippines to a foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of ownership of the goods
so exported, or foreign currency denominated sales. "Foreign currency denominated
sales", means sales to nonresidents of goods assembled or manufactured in the
Philippines, for delivery to residents in the Philippines and paid for in convertible foreign
currency remitted through the banking system in the Philippines.
These are termed zero-rated sales. A zero-rated sale is still considered a taxable
transaction for VAT purposes, although the VAT rate applied is 0%. A sale by a VAT-
registered taxpayer of goods and/or services taxed at 0% shall not result in any output
VAT, while the input VAT on its purchases of goods or services related to such zero-
rated sale shall be available as tax credit or refund.
Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring
that the said regulations imposed additional requirements, not found in the law itself, for
the zero-rating of its sales to Philippine Smelting and Refining Corporation (PASAR) and
Philippine Phosphate, Inc. (PHILPHOS), both of which are registered not only with the
BOI, but also with the then Export Processing Zone Authority (EPZA).21
The contentious provisions of Revenue Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of
raw materials to export-oriented BOI-registered enterprises whose export sales, under
rules and regulations of the Board of Investments, exceed seventy percent (70%) of
total annual production, shall be subject to zero-rate under the following conditions:
"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for zero-
rating for each and every separate buyer, in accordance with Section 8(d) of Revenue
Regulations No. 5-87. The application should be accompanied with a favorable
recommendation from the Board of Investments."
"(2) The raw materials sold are to be used exclusively by the buyer in the manufacture,
processing or repacking of his own registered export product;
"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice.
The exporter (buyer) can no longer claim from the Bureau of Internal Revenue or any
other government office tax credits on their zero-rated purchases;
(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident
foreign buyer for delivery to a resident local export-oriented BOI-registered enterprise to
be used in manufacturing, processing or repacking of the said buyer's goods and paid
for in foreign currency, inwardly remitted in accordance with Central Bank rules and
regulations shall be subject to zero-rate.
It is the position of the respondent Commissioner, affirmed by the CTA and the Court of
Appeals, that Section 2 of Revenue Regulations No. 2-88 should be applied in the
cases at bar; and to be entitled to the zero-rating of its sales to PASAR and PHILPHOS,
petitioner corporation, as a VAT-registered seller, must be able to prove not only that
PASAR and PHILPHOS are BOI-registered corporations, but also that more than 70%
of the total annual production of these corporations are actually exported. Revenue
Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-
oriented corporations registered with it.
While this Court is not prepared to strike down the validity of Revenue Regulations No.
2-88, it finds that its application must be limited and placed in the proper context. Note
that Section 2 of Revenue Regulations No. 2-88 referred only to the zero-rated sales of
raw materials to export-oriented BOI-registered enterprises whose export sales, under
BOI rules and regulations, should exceed seventy percent (70%) of their total annual
production.
Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-
rating of the sales made by petitioner corporation to PASAR and PHILPHOS. At the
onset, it must be emphasized that PASAR and PHILPHOS, in addition to being
registered with the BOI, were also registered with the EPZA and located within an
export-processing zone. Petitioner corporation does not claim that its sales to PASAR
and PHILPHOS are zero-rated on the basis that said sales were made to export-
oriented BOI-registered corporations, but rather, on the basis that the sales were made
to EPZA-registered enterprises operating within export processing zones. Although
sales to export-oriented BOI-registered enterprises and sales to EPZA-registered
enterprises located within export processing zones were both deemed export sales,
which, under Section 100(a) of the Tax Code of 1977, as amended, shall be subject to
0% VAT distinction must be made between these two types of sales because each may
have different substantiation requirements.
The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit:
"The sale and shipment or exportation of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods so exported, or foreign
currency denominated sales." Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990 and
1992), governed enterprises registered with both the BOI and EPZA, provided a more
comprehensive definition of export sales, as quoted below:
"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from
invoices, bills of lading, inward letters of credit, landing certificates, and other
commercial documents, of export products exported directly by a registered export
producer or the net selling price of export product sold by a registered export producer
or to an export trader that subsequently exports the same: Provided, That sales of
export products to another producer or to an export trader shall only be deemed export
sales when actually exported by the latter, as evidenced by landing certificates of similar
commercial documents: Provided, further, That without actual exportation the following
shall be considered constructively exported for purposes of this provision: (1) sales to
bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export
processing zones; (3) sales to registered export traders operating bonded trading
warehouses supplying raw materials used in the manufacture of export products under
guidelines to be set by the Board in consultation with the Bureau of Internal Revenue
and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions and
other agencies and/or instrumentalities granted tax immunities, of locally manufactured,
assembled or repacked products whether paid for in foreign currency or not: Provided,
further, That export sales of registered export trader may include commission income;
and Provided, finally, That exportation of goods on consignment shall not be deemed
export sales until the export products consigned are in fact sold by the consignee.
Sales of locally manufactured or assembled goods for household and personal use to
Filipinos abroad and other non-residents of the Philippines as well as returning
Overseas Filipinos under the Internal Export Program of the government and paid for in
convertible foreign currency inwardly remitted through the Philippine banking systems
shall also be considered export sales. (Underscoring ours.)
The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as

export sales the sales of export products to another producer or to an export trader,
provided that the export products are actually exported. For purposes of VAT zero-
rating, such producer or export trader must be registered with the BOI and is required to
actually export more than 70% of its annual production.
Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also
considers constructive exportation as export sales. Among other types of constructive
exportation specifically identified by the said provision are sales to export processing
zones. Sales to export processing zones are subjected to special tax treatment. Article
77 of the same Code establishes the tax treatment of goods or merchandise brought
into the export processing zones. Of particular relevance herein is paragraph 2, which
provides that "Merchandise purchased by a registered zone enterprise from the
customs territory and subsequently brought into the zone, shall be considered as export
sales and the exporter thereof shall be entitled to the benefits allowed by law for such
transaction."
Such tax treatment of goods brought into the export processing zones are only
consistent with the Destination Principle and Cross Border Doctrine to which the
Philippine VAT system adheres. According to the Destination Principle,22 goods and
services are taxed only in the country where these are consumed. In connection with
the said principle, the Cross Border Doctrine23 mandates that no VAT shall be imposed
to form part of the cost of the goods destined for consumption outside the territorial
border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT, while those destined for use or
consumption within the Philippines shall be imposed with 10% VAT.24 Export
processing zones25 are to be managed as a separate customs territory from the rest of
the Philippines and, thus, for tax purposes, are effectively considered as foreign
territory. For this reason, sales by persons from the Philippine customs territory to those
inside the export processing zones are already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are export
sales, which, under the Tax Code of 1977, as amended, were subject to 0% VAT. It is on
this ground that petitioner corporation is claiming refund/credit of the input VAT on its
zero-rated sales to PASAR and PHILPHOS.
The distinction made by this Court in the preceding paragraphs between the zero-rated
sales to export-oriented BOI-registered enterprises and zero-rated sales to EPZA-
registered enterprises operating within export processing zones is actually supported by
subsequent development in tax laws and regulations. In Revenue Regulations No. 7-95,
the Consolidated VAT Regulations, as amended,26 the BIR defined with more precision
what are zero-rated export sales –
(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so exported paid for in acceptable
foreign currency or its equivalent in goods or services, and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery
to a resident local export-oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyer's goods and paid for in
acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) The sale of raw materials or packaging materials to an export-oriented enterprise
whose export sales exceed seventy percent (70%) of total annual production;
Any enterprise whose export sales exceed 70% of the total annual production of the
preceding taxable year shall be considered an export-oriented enterprise upon
accreditation as such under the provisions of the Export Development Act (R.A. 7844)
and its implementing rules and regulations;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws,
e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export
sales, which are subject to 0% VAT.
This Court then reiterates its conclusion that Section 2 of Revenue Regulations No.
2-88, which applied to zero-rated export sales to export-oriented BOI-registered
enterprises, should not be applied to the applications for refund/credit of input VAT filed
by petitioner corporation since it based its applications on the zero-rating of export sales
to enterprises registered with the EPZA and located within export processing zones.
Sufficiency of evidence
There can be no dispute that the taxpayer-claimant has the burden of proving the legal
and factual bases of its claim for tax credit or refund, but once it has submitted all the
required documents, it is the function of the BIR to assess these documents with
purposeful dispatch.28 It therefore falls upon herein petitioner corporation to first
establish that its sales qualify for VAT zero-rating under the existing laws (legal basis),
and then to present sufficient evidence that said sales were actually made and resulted
in refundable or creditable input VAT in the amount being claimed (factual basis).
It would initially appear that the applications for refund/credit filed by petitioner
corporation cover only input VAT on its purportedly zero-rated sales to PASAR and
PHILPHOS; however, a more thorough perusal of its applications, VAT returns,
pleadings, and other records of these cases would reveal that it is also claiming refund/
credit of its input VAT on purchases of capital goods and sales of gold to the Central
Bank of the Philippines (CBP).
This Court finds that the claims for refund/credit of input VAT of petitioner corporation
have sufficient legal bases.
As has been extensively discussed herein, Section 106(b)(2), in relation to Section

100(a)(2) of the Tax Code of 1977, as amended, allowed the refund/credit of input VAT
on export sales to enterprises operating within export processing zones and registered
with the EPZA, since such export sales were deemed to be effectively zero-rated sales.
29 The fact that PASAR and PHILPHOS, to whom petitioner corporation sold its
products, were operating inside an export processing zone and duly registered with
EPZA, was never raised as an issue herein. Moreover, the same fact was already
judicially recognized in the case Atlas Consolidated Mining & Development Corporation
v. Commissioner of Internal Revenue.30 Section 106(c) of the same Code likewise
permitted a VAT-registered taxpayer to apply for refund/credit of the input VAT paid on
capital goods imported or locally purchased to the extent that such input VAT has not
been applied against its output VAT. Meanwhile, the effective zero-rating of sales of gold
to the CBP from 1989 to 199131 was already affirmed by this Court in Commissioner of
Internal Revenue v. Benguet Corporation,32 wherein it ruled that –
At the time when the subject transactions were consummated, the prevailing BIR
regulations relied upon by respondent ordained that gold sales to the Central Bank were
zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No.
581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered
export and therefore shall be subject to the export and premium duties. In coming out
with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular No.
960 which states that all sales of gold to the Central Bank are considered constructive
exports. x x x.
This Court now comes to the question of whether petitioner corporation has sufficiently
established the factual bases for its applications for refund/credit of input VAT. It is in this
regard that petitioner corporation has failed, both in the administrative and judicial level.
Applications for refund/credit of input VAT with the BIR must comply with the appropriate
revenue regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is
not relevant to the applications for refund/credit of input VAT filed by petitioner
corporation; nonetheless, the said applications must have been in accordance with
Revenue Regulations No. 3-88, amending Section 16 of Revenue Regulations No. 5-87,
which provided as follows –
SECTION 16. Refunds or tax credits of input tax. –
xxxx
(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added
Tax Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city
or municipality where the principal place of business of the applicant is located or
directly with the Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid
shall be submitted together with the application. The original copy of the said invoice/
receipt, however, shall be presented for cancellation prior to the issuance of the Tax
Credit Certificate or refund. In addition, the following documents shall be attached
whenever applicable:
xxxx
"3. Effectively zero-rated sale of goods and services.
"i) photo copy of approved application for zero-rate if filing for the first time.
"ii) sales invoice or receipt showing name of the person or entity to whom the sale of
goods or services were delivered, date of delivery, amount of consideration, and
description of goods or services delivered.
"iii) evidence of actual receipt of goods or services.
"4. Purchase of capital goods.
"i) original copy of invoice or receipt showing the date of purchase, purchase price,
amount of value-added tax paid and description of the capital equipment locally
purchased.
"ii) with respect to capital equipment imported, the photo copy of import entry document
for internal revenue tax purposes and the confirmation receipt issued by the Bureau of
Customs for the payment of the value-added tax.
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by certain government
agencies, a statement therefrom showing the amount and description of sale of goods
and services, name of persons or entities (except in case of exports) to whom the goods
or services were sold, and date of transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted shall be limited to
the amount of the value-added tax (VAT) paid directly and entirely attributable to the
zero-rated transaction during the period covered by the application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and exempt sales of
goods and services, and the VAT paid (inputs) on purchases of goods and services
cannot be directly attributed to any of the aforementioned transactions, the following
formula shall be used to determine the creditable or refundable input tax for zero-rated
sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
In case the application for refund/credit of input VAT was denied or remained unacted
upon by the BIR, and before the lapse of the two-year prescriptive period, the taxpayer-
applicant may already file a Petition for Review before the CTA. If the taxpayer's claim is
supported by voluminous documents, such as receipts, invoices, vouchers or long
accounts, their presentation before the CTA shall be governed by CTA Circular No. 1-95,
as amended, reproduced in full below –
In the interest of speedy administration of justice, the Court hereby promulgates the
following rules governing the presentation of voluminous documents and/or long
accounts, such as receipts, invoices and vouchers, as evidence to establish certain
facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrine
enunciated in Compania Maritima vs. Allied Free Workers Union (77 SCRA 24), as well
as Section 8 of Republic Act No. 1125:
1. The party who desires to introduce as evidence such voluminous documents must,
after motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological listing of the numbers, dates
and amounts covered by the invoices or receipts and the amount/s of tax paid; and (b) a
Certification of an independent Certified Public Accountant attesting to the correctness
of the contents of the summary after making an examination, evaluation and audit of the
voluminous receipts and invoices. The name of the accountant or partner of the firm in
charge must be stated in the motion so that he/she can be commissioned by the Court
to conduct the audit and, thereafter, testify in Court relative to such summary and
certification pursuant to Rule 32 of the Rules of Court.
2. The method of individual presentation of each and every receipt, invoice or account
for marking, identification and comparison with the originals thereof need not be done
before the Court or Clerk of Court anymore after the introduction of the summary and
CPA certification. It is enough that the receipts, invoices, vouchers or other documents
covering the said accounts or payments to be introduced in evidence must be pre-
marked by the party concerned and submitted to the Court in order to be made
accessible to the adverse party who desires to check and verify the correctness of the
summary and CPA certification. Likewise, the originals of the voluminous receipts,
invoices or accounts must be ready for verification and comparison in case doubt on the
authenticity thereof is raised during the hearing or resolution of the formal offer of
evidence.
Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the
CTA when the said Circular was issued, then petitioner corporation must have complied
therewith during the course of the trial of the said cases.
In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied

the claim of therein respondent, Manila Mining Corporation, for refund of the input VAT
on its supposed zero-rated sales of gold to the CBP because it was unable to
substantiate its claim. In the same case, this Court emphasized the importance of
complying with the substantiation requirements for claiming refund/credit of input VAT
on zero-rated sales, to wit –
For a judicial claim for refund to prosper, however, respondent must not only prove that
it is a VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts.
This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.
xxxx
Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed
before it are litigated de novo, party litigants should prove every minute aspect of their
cases. No evidentiary value can be given the purchase invoices or receipts submitted to
the BIR as the rules on documentary evidence require that these documents must be
formally offered before the CTA.
This Court thus notes with approval the following findings of the CTA:
x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax
but this does not ipso fact mean that [the seller] is entitled to the amount of refund
sought as it is required by law to present evidence showing the input taxes it paid during
the year in question. What is being claimed in the instant petition is the refund of the
input taxes paid by the herein petitioner on its purchase of goods and services. Hence,
it is necessary for the Petitioner to show proof that it had indeed paid the input taxes
during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not
adduce in evidence the sales invoice, receipts or other documents showing the input
value added tax on the purchase of goods and services.
xxx
Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
categorically that the Court of Tax Appeals shall be a court of record and as such it
is required to conduct a formal trial (trial de novo) where the parties must present
their evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)
A "sales or commercial invoice" is a written account of goods sold or services rendered

indicating the prices charged therefor or a list by whatever name it is known which is
used in the ordinary course of business evidencing sale and transfer or agreement to
sell or transfer goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact of payment in

money or other settlement between seller and buyer of goods, debtor or creditor, or
person rendering services and client or customer.
These sales invoices or receipts issued by the supplier are necessary to substantiate
the actual amount or quantity of goods sold and their selling price, and taken collectively
are the best means to prove the input VAT payments.3
Although the foregoing decision focused only on the proof required for the applicant for
refund/credit to establish the input VAT payments it had made on its purchases from
suppliers, Revenue Regulations No. 3-88 also required it to present evidence proving
actual zero-rated VAT sales to qualified buyers, such as (1) photocopy of the approved
application for zero-rate if filing for the first time; (2) sales invoice or receipt showing the
name of the person or entity to whom the goods or services were delivered, date of
delivery, amount of consideration, and description of goods or services delivered; and
(3) the evidence of actual receipt of goods or services.
Also worth noting in the same decision is the weight given by this Court to the
certification by the independent certified public accountant (CPA), thus –
Respondent contends, however, that the certification of the independent CPA attesting
to the correctness of the contents of the summary of suppliers' invoices or receipts
which were examined, evaluated and audited by said CPA in accordance with CTA
Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No.
10-97, which either expressly or impliedly suggests that summaries and schedules of
input VAT payments, even if certified by an independent CPA, suffice as evidence of
input VAT payments.
xxxx
The circular, in the interest of speedy administration of justice, was promulgated to

avoid the time-consuming procedure of presenting, identifying and marking of
documents before the Court. It does not relieve respondent of its imperative task of pre-
marking photocopies of sales receipts and invoices and submitting the same to the
court after the independent CPA shall have examined and compared them with the
originals. Without presenting these pre-marked documents as evidence – from which
the summary and schedules were based, the court cannot verify the authenticity and
veracity of the independent auditor's conclusions.
There is, moreover, a need to subject these invoices or receipts to examination by the
CTA in order to confirm whether they are VAT invoices. Under Section 21 of Revenue
Regulation, No. 5-87, all purchases covered by invoices other than a VAT invoice shall
not be entitled to a refund of input VAT.
xxxx
While the CTA is not governed strictly by technical rules of evidence, as rules of
procedure are not ends in themselves but are primarily intended as tools in the
administration of justice, the presentation of the purchase receipts and/or invoices is not
mere procedural technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of the respondent's claims.
The records further show that respondent miserably failed to substantiate its claims for
input VAT refund for the first semester of 1991. Except for the summary and schedules
of input VAT payments prepared by respondent itself, no other evidence was adduced in
support of its claim.
As for respondent's claim for input VAT refund for the second semester of 1991, it
employed the services of Joaquin Cunanan & Co. on account of which it (Joaquin
Cunanan & Co.) executed a certification that:
We have examined the information shown below concerning the input tax payments
made by the Makati Office of Manila Mining Corporation for the period from July 1 to
December 31, 1991. Our examination included inspection of the pertinent suppliers'
invoices and official receipts and such other auditing procedures as we considered
necessary in the circumstances. x x x
As the certification merely stated that it used "auditing procedures considered
necessary" and not auditing procedures which are in accordance with generally
accepted auditing principles and standards, and that the examination was made on
"input tax payments by the Manila Mining Corporation," without specifying that the said
input tax payments are attributable to the sales of gold to the Central Bank, this Court
cannot rely thereon and regard it as sufficient proof of the respondent's input VAT
payments for the second semester.37
As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation
on its zero-rated sales in the first quarter of 1992, this Court already found that the
petitioner corporation failed to comply with Section 106(b) of the Tax Code of 1977, as
amended, imposing the two-year prescriptive period for the filing of the application for
refund/credit thereof. This bars the grant of the application for refund/credit, whether
administratively or judicially, by express mandate of Section 106(e) of the same Code.
Granting arguendo that the application of petitioner corporation for the refund/credit of
the input VAT on its zero-rated sales in the first quarter of 1992 was actually and timely
filed, petitioner corporation still failed to present together with its application the required
supporting documents, whether before the BIR or the CTA. As the Court of Appeals
ruled –
In actions involving claims for refund of taxes assessed and collected, the burden of
proof rests on the taxpayer. As clearly discussed in the CTA's decision, petitioner failed
to substantiate its claim for tax refunds. Thus:
"We note, however, that in the cases at bar, petitioner has relied totally on Revenue
Regulations No. 2-88 in determining compliance with the documentary requirements for
a successful refund or issuance of tax credit. Unmentioned is the applicable and specific
amendment later introduced by Revenue Regulations No. 3-88 dated April 7, 1988
(issued barely after two months from the promulgation of Revenue Regulations No. 2-88
on February 15, 1988), which amended Section 16 of Revenue Regulations No. 5-87 on
refunds or tax credits of input tax. x x x.
xxxx
"A thorough examination of the evidence submitted by the petitioner before this court
reveals outright the failure to satisfy documentary requirements laid down under the
above-cited regulations. Specifically, petitioner was not able to present the following
documents, to wit:
"a) sales invoices or receipts;
"b) purchase invoices or receipts;
"c) evidence of actual receipt of goods;
"d) BOI statement showing the amount and description of sale of goods, etc.
"e) original or attested copies of invoice or receipt on capital equipment locally
purchased; and
"f) photocopy of import entry document and confirmation receipt on imported capital
equipment.
"There is the need to examine the sales invoices or receipts in order to ascertain the
actual amount or quantity of goods sold and their selling price. Without them, this Court
cannot verify the correctness of petitioner's claim inasmuch as the regulations require
that the input taxes being sought for refund should be limited to the portion that is
directly and entirely attributable to the particular zero-rated transaction. In this instance,
the best evidence of such transaction are the said sales invoices or receipts.
"Also, even if sales invoices are produced, there is the further need to submit evidence
that such goods were actually received by the buyer, in this case, by CBP, Philp[h]os
and PASAR.
xxxx
"Lastly, this Court cannot determine whether there were actual local and imported
purchase of capital goods as well as domestic purchase of non-capital goods without
the required purchase invoice or receipt, as the case may be, and confirmation receipts.
"There is, thus, the imperative need to submit before this Court the original or attested
photocopies of petitioner's invoices or receipts, confirmation receipts and import entry
documents in order that a full ascertainment of the claimed amount may be achieved.
"Petitioner should have taken the foresight to introduce in evidence all of the missing
documents abovementioned. Cases filed before this Court are litigated de novo. This
means that party litigants should endeavor to prove at the first instance every minute
aspect of their cases strictly in accordance with the Rules of Court, most especially on
documentary evidence." (pp. 37-42, Rollo)
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or
entity claiming the exemption. The taxpayer who claims for exemption must justify his
claim by the clearest grant of organic or statute law and should not be permitted to
stand on vague implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern
Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner,
30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617;
Davao Light and Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).
There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is
"self-destructive", as it finds comfort in the very SGV's stand, as follows:
"It is our understanding that the above procedure are sufficient for the purpose of the
Company. We make no presentation regarding the sufficiency of these procedures for
such purpose. We did not compare the total of the input tax claimed each quarter
against the pertinent VAT returns and books of accounts. The above procedures do not
constitute an audit made in accordance with generally accepted auditing standards.
Accordingly, we do not express an opinion on the company's claim for input VAT refund
or credit. Had we performed additional procedures, or had we made an audit in
accordance with generally accepted auditing standards, other matters might have come
to our attention that we would have accordingly reported on."
The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent
auditor. Indeed, SGV expressed that it "did not compare the total of the input tax
claimed each quarter against the VAT returns and books of accounts."38
Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner
corporation on its zero-rated sales in the second, third, and fourth quarters of 1990, the
appellate court likewise found that petitioner corporation failed to sufficiently establish its
claims. Already disregarding the declarations made by the Court of Appeals on its
erroneous application of Revenue Regulations No. 2-88, quoted hereunder is the rest of
the findings of the appellate court after evaluating the evidence submitted in accordance
with the requirements under Revenue Regulations No. 3-88 –
The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98
pursuant to Sec. 245 of the National Internal Revenue Code, which recognized his
power to "promulgate all needful rules and regulations for the effective enforcement of
the provisions of this Code." Thus, it is incumbent upon a taxpayer intending to file a
claim for refund of input VATs or the issuance of a tax credit certificate with the BIR x x x
to prove sales to such buyers as required by Revenue Regulations No. 3-98. Logically,
the same evidence should be presented in support of an action to recover taxes which
have been paid.
x x x Neither has [herein petitioner corporation] presented sales invoices or receipts

showing sales of gold, copper concentrates, and pyrite to the CBP, [PASAR], and
[PHILPHOS], respectively, and the dates and amounts of the same, nor any evidence of
actual receipt by the said buyers of the mineral products. It merely presented receipts of
purchases from suppliers on which input VATs were allegedly paid. Thus, the Court of
Tax Appeals correctly denied the claims for refund of input VATs or the issuance of tax
credit certificates of petitioner [corporation]. Significantly, in the resolution, dated 7 June
2000, this Court directed the parties to file memoranda discussing, among others, the
submission of proof for "its [petitioner's] sales of gold, copper concentrates, and pyrite to
buyers." Nevertheless, the parties, including the petitioner, failed to address this issue,
thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this
point.39
This Court is, therefore, bound by the foregoing facts, as found by the appellate court,
for well-settled is the general rule that the jurisdiction of this Court in cases brought
before it from the Court of Appeals, by way of a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, is limited to reviewing or revising errors of law;
findings of fact of the latter are conclusive.40 This Court is not a trier of facts. It is not its
function to review, examine and evaluate or weigh the probative value of the evidence
presented.
The distinction between a question of law and a question of fact is clear-cut. It has been
held that "[t]here is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts."
Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT
on these sales in the amount it had declared in its returns; whether all the input VAT
subject of its applications for refund/credit can be attributed to its zero-rated sales; and
whether it had not previously applied the input VAT against its output VAT liabilities, are
all questions of fact which could only be answered after reviewing, examining,
evaluating, or weighing the probative value of the evidence it presented, and which this
Court does not have the jurisdiction to do in the present Petitions for Review on
Certiorari under Rule 45 of the revised Rules of Court.
Granting that there are exceptions to the general rule, when this Court looked into
questions of fact under particular circumstances,43 none of these exist in the instant
cases. The Court of Appeals, in both cases, found a dearth of evidence to support the
claims for refund/credit of the input VAT of petitioner corporation, and the records bear
out this finding. Petitioner corporation itself cannot dispute its non-compliance with the
requirements set forth in Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as
amended. It concentrated its arguments on its assertion that the substantiation
requirements under Revenue Regulations No. 2-88 should not have applied to it, while
being conspicuously silent on the evidentiary requirements mandated by other relevant
regulations.
Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for
the re-opening of its cases or holding of new trial before the CTA for the reception of
additional evidence, may be granted. Petitioner corporation prays that the Court
exercise its discretion on the matter in its favor, consistent with the policy that rules of
procedure be liberally construed in pursuance of substantive justice.
This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment
already rendered in accordance with Section 1, Rule 37 of the revised Rules of Court,
which provides –
SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. –
Within the period for taking an appeal, the aggrieved party may move the trial court to
set aside the judgment or final order and grant a new trial for one or more of the
following causes materially affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not
have guarded against and by reason of which such aggrieved party has probably been
impaired in his rights; or
(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial, and which if presented would probably alter the
result.
Within the same period, the aggrieved party may also move fore reconsideration upon
the grounds that the damages awarded are excessive, that the evidence is insufficient
to justify the decision or final order, or that the decision or final order is contrary to law.
In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-
opening of its cases and/or holding of new trial before the CTA by contending that the
"[f]ailure of its counsel to adduce the necessary evidence should be construed as
excusable negligence or mistake which should constitute basis for such re-opening of
trial as for a new trial, as counsel was of the belief that such evidence was rendered
unnecessary by the presentation of unrebutted evidence indicating that respondent
[Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-
rated." 44 The CTA denied such motion on the ground that it was not accompanied by
an affidavit of merit as required by Section 2, Rule 37 of the revised Rules of Court. The
Court of Appeals affirmed the denial of the motion, but apart from this technical defect, it
also found that there was no justification to grant the same.
On the matter of the denial of the motion of the petitioner corporation for the re-opening
of its cases and/or holding of new trial based on the technicality that said motion was
unaccompanied by an affidavit of merit, this Court rules in favor of the petitioner
corporation. The facts which should otherwise be set forth in a separate affidavit of merit
may, with equal effect, be alleged and incorporated in the motion itself; and this will be
deemed a substantial compliance with the formal requirements of the law, provided, of
course, that the movant, or other individual with personal knowledge of the facts, take
oath as to the truth thereof, in effect converting the entire motion for new trial into an
affidavit.45 The motion of petitioner corporation was prepared and verified by its
counsel, and since the ground for the motion was premised on said counsel's excusable
negligence or mistake, then the obvious conclusion is that he had personal knowledge
of the facts relating to such negligence or mistake. Hence, it can be said that the motion
of petitioner corporation for the re-opening of its cases and/or holding of new trial was in
substantial compliance with the formal requirements of the revised Rules of Court.
Even so, this Court finds no sufficient ground for granting the motion of petitioner
corporation for the re-opening of its cases and/or holding of new trial.
In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July
1998, by the CTA in another case, CTA Case No. 5296, involving the claim of petitioner
corporation for refund/credit of input VAT for the third quarter of 1993. The said
Resolution allowed the re-opening of CTA Case No. 5296, earlier dismissed by the CTA,
to give the petitioner corporation the opportunity to present the missing export
documents.
The rule that the grant or denial of motions for new trial rests on the discretion of the
trial court,47 may likewise be extended to the CTA. When the denial of the motion rests
upon the discretion of a lower court, this Court will not interfere with its exercise, unless
there is proof of grave abuse thereof.48
That the CTA granted the motion for re-opening of one case for the presentation of
additional evidence and, yet, deny a similar motion in another case filed by the same
party, does not necessarily demonstrate grave abuse of discretion or arbitrariness on
the part of the CTA. Although the cases involve identical parties, the causes of action
and the evidence to support the same can very well be different. As can be gleaned
from the Resolution, dated 20 July 1998, in CTA Case No. 5296, petitioner corporation
was claiming refund/credit of the input VAT on its zero-rated sales, consisting of actual
export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into
account the presentation by petitioner corporation of inward remittances of its export
sales for the quarter involved, its Supply Contract with Mitsubishi Metal Corporation, its
1993 Annual Report showing its sales to the said foreign corporation, and its application
for refund. In contrast, the present Petitions involve the claims of petitioner corporation
for refund/credit of the input VAT on its purchases of capital goods and on its effectively
zero-rated sales to CBP and EPZA-registered enterprises PASAR and PHILPHOS for
the second, third, and fourth quarters of 1990 and first quarter of 1992. There being a
difference as to the bases of the claims of petitioner corporation for refund/credit of input
VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting
variances as to the evidence required to support them.
Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296,
invoked by petitioner corporation, emphasizes that the decision of the CTA to allow
petitioner corporation to present evidence "is applicable pro hac vice or in this occasion
only as it is the finding of [the CTA] that petitioner [corporation] has established a few of
the aforementioned material points regarding the possible existence of the export
documents together with the prior and succeeding returns for the quarters involved, x x
x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by
its ruling in CTA Case No. 5296, when these cases do not involve the exact same
circumstances that compelled it to grant the motion of petitioner corporation for re-
opening of CTA Case No. 5296.
Finally, assuming for the sake of argument that the non-presentation of the required
documents was due to the fault of the counsel of petitioner corporation, this Court finds
that it does not constitute excusable negligence or mistake which would warrant the re-
opening of the cases and/or holding of new trial.
Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be
excusable and generally imputable to the party because if it is imputable to the counsel,
it is binding on the client. To follow a contrary rule and allow a party to disown his
counsel's conduct would render proceedings indefinite, tentative, and subject to re-
opening by the mere subterfuge of replacing the counsel. What the aggrieved litigant
should do is seek administrative sanctions against the erring counsel and not ask for the
reversal of the court's ruling.49
As elucidated by this Court in another case,50 the general rule is that the client is bound
by the action of his counsel in the conduct of his case and he cannot therefore complain
that the result of the litigation might have been otherwise had his counsel proceeded
differently. It has been held time and again that blunders and mistakes made in the
conduct of the proceedings in the trial court as a result of the ignorance, inexperience or
incompetence of counsel do not qualify as a ground for new trial. If such were to be
admitted as valid reasons for re-opening cases, there would never be an end to
litigation so long as a new counsel could be employed to allege and show that the prior
counsel had not been sufficiently diligent, experienced or learned.
Moreover, negligence, to be "excusable," must be one which ordinary diligence and

prudence could not have guarded against.51 Revenue Regulations No. 3-88, which was
issued on 15 February 1988, had been in effect more than two years prior to the filing
by petitioner corporation of its earliest application for refund/credit of input VAT involved
herein on 21 August 1990. CTA Circular No. 1-95 was issued only on 25 January 1995,
after petitioner corporation had filed its Petitions before the CTA, but still during the
pendency of the cases of petitioner corporation before the tax court. The counsel of
petitioner corporation does not allege ignorance of the foregoing administrative
regulation and tax court circular, only that he no longer deemed it necessary to present
the documents required therein because of the presentation of alleged unrebutted
evidence of the zero-rated sales of petitioner corporation. It was a judgment call made
by the counsel as to which evidence to present in support of his client's cause, later
proved to be unwise, but not necessarily negligent.
Neither is there any merit in the contention of petitioner corporation that the non-
presentation of the required documentary evidence was due to the excusable mistake of
its counsel, a ground under Section 1, Rule 37 of the revised Rules of Court for the
grant of a new trial. "Mistake," as it is referred to in the said rule, must be a mistake of
fact, not of law, which relates to the case.52 In the present case, the supposed mistake
made by the counsel of petitioner corporation is one of law, for it was grounded on his
interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular No.
1-95, as amended, did not apply to his client's cases and that there was no need to
comply with the documentary requirements set forth therein. And although the counsel
of petitioner corporation advocated an erroneous legal position, the effects thereof,
which did not amount to a deprivation of his client's right to be heard, must bind
petitioner corporation. The question is not whether petitioner corporation succeeded in
establishing its interests, but whether it had the opportunity to present its side.53
Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new
trial on the ground of mistake must show that ordinary prudence could not have guarded
against it. A new trial is not a refuge for the obstinate.54 Ordinary prudence in these
cases would have dictated the presentation of all available evidence that would have
supported the claims for refund/credit of input VAT of petitioner corporation. Without
sound legal basis, counsel for petitioner corporation concluded that Revenue
Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to
its client's claims. The obstinacy of petitioner corporation and its counsel is
demonstrated in their failure, nay, refusal, to comply with the appropriate administrative
regulations and tax court circular in pursuing the claims for refund/credit, now subject of
G.R. Nos. 141104 and 148763, even though these were separately instituted in a span
of more than two years. It is also evident in the failure of petitioner corporation to
address the issue and to present additional evidence despite being given the
opportunity to do so by the Court of Appeals. As pointed out by the appellate court, in its
Decision, dated 15 September 2000, in CA-G.R. SP No. 46718 –
x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to
file memoranda discussing, among others, the submission of proof for "its [petitioner's]
sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties,
including the petitioner, failed to address this issue, thereby necessitating the affirmance
of the ruling of the Court of Tax Appeals on this point.55
Summary
Hence, although this Court agreed with the petitioner corporation that the two-year
prescriptive period for the filing of claims for refund/credit of input VAT must be counted
from the date of filing of the quarterly VAT return, and that sales to EPZA-registered
enterprises operating within economic processing zones were effectively zero-rated and
were not covered by Revenue Regulations No. 2-88, it still denies the claims of
petitioner corporation for refund of its input VAT on its purchases of capital goods and
effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the
first quarter of 1992, for not being established and substantiated by appropriate and
sufficient evidence. Petitioner corporation is also not entitled to the re-opening of its
cases and/or holding of new trial since the non-presentation of the required
documentary evidence before the BIR and the CTA by its counsel does not constitute
excusable negligence or mistake as contemplated in Section 1, Rule 37 of the revised
Rules of Court.
WHEREFORE, premises considered, the instant Petitions for Review are hereby
DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000, of the Court of
Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby AFFIRMED.
Costs against petitioner.
8
COMMISSIONER OF INTERNAL REVENUE vs. AMERICAN EXPRESS
INTERNATIONAL, INC. June 29, 2005 PANGANIBAN, J.:
As a general rule, the value-added tax (VAT) system uses the destination principle.
However, our VAT law itself provides for a clear exception, under which the supply of
service shall be zero-rated when the following requirements are met: (1) the service is
performed in the Philippines; (2) the service falls under any of the categories provided in
Section 102(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that
is accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas.
Since respondents services meet these requirements, they are zero-rated. Petitioners
Revenue Regulations that alter or revoke the above requirements are ultra vires and
invalid.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
assailing the February 28, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP
No. 62727. The assailed Decision disposed as follows:
WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of
merit. The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto.[3]
The Facts
Quoting the CTA, the CA narrated the undisputed facts as follows:

[Respondent] is a Philippine branch of American Express International, Inc., a
corporation duly organized and existing under and by virtue of the laws of the State of
Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE Building,
corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of
American Express International, Inc. - Hongkong Branch (Amex-HK) and is engaged
primarily to facilitate the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines.
Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue
District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March
1988 and was issued VAT Registration Certificate No. 088445 bearing VAT Registration
No. 32A-3-004868. For the period January 1, 1997 to December 31, 1997, [respondent]
Exhibit Period Covered Date Filed
D 1997 1st Qtr. April 18, 1997

F 2nd Qtr. July 21, 1997
G 3rd Qtr. October 2, 1997
H 4th Qtr. January 20, 1998
filed with the BIR its quarterly VAT returns as follows:
On March 23, 1999, however, [respondent] amended the aforesaid returns and
declared the following:
E x h Taxable Output Zero-rated Domestic Input

1997 Sales VAT Sales Purchases VAT
I 1st qtr P59,597. P5,959. P17,513,80 P6,778,182 P677,818.

20 72 1.11 .30 23
J 2nd qtr 67,517.20 6,751.72 17,937,361.519,333,242.90 933,324.29
K 3rd qtr 51,936.60 5,193.66 19,627,245.368,438,357.00 843,835.70
L 4th qtr 67,994.30 6,799.43 25,231,225.2213,080,822.101,308,082.21
Total P247,04 P24,704 P80,309,63 P37,630,60 P3,763,06

5.30 .53 3.20 4.30 0.43
On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund
of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was
arrived at after deducting from its total input VAT paid of P3,763,060.43 its applied
output VAT liabilities only for the third and fourth quarters of 1997 amounting to
P5,193.66 and P6,799.43, respectively. [Respondent] cites as basis therefor, Section
110 (B) of the 1997 Tax Code, to state:
Section 110. Tax Credits. -
xxxxxxxxx
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If
the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. Any input tax attributable to the purchase of capital
goods or to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of
Section 112.
There being no immediate action on the part of the [petitioner], [respondents]

petition was filed on April 15, 1999.
In support of its Petition for Review, the following arguments were raised by
[respondent]:
A. Export sales by a VAT-registered person, the consideration for which is paid

for in acceptable foreign currency inwardly remitted to the Philippines and accounted
for in accordance with existing regulations of the Bangko Sentral ng Pilipinas, are
subject to [VAT] at zero percent (0%). According to [respondent], being a VAT-
registered entity, it is subject to the VAT imposed under Title IV of the Tax Code, to
wit:
Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of
tax. - There shall be levied, assessed and collected, a value-added tax equivalent to
10% percent of gross receipts derived by any person engaged in the sale of services.
The phrase sale of services means the performance of all kinds of services for others
for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors: stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; and similar services regardless of whether o[r] not the
performance thereof calls for the exercise or use of the physical or mental faculties:
Provided That the following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:
(1) xxx
(2) Services other than those mentioned in the preceding
subparagraph, the consideration is paid for in acceptable foreign currency which is
remitted inwardly to the Philippines and accounted for in accordance with the rules
and regulations of the BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989,
the pertinent portion of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is

paid for in acceptable foreign currency which is remitted inwardly to the Philippines
and accounted for in accordance with the rules and regulations of the Central [B]ank
of the Philippines, your service income is automatically zero rated effective January
1, 1998. [Section 102(a)(2) of the Tax Code as amended].[4] For this, there is no
need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to

zero-rated revenues are available as tax refund in accordance with Section 106 (now
Section 112) of the [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No.
5-87, to state:
Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person,

except those covered by paragraph (a) above, whose sales are zero-rated or are
effectively zero-rated, may, within two (2) years after the close of the taxable quarter
when such sales were made, apply for the issuance of tax credit certificate or refund
of the input taxes due or attributable to such sales, to the extent that such input tax
has not been applied against output tax. x x x. [Section 106(a) of the Tax Code][5]
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable

transaction for value-added tax purposes. A sale by a VAT-registered person of goods
and/or services taxed at zero rate shall not result in any output tax. The input tax on
his purchases of goods or services related to such zero-rated sale shall be available
as tax credit or refundable in accordance with Section 16 of these Regulations. x x x.
[Section 8(a), [RR] 5-87].[6]
[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and
Affirmative Defenses that:
7. The claim for refund is subject to investigation by the Bureau of Internal

Revenue;
8. Taxes paid and collected are presumed to have been made in accordance
with laws and regulations, hence, not refundable. Claims for tax refund are construed
strictly against the claimant as they partake of the nature of tax exemption from tax
and it is incumbent upon the [respondent] to prove that it is entitled thereto under the
law and he who claims exemption must be able to justify his claim by the clearest
grant of organic or statu[t]e law. An exemption from the common burden [cannot] be
permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the governing
rules with reference to tax recovery or refund, which are found in Sections 204(c) and
229 of the Tax Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund

or Credit Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are returned
in good condition by the purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their value upon proof of
destruction. No credit or refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for credit or refund within two
(2) years after payment of the tax or penalty: Provided, however, That a return filed
with an overpayment shall be considered a written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or

proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner; but such
suit or proceeding may be maintained, whether or not such tax, penalty or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration
of two (2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta
rendered a decision[7] in favor of the herein respondent holding that its services are
subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and
Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of which
reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and
in accordance with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to
[respondent] the amount of P3,352,406.59 representing the latters excess input VAT
paid for the year 1997.[8]
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More
particularly, its services were not of the same class or of the same nature as project
studies, information, or engineering and architectural designs for non-resident foreign
clients; rather, they were services other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines. The
consideration in both types of service, however, was paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was
unwarranted. By requiring that respondents services be consumed abroad in order to be
zero-rated, petitioner went  
beyond the sphere of interpretation and into that of legislation. Even granting that it is
valid, the ruling cannot be given retroactive effect, for it will be harsh and oppressive to
respondent, which has already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.[9]
The Issue
Petitioner raises this sole issue for our consideration:
Whether or not the Court of Appeals committed reversible error in
holding that respondent is entitled to the refund of the amount
of P3,352,406.59 allegedly representing excess input VAT for
the year 1997.[10]
The Courts Ruling

The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code[11] provides:
Sec. 102. Value-added tax on sale of services and use or lease of

properties. -- (a) Rate and base of tax. -- There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services x x x.
The phrase 'sale or exchange of services' means the performance

of all kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by x x x persons
engaged in milling, processing, manufacturing or repacking goods for others;
x x x services of banks, non-bank financial intermediaries and finance
companies; x x x and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase 'sale or exchange of services' shall likewise include:
xxxxxxxxx
(3) The supply of x x x commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to
and is furnished as a means of enabling the application or enjoyment of x x x
any such knowledge or information as is mentioned in subparagraph (3);
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered
in connection with technical management or administration of any x x x
commercial undertaking, venture, project or scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental
or royalty, including the amount charged for materials supplied with the
services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be
performed for another person, excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following

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

doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
subparagraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the [BSP].
xxxxxxxxx
Zero Rating of
Other Services
The law is very clear. Under the last paragraph quoted above, services performed by
VAT-registered persons in the Philippines (other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines), when paid in
regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of

receivables belonging to its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with BSP
rules and regulations. Certainly, the service it renders in the Philippines is not in the
same category as processing, manufacturing or repacking of goods and should,
therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling
No. 080-89 that the income respondent earned from its parent companys regional
operating centers (ROCs) was automatically zero-rated effective January 1, 1988.[12]
Service has been defined as the art of doing something useful for a person or company
for a fee[13] or useful labor or work rendered or to be rendered by one person to
another.[14] For facilitating in the Philippines the collection and payment of receivables
belonging to its Hong Kong-based foreign client, and getting paid for it in duly accounted
acceptable foreign currency, respondent renders service falling under the category of
zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore, be
levied upon the supply of that service.[15]
The Credit Card System

and Its Components
For sure, the ancillary business of facilitating the said collection is different from the
main business of issuing credit cards.[16] Under the credit card system, the credit card
company extends credit accommodations to its card holders for the purchase of goods
and services from its member establishments, to be reimbursed by them later on upon
proper billing. Given the complexities of present-day business transactions, the
components of this system can certainly function as separate billable services.
Under RA 8484,[17] the credit card that is issued by banks[18] in general, or by non-
banks in particular, refers to any card x x x or other credit device existing for the
purpose of obtaining x x x goods x x x or services x x x on credit;[19] and is being used
usually on a revolving basis.[20] This means that the consumer-credit arrangement that
exists between the issuer and the holder of the credit card enables the latter to procure
goods or services on a continuing basis as long as the outstanding balance does not
exceed a specified limit.[21] The card holder is, therefore, given the power to obtain
present control of goods or service on a promise to pay for them in the future.[22]
Business establishments may extend credit sales through the use of the credit card
facilities of a non-bank credit card company to avoid the risk of uncollectible accounts
from their customers. Under  
this system, the establishments do not deposit in their bank accounts the credit card
drafts[23] that arise from the credit sales. Instead, they merely record their receivables
from the credit card company and periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement between
them usually provides for discounts to be taken by the company upon its redemption of
the drafts.[24] At the end of each month, it then bills its credit card holders for their
respective drafts redeemed during the previous month. If the holders fail to pay the
amounts owed, the company sustains the loss.[25]
In the present case, respondents role in the consumer credit[26]  

process described above primarily consists of gathering the bills and credit card drafts
of different service establishments located in the Philippines and forwarding them to the
ROCs outside the country. Servicing the bill is not the same as billing. For the former
type of service alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not
only of redeeming the drafts from the ROCs and sending the checks to the service
establishments, but also of billing the credit card holders for their respective drafts that it
has redeemed. While it usually imposes finance charges[27] upon the holders, none
may be exacted by respondent upon either the ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means
that each of them is a unit, an offshoot, lateral extension, or division[28] located at some
distance from the home office[29] of the parent company; carrying separate inventories;
incurring their own expenses; and generating their respective incomes. Each may
conduct sales operations in any locality as an extension of the principal office.[30]
The extent of accounting activity at any of these branches depends upon company
policy,[31] but the financial reports of the entire business enterprise -- the credit card
company to which they all belong -- must always show its financial position, results of
operation, and changes in its financial position as a single unit.[32] Reciprocal accounts
are reconciled or eliminated, because they lose all significance when the branches and
home office are viewed as a single entity.[33] In like manner, intra-company profits or
losses must be offset against each other for accounting purposes.
Contrary to petitioners assertion,[34] respondent can sell its services to another branch
of the same parent company.[35] In fact, the business concept of a transfer price allows
goods and services to be sold between and among intra-company units at cost or above
cost.[36] A branch may be operated as a revenue center, cost center, profit center or
investment center, depending upon the policies and accounting system of its parent
company.[37] Furthermore, the latter may choose not to make any sale itself, but merely
to function as a control center, where most or all of its expenses are allocated to any of
its branches.[38]
Gratia argumenti that the sending of drafts and bills by service establishments to
respondent is equivalent to the act of sending them directly to its parent company
abroad, and that the parent companys subsequent redemption of these drafts and
billings of credit card holders is also attributable to respondent, then with greater reason
should the service rendered by respondent be zero-rated under our VAT system. The
service partakes of the nature of export sales as  
applied to goods,[39] especially when rendered in the Philippines by a VAT-registered
person[40] that gets paid in acceptable foreign currency accounted for in accordance
with BSP rules and regulations.
VAT Requirements for

the Supply of Service
The VAT is a tax on consumption[41] expressed as a percentage of the value added to

goods or services[42] purchased by the producer or taxpayer.[43] As an indirect tax[44]
on services,[45] its main object is the transaction[46] itself or, more concretely, the
performance of all kinds of services[47] conducted in the course of trade or business in
the Philippines.[48] These services must be regularly conducted in this country;
undertaken in pursuit of a commercial or an economic activity;[49] for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any
international agreement.[50]
Without doubt, the transactions respondent entered into with its Hong Kong-based client
meet all these requirements.
First, respondent regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a clearly
separate and distinct entity.
Second, such service is commercial in nature; carried on over a sustained period of

time; on a significant scale; with a reasonable degree of frequency; and not at random,
fortuitous or attenuated.
Third, for this service, respondent definitely receives consideration in foreign currency
that is accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international
agreements.
Services Subject to
Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax.[51] Goods and services are taxed only in the country
where they are consumed. Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a

particular type of service with the consumption of its output abroad. In the present case,
the facilitation of the collection of receivables is different from the utilization or
consumption of the outcome of such service. While the facilitation is done in the
Philippines, the consumption is not. Respondent renders assistance to its foreign clients
-- the ROCs outside the country -- by receiving the bills of service establishments
located here in the country and forwarding them to the ROCs abroad. The consumption
contemplated by law, contrary to petitioners administrative interpretation,[52] does not
imply that the service be done abroad in order to be zero-rated.
Consumption is the use of a thing in a way that thereby exhausts it.[53] Applied to
services, the term means the performance or successful completion of a contractual
duty, usually resulting in the performers release from any past or future liability x x x.[54]
The services rendered by respondent are performed or successfully completed upon its
sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when
their destination is determined. Instead, there can only be a predetermined end of a
course[55] when determining the service location or position x x x for legal purposes.
[56] Respondents 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.
Respondents Services Exempt

from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is,
for a zero percent VAT rate for services that are performed in the Philippines, paid for in
regulations of the [BSP].[57] Thus, for the supply of service to be zero-rated as an
exception, the law merely requires that first, the service be performed in the Philippines;
second, the service fall under any of the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency accounted for in accordance with
BSP rules and regulations.
Indeed, these three requirements for exemption from the destination principle are met
by respondent. Its facilitation service is performed in the Philippines. It falls under the
second category found in Section 102(b) of the Tax Code, because it is a service other
than processing, manufacturing or repacking of goods as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that it be paid in
acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.
Performance of Service versus

Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated,
it need not be tacked in as part of the cost of goods exported.[58] The law neither
imposes such requirement nor associates services with exported goods. It simply states
that the services performed by VAT-registered persons in the Philippines -- services
other than the processing, manufacturing or repacking of goods for persons doing
business outside this country -- if paid in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP, are zero-rated. The service
rendered by respondent is clearly different from the product that arises from the
rendition of such service. The activity that creates the income must not be confused with
the main business in the course of which that income is realized.[59]
Tax Situs of a
Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs
of a zero-rated service. Under this criterion, the place where the service is rendered
determines the jurisdiction[60] to impose the VAT.[61] Performed in the Philippines, such
service is necessarily subject to its jurisdiction,[62] for the State necessarily has to have
a substantial connection[63] to it, in order to enforce a zero rate.[64] The place of
payment is immaterial;[65] much less is the place where the output of the service will be
further or ultimately used.
Statutory Construction
or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore,
no statutory construction or interpretation is needed. Neither can conditions or
limitations be introduced where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon.
The Court may not construe a statute that is free from doubt.[66] [W]here the law
speaks in clear and categorical language, there is no room for interpretation. There is
only room for application.[67] The Court has no choice but to see to it that its mandate is
obeyed.[68]
No Qualifications
Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero
rating of services other than the processing, manufacturing or repacking of goods -- in
general and without qualifications -- when paid for by the person to whom such services
are rendered in acceptable foreign currency inwardly remitted and duly accounted for in
accordance with the BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:
SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a

taxable transaction for value-added tax purposes. A sale by a VAT-
registered person of goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his purchases of goods or
services related to such zero-rated sale shall be available as tax credit or
refundable in accordance with Section 16 of these Regulations.
xxxxxxxxx
(c) Zero-rated sales of services. -- The following services

rendered by VAT-registered persons are zero-rated:
(1) Services in connection with the processing, manufacturing or

repacking of goods for persons doing business outside the Philippines,
where such goods are actually shipped out of the Philippines to said
persons or their assignees and the services are paid for in acceptable
foreign currency inwardly remitted and duly accounted for under the
regulations of the Central Bank of the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than those
mentioned in subparagraph (1) above which are paid for by the person or
entity to whom the service is rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with Central Bank
regulations. Where the contract involves payment in both foreign and local
currency, only the service corresponding to that paid in foreign currency
shall enjoy zero-rating. The portion paid for in local currency shall be
subject to VAT at the rate of 10%.
RR 7-95Broad Enough
RR 7-95, otherwise known as the Consolidated VAT Regulations,
[69] reiterates the above-quoted provision and further presents as
examples only the services performed in the Philippines by VAT-registered
hotels and other service establishments. Again, the condition remains that
these services must be paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with the rules and regulations of
the BSP. The term other service establishments is obviously broad enough
to cover respondents facilitation service. Section 4.102-2 of RR 7-95
provides thus:
SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated

sale by a VAT registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance with these
regulations.
(b) Transaction subject to zero-rate. -- The following services

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

persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the BSP;

subparagraph, e.g. those rendered by hotels and other service
establishments, the consideration for which is paid for in acceptable
regulations of the BSP;
xxxxxxxxx
Meaning of as well asin RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by

RR 5-96 to read as follows:
Section 4.102-2(b)(2) -- Services other than processing,

manufacturing or repacking for other persons doing business outside the
Philippines for goods which are subsequently exported, as well as
services by a resident to a non-resident foreign client such as project
studies, information services, engineering and architectural designs and
other similar services, the consideration for which is paid for in acceptable
regulations of the BSP."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR

7-95, the amendment introduced by RR 5-96 further enumerates specific services
entitled to zero rating. Although superfluous, these sample services are meant to be
merely illustrative. In this provision, the use of the term as well as is not restrictive. As a
prepositional phrase with an adverbial relation to some other word, it simply means in
addition to, besides, also or too.[70]
Neither the law nor any of the implementing revenue regulations aforequoted
categorically defines or limits the services that may be sold or exchanged for a fee,
remuneration or consideration. Rather, both merely enumerate the items of service that
fall under the term sale or exchange of services.[71]
Ejusdem Generis
Inapplicable
The canon of statutory construction known as ejusdem generis or of the same kind or
specie does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or specific
words, followed by the general phrase and other similar services, such words do not
constitute a readily discernible class and are patently not of the same kind.[72] Project
studies involve investments or marketing; information services focus on data
technology; engineering and architectural designs require creativity. Aside from calling
for the exercise or use of mental faculties or perhaps producing written technical
outputs, no common denominator to the exclusion of all others characterizes these
three services. Nothing sets them apart from other and similar general services that
may involve advertising, computers, consultancy, health care, management,
messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase and other similar
services a broader meaning.[73] Clearly, the preceding phrase as well as is not meant
to limit the effect of and other similar services.
Third, and most important, the statutory provision upon which this regulation is based is
by itself not restrictive. The scope of the word services in Section 102(b)(2) of the Tax
Code is broad; it is not susceptible of narrow interpretation.[74]
VAT Ruling
Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level,[75] rendered by the BIR commissioner upon request of a taxpayer
to clarify certain provisions of the VAT law. As correctly held by the CA, when this ruling
states that the service must be destined for consumption outside of the Philippines[76]
in order to qualify for zero rating, it contravenes both the law and the regulations issued
pursuant to it.[77] This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.
[78]
Although [i]t is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts,
[79] this interpretation is not conclusive and will have to be ignored if judicially found to
be erroneous[80] and clearly absurd x x x or improper.[81] An administrative issuance
that overrides the law it merely seeks to interpret, instead of remaining consistent and in
harmony with it, will not be countenanced by this Court.[82]
In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a
refund of the substantial amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89,
such revocation could not be given  
retroactive effect if the application of the latter ruling would only be prejudicial to
respondent.[83] Section 246 of the Tax Code categorically declares that [a]ny revocation
x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be
given retroactive application if the revocation x x x will be prejudicial to the taxpayers.
[84]
It is also basic in law that no x x x rule x x x shall be given retrospective effect[85]

unless explicitly stated.[86] No indication of such retroactive application to respondent
does the Court find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in
Section 246[87] of the Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code[88] and not
bound by predecessors acts or rulings, the BIR commissioner may render a different
construction to a statute[89] only if the new interpretation is in congruence with the law.
Otherwise, no amount of interpretation can ever revoke, repeal or modify what the law
says.
Consumed Abroad
Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the
part of the legislators not to impose the condition of being consumed abroad in order for
services performed in the Philippines by a VAT-registered person to be zero-rated. We
quote the relevant portions of the proceedings:
Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman
kindly explain to me - I am referring to the lower part of the first paragraph with the
Provided. Section 102. Provided that the following services performed in the Philippines
by VAT registered persons shall be subject to zero percent. There are three here. What
is the difference between the three here which is subject to zero percent and Section
103 which is exempt transactions, to being with?
Senator Herrera: Mr. President, in the case of processing and manufacturing or

repacking goods for persons doing business outside the Philippines which are
subsequently exported, and where the services are paid for in acceptable foreign
currencies inwardly remitted, this is considered as subject to 0%. But if these conditions
are not complied with, they are subject to the VAT.
In the case of No. 2, again, as the Gentleman pointed out, these three are
zero-rated and the other one that he indicated are exempted from the very
beginning. These three enumerations under Section 102 are zero-rated
provided that these conditions indicated in these three paragraphs are also
complied with. If they are not complied with, then they are not entitled to the
zero ratings. Just like in the export of minerals, if these are not exported, then
they cannot qualify under this provision of zero rating.
Senator Maceda: Mr. President, just one small item so we can leave this. Under the
proviso, it is required that the following services be performed in the Philippines.
Under No. 2, services other than those mentioned above includes, let us say,
manufacturing computers and computer chips or repacking goods for persons
doing business outside the Philippines. Meaning to say, we ship the goods to them
in Chicago or Washington and they send the payment inwardly to the Philippines in
foreign currency, and that is, of course, zero-rated.
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.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are
subject to VAT, and I am talking of all services. Do big contractual engineers in Saudi
Arabia pay VAT?
Senator Herrera: This provision applies to a VAT-registered person. When he performs

services in the Philippines, that is zero-rated.
Senator Maceda: That is right."[90]
Legislative Approval
By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle
of legislative approval of administrative interpretation by reenactment clearly obtains.
This principle means that the reenactment of a statute substantially unchanged is
persuasive indication of the adoption by Congress of a prior executive construction.[91]
The legislature is presumed to have reenacted the law with full knowledge of the
contents of the revenue regulations then in force regarding the VAT, and to have
approved or confirmed them because they would carry out the legislative purpose. The
particular provisions of the regulations we have mentioned earlier are, therefore, re-
enforced. When a statute is susceptible of the meaning placed upon it by a ruling of the
government agency charged with its enforcement and the [l]egislature thereafter
[reenacts] the provisions [without] substantial change, such action is to some extent
confirmatory that the ruling carries out the legislative purpose.[92]
In sum, having resolved that transactions of respondent are zero-rated, the Court
upholds the formers entitlement to the refund as determined by the appellate court.
Moreover, there is no conflict between the decisions of the CTA and CA. This Court
respects the findings and conclusions of a specialized court like the CTA which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax
cases and has necessarily developed an expertise on the subject.[93]
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is

completely freed from the VAT, because the seller is entitled to recover, by way of a
refund or as an input tax credit, the tax that is included in the cost of purchases
attributable to the sale or exchange.[94] [T]he tax paid or withheld is not deducted from
the tax base.[95] Having been applied for within the reglementary period,[96]
respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
9
CORAL BAY NICKEL CORPORATION v. CIR JUNE 13,2016 BERSAMIN, J.
This appeal is brought by a taxpayer whose claim for the refund or credit pertaining to
its alleged unutilized input tax for the third and fourth quarters of the year 2002
amounting to P50,124,086.75 had been denied by the Commissioner of Internal
Revenue. The Court of Tax Appeals (CTA) En Banc and in Division denied its appeal.
We sustain the denial of the appeal.
Antecedents
The petitioner, a domestic corporation engaged in the manufacture of nickel and/or

cobalt mixed sulphide, is a VAT entity registered with the Bureau of Internal Revenue
(BIR). It is also registered with the Philippine Economic Zone Authority (PEZA) as an
Ecozone Export Enterprise at the Rio Tuba Export Processing Zone under PEZA
Certificate of Registration dated December 27, 2002.[1]
On August 5, 2003,[2] the petitioner filed its Amended VAT Return declaring unutilized
input tax from its domestic purchases of capital goods, other than capital goods and
services, for its third and fourth quarters of 2002 totalling P50,124,086.75. On June 14,
2004,[3] it filed with Revenue District Office No. 36 in Palawan its Application for Tax
Credits/Refund (BIR Form 1914) together with supporting documents.
Due to the alleged inaction of the respondent, the petitioner elevated its claim to the
CTA on July 8, 2004 by petition for review, praying for the refund of the aforesaid input
VAT (CTA Case No. 7022).[4]
After trial on the merits, the CTA in Division promulgated its decision on March 10,
2008[5] denying the petitioner's claim for refund on the ground that the petitioner was
not entitled to the refund of alleged unutilized input VAT following Section 106(A)(2)(a)
(5) of the National Internal Revenue Code (NIRC) of 1997, as amended, in relation to
Article 77(2) of the Omnibus Investment Code and conformably with the Cross Border
Doctrine. In support of its ruling, the CTA in Division cited Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils) Inc. (Toshiba)[6] and Revenue
Memorandum Circular ("RMC") No. 42-03.[7]
After the CTA in Division denied its Motion for Reconsideration[8] on July 2, 2008,[9] the
petitioner elevated the matter to the CTA En Banc (CTA EB Case No. 403), which also
denied the petition through the assailed decision promulgated on May 29, 2009.[10]
The CTA En Banc denied the petitioner's Motion for Reconsideration through the
resolution dated December 10, 2009.[11]
Hence, this appeal, whereby the petitioner contends that Toshiba is not applicable
inasmuch as the unutilized input VAT subject of its claim w(as incurred from May 1,
2002 to December 31, 2002 as a VAT-registered taxpayer, not as a PEZA-registered
enterprise; that during the period subject of its claim, it was not yet registered with PEZA
because it was only on December 27, 2002 that its Certificate of Registration was
issued;[12] that until then, it could not have refused the payment of VAT on its
purchases because it could not present any valid proof of zero-rating to its VAT-
registered suppliers; and that it complied with all the procedural and substantive
requirements under the law and regulations for its entitlement to the refund.[13]
Issue
Was the petitioner, an entity located within an ECOZONE, entitled to the refund of its
unutilized input taxes incurred before it became a PEZA registered entity?
Ruling of the Court
The appeal is bereft of merit.
We first explain why we have given due course to the petition for review on certiorari
despite the petitioner's premature filing of its judiqial claim in the CTA.
The petitioner filed with the BIR on June 10, 2004 its application for tax refund or credit
representing the unutilized input tax for the third and fourth quarters of 2002. Barely 28
days later, it brought its appeal in the CTA contending that there was inaction on the part
of the petitioner despite its not having waited for the lapse of the 120-day period
mandated by Section 112 (D) of the 1997 NTRC. At the time of the petitioner's appeal,
however, the applicable rule was that provided under BIR Ruling No. DA-489-03,[14]
issued on December 10, 2003, to wit:
It appears, therefore, that it is not necessary for the Commissioner of Internal Revenue
to first act unfavorably on the claim for refund before the Court of Tax Appeals could
validly take cognizance of the case. This is so because of the positive mandate of
Section 230 of the Tax Code and also by virtue of the doctrine that the delay of the
Commissioner in rendering his decision does not extend the reglementary period
prescribed by statute.
Incidentally, the taxpayer could not be faulted for taking advantage of the full two-year
period set by law for filing his claim for refund [with the Commissioner of Internal
Revenue]. Indeed, no provision in the tax code requires that the claim for refund be
fxled at the earliest instance in order to give the Commissioner an opportunity to rule on
it and the court to review the ruling of the Commissioner of Internal Revenue on appeal.
xxx
As pronounced in Silicon Philippines Inc. vs. Commissioner of Internal Revenue,[15] the
exception to the mandatory and jurisdictional compliance with the 120+30 day-period is
when the claim for the tax refund or credit was filed in the period between December 10,
2003 and October 5, 2010 during which BIR Ruling No. DA-489-03 was still in effect.
Accordingly, the premature filing of the judicial claim was allowed, giving to the CTA
jurisdiction over the appeal.
As to the main issue, we sustain the assailed decision of the CTA En Banc.
The petitioner's insistence, that Toshiba is not applicable because Toshiba Information
Equipment (Phils) Inc., the taxpayer involved thereat, was a PEZA-registered entity
during the time subject of the claim for tax refund or credit, is unwarranted. The most
significant difference between Toshiba and this case is that Revenue Memorandum
Circular No. 74-99[16] was not yet in effect at the time Toshiba Information Equipment
(Phils) Inc. brought its claim for refund. Regardless of the distinction, however, Toshiba
actually discussed the VAT implication of PEZA-registered enterprises and ECOZONE-
located enterprises in its entirety, which renders Toshiba applicable to the petitioner's
case.
Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered enterprises
was based on their choice of fiscal incentives, namely: (1) if the PEZA-registered
enterprise chose the 5% preferential tax on its gross income in lieu of all taxes, as
provided by Republic Act No. 7916, as amended, then it was VAT-exempt; and (2) if the
PEZA-registered enterprise availed itself of the income tax holiday under Executive
Order No. 226, as amended, it was subject to VAT at 10%[17] (now, 12%). Based on
this old rule, Toshiba allowed the claim for refund or credit on the part of Toshiba
Information Equipment (Phils) Inc.
This is not true with the petitioner. With the issuance of RMC 74-99, the distinction
under the old rule was disregarded and the new circular took into consideration the two
important principles of the Philippine VAT system: the Cross Border Doctrine and the
Destination Principle. Thus, Toshiba opined:
The rule that any sale by a VAT-registered supplier from the Customs Territory to a
PEZA-registered enterprise shall be considered an export sale and subject to zero
percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance
of RMC No. 74-99. Prior to the said date, however, whether or not a PEZA-registered
enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the
said enterprise. This old rule on VAT-exemption or liability of PEZA-registered
enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court, cannot be lightly disregarded considering the great
number of PEZA-registered enterprises which did rely on it to determine its tax liabilities,
as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the
PEZA-registered enterprise the option to choose between two sets of fiscal incentives:
(a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No.
7916, as amended; and (b) the income tax holiday provided under Executive Order No.
226, otherwise known as the Omnibus Investment Code of 1987, as amended.
xxxx
This old rule clearly did not take into consideration the Cross Border Doctrine
essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It
relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again,
for emphasis, the old VAT rule for PEZA-registered enterprises was based on their
choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent
(5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act
No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered
enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it
shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC
No. 74-99, which categorically declared that all sales of goods, properties, and
services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless
of the tatter's type or class of PEZA registration; and, thus, affirming the nature of
a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.[18]
(underscoring and emphasis supplied)
Furthermore, Section 8 of Republic Act No. 7916 mandates that PEZA shall manage
and operate the ECOZONE as a separate customs territory. The provision thereby
establishes the fiction that an ECOZONE is a foreign tenitory separate and distinct from
the customs territory. Accordingly, the sales made by suppliers from a customs territory
to a purchaser located within an ECOZONE will be considered as exportations.
Following the Philippine VAT system's adherence to the Cross Border Doctrine and
Destination Principle, the VAT implications are that "no VAT shall be imposed to form
part of the cost of goods destined for consumption outside of the territorial border of the
taxing authority"[19] Thus, Toshiba has discussed that:
This Court agrees, however, that PEZA-registered enterprises, which would
necessarily be located within ECQZONES, are VAT-exempt entities, not because of
Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%)
preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes;
but, rather, because of Section 8 of the same statute which establishes the fiction
that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an

ECOZONE. An ECOZONE or a Special Economic Zone has been described as —
. . . [S]elected areas with highly developed or which have the potential to be developed
into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and
financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following: industrial estates
(IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.
The national territory of the Philippines outside of the proclaimed borders of the
ECOZONE shall be referred to as the Customs Territory.
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage
and operate the ECOZONES as a separate customs territory; thus, creating the
fiction that the ECOZONE is a foreign territory. As a result, sales made by a
supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated
as an exportation from the Customs Territory. Conversely, sales made by a supplier
from the ECOZONE to a purchaser in the Customs Territory shall be considered as an
importation into the Customs Territory.[20] (underscoring and emphasis are supplied)
The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan.
[21] Its plant site was specifically located inside the Rio Tuba Export Processing Zone
— a special economic zone (ECOZONE) created by Proclamation No. 304, Series of
2002, in relation to Republic Act No. 7916. As such, the purchases of goods and
services by the petitioner that were destined for consumption within the ECOZONE
should be free of VAT; hence, no input VAT should then be paid on such purchases,
rendering the petitioner not entitled to claim a tax refund or credit. Verily, if the petitioner
had paid the input VAT, the CTA was correct in holding that the petitioner's proper
recourse was not against the Government but against the seller who had shifted to it the
output VAT following RMC No. 42-03,[22] which provides:
In case the supplier alleges that it reported such sale as a taxable sale, the
substantiation of remittance of the output taxes of the seller (input taxes of the exporter-
buyer) can only be established upon the thorough audit of the suppliers' VAT returns
and corresponding books and records. It is, therefore, imperative that the processing
office recommends to the concerned BIR Office the audit of the records of the seller.
In the meantime, the claim for input tax credit by the exporter-buyer should be denied
without prejudice to the claimant's right to seek reimbursement of the VAT paid, if any,
from its supplier.
We should also take into consideration the nature of VAT as an indirect tax. Although
the seller is statutorily liable for the payment of VAT, the amount of the tax is allowed to
be shifted or passed on to the buyejr.[23] However, reporting and remittance of the VAT
paid to the BIR remained to be the seller/supplier's obligation. Hence, the proper party
to seek the tax refund or credit should be the suppliers, not the petitioner.
In view of the foregoing considerations, the Court must uphold the rejection of the
appeal of the petitioner. This Court has repeatedly poirited out that a claim for tax refund
or credit is similar to a tax exemption and should be strictly construed against the
taxpayer. The burden of proof to show that he is ultimately entitled to the grant of such
tax refund or credit rests on the taxpayer.[24] Sadly, the petitioner has not discharged its
burden.
WHEREFORE, the Court AFFIRMS the decision promulgated on May 29, 2009 in CTA
EB Case No. 403; and ORDERS the petitioner to pay the costs of suit. SO ORDERED.
10
ACCENTURE, INC. vs. COMMISSIONER OF INTERNAL REVENUE
July 11, 2012 SERENO, J.
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for
the reversal of the Decision of the Court of Tax Appeals En Banc (CTA En Banc ) dated
22 September 2009 and its subsequent Resolution dated 23 October 2009.1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing

management consulting, business strategies development, and selling and/or licensing
of software.2 It is duly registered with the Bureau of Internal Revenue (BIR) as a Value
Added Tax (VAT) taxpayer or enterprise in accordance with Section 236 of the National
Internal Revenue Code (Tax Code).3
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to
31 August 2002 (1st period). Its Quarterly VAT Return for the fourth quarter of 2002,
which covers the 1st period, was filed on 17 September 2002; and an Amended
Quarterly VAT Return, on 21 June 2004.4 The following are reflected in Accenture’s VAT
Return for the fourth quarter of 2002:
Purchases Amount Input VAT

Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20
Domestic Purchases- Goods other than capital

₱64,789,507.90 ₱6,478,950.79
Goods
Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81
Total Input Tax ₱9,355,809.80
Zero-rated Sales ₱316,113,513.34
Total Sales ₱335,640,544.74
Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October
2002; and that for October 2002, on 12 November 2002. These returns were amended
on 9 January 2003. Accenture’s Quarterly VAT Return for the first quarter of 2003, which
included the period 1 September 2002 to 30 November 2002 (2nd period), was filed on
17 December 2002; and the Amended Quarterly VAT Return, on 18 June 2004. The
latter contains the following information:
Purchases Amount Input VAT
Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41
Domestic Purchases- Goods other than capital

₱132,820,541.70 ₱13,282,054.17
Goods
Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80
Total Input Tax ₱27,682,459.38
Zero-rated Sales ₱545,686,639.18
Total Sales ₱ ₱572,880,982.68
The monthly and quarterly VAT returns of Accenture show that, notwithstanding its
application of the input VAT credits earned from its zero-rated transactions against its
output VAT liabilities, it still had excess or unutilized input VAT credits. These VAT credits
are in the amounts of P9,355,809.80 for the 1st period and P27,682,459.38 for the 2nd
period, or a total of P37,038,269.18.
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on
Accenture’s "domestic purchases of taxable goods which cannot be directly attributed to
its zero-rated sale of services."8 This allocated input VAT was broken down to
P8,811,301.66 for the 1st period and P26,367,542.55 for the 2nd period.
The excess input VAT was not applied to any output VAT that Accenture was liable for in
the same quarter when the amount was earned—or to any of the succeeding quarters.
Instead, it was carried forward to petitioner’s 2nd Quarterly VAT Return for 2003.
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an
administrative claim for the refund or the issuance of a Tax Credit Certificate (TCC). The
DoF did not act on the claim of Accenture. Hence, on 31 August 2004, the latter filed a
Petition for Review with the First Division of the Court of Tax Appeals (Division), praying
for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:

1. The sale by Accenture of goods and services to its clients are not zero-rated
transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture has failed
to prove that it is entitled to a refund, because its claim has not been fully substantiated
or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for
failing to prove that the latter’s sale of services to the alleged foreign clients qualified for
zero percent VAT.
In resolving the sole issue of whether or not Accenture was entitled to a refund or an
issuance of a TCC in the amount of P35,178,844.21,14 the Division ruled that
Accenture had failed to present evidence to prove that the foreign clients to which the
former rendered services did business outside the Philippines.15 Ruling that
Accenture’s services would qualify for zero-rating under the 1997 National Internal
Revenue Code of the Philippines (Tax Code) only if the recipient of the services was
doing business outside of the Philippines,16 the Division cited Commissioner of Internal
Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.
(Burmeister)17 as basis.
Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR).
18 In its MR, it argued that the reliance of the Division on Burmeister was misplaced19
for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund,
given that the recipient of its service was doing business in the Philippines; it was not an
issue of failure of the applicant to present evidence to prove the fact that the recipient of
its services was a foreign corporation doing business outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services
should be doing business outside the Philippines, and Accenture had successfully
established that.21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with
the Division, Burmeister cannot be made to apply to this case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex)23
in support of its position. The MR was denied by the Division in its 12 March 2009
Resolution.
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment
introduced by Republic Act No. (R.A.) 9337, 25 there was no requirement that the
services must be rendered to a person engaged in business conducted outside the
Philippines to qualify for zero-rating. The CTA En Banc agreed that because the case
pertained to the third and the fourth quarters of taxable year 2002, the applicable law
was the 1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though the
provision used in Burmeister was Section 102(b)(2) of the earlier 1977 Tax Code, the
pronouncement therein requiring recipients of services to be engaged in business
outside the Philippines to qualify for zero-rating was applicable to the case at bar,
because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section
102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving
the latter’s allegation that its clients were foreign-based.27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter
affirmed the Division’s Decision and Resolution.28 A subsequent MR was also denied in
a Resolution dated 23 October 2009.
Hence, the present Petition for Review under Rule 45.

In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to
submit the following issues for resolution:
1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT
purposes under Section 108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioner’s claim for refund/tax credit in the amount of
P35,178,884.21 represents unutilized input VAT paid on its domestic purchases of
goods and services for the period commencing from 1 July 2002 until 30 November
2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or
year(s) the alleged unutilized input VAT paid on its domestic purchases of goods and
services for the period commencing from 1 July 2002 until 30 November 2002, and
applied the same fully to its output VAT liability for the said period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21,
representing the unutilized input VAT on domestic purchases of goods and services for
the period commencing from 1 July 2002 until 30 November 2002, from its sales of
services to various foreign clients.
5. Whether or not Petitioner’s claim for refund/tax credit in the amount of
P35,178,884.21, as alleged unutilized input VAT on domestic purchases of goods and
services for the period covering 1 July 2002 until 30 November 2002 are duly
substantiated by proper documents.
For consideration in the present Petition are the following issues:

1. Should the recipient of the services be "doing business outside the Philippines" for
the transaction to be zero-rated under Section 108(B)(2) of the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside
the Philippines?
Recipient of services must be doing business outside the Philippines for the
transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which
allows the refund of unutilized input VAT earned from zero-rated or effectively zero-rated
sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against
output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also
in taxable or exempt sale of goods of properties or services, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales.
Section 108(B) referred to in the foregoing provision was first seen when Presidential
Decree No. (P.D.) 199431 amended Title IV of P.D. 1158,32 which is also known as the
National Internal Revenue Code of 1977. Several Decisions have referred to this as the
1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333 further
amended provisions of Title IV. E.O. 273 by transferring the old Title IV provisions to
Title VI and filling in the former title with new provisions that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No.
(R.A.) 7716.34 This law, which was approved on 5 May 1994, widened the tax base.
Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x
xxx xxx xxx
"(b) Transactions subject to zero-rate. — The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)."
Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273,
and R.A. 7716—provides that if the consideration for the services provided by a VAT-
registered person is in a foreign currency, then this transaction shall be subjected to
zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section
108(B), to wit:
(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
and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision,
became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read
as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(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
and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph 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 Bangko Sentral ng
Pilipinas (BSP); x x x." (Emphasis supplied)
The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax
Code state that services, to be zero-rated, should be rendered to clients doing business
outside the Philippines, the requirement introduced by R.A. 9337.35 Required by
Section 108(B), prior to the amendment, is that the consideration for the services
rendered be in foreign currency and in accordance with the rules of the Bangko Sentral
ng Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in
Section 108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that
Section 108(B) reveals a clear intent on the part of the legislators not to impose the
condition of being "consumed abroad" in order for the services performed in the
Philippines to be zero-rated.36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the
requirement—that the client must be doing business outside the Philippines—can be
disregarded, because this requirement is expressly provided in Article 108(2) of the Tax
Code.
Accenture questions the Division’s application to this case of the pronouncements made
in Burmeister. According to petitioner, the provision applied to the present case was
Section 102(b) of the 1977 Tax Code, and not Section 108(B) of the 1997 Tax Code,
which was the law effective when the subject transactions were entered into and a
refund was applied for.
In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the
1997 Tax Code was a mere reproduction of Section 102(b) of the 1977 Tax Code, this
Court’s interpretation of the latter may be used in interpreting the former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and
102(b)(2) of the 1977 Tax Code, as amended, pertaining to zero-rated transactions. A
parallel approach should be accorded to the renumbered provisions of Sections 108(B)
(2) and 108(B)(1) of the 1997 NIRC. This means that Section 108(B)(2) must be read in
conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a) services
other than processing, manufacturing or repacking rendered by VAT registered persons
in the Philippines; and b) the transaction paid for in acceptable foreign currency duly
accounted for in accordance with BSP rules and regulations. The same provision made
reference to Section 108(B)(1) further imposing the requisite c) that the recipient of
services must be performing business outside of Philippines. Otherwise, if both the
provider and recipient of service are doing business in the Philippines, the sale
transaction is subject to regular VAT as explained in the Burmeister case x x x.
xxx xxx xxx
Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the
recipient of the services must be doing business outside the Philippines as mandated by
law govern the instant case.
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts
cannot be allowed to apply to Burmeister this Court’s interpretation of Section 102(b) of
the 1977 Tax Code, because the Petition of Accenture had already been filed before the
case was even promulgated on 22 January 2007,39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same
authority as the statute itself, however, the same cannot be applied retroactively against
the Petitioner because to do so will be prejudicial to the latter.40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of
the rulings of the Supreme Court, whose interpretation of the law is part of that law as of
the date of its enactment.41
We rule that the recipient of the service must be doing business outside the Philippines
for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the
1997 Tax Code is a verbatim copy of Section 102(b) of the 1977 Tax Code, any
interpretation of the latter holds true for the former.
Moreover, even though Accenture’s Petition was filed before Burmeister was
promulgated, the pronouncements made in that case may be applied to the present one
without violating the rule against retroactive application. When this Court decides a
case, it does not pass a new law, but merely interprets a preexisting one.42 When this
Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this interpretation
became part of the law from the moment it became effective. It is elementary that the
interpretation of a law by this Court constitutes part of that law from the date it was
originally passed, since this Court's construction merely establishes the
contemporaneous legislative intent that the interpreted law carried into effect.43
Accenture questions the CTA’s application of Burmeister, because the provision

interpreted therein was Section 102(b) of the 1977 Tax Code. In support of its position
that Section 108 of the 1997 Tax Code does not require that the services be rendered to
an entity doing business outside the Philippines, Accenture invokes this Court’s
pronouncements in Amex. However, a reading of that case will readily reveal that the
provision applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the
1997 Tax Code. As previously mentioned, an interpretation of Section 102(b) of the
1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the latter being
a mere reproduction of the former.
This Court further finds that Accenture’s reliance on Amex is misplaced.

We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the
services be consumed abroad to be zero-rated. However, nowhere in that case did this
Court discuss the necessary qualification of the recipient of the service, as this matter
was never put in question. In fact, the recipient of the service in Amex is a nonresident
foreign client.
The aforementioned case explains how the credit card system works. The issuance of a
credit card allows the holder thereof to obtain, on credit, goods and services from
certain establishments. As proof that this credit is extended by the establishment, a
credit card draft is issued. Thereafter, the company issuing the credit card will pay for
the purchases of the credit card holders by redeeming the drafts. The obligation to
collect from the card holders and to bear the loss—in case they do not pay—rests on
the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit
card drafts from establishments located in the Philippines and forwarding them to its
parent company's regional operating centers outside the country. It facilitated in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based
foreign client.
The Court explained how the services rendered in Amex were considered to have been
performed and consumed in the Philippines, to wit:
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.
The effect of the place of consumption on the zero-rating of the transaction was not the
issue in Burmeister.1âwphi1 Instead, this Court addressed the squarely raised issue of
whether the recipient of services should be doing business outside the Philippines for
the transaction to qualify for zero-rating. We ruled that it should. Thus, another essential
condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax Code
is that the recipient of the business be doing that business outside the Philippines. In
clarifying that there is no conflict between this pronouncement and that laid down in
Amex, we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch), 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. (Emphasis in the original)
In Amex we ruled that the place of performance and/or consumption of the service is
immaterial. In Burmeister, the Court found that, although the place of the consumption
of the service does not affect the entitlement of a transaction to zero-rating, the place
where the recipient conducts its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)
(2) of the 1977 Tax Code—and consequently Section 108(B)(2) of the 1997 Tax Code—
was intended to operate, the two aforementioned cases should be taken together. The
zero-rating of the services performed by respondent in Amex was affirmed by the Court,
because although the services rendered were both performed and consumed in the
Philippines, the recipient of the service was still an entity doing business outside the
Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to
qualify for zero-rating is the only logical interpretation of Section 102(b)(2) of the 1977
Tax Code, as we explained in Burmeister:
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.
xxx xxx xxx
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 "services 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. (Emphasis in the original)46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had
already clarified the intent behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)
(2) of the 1997 Tax Code amending the earlier provision. R.A. 9337 added the following
phrase: "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."
Accenture has failed to establish that the recipients of its services do business outside
the Philippines.
Accenture argues that based on the documentary evidence it presented,47 it was able
to establish the following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that
Accenture’s clients have not established any branch office in which to do business in the
Philippines.
2. For these services, Accenture bills another corporation, Accenture Participations B.V.
(APB), which is likewise a foreign corporation with no "presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to
pay in acceptable currency for their purchase of goods and services from the
Philippines. Thus, 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.48
Accenture claims that these documentary pieces of evidence are supported by the
Report of Emmanuel Mendoza, the Court-commissioned Independent Certified Public
Accountant. He ascertained that Accenture’s gross billings pertaining to zero-rated sales
were all supported by zero-rated Official Receipts and Billing Statements. These
documents show that these zero-rated sales were paid in foreign exchange currency
and duly accounted for in the rules and regulations of the BSP.49
In the CTA’s opinion, however, the documents presented by Accenture merely

substantiate the existence of the sales, receipt of foreign currency payments, and
inward remittance of the proceeds of these sales duly accounted for in accordance with
BSP rules. Petitioner presented no evidence whatsoever that these clients were doing
business outside the Philippines.50
Accenture insists, however, that it was able to establish that it had rendered services to
foreign corporations doing business outside the Philippines, unlike in Burmeister, which
allegedly involved a foreign corporation doing business in the Philippines.
We deny Accenture’s Petition for a tax refund.

The evidence presented by Accenture may have established that its clients are foreign.
1âwphi1 This fact does not automatically mean, however, that these clients were doing
business outside the Philippines. After all, the Tax Code itself has provisions for a
foreign corporation engaged in business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx xxx xxx
(H) The term "resident foreign corporation" applies to a foreign corporation engaged in
trade or business within the Philippines.
(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not
engaged in trade or business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the
recipient of the service be proven to be a foreign corporation; rather, it must be
specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. We ruled thus in Commissioner of Internal Revenue v. British
Overseas Airways Corporation:52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order
that a foreign corporation may be regarded as doing business within a State, there must
be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character."53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual
basis of that claim. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove
only that its clients were foreign entities. However, as found by both the CTA Division
and the CTA En Banc, no evidence was presented by Accenture to prove the fact that
the foreign clients to whom petitioner rendered its services were clients doing business
outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests,
Billing Statements, Memo Invoices-Receivable, Memo Invoices-Payable, and Bank
Statements presented by Accenture merely substantiated the existence of sales, receipt
of foreign currency payments, and inward remittance of the proceeds of such sales duly
accounted for in accordance with BSP rules, all of these were devoid of any evidence
that the clients were doing business outside of the Philippines.
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and
the 23 October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No.
477, dismissing the Petition for the refund of the excess or unutilized input VAT credits
of Accenture, Inc., are AFFIRMED. SO ORDERED.

Tax 2 Cases On VAT

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Tax 2 Cases On VAT

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1

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.

Mounting budget deficit, revenue generation, inadequate fiscal allocation for

Every law enjoys in its favor the presumption of constitutionality. Their

Before long, the Conference Committee on the Disagreeing Provisions of

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : Thats correct . . .

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr.

ATTY. BANIQUED : I guess so, Your Honor, yes.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO

G.R. No. 168056

. . . That the President, upon the recommendation of the Secretary of

(i) Value-added tax collection as a percentage of Gross Domestic Product

(ii) National government deficit as a percentage of GDP of the previous year

Petitioners argue that the law is unconstitutional, as it constitutes

G.R. No. 168207

G.R. No. 168461

Petitioners contend that these provisions are unconstitutional for being

Petitioners argument is premised on the constitutional right of non-deprivation

Petitioners also believe that these provisions violate the constitutional

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of

2) The Bicameral Conference Committee acted without jurisdiction in deleting

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34,

G.R. No. 168730

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

The Court defined the issues, as follows:

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2)

RULING OF THE COURT

The VAT is a tax on spending or consumption. It is levied on the sale, barter,

It was only in 1987, when President Corazon C. Aquino issued Executive

The Court will now discuss the issues in logical sequence.

A. The Bicameral Conference Committee

1) Inserting the stand-by authority in favor of the President in Sections

2) Deleting entirely the no pass-on provisions found in both the House

3) Inserting the provision imposing a 70% limit on the amount of input

4) Including the amendments introduced only by Senate Bill No. 1950

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives

Sec. 88. Conference Committee. In the event that the

In resolving the differences with the Senate, the

Sec. 89. Conference Committee Reports. . . . Each

The Chairman of the House panel may be

Rule XII, Section 35 of the Rules of the Senate states:

Each Conference Committee Report shall contain a

A comparative presentation of the conflicting House

The creation of such conference committee was apparently in response to a

Striking down such argument, the Court held thus:

But the cases, both here and

With regard to amendments to be made to NIRC provisions regarding income and

There being differences and/or disagreements on the foregoing provisions of

1. With regard to the disagreement on the rate of VAT to be imposed, it would

2. With regard to the disagreement on whether only the VAT imposed on

3. With regard to the disagreement on whether input tax credits should be

(A) Creditable Input Tax. . . .

In the present case, the changes introduced by the Bicameral Conference

The no pass-on provision was deleted altogether. In the transcripts of the

As to the amendments to NIRC provisions on taxes other than the value-added

Thus, all the changes or modifications made by the Bicameral Conference

. . . it is within the power of a conference committee to include in its report