Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 125355

March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

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.
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On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows: Taxable sale/receipt P1,679,155.00 =========== 10% tax due thereon 167,915.50 25% surcharge 41,978.88 20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00 TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3 =========== COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of P6,077.00. On February 10, 1992, COMASERCO filed with the BIR, a letterprotest objecting to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT. On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT. On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the dispositive portion of which reads: WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24,

1992 until fully paid pursuant to Section 248 and 249 of the Tax Code. The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency.5 On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals. After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis. 6 The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties,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. We agree with the Commissioner. Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides that: Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9 COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursementof-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT. We disagree. On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended law provides that: Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented. The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services. Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or

administration of any scientific, undertaking or project." 11

industrial

or

commercial

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. 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. 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.
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Davide, Jr., C.J., Puno, Kapunan and Ynares-Santiago, JJ., concur.

SECOND DIVISION COMMISSIONER OF G.R. No. 153205 INTERNAL REVENUE, Petitioner, Present: QUISUMBING, J. - versus Chairperson, CARPIO, CARPIO MORALES, TINGA, and BURMEISTER AND WAIN VELASCO, JR., JJ. SCANDINAVIAN CONTRACTOR MINDANAO, INC., Promulgated: Respondent. January 22, 2007 x---------------------------------------------------------------------------------------x

DECISION CARPIO, J.: The Case This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent). The Antecedents The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian

Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as its coordination manager. BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system. In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be

subject to VAT at zero-rate. [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City. For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zerorated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows: Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax --------------------------------------------------------------------------------1st E 04-18-96 P 33,019,651.07 P608,953.48 nd 2 F 07-16-96 37,108,863.33 756,802.66 rd 3 G 10-14-96 34,196,372.35 930,279.14 th 4 H 01-20-97 42,992,302.87 1,065,138.86 Totals P147,317,189.62 P3,361,174.14 On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows: Section 4.102-2(b)(2) Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar

quarters of 1996. It paid the amount of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows: Amount VAT subject to P103,558,338.11 Multiply 10%

by 10% VAT Output Tax P 10,355,833.81 Less: 1996 Input VAT P 3,361,174.14 VAT Output Tax Payable P 6,994,659.67 On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%). On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.[4]

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the

running of the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPIDavao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondents] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code. xxxx

The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 02395 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x. Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x[5]

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and affirmed the CTA decision.[6] Hence, this petition.

The Court of Appeals Ruling In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are not destined for consumption abroad, they

are not of the same nature as project studies, information services, engineering and architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 596[7] as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.[8] The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98, respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).[9] The Court of Appeals stated that only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied

stipulation in the statute, the second classification need not be consumed abroad.[10] The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-rating. This is indicated by the additional phrase as well as services by a resident to a non-resident foreign client, such as project studies, information services and engineering and architectural designs and other similar services. In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a nonresident; and (b) these must be in the nature of project studies, information services, etc.[11] The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be destined for consumption abroad in order to be VAT zerorated.[13] The Court of Appeals disagreed with

petitioners argument that our VAT law generally follows the destination principle (i.e., exports exempt, imports taxable).[14] The Court of Appeals stated that if indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this case.[15] The Issue The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.[16] The Ruling of the Court We deny the petition. At the outset, the Court declares that the denial of the instant petition is not on the ground that respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95[17] and VAT Ruling No. 003-99,[18] which held that respondents services are subject to 0% VAT and which

respondent invoked in applying for refund of the output VAT. Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent rendered the services and paid the VAT in question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate; (4) Services rendered to vessels engaged

exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent contends that its services which constitute the actual operation and management of two (2) power barges in Mindanao are not even remotely similar to project studies, information services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96. As such, respondents services need not be destined to be consumed abroad in order to be VAT zero-rated. Respondent is mistaken.

The Tax Code not only requires that the services be other than processing, manufacturing or repacking of goods and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be for other persons doing business outside the Philippines. The phrase for other persons doing business outside the Philippines not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term services appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines. This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the other services are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-

recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payerrecipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution. When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules, the law clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required under BSP rules[20] to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency. Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payerrecipient of services is doing business outside the Philippines. Under BSP rules,[21] the proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the

BSP. The same rationale does not apply if the provider and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an export sale even if payment is denominated in foreign currency. Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102(b). Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned in the preceding subparagraph, the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for zerorating, including the essential condition that the recipient of services is doing business outside the Philippines, remain the same under both subparagraphs. Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are [s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person

engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business in the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S (BWSC), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (MITSUI), all referred to hereinafter as the Consortium, and the National Power Corporation (NAPOCOR) for the operation and maintenance of two 100-Megawatt power barges (Power Barges) acquired by NAPOCOR for a 15-year term.[23] (Emphasis supplied)

Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondents services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT. Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),[24] the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and

maintain NAPOCORs two 100-megawatt power barges in Mindanao. The Court recognizes the rule that the VAT system generally follows the destination principle (exports are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this rule.[25] This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules. Respondents reliance on the ruling in American Express[26] is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules

and regulations. x x x x[27] (Emphasis supplied)

In contrast, this case involves a recipient of services the Consortium which is doing business in the Philippines. Hence, American Express services were subject to 0% VAT, while respondents services should be subject to 10% VAT. Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 00399,[28] which reconfirmed BIR Ruling No. 02395[29] insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents reliance on these BIR rulings binds petitioner. Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents status will deprive respondent of a refund of a substantial amount representing excess output tax.[30] Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for refund, respondents services shall be subject to the regular 10% VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. WHEREFORE, the Court DENIES the petition. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 164365 June 8, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PLACER DOME TECHNICAL SERVICES (PHILS.), INC., respondent. DECISION TINGA, J.: Two years ago, the Court in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch)1 definitively ruled that under the National Internal Revenue Code of 1986, as amended,2 "services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [Bangko Sentral ng Pilipinas], are zero-rated."3 The grant of the present petition entails the extreme step of rejecting American Express as precedent, a recourse which the Court is unwilling to take. The facts, as culled from the recital in the assailed Decision4 dated 30 June 2004 of the Court of Appeals, follow. On 24 March 1996, at the San Antonio Mines in Marinduque owned by Marcopper Mining Corporation (Marcopper), mine tailings from the Taipan Pit started to escape through the Makulapnit Tunnel and Boac Rivers, causing the cessation of mining and milling operations, and causing potential environmental damage to the rivers and the immediate area. To contain the damage and prevent the further spread of the tailing leak, Placer Dome, Inc. (PDI), the owner of 39.9% of Marcopper, undertook to perform the clean-up and rehabilitation of the Makalupnit and Boac Rivers, through a subsidiary. To accomplish this, PDI engaged Placer Dome Technical Services Limited (PDTSL), a non-resident foreign corporation with office in Canada, to carry out the project. In turn, PDTSL engaged the services of Placer Dome Technical Services (Philippines), Inc. (respondent), a domestic corporation

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

rules and regulations of the Bangko Sentral ng Pilipinas (BSP). At the same time, the CTA pointed out that of the US$27,544,707.00 paid by PDTSL to respondent, only US$14,750,473.00 was inwardly remitted and accounted for in accordance with the BSP.9 The CTA also noted that not all the reported total input VAT payments of respondent were properly supported by VAT invoices and/or official receipts,10 and that not all of the allowable input VAT of the respondent could be directly attributed to its zero-rated sales.11 In the end, the CTA found that only the resulting input VAT of P17,178,373.12 could be refunded the respondent.12 The CIR filed a Motion for Reconsideration where he invoked Section 4.102-2(b)(2) of Revenue Regulation No. 5-96,13 and especially VAT Ruling No. 040-98 dated 23 November 1998, which had interpreted the aforecited provision. The CTA remained unpersuaded despite the cited issuances. In fact, the CTA Resolution14 dated 20 June 2002, denying the CIRs motion for reconsideration, noted that petitioners argument was not novel as it had debunked the same when first raised before it, referring to its decision dated 19 April 2002 in CTA Case No. 6099, American Express International, Inc. Philippine Branch v. Commissioner of Internal Revenue.15 The CTA reiterated its pronouncement in said case, thus: "x x x it is very clear that VAT Ruling No. 040-98 not only expands the language of Section (108)(B)(2) but also of Revenue Regulation No. 5-96 which interprets the said statute. The same cannot be countenanced. It is a settled rule of legal hermeneutics that the implementing rules and regulations cannot amend the act of Congress x x x for administrative rules and regulations are intended to carry out, not supplant or modify, the law."16 The rulings of the CTA were elevated by petitioner to the Court of Appeals on Petition for Review. In a Decision17 dated 30 June 2004, the appellate court affirmed the CTA rulings. As a consequence, the present petition is now before us. Our evaluation of the petition must begin with the statutory scope of the "services performed in the Philippines by VAT-registered persons,"18 referred to in the law applicable at the time of the subject incidents, the National Internal Revenue Code of 1986, as amended19 (1986 NIRC). Section 102(b) of the 1986 NIRC reads: Section 102. Value-Added Tax on Sale of Services and Use or

Lease of Properties. (a) x x x (b) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]. x x x 20 It is Section 102(b)(2) which finds special relevance to this case. As explicitly provided in the law, a zero-rated VAT transaction includes services by VAT-registered persons other than processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, the consideration for which is paid in foreign currency and accounted for in accordance with the rules and regulations of the BSP. Still, this provision was interpreted by the Bureau of Internal Revenue through Revenue Regulation No. 5-96, Section 4.1022(b)(2) of which states: Section 4.102(b)(2)Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Although there is nothing in Section 4.102-2(b)(2) that is expressly

fatal to respondents claim, VAT Ruling No. 040-98 interpreted the provision in such fashion. The relevant portion of the ruling reads: The sales of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code of 1997, are limited to such sales which are destined for consumption outside of the Philippines in that such services are tacked-in as part of the cost of goods exported. The zero-rating also extends to project studies, information services, engineering and architectural designs and other similar services sold by a resident of the Philippines to a nonresident foreign client because these services are likewise destined to be consumed abroad. The phrase project studies, information services, engineering and architectural designs and other similar services does not include services rendered by travel agents to foreign tourists in the Philippines following the doctrine of ejusdem generis, since such services by travel agents are not of the same class or of the same nature as those enumerated under the aforesaid section. Considering that the services by your client to foreign tourists are basically and substantially rendered within the Philippines, it follows that the onus of taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines. For this reason, it is our considered opinion that the tour package services of your client to foreign tourists in the Philippines cannot legally qualify for zero-rated (0%) VAT but rather subject to the regular VAT rate of 10%. Petitioner argues that following Section 4.102-2(b)(2) of Revenue Regulation No. 5-96, there are only two categories of services that are subject to zero percent VAT, namely: services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported; and services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services.21 Petitioner explains that the services rendered by respondent were not for goods which were subsequently exported. Likewise, it is argued that the services rendered by respondent were not similar to "project studies, information services, engineering and architectural designs" which were destined to be consumed abroad by non-resident foreign clients.

These views, petitioner points out, were reiterated in VAT Ruling No. 040-98. It is clear from that issuance that the location or "destination" where the services were destined for consumption was determinative of whether the zero-rating availed when such services were sold by a resident of the Philippines to a nonresident foreign client. VAT Ruling No. 040-98 expresses that the zero-rating may apply only when the services are destined for consumption abroad. This view aligns with the theoretical principle that the VAT is ultimately levied on consumption.22 If the service were destined for consumption in the Philippines, the service provider would have the faculty to pass on its VAT liability to the end-user, thus avoiding having to shoulder the tax itself. Unfortunately for petitioner, his arguments are no longer fresh. The Court spurned them in Commissioner of Internal Revenue v. American Express.23 American Express involved transactions invoked as "zero-rated" by a "VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations."24 The CIR in that case relied extensively on the same VAT Ruling No. 040-98 now cited before us. However, the Court would conclude in American Express that the opinion therein that the service must be destined for consumption outside of the Philippines was "clearly ultra vires and invalid."25 The discussion of the issues in American Express was comprehensive enough as to address each issue now presently raised before us. American Express explained the nature of VAT imposed on services in this manner: The VAT is a tax on consumption "expressed as a percentage of the value added to goods or services" purchased by the producer or taxpayer. As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this country; undertaken in "pursuit of a commercial or an economic activity;" for a valuable consideration; and not exempt under the Tax Code, other special laws, or any international agreement.26

Yet even as services may be subject to VAT, our tax laws extend the benefit of zero-rating the VAT due on certain services. The aforementioned Section 102(b) of the 1986 NIRC activates such zero-rating on two categories of transactions: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; and (2) services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.27 Obviously, it is the second category that begs for further explication, owing to its apparently broad scope, covering as it does "services other than those mentioned in the preceding subparagraph." Yet, as found by the Court in American Express, such broad scope did not mean that Section 102(b) is vague, thus: The law is very clear. Under the last paragraph [of Section 102(b)], services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated.28 Since Section 102(b) is, in fact, "very clear," the Court declared that any resort to statutory construction or interpretation was unnecessary. As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon. The Court may not construe a statute that is free from doubt. "[W]here the law speaks in clear and categorical language, there is no room for interpretation. There is only room for application." The Court has no choice but to "see to it that its mandate is obeyed."29 It was from the awareness that Section 102(b) is free from ambiguity in providing so broad an extension of the zero-rated benefit on VAT-registered persons performing services that the

Court in American Express proceeded to consider the same Section 4.102-2(b)(2) of Revenue Regulation No. 5-96 now cited by petitioner. The Court in American Express explained that Revenue Regulation No. 5-96 had amended Revenue Regulation No. 7-95, Section 4.102-2 of which had retained the broad language of Section 102(b) in defining "transactions subject to zero-rate," adding only, by way of specific example, the phrase "those [services] rendered by hotels and other service establishments."30 However, the amendatory Revenue Regulation No. 5-96 opted for a more specific approach, providing, by way of example, an enumeration of those services contemplated as zerorated.31 In the present case, it is because of such enumeration that petitioner now argues that "respondents services likewise do not fall under the second category mentioned in Section 4.102-2(b)(2) [as amended by Revenue Regulation No. 5-96], because they are not similar to project studies, information services, engineering and architectural designs which are destined to be consumed abroad by non-resident foreign clients."32 However, the Court in American Express clearly rebuffed a similar contention. Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating. Although superfluous, these sample services are meant to be merely illustrative. In this provision, the use of the term "as well as" is not restrictive. As a prepositional phrase with an adverbial relation to some other word, it simply means "in addition to, besides, also or too." Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or limits the services that may be sold or exchanged for a fee, remuneration or consideration. Rather, both merely enumerate the items of service that fall under the term "sale or exchange of services." xxxx The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does not apply to Section 4.1022(b)(2) of RR 7-95 as amended by RR 5-96.

First, although the regulatory provision contains an enumeration of particular or specific words, followed by the general phrase "and other similar services," such words do not constitute a readily discernible class and are patently not of the same kind. Project studies involve investments or marketing; information services focus on data technology; engineering and architectural designs require creativity. Aside from calling for the exercise or use of mental faculties or perhaps producing written technical outputs, no common denominator to the exclusion of all others characterizes these three services. Nothing sets them apart from other and similar general services that may involve advertising, computers, consultancy, health care, management, messengerial work to name only a few. Second, there is the regulatory intent to give the general phrase "and other similar services" a broader meaning. Clearly, the preceding phrase "as well as" is not meant to limit the effect of "and other similar services." Third, and most important, the statutory provision upon which this regulation is based is by itself not restrictive. The scope of the word "services" in Section 102(b)(2) of the [1986 NIRC] is broad; it is not susceptible of narrow interpretation. (Emphasis supplied)33 The Court in American Express recognized the existence of the contrary holding in VAT Ruling No. 040-98, now relied upon by petitioner especially as he states that the zero-rating applied only when the services are destined for consumption abroad. American Express minced no words in criticizing said ruling. VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative level, rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of the VAT law. As correctly held by the CA, when this ruling states that the service must be "destined for consumption outside of the Philippines" in order to qualify for zero rating, it contravenes both the law and the regulations issued pursuant to it. This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid. Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts," this

interpretation is not conclusive and will have to be "ignored if judicially found to be erroneous" and "clearly absurd x x x or improper." An administrative issuance that overrides the law it merely seeks to interpret, instead of remaining consistent and in harmony with it, will not be countenanced by this Court.(Emphasis supplied)34 Petitioner presently invokes the "destination principle," citing that [r]espondents services, while rendered to a non-resident foreign corporation, are not destined to be consumed abroad. Hence, the onus of taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines. Yet the Court in American Express debunked this argument when it rebutted the theoretical underpinnings of VAT Ruling No. 040-98, particularly its reliance on the "destination principle" in taxation: As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its output abroad. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the outcome of such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its foreign clients the ROCs outside the country by receiving the bills of service establishments located here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law, contrary to petitioner's administrative interpretation, does not imply that the service be done abroad in order to be zerorated. Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability x x x" The services rendered by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the

Philippines, are therefore also consumed in the Philippines. Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." Respondent's facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent. xxxx However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. (Emphasis supplied)35 xxxx Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-rated, it need not be tacked in as part of the cost of goods exported. The law neither imposes such requirement nor associates services with exported goods. It simply states that the services performed by VAT-registered persons in the Philippines services other than the processing, manufacturing or repacking of goods for persons doing business outside this country if paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different from the product that arises from the rendition of such service. The activity that creates the income must not be confused with the main business in the course of which that income is realized. (Emphasis supplied)36

xxxx The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State necessarily has to have "a substantial connection" to it, in order to enforce a zero rate. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used.37 Finally, the Court in American Express found support from the legislative record that revealed that consumption abroad is not a pertinent factor to imbue the zero-rating on services by VATregistered persons performed in the Philippines. Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the legislators not to impose the condition of being "consumed abroad" in order for services performed in the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the proceedings: "Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly explain to me I am referring to the lower part of the first paragraph with the 'Provided'. Section 102. 'Provided that the following services performed in the Philippines by VAT registered persons shall be subject to zero percent.' There are three here. What is the difference between the three here which is subject to zero percent and Section 103 which is exempt transactions, to being with? "Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking goods for persons doing business outside the Philippines which are subsequently exported, and where the services are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject to 0%. But if these conditions are not complied with, they are subject to the VAT. "In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the other one that he indicated are exempted from the very beginning. These three enumerations under Section 102 are zero-rated provided that these conditions indicated in these three paragraphs are also complied with. If they

are not complied with, then they are not entitled to the zero ratings. Just like in the export of minerals, if these are not exported, then they cannot qualify under this provision of zero rating. "Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it is required that the following services be performed in the Philippines. "Under No. 2, services other than those mentioned above includes, let us say, manufacturing computers and computer chips or repacking goods for persons doing business outside the Philippines. Meaning to say, we ship the goods to them in Chicago or Washington and they send the payment inwardly to the Philippines in foreign currency, and that is, of course, zero-rated. "Now, when we say 'services other than those mentioned in the preceding subsection[,'] may I have some examples of these? "Senator Herrera: Which portion is the Gentleman referring to? "Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first paragraph is when one manufactures or packages something here and he sends it abroad and they pay him, that is covered. That is clear to me. The second paragraph says 'Services other than those mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable foreign currency. . . .' "One example I could immediately think ofI do not know why this comes to my mind tonightis for tourism or escort services. For example, the services of the tour operator or tour escortjust a good name for all kinds of activitiesis made here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is made from outside and remitted into the country. "Senator Herrera: What is important here is that these services are paid in acceptable foreign currency remitted inwardly to the Philippines. "Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the services of a woman or a tourist guide, it is zero-rated when it is remitted here. "Senator Herrera: I guess it can be interpreted that way, although

this tourist guide should also be considered as among the professionals. If they earn more than P200,000, they should be covered. xxxx Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT, and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT? "Senator Herrera: This provision applies to a VAT-registered person. When he performs services in the Philippines, that is zerorated. "Senator Maceda: That is right."38 It is indubitable that petitioners arguments cannot withstand the Courts ruling in American Express, a precedent warranting stare decisis application and one which, in any event, we are disinclined to revisit at this juncture. WHEREFORE, the petition is DENIED. No pronouncement as to costs. SO ORDERED.

SECOND DIVISION

PANASONIC COMMUNICATIONS G.R. No. 178090 IMAGING CORPORATION OF THE PHILIPPINES (formerly MATSUSHITA BUSINESS MACHINE CORPORATION OF THE PHILIPPINES), Petitioner, Present: Carpio, J., Chairperson, - versus Brion, Del Castillo, Abad, and Perez, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. February 8, 2010 x -------------------------------------------------------------------------------------- x

DECISION
ABAD, J.:
This petition for review puts in issue the May 23, 2007 Decision[1] of the Court of Tax Appeals (CTA) en banc in CTA EB 239, entitled Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue, which affirmed the denial of petitioners claim for refund.

The Facts and the Case Petitioner Panasonic Communications Imaging Corporation of the Philippines (Panasonic) produces and exports plain paper copiers and their subassemblies, parts, and components. It is registered with the Board of Investments as a preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is also a registered value-added tax (VAT) enterprise. From April 1 to September 30, 1998 and from October 1, 1998 to March 31, 1999, petitioner Panasonic generated export sales amounting to US$12,819,475.15 and US$11,859,489.78, respectively, for a total of US$24,678,964.93.

Believing that these export sales were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997 National Internal Revenue Code as amended by Republic Act (R.A.) 8424 (1997 NIRC),[2] Panasonic paid input VAT of P4,980,254.26 and P4,388,228.14 for the two periods or a total of P9,368,482.40 attributable to its zero-rated sales. Claiming that the input VAT it paid remained unutilized or unapplied, on March 12, 1999 and July 20, 1999 petitioner Panasonic filed with the Bureau of Internal Revenue (BIR) two separate applications for refund or tax credit of what it paid. When the BIR did not act on the same, Panasonic filed on December 16, 1999 a petition for review with the CTA, averring the inaction of the respondent Commissioner of Internal Revenue (CIR) on its applications. After trial or on August 22, 2006 the CTAs First Division rendered judgment,[3] denying the petition for lack of merit. The First Division said that, while petitioner Panasonics export sales were subject to 0% VAT under Section 106(A)(2)(a)(1) of the 1997 NIRC, the same did not qualify for zero-rating because the word zero-rated was not printed on Panasonics export invoices. This omission, said the First Division, violates the invoicing requirements of Section 4.108-1 of Revenue Regulations (RR) 795.[4] Its motion for reconsideration having been

denied, on January 5, 2007 petitioner Panasonic appealed the First Divisions decision to the CTA en banc. On May 23, 2007 the CTA en banc upheld the First Divisions decision and resolution and dismissed the petition. Panasonic filed a motion for reconsideration of the en banc decision but this was denied. Thus, petitioner filed the present petition in accordance with R.A. 9282.[5] The Issue Presented The sole issue presented in this case is whether or not the CTA en banc correctly denied petitioner Panasonics claim for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales invoices did not state on their faces that its sales were zero-rated. The Courts Ruling The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports.[6] For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to

get a reduction of his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed. Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes[7] equal to the input taxes[8] that his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zerorated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer.[9] Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive.[10]

For the effective zero rating of such transactions, however, the taxpayer has to be VATregistered and must comply with invoicing requirements.[11] Interpreting these requirements, respondent CIR ruled that under Revenue Memorandum Circular (RMC) 42-2003, the taxpayers failure to comply with invoicing requirements will result in the disallowance of his claim for refund. RMC 42-2003 provides:
A-13. Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant. If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the

taxpayer.

Petitioner Panasonic points out, however, that in requiring the printing on its sales invoices of the word zero-rated, the Secretary of Finance unduly expanded, amended, and modified by a mere regulation (Section 4.108-1 of RR 7-95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337.[12] Panasonic argues that the 1997 NIRC, which applied to its paymentsspecifically Sections 113 and 237 required the VAT-registered taxpayers receipts or invoices to indicate only the following information:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax; (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and (4) The name, business style, if any, address and taxpayers identification number (TIN) of the purchaser, customer or client.

Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the word

zero-rated for zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only after the enactment of R.A. 9337 on November 1, 2005, a law that did not yet exist at the time it issued its invoices. But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the printing of the word zero-rated on the invoices covering zerorated sales. When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the enactment of that law. Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient enforcement of the tax code and of course its amendments.[13] The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. As aptly explained by the CTAs First Division, the appearance of the word zero-rated on the face of invoices

covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect.[14] Further, the printing of the word zero-rated on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zerorated.[15] Unable to submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund. Petitioner Panasonics citation of Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue[16] is misplaced. Quite the contrary, it strengthens the position taken by respondent CIR. In that case, the CIR denied the claim for tax refund on the ground of the taxpayers failure to indicate on its invoices the BIR authority to print. But Sec. 4.108-1 required only the following to be reflected on the invoice: 1. The name, taxpayers identification number (TIN) and address of seller; 2. Date of transaction; 3. Quantity, unit cost and description of merchandise or nature of service;

4. The name, TIN, business style, if any, and address of the VATregistered purchaser, customer or client; 5. The word zero-rated imprinted on the invoice covering zerorated sales; and 6. The invoice value or consideration. This Court held that, since the BIR authority to print is not one of the items required to be indicated on the invoices or receipts, the BIR erred in denying the claim for refund. Here, however, the ground for denial of petitioner Panasonics claim for tax refundthe absence of the word zero-rated on its invoicesis one which is specifically and precisely included in the above enumeration. Consequently, the BIR correctly denied Panasonics claim for tax refund. This Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.[17] Besides, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax refunds in relation to the VAT are in the nature of such exemptions. The general rule is that claimants of

tax refunds bear the burden of proving the factual basis of their claims. Taxes are the lifeblood of the nation. Therefore, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government.[18] WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner. SO ORDERED.

EN BANC
FORT BONIFACIO DEVELOPMENT No. 158885 CORPORATION, Petitioner, Present: C.J., QUISUMBING, YNARES-SANTIAGO, CARPIO, AUSTRIA-MARTINEZ, CORONA, - versus CARPIO MORALES, TINGA, CHICO-NAZARIO, VELASCO, JR., G.R.

PUNO,

NACHURA, LEONARDO DE CASTRO, BRION, and COMMISSIONER OF INTERNAL PERALTA, JJ. REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF, ASSESSMENT DIVISION, Promulgated: REVENUE REGION NO. 8, BIR, Respondents. 2009

April 2,

x-------------------------------------------------------------------------- x FORT BONIFACIO DEVELOPMENT No. 170680 CORPORATION, Petitioner, G.R.

versus -

COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents. x--------------------------------------------------------------------------x

DECISION TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with the tax imposable on 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.[1] The first VAT law is found in Executive Order No. 273 (E.O. 273), which amended several provisions of the then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise accommodated the potential burdens of the shift to the VAT system by allowing newly liable VAT-registered persons to avail of a transitional input tax credit, as provided for in Section 105 of the old NIRC, as amended by E.O. No. 273. Said Section 105 is quoted, thus:

SEC. 105. Transitional input tax credits. A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.[2]

There are other measures contained in E.O. No. 273 which were similarly intended to ease the shift to the VAT system. These measures also took the form of transitional input taxes which can be credited against output tax,[3] and are found in Section 25 of E.O. No. 273, the section entitled Transitory Provisions. Said transitory provisions, which were never incorporated in the Old NIRC, read:
Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed transitional input taxes which can be credited against output tax in the same manner as provided in Sections 104 of the National Internal Revenue Code as follows: 1) The balance of the deferred sales tax credit account as of December 31, 1987 which

are accounted for in accordance regulations prescribed therefor;

with

2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 as goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit. Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered person who files an inventory of the goods referred to in said paragraphs as provided in regulations. (b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits which are applicable against advance sales tax shall be surrendered to, and replaced by the Commissioner with new tax credit certificates which can be used in payment for value-added tax liabilities. (c) Any person already engaged in business whose gross sales or receipts for a 12-month period from September 1, 1986 to August 1, 1987, exceed the amount of P200,000.00, or any person who has been in business for less than 12 months as of August 1, 1987 but expects his gross sales or receipts to exceed P200,000 on or before December 31, 1987, shall apply for registration on

or before October 29, 1987.[4]

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.[5] It amended provisions of the Old NIRC principally by restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was imposed for the first time on the sale of real properties. This was accomplished by amending Section 100 of the NIRC to include real properties among the goods or properties, the sale, barter or exchange of which is made subject to VAT. The relevant portions of Section 100, as amended by Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties. (a) Rate and base of tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods, or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. (1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (A) Real properties held primarily for

sale to customers or held for lease in the ordinary course of trade or business; xxx[6]

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact despite the enactment of Rep. Act No. 7716. Said provisions would however be amended following the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Rep Act No. 8424. The section on the transitional input tax credit was renumbered from Section 105 of the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the transitional input tax credit are relatively minor, hardly material to the case at bar. They are highlighted below for easy reference:
Section 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.[7]

(Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of presumptive input tax credits, with Section 111(b) of the New NIRC providing as follows:
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and onehalf percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government

contracts only in lieu of actual input taxes therefrom.[8]

What we have explained above are the statutory antecedents that underlie the present petitions for review. We now turn to the factual antecedents. I. Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real property. On 8 February 1995, FBDC acquired by way of sale from the national government, a vast tract of land that formerly formed part of the Fort Bonifacio military reservation, located in what is now the Fort Bonifacio Global City (Global City) in Taguig City.[9] Since the sale was consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to develop the tract of land, and from October, 1966 onwards it has been selling lots located in the Global City to interested buyers.[10] Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly engaged in by FBDC have since been made subject to VAT. As the vendor, FBDC from thereon has become obliged to remit to the Bureau of Internal Revenue (BIR) output VAT payments it received from the sale of its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right to avail of the

transitional input tax credit and accordingly submitted an inventory list of real properties it owned, with a total book value of P71,227,503,200.00.[11] On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts to sell, separately conveying two (2) parcels of land within the Global City in consideration of the purchase prices at P1,526,298,949.00 and P785,009,018.00, both payable in installments.[12] For the fourth quarter of 1996, FBDC earned a total of P3,498,888,713.60 from the sale of its lots, on which the output VAT payable to the BIR was P318,080,792.14. In the context of remitting its output VAT payments to the BIR, FBDC paid a total of P269,340,469.45 and utilized (a) P28,413,783.00 representing a portion of its then total transitional/presumptive input tax credit of P5,698,200,256.00, which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit of P20,326,539.69 on the purchase of goods and services.[13]

Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate action on whether its use of its presumptive input VAT on its land inventory, to the extent of P28,413,783.00 in partial payment of its output VAT for the fourth quarter of 1996, was in order. After investigating the matter, the BIR recommended that

the claimed presumptive input tax credit be disallowed.[14] Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23 December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by a letter of respondent Commissioner of Internal Revenue (CIR),[15] addressed to and received by FBDC on 5 March 1998, disallowing the presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95 provided the basis in main for the CIRs opinion, the section reading, thus:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayers trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the

improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988). The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person.

The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits xxx (iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed. For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or properties and improvements showing the quantity, description and amount filed with the RDO not later than Janaury 31, 1996. xxx

Consequently, FBDC received an Assessment Notice in the amount of P45,188,708.08, representing deficiency VAT for the 4th quarter of 1996, including

surcharge, interest and penalty. After respondent Regional Director denied FBDCs motion for reconsideration/protest, FBDC filed a petition for review with the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.[16] On 11 August 2000, the CTA rendered a decision affirming the assessment made by the respondents.[17] FBDC assailed the CTA decision through a petition for review filed with the Court of Appeals, docketed as CA-G.R. SP No. 60477. On 15 November 2002, the Court of Appeals rendered a decision affirming the CTA decision, but removing the surcharge, interests and penalties, thus reducing the amount due to P28,413,783.00.[18] From said decision, FBDC filed a petition for review with this Court, the first of the two petitions now before us, seeking the reversal of the CTA decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R. No. 158885. The second petition, which is docketed as G.R. No. 170680, involves the same parties and legal issues, but concerns the claim of FBDC that it is entitled to claim a similar transitional/presumptive input tax credit, this time for the third quarter of 1997. A brief recital of the anteceding facts underlying this second claim is in order. For the third quarter of 1997, FBDC derived the

total amount of P3,591,726,328.11 from its sales and lease of lots, on which the output VAT payable to the BIR was P359,172,632.81.[19] Accordingly, FBDC made cash payments totaling P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on purchases of goods and services.[20] On 11 May 1999, FBDC filed with the BIR a claim for refund of the amount of P347,741,695.74 which it had paid as VAT for the third quarter of 1997.[21] No action was taken on the refund claim, leading FBDC to file a petition for review with the CTA, docketed as CTA Case No. 5926. Utilizing the same valuation[22] of 8% of the total book value of its beginning inventory of real properties (or P71,227,503,200.00) FBDC argued that its input tax credit was more than enough to offset the VAT paid by it for the third quarter of 1997.[23] On 17 October 2000, the CTA promulgated its decision[24] in CTA Case No. 5926, denying the claim for refund. FBDC then filed a petition for review with the Court of Appeals, docketed as CAG.R. SP No. 61517. On 3 October 2003, the Court of Appeals rendered a decision[25] affirming the judgment of the CTA. As a result, FBDC filed its second petition, docketed as G.R. No. 170680. II.

The two petitions were duly consolidated[26] and called for oral argument on 18 April 2006. During the oral arguments, the parties were directed to discuss the following issues:
1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real properties by real estate dealers, is the 8% transitional input tax credit in Section 105 applied only to the improvements on the real property or is it applied on the value of the entire real property? Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No. 7-95 valid in limiting the 8% transitional input tax to the improvements on the real property?

2.

While the two issues are linked, the main issue is evidently whether Section 105 of the Old NIRC may be interpreted in such a way as to restrict its application in the case of real estate dealers only to the improvements on the real property belonging to their beginning inventory, and not the entire real property itself. There would be no controversy before us if the Old NIRC had itself supplied that limitation, yet the law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on real estate dealers, is discordant with the Old NIRC, so it is alleged.

III. On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input tax credit is computed. It can be conceded that when it was drafted Section 105 could not have possibly contemplated concerns specific to real properties, as real estate transactions were not originally subject to VAT. At the same time, when transactions on real properties were finally made subject to VAT beginning with Rep. Act No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in the application of the transitional input tax credit with respect to real properties or real estate dealers. It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT on every sale, barter or exchange of goods, without however specifying the kind of properties that fall within or under the generic class goods subject to the tax. Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT)

law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of which we will enumerate. First, it made every sale, barter or exchange of goods or properties subject to VAT.[27] Second, it generally defined goods or properties as all tangible and intangible objects which are capable of pecuniary estimation.[28] Third, it included a non-exclusive enumeration of various objects that fall under the class goods or properties subject to VAT, including [r]eal properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.[29] From these amendments to Section 100, is there any differentiated VAT treatment on real properties or real estate dealers that would justify the suggested limitations on the application of the transitional input tax on them? We see none. Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business that are subject to the VAT, and not when the real estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is clear that those regularly engaged in the real estate business are accorded the same treatment as the merchants of other goods or properties available in the market. In the same way that a milliner considers hats as his goods

and a rancher considers cattle as his goods, a real estate dealer holds real property, whether or not it contains improvements, as his goods. Had Section 100 itself supplied any differentiation between the treatment of real properties or real estate dealers and the treatment of the transactions involving other commercial goods, then such differing treatment would have constituted the statutory basis for the CIR to engage in such differentiation which said respondent did seek to accomplish in this case through Section 4.105-1 of RR 7-95. Yet the amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact that the said law left Section 105 intact, reveal the lack of any legislative intention to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the sale of other goods or properties or in any other commercial trade or business. If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on their properties, how then were the CIR and the courts a quo able to justify such a view? IV. The fact alone that the denial of FBDCs claims is in accord with Section 4.105-1 of RR 7-95 does not,

of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the incongruence cannot by itself justify the denial of the claims. We need to inquire into the rationale behind Section 4.105-1, as well as the question whether the interpretation of the law embodied therein is validated by the law itself. The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts of the laws we have cited. The transitional input tax credit is conditioned on the prior payment of sales taxes or the VAT, so the CTA observed. The introduction of the VAT through E.O. No. 273 and its subsequent expansion through Rep. Act No. 7716 subjected various persons to the tax for the very first time, leaving them unable to claim the input tax credit based on their purchases before they became subject to the VAT. Hence, the transitional input tax credit was designed to alleviate that relatively iniquitous loss. Given that rationale, according to the CTA, it would be improper to allow FBDC, which had acquired its properties through a tax-free purchase, to claim the transitional input tax credit. The CTA added that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale behind the transitional input tax credit since the materials used for the construction of improvements would have most likely involved the payment of VAT on their purchase.

Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is though from the seeming silence on the part of the provisions of the law. Yet ultimately, the theory is woefully limited in perspective. It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newlyVAT registered people would have been prejudiced by the inability to credit against the output VAT their payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VATregistered persons to invoke a presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit, and a similar presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.[30] Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section 25 alone

would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the transitional input tax credit under Section 105, thereby assuring that the tax credit would endure long after the last goods made subject to sales tax have been consumed. If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal link between those two would have been nonetheless extinguished long ago. Yet Congress has reenacted the transitional input tax credit several times; that fact simply belies the absence of any relationship between such tax credit and the longabolished sales taxes. Obviously then, the purpose behind the transitional input tax credit is not confined to the transition from sales tax to VAT. There is hardly any constricted definition of "transitional" that will limit its possible meaning to the shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could also occur when one decides to start a business. Section 105 states that the transitional input tax credits become available either to (1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear language of the law entitles new trades or businesses to avail of the tax credit once they become VAT-registered. The

transitional input tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a newlyVAT registered person such as when a business as it commences operations. If we view the matter from the perspective of a starting entrepreneur, greater clarity emerges on the continued utility of the transitional input tax credit. Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods, materials and supplies in its beginning inventory. Consequently, as the CTA held below, if the new enterprise has not paid VAT in its purchases of such goods, materials and supplies, then it should not be able to claim the tax credit. However, it is not always true that the acquisition of such goods, materials and supplies entail the payment of taxes on the part of the new business. In fact, this could occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only on account of a specially legislated exemption. Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired from a person in the course of trade or business, the transaction would not be subject to VAT under Section 105.[31] The sale would be subject to capital gains taxes under Section 24(D),[32] but since capital gains is a tax on passive income it is the seller, not the

buyer, who generally would shoulder the tax. If the goods or properties are acquired through donation, the acquisition would not be subject to VAT but to donors tax under Section 98 instead.[33] It is the donor who would be liable to pay the donors tax,[34] and the donation would be exempt if the donors total net gifts during the calendar year does not exceed P100,000.00.[35] If the goods or properties are acquired through testate or intestate succession, the transfer would not be subject to VAT but liable instead for estate tax under Title III of the New NIRC.[36] If the net estate does not exceed P200,000.00, no estate tax would be assessed.[37] The interpretation proffered by the CTA would exclude goods and properties which are acquired through sale not in the ordinary course of trade or business, donation or through succession, from the beginning inventory on which the transitional input tax credit is based. This prospect all but highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments. There is another point that weighs against the CTAs interpretation. Under Section 105 of the Old NIRC, the rate of the transitional input tax credit is 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher.[38] If indeed the transitional input tax credit is premised on the previous payment of VAT, then it does not make sense to afford the taxpayer the benefit of such credit based on 8% of the value of such inventory should the same prove higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented with ease had the legislature shared such intent by providing the actual VAT paid as the sole

basis for the rate of the transitional input tax credit. The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its properties from the national government, even claiming that to allow the transitional input tax credit is "tantamount to giving an undeserved bonus to real estate dealers similarly situated as [FBDC] which the Government cannot afford to provide." Yet the tax laws in question, and all tax laws in general, are designed to enforce uniform tax treatment to persons or classes of persons who share minimum legislated standards. The common standard for the application of the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and accommodating in ascertaining who should be entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.

IV. Given the fatal flaws in the theory offered by the CTA as supposedly underlying the transitional input tax credit, is there any other basis to justify the

limitations imposed by the CIR through RR 7-95? We discern nothing more. As seen in our discussion, there is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and their ability to claim the transitional input tax credit based on the value of their real properties. In addition, the very idea of excluding the real properties itself from the beginning inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of goods, whether or not such goods take the form of real properties or more mundane commodities. Under Section 105, the beginning inventory of goods forms part of the valuation of the transitional input tax credit. Goods, as commonly understood in the business sense, refers to the product which the VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their goods. Such real properties are the operating assets of the real estate dealer. Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or properties such real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to improvements in Section

4.105-1, the BIR not only contravened the definition of goods as provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided. The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods, materials and supplies upon which the transitional input VAT would be based shall be left to regulation by the appropriate administrative authority. This is based on the phrase filing of an inventory as prescribed by regulations found in Section 105. Nonetheless, Section 105 does include the particular properties to be included in the inventory, namely goods, materials and supplies. It is questionable whether the CIR has the power to actually redefine the concept of goods, as she did when she excluded real properties from the class of goods which real estate companies in the business of selling real properties may include in their inventory. The authority to prescribe regulations can pertain to more technical matters, such as how to appraise the value of the inventory or what papers need to be filed to properly itemize the contents of such inventory. But such authority cannot go as far as to amend Section 105 itself, which the Commissioner had unfortunately accomplished in this case. It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the enabling statute if such rule or regulation is to

be valid.[39] In case of conflict between a statute and an administrative order, the former must prevail.[40] Indeed, the CIR has no power to limit the meaning and coverage of the term goods in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such limitation. A contrary conclusion would mean the CIR could very well moot the law or arrogate legislative authority unto himself by retaining sole discretion to provide the definition and scope of the term goods. V. At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio T. Carpio. The dissent adopts the CTAs thesis that the transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory. Had the dissenting view won, it would have introduced a new requisite to the application of the transitional input tax credit and required the taxpayer to supply proof that it had previously paid taxes on the acquisition of goods, materials and supplies comprising its beginning inventory. We have sufficiently rebutted this thesis, but the dissent adds a twist to the argument by using the term presumptive input tax credit to imply that the transitional input tax credit involves a presumption that there was a previous payment of taxes.

Let us clarify the distinction between the presumptive input tax credit and the transitional input tax credit. As with the transitional input tax credit, the presumptive input tax credit is creditable against the output VAT. It necessarily has come into existence in our tax structure only after the introduction of the VAT. As quoted earlier,[41] E.O. No. 273 provided for a presumptive input tax credit as one of the transitory measures in the shift from sales taxes to VAT, but such presumptive input tax credit was never integrated in the NIRC itself. It was only in 1997, or eleven years after the VAT was first introduced, that the presumptive input tax credit was first incorporated in the NIRC, more particularly in Section 111(B) of the New NIRC. As borne out by the text of the provision,[42] it is plain that the presumptive input tax credit is highly limited in application as it may be claimed only by persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil;[43] and public works contractors.[44] Clearly, for more than a decade now, the term presumptive input tax credit has contemplated a particularly idiosyncratic tax credit far divorced from its original usage in the transitory provisions of E.O. No. 273. There is utterly no sense then in latching on to the term as having any significant meaning for the purpose of the cases at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this manner: (1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which provides that the input tax is allowed on the beginning inventory of goods, materials and supplies; (2) input taxes must have been paid on such goods, materials and supplies; (3) unlike real property itself, the improvements thereon were already subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no VAT was paid on the real property prior to the passage of Rep. Act No. 7716, it could not form part of the beginning inventory of goods, materials and supplies. This chain of premises have already been debunked. It is apparent that the dissent believes that only those goods, materials and supplies on which input VAT was paid could form the basis of valuation of the input tax credit. Thus, if the VAT-registered person acquired all the goods, materials and supplies of the beginning inventory through a sale not in the ordinary course of trade or business, or through succession or donation, said person would be unable to receive a transitional input tax credit. Yet even RR 7-95, which imposes the restriction only on real estate dealers permits such other persons who obtained their beginning inventory through tax-free means to claim the transitional input tax credit. The dissent thus betrays a view that is even more radical and more misaligned with the language of the law than that expressed by the CIR.

VI. A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from including the value of their real properties in the beginning inventory of goods, materials and supplies, has in fact already been repealed. The offending provisions were deleted with the enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 7-95.[45] The repeal of the basis for the present assessments by RR 6-97 only highlights the continuing absurdity of the position of the BIR towards FBDC. FBDC points out that while the transactions involved in G.R. No. 158885 took place during the effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in fact took place after RR No. 6-97 had taken effect. Indeed, the assessments subject of G.R. No. 170680 were for the third quarter of 1997, or several months after the effectivity of RR 6-97. That fact provides additional reason to sustain FBDCs claim for refund of its 1997 Third Quarter VAT payments. Nevertheless, since the assailed restrictions implemented by RR 7-95 were not sanctioned by law in the first place there is no longer need to dwell on such fact. WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals

and the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner the amount of P28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No pronouncement as to costs. SO ORDERED.

SECOND DIVISION [G.R. No. 172129, September 12, 2008] COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. MIRANT PAGBILAO CORPORATION (FORMERLY SOUTHERN ENERGY QUEZON, INC.), RESPONDENT. DECISION
VELASCO JR., J.: Before us is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the Decision[1] dated December 22, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 78280 which modified the March 18, 2003 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No. 6133 entitled Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.) v. Commissioner of Internal Revenue and ordered the Bureau of Internal Revenue (BIR) to refund or issue a tax credit certificate (TCC) in favor of respondent Mirant Pagbilao Corporation (MPC) in the amount representing its unutilized input value added tax (VAT) for the second quarter of 1998. Also assailed is the CA's Resolution[3] of March 31, 2006 denying petitioner's motion for reconsideration. The Facts MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation, is a domestic firm engaged in the generation of power which it sells to the National Power Corporation (NPC). For the construction of the electrical and mechanical equipment portion of its Pagbilao, Quezon plant, which appears to have been undertaken from 1993 to 1996, MPC secured the services of Mitsubishi Corporation (Mitsubishi) of Japan. Under Section 13[4] of Republic Act No. (RA) 6395, the NPC's revised charter, NPC is exempt from all taxes. In Maceda v. Macaraig,[5] the Court construed the exemption as covering both direct and indirect taxes. In the light of the NPC's tax exempt status, MPC, on the belief that its sale of power generation services to NPC is, pursuant to Sec. 108(B)(3) of the Tax Code,[6] zero-rated for VAT purposes, filed on December 1, 1997 with Revenue District Office (RDO) No. 60 in Lucena City an Application for Effective Zero Rating. The application covered the construction and operation of its Pagbilao power station under a Build, Operate, and Transfer scheme. Not getting any response from the BIR district office, MPC refiled its application in the form of a "request for ruling" with the VAT Review Committee at the BIR national office on January 28, 1999. On May 13, 1999, the Commissioner of Internal Revenue issued VAT Ruling No. 05299, stating that "the supply of electricity by Hopewell Phil. to the NPC,

shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B) (3) of the National Internal Revenue Code of 1997." It must be noted at this juncture that consistent with its belief to be zerorated, MPC opted not to pay the VAT component of the progress billings from Mitsubishi for the period covering April 1993 to September 1996--for the E & M Equipment Erection Portion of MPC's contract with Mitsubishi. This prompted Mitsubishi to advance the VAT component as this serves as its output VAT which is essential for the determination of its VAT payment. Apparently, it was only on April 14, 1998 that MPC paid Mitsubishi the VAT component for the progress billings from April 1993 to September 1996, and for which Mitsubishi issued Official Receipt (OR) No. 0189 in the aggregate amount of PhP 135,993,570. On August 25, 1998, MPC, while awaiting approval of its application aforestated, filed its quarterly VAT return for the second quarter of 1998 where it reflected an input VAT of PhP 148,003,047.62, which included PhP 135,993,570 supported by OR No. 0189. Pursuant to the procedure prescribed in Revenue Regulations No. 7-95, MPC filed on December 20, 1999 an administrative claim for refund of unutilized input VAT in the amount of PhP 148,003,047.62. Since the BIR Commissioner failed to act on its claim for refund and obviously to forestall the running of the two-year prescriptive period under Sec. 229 of the National Internal Revenue Code (NIRC), MPC went to the CTA via a petition for review, docketed as CTA Case No. 6133. Answering the petition, the BIR Commissioner, citing Kumagai-Gumi Co. Ltd. v. CIR,[7] asserted that MPC's claim for refund cannot be granted for this main reason: MPC's sale of electricity to NPC is not zero-rated for its failure to secure an approved application for zero-rating. Before the CTA, among the issues stipulated by the parties for resolution were, in gist, the following: 1.Whether or not [MPC] has unapplied or unutilized creditable input VAT for the 2nd quarter of 1998 attributable to zero-rated sales to NPC which are proper subject for refund pursuant to relevant provisions of the NIRC; 2.Whether the creditable input VAT of MPC for said period, if any, is substantiated by documents; and 3.Whether the unutilized creditable input VAT for said quarter, if any, was applied against any of the VAT output tax of MPC in the subsequent quarter. To provide support to the CTA in verifying and analyzing documents and figures and entries contained therein, the Sycip Gorres & Velayo (SGV), an independent auditing firm, was commissioned. The Ruling of the CTA On the basis of its affirmative resolution of the first issue, the CTA, by its Decision dated March 18, 2003, granted MPC's claim for input VAT refund or credit, but only for the amount of PhP 10,766,939.48. The fallo of the

CTA's decision reads: In view of all the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter of 1998 in the reduced amount of P10,766,939.48, computed as follows:
Claimed Input VAT P148,003,047.6 2

Less: Disallowances

a.)

As summarized by SGV & Co. in its initial report (Exh. P) I. Input Taxes on Purchases of Services: 1. 2. II. Supported by than VAT Ors documents other P 10,629.4 6 879.09

Supported by photocopied VAT OR

Input Taxes on Purchases of Goods: 1. Supported by documents other than VAT invoices 2. Supported by Invoices with TIN only 3. Supported by photocopied VAT invoices Input Taxes on Importation of Goods: 1. Supported by photocopied documents [IEDs and/or Bureau of Customs (BOC) Ors] 2. Supported computations by broker's 716,250. 00 91,601.0 0 165,795. 70 1,781.82 3,153.62

III.

990,090.69

b.)

Input taxes without supporting documents as summarized in Annex A of SGV & Co.'s supplementary 134) report (CTA records, page 252,447.45

c.)

Claimed input taxes on purchases of services from Mitsubishi Corp. for being substantiated by dubious OR

135,996,570.00

[8]

Refundable Input

P10,766,939.48

SO ORDERED.[9] Explaining the disallowance of over PhP 137 million claimed input VAT, the CTA stated that most of MPC's purchases upon which it anchored its claims for refund or tax credit have not been amply substantiated by pertinent documents, such as but not limited to VAT ORs, invoices, and other supporting documents. Wrote the CTA: We agree with the above SGV findings that out of the remaining taxes of P136,246,017.45, the amount of P252,477.45 was not supported by any document and should therefore be outrightly disallowed. As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less P252,477.45 ) on purchases of services from Mitsubishi Corporation, Japan, the same is found to be of doubtful veracity. While it is true that said amount is substantiated by a VAT official receipt with Serial No. 0189 dated April 14, 1998 x x x, it must be observed, however, that said VAT allegedly paid pertains to the services which were rendered for the period 1993 to 1996. x x x The Ruling of the CA Aggrieved, MPC appealed the CTA's Decision to the CA via a petition for review under Rule 43, docketed as CA-G.R. SP No. 78280. On December 22, 2005, the CA rendered its assailed decision modifying that of the CTA decision by granting most of MPC's claims for tax refund or credit. And in a Resolution of March 31, 2006, the CA denied the BIR Commissioner's motion for reconsideration. The decretal portion of the CA decision reads: WHEREFORE, premises considered, the instant petition is GRANTED. The assailed Decision of the Court of Tax Appeals dated March 18, 2003 is hereby MODIFIED. Accordingly, respondent Commissioner of Internal Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner Mirant Pagbilao Corporation its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter of 1998 in the total amount of P146,760,509.48. SO ORDERED.[10] The CA agreed with the CTA on MPC's entitlement to (1) a zero-rating for VAT purposes for its sales and services to tax-exempt NPC; and (2) a refund or tax credit for its unutilized input VAT for the second quarter of 1998. Their disagreement, however, centered on the issue of proper documentation, particularly the evidentiary value of OR No. 0189. The CA upheld the disallowance of PhP 1,242,538.14 representing zerorated input VAT claims supported only by photocopies of VAT OR/Invoice, documents other than VAT Invoice/OR, and mere broker's computations.

But the CA allowed MPC's refund claim of PhP 135,993,570 representing input VAT payments for purchases of goods and/or services from Mitsubishi supported by OR No. 0189. The appellate court ratiocinated that the CTA erred in disallowing said claim since the OR from Mitsubishi was the best evidence for the payment of input VAT by MPC to Mitsubishi as required under Sec. 110(A)(1)(b) of the NIRC. The CA ruled that the legal requirement of a VAT Invoice/OR to substantiate creditable input VAT was complied with through OR No. 0189 which must be viewed as conclusive proof of the payment of input VAT. To the CA, OR No. 0189 represented an undisputable acknowledgment and receipt by Mitsubishi of the input VAT payment of MPC. The CA brushed aside the CTA's ruling and disquisition casting doubt on the veracity and genuineness of the Mitsubishi-issued OR No. 0189. It reasoned that the issuance date of the said receipt, April 14, 1998, must be taken conclusively to represent the input VAT payments made by MPC to Mitsubishi as MPC had no real control on the issuance of the OR. The CA held that the use of a different exchange rate reflected in the OR is of no consequence as what the OR undeniably attests and acknowledges was Mitsubishi's receipt of MPC's input VAT payment. The Issue Hence, the instant petition on the sole issue of "whether or not respondent [MPC] is entitled to the refund of its input VAT payments made from 1993 to 1996 amounting to [PhP] 146,760,509.48."[11] The Court's Ruling As a preliminary matter, it should be stressed that the BIR Commissioner, while making reference to the figure PhP 146,760,509.48, joins the CA and the CTA on their disposition on the propriety of the refund of or the issuance of a TCC for the amount of PhP 10,766,939.48. In fine, the BIR Commissioner trains his sight and focuses his arguments on the core issue of whether or not MPC is entitled to a refund for PhP 135,993,570 (PhP 146,760,509.48 - PhP 10,766,939.48 = PhP 135,993,570) it allegedly paid as creditable input VAT for services and goods purchased from Mitsubishi during the 1993 to 1996 stretch. The divergent factual findings and rulings of the CTA and CA impel us to evaluate the evidence adduced below, particularly the April 14, 1998 OR 0189 in the amount of PhP 135,996,570 [for US$ 5,190,000 at US$1: PhP 26.203 rate of exchange]. Verily, a claim for tax refund may be based on a statute granting tax exemption, or, as Commissioner of Internal Revenue v. Fortune Tobacco Corporation[12] would have it, the result of legislative grace. In such case, the claim is to be construed strictissimi juris against the taxpayer,[13] meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant must show that he clearly falls under the exempting statute. On the other hand, a tax refund may be, as usually it is, predicated on tax refund provisions allowing a refund of erroneous or

excess payment of tax. The return of what was erroneously paid is founded on the principle of solutio indebiti, a basic postulate that no one should unjustly enrich himself at the expense of another. The caveat against unjust enrichment covers the government.[14] And as decisional law teaches, a claim for tax refund proper, as here, necessitates only the preponderance-of-evidence threshold like in any ordinary civil case.[15] We apply the foregoing elementary principles in our evaluation on whether OR 0189, in the backdrop of the factual antecedents surrounding its issuance, sufficiently proves the alleged unutilized input VAT claimed by MPC. The Court can review issues of fact where there are divergent findings by the trial and appellate courts As a matter of sound practice, the Court refrains from reviewing the factual determinations of the CA or reevaluate the evidence upon which its decision is founded. One exception to this rule is when the CA and the trial court diametrically differ in their findings,[16] as here. In such a case, it is incumbent upon the Court to review and determine if the CA might have overlooked, misunderstood, or misinterpreted certain facts or circumstances of weight, which, if properly considered, would justify a different conclusion.[17] In the instant case, the CTA, unlike the CA, doubted the veracity of OR No. 0189 and did not appreciate the same to support MPC's claim for tax refund or credit. Petitioner BIR Commissioner, echoing the CTA's stand, argues against the sufficiency of OR No. 0189 to prove unutilized input VAT payment by MPC. He states in this regard that the BIR can require additional evidence to prove and ascertain payment of creditable input VAT, or that the claim for refund or tax credit was filed within the prescriptive period, or had not previously been refunded to the taxpayer. To bolster his position on the dubious character of OR No. 0189, or its insufficiency to prove input VAT payment by MPC, petitioner proffers the following arguments: (1) The input tax covered by OR No. 0189 pertains to purchases by MPC from Mitsubishi covering the period from 1993 to 1996; however, MPC's claim for tax refund or credit was filed on December 20, 1999, clearly way beyond the two-year prescriptive period set in Sec. 112 of the NIRC; (2) MPC failed to explain why OR No. 0189 was issued by Mitsubishi (Manila) when the invoices which the VAT were originally billed came from the Mitsubishi's head office in Japan; (3) The exchange rate used in OR No. 0189 was pegged at PhP 26.203: USD 1 or the exchange rate prevailing in 1993 to 1996, when, on April 14, 1998, the date OR No. 0189 was issued, the exchange rate was already PhP 38.01 to a US dollar; (4) OR No. 0189 does not show or include payment of accrued interest

which Mitsubishi was charging and demanded from MPC for having advanced a considerable amount of VAT. The demand, per records, is embodied in the May 12, 1995 letter of Mitsubishi to MPC; (5) MPC failed to present to the CTA its VAT returns for the second and third quarters of 1995, when the bulk of the VAT payment covered by OR No. 0189--specifically PhP 109,329,135.17 of the total amount of PhP 135,993,570--was billed by Mitsubishi, when such return is necessary to ascertain that the total amount covered by the receipt or a large portion thereof was not previously refunded or credited; and (6) No other documents proving said input VAT payment were presented except OR No. 0189 which, considering the fact that OR No. 0188 was likewise issued by Mitsubishi and presented before the CTA but admittedly for payments made by MPC on progress billings covering service purchases from 1993 to 1996, does not clearly show if such input VAT payment was also paid for the period 1993 to 1996 and would be beyond the two-year prescriptive period. The petition is partly meritorious. Belated payment by MPC of its obligation for creditable input VAT As no less found by the CTA, citing the SGV's report, the payments covered by OR No. 0189 were for goods and service purchases made by MPC through the progress billings from Mitsubishi for the period covering April 1993 to September 1996--for the E & M Equipment Erection Portion of MPC's contract with Mitsubishi.[18] It is likewise undisputed that said payments did not include payments for the creditable input VAT of MPC. This fact is shown by the May 12, 1995 letter[19] from Mitsubishi where, as earlier indicated, it apprised MPC of the advances Mitsubishi made for the VAT payments, i.e., MPC's creditable input VAT, and for which it was holding MPC accountable for interest therefor. In net effect, MPC did not, for the VATable MPC-Mitsubishi 1993 to 1996 transactions adverted to, immediately pay the corresponding input VAT. OR No. 0189 issued on April 14, 1998 clearly reflects the belated payment of input VAT corresponding to the payment of the progress billings from Mitsubishi for the period covering April 7, 1993 to September 6, 1996. SGV found that OR No. 0189 in the amount of PhP 135,993,570 (USD 5,190,000) was duly supported by bank statement evidencing payment to Mitsubishi (Japan).[20] Undoubtedly, OR No. 0189 proves payment by MPC of its creditable input VAT relative to its purchases from Mitsubishi. OR No. 0189 by itself sufficiently proves payment of VAT The CA, citing Sec. 110(A)(1)(B) of the NIRC, held that OR No. 0189 constituted sufficient proof of payment of creditable input VAT for the progress billings from Mitsubishi for the period covering April 7, 1993 to September 6, 1996. Sec. 110(A)(1)(B) of the NIRC pertinently provides: Section 110. Tax Credits. -

A. Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: (a) Purchase or importation of goods: xxxx (b) Purchase of services on which a value-added tax has been actually paid. (Emphasis ours.) Without necessarily saying that the BIR is precluded from requiring additional evidence to prove that input tax had indeed paid or, in fine, that the taxpayer is indeed entitled to a tax refund or credit for input VAT, we agree with the CA's above disposition. As the Court distinctly notes, the law considers a duly-executed VAT invoice or OR referred to in the above provision as sufficient evidence to support a claim for input tax credit. And any doubt as to what OR No. 0189 was for or tended to prove should reasonably be put to rest by the SGV report on which the CTA notably placed much reliance. The SGV report stated that "[OR] No. 0189 dated April 14, 1998 is for the payment of the VAT on the progress billings" from Mitsubishi Japan "for the period April 7, 1993 to September 6, 1996 for the E & M Equipment Erection Portion of the Company's contract with Mitsubishi Corporation (Japan)."[21] VAT presumably paid on April 14, 1998 While available records do not clearly indicate when MPC actually paid the creditable input VAT amounting to PhP 135,993,570 (USD 5,190,000) for the aforesaid 1993 to 1996 service purchases, the presumption is that payment was made on the date appearing on OR No. 0189, i.e., April 14, 1998. In fact, said creditable input VAT was reflected in MPC's VAT return for the second quarter of 1998. The aforementioned May 12, 1995 letter from Mitsubishi to MPC provides collaborating proof of the belated payment of the creditable input VAT angle. To reiterate, Mitsubishi, via said letter, apprised MPC of the VAT component of the service purchases MPC made and reminded MPC that Mitsubishi had advanced VAT payments to which Mitsubishi was entitled and from which it was demanding interest payment. Given the scenario depicted in said letter, it is understandable why Mitsubishi, in its effort to recover the amount it advanced, used the PhP 26.203: USD 1 exchange formula in OR No. 0189 for USD 5,190,000. No showing of interest payment not fatal to claim for refund Contrary to petitioner's posture, the matter of nonpayment by MPC of the interests demanded by Mitsubishi is not an argument against the fact of payment by MPC of its creditable input VAT or of the authenticity or genuineness of OR No. 0189; for at the end of the day, the matter of interest payment was between Mitsubishi and MPC and may very well be covered by another receipt. But the more important consideration is the fact that MPC, as confirmed by the SGV, paid its obligation to Mitsubishi,

and the latter issued to MPC OR No. 0189, for the VAT component of its 1993 to 1996 service purchases. The next question is, whether or not MPC is entitled to a refund or a TCC for the alleged unutilized input VAT of PhP 135,993,570 covered by OR No. 0189 which sufficiently proves payment of the input VAT. We answer the query in the negative. Claim for refund or tax credit filed out of time The claim for refund or tax credit for the creditable input VAT payment made by MPC embodied in OR No. 0189 was filed beyond the period provided by law for such claim. Sec. 112(A) of the NIRC pertinently reads: (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: x x x. (Emphasis ours.) The above proviso clearly provides in no uncertain terms that unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously applied the aforequoted Sec. 112(A), "[P]rescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the official receipt was issued."[22] Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it may, and given that the last creditable input VAT due for the period covering the progress billing of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPC's claim for refund or tax credit filed on December 10, 1999 had already prescribed. Reckoning for prescriptive period under Secs. 204(C) and 229 of the NIRC inapplicable To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229 respectively provide: Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.-- The Commissioner may xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. xxxx Sec. 229. Recovery of Tax Erroneously or Illegally Collected.-- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis ours.) Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only to instances of erroneous payment or illegal collection of internal revenue taxes. MPC's creditable input VAT not erroneously paid For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation. In Commissioner of Internal Revenue v. Seagate Technology (Philippines), the Court explained the nature of the VAT and the entitlement to tax refund or credit of a zero-rated taxpayer:

Viewed broadly, the VAT is a uniform tax x x x 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 as they pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller, transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. 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. In either case, though, the same conclusion is arrived at. The law 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. Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe x x x. 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. If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zerorated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. xxxx Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. 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, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.[23] (Emphasis added.) Considering the foregoing discussion, it is clear that Sec. 112(A) of the NIRC, providing a two-year prescriptive period reckoned from the close of the taxable quarter when the relevant sales or transactions were made pertaining to the creditable input VAT, applies to the instant case, and not to the other actions which refer to erroneous payment of taxes. As a final consideration, the Court wishes to remind the BIR and other tax agencies of their duty to treat claims for refunds and tax credits with proper attention and urgency. Had RDO No. 60 and, later, the BIR proper acted, instead of sitting, on MPC's underlying application for effective zero rating, the matter of addressing MPC's right, or lack of it, to tax credit or refund could have plausibly been addressed at their level and perchance freed the taxpayer and the government from the rigors of a tedious

litigation. The all too familiar complaint is that the government acts with dispatch when it comes to tax collection, but pays little, if any, attention to tax claims for refund or exemption. It is high time our tax collectors prove the cynics wrong. WHEREFORE, the petition is PARTLY GRANTED. The Decision dated December 22, 2005 and the Resolution dated March 31, 2006 of the CA in CA-G.R. SP No. 78280 are AFFIRMED with the MODIFICATION that the claim of respondent MPC for tax refund or credit to the extent of PhP 135,993,570, representing its input VAT payments for service purchases from Mitsubishi Corporation of Japan for the construction of a portion of its Pagbilao, Quezon power station, is DENIED on the ground that the claim had prescribed. Accordingly, petitioner Commissioner of Internal Revenue is ordered to refund or, in the alternative, issue a tax credit certificate in favor of MPC, its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter in the total amount of PhP 10,766,939.48. No pronouncement as to costs. SO ORDERED. Quisumbing, (Chairperson), Carpio Morales, Tinga, and Brion, JJ., concur.