1.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 153866 February 11, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
D E C I S I O N
PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu --
like herein respondent -- are entities exempt from all internal revenue taxes and the implementing
rules relevant thereto, including the value-added taxes or VAT. Although export sales are not
deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the
distinction between exempt entities and exempt transactions has little significance, because the net
result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital
goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that
it is entitled to such refund or credit.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court, seeking to set aside the May 27,
2002 Decision
2
of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the
Decision reads as follows:
"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."
3

The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for
VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by
the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way
of Petition for Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought.
Failure on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who
claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As
[respondents] business is not subject to VAT, the capital goods and services it alleged to have
purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to
refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."
4

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

Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the
amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased
for the period April 1, 1998 to June 30, 1999."
6

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

Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those prohibited by law, brought into the
zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise
processed, manipulated, manufactured, mixed or used directly or indirectly in such activities.
13
Even
so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses.
14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226
15
is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw
materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported
capital equipment and spare parts, export taxes, duties, imposts and fees,
16
local taxes and licenses,
and real property taxes.
17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation
of raw materials, capital and equipment
18
-- is, ipso facto, also accorded to the zone
19
under RA
7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the
contrary -- extends
20
to that zone the provision stating that no local or national taxes shall be imposed
therein.
21
No exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.
22
Banking and finance shall also be liberalized
under minimum Bangko Sentral regulation with the establishment of foreign currency depository units
of local commercial banks and offshore banking units of foreign banks.
23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits
24
for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it by
the Board of Investments, it also enjoys preferential credit facilities
25
and exemption from PD 1853.
26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.
27
It
is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered person,
28
however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties or on each rendition of services in the course
of trade or business
29
as they pass along the production and distribution chain, the tax being limited
only to the value added
30
to such goods, properties or services by the seller, transferor or lessor.
31
It is
an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.
32
As such, it should be understood not in the context of the person or entity that
is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.
33
In either case, though, the same conclusion is arrived at.
The law
34
that originally imposed the VAT in the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method.
35
Such method adopted the mechanics and
self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.
36
Under the present method that relies on invoices, an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.
37

If at the end of a taxable quarter the output taxes
38
charged by a seller
39
are equal to the input
taxes
40
passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
41
If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.
42
Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,
43
any excess
over the output taxes shall instead be refunded
44
to the taxpayer or credited
45
against other internal
revenue taxes.
46

Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-
rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services.
47
The tax
rate is set at zero.
48
When applied to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no output tax,
49
but can claim a refund
of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods
50
or supply of services
51
to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate.
52
Again, as applied to
the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who
charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief
that results from either one of them is not.
Applying the destination principle
53
to the exportation of goods, automatic zero rating
54
is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to
export sales.
55
Effective zero rating, on the contrary, is intended to benefit the purchaser who, not
being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax
shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.
56
But
in an exemption there is only partial relief,
57
because the purchaser is not allowed any tax refund of
or credit for input taxes paid.
58

Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.
59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction.
60
Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT.
61
Such party is also not subject
to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its
registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services.
62
While the liability is
imposed on one person, the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the
same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the
purchase transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.
63
However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,
64

depending again on the application of the destination principle.
65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent.
66
If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,
67
unless
the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,
68

because the ecozone within which it is registered is managed and operated by the PEZA as a
separate customs territory.
69
This means that in such zone is created the legal fiction of foreign
territory.
70
Under the cross-border principle
71
of the VAT system being enforced by the Bureau of
Internal Revenue (BIR),
72
no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT,
73
then the same rule holds for such
exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.
74
An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.
75

This legal fiction is necessary to give meaningful effect to the policies of the special law creating the
zone.
76
If respondent is located in an export processing zone
77
within that ecozone, sales to the
export processing zone, even without being actually exported, shall in fact be viewed as
constructively exported under EO 226.
78
Considered as export sales,
79
such purchase transactions by
respondent would indeed be subject to a zero rate.
80

Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT
on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments
operating within the ecozone."
81
Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the
purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the
law. That no VAT shall be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando
aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is
also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers.
82
This similar and
repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or
national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject
to x x x internal revenue laws and regulations" under PD 66
83
-- the original charter of PEZA (then EPZA)
that was later amended by RA 7916.
84
No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments
and creating more employment opportunities.
85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"
86
if
brought to the ecozones restricted area
87
for manufacturing by registered export enterprises,
88
of
which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.
89

Fifth, export processing zone enterprises registered
90
with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products;
91
on required supplies
and spare part for consigned equipment;
92
and on foreign and domestic merchandise, raw
materials, equipment and the like -- except those prohibited by law -- brought into the zone for
manufacturing.
93
In addition, they are given credits for the value of the national internal revenue
taxes imposed on domestic capital equipment also reasonably needed and exclusively used for the
manufacture of their products,
94
as well as for the value of such taxes imposed on domestic raw
materials and supplies that are used in the manufacture of their export products and that form part
thereof.
95

Sixth, the exemption from local and national taxes granted under RA 7227
96
are ipso facto accorded
to ecozones.
97
In case of doubt, conflicts with respect to such tax exemption privilege shall be
resolved in favor of the ecozone.
98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,
99
and for locally produced raw materials, capital equipment and spare
parts used by exporters of non-traditional products
100
-- shall also be continuously enjoyed by similar
exporters within the ecozone.
101
Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris
102
against the taxpayer
103

and liberally in favor of the taxing authority.
104

Tax refunds are in the nature of such exemptions.
105
Accordingly, the claimants of those refunds bear
the burden of proving the factual basis of their claims;
106
and of showing, by words too plain to be
mistaken, that the legislature intended to exempt them.
107
In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass
unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.
108
Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws
109
will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate
the nature of the VAT as a tax on consumption and the application of the destination principle.
110

Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that
any VAT-registered suppliers sale of goods, property or services from the customs territory to any
registered enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.
111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of
reducing domestic unemployment, and of accelerating the development of the country."
112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a
sound and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments."
113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions
of the country[,] and result in increased volume and value of exports for the economy."
114
Fiscal
incentives that are cost-efficient and simple to administer shall be devised and extended to
significant projects "to compensate for market imperfections, to reward performance contributing to
economic development,"
115
and "to stimulate the establishment and assist initial operations of the
enterprise."
116

Wisely accorded to ecozones created under RA 7916
117
was the governments policy -- spelled out
earlier in RA 7227 -- of converting into alternative productive uses
118
the former military reservations
and their extensions,
119
as well as of providing them incentives
120
to enhance the benefits that would
be derived from them
121
in promoting economic and social development.
122

Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort"
123
in order to win international markets. By providing many export and tax incentives,
124
the
State is able to drive home the point that exporting is indeed "the key to national survival and the
means through which the economic goals of increased employment and enhanced incomes can
most expeditiously be achieved."
125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market."
126
After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.
127

All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,
128
as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive.
129
Tax credits for domestic
inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development."
130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.
131
Petitioner alleges that respondent
did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late
in the day for petitioner to challenge the VAT-registered status of respondent, given the latters prior
representation before the lower courts and the mode of appeal taken by petitioner before this
Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises
will use, directly or indirectly, in manufacturing.
132
EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.
133
Petitioner merely asserts that by virtue of the PEZA registration
alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods and
services respondent has purchased are not considered used in the VAT business, and no VAT refund
or credit is due.
134
This is a non sequitur. By the VATs very nature as a tax on consumption, the capital
goods and services respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,
135

petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments not
adequately and seriously brought below cannot be raised for the first time on appeal."
136
This is a
"matter of procedure"
137
and a "question of fairness."
138
Failure to assert "within a reasonable time
warrants a presumption that the party entitled to assert it either has abandoned or declined to assert
it."
139

The BIR regulations additionally requiring an approved prior application for effective zero rating
140

cannot prevail over the clear VAT nature of respondents transactions. The scope of such regulations
is not "within the statutory authority x x x granted by the legislature.
141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.
142
The courts will not countenance one that
overrides the statute it seeks to apply and implement.
143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or agents
who, without fluid consideration, are bent on denying a valid application. Moreover, the State can
never be estopped by the omissions, mistakes or errors of its officials or agents.
144

Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty.
145
Respondents registration carries with it the
presumption that, in the absence of contradictory evidence, an application for effective zero rating
was also filed and approval thereof given. Besides, it is also presumed that the law has been
obeyed
146
by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,
147
is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to
apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by
their nature, but by the taxpayers negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in
EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,
148
for EO
226
149
also has provisions to contend with. These two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may
then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.
150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex,
in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.
151
Hence,
for being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices
and have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment --
as provided for under Article 39(d), Title III, Book I of EO 226
152
-- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by
RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x."
x x x x x x x x x
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes,
x x x tax credits for locally sourced inputs x x x."
153

And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all
the special laws cited above is broad enough to cover even the enforcement of internal revenue
laws, including prescription.
154

Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.
SO ORDERED.






















2. Republic of the Philippines
SUPREME COURT
THIRD DIVISION
G.R. No. 140230 December 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.
D E C I S I O N
GARCIA, J.:
In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner) seeks
the review and reversal of the September 17, 1999 Decision
1
of the Court of Appeals (CA) in CA-G.R.
No. SP 47895, affirming, in effect, the February 18, 1998 decision
2
of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5178, a claim for tax refund/credit instituted by respondent Philippine Long Distance
Company (PLDT) against petitioner for taxes it paid to the Bureau of Internal Revenue (BIR) in
connection with its importation in 1992 to 1994 of equipment, machineries and spare parts.
The facts:
PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a
telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it imported for its business on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as
follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other
internal revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May
31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax
exemption privilege under Section 12 of R.A. 7082, which reads:
Sec. 12. The grantee shall be liable to pay the same taxes on their real estate, buildings, and
personal property, exclusive of this franchise, as other persons or corporations are now or hereafter
may be required by law to pay. In addition thereto, the grantee, shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee, its successors or assigns, and the said
percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the
grantee shall continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment is amended
or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis
supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,
3
pertinently reading, as follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings
thereof.
xxx xxx xxx
The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes
including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary in the conduct of its business
covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly
made liable.
xxx xxx xxx
In view thereof, this Office hereby holds that PLDT, is exempt from VAT on its importation of
equipment, machineries and spare parts needed in its franchise operations.
Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim
4
for tax credit/refund of
the VAT, compensating taxes, advance sales taxes and other taxes it had been paying "in
connection with its importation of various equipment, machineries and spare parts needed for its
operations". With its claim not having been acted upon by the BIR, and obviously to forestall the
running of the prescriptive period therefor, PLDT filed with the CTA a petition for review,
5
therein
seeking a refund of, or the issuance of a tax credit certificate in, the amount of P280,552,286.00,
representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes
alleged to have been erroneously paid on its importations from October 1992 to May 1994. The
petition was docketed in said court as CTA Case No. 5178.
On February 18, 1998, the CTA rendered a decision
6
granting PLDTs petition, pertinently saying:
This Court has noted that petitioner has included in its claim receipts covering the period prior to
December 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find that the
petitioner is entitled to the reduced amount of P223,265,276.00 after excluding from the final
computation those taxes that were paid prior to December 16, 1992 as they fall outside the two-year
prescriptive period for claiming for a refund as provided by law. The computation of the refundable
amount is summarized as follows:
COMPENSATING TAX
Total amount claimed P126,713.037.00
Less:
a) Amount already prescribed: xxx
Total P 38,015,132.00
b) Waived by petitioner
(Exh. B-216) P 1,440,874.00 P39,456,006.00
Amount refundable P87,257,031.00
ADVANCE SALES TAX
Total amount claimed P12,460.219.00
Less amount already prescribed: P5,043,828.00
Amount refundable P7,416,391.00
OTHER BIR TAXES
Total amount claimed P25,337,697.00
Less amount already prescribed: 11,187,740.00
Amount refundable P14,149,957.00
VALUE ADDED TAX
Total amount claimed P116.041,333.00
Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00
Amount refundable P114,441,897.00
TOTAL AMOUNT REFUNDABLE P223,265,276.00,
============
(Breakdown omitted)
and accordingly disposed, as follows:
WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and in
accordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount of P223,265,276.00 representing erroneously
paid value-added taxes, compensating taxes, advance sales taxes and other BIR taxes on its
importation of equipments (sic), machineries and spare parts for the period covering the taxable
years 1992 to 1994.
Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then CTA
Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion
7
of Associate
Judge Amancio Q. Saga who maintained that the phrase "in lieu of all taxes" found in Section 12 of
R.A. No. 7082, supra, refers to exemption from "direct taxes only" and does not cover "indirect taxes",
such as VAT, compensating tax and advance sales tax.
In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution
8
of May 7,
1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.
9

Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of
Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the herein challenged Decision
10
dated
September 17, 1999, dismissed the BIRs petition, thereby effectively affirming the CTAs judgment.
Relying on its ruling in an earlier case between the same parties and involving the same issue CA-
G.R. SP No. 40811, decided 16 February 1998 the appellate court partly wrote in its assailed
decision:
This Court has already spoken on the issue of what taxes are referred to in the phrase "in lieu of all
taxes" found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and the same
must be followed pursuant to the doctrine of stare decisis. xxx. "Stare decisis et non quieta movere.
Stand by the decision and disturb not what is settled."
Hence, this recourse by the BIR Commissioner on the lone assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROM THE PAYMENT OF
VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR TAXES ON ITS
IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS
GROSS RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.
There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently
raises had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal
Revenue vs. Philippine Long Distance Company. There, the Sixteenth Division of the appellate court
declared that under the express provision of Section 12 of R.A. 7082, supra, "the payment [by PLDT] of
the 3% franchise tax of [its] gross receipts shall be in lieu of all taxes" exempts PLDT from payment of
compensating tax, advance sales tax, VAT and other internal revenue taxes on its importation of
various equipment, machinery and spare parts for the use of its telecommunications system.
Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court a
motion for time to file a petition for review, docketed in this Court as G.R. No. 134386. However, on
the last day for the filing of the intended petition, the then BIR Commissioner had a change of heart
and instead manifested
11
that he will no longer pursue G.R. No. 134386, there being no compelling
grounds to disagree with the Court of Appeals decision in CA-G.R. 40811. Consequently, on
September 28, 1998, the Court issued a Resolution
12
in G.R. No. 134386 notifying the parties that "no
petition" was filed in said case and that the CA judgment sought to be reviewed therein "has now
become final and executory". Pursuant to said Resolution, an Entry of Judgment
13
was issued by the
Court of Appeals in CA-G.R. SP No. 40811. Hence, the CAs dismissal of CA-G.R. No. 47895 on the
additional ground of stare decisis.
Under the doctrine of stare decisis et non quieta movere, a point of law already established will,
generally, be followed by the same determining court and by all courts of lower rank in subsequent
cases where the same legal issue is raised.
14
For reasons needing no belaboring, however, the Court
is not at all concluded by the ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895.
The Court has time and again stated that the rule on stare decisis promotes stability in the law and
should, therefore, be accorded respect. However, blind adherence to precedents, simply as
precedent, no longer rules. More important than anything else is that the court is right,
15
thus its duty
to abandon any doctrine found to be in violation of the law in force.
16

As it were, the former BIR Commissioners decision not to pursue his petition in G.R. No. 134386 denied
the BIR, at least as early as in that case, the opportunity to obtain from the Court an authoritative
interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the government is not estopped
by acts or errors of its agents, particularly on matters involving taxes. Corollarily, the erroneous
application of tax laws by public officers does not preclude the subsequent correct application
thereof.
17
Withal, the errors of certain administrative officers, if that be the case, should never be
allowed to jeopardize the governments financial position.
18

Hence, the need to address the main issue tendered herein.
According to the Court of Appeals, the "in lieu of all taxes" clause found in Section 12 of PLDTs
franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in no
uncertain terms, that PLDTs payment of the 3% franchise tax on all its gross receipts from businesses
transacted by it under its franchise is in lieu of all taxes on the franchise or earnings thereof. In fine, the
appellate court, agreeing with PLDT, posits the view that the word "all" encompasses any and all
taxes collectible under the National Internal Revenue Code (NIRC), save those specifically
mentioned in PLDTs franchise, such as income and real property taxes.
The BIR Commissioner excepts. He submits that the exempting "in lieu of all taxes" clause covers direct
taxes only, adding that for indirect taxes to be included in the exemption, the intention to include
must be specific and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT
exempt from payment of VAT and other indirect taxes on its importations. To the Commissioner,
PLDTs claimed entitlement to tax refund/credit is without basis inasmuch as the 3% franchise tax
being imposed on PLDT is not a substitute for or in lieu of indirect taxes.
The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt from
paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations.
Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of
taxation, taxes may be classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the very person who, it is intended or desired,
should pay them;
19
they are impositions for which a taxpayer is directly liable on the transaction or
business he is engaged in.
20

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid
by, one person in the expectation and intention that he can shift the burden to someone else.
21

Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another person, such as when the tax
is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller
passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services rendered.
To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate
buyer and ultimately to the final purchaser is the burden of the tax.
22
Stated differently, a seller who is
directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
end-user of such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax.
23

There can be no serious argument that PLDT, vis--vis its payment of internal revenue taxes on its
importations in question, is effectively claiming exemption from taxes not falling under the category
of direct taxes. The claim covers VAT, advance sales tax and compensating tax.
The NIRC classifies VAT as "an indirect tax the amount of [which] may be shifted or passed on to
the buyer, transferee or lessee of the goods".
24
As aptly pointed out by Judge Amancio Q. Saga in his
dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied
on the privilege of importing articles. It is not a tax on the franchise of a business enterprise or on its
earnings. It is imposed on all taxpayers who import goods (unless such importation falls under the
category of an exempt transaction under Sec. 109 of the Revenue Code) whether or not the goods
will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on
importation replaces the advance sales tax payable by regular importers who import articles for sale
or as raw materials in the manufacture of finished articles for sale.
25

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for
sale or of raw materials to be processed into merchandise can shift the tax or, to borrow from
Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,
26
lay the "economic burden of
the tax", on the purchaser, by subsequently adding the tax to the selling price of the imported article
or finished product.
Compensating tax also partakes of the nature of an excise tax payable by all persons who import
articles, whether in the course of business or not.
27
The rationale for compensating tax is to place, for
tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with
those who buy directly from foreign countries.
28

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the
goods or services, not in the buyer thereof. Thus, one cannot invoke ones exemption privilege to
avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he
purchased.
29
Hence, it is important to determine if the tax exemption granted to a taxpayer
specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it
is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.
30

Time and again, the Court has stated that taxation is the rule, exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
31
To him, therefore, who claims a refund or
exemption from tax payments rests the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted.
32

As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by
the limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the exemption
is limited to taxes imposed directly on PLDT since taxes pertaining to PLDTs franchise or earnings are
its direct liability. Accordingly, indirect taxes, not being taxes on PLDTs franchise or earnings, are
outside the purview of the "in lieu" provision.
If we were to adhere to the appellate courts interpretation of the law that the "in lieu of all taxes"
clause encompasses the totality of all taxes collectible under the Revenue Code, then, the
immediately following limiting clause "on this franchise and its earnings" would be nothing more than
a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of interpretation
cannot be accorded a governing sway following the familiar legal maxim redendo singula singulis
meaning, take the words distributively and apply the reference. Under this principle, each word or
phrase must be given its proper connection in order to give it proper force and effect, rendering
none of them useless or superfluous.
33

Significantly, in Manila Electric Company [Meralco] vs. Vera,
34
the Court declared the relatively
broader exempting clause "shall be in lieu of all taxes and assessments of whatsoever nature upon
the privileges earnings, income franchise ... of the grantee" written in par. # 9 of Meralcos franchise
as not so all encompassing as to embrace indirect tax, like compensating tax. There, the Court said:
It is a well-settled rule or principle in taxation that a compensating tax is an excise tax one that is
imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a
privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied
upon property because of its use is an excise duty. .
The compensating tax being imposed upon MERALCO, is an impost on its use of imported articles
and is not in the nature of a direct tax on the articles themselves, the latter tax falling within the
exemption. Thus, in International Business Machine Corporation vs. Collector of Internal Revenue,
which involved the collection of a compensating tax from the plaintiff-petitioner on business
machines imported by it, this Court stated in unequivocal terms that "it is not the act of importation
that is taxed under section 190 but the uses of imported goods not subjected to a sales tax" because
the "compensating tax was expressly designated as a substitute to make up or compensate for the
revenue lost to the government through the avoidance of sales taxes by means of direct purchases
abroad.
xxx xxx xxx
xxx If it had been the legislative intent to exempt MERALCO from paying a tax on the use of imported
equipments, the legislative body could have easily done so by expanding the provision of paragraph
9 and adding to the exemption such words as "compensating tax" or "purchases from abroad for use
in its business," and the like.
It may be so that in Maceda vs. Macaraig, Jr.
35
the Court held that an exemption from "all taxes"
granted to the National Power Corporation (NPC) under its charter
36
includes both direct and indirect
taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the
correct lesson of Maceda being that an exemption from "all taxes" excludes indirect taxes, unless the
exempting statute, like NPCs charter, is so couched as to include indirect tax from the exemption.
Wrote the Court:
xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to
cover, among others, both direct and indirect taxes on all petroleum products used in its operation.
Presidential Decree No. 938 [NPCs amended charter) amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties fees ."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. .
xxx xxx xxx
It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of
NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is
to attain its goals. (Italics in the original; words in bracket added)
Of similar import is what we said in Borja vs. Collector of Internal Revenue.
37
There, the Court upheld
the decision of the CTA denying a claim for refund of the compensating taxes paid on the
importation of materials and equipment by a grantee of a heat and power legislative franchise
containing an "in lieu" provision, rationalizing as follows:
xxx Moreover, the petitioners alleged exemption from the payment of compensating tax in the
present case is not clear or expressed; unlike the exemption from the payment of income tax which
was clear and expressed in the Carcar case. Unless it appears clearly and manifestly that an
exemption is intended, the provision is to be construed strictly against the party claiming exemption.
xxx.
Jurisprudence thus teaches that imparting the "in lieu of all taxes" clause a literal meaning, as did the
Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it is the
duty of courts to seek the real intent of the legislature, even if, by so doing, they may limit the literal
meaning of the broad language.
38

It cannot be over-emphasized that tax exemption represents a loss of revenue to the government
and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against
the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist,
it must not be enlarged by construction, since the reasonable presumption is that the state has
granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the
very terms of the statute the favor would be extended beyond dispute in ordinary cases.
39

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from
payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings.
PLDT has not shown its eligibility for the desired exemption. None should be granted.
As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDTs allegation
that the Bureau of Customs assessed the company for advance sales tax and compensating tax for
importations entered between October 1, 1992 and May 31, 1994 when the value-added tax system
already replaced, if not totally eliminated, advance sales and compensating taxes.
40
Indeed,
pursuant to Executive Order No. 273
41
which took effect on January 1, 1988, a multi-stage value-
added tax was put into place to replace the tax on original and subsequent sales tax.
42
It stands to
reason then, as urged by PLDT, that compensating tax and advance sales tax were no longer
collectible internal revenue taxes under the NILRC when the Bureau of Customs made the
assessments in question and collected the corresponding tax. Stated a bit differently, PLDT was no
longer under legal obligation to pay compensating tax and advance sales tax on its importation
from 1992 to 1994.
Parenthetically, petitioner has not made an issue about PLDTs allegations concerning the abolition
of the provisions of the Tax Code imposing the payment of compensating and advance sales tax on
importations and the non-existence of these taxes during the period under review. On the contrary,
petitioner admits that the VAT on importation of goods has "replace[d] the compensating tax and
advance sales tax under the old Tax Code".
43

Given the above perspective, the amount PLDT paid in the concept of advance sales tax and
compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments and
would theoretically be refundable. It should be emphasized, however, that, such importations were,
when made, already subject to VAT.
Factoring in the fact that a portion of the claim was barred by prescription, the CTA had determined
that PLDT is entitled to a total refundable amount of P94,673,422.00 (P87,257,031.00 of compensating
tax + P7,416,391.00 = P94,673,422.00). Accordingly, it behooves the BIR to grant a refund of the
advance sales tax and compensating tax in the total amount of P94,673,422.00, subject to the
condition that PLDT present proof of payment of the corresponding VAT on said transactions.
WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No.
47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue is ORDERED to
issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00 advance sales tax and
compensating tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31,
1994, less the VAT which may have been due on the importations in question, but have otherwise
remained uncollected.
SO ORDERED.
3. Republic of the Philippines
SUPREME COURT
EN BANC
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES
MARTINEZ doing business under the name and style of "SHELL GATE N. DOMINGO"; BETHZAIDA TAN
doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA
doing business under the name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO
doing business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA
CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under
the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business under the name and
style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the
name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business
under the name and style of "STARCARGA ENTERPRISES"; ADORACION MAEBO doing business under
the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name
and style of "LEONAS GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO doing
business under the name and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing
business under the name and style of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS doing business
under the name and style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing business under
the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART CORPORATION
represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS
HERITAGE CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations, JOSELITO
F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE
STATION"; ANTHONY ALBERT CRUZ III doing business under the name and style of "TRUE SERVICE
STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN,
RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ,
RODOLFO Q. AGBAYANI and TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive
Secretary, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as
the OIC Commissioner of the Bureau of Customs, Respondent.
D E C I S I O N
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by everyone,
and the more man enjoys the advantages of society, the more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full value-added tax benefits these are the
reasons why Republic Act No. 9337 (R.A. No. 9337)
1
was enacted. Reasons, the wisdom of which, the
Court even with its extensive constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities
in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and
Senate Bill No. 1950.
House Bill No. 3555
2
was introduced on first reading on January 7, 2005. The House Committee on
Ways and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.)
Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for
immediate enactment. On January 27, 2005, the House of Representatives approved the bill on
second and third reading.
House Bill No. 3705
3
on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No.
3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President
also certified it as urgent on February 8, 2005. The House of Representatives approved the bill on
second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 1950
4
on March 7,
2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos.
3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838
and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan.
The President certified the bill on March 11, 2005, and was approved by the Senate on second and
third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives
for a committee conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House
Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference,"
recommended the approval of its report, which the Senate did on May 10, 2005, and with the House
of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to
the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.
5
When said date came, the Court issued a
temporary restraining order, effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking
through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a lot of complaints aired on television and on
radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices that theyll have to pay would have to go up
by 10%. While all that was being aired, per your presentation and per our own understanding of the
law, thats not true. Its not true that the e-vat law necessarily increased prices by 10% uniformly isnt
it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of
the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum
dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover
the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in
the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that
different industries, different products, different services are hit differently. So its not correct to say
that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%,
correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were
being increased arbitrarily by 10%. And thats one reason among many others this Court had to issue
TRO because of the confusion in the implementation. Thats why we added as an issue in this case,
even if its tangentially taken up by the pleadings of the parties, the confusion in the implementation
of the E-vat. Our people were subjected to the mercy of that confusion of an across the board
increase of 10%, which you yourself now admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these
mitigating measures and the location and situation of each product, of each service, of each
company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of
all these and we wish the government will take time to clarify all these by means of a more detailed
implementing rules, in case the law is upheld by this Court. . . .
6

The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006,
after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to
12%, on the ground that it amounts to an undue delegation of legislative power, petitioners also
contend that the increase in the VAT rate to 12% contingent on any of the two conditions being
satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it
imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to
be an incentive to the President to raise the VAT collection to at least 2
4
/5 of the GDP of the previous
year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the
Bicameral Conference Committee is a violation of the "no-amendment rule" upon last reading of a
bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell
Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax
to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding
tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale
of goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or
property without due process of law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount of input tax that may be
claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be
confiscated, appropriated, or limited without due process of law. Petitioners further contend that like
any other property or property right, the input tax credit may be transferred or disposed of, and that
by limiting the same, the government gets to tax a profit or value-added even if there is no profit or
value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection
of the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if:
(1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several
transactions with the government, is not based on real and substantial differences to meet a valid
classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section
28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio
that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners
make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this
petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the
following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on
provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,
7

148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1)
of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate
exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July
20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable
input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect,
thus violating the principle that tax collection and revenue should be solely allocated for public
purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to
pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the
Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners
failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of the two conditions provided
therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation
on the creditable input tax, the 60-month amortization on the purchase or importation of capital
goods exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is
arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive
taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform
agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt the
balance towards a sustainable macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of
the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added
tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of
goods or properties and services.
8
Being an indirect tax on expenditure, the seller of goods or services
may pass on the amount of tax paid to the buyer,
9
with the seller acting merely as a tax collector.
10

The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in, without transferring the burden to someone else.
11
Examples are individual and
corporate income taxes, transfer taxes, and residence taxes.
12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers. The single-stage system was subsequently
modified, and a mixture of the "cost deduction method" and "tax credit method" was used to
determine the value-added tax payable.
13
Under the "tax credit method," an entity can credit
against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs
and imports.
14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT
system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax
credit method."
15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,
16
R.A. No. 8241 or the Improved
VAT Law,
17
R.A. No. 8424 or the Tax Reform Act of 1997,
18
and finally, the presently beleaguered R.A.
No. 9337, also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee
exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the
output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in
addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be
utterly impracticable to transact the business of the nation, either at all, or at least with decency,
deliberation, and order."
19
Thus, Article VI, Section 16 (3) of the Constitution provides that "each House
may determine the rules of its proceedings." Pursuant to this inherent constitutional power to
promulgate and implement its own rules of procedure, the respective rules of each house of
Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on
the amendment to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
. . .
The Chairman of the House panel may be interpellated on the Conference Committee Report prior
to the voting thereon. The House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee of
both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled version
thereof with the explanatory statement of the conference committee shall be attached to the
report.
. . .
The creation of such conference committee was apparently in response to a problem, not
addressed by any constitutional provision, where the two houses of Congress find themselves in
disagreement over changes or amendments introduced by the other house in a legislative bill. Given
that one of the most basic powers of the legislative branch is to formulate and implement its own
rules of proceedings and to discipline its members, may the Court then delve into the details of how
Congress complies with its internal rules or how it conducts its business of passing legislation? Note
that in the present petitions, the issue is not whether provisions of the rules of both houses creating the
bicameral conference committee are unconstitutional, but whether the bicameral conference
committee has strictly complied with the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,
20
the Court En Banc, unanimously reiterated
and emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners plea
for the Court to go behind the enrolled copy of the bill. Assailed in said case was Congresss creation
of two sets of bicameral conference committees, the lack of records of said committees
proceedings, the alleged violation of said committees of the rules of both houses, and the
disappearance or deletion of one of the provisions in the compromise bill submitted by the
bicameral conference committee. It was argued that such irregularities in the passage of the law
nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of both Houses of Congress that it was passed are
conclusive of its due enactment. A review of cases reveals the Courts consistent adherence to the
rule. The Court finds no reason to deviate from the salutary rule in this case where the irregularities
alleged by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2nd or
3
rd
Bicameral Conference Committee by the House. This Court is not the proper forum for the
enforcement of these internal rules of Congress, whether House or Senate. Parliamentary rules are
merely procedural and with their observance the courts have no concern. Whatever doubts there
may be as to the formal validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates
its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power
to inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own
rules, in the absence of showing that there was a violation of a constitutional provision or the rights of
private individuals. In Osmea v. Pendatun, it was held: "At any rate, courts have declared that the
rules adopted by deliberative bodies are subject to revocation, modification or waiver at the
pleasure of the body adopting them. And it has been said that "Parliamentary rules are merely
procedural, and with their observance, the courts have no concern. They may be waived or
disregarded by the legislative body." Consequently, "mere failure to conform to parliamentary usage
will not invalidate the action (taken by a deliberative body) when the requisite number of members
have agreed to a particular measure."
21
(Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting provisions
in the House and Senate bills. Akin to the Farias case,
22
the present petitions also raise an issue
regarding the actions taken by the conference committee on matters regarding Congress
compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of
the legislature is the power to formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business expeditiously and in the most
orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it believes
that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this
Court cannot apply to questions regarding only the internal operation of Congress, thus, the Court is
wont to deny a review of the internal proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of
Finance,
23
the Court already made the pronouncement that "[i]f a change is desired in the practice
[of the Bicameral Conference Committee] it must be sought in Congress since this question is not
covered by any constitutional provision but is only an internal rule of each house."
24
To date,
Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that
Congress finds the practices of the bicameral conference committee to be very useful for purposes
of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements
were as follows:
House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on
every sale of goods or
properties (amending Sec.
106 of NIRC); 12% VAT on
importation of goods
(amending Sec. 107 of
NIRC); and 12% VAT on sale
of services and use or lease
of properties (amending Sec.
108 of NIRC)
Provides for 12% VAT in general
on sales of goods or properties
and reduced rates for sale of
certain locally manufactured
goods and petroleum products
and raw materials to be used in
the manufacture thereof
(amending Sec. 106 of NIRC);
12% VAT on importation of goods
and reduced rates for certain
imported products including
petroleum products (amending
Sec. 107 of NIRC); and 12% VAT
on sale of services and use or
lease of properties and a
reduced rate for certain services
including power generation
Provides for a single rate of
10% VAT on sale of goods or
properties (amending Sec.
106 of NIRC), 10% VAT on sale
of services including sale of
electricity by generation
companies, transmission and
distribution companies, and
use or lease of properties
(amending Sec. 108 of NIRC)
(amending Sec. 108 of NIRC)
With regard to the "no pass-on" provision
No similar provision Provides that the VAT imposed
on power generation and on the
sale of petroleum products shall
be absorbed by generation
companies or sellers,
respectively, and shall not be
passed on to consumers
Provides that the VAT
imposed on sales of electricity
by generation companies
and services of transmission
companies and distribution
companies, as well as those
of franchise grantees of
electric utilities shall not apply
to residential
end-users. VAT shall be
absorbed by generation,
transmission, and distribution
companies.
With regard to 70% limit on input tax credit
Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods
shall not exceed 5% of the
total amount of such goods
and services; and for persons
engaged in retail trading of
goods, the allowable input
tax credit shall not exceed
11% of the total amount of
goods purchased.
No similar provision Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods shall
not exceed 90% of the output
VAT.
With regard to amendments to be made to NIRC provisions regarding income and
excise taxes
No similar provision No similar provision Provided for
amendments to several
NIRC provisions regarding
corporate income,
percentage, franchise
and excise taxes
The disagreements between the provisions in the House bills and the Senate bill were with regard to
(1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner input tax credits should be limited; (4)
and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes
should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and Senate
bills, the Bicameral Conference Committee was mandated by the rules of both houses of Congress
to act on the same by settling said differences and/or disagreements. The Bicameral Conference
Committee acted on the disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in
the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12% as
the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT
rate would be retained until certain conditions arise, i.e., the value-added tax collection as a
percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the previous year exceeds 1%, when the President,
upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers or whether both the
VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed
on sale of petroleum products may be passed on to consumers, the Bicameral Conference
Committee chose to settle such disagreement by altogether deleting from its Report any no pass-on
provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the
Bicameral Conference Committee decided to adopt the position of the House by putting a limitation
on the amount of input tax that may be credited against the output tax, although it crafted its own
language as to the amount of the limitation on input tax credits and the manner of computing the
same by providing thus:
(A) Creditable Input Tax. . . .
. . .
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost
for such goods, excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00):
PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters: PROVIDED that the input tax
inclusive of input VAT carried over from the previous quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax
attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax,
franchise, percentage and excise taxes, the conference committee decided to include such
amendments and basically adopted the provisions found in Senate Bill No. 1950, with some changes
as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated to settle the differences between the disagreeing
provisions in the House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and
"harmonize."
25
To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for it
did not inject any idea or intent that is wholly foreign to the subject embraced by the original
provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by
the Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the
House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of
VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the
subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the
Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate
Panel, explained the reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no
sector should be a beneficiary of legislative grace, neither should any sector be discriminated on.
The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the
bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this two-thirds of
the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is
basically simple, lets keep the VAT simple.
26
(Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really
enjoyed the support of either House."
27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference
Committee came to a compromise on the percentage rate of the limitation or cap on such input tax
credit, but again, the change introduced by the Bicameral Conference Committee was totally within
the intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of
Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y
introducing limitations on the claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage."
28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in
Senate Bill No. 1950, since said provisions were among those referred to it, the conference committee
had to act on the same and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs. Prado
29
and Tolentino vs. Secretary of Finance,
30

the Court recognized the long-standing legislative practice of giving said conference committee
ample latitude for compromising differences between the Senate and the House. Thus, in the
Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its report an entirely new provision
that is not found either in the House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two provisions, there is no reason why it cannot propose several
provisions, collectively considered as an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the committee. After all, its report was not
final but needed the approval of both houses of Congress to become valid as an act of the
legislative department. The charge that in this case the Conference Committee acted as a third
legislative chamber is thus without any basis.
31
(Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment
Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays
entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add
or delete provisions in the House bill and the Senate bill after these had passed three readings is in
effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails
to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.
32
(Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed
by each house of Congress with regard to bills initiated in each of said respective houses, before said
bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said
provision in a way as to proscribe any further changes to a bill after one house has voted on it would
lead to absurdity as this would mean that the other house of Congress would be deprived of its
constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by the Bicameral Conference
Committee of amendments and modifications to disagreeing provisions in bills that have been acted
upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on
corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to
wit:
Section 27 Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the
House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107,
108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106,
107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate
amended but which amendments were not found in the House bills are not intended to be
amended by the House of Representatives. Hence, they argue that since the proposed amendments
did not originate from the House, such amendments are a violation of Article VI, Section 24 of the
Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated
the move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon
transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing
amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC
provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly
with the value- added tax, which is the only kind of tax being amended in the House bills, still within
the purview of the constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court held,
thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which
initiated the legislative process culminating in the enactment of the law must substantially be the
same as the House bill would be to deny the Senates power not only to "concur with amendments"
but also to "propose amendments." It would be to violate the coequality of legislative power of the
two houses of Congress and in fact make the House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.
. . .
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from
the House of Representatives on the theory that, elected as they are from the districts, the members
of the House can be expected to be more sensitive to the local needs and problems. On the other
hand, the senators, who are elected at large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on the enactment of such laws.
33

(Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives,
the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate
Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily,
Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of
the amendments that may be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
touched in the House bills are still in furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the
floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of solving
the countrys serious financial problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly increased. This may be easier said than
done, but our fiscal authorities are still optimistic the government will be operating on a balanced
budget by the year 2009. In fact, several measures that will result to significant expenditure savings
have been identified by the administration. It is supported with a credible package of revenue
measures that include measures to improve tax administration and control the leakages in revenues
from income taxes and the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged
that on top of our agenda must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective and beneficial to the overall status of
our economy. One such opportunity is a review of existing tax rates, evaluating the relevance given
our present conditions.
34
(Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to
bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and control
of the leakages in revenues from income taxes and value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the measures from the point of national
perspective, can introduce amendments within the purposes of those bills. It can provide for ways
that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden
across all sectors instead of putting it entirely on the shoulders of the consumers. The sponsorship
speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is
worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in
additional revenues annually even while by mitigating prices of power, services and petroleum
products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on
twelve goods and services. The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer.
Why should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the
consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not
to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel,
this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there
to share the burden.
35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the house bills which is
to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the
reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be burdened more as they would be paying
the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact
of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker
fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT
chain, we will however bring down the excise tax on socially sensitive products such as diesel, bunker,
fuel and kerosene.
. . .
What do all these exercises point to? These are not contortions of giving to the left hand what was
taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so that
the people can cushion the blow of higher prices they will have to pay as a result of VAT.
36

The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes
of the house bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate
acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively,
of the NIRC giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a
certain condition is met, constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor: provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of
the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services:
provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a
virtual abdication by Congress of its exclusive power to tax because such delegation is not within the
purview of Section 28 (2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff
rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services, which cannot be included within the purview of tariffs
under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods or merchandise imported or
exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the
legislative power to tax is contrary to republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also effectively nullified the Presidents power
of control, which includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the
conditions provided by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without representation. They submit that the
Secretary of Finance is not mandated to give a favorable recommendation and he may not even
give his recommendation. Moreover, they allege that no guiding standards are provided in the law
on what basis and as to how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the President since the
former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether
to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of government
has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated
sphere.
37
A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata non delegari potest which means "what has been
delegated, cannot be delegated."
38
This doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be performed by the delegate through
the instrumentality of his own judgment and not through the intervening mind of another.
39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative
power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House
of Representatives." The powers which Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make a complete law complete as to the time
when it shall take effect and as to whom it shall be applicable and to determine the expediency of
its enactment.
40
Thus, the rule is that in order that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must appear that the power involved is purely
legislative in nature that is, one appertaining exclusively to the legislative department. It is the
nature of the power, and not the liability of its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is
valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried
out, or implemented by the delegate;
41
and (b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must conform in the performance of his
functions.
42
A sufficient standard is one which defines legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to apply it. It indicates the circumstances under which
the legislative command is to be effected.
43
Both tests are intended to prevent a total transference
of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature
and exercise a power essentially legislative.
44

In People vs. Vera,
45
the Court, through eminent Justice Jose P. Laurel, expounded on the concept
and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other appointee or delegate of the
legislature.
. . .
The true distinction, says Judge Ranney, is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring an authority or discretion
as to its execution, to be exercised under and in pursuance of the law. The first cannot be done; to
the latter no valid objection can be made.
. . .
It is contended, however, that a legislative act may be made to the effect as law after it leaves the
hands of the legislature. It is true that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a particular community. In Wayman
vs. Southard, the Supreme Court of the United States ruled that the legislature may delegate a power
not legislative which it may itself rightfully exercise. The power to ascertain facts is such a power which
may be delegated. There is nothing essentially legislative in ascertaining the existence of facts or
conditions as the basis of the taking into effect of a law. That is a mental process common to all
branches of the government. Notwithstanding the apparent tendency, however, to relax the rule
prohibiting delegation of legislative authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the orthodox pronouncement of Judge
Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the
Constitution of the United States in the following language speaking of declaration of legislative
power to administrative agencies: The principle which permits the legislature to provide that the
administrative agent may determine when the circumstances are such as require the application of
a law is defended upon the ground that at the time this authority is granted, the rule of public policy,
which is the essence of the legislative act, is determined by the legislature. In other words, the
legislature, as it is its duty to do, determines that, under given circumstances, certain executive or
administrative action is to be taken, and that, under other circumstances, different or no action at all
is to be taken. What is thus left to the administrative official is not the legislative determination of what
public policy demands, but simply the ascertainment of what the facts of the case require to be done
according to the terms of the law by which he is governed. The efficiency of an Act as a declaration
of legislative will must, of course, come from Congress, but the ascertainment of the contingency
upon which the Act shall take effect may be left to such agencies as it may designate. The
legislature, then, may provide that a law shall take effect upon the happening of future specified
contingencies leaving to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).
46

In Edu vs. Ericta,
47
the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to alter and
repeal them; the test is the completeness of the statute in all its terms and provisions when it leaves
the hands of the legislature. To determine whether or not there is an undue delegation of legislative
power, the inquiry must be directed to the scope and definiteness of the measure enacted. The
legislative does not abdicate its functions when it describes what job must be done, who is to do it,
and what is the scope of his authority. For a complex economy, that may be the only way in which
the legislative process can go forward. A distinction has rightfully been made between delegation of
power to make the laws which necessarily involves a discretion as to what it shall be, which
constitutionally may not be done, and delegation of authority or discretion as to its execution to be
exercised under and in pursuance of the law, to which no valid objection can be made. The
Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility
and practicability. (Emphasis supplied).
48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain
facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its
terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations
on their authority.
49
While the power to tax cannot be delegated to executive agencies, details as to
the enforcement and administration of an exercise of such power may be left to them, including the
power to determine the existence of facts on which its operation depends.
50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the absence of
accurate information on the part of the legislators, and any reasonable method of securing such
information is proper.
51
The Constitution as a continuously operative charter of government does not
require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress itself properly to investigate.
52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5
and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions
has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the
law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact
that the word shall is used in the common proviso. The use of the word shall connotes a mandatory
order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of
discretion.
53
Where the law is clear and unambiguous, it must be taken to mean exactly what it says,
and courts have no choice but to see to it that the mandate is obeyed.
54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence
of any of the conditions specified by Congress. This is a duty which cannot be evaded by the
President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the
President does not come into play. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the Secretary of Finance by mandating the
fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The
Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon
the recommendation of the Secretary of Finance." Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can
easily be brushed aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that
as head of the Department of Finance he is the assistant and agent of the Chief Executive. The
multifarious executive and administrative functions of the Chief Executive are performed by and
through the executive departments, and the acts of the secretaries of such departments, such as the
Department of Finance, performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive.
The Secretary of Finance, as such, occupies a political position and holds office in an advisory
capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence"
and, in the language of Attorney-General Cushing, is "subject to the direction of the President."
55

In the present case, in making his recommendation to the President on the existence of either of the
two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of control and direction of the President.
He is acting as the agent of the legislative department, to determine and declare the event upon
which its expressed will is to take effect.
56
The Secretary of Finance becomes the means or tool by
which legislative policy is determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader perspective to properly evaluate
them. His function is to gather and collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. His personality in such instance is in reality
but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the
President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to
substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2
4
/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1%). If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by
the President effective January 1, 2006. There is no undue delegation of legislative power but only of
the discretion as to the execution of a law. This is constitutionally permissible.
57
Congress does not
abdicate its functions or unduly delegate power when it describes what job must be done, who must
do it, and what is the scope of his authority; in our complex economy that is frequently the only way
in which the legislative process can go forward.
58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President
the legislative power to tax is contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the mere implementation of the law.
The intent and will to increase the VAT rate to 12% came from Congress and the task of the President
is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within
the province of the Court to inquire into, its task being to interpret the law.
59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence
or create the conditions to bring about either or both the conditions precedent does not deserve
any merit as this argument is highly speculative. The Court does not rule on allegations which are
manifestly conjectural, as these may not exist at all. The Court deals with facts, not fancies; on
realities, not appearances. When the Court acts on appearances instead of realities, justice and law
will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on any
of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the
VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate
from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set
forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law
are clear. It does not provide for a return to the 10% rate nor does it empower the President to so
revert if, after the rate is increased to 12%, the VAT collection goes below the 2
4
/5 of the GDP of the
previous year or that the national government deficit as a percentage of GDP of the previous year
does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations
be introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress
may tread upon.
60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the
Court finds none, petitioners argument is, at best, purely speculative. There is no basis for petitioners
fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to
10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the
provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the
legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.
61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the
President to raise the VAT collection to at least 2
4
/5 of the GDP of the previous year, should be based
on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is
another condition, i.e., the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less
than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT
is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12%
because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a
relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to
increase the VAT rate.
62

That the first condition amounts to an incentive to the President to increase the VAT collection does
not render it unconstitutional so long as there is a public purpose for which the law was passed,
which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in
revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the state.
63

It simply means that sources of revenues must be adequate to meet government expenditures and
their variations.
64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During
the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the
countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position where
90 percent of our revenue is used for debt service. So, for every peso of revenue that we currently
raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly, this is not a
sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that
borrow money from that international financial markets. Our debt to GDP is approximately equal to
our GDP. Again, that shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is not as
benign as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global
growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid
increase in the interest rates in the leading economies of the world. And, therefore, our ability to
borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our ability to
access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is now,
at least based on the forecast of most financial institutions. So, we were assuming that raising 80
billion would put us in a position where we can then convince them to improve our ability to borrow
at lower rates. But conditions have changed on us because the interest rates have gone up. In fact,
just within this room, we tried to access the market for a billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We
issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the
market was not as favorable and up to now we have not accessed and we might pull back
because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end our
deficit reduction. Because it is deficit that is causing the increase of the debt and we are in what we
call a debt spiral. The more debt you have, the more deficit you have because interest and debt
service eats and eats more of your revenue. We need to get out of this debt spiral. And the only way,
I think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base.
65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the states economic dilemma is not for
the Court to judge. In the Farias case, the Court refused to consider the various arguments raised
therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing
that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the wisdom or
propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best means to achieve the desired results,
whether, in short, the legislative discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the legislature, and the serious conflict of opinions
does not suffice to bring them within the range of judicial cognizance.
66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive
policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of
legislation."
67

II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section
12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of
the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the
constitutional right against deprivation of life, liberty of property without due process of law, as
embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection
of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing, the presumption of validity
must prevail.
68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount
of input tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input
tax inclusive of the input VAT carried over from the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from
or paid by a VAT-registered person on the importation of goods or local purchase of good and
services, including lease or use of property, in the course of trade or business, from a VAT-registered
person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that may
be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited
against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax,
and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the
input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and
remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which
provides that "if the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-registered person to apply
for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that
such input taxes have not been applied against the output taxes. Such unused input tax may be
used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided.
It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does
not proceed further to the fact that such unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70%
limitation on the input tax. According to petitioner, the limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he
buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing
the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input
taxes that he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal Revenue (BIR);
69
and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions,
any excess over the output taxes shall instead be refunded to the taxpayer or credited against other
internal revenue taxes, at the taxpayers option.
70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can
credit his input tax only up to the extent of 70% of the output tax. In laymans term, the value-added
taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70%
of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax
collection because the person/taxpayer has already previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the
tax is the seller.
71
What only needs to be done is for the person/taxpayer to apply or credit these input
taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the
nature of a property that may not be confiscated, appropriated, or limited without due process of
law.
The input tax is not a property or a property right within the constitutional purview of the due process
clause. A VAT-registered persons entitlement to the creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons have
no vested rights in statutory privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away property, which was vested by virtue
of such rights.
72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible from
the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales,
it was then that the crediting of the input tax paid on purchase or importation of goods and services
by VAT-registered persons against the output tax was introduced.
73
This was adopted by the
Expanded VAT Law (R.A. No. 7716),
74
and The Tax Reform Act of 1997 (R.A. No. 8424).
75
The right to
credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the
law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly over
the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost
for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00):
Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over such a shorter period:
Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty
or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax
on purchase or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the
VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners
argument is without basis because the taxpayer is not permanently deprived of his privilege to credit
the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this
case amounts to a 4-year interest-free loan to the government.
76
In the same breath, Congress also
justified its move by saying that the provision was designed to raise an annual revenue of 22.6
billion.
77
The legislature also dispelled the fear that the provision will fend off foreign investments,
saying that foreign investors have other tax incentives provided by law, and citing the case of China,
where despite a 17.5% non-creditable VAT, foreign investments were not deterred.
78
Again, for
whatever is the purpose of the 60-month amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government for
taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and services which are subject to
the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final
value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or
person in control of the payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more
simplified VAT withholding system. The government in this case is constituted as a withholding agent
with respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be
withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services supplied
by contractors other than by public works contractors; 8.5% on gross payments for services supplied
by public work contractors; or 10% on payment for the lease or use of properties or property rights to
nonresident owners. Under the present Section 114(C), these different rates, except for the 10% on
lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five
percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the
concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of the payee
on said income. Taxes withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions with the government are subject
to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT
(deemed input VAT), in lieu of the actual input VAT directly or attributable to the taxable
transaction.
79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to
treat differently taxable transactions with the government.
80
This is supported by the fact that under
the old provision, the 5% tax withheld by the government remains creditable against the tax liability
of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods from sellers and services rendered
by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross
payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which shall be creditable against the value-added
tax liability of the seller or contractor: Provided, however, That in the case of government public
works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further,
That the payment for lease or use of properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or
person in control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits Congresss
intention to treat transactions with the government differently. Since it has not been shown that the
class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross payments, the excess may form part of
the cost. Equally, should the actual input tax be less than 5%, the difference is treated as income.
81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets
to tax a profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any
disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,
82
"full of
sound and fury, signifying nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It
need not take an astute businessman to know that it is a matter of exception that a business will sell
goods or services without profit or value-added. It cannot be overstressed that a business is created
precisely for profit.
The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."
83

The power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the rates
to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the
States power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such
power absent a clear showing of unreasonableness, discrimination, or arbitrariness.
84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input
tax, or invests in capital equipment, or has several transactions with the government, is not based on
real and substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the
subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners alleged distinctions are based on
variables that bear different consequences. While the implementation of the law may yield varying
end results depending on ones profit margin and value-added, the Court cannot go beyond what
the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or
things without distinction. This might in fact sometimes result in unequal protection. What the clause
requires is equality among equals as determined according to a valid classification. By classification is
meant the grouping of persons or things similar to each other in certain particulars and different from
all others in these same particulars.
85

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R.
Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep.
Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to
90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and
confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress
amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.
86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods
and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively,
of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods,
and sale of services and use or lease of properties. These same sections also provide for a 0% rate on
certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform
taxation does not deprive Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.
87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services with gross annual sales or receipts not
exceeding P1,500,000.00.
88
Also, basic marine and agricultural food products in their original state are
still not subject to the tax,
89
thus ensuring that prices at the grassroots level will remain accessible. As
was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:
90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-
sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of
farm and marine products, so that the costs of basic food and other necessities, spared as they are
from the incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly
favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty
burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt
persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding
P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage
and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax
on those previously exempt. Excise taxes on petroleum products
91
and natural gas
92
were reduced.
Percentage tax on domestic carriers was removed.
93
Power producers are now exempt from paying
franchise tax.
94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute
the burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35%
income tax rate, from a previous 32%.
95
Intercorporate dividends of non-resident foreign corporations
are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile
was increased to 20%.
96
The Philippine Amusement and Gaming Corporation (PAGCOR) is not
exempt from income taxes anymore.
97
Even the sale by an artist of his works or services performed for
the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is
the smaller business with higher input tax-output tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also
lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.
98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer
or business for every goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies
in the income earned by a person or profit margin marked by a business, such that the higher the
income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the
end of the day, it is really the lower income group or businesses with low-profit margins that is always
hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT.
What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court
stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall evolve a progressive system of taxation. The
constitutional provision has been interpreted to mean simply that direct taxes are . . . to be preferred
[and] as much as possible, indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF
THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to
evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect
taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution
from which the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating
of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions
to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)
99

CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-
aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear
on the plight of the masses. But it does not have the panacea for the malady that the law seeks to
remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of
its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature may
not correct, for instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers
of government to three distinct and separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three, and a zealous regard of the
prerogatives of each, knowing full well that one is not the guardian of the others and that, for official
wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box.
100

The words of the Court in Vera vs. Avelino
101
holds true then, as it still holds true now. All things
considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A. No.
9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of
herein decision.
SO ORDERED.



4. Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 81311 June 30, 1988
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C.
DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.
G.R. No. 81820 June 30, 1988
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and alliances,
petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and
SECRETARY OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and
SECRETARY OF BUDGET, respondent.
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.
Jaime C. Opinion for individual petitioners in G.R. No. 81311.
Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820.
Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No
81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

PADILLA, J.:
These four (4) petitions, which have been consolidated because of the similarity of the main issues
involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of
the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain
sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short),
for being unconstitutional in that its enactment is not alledgedly within the powers of the President;
that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal
protection clauses and other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have
failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an
appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional
questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the
question of constitutionality is directly and necessarily involved in a justiciable controversy and its
resolution is essential to the protection of the rights of the parties. According to the Solicitor General,
only the third requisite that the constitutional question should be raised at the earliest opportunity
has been complied with. He also questions the legal standing of the petitioners who, he contends,
are merely asking for an advisory opinion from the Court, there being no justiciable controversy for
resolution.
Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the
main procedural matters. Considering the importance to the public of the cases at bar, and in
keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other
branches of government have kept themselves within the limits of the Constitution and the laws and
that they have not abused the discretion given to them, the Court has brushed aside technicalities of
procedure and has taken cognizance of these petitions.
But, before resolving the issues raised, a brief look into the tax law in question is in order.
The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by
every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to
his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the
gross selling price of goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is
principally aimed to rationalize the system of taxing goods and services; simplify tax administration;
and make the tax system more equitable, to enable the country to attain economic recovery.
The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As
pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273,
was essentially a single stage value added tax system computed under the "cost subtraction
method" or "cost deduction method" and was imposed only on original sale, barter or exchange of
articles by manufacturers, producers, or importers. Subsequent sales of such articles were not subject
to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a
second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to
take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but on
every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-
rated or exempt.
Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no
authority to issue EO 273 on 25 July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole
legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states:
Sec. 1. Until a legislature is elected and convened under a new Constitution, the
President shall continue to exercise legislative powers.
On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the
Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article
XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides:
Sec. 6. The incumbent President shall continue to exercise legislative powers until the
first Congress is convened.
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested
with legislative powers until a legislature under a new Constitution is convened. The first Congress,
created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the
enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was
within the President's constitutional power and authority to legislate.
Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27
July 1987). He contends that the word "convene" is synonymous with "the date when the elected
members of Congress assumed office."
The contention is without merit. The word "convene" which has been interpreted to mean "to call
together, cause to assemble, or convoke,"
1
is clearly different from assumption of office by the
individual members of Congress or their taking the oath of office. As an example, we call to mind the
interim National Assembly created under the 1973 Constitution, which had not been "convened" but
some members of the body, more particularly the delegates to the 1971 Constitutional Convention
who had opted to serve therein by voting affirmatively for the approval of said Constitution, had
taken their oath of office.
To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a
bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render
meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15,
requiring Congress to convene once every year on the fourth Monday of July for its regular session
would be a contrariety, since Congress would already be deemed to be in session after the
individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10,
requiring Congress to convene for the purpose of enacting a law calling for a special election to
elect a President and Vice-President in case a vacancy occurs in said offices, would also be a
surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in
session, to decide a conflict between the President and the Cabinet as to whether or not the
President and the Cabinet as to whether or not the President can re-assume the powers and duties
of his office, would also be redundant. The same is true with the portion of Art. VII, sec. 18, which
requires Congress to convene within twenty-four (24) hours following the declaration of martial law or
the suspension of the privilage of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the
framers of said Constitution had intended to terminate the exercise of legislative powers by the
President at the beginning of the term of office of the members of Congress, they should have so
stated (but did not) in clear and unequivocal terms. The Court has not power to re-write the
Constitution and give it a meaning different from that intended.
The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave
abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been
defined, as follows:
Grave abuse of discretion" implies such capricious and whimsical exercise of judgment
as is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz.
834), or, in other words, where the power is exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, and it must be so patent and gross as to
amount to an evasion of positive duty or to a virtual refusal to perform the duty
enjoined or to act at all in contemplation of law. (Tavera-Luna, Inc. vs. Nable, 38 Off.
Gaz. 62).
2

Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary
or despotic manner by reason of passion or personal hostility. It appears that a comprehensive study
of the VAT had been extensively discussed by this framers and other government agencies involved
in its implementation, even under the past administration. As the Solicitor General correctly sated.
"The signing of E.O. 273 was merely the last stage in the exercise of her legislative powers. The
legislative process started long before the signing when the data were gathered, proposals were
weighed and the final wordings of the measure were drafted, revised and finalized. Certainly, it
cannot be said that the President made a jump, so to speak, on the Congress, two days before it
convened."
3

Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation
of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust.
Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary
value. To justify the nullification of a law. there must be a clear and unequivocal breach of the
Constitution, not a doubtful and argumentative implication.
4

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of
Baguio vs. De Leon,
5
said:
... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the
Court, stated: "A tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found."
There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came in
Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation; . . ." About two years later, Justice
Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. de la Fuente (88
Phil. 60, 65) incorporated the above excerpt in his opinion and continued; "Taking
everything into account, the differentiation against which the plaintiffs complain
conforms to the practical dictates of justice and equity and is not discriminatory within
the meaning of the Constitution."
To satisfy this requirement then, all that is needed as held in another case decided two
years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in
question "applies equally to all persons, firms and corporations placed in similar
situation." This Court is on record as accepting the view in a leading American case
(Carmichael v. Southern Coal and Coke Co., 301 US 495) that "inequalities which result
from a singling out of one particular class for taxation or exemption infringe no
constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153).
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which
are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-
sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of
farm and marine products, spared as they are from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general public.
6

The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers
Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National
Internal Revenue Code, unduly discriminates against customs brokers. The contested provision states:
Sec. 103. Exempt transactions. The following shall be exempt from the value-added
tax:
xxx xxx xxx
(r) Service performed in the exercise of profession or calling (except customs brokers)
subject to the occupation tax under the Local Tax Code, and professional services
performed by registered general professional partnerships;
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was
inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the
services of customs brokers subject to the payment of the VAT and to distinguish customs brokers
from other professionals who are subject to the payment of an occupation tax under the Local Tax
Code. Pertinent provisions of Sec. 102 read:
Sec. 102. Value-added tax on sale of services. There shall be levied, assessed and
collected, a value-added tax equivalent to 10% percent of gross receipts derived by
any person engaged in the sale of services. The phrase sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock,
real estate, commercial, customs and immigration brokers; lessors of personal property;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and similar services regardless of whether
or not the performance thereof call for the exercise or use of the physical or mental
faculties: ...
With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential
conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is
averted.
At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities of
customs brokers (like those of stock, real estate and immigration brokers) partake more of a business,
rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the
National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage
tax and replaced it with the VAT. If the petitioner Association did not protest the classification of
customs brokers then, the Court sees no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the
fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of
basic commodities and services, as well as mass actions and demonstrations against the VAT should
by now be evident. The fact that nothing of the sort has happened shows that the fears and
apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT
is not as bad as we are made to believe.
In any event, if petitioners seriously believe that the adoption and continued application of the VAT
are prejudicial to the general welfare or the interests of the majority of the people, they should seek
recourse and relief from the political branches of the government. The Court, following the time-
honored doctrine of separation of powers, cannot substitute its judgment for that of the President as
to the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and
determine whether or not EO 273 was enacted and made effective as law, in the manner required
by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of
discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to
impede its application or continued implementation.
WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.
SO ORDERED.














5. Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 158885 October 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG
and PATEROS, BUREAU OF INTERNAL REVENUE. Respondents.
R E S O L U T I O N
LEONARDO-DE CASTRO, J.:
Before us is respondents Motion for Reconsideration of our Decision dated April 2, 2009 which
granted the consolidated petitions of petitioner Fort Bonifacio Development Corporation, the
dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the
Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting
from petitioner the amount of 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.
The Motion for Reconsideration raises the following arguments:
I
SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY REPUBLIC
ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT OF REAL
PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS
INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN
SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX
CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT TO VAT FOR THE FIRST TIME.
II
SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE REGULATIONS
NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON REAL PROPERTIES.
III
REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.
The instant motion for reconsideration lacks merit.
The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It
amended several provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273
likewise accommodated the potential burdens of the shift to the VAT system by allowing newly VAT-
registered persons to avail of a transitional input tax credit as provided for in Section 105 of the Old
NIRC. Section 105 as amended by EO 273 reads:
Sec. 105. Transitional Input Tax Credits. A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the
first time value-added-tax on sale of real properties. The amendment reads:
Sec. 100. Value-added-tax on sale of goods or properties. (a) Rate and base of tax. There shall
be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-
added tax equivalent to 10% of the gross selling price or gross value in money of the goods, or
properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.1avvph!1
(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business; xxx
The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the
enactment of RA 7716. Section 105 however was amended with the passage of the new National
Internal Revenue Code of 1997 (New NIRC), also officially known as Republic Act (RA) 8424. The
provisions on the transitional input tax credit are now embodied in Section 111(A) of the New NIRC,
which reads:
Section 111. Transitional/Presumptive Input Tax Credits.
(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person
who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules
and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner,
be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of
the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax. [Emphasis ours.]
The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporations
(FBDC) presumptive input tax credit arising from the land inventory on the basis of Revenue
Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section
4.105-1 of RR 7-95 provides:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-registered
persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of 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.
In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-
95 for being in conflict with the law. It held that the CIR had no power to limit the meaning and
coverage of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and
justification to make such limitation. This it did when it restricted the application of Section 105 in the
case of real estate dealers only to improvements on the real property belonging to their beginning
inventory.
A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is
the cardinal rule in statutory construction that a statutes clauses and phrases must not be taken as
detached and isolated expressions, but the whole and every part thereof must be considered in
fixing the meaning of any of its parts in order to produce a harmonious whole. Every part of the
statute must be interpreted with reference to the context, i.e., that every part of the statute must be
considered together with other parts of the statute and kept subservient to the general intent of the
whole enactment.
1

In construing a statute, courts have to take the thought conveyed by the statute as a whole;
construe the constituent parts together; ascertain the legislative intent from the whole act; consider
each and every provision thereof in the light of the general purpose of the statute; and endeavor to
make every part effective, harmonious and sensible.
2

The statutory definition of the term "goods or properties" leaves no room for doubt. It states:
Sec. 100. Value-added tax on sale of goods or properties. (a) Rate and base of tax. xxx.
(1) The term goods or properties shall mean all tangible and intangible objects which are capable
of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business; xxx.
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:
Sec. 105. Transitional Input tax Credits. A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held
primarily for sale to costumers or held for lease in the ordinary course of business." Having been
defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could
not have a different meaning. This has been explained in the Decision dated April 2, 2009, thus:
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood in the business sense, refers to the product which
the VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real
properties themselves which constitute their "goods." Such real properties are the operating assets of
the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business." Said definition was taken from the very statutory language of Section 100 of the Old NIRC.
By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened
the definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue
regulation itself has provided.
Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:
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).
As mandated by Article 7 of the Civil Code,
3
an administrative rule or regulation cannot contravene
the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the
term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary
of Finance. The rules and regulations that administrative agencies promulgate, which are the
product of a delegated legislative power to create new and additional legal provisions that have
the effect of law, should be within the scope of the statutory authority granted by the legislature to
the objects and purposes of the law, and should not be in contradiction to, but in conformity with,
the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it
is intended to implement. Any rule that is not consistent with the statute itself is null and void.
4

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of
the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an
act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or
administrative ruling, the basic law prevails.
5

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax
credit under Section 105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was
basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the
following paragraph:
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures, constructed
on or after the effectivity of E.O. 273 (January 1, 1988).
It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by
RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real
properties as goods is concerned. The failure to add a specific repealing clause would not
necessarily indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted
paragraph was deleted created an irreconcilable inconsistency and repugnancy between the
provisions of RR 6-97 and RR 7-95.
We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T.
Carpio.
At the outset, it must be stressed that FBDC sought the refund of the total amount of P347,741,695.74
which it had itself paid in cash to the BIR. It is argued that the transitional input tax credit applies only
when taxes were previously paid on the properties in the beginning inventory and that there should
be a law imposing the tax presumed to have been paid. The thesis is anchored on the argument that
without any VAT or other input business tax imposed by law on the real properties at the time of the
sale, the 8% transitional input tax cannot be presumed to have been paid.
The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax
credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of "eight
percent (8%) of the value of such inventory" followed by the clause "or the actual value-added tax
paid on such goods, materials and supplies," the implication is clear that under the first clause, "eight
percent (8%) of the value of such inventory," the law does not contemplate the payment of any prior
tax on such inventory. This is distinguished from the second clause, "the actual value-added tax paid
on the goods, materials and supplies" where actual payment of VAT on the goods, materials and
supplies is assumed. Had the intention of the law been to limit the amount to the actual VAT paid,
there would have been no need to explicitly allow a claim based on 8% of the value of such
inventory.
The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax
was paid, whether or not it was actually paid, requires a transaction where a tax has been imposed
by law, is utterly without basis in law. The rationale behind the provisions of Section 105 was aptly
elucidated in the Decision sought to be reconsidered, thus:
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales
as output VAT. The transitional input tax credit mitigates this initial diminution of the 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.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were previously paid on the properties in the
beginning inventory and there is a law imposing the tax which is presumed to have been paid, is to
impose conditions or requisites to the application of the transitional tax input credit which are not
found in the law. The courts must not read into the law what is not there. To do so will violate the
principle of separation of powers which prohibits this Court from engaging in judicial legislation.
6

WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of
merit.
SO ORDERED.





















6. Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 166408 October 6, 2008
QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,
vs.
ABS-CBN BROADCASTING CORPORATION, respondent.
D E C I S I O N
REYES, R.T., J.:
CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be
made out of inference or implication.
The principle is relevant in this petition for review on certiorari of the Decision
1
of the Court of Appeals
(CA) and that
2
of the Regional Trial Court (RTC) ordering the refund and declaring invalid the
imposition and collection of local franchise tax by the City Treasurer of Quezon City on ABS-CBN
Broadcasting Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local government unit duly organized and existing by
virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City.
Petitioner City Treasurer of Quezon City is primarily responsible for the imposition and collection of
taxes within the territorial jurisdiction of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,
3
a franchise tax was imposed
on businesses operating within its jurisdiction. The provision states:
Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption to the
contrary notwithstanding, any person, corporation, partnership or association enjoying a
franchise whether issued by the national government or local government and, doing business
in Quezon City, shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%)
for 1993-1994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of
one percent (1%) for 1996 and the succeeding years thereafter, of gross receipts and sales
derived from the operation of the business in Quezon City during the preceding calendar
year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television
broadcasting stations in the Philippines under R.A. No. 7966.
4
Section 8 of R.A. No. 7966 provides the
tax liabilities of ABS-CBN which reads:
Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay the same
taxes on their real estate, buildings and personal property, exclusive of this franchise, as other
persons or corporations are now hereafter may be required by law to pay. In addition thereto,
the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%)
of all gross receipts of the radio/television business transacted under this franchise by the
grantee, its successors or assigns, and the said percentage tax shall be in lieu of all taxes on
this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall
continue to be liable for income taxes under Title II of the National Internal Revenue Code
pursuant to Section 2 of Executive No. 72 unless the latter enactment is amended or repealed,
in which case the amendment or repeal shall be applicable thereto. (Emphasis added)
ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the
above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the
corporation developed the opinion that it is not liable to pay the local franchise tax imposed by
Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by Quezon
City on the dates, in the amounts and under the official receipts as follows:
O.R. No. Date Amount Paid
2464274 7/18/1995 P 1,489,977.28
2484651 10/20/1995 1,489,977.28
2536134 1/22/1996 2,880,975.65
8354906 1/23/1997 8,621,470.83
48756 1/23/1997 2,731,135.81
67352 4/3/1997 2,731,135.81
Total P19,944,672.66
5

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon
City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred
Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as
follows:
O.R. No. Date Amount Paid
2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29
6

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund
of local franchise taxes paid.
On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a
complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local
franchise tax by the City Government of Quezon City for being unconstitutional. It likewise prayed for
the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand
Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66
7

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been
intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of
local government units. Further, that taxes collectible by and payable to the local government were
distinct from taxes collectible by and payable to the national government, considering that the
Constitution specifically declared that the taxes imposed by local government units "shall accrue
exclusively to the local governments." Lastly, the City contended that the exemption claimed by ABS-
CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code (LGC) was
passed.
8
Section 193 of the LGC provides:
Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or -controlled corporations, except local water
districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis
added)
On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local
franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One
Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of
local franchise tax as may have been and will be paid by ABS-CBN until the resolution of the case.
Quezon City insisted that the claim for refund must fail because of the absence of a prior written
claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and
collection from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-
93, after the enactment of R.A. No. 7966, and ordered the refund of all payments made. The
dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from
plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon
City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid,
and, accordingly, the Court hereby orders the defendants to refund all its payments made
after the effectivity of its legislative franchise on May 3, 1995.
SO ORDERED.
9

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A. No.
7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under Quezon
City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from payment of local
franchise tax could be discerned from the usage of the "in lieu of all taxes" provision and from the
absence of any qualification except income taxes. Had Congress intended to exclude taxes
imposed from the exemption, it would have expressly mentioned so in a fashion similar to the proviso
on income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric
Power and Light Company, Inc. (CEPALCO).
10
In said case, the exemption of respondent electric
company CEPALCO from payment of provincial franchise tax was upheld on the ground that the
franchise of CEPALCO was a special law, while the Local Tax Code, on which the provincial
ordinance imposing the local franchise tax was based, was a general law. Further, it was held that
whenever there is a conflict between two laws, one special and particular and the other general,
the special law must be taken as intended to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the
LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since
the legislature ought to be presumed to have enacted it with the knowledge and awareness of the
existence and prior enactment of Section 137
11
of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power
and Light Company, Inc. (CEPALCO),
12
ruled that the imposition of the local franchise tax was an
impairment of ABS-CBN's contract with the government. The imposition of another franchise on the
corporation by the local authority would constitute an impairment of the former's charter, which is in
the nature of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for
refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in
court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred
Eighty-Two and 29/100 centavos (P14,233,582.29) was the only amount stated in the letter to the
Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all payments
made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund
of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in
relation to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently
denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the
petition of Quezon City and its Treasurer. According to the appellate court, the issues raised were
purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Court's consideration are more of legal
query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.
x x x x
The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric
and Power Co., Inc. to be a legal one. There is no more argument to this.
The next issue although it may need the reexamination of the pertinent provisions of the local
franchise and the legislative franchise given to appellee, also needs no evaluation of facts. It
suffices that there may be a conflict which may need to be reconciled, without regard to the
factual backdrop of the case.
The last issue deals with a legal question, because whether or not there is a prior written claim
for refund is no longer in dispute. Rather, the question revolves on whether the said
requirement may be dispensed with, which obviously is not a factual issue.
13

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by
the CA in its Resolution dated December 16, 2004. Hence, the present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent
appellee (Section 8 of RA 7966) serves to exempt it from the payment of the local franchise
tax imposed by the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court
of Appeals.
14

Our Ruling
The second issue, being procedural in nature, shall be dealt with immediately. But there are other
resultant issues linked to the first.
I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal issues,
namely:
1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall
be in lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the
franchise tax imposed by appellants;
2) Whether appellants' imposition of local franchise tax is a violation of appellee's legislative
franchise; and
3) Whether one can do away with the requirement on prior written claim for refund.
15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other
courts. There is a question of law when the doubt or difference arises as to what the law is pertaining
to a certain state of facts.
16

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising
only questions of law is erroneous and shall be dismissed, issues of pure law not being within its
jurisdiction.
17
Consequently, the dismissal by the CA of petitioners' appeal was in order.
In the recent case of Sevilleno v. Carilo,
18
this Court ruled that the dismissal of the appeal of petitioner
was valid, considering the issues raised there were pure questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the
wrong mode of appeal. The appellate court held that since the issue being raised is whether
the RTC has jurisdiction over the subject matter of the case, which is a question of law, the
appeal should have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of
Civil Procedure, as amended. Section 2, Rule 41 of the same Rules which governs appeals
from judgments and final orders of the RTC to the Court of Appeals, provides:
SEC. 2. Modes of appeal. -
(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing a
notice of appeal with the court which rendered the judgment or final order appealed
from and serving a copy thereof upon the adverse party. No record on appeal shall be
required except in special proceedings and other cases of multiple or separate
appeals where the law or these Rules so require. In such cases, the record on appeal
shall be filed and served in like manner.
(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for
review in accordance with Rule 42.
(c) Appeal by certiorari. - In all cases where only questions of law are raised or involved,
the appeal shall be to the Supreme Court by petition for review on certiorari in
accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the
rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may
be made to the Court of Appeals by mere notice of appeal where the appellant raises
questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the
appellant raises only questions of law, the appeal must be taken to the Supreme Court
on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate
jurisdiction, regardless of whether the appellant raises questions of fact, questions of
law, or mixed questions of fact and law, shall be brought to the Court of Appeals by
filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves the
jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a
court's jurisdiction over the subject matter of an action is conferred only by the Constitution or
by statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a
matter of law. Consequently, issues which deal with the jurisdiction of a court over the subject
matter of a case are pure questions of law. As petitioners' appeal solely involves a question of
law, they should have directly taken their appeal to this Court by filing a petition for review on
certiorari under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41.
Clearly, the appellate court did not err in holding that petitioners pursued the wrong mode of
appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of
the same Rules provides that an appeal from the RTC to the Court of Appeals raising only
questions of law shall be dismissed; and that an appeal erroneously taken to the Court of
Appeals shall be dismissed outright, x x x.
19
(Emphasis added)
However, to serve the demands of substantial justice and equity, the Court opts to relax procedural
rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance
Corporation,
20
this Court stated:
Courts have the prerogative to relax procedural rules of even the most mandatory character,
mindful of the duty to reconcile both the need to speedily put an end to litigation and the
parties' right to due process. In numerous cases, this Court has allowed liberal construction of
the rules when to do so would serve the demands of substantial justice and equity. In Aguam
v. Court of Appeals, the Court explained:
"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a
power conferred on the court, not a duty. The "discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause of justice. The court's primary duty is to
render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike
duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts." Litigations must be decided on their merits and not on
technicality. Every party litigant must be afforded the amplest opportunity for the
proper and just determination of his cause, free from the unacceptable plea of
technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon
where the policy of the court is to encourage hearings of appeals on their merits and
the rules of procedure ought not to be applied in a very rigid, technical sense; rules of
procedure are used only to help secure, not override substantial justice. It is a far better
and more prudent course of action for the court to excuse a technical lapse and afford
the parties a review of the case on appeal to attain the ends of justice rather than
dispose of the case on technicality and cause a grave injustice to the parties, giving a
false impression of speedy disposal of cases while actually resulting in more delay, if not
a miscarriage of justice.
21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local
franchise tax.
A. The present controversy essentially boils down to a dispute between the inherent taxing power of
Congress and the delegated authority to tax of local governments under the 1987 Constitution and
effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is based on Section 151 in
relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at the rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized within its territorial
jurisdiction. x x x
x x x x
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may
levy the taxes, fees and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
component cities shall accrue to them and distributed in accordance with the provisions of
this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense that Congress can
enact legislation granting exemptions. This principle was upheld in City Government of Quezon City,
et al. v. Bayan Telecommunications, Inc.
22
Said this Court:
This thus raises the question of whether or not the City's Revenue Code pursuant to which the
city treasurer of Quezon City levied real property taxes against Bayantel's real properties
located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its
franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the
same taxes, as any other persons or corporations on all its real or personal properties, exclusive
of its franchise."
Bayantel's posture is well-taken. While the system of local government taxation has changed
with the onset of the 1987 Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport Authority:
"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely be virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X
of the Constitution. Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy. x x x"
Clearly then, while a new slant on the subject of local taxation now prevails in the sense that
the former doctrine of local government units' delegated power to tax had been effectively
modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on
local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to
tax is [still] primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner
of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:
"What is the effect of Section 5 on the fiscal position of municipal corporations? Section
5 does not change the doctrine that municipal corporations do not possess inherent
powers of taxation. What it does is to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue. They no longer have to wait for a
statutory grant of these powers. The power of the legislative authority relative to the
fiscal powers of local governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these limitations must be "consistent with the
basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse
the principle that doubts are resolved against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in
favor of municipal corporations. It is understood, however, that taxes imposed by local
government must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to pass."
In net effect, the controversy presently before the Court involves, at bottom, a clash between
the inherent taxing power of the legislature, which necessarily includes the power to exempt,
and the local government's delegated power to tax under the aegis of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all
real properties within the city's territory and removed exemptions theretofore "previously
granted to, or presently enjoyed by all persons, whether natural or juridical [x x x]" there can
really be no dispute that the power of the Quezon City Government to tax is limited by Section
232 of the LGC which expressly provides that "a province or city or municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvement not hereinafter specifically exempted." Under this
law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing
power of local government units. An interpretation denying Congress such power to exempt
would reduce the phrase "not hereinafter specifically exempted" as a pure jargon, without
meaning whatsoever. Needless to state, such absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this
Court has upheld the power of Congress to grant exemptions over the power of local
government units to impose taxes. There, the Court wrote:
"Indeed, the grant of taxing powers to local government units under the Constitution
and the LGC does not affect the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal effect of the constitutional
grant to local governments simply means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved in favor of municipal corporations."
23

(Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995,
subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the
franchise to install and operate radio and television broadcasting stations in the Philippines. Likewise,
Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however, that
payment of the percentage franchise tax shall be "in lieu of all taxes" on the said franchise.
24

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the
other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of
the LGC which expressly provides that notwithstanding any exemption granted by any law or other
special law, the City may impose a franchise tax. It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions. As earlier discussed, this Court in City Government of Quezon
City v. Bayan Telecommunications, Inc.
25
sustained the power of Congress to grant tax exemptions
over and above the power of the local government's delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains
the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local franchise tax.
Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly
exempt it from payment of local franchise tax. They contend that a tax exemption cannot be
created by mere implication and that one who claims tax exemptions must be able to justify his
claim by clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in
favor of the taxing authority. A claim of tax exemption must be clearly shown and based on
language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the
exception.
26
The burden of proof rests upon the party claiming the exemption to prove that it is in
fact covered by the exemption so claimed.
27

The basis for the rule on strict construction to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers.
28
He who claims an exemption from his share of common burden must
justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions
from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest
and most unambiguous language and not left to mere implications. It has been held that
"exemptions are never presumed, the burden is on the claimant to establish clearly his right to
exemption and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and exemption the exception, the
intention to make an exemption ought to be expressed in clear and unambiguous terms.
29

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all
gross receipts of the radio/television business transacted under the franchise and the franchise tax
shall be "in lieu of all taxes" on the franchise or earnings thereof.
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local,
whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to
pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in
lieu of all taxes provision" would include exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be clearly established and
cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily,
the uncertainty in the "in lieu of all taxes" provision should be construed against ABS-CBN. ABS-CBN
has the burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably
failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,
30
Manila
Railroad v. Rafferty,
31
Philippine Railway Co. v. Collector of Internal Revenue,
32
and Visayan Electric
Co. v. David
33
to support its claim that that the "in lieu of all taxes" clause includes exemption from all
taxes.
However, a review of the foregoing case law reveals that the grantees' respective franchises
expressly exempt them from municipal and provincial taxes. Said the Court in Manila Railroad v.
Rafferty:
34

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was
granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510)
provides that:
"In consideration of the premises and of the granting of this concession or franchise,
there shall be paid by the grantee to the Philippine Government, annually, for the
period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of
one per cent of the gross earnings of the grantee in respect of the lines covered hereby
for the preceding year; after said period of thirty (30) years, and for the fifty (50) years
thereafter, the amount so to be paid annually shall be an amount equal to one and
one-half (1 1/2) per cent of such gross earnings for the preceding year; and after such
period of eighty (80) years, the percentage and amount so to be paid annually by the
grantee shall be fixed by the Philippine Government.
Such annual payments, when promptly and fully made by the grantee, shall be in lieu
of all taxes of every name and nature - municipal, provincial or central - upon its capital
stock, franchises, right of way, earnings, and all other property owned or operated by
the grantee under this concession or franchise."
35
(Underscoring supplied)
In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in
Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify
the taxing authority from whose jurisdiction the taxing power is withheld, whether municipal,
provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption from local
franchise tax, by a grant expressed in terms "too plain to be mistaken" its claim for exemption for local
franchise tax must fail.
C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the
abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten
Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes" provision
contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise
tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of
all gross receipts in lieu of all other taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the
grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3%
franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax
under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon
the gross receipts from the business covered by the law granting the franchise, a tax in
accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three
(3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law,
36
took
effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Section
3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further
amended to read as follows:
SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate
and base of tax. - There shall be levied, assessed and collected, as value-added tax
equivalent to 10% of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines, for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; x x x services of
franchise grantees of telephone and telegraph, radio and television broadcasting and
all other franchise grantees except those under Section 117 of this Code; x x x (Emphasis
supplied)
Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and other
franchise grantees" were omitted from the list of entities subject to franchise tax. The impression was
that these entities were subject to 10% VAT but not to franchise tax. Only the franchise tax on
"electric, gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
SEC. 117. Tax on Franchises. - Any provision of general or special law to the contrary
notwithstanding there shall be levied, assessed and collected in respect to all franchises
on electric, gas and water utilities a tax of two percent (2%) on the gross receipts
derived from the business covered by the law granting the franchise. (Emphasis added)
Subsequently, R.A. No. 8241
37
took effect on January 1, 1997
38
containing more amendments to the
NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00
were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9
of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:
"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
"Sec. 117. Tax on franchise. - Any provision of general or special law to the contrary,
notwithstanding, there shall be levied, assessed and collected in respect to all
franchises on radio and/or television broadcasting companies whose annual gross
receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of three percent (3%) and on electric, gas
and water utilities, a tax of two percent (2%) on the gross receipts derived from the
business covered by the law granting the franchise: Provided, however, That radio and
television broadcasting companies referred to in this section, shall have an option to be
registered as a value-added tax payer and pay the tax due thereon: Provided, further,
That once the option is exercised, it shall not be revoked. (Emphasis supplied)
On the other hand, radio and/or television companies with yearly gross receipts exceeding
P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424
39
was passed confirming the 10% VAT liability of radio and/or
television companies with yearly gross receipts exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further
amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12%
VAT was later moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the
payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT
since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos
(P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the
course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is
also levied on every importation of goods whether or not in the course of trade or business. The tax
base of the VAT is limited only to the value added to such goods, properties, or services by the seller,
transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.
The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.
The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when what is
paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with
yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause
has now become functus officio, rendered inoperative.
In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes" clause in
its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it
particularize the jurisdiction from which the taxing power is withheld. Second, the clause has become
functus officio because as the law now stands, ABS-CBN is no longer subject to a franchise tax. It is
now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The
petition in the trial court for refund of local franchise tax is DISMISSED.
SO ORDERED.














7. Republic of the Philippines
SUPREME COURT
THIRD DIVISION
G.R. No. 152532. August 16, 2005
PEOPLE OF THE PHILIPPINES, Petitioners,
vs.
SANDIGANBAYAN (Fourth Division) and BIENVENIDO A. TAN JR., Respondent.
D E C I S I O N
PANGANIBAN, J.:
A judgment of acquittal made by a competent court on a valid information after the accused has
entered a plea bars an appeal by the prosecution. Only a clear showing of grave abuse of discretion
or denial of due process to the State can justify a review (through a petition for certiorari) of such
decision by this Court. In acquitting private respondent in the present case, the Sandiganbayan has
not been shown to have acted arbitrarily or whimsically. Equally important, the herein accused,
Commissioner Bienvenido A. Tan Jr., has not been proven to have exceeded his discretion in the
exercise of his functions. Taking into account the relevant facts and applicable laws in this very
perplexing subject of taxation, this Court cannot fault him for abating an excessive and erroneous tax
assessment. Quite the contrary, he has acted fairly and sensibly under the circumstances.
The Case
Before us is a Petition for Certiorari
1
under Rule 65 of the Rules of Court, seeking to nullify and set aside
the January 23, 2002 Resolution
2
of the Sandiganbayan (SB) in Criminal Case No. 20685. The
dispositive part of the Resolution reads as follows:
"WHEREFORE, premises considered, the Decision dated 02 March 2001 is hereby RECONSIDERED and
SET ASIDE, and the accused is hereby ACQUITTED of the charge in the instant case.
"The bailbond of the accused is hereby cancelled and the Hold Departure order previously issued by
the court is hereby lifted and set aside."
3

The Facts
The facts are narrated by the SB in its original Decision dated March 2, 2001, as follows:
"Pursuant to Letter of Authority No. ATD-035-STO dated January 2, 1986 and Memorandum of
Authority dated March 3, 1986, an investigation was conducted by [Bureau of Internal Revenue (BIR)]
examiners on the ad valorem and specific tax liabilities of [San Miguel Corp. (SMC)] covering the
period from January 1, 1985 to March 31, 1986. The result of the investigation showed that [SMC] has
a deficiency on specific and ad valorem taxes totaling P342,616,217.88 broken down as follows:
Specific Tax P 33,817,613.21
Ad Valorem Tax P308,798,604.67
"On the basis of these findings, the BIR sent a letter dated July 13, 1987 to SMC demanding the
payment of its deficiency tax in the amount of P342,616,217.88. Apparently, the letter was received
by the SMC, as it protested the assessment in its letter dated August 10, 1987 with the information: 1)
that the alleged specific tax deficiency was already paid when the BIR approved SMCs request that
its excess ad valorem payments be applied to its specific tax balance; 2) that the computation of
the ad valorem tax deficiency was erroneous since the BIR examiners disallowed the deduction of
the price differential (cost of freight from brewery to warehouse) and ad valorem tax.
"The protest was denied by the BIR thru a letter dated October [8], 1987 signed by accused
Commissioner Bienvenido Tan, Jr., but the original assessment of P342,616,217.88 was reduced to
P302,[0]51,048.93 due to the crediting of the taxpayers excess ad valorem tax deposit of
P21,805,409.10 with a reiteration of the payment of the x x x assessed specific and ad valorem tax as
reduced.
"On October 27, 1987, herein accused referred the matter to Jaime M. Maza, Assistant BIR
Commissioner, Legal Service Division and thereafter different BIR officials also reviewed the case of
SMC and rendered varying legal opinions on the issue x x x
"On the part of Alicia P. Clemeno, Chief, Legislative Ruling and Research Division, she recommended
the reduction of SMCs tax liability, first to P21,856,985.29, and later to P22,000,000.00. Balbino E.
Gatdula, Jr., Assistant Revenue Service Chief, Legal Service, supported the demand for ad valorem
tax deficiency from SMC. In a letter dated August 31, 1988, SMC, thru a certain Avendano offered
the amount of P10,000,000.00 for the settlement of the assessment. This was concurred in by Juanito
Urbi, Chief, Prosecutor Division, BIR in a Memorandum dated December 20, 1988. Jaime Maza,
Assistant Commissioner, Legal Service, BIR, also gave his concurrence to the recommendation that
the offer of SMC for P10,000,000.00 in compromise settlement be accepted. The recommendation
was approved by accused Bienvenido Tan; and accordingly, in a letter dated December 20, 1988,
SMC was informed that its offer to compromise was accepted."
4

Subsequently, the SB reversed its original March 2, 2001 Decision with its now assailed January 23,
2002 Resolution. The antecedents leading to the Petition before this Court are narrated by the SB in
this manner:
"In our Decision of March 2, 2001, herein accused Bienvenido A. Tan, former Commissioner of the
[BIR], was convicted for violation of Section 3(e) of Republic Act [(RA)] No. 3019 as amended,
otherwise known as the Anti-Graft and Corrupt Practices Act, the dispositive portion of which states
as follows:
WHEREFORE, premises considered, judgment is hereby rendered convicting the accused for
Violation of Section 3(e) of [(RA)] 3019 as amended, and appreciating in his favor the presence of
the mitigating circumstance of age, accused being over seventy (70) years old, and in the absence
of aggravating circumstances to offset the same, applying the Indeterminate Sentence Law, he is
hereby sentenced to suffer imprisonment of six (6) years and one (1) month as minimum to fifteen (15)
years as maximum. He is further disqualified perpetually from holding public office.
As the Court finds the compromise agreement to have been entered into illegally, the [BIR] is hereby
ordered to collect from [SMC] the amount of P292,951,048.93 representing its tax liabilities covering
the period from January 1, 1985 to March 31, 1986.
SO ORDERED.
"In his Motion for Reconsideration filed on March 12, 2001, accused seeks to reconsider aforesaid
Decision and posits the following grounds: (1) the Court erred in holding that the assessment
contained in the letter of accused dated 08 October 1987 was final and executory; (2) corollarily, the
Court erred in holding that the referral of the 08 October 1987 assessment to the Assistant
Commissioner for further study was uncalled for, given that there was no request for a reconsideration
of the 08 October 1987 assessment; (3) the Court erred in not holding that the specific tax assessment
of [P]33,817,613.21 had been paid through the application of SMCs excess ad valorem tax deposits
to its unpaid specific tax; (4) the Court erred in not holding that the abatement of SMCs ad valorem
tax was proper on the ground that there exists a reasonable doubt as to the correctness of said
assessment; [(5)] the Court erred in holding that accused exercise of his authority under Section 204
of the [National Internal Revenue Code (NIRC)] to abate the assessment of ad valorem tax was
improper; and [(6)] the Court erred in holding that there was a compromise of the SMC tax case
which resulted in undue injury to the government.
"In its Comment, the prosecution asserts that (1) the assessment contained in the letter of SMC dated
October 8, 1987 was final and executory; (2) the referral of the 08 October 1987 assessment to the
Assistant Commissioner for further study was uncalled for given that there was no request for a
reconsideration from SMC; (3) SMCs total tax due and collectible as Specific Tax of [P]33,817,613.21
has not been settled; (4) the Court correctly held that the abatement of SMCs ad valorem taxes is
improper; and (5) the Court is correct in ruling that there was a compromise of SMCs tax which
resulted in undue injury to the government.
"Thereafter, the accused and the prosecution made a further exchange of pleadings elaborating on
their respective positions on the matter.
"The Motion is impressed with merit. After a careful and exhaustive review of the pleadings, the
records and the evidence, we reconsider our Decision dated March 2, 2001 and hereby acquit the
accused of the charge in the instant case."
5

Ruling of the Sandiganbayan
In acquitting herein private respondent, the SB adduced several reasons.
First, the SB failed to give weight to the October 27, 1987 meeting between Commissioner Tan and
SMCs representatives -- a meeting which resulted in the referral of the assessment to Tans
subordinates for further review and study. The referral showed that the disputed assessment had not
yet become final and executory.
Second, notwithstanding the prosecutions observation that the BIR rejected SMCs protest against
the inclusion of the water component of beer, private respondent unequivocally approved SMCs
application of its excess ad valorem deposit to complete the payment of its specific tax deficiency.
Third, the abatement of SMCs ad valorem taxes is proper. The tax base for computing them should
not include the ad valorem tax itself and the price differential. Reliance upon Executive Order (EO)
No. 273 is not misplaced, because that law simply affirms general principles of taxation as well as
BIRs long-standing practice and policy not to impose a tax on a tax. Moreover, nothing precludes
private respondent from applying EO 273 on an assessment made prior to its effectivity, because that
law was merely intended to formalize such long-standing practice and policy.
Fourth, after inquiring into the discretionary prerogative of private respondent to compromise, the SB
found no reason to conclude that he had acted contrary to law or been impelled by any motive
other than honest good faith. The compromise he had entered into regarding SMCs tax did not
result in any injury to the government. No genuine compromise is impeccable, since the parties to it
must perforce give up something in exchange for something else. No basis existed to hold him liable
for violation of Section 3(e) of RA 3019.
Hence, this Petition.
6

The Issues
Petitioner raises the following issues for our consideration:
"A.
"The respondent court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when, in upholding private respondents act in ruling upon SMCs Motion for
Reconsideration, it disregarded Section 228 (previously Section 246) of the NIRC.
"B.
"The respondent court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when, in upholding private respondents act in accepting SMCs offer of compromise of
P10,000,000.00 for its tax liability of P302,051,048.93, it disregarded Sections 124 and 228 of the NIRC.
"C.
"The respondent court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when it declared the validity of private respondents act of approving SMCs application
of the excess ad valorem to its specific tax deficiency despite its being contrary to law.
"D.
"The respondent court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when it acquitted private respondent for violation of Sec. 3(e) of RA 3019 despite the
overwhelming evidence proving his guilt beyond reasonable doubt."
7

We shall tackle the foregoing issues seriatim, with the exception of the third issue that will be
discussed ahead of the second.
The Courts Ruling
The Petition has no merit.
First Issue:
Viability of SMCs Motion for Reconsideration
Section 229 of the NIRC
8
provides thus:
"Sec. 229. Protesting of assessment. -- When the Commissioner of Internal Revenue or his duly
authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer
of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an
assessment based on his findings.
"Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by implementing regulation within
thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.
"If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision; otherwise, the decision shall become final, executory and
demandable."
9

Petitioner argues that "on October 8, 1987, a final decision was rendered by private respondent as to
SMCs tax liability totaling P302,051,048.93 x x x." Since SMC did not appeal to the CTA, this decision
became final and could no longer be compromised by private respondent. We disagree.
A careful reading of the quoted tax provision readily shows that the "Motion for Reconsideration" filed
by SMC was aptly ruled upon by private respondent. Despite the use of the phrase "finally decided,"
his October 8, 1987 letter to SMC did not constitute a final assessment.
First, the phrase "finally decided" referred not to the total amount of deficiency specific and ad
valorem taxes, but to the reduction of such assessment. The reduction was the result of SMCs protest,
by way of two requests for reconsideration dated June 9, 1987 and August 10, 1987. Contrary to
petitioners assertion, the rules on statutory construction did not apply; the October 8, 1987 letter was
not even a law. Grantia argumenti that the letter partook of the nature of a final assessment, its
finality was suspended by private respondents handwritten note on the bottom left of the second
page, extending the tender of payment for another 15 days from October 27, 1987, because of a
referral of the assessment to the BIRs Legal Service.
10

Second, SMC filed on November 2, 1987 a timely request for reinvestigation -- technically not a
motion for reconsideration. Under Section 229 of the NIRC, this request was a proper administrative
protest
11
done within 30 days from receipt of the assessment and substantiated by facts and law.
12

The assessment was received by SMC only on October 26, 1987. Its request for reinvestigation was in
turn received by the BIR on November 10, 1987, well within the 30-day period allowed by Section 229;
thus, the assessment had not yet become final.
Moreover, a day after SMCs receipt of the assessment, the SB found that a meeting had indeed
been held between private respondent and the representatives of SMC, resulting in the suspension of
the alleged finality of the assessment. The meeting partook of the nature of an oral, in advance of
the written, request for reinvestigation. In both instances, the taxpayers request was not merely pro
forma; it had the effect of suspending -- not interrupting -- the 30-day period for appeal.
13

We do not agree with petitioners contention that, contrary to the finding of the SB in its March 2,
2001 Decision, no conference had been held on that date. A careful perusal of the Decision would,
however, reveal that the date of the supposed conference was not indicated with certainty.
14
And
even if it were, the conference was supposed to have been held between SMCs representatives
and BIR officials, other than private respondent, on the computation (not the assessment) that was
followed by SMC and that bore the alleged approval by the BIR.
Third, after SMCs request for reinvestigation, no other issuance emanated from the BIR that could be
considered a decision. Therefore, no appeal to the Tax Court
15
could have been made under
Section 229 of the NIRC, since the protest filed with the BIR had not been acted upon. Appealable to
the Tax Court is a decision that refers not to the assessment itself, but to one made on the protest
against such assessment.
16
The commissioner of internal revenues action in response to a taxpayers
request for reconsideration or reinvestigation of the assessment constitutes the decision, the receipt
of which will start the 30-day period for appeal.
17

Section 229 does not prevent a taxpayer from exhausting administrative remedies by filing a request
for reconsideration, then a request for reinvestigation.
18
Furthermore, under Section 7(1) of RA 1125
19

as amended,
20
the Tax Court exercised exclusive appellate jurisdiction to review not the assessments
themselves, but the decisions involving disputed ones arising under the NIRC.
21

Fourth, quite obviously, no decision could as yet be made by the BIR, because the protest filed by
SMC had been referred by private respondent to several top BIR officials for further review. In fact,
various intra-office Memoranda were issued in 1988 involving the chiefs of the (1) Legislative Ruling
and Research and (2) Prosecution Divisions of the BIR, as well as its assistant commissioners for legal
service and excise tax. Had the assessment already become final in 1987, there would then be no
more reason to reinvestigate and study the merits of SMCs protest in 1988.
Fifth, totally misplaced is petitioners reference to the 180-day period from the submission of
documents, within which time the BIR should act upon the protest, followed by a 30-day period of
appeal to the Tax Court. This provision did not exist in either 1987 or 1988. It appeared only in a much
later law, RA 8424, as Section 228 -- again erroneously referred to by petitioner as the basis for the
present controversy.
Consequently, there was no legal impediment either to the referral of the protest by private
respondent to his subordinates or to the action taken by them -- a process that lasted for more than
180 days. Neither was there a need to make a 30-day appeal to the Tax Court due to the BIRs
inaction on the protest within the 180-day period.
The assessment was clearly not yet final, executory or demandable. While it is pending with the
commissioner of internal revenue, it cannot yet serve as the basis of collection by distraint or levy or
by judicial action.
22
No grave abuse of discretion can be attributed to the SB for upholding private
respondents act of reinvestigation upon SMCs request.
Second Issue:
Application of the Ad Valorem Tax
to the Specific Tax Deficiency
In like manner, no grave abuse of discretion was committed when the SB upheld private
respondents approval of SMCs application of its excess ad valorem tax deposits to its specific tax
deficiency.
First, the approval given by private respondent was correct. Ad valorem taxes
23
and specific taxes
24

are both excise taxes
25
on alcohol products.
26
The payment by installment of a portion of the total
specific tax deficiency of SMC, in addition to the application of its excess and unused ad valorem tax
deposits to the remaining portion, fully covered the total net specific tax shortfall. BIR committed an
oversight in failing to credit the amount of deposits to the specific tax deficiency, as well as an error
in crediting the same amount to a subsequent ad valorem tax liability. A confusion was thus created
when it issued a later assessment for the same specific tax deficiency, this time inclusive of
increments.
27
Proper was the BIR officials abatement or cancellation of the specific taxes of SMC,
after the amount of its ad valorem tax deposits had already been credited to it.
To state that the balances of accounts pertaining to different tax deposits could only be applied to
cover certain tax liabilities upon the approval of a request for tax credit is to validate the proposition
that the acceptance of payment by installment of a portion of the specific tax deficiency was
indeed tantamount to the approval of the request. No law or regulation prevented such approval.
Private respondents letter states a condition: should the final computation of specific and ad
valorem taxes yield a different result, the difference plus penalties would be paid in addition to them.
Obviously, this condition referred solely to the discrepancy, not to the application, and had nothing
to do with the approval that was given.
Second, such approval had the concurrence of top tax officials within the Bureau. Not only was there
a presumption of regularity in the performance of official functions;
28
also, their collective conclusion
was controlling. Besides, the disclosure of the change in beer formulation was timely and voluntary;
no attribution of bad faith or fraud could be made. A change in technology that would result in a
change in the manner of computing taxes was well within the realm of tax administration,
29
on which
private respondent had reasonable discretion to rule.
Third, the law and revenue regulations
30
allowed pre-payment schemes,
31
whereby excise taxes on
alcohol products could be paid in advance of the dates they were due. Since the equivalent value
of specific taxes by way of advance ad valorem tax deposits had already been paid, the
government lost nothing. It was a simple request properly granted for applying the advance deposits
made on one type of excise tax to another type. Granting such request was well within private
respondents authority to administer tax laws and regulations.
32
Again, the assessment was not final,
demandable or executory at the time.
Fourth, in a letter to the Blue Ribbon Committee of the Senate, no less than the succeeding
commissioner of internal revenue declared that the abatement of the specific tax deficiency
through the proposed application was proper. Even if the new commissioner had admittedly been
advised by private respondent, there remained the unrebutted presumptions of good faith and
regularity in the performance of official functions.
Third Issue:
Acceptance of the P10 Million Alleged Compromise
The SB did not gravely abuse its discretion when it upheld private respondents acceptance of SMCs
compromise offer of P10 million.
In computing its ad valorem tax liabilities for the taxable period involved in the present case, SMC
deducted from its brewers gross selling price the specific tax, price differential, and ad valorem tax.
The BIR allowed the deduction of the specific tax, but not the deduction of the price differential and
ad valorem tax, thus increasing the tax base and consequently the ad valorem tax liabilities of SMC
for the said period.
Prior to and during the taxable period involved in the present case, several changes were made in
the NIRC of 1977, particularly its provisions pertaining to fermented liquor. We must therefore trace
the NIRCs pertinent history to be able to rule properly on the validity of SMCs deduction of both the
price differential and the ad valorem tax from the brewers gross selling price.
Section 147(A) of the NIRC, as amended by PD 1959
33
in 1984, provides for the collection of a specific
tax on each liter of the volume capacity of fermented liquor. In addition to the provision on the
specific tax, the first paragraph of its Section 147(B) provides for the levying, assessment and
collection of an ad valorem tax. The latter tax is equivalent to a certain percentage of the brewers
gross selling price, net of the specific tax, of the product to be removed from the brewery or other
place of manufacture. The ad valorem tax shall be paid by the brewer at the same time as the
specific tax.
Added in 1984 were provisions of Section 186-A
34
governing the determination of the gross selling
price of cigarettes, as well as the administrative requirements and penalties imposable. Such
provisions shall apply to the determination of the gross selling price of fermented liquor.
35
Basically,
this means that the amount of tax due on the fermented liquor shall be determined by the price at
which it is sold either wholesale in the factory of SMC or directly to the public through its sales agents.
If the fermented liquor is sold or allowed to be sold wholesale by SMC in another establishment which
it owns, the wholesale price in that establishment shall determine the tax applicable to the
fermented liquor sold there. When the price is less than the cost of manufacture plus all expenses
incurred, until the fermented liquor is finally sold by SMC, such cost plus expenses shall be the basis for
determining the amount of tax to be collected.
In 1986, PD 1994 amended the NIRC of 1977 by renumbering, among others, Section 147 as Section
124.
36
In the new Section 124, the provisions on the specific and ad valorem taxes imposed on
fermented liquors remained substantially the same, except for the tax rates.
On July 1, 1986, Section 4 of EO 22 amended said Section 124 by essentially providing that an ad
valorem tax equivalent to a certain percentage of the brewers wholesale selling price -- this time
excluding the ad valorem tax -- shall be levied, assessed and collected on fermented liquors. It was
only in 1988 that EO 273 renumbered Section 124 as Section 140, and thereby amended it further to
exclude also from such wholesale price the value-added tax already imposed at the time upon the
same articles.
37

Price Differential Deduction
Section 110 of the NIRC of 1977, as amended in 1986 by PD 1994, explicitly provides that the excise
taxes on domestic products shall be paid by the manufacturer or producer before the removal of
those products from the place of production.
38
"It does not matter to what use the article[s] subject to
tax is put";
39
the excise taxes are still due, even though the articles are removed merely for storage in
some other place and are not actually sold or consumed.
40
The intent of the law is reiterated in
several implementing regulations.
41
This means, therefore, that the price that should be used as the
tax base for computing the ad valorem tax on fermented liquor is the price at the brewery. After all,
excise taxes are taxes on property,
42
not on the sale of the property.
Verily, the price differential cannot be ascertained at the time the fermented liquor is removed from
the brewery, because such ascertainment will involve amounts that cannot be determined with
certainty in advance, and that vary from one commercial outlet to another. The price differential,
according to SMC, represents the cost of discounts, promotions, rebates, and transportation. To
require the inclusion of the price differential in, not its deduction from, the tax base for purposes of
computing the ad valorem tax would certainly lead to the impossible situation of computing for such
tax, because the price differential itself cannot be determined unless the fermented liquor is actually
sold.
Hence, no ad valorem tax can ever be paid before the removal of the fermented liquor from the
place of production. This outcome cannot be countenanced, for it would be contrary to what the
law mandates -- payment before removal. It follows that the tax base to be used should be net of
the price differential. In other words, the gross selling price should be that which is charged at the
brewery prior to the removal of the fermented liquor.
Ad Valorem Tax Deduction
The taxable period covered in this case is January 1, 1985 to March 31, 1986. Prior to the amendment
of the NIRC of 1977 by EO 22 on July 1, 1986, the ad valorem tax was not excluded from the brewers
wholesale price. Does this mean that such tax cannot be deducted? The answer is no.
A tax should not be imposed upon another tax. This is tax pyramiding, which has no basis either in
fact or in law.
Private respondent has shown by mathematical analysis that the inclusion of the ad valorem tax in
the tax base would only yield a circuitous manner of computation that will never end in just one ad
valorem tax figure properly chargeable against a taxpayer. Quoted verbatim, his presentation is as
follows:
"If [SMC] wants to make P42.7269 on a case of beer and because of price differential and specific
taxes has to fix a price of P51.2722 ex brewery, what would the ad valorem tax be?
"The prosecutions method is to charge the 20% ad valorem on the selling price ex brewery of
P51.2722 and to tack that on the SMC price as follows:
P51.2722 - price ex brewery
x .20
P10.2544 - ad valorem tax
and 42.7269 - SMC price
P52.9813 - this should be the new selling price ex
brewery but SMC only charged P51.2722
"Following the prosecutions theory, since there is a new selling price ex brewery, i.e., P52.9813, the ad
valorem tax should be adjusted to the new selling price or tax base or 20% of P52.9813, resulting in:
P42.7269 - SMC price
10.5962 - new ad valorem tax P53.3231
P53.3231 - another new selling price ex brewery
"Then following the prosecutions theory, the 20% ad valorem tax is again charged on the new selling
price ex brewery.
20% of P53.3231 the new tax base or
P10.6646 - the new ad valorem tax
Resulting in P42.7269 - SMC price
10.6646 - new ad valorem tax
P53.3915 - new selling price ex warehouse
"Therefore, the ad valorem tax is not P10.2544 or P10.5962 but P10.6646 ad infinitum.
"The obvious untenability of the above situation is a clear enough argument to prove that ad
valorem tax should be excluded from the tax base.
"The correct method is that used by the BIR and that is:
P51.2722 - original price to public
[1.20]
= P42.726[8] - SMC warehouse price."
43

Expectedly, though, petitioner is unable to negate the mathematics proffered by private respondent.
Equally important, tax pyramiding has since 1922 been rejected by this Court, the legislature, and our
tax authorities. The intent behind the law is clearly to obviate a tax imposed upon another tax. Ratio
legis est anima legis. The reason for the law is its spirit.
For instance, Regulations No. 27,
44
promulgated March 1, 1923, already excludes the specific tax on
cigars and cigarettes from the tax base upon which such tax is computed.
45
This is reiterated in the
more recent amendments to our tax law, among which are EOs 22 and 273,
46
and their
implementing rules. In fact, Commissioner of Internal Revenue v. American Rubber Co. held that a
taxpayer cannot be "compelled to pay a x x x tax on the tax itself."
47

Having shown the appropriateness of deducting the ad valorem tax from the tax base upon which it
is computed, private respondent has shown prudence in exercising his power under Section 204(2)
48

of the NIRC of 1977 to abate an unjust, excessively assessed, and unreasonable tax; and to accept
the offer of P10 million,
49
if only to avoid protracted and costly litigation.
Abatement,
Not Compromise
Although referred to in the pleadings as a compromise, the matter at hand is actually an abatement
or a cancellation. Abatement is the "diminution or decrease in the amount of tax imposed;"
50
it refers
to "the act of eliminating or nullifying; x x x of lessening or moderating x x x."
51
To abate is "to nullify or
reduce in value or amount";
52
while to cancel is "to obliterate, cross out, or invalidate";
53
and "to strike
out; x x x delete; x x x erase; x x x make void or invalid; x x x annul; x x x destroy; x x x revoke or
recall."
54

The BIR may therefore abate or cancel the whole or any unpaid portion of a tax liability, inclusive of
increments, if its assessment is excessive or erroneous;
55
or if the administration costs involved do not
justify the collection of the amount due.
56
No mutual concessions need be made,
57
because an
excessive or erroneous tax is not compromised; it is abated or canceled. Only correct taxes should
be paid.
58
Besides, as we have discussed earlier, there was no finality in the assessment that could be
settled.
Moreover, petitioner did not prove the alleged bad faith attributed to private respondent, who
simply relied upon his subordinates. Mere assertion will not suffice. Even reference to the approval by
the Evaluation Board was misleading, for such approval was inexistent at the time and was merely a
product of RA 8424 as amended.
59
Actual, not presumed, fraud should be the bench mark of liability.
Fourth Issue:
Violation of Section 3(e) of RA 3019
Clearly, the court a quo did not commit grave abuse of discretion in upholding private respondent in
his act of ruling upon the request of SMC for reinvestigation, leading, first, to his approval of its
application of the excess tax deposit to its tax deficiency; and, second, to his acceptance of its offer
to pay for its tax liability, which was a little over the assessed amount, inclusive of increments. It
necessarily follows that his acquittal is proper and inevitable.
Basic is the rule that no person shall be twice put in jeopardy of punishment for the same offense.
60
It
is a constitutional guarantee repeated in Section 7 of Rule 117 of the Rules of Court. A judgment of
acquittal cannot be reopened, absent a grave abuse of discretion or a denial of due process to the
State.
61
In this light, pertinent is the following excerpt, showing how a similar attempt was made by
the prosecution to overturn an acquittal through a Petition for Certiorari in this Court:
"The rule against double jeopardy proscribes an appeal from a judgment of acquittal. If said
judgment is assailed in a petition for certiorari under Rule 65 of the Rules of Court, x x x the petitioner
must prove that the lower court, in acquitting the accused, committed not merely reversible errors,
but grave abuse of discretion amounting to lack or excess of jurisdiction. A judgment rendered with
grave abuse of discretion or without due process is void, does not exist in legal contemplation and,
thus, cannot be the source of an acquittal. However, where the petition demonstrate[s] mere errors
in judgment not amounting to grave abuse of discretion or deprivation of due process, the writ of
certiorari cannot issue. A review of the alleged errors of judgment cannot be made without trampling
upon the right of the accused against double jeopardy."
62

As aptly put by private respondent, error in the exercise of jurisdiction is not the same as error in
judgment. The latter is not reviewable by certiorari,
63
since evidence has been duly considered and
passed upon by the SB.
Epilogue
Former BIR Commissioner Bienvenido A. Tan Jr. was charged with "having willfully, unlawfully and
criminally cause[d] undue injury to the government by effecting a compromise of the tax liabilities" of
SMC amounting to P302,051,048.93 for only P10,000,000, a "compromise [that] is grossly
disadvantageous to the government." In no uncertain terms, the assailed Resolution of the
Sandiganbayan acquitted him of violating Section 3(e) of Republic Act No. 3019 (the Anti-Graft
Law).
Under the Constitution, no person shall be twice put in jeopardy of punishment for the same offense.
To implement this constitutional mandate, the Rules of Court
64
bars an appeal by the State from a
judgment of acquittal, provided the following requisites are present: (1) a valid complaint or
information was filed; (2) before a competent court; (3) the defendant pleaded to the charge; and
(4) the accused was acquitted.
Petitioner alleges, however, that in acquitting the accused, the Sandiganbayan acted in a
"capricious, whimsical, arbitrary or despotic manner" equivalent to lack or excess of jurisdiction.
Indeed, the double jeopardy principle will not protect the accused, if the prosecution can show that
the court gravely abused its discretion in rendering the judgment of acquittal. The prosecutions
burden is heavy: to show grave -- not just ordinary -- abuse of discretion equivalent to lack or excess
of jurisdiction.
This Court notes the tenacity of the Ombudsman and the Office the Special Prosecutor in doggedly
pursuing what they believe is the public weal. But after a careful review of the assailed judgment and
the relevant facts and laws, this Court cannot ascribe capricious or whimsical conduct on the part of
the Sandiganbayan. The SB Resolution assessed the facts and applied the governing laws and
jurisprudence. It analyzed the arguments of both the prosecution and the defense. It then concluded
that the elements of the crime charged had not been sufficiently proven. Hence, it acquitted the
accused.
Because of the importance of this case and the need to assist the government in collecting the
correct amount of taxes, this Court even went further by inquiring whether private respondent (not
just the Sandiganbayan) acted within the confines of his duties and prerogatives.
As can be seen from the foregoing discussions, Commissioner Bienvenido A. Tan Jr. acted fairly,
honestly and in good faith in discharging his functions. To compromise a tax liability of more than
P300 million for only P10 million may appear to be an arbitrary action grossly disadvantageous to the
government. The fact remains, however, that the initial tax assessment of P300 million was correctly
found by the SB to be overly excessive and erroneous. Under the circumstances, the abatement of
the excessive and erroneous taxes was not only within the discretion of respondent; it was just and fair
to all concerned. After all, the purpose of tax assessment is to collect only what is legally and justly
due the government; not to overburden, much less harass, the taxpayers.
WHEREFORE, the Petition is DENIED, and the assailed Resolution AFFIRMED. No pronouncement as to
costs.
SO ORDERED.














8. Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19667 November 29, 1966
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.
G.R. No. L-19801-03 November 29, 1966
AMERICAN RUBBER COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.
Nos. L-19667:
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.
Nos. L-19801-03:
Ozaeta, Gibbs and Ozaeta for petitioner.
Office of the Solicitor General for respondents.
REYES, J.B.L., J.:
These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as
well as by the American Rubber Company (G.R. Nos. L-19801, 19802, 19803).
The factual background is the same in all four cases, and is not in controversy, having been
stipulated between the parties.
Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December
1, 1958, was engaged in producing rubber from its approximately 900 hectare rubber tree plantation,
which it owned and operated in Latuan, Isabela, City of Basilan. Its products, known in the market as
Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark
Rubber, 2X Brown Crepe and 3X Brown Crepe, are turned out in the following manner:
The initial step common to the production of all the foregoing rubber products is tapping, i.e., the
collection of latex (rubber juice) from rubber trees. This is done by the daily cutting, early in the
morning, of a spiral incision in the bark of rubber trees and placing a cup below the lower end of the
incision to receive the flow of latex. The collecting cup is filled after two hours. The tapper then
collects the latex into buckets and carries them to the collecting shed. The tapper subsequently
pours the latex collected into big milk cans. The filled milk cans are then taken in motor vehicles to a
coagulating shed, also within the premises of petitioner's plantation, where the latex is strained into
coagulating tanks to remove foreign matter such as leaves and dirt. After these initial steps, the
processes vary in the production of the various rubber products mentioned above. Said processes
are described hereunder.
Preserved Rubber Latex
Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly
stirred and then poured into metal drums. The addition of ammonia preserves the latex in liquid form
and prevents its deterioration or its acquisition of a repulsive smell, and at the same time preserves its
uniform color. Latex which has been thus artificially preserved in its liquid form generally lasts for
about a month without spoiling. On the other hand, fresh latex in its original state lasts for only about
two hours, after which it becomes spoiled.
Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum
containers.
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2
To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to
the latex in the coagulating tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The
mixture is stirred thoroughly. Thereafter aluminum partitions are placed crosswise inside the tank so
that the latex will coagulate into uniform slabs. Acetic acid is added to the latex to hasten
coagulation which otherwise takes place naturally, and to preserve its fresh state and color. The
similarity in the production of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ends
at the point of removing the coagulum (coagulated rubber sheets) from the coagulating tanks.
To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired
thickness is attained, whereupon it is removed to the air-drying house situated inside petitioner's
plantation and hung for a period of about twelve or thirteen days to dry. There are no mechanical
driers used; the air-drying is done naturally. As soon as the Pale Crepe is dried, the sheets are sorted;
those which are of uniform pale color are classified as Pale Crepe No. 2, whereupon they are baled
and stored, ready for market.
Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe,
except that the coagulum is passed only once through a roller provided with ribs after which the
flattened and ribbed coagulum is removed to petitioner's smoke-house where it is hung and cured
by exposure to heat and smoke from wood fires for about six or seven days. The resulting smoked
sheets are sorted and classified dependent upon color and opaqueness into ribbed smoked sheets
(RSS) No. 1 and No. 2, baled, and stored ready for the market. No mechanical equipment is used in
generating the smoke in the smoke-house.
The petitioner's rollers are powered by engines although they could be turned by hand as it is done in
small rubber plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not
air-dried and smoked they deteriorate, get spoiled, and the color varies.
Flat Bark Rubber
Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex
dripping from the ground around the tree, called "ground rubber", as well as the dried latex from the
incisions made the previous day, called "bark rubber". Ground and bark rubber are not intentionally
produced. No chemicals are added to the latex transformed into ground and bark rubber. This kind
of dried latex is spoiled and has a bad odor.
Ground and bark rubber when gathered in sufficient quantities are passed numerous times through
the rollers or mills until they form a uniform mass or sheet which, finally is called Flat Bark Rubber. No
chemical is used to coagulate the dried ground and bark rubber because they are already
coagulated. They are formed into sheets by means only of pressure of the mills or rollers through
which they are passed. Flat Bark Rubber commands the lowest prices in the rubber market.
3X Brown Crepe
Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not
only ground and bark rubber but removes and collects the latex in the cups, known as "cup rubber".
The cup rubber coagulates and dries through natural processes and, when gathered in sufficient
quantities, is milled and rolled through a series of rollers until by force of pressure it is formed into a
mass of the desired thickness called "3X Brown Crepe." Like ground and bark rubber, no chemicals
are added to cup rubber to produce 3X Brown Crepe. Cup rubber in its original form, like ground and
bark rubber, is spoiled and has a bad odor.
2X Brown Crepe
2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which
had been cut or trimmed from the from the ribbed smoked sheets No. 2 into a uniform mass. 2X
Brown Crepe is produced in the same manner as the other sheets of crepe rubber, i.e., without the
addition of any chemicals.
Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the
respondent's regulations declared same for tax purposes which respondent accordingly assessed.
Petitioner paid, under protest, the corresponding sales taxes thereon claiming exemption therefrom
under Section 188 (b) of the National Internal Revenue Code.
The following sales taxes on the aforementioned rubber products were paid under protest
From Jan. 1, 1955 to Dec. 31,
1956
P83,193.48
From Jan. 1, 1957 to June 30,
1957
P20,504.99
From July 1, 1957 to Dec. 31,
1958
P52,378.90
It is further stipulated that the sales tax collected from petitioner American Rubber Company on the
local sales of its rubber products, following Internal Revenue General Circulars Nos. 431 and 440, had
been separately itemized and billed by petitioner Company in the invoices issued to the customers,
that paid both the value of the rubber articles and the separately itemized sales tax, from January 1,
1955 to August 2, 1957.
After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground
that under section 188, paragraph b, of the Internal Revenue Code, as amended,
1
its rubber
products were agricultural products exempt from sales tax, and upon refusal of the Commissioner of
Internal Revenue, brought the case on appeal to the Court of Tax Appeals (C.T.A. Nos. 356, 440,,
632). The respondent Commissioner interposed defenses, denying that petitioner's products were
agricultural ones within the exemption; claiming that there had been no exhaustion of administrative
remedies; and argued that the sales tax having been passed to the buyers during the period that
elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have personality to demand,
sue for and recover the aforesaid sales taxes, plus interest.
In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown
Crepe to be agricultural products, "because the labor employed in the processing thereof is
agricultural labor", and hence, the sales of such products were exempt from sales tax, but declared
Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained
from rolling excess pieces of Smoked Sheets) to be manufactured products, sales of which were
subject to the tax. It overruled the defense of non-exhaustion of administrative remedies and upheld
the Revenue Commissioner's stand that petitioner Company was not entitled to recover the sales tax
that had been separately billed to its customers, and paid by the latter. Hence, it dismissed the
appeal in C.T.A. Nos. 356 and 440 and ordered respondent Commissioner to refund only P3,916.49
without interest, or costs.
Both parties then duly appealed to this.
The issues posed on these appeals are:
(1) Whether the plaintiff's rubber products above described should be considered agricultural
or manufactured for purposes of their subjection to the sales tax;
(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and
paid by the buyers of its products; and
(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in
case recovery thereof is allowed.
The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing
Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption
from sales tax established in section 188 (b) of the Internal Revenue Tax Code in favor of sales of
agricultural products, whether in their original form or not, made by the producer or owner of the
land where produced is not taken away merely because the produce undergoes processing at the
hand of said producer or owner for the purpose of working his product into a more convenient and
valuable form suited to meet the demand of an expanded market; that the exemption was not
designed in favor of the small agricultural producer, already exempted by the subsequent
paragraphs of the same section 188, but that said exemption is not incompatible with large scale
agricultural production that incidentally required resort to preservative processes designed to
increase or prolong marketability of the product.
In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber
tree, which is clearly an agricultural product, becomes spoiled after only two hours. It has, therefore,
a severely limited marketability. The addition of ammonia prevents its deterioration for about a
month, and we see no reason why this preservative process should wrest away from the preserved
latex the protective mantle of the tax exemption.
Taking also into account the great distance that separates the plaintiff's plantation from the main
rubber processing centers in Japan, the United States and Europe, and the difficulty in handling
products in liquid form, it can be discerned without difficulty that preserved, latex, with its 30-day
spoilage limit, is still severely handicapped for export and dollar earning purposes.
To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary
to separate and solidify the rubber granules diffused in the latex, and hence, according to the
stipulation of facts and the evidence, acetic acid is added to hasten coagulation. There is nothing
on record to show that the acetic acid in way produces anything that was not originally in the
source, the liquid latex. The coagulum is then rolled and compacted and afterwards air dried to
make Pale Crepe(1 and 2), or else cured and smoked to produce rubber sheets. Once again we see
nothing in this processing to alter the agricultural nature of the result; what takes place is merely an
accelerated coagulation and dessication that would naturally occur anyway, only within a longer
period of time, coupled with greater spoilage of the product.
Thus the operations carried out by plaintiff appear to be purely preservative in nature, made
necessary, by its production of fresh rubber latex in a large scale. they are purely incidental to the
latter, just as the canning of skinned and cored pineapples in syrup was held to be incidental to the
large-scale cultivation of the fruit in the Philippine Packing Corporation case (ante). Being necessary
to suit the product to the demands of the market, the operations in both cases should lead to the
same result, non-taxability of the sales of the respective agricultural products. In not so holding, the
Tax Court was in error.
Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the
finding of the Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products. According to
the record, these sheets result from the drippings and waste rubber that have dried naturally, that are
rolled and compacted into the desired thickness, without any other processing.
As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the
production of ribbed smoked sheets, no reason is seen why it should be treated differently from the
ribbed smoked sheets themselves.
In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed
manufactured articles, on the strength of section 194 (n) of the Revenue Code defining a
"manufacturer" as
every person who by physical or chemical process alters the exterior texture or form or inner
substances of any raw material or manufactured or partially manufactured product in such
manner as to prepare it for a special use or uses to which it could not have been put to in its
original condition, or who . . . alters the quality of any such raw material . . . as to reduce it to
marketable shape . . . .
But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the
exemption of agricultural products, "whether in their original form or not". The use of this last phrase in
the statute clearly indicates that the agricultural product may be altered in texture or form without
being divested of the exemption (cas cit. 100 Phil., p. 548). The exception would be sales of
agricultural products while Republic Act No. 1612 was in effect because under this Act the freedom
from sales tax became restricted to agricultural products "in their original form" only. So that plaintiff's
sales from August 24, 1956 (approval of Republic Act 1612) to June 22, 1957 (when Republic Act 1856
became effective and restored the exemption to agricultural products "whether in their original form
or not") became properly taxable. Under paragraphs (A)2 and B(4) of the additional stipulation of
facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax properly collected during this period of
plaintiff's transactions amounted to P18,187.19 from August 24 to December 31, 1956; and P18,888.28
from January 1 to June 21, 1957, or a total of P37,075.47. This last amount is, therefore non-
recoverable.
2

The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff
Company is not entitled to recover the sales tax paid by it from January, 1955 to August 2, 1957,
because during that period the plaintiff had separately invoiced and billed the corresponding sales
tax to the buyers of its products. In so holding, the Tax Court relied on our decisions in Medina vs. City
of Baguio, 91 Phil. 854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30,
1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27, 1958.
The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the
court of First Instance to the effect that
"The amount collected from the theatergoers as additional price of admission tickets is not the
property of plaintiffs or any of them. It is paid by the public. If anybody has the right to claim it,
it is those who paid it. Only owners of property has the right to claim said property. The cine
owner acted as mere agents of the city in collecting additional price charged in the sale of
admission tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied)
We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case,
since the municipal taxes therein imposed were taxes on the admission tickets sold, so that, in effect,
they were levies upon the theatergoers who bought them; so much so that (as the decision expressly
ruled) the tax was collected by the theater owners as agents of the respective municipal treasurers.
This does not obtain in the case at bar. The Medina ruling was merely followed in Rojas & Bros. vs.
Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.
By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed
directly, not on the thing sold, but on the act (sale) of the manufacturer, producer or importer (Op. of
the Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the very money paid by its customers.
Where the tax money paid by the plaintiff came from is really no concern of the Government, but
solely a matter between the plaintiff and its customers. Anyway, once recovered, the plaintiff must
hold the refund taxes in trust for the individual purchasers who advanced payment thereof, and
whose names must appear in plaintiff's records.
Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the
respondent Commissioner's General Circular No. 440, providing that
if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by
him, has included an amount intended to cover the sales tax in the gross selling price of the
article, the sales tax shall be based on the gross selling price less the amount intended to
cover the tax, if the same is billed to the purchaser as a separate item in the invoice. . . .
(Emphasis supplied)
In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the
taxpayer being compelled to pay a sales tax on the tax itself. It does not seem either just or proper
that a step suggested by the Internal Revenue authorities themselves to protect the taxpayer from
paying a double tax should now be used to block his action to recover taxes collected without legal
sanction.
Finally, a more important reason that militates against extensive and indiscriminate application of the
Medina vs. City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the individual
customers to whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of
the small amount paid by each and the high cost of litigation for the reclaiming of an illegal tax. In so
far, therefore, as it favors the imposition, collection and retention of illegal taxes, and encourages a
multiplicity of suits, the Tax Court's ruling under appeal violates morals and public policy.
The plaintiff Company also urges that the refund of the taxes should include interest thereon. While
this Court has allowed recovery of interest in some cases, it has done so only in cases of patent
arbitrariness on the part of the Revenue authorities; and in this instance we agree with the Tax Court
that no such patent arbitrariness has been shown.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No. L-
19667 and modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes
therein involved to have been improperly denied levied and collected and ordering respondent
Commissioner of Internal Revenue to refund the same, except the taxes corresponding to the period
from August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in force. The amount
of P37,075.47 paid by the taxpayer for this period is hereby declared properly collected and not
refundable. Without special pronouncement as to costs.
Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.






















9. Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.
D E C I S I O N
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. 95-113-007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86

Totals

P147,317,189.62


P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR.
It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to
its case. Revenue Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to
read as follows:
Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services
by a resident to a non-resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to
the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December
1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of
P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently,
[respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes
for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIRs collecting
agent, PCIBank, as its output tax liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed
that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment
Program (VAP) of the BIR.
4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running
of the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for
P6,994,659.67 in favor of respondent. The 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 BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den
Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondents] sale of
services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
x x x x
The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated
January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent] were indeed subject
to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by
paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return of what has been delivered
by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x
x 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. 5-96
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 non-resident; and (b) these must be in the
nature of project studies, information services, etc."
11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,
12
for services which
were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to
wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules
of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.
13

The Court of Appeals disagreed with 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 payer-recipient. Such interpretation
removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot
sanction. A tax is a mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only
those not doing business in the Philippines can be required under BSP 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 payer-
recipient of services is doing business outside the Philippines. Under BSP rules,
21
the proceeds of export
sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider
of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP.
The same rationale does not apply if the provider and recipient of the services are both doing
business in the Philippines since their transaction is not in the nature of an export sale even if payment
is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course
the transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1
and 2. The requirements for zero-rating, including the essential condition that the recipient of services
is doing business outside the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)
22
[previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a
person engaged in business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP."
In this case, the payer-recipient of 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 15-year
term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of
a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S
("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation
and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a
15-year term.
23
(Emphasis supplied)
Considering this length of time, the 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. 003-
99,
28
which reconfirmed BIR Ruling No. 023-95
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.














10. Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 150154. August 9, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.
D E C I S I O N
CHICO-NAZARIO, J.:
In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No. 59106,
1

affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,
2
which ordered said
petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized
input value-added tax (VAT) payments for the first and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present Petition.
Respondent Toshiba was organized and established as a domestic corporation, duly-registered with
the Securities and Exchange Commission on 07 July 1995,
3
with the primary purpose of engaging in
the business of manufacturing and exporting of electrical and mechanical machinery, equipment,
systems, accessories, parts, components, materials and goods of all kinds, including, without
limitation, to those relating to office automation and information technology, and all types of
computer hardware and software, such as HDD, CD-ROM and personal computer printed circuit
boards.
4

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Bian,
Laguna.
5
Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a
VAT taxpayer and a withholding agent.
6

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of P13,118,542.00
7
and P5,128,761.94,
8
respectively, or a total of
P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services
which remained unutilized since it had not yet engaged in any business activity or transaction for
which it may be liable for any output VAT.
9
Consequently, on 27 March 1998, respondent Toshiba
filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department
of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31
March 1996 in the amount of P14,176,601.28,
10
and for 01 April to 30 June 1996 in the amount of
P5,161,820.79,
11
for a total of P19,338,422.07. To toll the running of the two-year prescriptive period for
judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a
Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998
so as to conform to the evidence presented before the CTA during the hearings.
In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several
Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to
investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must
prove that the taxes sought to be refunded were erroneously or illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997
Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of
the tax.
9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of
an exemption from taxation.
12

After evaluating the evidence submitted by respondent Toshiba,
13
the CTA, in its Decision dated 10
March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of P16,188,045.44.
14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration for
lack of merit.
15

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs Petition for
Review and affirmed the CTA Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of
Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the
arguments relied upon by him in the petition, is fatal to his cause.
2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT
pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is not subject to VAT, the
capital goods and services it purchased are considered not used in VAT taxable business, and,
therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1
of Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said
Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input
taxes it paid on zero-rated transactions.
16

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is
entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to
which this Court answers in the affirmative.
I
An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977,
as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.

(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such
input taxes have not been applied against output taxes. The application may be made only within
two (2) years after the close of the taxable quarter when the importation or purchase was made.
17

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as
follows
Sec. 4.106-1. Refunds or tax credits of input tax.
. . .
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate
or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be
allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the
importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods
are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall
only be the ratable portion corresponding to the taxable operations.
"Capital goods or properties" refer to goods or properties with estimated useful life greater than one
year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in
the production or sale of taxable goods or services. (Underscoring ours.)
Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not
engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-
exempt, invoking the following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938,
or international agreements to which the Philippines is a signatory.
18

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%)
preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known
as The Special Economic Zone Act of 1995, as amended. According to the said section, "[e]xcept for
real property taxes on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONE shall be paid" The five percent (5%)
preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all
national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by
virtue of a special law, Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-
exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology
(Philippines),
19
this Court already made such distinction
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status VAT-exempt or not of the party to the transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from VAT
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-
exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes that transactions covered by special laws may
be exempt from VAT, the very same section provides that those falling under Presidential Decree No.
66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the
precursor of Rep. Act No. 7916, as amended,
20
under which the EPZA evolved into the PEZA.
Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of
1977, as amended, extends likewise to Rep. Act No. 7916, as amended.
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as
amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or
a Special Economic Zone has been described as
. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers
whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may
contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade
zones and tourist/recreational centers.
21

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.
22

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory;
23
thus, creating the fiction that the ECOZONE is a foreign
territory.
24
As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE
shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier
from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into
the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a supplier from
the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.
25

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,
26

the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular
interest to the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a
PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of
all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916,
in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,
hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under
the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916
in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier
from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the
class or type of the latters PEZA registration, is actually qualified and thus legally entitled to the zero
percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the
benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and
shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt
entity. The VAT treatment of sales to it, however, varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same
time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating
of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory),
who is directly and legally liable for the VAT, making it internationally competitive by allowing it to
credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only
be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt
entity that could not have engaged in a VAT-taxable business, this Court still believes, given the
particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under
Executive Order No. 226, as amended, were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning
thus
In the first place, respondent could not have paid input taxes on its purchases of goods and services
from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax
and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services (Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:
"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations."
From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax
on his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the
foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and
services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier)
own purchases of goods and services related to its zero-rated sale of goods and services to
respondent. On the other hand, respondent, as the buyer in such zero-rated sale of goods and
services, could not have paid input taxes for which it can claim as tax credit or refund.
27

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous
premise that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-
2,
28
in relation to Section 4.106-1(a),
29
of RR No. 7-95, as amended, which allows the tax credit/refund
of input VAT on zero-rated sales of goods, properties or services. Instead, respondent Toshiba is basing
its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which allows a VAT-
registered person to apply for tax credit/refund of the input VAT on its capital goods. While in the
former, the seller of the goods, properties or services is the one entitled to the tax credit/refund; in the
latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application for tax
credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually
passed on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the
VAT-registered supplier from the Customs Territory did not charge any output VAT to respondent
Toshiba believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba
did not pay any input VAT on its purchase of capital goods and it could not claim any tax
credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of
fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,
30
cannot be lightly disregarded considering the great number of PEZA-
registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income
tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment
Code of 1987, as amended.
31

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is
in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a
PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered
pioneer and non-pioneer enterprises for six-year and four-year periods, respectively.
32
Those availing
of this incentive are exempt only from income tax, but shall be subject to all other taxes, including the
ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose
the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act
No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of
the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten
percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that
all sales of goods, properties, and services made by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of
the latters type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present
Petition took place during the first and second quarters of 1996, way before the issuance of RMC No.
74-99, and when the old rule was accepted and implemented by no less than the BIR itself. Since
respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that
suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter,
thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent
accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted
by respondent Toshiba consisting of receipts, invoices, and vouchers, from its suppliers from the
Customs Territory. Accordingly, this Court gives due respect to and adopts herein the CTAs findings
that the suppliers of capital goods from the Customs Territory did pass on output VAT to respondent
Toshiba and the amount of input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July
2003, the BIR answered the following question
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms
automatically qualify as zero-rated without seeking prior approval from the BIR effective October
1999.
1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were
allegedly billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT
invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the
said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases. However, if
the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to
the purchaser prior to the implementation of RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and
declared the sales to the PEZA-registered purchaser as taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-
registered companies, regardless of the type or class of PEZA registration, should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-
registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior
to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval
thereof depending on whether the given conditions are met. Respondent Toshibas claim for tax
credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No.
42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent
Toshibas application for tax credit/refund of its input VAT, when such claim had already been
determined and approved by the CTA after due hearing, and even affirmed by the Court of
Appeals; while it could accept, process, and even approve applications filed by other similarly-
situated PEZA-registered enterprises at the administrative level.
III
Findings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for tax
credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate under
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised
and threshed out in the lower courts. Giving it credence would belie petitioner CIRs assertion that it is
raising only issues of law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court
of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec.
Order No. 226, as amended.
WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-
G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to
refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount of
P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.
SO ORDERED.













11. Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 166732 April 27, 2007
INTEL TECHNOLOGY PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
D E C I S I O N
CALLEJO, SR., J.:
Before the Court is a Petition for Review on Certiorari filed by Intel Technology Philippines, Inc.
(petitioner) seeking to reverse and set aside the Decision
1
dated August 12, 2004 of the Court of
Appeals (CA) in CA-G.R. SP No. 79327. The assailed decision affirmed that of the Court of Tax Appeals
denying petitioners claim for a refund or issuance of a tax credit certificate in the amount of
P11,770,181.70, allegedly representing the value-added input taxes it had paid on domestic
purchases of goods and services for the period of April 1, 1998 to June 30, 1998. Likewise sought to be
reversed and set aside is the appellate courts Resolution
2
dated January 14, 2005 denying
petitioners Motion for Reconsideration.
The Antecedents
Petitioner is a domestic corporation engaged primarily in the business of designing, developing,
manufacturing and exporting advanced and large- scale integrated circuit components (ICs).
3
It is
registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) entity in 1996 under
Certificate of Registration RDO Control No. 96-540-000713.
4
It is likewise registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone export enterprise.
5

As a VAT-registered entity, petitioner filed with the Commission of Internal Revenue its Monthly VAT
Declarations and Quarterly VAT Return for the second quarter of 1998 declaring zero-rated export
sales of P2,538,906,840.16 and VAT input taxes from domestic purchases of goods and services in the
total amount of P11,770,181.70. Petitioner alleged that its zero-rated export sales were paid for in
acceptable foreign currency and were inwardly remitted in accordance with the regulations of the
Bangko Sentral ng Pilipinas (BSP).
On May 18, 1999, petitioner filed with the Commission of Internal Revenue, through its One-Stop Shop
Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, a claim for tax
credit/refund of VAT input taxes on its domestic purchases of goods and services directly used in its
commercial operations. Petitioners claim for refund amounted to P11,770,181.70 covering the period
April 1, 1998 to June 30, 1998.
6

On June 30, 2000, when the two-year prescriptive period to file a refund was about to lapse without
any action by the Commission of Internal Revenue on its claim, petitioner filed with the Court of Tax
Appeals (CTA) a petition for review with the Commissioner of Internal Revenue (Commissioner) as
respondent.
7
Petitioner alleged therein that:
3. Petitioner is engaged primarily in the business of designing, developing, manufacturing and
exporting advanced and large-scale integrated circuit components, commonly referred to in
the industry as Integrated Circuits or "ICs." As such, [it] has registered itself as a value-added
tax entity pursuant to Section 107 of the Tax Code effective January 30, 1996, pursuant to
which it was issued Certificate of Registration No. 96-540-000713. Being engaged in said
business, Petitioner registered itself with the Philippine Economic Zone Authority (PEZA) as an
export enterprise and was issued Certificate of Registration No. 95-133 by the Philippine
Economic Zone Authority. Photocopies of Petitioners Certificate of Registration (BIR Form 1556)
and PEZA Certificate of Registration are hereto attached as Annexes "A" and "B," and made as
integral parts hereof;
4. For the period covering April 01 to June 30, 1998, petitioner generated and recorded zero-
rated export sales in the amount of PhP2,538,906,840.16, Philippine Currency;
5. The above amount of P2,538,906,840.16 was paid to petitioner in acceptable foreign
currency and was inwardly remitted in accordance with existing regulations of the Central
Bank of the Philippines pursuant to Sec. 106(A)(2)(a)(1) of the Tax Code;
6. For the period covering April 01, 1998 to June 30, 1998, petitioner paid VAT input taxes
amounting to PhP11,770,181.70 for domestic purchases of goods and services which were
attributable to petitioners zero-rated sales of PhP2,538,906,840.16. Photocopies of petitioners
quarterly VAT returns and monthly declarations for the second taxable quarter of 1998 which
was duly filed with the Respondent, and received by Respondents collection agents, RCBC
Gateway Branch are hereto attached as Annex "C," "D," "E" and "F" forming as integral parts
hereof;
7. The above VAT input taxes were paid in connection with the Petitioners trade or business
and were duly supported by invoices and/or receipts showing the information required under
Sections 113 and 237 of the Tax Code, and had not been applied against any VAT output tax
liability of the Petitioner during the same period from April 1, 1998 to June 30, 1998, or any
succeeding period or periods;
x x x x
8. Being a VAT-registered entity, Petitioner is subject to the Value-Added Tax imposed under
Title IV of the Tax Code.
x x x x
9. The export sales of the petitioner are not subject to 10% value-added tax but are zero-rated.
Hence, such zero-rated sales will not result to any VAT output tax pursuant to Sec.
106(A)(2)(a)(1) and Sec. 108(B)(1) of the Tax Code;
10. Petitioner, for the period covering April 01, 1998 to June 30, 1998, having generated zero-
rated sales and paid VAT input taxes in the course of its trade or business, which VAT input
taxes are attributable to the zero-rated sales and have not been applied to any VAT output
tax liability of the Petitioner for said period or any succeeding quarter or quarters nor has been
issued any tax credit certificate, it follows that petitioner is entitled to the issuance of a tax
credit certificate for VAT input taxes in the amount of PhP11,770,181.70 x x x.
x x x x
11. On May 18, 1999, petitioner in compliance with the requisites provided for by law for the
issuance of a tax credit certificate filed a claim for tax credit in the total amount of
PhP11,770,181.70, with respondent through the One Stop Shop Inter-Agency Tax Credit and
Duty Drawback Center per BIR Form No. 2552 entitled APPLICATION FOR TAX CREDIT/REFUND
OR VALUE-ADDED TAX PAID and Claimant Information Sheet No. 35418. x x x
12. Respondent, however, despite such application for the issuance of a tax credit certificate
above-mentioned and notwithstanding presentation of documentary evidences in support of
such application, failed to grant the tax credit applied for. x x x
8

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, as follows:
WHEREFORE, it is respectfully prayed that this Honorable Court after trial render judgment:
1. Declaring Petitioner entitled to the issuance of tax credit certificate in the amount of
PhP11,770,181.70 representing VAT input taxes paid by it during the period from April 01, 1998
to June 30, 1998, for which no tax credit certificate was issued;
2. Ordering respondent to issue the tax credit certificate in favor of petitioner in the amount of
PhP11,770,181.70 referred to above; and
3. Granting petitioner such other reliefs as may be just and equitable under the premises.
9

The Commissioner, as respondent, opposed the petition and prayed for its dismissal. The
following special and affirmative defenses were raised:
4. Petitioner, being allegedly registered with the Philippine Economic Zone Authority, is exempt
from all taxes, including value-added tax, pursuant to Section 24 of Republic Act No. 7916, in
relation to Section 103 of the Tax Code, as amended by RA 7716. Since its sales are not zero-
rated but are exempt from VAT, petitioner is not entitled to refund of input tax pursuant to
Section 4.106-1 and 4.103-1 of Revenue Regulations No. 7-95;
5. Petitioners alleged claim for refund is subject to administrative routinary
investigation/examination by the Bureau;
6. The amount of P47,582,813.72 being claimed by petitioner as alleged VAT input taxes for the
period of 01 July 1997 to 31 December 1997 was not properly documented;
7. In an action for refund the burden of proof is on the taxpayer to establish its right to refund,
and failure to sustain the burden is fatal to the claim for refund/credit;
8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of
the Tax Code on the prescriptive period for claiming tax refund/credit;
9. Claims for refund are construed strictly against the claimant for the same partake the nature
of exemption from taxation.
10

The CTA commissioned the services of an independent auditor, Eliseo Aurellado, to conduct an audit
and evaluate petitioners claim. On March 22, 2001, he submitted a Report to the CTA with the
following conclusion:
In performing the above procedures, except for the net effect of the Input VAT paid on its purchases
as compared to the results of my review of supporting documents, as shown in Annex "B" no other
matters came to my attention that cause me to believe that the attached Schedule of Input VAT
Paid should be adjusted. We believe that only the amounts of P9,688,809.39 is a valid claim for tax
credit. This report relates only to the application of Intel Technology Philippines, Inc. for tax
credit/refund specified on page 1 of this report and does not extend to the Financial Statements,
taken as a whole, for any period where the aforementioned tax refund is present.
11

Appended thereto were the summary of purchases, statements of input VAT exception, and
statements of zero-rated export sales.
12

Petitioner adduced testimonial evidence and offered the following documents in evidence:
EXHIBIT DESCRIPTION PURPOSE
"A" A copy of Petitioners Certificate of
Registration No. 95-133 issued by
Philippine Economic Zone Authority
(PEZA). This was already subject of
stipulation of facts.
To prove that Intel Technology
Philippines, Inc. is registered with
PEZA as Ecozone Export
Enterprise.
"B" A copy of Petitioners BIR Certificate
of Registration with RDO Control No.
96-540-000713 issued on January 30,
1996 by Revenue District Office No.
54.
This was already subject of
stipulation of facts.
To prove that Petitioner is duly
registered with the Bureau of
Internal Revenue.
To prove that Petitioner is a duly
registered VAT entity.
"C" & "D"
"C-1" &
"D-1"
Copies of the Monthly VAT Returns
for the month of April and May of
1998. These were already subjects
of stipulation of facts.
Signature of Pablo V. Pablo.
To prove that Petitioner filed its
Monthly VAT Declaration for the
month of April and May of 1998.
To prove that the monthly VAT
Returns was duly signed by
Petitioners authorized agent.
"E"
"E-1"
Copies of Petitioners Quarterly VAT
Return for the second quarter of
1998.
Signature of Pablo V. Pablo
This was already subject to
stipulation of facts
To prove that Petitioner filed its
Quarterly VAT return for the
second quarter of 1998.
To prove that Petitioners
authorized agent properly signed
the Quarterly VAT Return for the
second quarter of 1998.
"F" & "F-2"
"F-1"
Copies of Petitioners Amended
Quarterly VAT Return for the second
quarter of 1998.
To prove that Petitioner filed its
Amended Quarterly VAT return
for the second quarter of 1998.
To prove that Petitioners
Signature of Pablo V. Pablo
This was already subject to
stipulation of facts.
authorized agent properly signed
the Amended Quarterly VAT
Return for the second quarter of
1998.
"F-3" Box No. 16A of the Amended
Quarterly VAT return for the second
quarter of 1998.
To prove that Petitioner properly
reported its sales subject to zero-
rated for the second quarter of
1998.
"F-4" Box No. 16B of the Amended
Quarterly VAT return for the second
quarter of 1998.
To prove that petitioner paid and
remitted the output VAT for the
second quarter of 1998.
"F-5" Box No. 17 of the Amended Quarter
VAT return for the second quarter of
1998
To prove that petitioner property
reported its export sales subject
to zero-rated for the second
quarter of 1998 in the amount of
P2,538,906,840.160.
"F-6" Box No. 22B of the Amended
Quarterly VAT return for the second
quarter of 1998.
To prove that petitioner incurred
an input taxes on its domestic
purchases of goods and services
for the second quarter of 1998 in
the amount of P11,770,181.70.
"G" to "L"
and "H-2"
and "K-
2"
"G-1" to
"L-1"
Copies of Petitioners Quarterly VAT
Returns for the third and fourth
quarters of 1998 and first and
second quarters of 1999 including
the amended returns for the third
quarter and first quarter of 1998 and
1999, respectively.
Signature of Pablo V. Pablo.
These were already subject of
stipulation of facts.
To prove that Petitioner filed its
Quarterly VAT Returns for the
third and fourth quarters of 1998
and first and second quarters of
1999 including the amended
returns for the third and first
quarters of 1998 and 1999,
respectively.
To prove that the Quarterly VAT
returns were properly signed by
Petitioners duly authorized
representative.
"H-3," "I-2,"
"K3" & "L-
2"
Box No. 34 or 35 of the Quarterly
VAT returns for the third and fourth
quarters of 1998 and first and
second quarters of 1999.
To prove that the Petitioner
always has excess input VAT and
the same was not utilized in the
succeeding quarter or quarters.
"M" & "N"
"M-1" &
"N-1"
Copies of Petitioners Claimant
Information Sheet No. 35418
including BIR Form No. 2552 for the
period April 1, 1998 to June 30, 1998
filed with the One-Stop-Shop Inter-
Agency Tax Credit and Duty
Drawback Center of the
Department of Finance duly
To prove that Petitioner filed a
claim for refund of input taxes in
the total amount of
P11,770,181.70 with the One-
Stop-Shop Inter-Agency Tax
Credit and Duty Drawback
Center of the Department of
Finance last 05-18-99.
stamped received last 05-18-99.
Signature of Pablo V. Pablo
These were already subject of
stipulation of facts.
To prove that the claimant
information sheet and BIR form
2552 were signed by Petitioners
duly authorized representative.
"O"
"O-1"
"O-2"
Certification of inward remittance
dated March 08, 2000 issued by
CITIBANK
Signature of Pepper M. Lopez,
CitiService Officer
Amount of inward remittance in the
amount of US$98,000,000.00
To prove that the proceeds of
export sales of petitioner were
properly remitted in US dollars in
accordance with the regulations
of the Bangko Sentral ng
Pilipinas.
To prove that the Certification
was properly signed by
Citibanks authorized
representative.
To prove the amount of inward
remittance in the amount of
US$98,000,000.00.
"P"
"P-1"
"P-2"
Certification of inward remittance
dated March 09, 2000 issued by
RCBC
Signture of Ms. Araceli V.
Dyoco, Head Export Dept.
Amount of inward remittance in the
amount of US$102,499,965.00
To prove that the proceeds of
export sales of petitioner were
properly remitted in US dollars in
accordance with the regulations
of the Bangko Sentral ng
Pilipinas.
To prove that the Certification
was properly signed by RCBCs
authorized representative.
To prove the amount of inward
remittance in the amount of
US$102,499,965.00.
"Q"
"Q-1" and
"Q-
2"
Copy of the Certification issued by
Mr. Eliseo A. Aurellado,
independent CPA commissioned
by the Honorable Court of Tax
Appeals.
Signature and PTR No. of Mr. Eliseo
A. Aurellado.
To prove that Mr. Eliseo A.
Aurellado has issued a
certification with regards to the
correctness of Petitioners
summary input VAT paid and
summary of zero-rated sales.
To prove that Mr. Eliseo A.
Aurellado is the one who issued
the above-mentioned
Certification and that he has the
authority to act as such.
"S" Copy of the summary of purchases
attached as Annex "A" to the
To prove the correctness of the
input VAT paid on domestic
Certification marked as "Annex "Q." purchases of goods and services
for the second quarter of 1998.
"T"
"T-1"
Copy of schedule of input VAT paid
with exception attached as Annex
"B" to the Certification marked as
"Annex "Q."
The total amount of exception is
P2,081,372.31.
To prove the amount of input
VAT paid on domestic purchases
of goods and services with
exception.
To prove the total input VAT with
exception in the amount of
P2,081,372.31.
"U-1" to
"U-375,"
"V-1" to
V-665"
and "W-1"
to "W-
424"
Copies of Petitioners supplier
invoices and official receipts for the
second quarter of 1998.
To prove that the input VAT paid
by Petitioner for the second
quarter of 1998 except those
with exception are property
supported with sales invoices
and official receipts.
"X" to "X-
669"
Copies of Petitioners summary of
export sales, sales invoices, official
receipts, airway bills, export
declarations and certification of
inward remittances for the second
quarter of 1998.
To prove that Petitioner for the
second quarter of 1998
generated export sales in the
total amount of
P2,538,906,840.16 and the same
were duly supported with
documents.
"Y" Copy of the summary export sales
consisting of 13 pages attached as
Annex "C" to the Certification
marked as Exhibit "Q."
To prove [that] from April 1, 1998
to June 30, 1998, Petitioner
generated and recorded an
export sales in the amount of
P2,538,906,840.16.
13

On April 21, 2003, the CTA rendered judgment denying petitioners claim for refund or issuance of a
tax credit certificate. The tax court acknowledged that petitioner is legally entitled to a refund or
issuance of a tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods
and service attributable to its zero-rated sales. However, the export invoices adduced in evidence by
petitioner could not be considered as competent evidence to prove its zero-rated sales of goods for
VAT purposes and for refund or issuance of a tax credit certificate because no BIR authority to print
said invoices was indicated thereon. The CTA also observed that some of the invoices do not contain
the Taxpayers Identification Number-VAT (TIN-V) of petitioner as required in Section 113, in
conjunction with Section 237, of the Tax Code. The dispositive portion of the CTA decision reads:
WHEREFORE, in view of the foregoing, petitioners claim for issuance of a tax credit certificate in the
amount of P11,770,181.70 allegedly representing its VAT input taxes on domestic purchases of goods
and services for the period April 1, 1998 to June 30, 1998 is hereby DENIED.
SO ORDERED.
14

Petitioner filed a Motion for Reconsideration
15
alleging that it was able to prove its export sales by the
following documentary evidence:
(1) Certifications of inward remittances marked as Exhibits "O" and "P" for the Petitioner.
(2) Airway bills.
(3) Export declarations.
(4) Certifications of Mr. Eliseo Aurellado (Exhibit "Q" for the Petitioner), the independent CPA
duly commissioned by this Honorable Court, to the effect that the petitioner made export sales
for the period covered in the amount of Php2,538, 906,840.16.
16

Petitioner also alleged the following in its Supplemental Motion for Reconsideration:
The petitioner truly believes that although the invoicing requirements prescribed under Section 113
(A)(1), in relation to Section 237 of the 1997 Tax Code, should be applied strictly in the use of invoices
or receipts for purposes of substantiating input VAT incurred, the same stringent application is not
called for when the invoices or receipts are used for purposes of substantiating actual export sales.
While the invoices or receipts being used to substantiate claim for input VAT pertain to domestic
sales, the invoices or receipts presented by the petitioner, and which were invalidated by this
Honorable Court pertain to export sales. There should be a marked difference because in domestic
sales, there results a corresponding input VAT which may be possibly claimed by the purchaser,
whereas in export sales, such as those done by the petitioner, the purchaser incurs no input VAT
which it may eventually claim. Thus, for purposes of substantiation in the claim for input VAT resulting
from domestic sales the stern application of the mentioned invoicing requirements is naturally
demanded. But for simple purposes of substantiating export sales, as in the case of petitioner, it
should not be as exacting especially considering that the petitioner still has to substantiate its input
VAT, which, this time, needs to hurdle the aforesaid invoicing requirements under the 1997 Tax Code.
Moreover, unlike in the substantiation of input VAT, which can only be done through the submission of
domestic sales invoices, there are other documents to show the fact of export sales such as export
declarations, inward remittances and airway bills. This gives more plausible reason why invoices or
receipts being used to prove input VAT need to comply with the invoice requirements set forth under
Section 113(A)(1), in relation to Section 237, of the 1997 Tax Code.
17

Petitioner appended thereto a letter-authority dated April 17, 1997 signed by BIR Regional Director
Sol Hubahib of Region No. 9 approving its request to use computerized sales invoices.
On September 1, 2003, the CTA denied petitioners Motion for Reconsideration and Supplemental
Motion for Reconsideration.
Aggrieved, petitioner filed before the CA a petition for review of the tax courts decision. Petitioner
averred that, under Sections 113(A)(1) and 237 of the 1997 Tax Code, the following information is
required to be indicated in the invoice or receipt: (1) a statement that the seller is VAT-registered; (2)
the sellers TIN; and (3) the name, business style, if any, and address of the purchaser, customer or
client. However, petitioner averred, such requirements apply only to domestic or local sales,
considering that the output tax (the input tax on the part of the local purchaser), may be claimed by
the latter as a credit against its output VAT. Thus, according to petitioner, the invoices or receipts
being issued by the local seller are required to indicate the information listed under the
aforementioned provisions of the Tax Code so that the local purchaser would have a valid basis in its
claim for the crediting of the input VAT. On the other hand, such requirements do not apply to its
export sales, since no input VAT may be claimed thereon. Petitioner further pointed out that the
transaction is subject to 0% rate; there is no input VAT to be claimed by its foreign purchaser; and the
latter is not a VAT-registered entity in the Philippines. Considering that no refundable or creditable
input VAT results from its export sales transactions, it should not be subjected to strict compliance with
the invoicing requirements.
Petitioner also claimed that the absence of BIR authority to print its TIN-V in some of the invoices is not
fatal to its claim for refund or issuance of a tax credit certificate as to invalidate the documents used
to prove its export sales. It declared that it used computerized accounting forms as sales invoices in
its export sales based on the letter-authority dated April 17, 1997 of the BIR. It was only through plain
mistake and inadvertence that the sales invoices it used had no authority to print. Such omission
should not allegedly render the said sales invoices altogether invalid or inadmissible for purposes of
substantiating petitioners actual export sales covering the period April 1, 1998 to June 30, 1998.
Petitioner opined that its failure to adduce in evidence the said letter-authority of the BIR was due to
its honest belief that it had already adduced sufficient evidence to prove its actual export sales.
Petitioner submitted that while the CTA ruled that the invoices which did not indicate TIN-V were not
sufficient proof of its export sales, this constituted only a small part of the hundreds of invoices it had
submitted. These defective invoices, therefore, relate to a small chunk of the export sales it made for
the covered period. If at all, the invalid invoices could only mean that only a small part of its claim
was being disallowed, not the entire claim.
On August 12, 2004, the CA rendered its Decision
18
affirming the CTA ruling. The CA ruled that while
under Section 106(A)(2)(a)(1) of the Tax Code, VAT-registered entities are entitled to claim VAT
refund on their input taxes if their export sales are zero-rated, the claim is nevertheless subject to the
invoicing and accounting requirements of VAT-registered persons under Section 113 in relation to
Section 237 of the Tax Code. It is therefore clear, the appellate court concluded, that what should be
proven are not only the export sales but also compliance with the requirements under the aforesaid
sections of the Tax Code.
19

The CA further ruled that Revenue Regulations (RR) No. 7-95 requires VAT-registered persons to issue
duly registered receipts, and enumerates the entries that should be contained in the said duly
registered receipts. Section 237 of the Tax Code further mandates that persons required to issue
receipts or invoices should register these documents with the BIR. In fact, RR No. 2-90 restored the
requirement to register and stamp receipts and invoices prior to their use.
20
Thus, VAT-registered
persons are directed to issue duly registered invoices for every sale or lease of goods, properties or
services, containing the required information under the law.
21

According to the CA, since petitioner issued invoices with the BIRs authority to print, it must be
concluded that these invoices were not registered as they did not comply with the invoicing
requirements under Section 113, and the requirements for issuance of receipts or sales or commercial
invoices under Section 237. The CA declared that an unregistered receipt could not be used as
supporting document for input tax.
22
It further explained that Revenue Memorandum Circular (RMC)
No. 42-2003 already clarified that failure to comply with invoicing requirements would result in the
disallowance of the claim for input tax by the purchaser-claimant. Hence, the CA ruled, if the claim
for refund or issuance of a tax credit certificate is based on the taxpayers zero-rated sales, but the
invoicing requirements in the issuance of sales invoices are not complied with, the claim for tax
credit/refund of VAT on its purchases shall be denied. This is because the invoices issued to its
customers failed to depict that the taxpayer is VAT-registered and that its sales are classified as zero-
rated. According to the appellate court, however, 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.
23

The CA further declared that petitioner failed to establish that its computer-generated sales invoices
were duly stamped with the approval of the BIR as shown by the letter-authority dated April 17, 1997,
considering that the said letter-authority was not presented during the trial of the case, much less
attached to the petition filed before it.
24
The fallo of the CA decision reads:
WHEREFORE, in view of the foregoing, the instant petition is DENIED. The Decision of the Court of Tax
Appeals in CTA Case No. 6128 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
25

Undaunted by the adverse ruling of the appellate court, petitioner now seeks recourse to this Court
on the following grounds:
I.
THE DECISION OF THE COURT OF APPEALS AFFIRMING THE DENIAL OF PETITIONERS CLAIM FOR TAX
CREDIT/REFUND IS CONTRARY TO PROVISIONS OF THE TAX CODE AND APPLICABLE REGULATIONS AND
DECISIONS OF THE HONORABLE SUPREME COURT.
II.
SECTIONS 113 AND 237 OF THE TAX CODE DO NOT REQUIRE PETITIONER TO REFLECT ITS AUTHORITY TO
PRINT IN ITS INVOICES. PETITIONER IS NOT REQUIRED BY ANY LAW OR REGULATION TO REFLECT ITS
AUTHORITY TO PRINT UPON ITS INVOICES. NEITHER IS THE FAILURE PENALIZED BY ANY LAW OR STATUTE
SUCH THAT THE INVOICES ARE RENDERED INADMISSIBLE.
III.
THE FAILURE TO STATE THE TIN-V IN PETITIONERS EXPORT SALES INVOICES SHOULD NOT INVALIDATE
PETITIONERS CLAIM. PETITIONERS EXPORT SALES INVOICES, WHICH ARE ADMISSIBLE, COMPETENT AND
MATERIAL EVIDENCE, SUFFICIENTLY PROVE PETITIONERS EXPORT SALES.
26

The Issues
The issues to be resolved in the instant case are (1) whether the absence of the BIR authority to print
or the absence of the TIN-V in petitioners export sales invoices operates to forfeit its entitlement to a
tax refund/credit of its unutilized input VAT attributable to its zero-rated sales; and (2) whether
petitioners failure to indicate "TIN-V" in its sales invoices automatically invalidates its claim for a tax
credit certification.
Petitioners Arguments
Petitioner contends that Sections 113 and 237 of the Tax Code, and even RR 7-95, do not require the
taxpayer to reflect its authority to print in its invoices.
27
Failure to print such authority is not even
penalized by any law or statute such that the invoices which do not contain the BIR authority for
petitioner to print its sales are rendered inadmissible in evidence.
28
Further, the authority to print under
Section 238 of the Tax Code is a requirement that is separate from and independent of the
information that ought to be reflected in the invoice or official receipt as mandated by Section 113,
in relation to Section 237 of the Tax Code.
29
The BIR has even ruled, in BIR Ruling DA-375-03, that
receipts which do not reflect that the taxpayer is VAT-registered do not automatically invalidate the
claim for an input tax credit.
30
Moreover, RR 2-90 (which the appellate court cited in the assailed
decision) does not state that failure to reflect the authority to print on the face of a sales invoice or
receipt results in the outright invalidation of such sales invoice or of the claim for tax credit/refund.
31
It
insists that RMC No. 42-03, which the CA likewise relied on in the assailed decision, does not apply, for
it relates to non-compliance with invoicing requirements; the authority to print is not among the
information required by law or any regulation to be reflected in petitioners invoices.
32

Petitioner asserts that even if it were assumed for the sake of argument that the BIR has issued a
regulation to the effect that failure to indicate the authority to print on the face of a sales invoice
would render it invalid, such regulation cannot prevail over the law that it seeks to implement. It insists
that any additional requirement imposed by the BIR for a valid claim other than those mandated by
law is invalid,
33
and that the provisions of a taxing act are not to be extended by implication.
34

Further, petitioner contends that it was authorized by the BIR to use a computerized accounting
system
35
through the letter-authority dated April 17, 1997.
36
It avers that even if the letter-authority was
not offered in evidence, the Court ought to take judicial notice thereof as an official act of the
Executive Branch.
37
Petitioner asserts that since its export sales invoices were computer-generated
under an approved computerized accounting system, it is no longer mandated to comply with the
requirements under Section 19 of RR No. 2-90 on the authentication and registration of books,
registers or records, authority to print receipts, sales or commercial invoices; and registration and
stamping of receipts and invoices. Such requirements apply only to manually generated receipts and
invoices. Even granting arguendo that it was still required by RR No. 7-95 to indicate its authority to
print in its invoices, it was not mandated to obtain an authority to print as the burden of securing the
same falls upon the printer of the receipts.
38

Petitioner further contends that the invoicing requirement of stating the TIN-V applies only to
domestic or local sales, given that the output tax (the input tax on the part of the local purchaser),
may be claimed by the latter as a credit against its output VAT. In such a case, the invoicing
requirements should be complied with in order for the local purchaser to have a valid basis in its
claim for crediting of input VAT. This, however, does not apply in the instant case for the following
reasons: petitioners export sales with its foreign purchaser is subject to zero-rated VAT; its foreign
purchaser cannot claim input VAT as it is governed by a foreign taxing jurisdiction; and the latter is
not a VAT-registered entity in the Philippines.
39
To buttress its claim, petitioner cites the decision of the
CA in Intel Technology Philippines, Inc. v. CIR.
40

In any case, petitioner argues, it sufficiently proved its export sales since, other than the subject
invoices, it also submitted in evidence the following: certifications of inward remittances; airway bills;
export declarations; certification by Eliseo Aurellado, the independent CPA duly commissioned by
the tax court, attesting that petitioner made export sales of P2,538,906,840.16 during the second
quarter of 1998.
Petitioner pleads that its application for tax credit/refund should be granted to serve the higher
interest of justice, equity and fairness, and claims that technicalities should give way to its substantive
rights.
41
While it may be true that taxes are the lifeblood of the government, technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging
to it and thereby enrich itself at the expense of its law-abiding citizens.
The Respondents Counter-Arguments
For his part, respondent Commissioner, through the Office of the Solicitor General, maintains that the
absence of the BIR authority to print and the TIN-V in its export sales invoices is fatal to petitioners
claim for refund.
42
Section 113 of the Tax Code enumerates the invoicing requirements for VAT-
registered persons, which include, among others, a statement that the seller is VAT-registered and the
sellers TIN.
43
Section 237 of the same Code, and Section 4.108.1 of RR No. 7-95, further require the
issuance of duly registered receipts or invoices for every sale or transaction, indicating thereon the
purchasers TIN.
44

A VAT-registered person is, therefore, required to issue a receipt or invoice with a TIN for every
consummated sale, and which, following Section 19 of RR No. 2-90,
45
must be duly registered with the
BIR as evidenced by a stamp of the taxpayers authority to print.
46
Respondent stresses that Section
238 of the Tax Code mandates all persons engaged in business to secure an authority to print
receipts or invoices from the BIR.
47
There is an additional requirement that such authority to print must
be stamped on every receipt or invoice of a VAT-registered person. While it is not explicitly
enumerated in Sections 113 and 237 of the Tax Code as one of the invoicing requirements, it can be
implied from said provisions that such information must be reflected on the receipt or invoice, as the
stamping of the said BIR authority to print is a proof of the invoice being BIR-registered.
48
Absent the
said authority to print, therefore, petitioners invoices are considered unregistered, and thus cannot
be used as supporting documents to prove its input tax and eventually, its claim for tax refund.
49

Respondent Commissioner further emphasizes that tax refunds/ credits are in the nature of tax
exemptions; hence, laws relating to them call for a strict application against the claimant.
50
The
burden to prove the entitlement to the refund also rests on the taxpayer, which, in this case, was not
proven by petitioner.
51
Moreover, petitioners argument, that it was authorized by the BIR to use a
computerized accounting system and as such is no longer required to secure an authority to print,
has no leg to stand on because the April 17, 1997 letter-authority
52
from the BIR was not formally
offered in evidence.
53
It insists that since the letter-authority is a mere correspondence containing
matters that are not of public knowledge and incapable of unquestionable demonstration, the Court
cannot take judicial notice thereof.
54
And even if petitioner was authorized to use computerized
invoices, it was not excused from complying with the stamping and invoicing requirements.
55

Lastly, respondent contends that it is incorrect for petitioner to state that the invoicing requirement
under the Tax Code finds relevance only in domestic or local sales. The provisions of the law and the
BIR regulations on invoicing do not distinguish whether the transaction is an export or local sale.
56

The Courts Ruling
The petition is partially granted.
Since the issues are interrelated, the Court shall delve into and resolve them simultaneously.
The pertinent provision of the Tax Code on VAT on the sale of goods or properties, particularly with
respect to export sales, is Section 106(A)(2)(a)(1).
57
The provision reads:
Section 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax.-- xxx
x x x x
(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
(a) Export Sales.--The term export sales means:
(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the transfer
of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent
in goods or services, and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
Based on the above provision, export sales, or sales outside the Philippines, are subject to VAT at 0%
rate if made by a VAT-registered person.
58
When applied to the tax base, the 0% rate obviously results
in no tax chargeable against the purchaser. The seller of such transactions charges no output tax,
but can claim a refund or tax credit certificate for the VAT previously charged by suppliers.
59

In the instant case, petitioner, as a VAT-registered as well as PEZA-registered entity engaged in the
export of advanced and large-scale ICs, is claiming a refund or issuance of a tax credit certificate in
the amount of P11,770,181.70 for VAT input taxes it paid on its domestic purchases of goods and
services covering the period April 1, 1998 to June 30, 1998. For petitioner (or other VAT-registered
persons or entities whose sales are zero-rated or effectively zero-rated) to validly claim a refund or tax
credit, Section 112(A) of the Tax Code provides:
Section 112. Refunds or Tax Credits of Input Tax.-
(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax
has not been applied against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of
the volume of sales.
60

Under Sections 106 (A)(2)(a)(1) in relation to 112(A) of the Tax Code, a taxpayer engaged in zero-
rated or effectively zero-rated transactions may apply for a refund or issuance of a tax credit
certificate for input taxes paid attributable to such sales upon complying with the following requisites:
(1) the taxpayer is engaged in sales which are zero-rated (like export sales) or effectively zero-rated;
(2) the taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the
taxable quarter when such sales were made; (4) the creditable input tax due or paid must be
attributable to such sales, except the transitional input tax, to the extent that such input tax has not
been applied against the output tax; and (5) in case of zero-rated sales under Section 106(A)(2)(a)(1)
and (2), Section 106(B), and Section 108(B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with BSP rules and regulations. It is
added that, "where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the amount of creditable input tax
due or paid cannot be directly or entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of the sales."
In this connection, petitioner, in order to prove that it was engaged in export sales during the second
quarter of 1998, offered in evidence copies of summary of export sales, sales invoices, official
receipts, airway bills, export declarations and certification of inward remittances during the said
period.
61
In addition, petitioners Certificate of Registration with RDO Control No. 96-540-000713
62

issued by the BIR and Certificate of Registration No. 95-133
63
issued by the PEZA were likewise offered
in evidence to prove that it is a VAT-registered entity as well as an Ecozone export enterprise.
To the mind of the Court, these documentary evidence submitted by petitioner, e.g., summary of
export sales, sales invoices, official receipts, airway bills and export declarations, prove that it is
engaged in the "sale and actual shipment of goods from the Philippines to a foreign country." In
short, petitioner is considered engaged in export sales (a zero-rated transaction) if made by a VAT-
registered entity. Moreover, the certification of inward remittances attests to the fact of payment "in
acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the BSP." Thus, petitioners evidence, juxtaposed with
the requirements of Sections 106 (A)(2)(a)(1) and 112(A) of the Tax Code, as enumerated earlier,
sufficiently establish that it is entitled to a claim for refund or issuance of a tax credit certificate for
creditable input taxes.
Significantly, the CTA and the CA have similarly found petitioner to be legally entitled to a claim for
refund or issuance of tax credit certificate of its unutilized VAT input taxes on domestic purchases of
goods and services attributable to its zero-rated sales. They denied petitioners claim, however, on
the ground that it purportedly failed to comply with the invoicing requirements under Sections 113
and 237 of the Tax Code since its sales invoices do not bear the BIR authority to print, and several of
the invoices do not indicate the TIN-V.
On the latter point, the Court disagrees with the CTA and CA. As correctly argued by petitioner, there
is no law or BIR rule or regulation requiring petitioners authority from the BIR to print its sales invoices
(BIR authority to print) to be reflected or indicated therein. Sections 113, 237 and 238 of the Tax Code
provide:
Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information
shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayers
identification number; and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with
the indication that such amount includes the value-added tax.
(B) Accounting Requirements. Notwithstanding the provisions of Section 233, all persons
subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and subsidiary purchase
journal on which the daily sales and purchases are recorded. The subsidiary journals shall
contain such information as may be required by the Secretary of Finance.
64
(emphasis
supplied)
Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal
revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-
five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared
at least in duplicate, showing the date of transaction, quantity, unit cost and description of
merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in
the amount of One Hundred Pesos (P100.00) or more, or regardless of amount, where the sale or
transfer is made by a person liable to value-added tax to another person also liable to value-added
tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address
of the purchaser, customer or client; Provided, further, That where the purchaser is a VAT-registered
person, in addition to the information herein required, the invoice or receipt shall further show the
Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time
the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the close of the taxable
year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any person subject to an internal revenue tax
from compliance with the provisions of this Section.
65
(emphasis supplied)
Sec. 238. Printing of Receipts or Sales or Commercial Invoices. All persons who are engaged in
business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or
commercial invoices before a printer can print the same.
No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or
invoices to be printed are serially numbered and shall show, among other things, the name, business
style, Taxpayer Identification Number (TIN) and business address of the person or entity to use the
same, and such other information that may be required by rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner.
All persons who print receipt or sales or commercial invoices shall maintain a logbook/register of
taxpayer who availed of their printing services. The logbook/register shall contain the following
information:
(1) Names, Taxpayer Identification Numbers of the persons or entities for whom the receipts or
sales or commercial invoices are printed; and
(2) Number of booklets, number of sets per booklet, number of copies per set and the serial
numbers of the receipts or invoices in each booklet. (emphasis supplied)
RR 2-90, as cited by respondent Commissioner, also states in its Section 19(d) that:
Section 19. Authentication and registration of books, register, or records; authority to print receipts,
sales or commercial invoices; and registration and stamping of receipts and invoices.
x x x x
(d) Registration and stamping of receipts and invoices
Before being used, the printed receipts, sales or commercial invoices shall be registered with the
revenue district officer where the principal place of business of the taxpayer is located within thirty
(30) days from the date of printing the same. The registration of the printed receipts or invoices shall
be evidenced by an appropriate stamp on the face of the taxpayers copy of the authority to print
as well as on the front cover, on the back of the middle invoice or receipt and on the back of the last
invoice or receipt of the registered booklet or pad, authenticated by the signature of the officer
authorized to place the stamp thereon. (emphasis supplied)
RR 7-95, the Consolidated VAT Regulations, also states in Section 4.108-1 that:
Section 4.108-1. Invoicing Requirements. All VAT-registered persons shall, for every sale or lease of
goods or properties or services, issue duly registered receipts or sales or commercial invoices which
must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer
or client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.
In the case of sale of real property subject to VAT and where the zonal or market value is higher than
the actual consideration, the VAT shall be separately indicated in the invoice or receipt.
Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices
or receipts and this shall be considered as a "VAT-invoice." All purchases covered by invoices other
than "VAT Invoice" shall not give rise to any input tax.
If the taxable person is also engaged in exempt operations, he should issue separate invoices or
receipts for the taxable and exempt operations. A "VAT-invoice" shall be issued only for sales of
goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code.
The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer
and the duplicate to be retained by the seller as part of his accounting records.
It is clear from the foregoing that while entities engaged in business are required to secure from the
BIR an authority to print receipts or invoices and to issue duly registered receipts or invoices, it is not
required that the BIR authority to print be reflected or indicated therein. Only the following items are
required to be indicated in the receipts or invoices: (1) a statement that the seller is a VAT-registered
entity followed by its TIN-V; (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) date of the
transaction; (4) quantity of merchandise; (5) unit cost; (6) description of merchandise or nature of
service; (7) the name, business style, if any, and address of the purchaser, customer or client in the
case of sales, receipt or transfers in the amount of P100.00 or more, or regardless of the amount,
where the sale or transfer is made by a person liable to VAT to another person also liable to VAT, or
where the receipt is issued to cover payment made as rentals, commissions, compensations or fees;
and (8) the TIN of the purchaser where the purchaser is a VAT-registered person.
It should be noted that petitioner is engaged in export sales, such that the purchasers of its goods are
foreign entities, which are, logically, not VAT-registered in our country or liable to pay VAT in our
jurisdiction. Items (7) and (8) in the above enumeration do not, thus, apply to petitioner; that is, they
need not be reflected or indicated in the invoices or receipts, given that it is an entity engaged in
export sales, and the purchasers of its goods which are foreign entities are not VAT-registered in our
country nor liable to pay VAT in our jurisdiction.
In any case, the above cited provisions of law and revenue regulations do not provide that failure to
reflect or indicate in the invoices or receipts the BIR authority to print, as well as the TIN-V, would result
in the outright invalidation of these invoices or receipts. Neither is it provided therein that such
omission or failure would result in the outright denial of a claim for tax credit/refund. Instead, Section
264 of the Tax Code imposes the penalty of fine and imprisonment for, among others, invoices or
receipts that do not truly reflect or contain all the required information, to wit:
Section 264. Failure or Refusal to Issue Receipts or Sales or Commercial Invoices, Violations Related to
the Printing of such Receipts or Invoices or Other Violations.
(a) Any person who, being required under Section 237 to issue receipts or sales or commercial
invoices, fails or refuses to issue such receipts or invoices, issues receipts or invoices that do not
truly reflect and/or contain all the informations required to be shown therein or uses multiple or
double receipts or invoices, shall, upon conviction for each act or omission, be punished by a
fine of not less than One thousand pesos (P1,000) but not more than Fifty thousand pesos
(P50,000) and suffer imprisonment of not less than two (2) years but not more than four (4)
years.
(b) Any person who commits any of the acts enumerated hereunder shall be penalized in the
same manner and to the same extent as provided for in this Section:
(1) Printing of receipts or sales or commercial invoices without authority from the Bureau
of Internal Revenue; or
(2) Printing of double or multiple sets of invoices or receipts;
(3) Printing of unnumbered receipts or sales or commercial invoices, not bearing the
name, business style, Taxpayer Identification Number, and business address of the
person or entity.
The appellate courts reliance on RMC No. 42-2003 is misplaced. The said Circular clarified, inter alia,
that failure to comply with the invoicing requirements on the documents supporting the sale of goods
and services would result in the disallowance of the claim for refund or issuance of a tax credit
certificate of creditable input taxes. The said Circular mentioned as an example the failure to state
the TIN of the taxpayer in the invoice or receipt. However, in petitioners case, the principal ground
for the denial of its claim for refund or issuance of a tax credit certificate is its failure to reflect or
indicate in its invoices the BIR authority to print. As earlier discussed, the BIR authority to print is not
one of the items required by law to be reflected or indicated in the invoices or receipts. In any case,
the said Circular was issued on July 15, 2003 by then Commissioner Guillermo L. Parayno, Jr., while
petitioners claim was filed on May 18, 1999. Hence, RMC No. 42-2003 cannot be applied
retroactively because to do so would be prejudicial to petitioner. In a long line of cases,
66
the Court
has affirmed that the rulings, circulars, rules and regulations promulgated by the Commissioner on
Internal Revenue would have no retroactive application if to so apply them would be prejudicial to
the taxpayers.
It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations
implementing them require entities engaged in business to secure a BIR authority to print invoices or
receipts and to issue duly registered invoices or receipts, it is not specifically required that the BIR
authority to print be reflected or indicated therein. Indeed, what is important with respect to the BIR
authority to print is that it has been secured or obtained by the taxpayer, and that invoices or
receipts are duly registered.
To stress, petitioner, as a VAT-registered entity, is engaged in export sales of advanced and large-
scale ICs and, as such, under Section 106 (A)(2)(a)(1) of the Tax Code, its sales or transactions are
subject to VAT at 0% rate. Further, subject to the requirements stated in Section 112(A), it is entitled to
claim refund or issuance of a tax credit certificate for input VAT taxes attributable to its export sales.
As the Court had the occasion to explain since no output VAT was imposed on the zero-rated export
sales, what the government reimburses or refunds to the claimant is the input VAT paid thus, the
necessity for the input VAT paid to be substantiated by purchase invoices or official receipts.
67
These
sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or
quality of goods sold and their selling price, and, taken collectively, are the best means to prove the
input VAT payments of the claimant.
68

In a claim for refund or issuance of a tax credit certificate attributable to zero-rated sales, what is to
be closely scrutinized is the documentary substantiation of the input VAT paid, as may be proven by
other export documents, rather than the supporting documents for the zero-rated export sales. And
since petitioner has established by sufficient evidence that it is entitled to a refund or issuance of a
tax credit certificate, in accordance with the requirements of Sections 106 (A)(2)(a)(1) and 112(A) of
the Tax Code, then its claim should not be denied, notwithstanding its failure to state on the invoices
the BIR authority to print and the TIN-V. Worthy of mentioning again is the fact that even the CTA and
the CA have found petitioner to be legally entitled to a claim for refund or issuance of a tax credit
certificate of its unutilized VAT input taxes on domestic purchases of goods and services attributable
to its zero-rated sales.
What applies to petitioner, as a PEZA-registered export enterprise, is the Courts pronouncement that
leniency in the implementation of the VAT is an imperative, precisely to spur economic growth in the
country and attain global competitiveness as envisioned in our laws.
69
The incentives offered to PEZA
enterprises, among which are tax exemptions and tax credits, ultimately redound to the benefit of
the national economy, enticing as they do more enterprises to invest and do business within the
zones, thus creating more employment opportunities and infusing more dynamism to the vibrant
interplay of market forces.
70

Even as the Court now holds that petitioner is legally entitled to a refund or issuance of a tax credit
certificate of its unutilized VAT input taxes on domestic purchases of goods and services attributable
to its zero-rated sales, the case shall nevertheless be remanded to the CTA for proper determination
and computation of petitioners tax credit/refund, considering that in the Report
71
of the
independent auditor, Eliseo Aurellado, only the amount of P9,688,809.00 was deemed as petitioners
valid claim for tax credit.
72
According to Aurellado, the difference of P2,081,372.32 from petitioners
input VAT claim of P11,770,181.70 was not supported by sufficient documentary proof.
73
The Court,
not being a trier of facts, cannot certainly decide this factual circumstance.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Decision dated August 12,
2004 of the CA in CA-G.R. SP No. 79327 is REVERSED and SET ASIDE. The instant case is REMANDED to
the Court of Tax Appeals for the determination and computation of petitioners tax credit/refund.
SO ORDERED.



12. Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 147295 February 16, 2007
THE COMMISIONER OF INTERNAL REVENUE, Petitioner,
vs.
ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.
D E C I S I O N
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari
1
under Rule 45 of the Rules of Court, assailing the
November 17, 2000 Decision
2
of the Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed
the January 3, 2000 Decision
3
of the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite
(Philippines) Hotel Corporation v. The Commissioner of Internal Revenue for Refund of VAT Payments.
The Facts
The facts as found by the appellate court are undisputed, thus:
Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations
Avenue in Manila. It leases 6,768.53 square meters of the hotels premises to the Philippine
Amusement and Gaming Corporation [hereafter, PAGCOR] for casino operations. It also caters food
and beverages to PAGCORs casino patrons through the hotels restaurant outlets. For the period
January (sic) 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to
pay the taxes on account of its tax exempt status.1awphi1.net
Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the
VAT to the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences of
non-payment of the tax. However, Acesite belatedly arrived at the conclusion that its transaction
with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998,
Acesite filed an administrative claim for refund with the CIR but the latter failed to resolve the same.
Thus on 29 May 1998, Acesite filed a petition with the Court of Tax Appeals [hereafter, CTA] which
was decided in this wise:
As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now
106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue
of a special law. Accordingly, the amounts of P21,413,026.78 and P8,739,865.24, representing the 10%
EVAT on its sales of food and services and gross rentals, respectively from PAGCOR shall, as a matter
of course, be refunded to the petitioner for having been inadvertently remitted to the respondent.
Thus, taking into consideration the prescribed portion of Petitioners claim for refund of P98,743.40,
and considering further the principle of solutio indebiti which requires the return of what has been
delivered through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64
computed as follows:
Total amount per claim 30,152,892.02
Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94

February 1996 26,205.04

March 1996 70,338.42

98,743.40


P30,054,148.64
vvvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR
THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64)
immediately.
SO ORDERED.
4

The Ruling of the Court of Appeals
Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR
was not only exempt from direct taxes but was also exempt from indirect taxes like the VAT and
consequently, the transactions between respondent Acesite and PAGCOR were "effectively zero-
rated" because they involved the rendition of services to an entity exempt from indirect taxes. Thus,
the CA affirmed the CTAs determination by ruling that respondent Acesite was entitled to a refund
of PhP 30,054,148.64 from petitioner.
The Issues
Hence, we have the instant petition with the following issues: (1) whether PAGCORs tax exemption
privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate; and (2)
whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section
108 (B)(3) of the Tax Code of 1997) legally applies to Acesite.
The petition is devoid of merit.
In resolving the first issue on whether PAGCORs tax exemption privilege includes the indirect tax of
VAT to entitle Acesite to zero percent (0%) VAT rate, we answer in the affirmative. We will however
discuss both issues together.
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions.
x x x x
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.
x x x x
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under
the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship
in connection with the operations of the casino(s) authorized to be conducted under this Franchise
and to those receiving compensation or other remuneration from the Corporation or operator as a
result of essential facilities furnished and/or technical services rendered to the Corporation or
operator. (Emphasis supplied.)
Petitioner contends that the above tax exemption refers only to PAGCORs direct tax liability and not
to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers
to PAGCOR. Although the law does not specifically mention PAGCORs exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons
or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision
clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt
status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties,
or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the
value. Verily, the seller or lessor has the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10%
of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services (a) Rate and base of tax There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any
person engaged in the sale of services x x x; Provided, that the following services performed in the
Philippines by VAT-registered persons shall be subject to 0%.
x x x x
(b) Transactions subject to zero percent (0%) rated.
x x x x
(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 (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of
such exemption to entities or individuals dealing with PAGCOR in casino operations are best
elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,
5

where the absolute tax exemption of the World Health Organization (WHO) upon an international
agreement was upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who constructed the
building owned by contractee WHO, and such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is to exempt the contractor so that no
contractors tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the
exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe
any indirect tax, like VAT, that may be shifted to PAGCOR.
Acesite paid VAT by mistake
Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT
pertaining to the effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has
clearly shown that it paid the subject taxes under a mistake of fact, that is, when it was not aware
that the transactions it had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,
6
we explained that "there is erroneous payment of taxes when a
taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an
existing exemption in his favor at the time the payment was made."
7
Such payment is held to be not
voluntary and, therefore, can be recovered or refunded.
8

Moreover, it must be noted that aside from not raising the issue of Acesites compliance with
pertinent Revenue Regulations on exemptions during the proceedings in the CTA, it cannot be
gainsaid that Acesite should have done so as it paid the VAT under a mistake of fact. Hence,
petitioners argument on this point is utterly tenuous.
Solutio indebiti applies to the Government
Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws
governing this principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:
Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.
Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
When money is paid to another under the influence of a mistake of fact, that is to say, on the
mistaken supposition of the existence of a specific fact, where it would not have been known that
the fact was otherwise, it may be recovered. The ground upon which the right of recovery rests is that
money paid through misapprehension of facts belongs in equity and in good conscience to the
person who paid it.
9

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner
of Internal Revenue v. Firemans Fund Insurance Company, where we held that: "Enshrined in the
basic legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the
expense of another. It goes without saying that the Government is not exempted from the
application of this doctrine."
10

Action for refund strictly construed; Acesite discharged the burden of proof
Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed
unless granted in the most explicit and categorical language, it is strictly construed against the
claimant who must discharge such burden convincingly.
11
In the instant case, respondent Acesite
had discharged this burden as found by the CTA and the CA. Indeed, the records show that Acesite
proved its actual VAT payments subject to refund, as attested to by an independent Certified Public
Accountant who was duly commissioned by the CTA. On the other hand, petitioner never disputed
nor contested respondents testimonial and documentary evidence. In fact, petitioner never
presented any evidence on its behalf.
One final word. The BIR must release the refund to respondent without any unreasonable delay.
Indeed, fair dealing is expected by our taxpayers from the BIR and this duty demands that the BIR
should refund without any unreasonable delay what it has erroneously collected.
12

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA is
hereby AFFIRMED. No costs.
SO ORDERED


13. Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 163835 July 7, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Respondent.
D E C I S I O N
BRION, J.:
Through a petition for review on certiorari,
1
petitioner Commissioner of Internal Revenue (CIR) seeks to
set aside the decision dated October 1, 2003
2
and the resolution dated May 26, 2004
3
of the Court of
Appeals (CA) in CA G.R. SP No. 61157. The assailed CA rulings affirmed the decision dated July 17,
2000
4
of the Court of Tax Appeals (CTA) in CTA Case No. 5551, partially granting respondent Eastern
Telecommunications Philippines, Inc.s (Easterns) claim for refund of unapplied input tax from its
purchase and importation of capital goods.
THE FACTUAL ANTECEDENTS
Eastern is a domestic corporation granted by Congress with a telecommunications franchise under
Republic Act (RA) No. 7617 on June 25, 1992. Under its franchise, Eastern is allowed to install, operate,
and maintain telecommunications system throughout the Philippines.
From July 1, 1995 to December 31, 1996, Eastern purchased various imported equipment,
machineries, and spare parts necessary in carrying out its business activities. The importations were
subjected to a 10% value-added tax (VAT) by the Bureau of Customs, which was duly paid by
Eastern.
On September 19, 1997, Eastern filed with the CIR a written application for refund or credit of
unapplied input taxes it paid on the imported equipment during the taxable years 1995 and 1996
amounting to P22,013,134.00. In claiming for the tax refund, Eastern principally relied on Sec. 10 of RA
No. 7617, which allows Eastern to pay 3% of its gross receipts in lieu of all taxes on this franchise or
earnings thereof.
5
In the alternative, Eastern cited Section 106(B) of the National Internal Revenue
Code of 1977
6
(Tax Code) which authorizes a VAT-registered taxpayer to claim for the issuance of a
tax credit certificate or a tax refund of input taxes paid on capital goods imported or purchased
locally to the extent that such input taxes
7
have not been applied against its output taxes.
8

To toll the running of the two-year prescriptive period under the same provision, Eastern filed an
appeal with the CTA on September 25, 1997 without waiting for the CIRs decision on its application
for refund. The CIR filed an Answer to Easterns appeal in which it raised the following special and
affirmative defenses:
6. [Easterns] claim for refund/tax credit is pending administrative investigation;
x x x x
8. [Easterns] exempting clause under its legislative franchise x x x should be understood or
interpreted as written, meaning, the 3% franchise tax shall be collected as substitute for any
internal revenue taxes x x x imposed on its franchise or gross receipts/earnings thereof x x x;
9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither a tax on
franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing
goods whether or not the taxpayer is engaged in business, and regardless of whether the
imported goods are intended for sale, barter or exchange;
10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance sales tax and
compensating tax x x x. Accordingly, the 3% franchise tax did not substitute the 10% [VAT] on
[Easterns] importation of equipment, machineries and spare parts for the use of its
telecommunication system;
11. Tax refunds are in the nature of tax exemptions. As such, they are regarded in derogation
of sovereign authority and to be construed in strictissimi juris against the person or entity
claiming the exemption. The burden is upon him who claims the exemption in his favour and
he must be able to justify his claim by the clearest grant of organic or statute law and cannot
be permitted to exist upon vague implication x x x;
12. Taxes paid and collected are presumed to have been made in accordance with the laws
and regulations; and
13. It is incumbent upon the taxpayer to establish its right to the refund and failure to sustain
the burden is fatal to the claim for refund.
9

Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the refund/credit of the
unapplied input taxes, not on the basis of the "in lieu of all taxes" provision of its legislative franchise,
10

but rather, on Section 106(B) of the Tax Code, which states:
SECTION 106. Refunds or tax credits of input tax.
x x x x
(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such
input taxes have not been applied against output taxes. The application may be made only within
two (2) years after the close of the taxable quarter when the importation or purchase was made.
11

[Emphases supplied.]
The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed refund/credit
as all the elements of the above provision were present: (1) Eastern was a VAT-registered entity which
paid 10% input taxes on its importations of capital equipment; (2) this input VAT remained unapplied
as of the first quarter of 1997; and (3) Eastern seasonably filed its application for refund/credit within
the two-year period stated in the law. However, the CTA noted that Eastern was able to substantiate
only P21,487,702.00 of its claimed amount of P22,013,134.00. The difference represented input taxes
that were allegedly paid but were not supported by the corresponding receipts, as found by an
independent auditor. Moreover, it excluded P5,360,634.00 in input taxes on imported equipment for
the year 1995, even when these were properly documented as they were already booked by Eastern
as part of the cost. Once input tax becomes part of the cost of capital equipment, it necessarily
forms part of depreciation. Thus, to grant the refund of the 1995 creditable input tax amounts to
twice giving Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA granted in part
Easterns appeal by declaring it entitled to a tax refund of P16,229,100.00, representing unapplied
input taxes on imported capital goods for the taxable year 1996.
12

The CIR filed, on August 3, 2000, a motion for reconsideration
13
of the CTAs decision. About a month
and a half later, it filed a supplemental motion for reconsideration dated September 15, 2000.
14
The
CTA denied the CIRs motion for reconsideration in its resolution dated September 20, 2000.
15
The CIR
then elevated the case to the CA through a petition for review under Rule 43 of the Rules of Court.
The CA affirmed the CTA ruling through its decision dated October 1, 2003
16
and its resolution dated
May 26, 2004,
17
denying the motion for reconsideration. Hence, the present petition.
THE PETITIONERS ARGUMENTS
The CIR takes exception to the CAs ruling that Eastern is entitled to the full amount of unapplied
input taxes paid for its purchase of imported capital goods that were substantiated by the
corresponding receipts and invoices. The CIR posits that, applying Section 104(A) of the Tax Code on
apportionment of tax credits, Eastern is entitled to a tax refund of only P8,814,790.15, instead of the
P16,229,100.00 adjudged by the CTA and the CA. Section 104(A) of the Tax Code states:
SEC. 104. Tax Credits.
(a) Creditable Input tax. -
x x x x
A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall
be allowed input tax credit as follows:
(A) Total input tax which can be directly attributed to transactions subject to value-added tax;
and
(B) A ratable portion of any input tax which cannot be directly attributed to either activity.
18

[Emphases supplied.]
To be entitled to a tax refund of the full amount of P16,229,100.00, the CIR asserts that Eastern must
prove that (a) it was engaged in purely VAT taxable transactions and (b) the unapplied input taxes it
claims as refund were directly attributable to transactions subject to VAT. The VAT returns of Eastern
for the 1st, 2nd, 3rd, and 4th quarters of 1996, however, showed that it earned income from both
transactions subject to VAT and transactions exempt from VAT;
19
the returns reported income earned
from taxable sales, zero-rated sales, and exempt sales in the following amounts:
1996 Taxable Sales Zero-Rated Sales Exempt Sales
1st Quarter 820,673.70 --- ---
2nd Quarter 3,361,618.59 225,088,899.07 140,111,655.85
3rd Quarter 2,607,168.96 169,821,537.80 187,712,657.16
4th Quarter 1,134,942.71 162,530,947.40 147,717,028.53
TOTAL 7,924,403.96 557,441,384.27 475,541,341.54
Total Amount of Sales 1,040,907,129.77
The taxable sales and zero-rated sales are considered transactions subject to VAT,
20
while exempt
sales refer to transactions not subject to VAT.
Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that this constitutes
as an admission on Easterns part that it engaged in transactions not subject to VAT. Hence, the
proportionate allocation of the tax credit to VAT and non-VAT transactions provided in Section
104(A) of the Tax Code should apply. Eastern is then entitled to only P8,814,790.15 as the ratable
portion of the tax credit, computed in the following manner:
Taxable Sales + Zero-rated
Sales

Total Sales
x Input Tax as found by the
CTA
= Refundable input
tax
7,924,403.96 + 557,445,384.97

1,040,907,129.77
x 16,229,100.00 = P8,814,790.15
THE RESPONDENTS ARGUMENTS
Eastern objects to the arguments raised in the petition, alleging that these have not been raised in
the Answer filed by the CIR before the CTA. In fact, the CIR only raised the applicability of Section
104(A) of the Tax Code in his supplemental motion for reconsideration of the CTAs ruling which,
notably, was filed a month and a half after the original motion was filed, and thus beyond the 15-day
reglementary period.
21
Accordingly, the applicability of Section 104(A) was never validly presented
as an issue before the CTA; this, Eastern presumes, is the reason why it was not discussed in the CTAs
resolution denying the motion for reconsideration. Eastern claims that for the CIR to raise such an
issue now would constitute a violation of its right to due process; following settled rules of procedure
and fair play, the CIR should not be allowed at the appeal level to change his theory of the case.
Moreover, in raising the question of whether Eastern was in fact engaged in transactions not subject
to VAT and whether the unapplied input taxes can be directly attributable to transactions subject to
VAT, Eastern posits that the CIR is effectively raising factual questions that cannot be the subject of
an appeal by certiorari before the Court.
Even if the CIRs arguments were considered, Eastern insists that the petition should nevertheless be
denied since the CA found that there was no evidence in the claim that it was engaged in non-VAT
transactions. The CA has ruled that:
The following requirements must be present before [Section 104(A)] of the [1977 Tax Code] can be
applied, to wit:
1. The person claiming the creditable input tax must be VAT-registered;
2. Such person is engaged in a transaction subject to VAT;
3. The person is also engaged in other transactions not subject to VAT; and
4. The ratable portion of any input tax cannot be directly attributed to either activity.
In the case at bar, the third and fourth requisites are not extant. It is undisputed that [Eastern] is VAT-
registered and the importation of [Easterns] telecommunications equipment, machinery, spare
parts, fiber optic cables, and the like, as found by the CTA, is a transaction subject to VAT. However,
there is no evidence on record that would evidently show that respondent is also engaged in other
transactions that are not subject to VAT. [Emphasis supplied.]
22

Given the parties arguments, the issue for resolution is whether the rule in Section 104(A) of the Tax
Code on the apportionment of tax credits can be applied in appreciating Easterns claim for tax
refund, considering that the matter was raised by the CIR only when he sought reconsideration of the
CTA ruling?
THE COURTS RULING
We find the CIRs petition meritorious.
The Rules of Court prohibits raising new issues on appeal; the question of the applicability of Section
104(A) of the Tax Code was already raised but the tax court did not rule on it
Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues on appeal:
SEC. 15. Questions that may be raised on appeal. Whether or not the appellant has filed a motion
for new trial in the court below, he may include in his assignment of errors any question of law or fact
that has been raised in the court below and which is within the issues framed by the parties.
The general rule is that appeals can only raise questions of law or fact that (a) were raised in the
court below, and (b) are within the issues framed by the parties therein.
23
An issue which was neither
averred in the pleadings nor raised during trial in the court below cannot be raised for the first time
on appeal.
24
The rule was made for the benefit of the adverse party and the trial court as well.
Raising new issues at the appeal level is offensive to the basic rules of fair play and justice and is
violative of a partys constitutional right to due process of law. Moreover, the trial court should be
given a meaningful opportunity to consider and pass upon all the issues, and to avoid or correct any
alleged errors before those issues or errors become the basis for an appeal.
25

Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax Code only in his
supplemental motion for reconsideration of the CTA decision (which was even belatedly filed), the
issue was not properly and timely raised and, hence, could not be considered by the CTA. By raising
the issue in his appeal before the CA, the CIR has violated the above-cited procedural rule.
Contrary to Easterns claim, we find that the CIR has previously questioned the nature of Easterns
transactions insofar as they affected the claim for tax refund in his motion for reconsideration of the
CTA decision, although it did not specifically refer to Section 104(A) of the Tax Code. We quote
relevant portions of the motion:
[W]e maintain that [Easterns] claims are not creditable input taxes under [Section 104(A) of the Tax
Code]. What the law contemplates as creditable input taxes are only those paid on purchases of
goods and services specifically enumerated under [Section 104 (A)] and that such input tax must
have been paid by a VAT[-]registered person/entity in the course of trade or business. It must be
noted that [Eastern] failed to prove that such purchases were used in their VAT[-]taxable business.
[Easterns pieces of] evidence are not purchases of capital goods and do not fall under the
enumeration x x x.
It is significant to point out here that refund of input taxes on capital goods shall be allowed only to
the extent that such capital goods are used in VAT[-]taxable business. x x x a perusal of the evidence
submitted before [the CTA] does not show that the alleged capital goods were used in VAT[-]taxable
business of [Eastern] x x x. [Emphases supplied.]
26

In raising these matters in his motion for reconsideration, the CIR put forward the applicability of
Section 104(A) because, essentially, the applicability of the provision boils down to the question of
whether the purchased capital goods which a taxpayer paid input taxes were also used in a VAT-
taxable business, i.e., transactions that were subject to VAT, in order for them to be
refundable/creditable. Once proved that the taxpayer used the purchased capital goods in a both
VAT taxable and non-VAT taxable business, the proportional allocation of tax credits stated in the law
necessarily applies. This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95,
entitled Consolidated Value-Added Tax Regulations, which states:
SEC. 4.106-1. Refunds or tax credits of input tax. x x x x
(b) Capital Goods. Only a VAT-registered person may apply for issuance of a tax credit certificate
or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be
allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the
importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods
are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall
only be the ratable portion corresponding to the taxable operations. [Emphasis supplied.]
That the CTA failed to rule on this question when it resolved the CIRs motion for reconsideration
should not be taken against the CIR. It was the CTA which committed an error when it failed to avail
of that "meaningful opportunity to avoid or correct any alleged errors before those errors become
the basis for an appeal."
27
1avvphi1
Exceptions to the general rule; Easterns VAT returns reporting income from exempt sales are matters
of record that the tax court should have considered
The rule against raising new issues on appeal is not without exceptions; it is a procedural rule that the
Court may relax when compelling reasons so warrant or when justice requires it. What constitutes
good and sufficient cause that would merit suspension of the rules is discretionary upon the courts.
28

Former Senator Vicente Francisco, a noted authority in procedural law, cites an instance when the
appellate court may take up an issue for the first time:
The appellate court may, in the interest of justice, properly take into consideration in deciding the
case matters of record having some bearing on the issue submitted which the parties failed to raise
or the lower court ignored, although they have not been specifically raised as issues by the
pleadings. This is in consonance with the liberal spirit that pervades the Rules of Court, and the
modern trend of procedure which accord the courts broad discretionary power, consistent with the
orderly administration of justice, in the decision of cases brought before them.
29
[Emphasis supplied.]
As applied in the present case, even without the CIR raising the applicability of Section 104(A), the
CTA should have considered it since all four of Easterns VAT returns corresponding to each taxable
quarter of 1996 clearly stated that it earned income from exempt sales, i.e., non-VAT taxable sales.
Easterns quarterly VAT returns are matters of record. In fact, Eastern included them in its formal offer
of evidence before the CTA "to prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-
rated sales." By declaring income from exempt sales, Eastern effectively admitted that it engaged in
transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill any output tax
on his sales to his customers and, corollarily, is not allowed any credit or refund of the input taxes he
paid on his purchases.
30
This non-crediting of input taxes in exempt transactions is the underlying
reason why the Tax Code adopted the rule on apportionment of tax credits under Section 104(A)
whenever a VAT-registered taxpayer engages in both VAT taxable and non-VAT taxable sales. In the
face of these disclosures by Eastern, we thus find the CAs the conclusion that "there is no evidence
on record that would evidently show that [Eastern] is also engaged in other transactions that are not
subject to VAT" to be questionable.
31

Also, we disagree with the CAs declaration that:
The mere fact that [Easterns] Quarterly VAT Returns confirm that [Easterns] transactions involved
zero-rated sales and exempt sales do not sufficiently establish that the same were derived from
[Easterns] transactions that are not subject to VAT. On the contrary, the transactions from which
[Easterns] sales were derived are subject to VAT but are either zero[-]rated (0%) or otherwise
exempted for falling within the transactions enumerated in [Section 102(B) or Section 103] of the Tax
Code.
32
[Emphasis supplied.]
Section 103 of the Tax Code
33
is an enumeration of transactions exempt from VAT. Explaining the
relation between exempt transactions in Section 103 and claims for tax refunds, the Court declared
in CIR v. Toshiba Equipment (Phils.), Inc. that:
Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-
exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they had paid thereon.
34

The mere declaration of exempt sales in the VAT returns, whether based on Section 103 of the Tax
Code or some other special law, should have prompted the CA to apply Section 104(A) of the Tax
Code to Easterns claim. It was thus erroneous for the appellate court to rule that the declaration of
exempt sales in Easterns VAT return, which may correspond to exempt transactions under Section
103, does not indicate that Eastern was also involved in non-VAT transactions.
Exception to general rule; taxpayer claiming refund has the duty to prove entitlement thereto
Another exemption from the rule against raising new issues on appeal is when the question involves
matters of public importance.
35

The power of taxation is an inherent attribute of sovereignty; the government chiefly relies on taxation
to obtain the means to carry on its operations. Taxes are essential to its very existence;
36
hence, the
dictum that "taxes are the lifeblood of the government." For this reason, the right of taxation cannot
easily be surrendered; statutes granting tax exemptions are considered as a derogation of the
sovereign authority and are strictly construed against the person or entity claiming the exemption.
Claims for tax refunds, when based on statutes granting tax exemption or tax refund, partake of the
nature of an exemption; thus, the rule of strict interpretation against the taxpayer-claimant similarly
applies.
37

The taxpayer is charged with the heavy burden of proving that he has complied with and satisfied all
the statutory and administrative requirements to be entitled to the tax refund. This burden cannot be
offset by the non-observance of procedural technicalities by the governments tax agents when the
non-observance of the remedial measure addressing it does not in any manner prejudice the
taxpayers due process rights, as in the present case.
Eastern cannot validly claim to have been taken by surprise by the CIRs arguments on the relevance
of Section 104(A) of the Tax Code, considering that the arguments were based on the reported
exempt sales in the VAT returns that Eastern itself prepared and formally offered as evidence. Even if
we were to consider the CIRs act as a lapse in the observance of procedural rules, such lapse does
not work to entitle Eastern to a tax refund when the established and uncontested facts have shown
otherwise. Lapses in the literal observance of a rule of procedure may be overlooked when they
have not prejudiced the adverse party and especially when they are more consistent with upholding
settled principles in taxation.
WHEREFORE, we GRANT the petitioners petition for review on certiorari, and REVERSE the decision of
the Court of Appeals in CA G.R. SP No. 61157, promulgated on October 1, 2003, as well as its
resolution of May 26, 2004. We order the REMAND of the case to the Court of Tax Appeals to
determine the proportionate amount of tax credit that respondent is entitled to, consistent with our
ruling above. Costs against the respondent.
SO ORDERED.