MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission,
value added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power
Production Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric
Power Industry Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax
Reform Act of 1997 (1997 Tax Code), when it decreed that sales of power by generation companies
shall be subjected to a zero rate of VAT. Pursuant to EPIRA, Mindanao I and II filed with the CIR
claims for refund or tax credit of accumulated unutilized and/or excess input taxes due to VAT
zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.

The Facts

On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT)
contract with the Philippine National Oil Corporation – Energy Development Company (PNOC-EDC)
for finance, engineering, supply, installation, testing, commissioning, operation, and maintenance of
a 48.25 megawatt geothermal power plant, provided that PNOC-EDC shall supply and deliver steam
to Mindanao II at no cost. In turn, Mindanao II shall convert the steam into electric capacity and
energy for PNOC-EDC and shall deliver the same to the National Power Corporation (NPC) for and
in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated power and delivery of electric
capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated
power by generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and
accumulates therefrom creditable input taxes. Pursuant to the provisions of the National Internal
Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated input tax credits to offset
its output tax liability. Considering, however that its only revenue-generating activity is VAT zero-
rated under RA No. 9136, Mindanao II’s input tax credits remain unutilized.

Considering that it has accumulated unutilized creditable input taxes from its only income-
generating activity, Mindanao II filed an application for refund and/or issuance of tax credit
certificate with the BIR.

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the
twin requirements for VAT zero rating under EPIRA: (1) it is a generation

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of
₱7,703,957.79, after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from
Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to
₱522,059.91 were disallowed for failure to meet invoicing requirements, while the input VAT on
the sale of the Nissan Patrol was reduced by ₱18,181.82 because the output VAT for the sale was
not included in the VAT declarations.
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction and is not incidental to its VAT zero-rated
operations. Moreover, the disallowed input taxes substantially complied with the requirements for
refund or tax credit.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s
motion for partial reconsideration partly meritorious, and rendered an Amended Decision20 on 26
June 2009.

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the
sale of the Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover,
Mindanao II’s submitted documents failed to substantiate the requisites for the refund or credit
claims.

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc (3) the sale of the fully-depreciated Nissan Patrol is
incidental to Mindanao II’s VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II
failed to comply with the substantiation requirements provided under Section 113(A) in relation to
Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of
Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.

The Issues

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax
Code, as amended in that the sale of the fully depreciated Nissan Patrol is a one-time
transaction and is not incidental to the VAT zero-rated operation of Mindanao II.

The Court’s Ruling

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction
in the course of its business; hence, it is an isolated transaction that should not have been subject to
10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

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

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income and whether or not it sells exclusively
to members or their guests), or government entity.

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

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

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

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to
deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course
of Mindanao II’s business which should be liable for VAT.
SECOND DIVISION

KEPCO PHILIPPINES
CORPORATION,
Petitioner,

- versus -

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
x --------------------------------------------------------------------------------------------------------x

DECISION

Petitioner KEPCO Philippines Corporation (Kepco) is a VAT-registered independent

power producer engaged in the business of generating electricity. It exclusively sells electricity
to National Power Corporation (NPC), an entity exempt from taxes under Section 13 of Republic
Act No. 6395 (RA No. 6395).[3]

Records show that on December 4, 2001, Kepco filed an application for zero-rated sales
with the Revenue District Office (RDO) No. 54 of the Bureau of Internal Revenue (BIR). Kepcos
application was approved under VAT Ruling 64-01. Accordingly, for taxable year 2002, it filed
four Quarterly VAT Returns declaring zero-rated sales in the aggregate amount
of P3,285,308,055.85
In the course of doing business with NPC, Kepco claimed expenses reportedly sustained
in connection with the production and sale of electricity with NPC. Based on Kepcos calculation,
it paid input VAT amounting to P11,710,868.86 attributing the same to its zero-rated sales of
electricity with NPC.
Thus, on April 20, 2004, Kepco filed before the Commissioner of Internal
Revenue (CIR) a claim for tax refund covering unutilized input VAT payments attributable to its
zero-rated sales transactions for taxable year 2002.
In its Answer,[8] respondent CIR averred that claims for refund were strictly construed against
the taxpayer as it was similar to a tax exemption. It asserted that the burden to show that the
taxes were erroneous or illegal lay upon the taxpayer. Thus, failure on the part of Kepco to prove
the same was fatal to its cause of action because it was its duty to prove the legal basis of the
amount being claimed as a tax refund.

On February 26, 2007, the CTA Second Division ruled that Kepco was only able to
properly substantiate P1,451,788,865.52 as its zero-rated sales. After factoring, only 44.19% of
the validly supported input VAT payments being claimed could be considered.

The CTA Second Division likewise disallowed the P5,170,914.20 of Kepcos claimed
input VAT due to its failure to comply with the substantiation requirement.Specifically, the
CTA Second Division wrote:

[i]nput VAT on purchases supported by invoices or official receipts

stamped with TIN-VAT shall be disallowed because these purchases are
not supported by VAT Invoices under the contemplation of the
aforequoted invoicing requirement. To be considered a VAT Invoice, the
TIN-VAT must be printed, and not merely stamped.Consequently,
purchases supported by invoices or official receipts, wherein the TIN-VAT
are not printed thereon, shall not give rise to any input VAT. Likewise,
input VAT on purchases supported by invoices or official receipts which
are not NON-VAT are disallowed because these invoices or official receipts
are not considered as VAT Invoices.Hence, the claims for input VAT on
purchases referred to in item (e) are properly disallowed.

Accordingly, the CTA Second Division partially granted Kepcos claim for refund of
unutilized input VAT for taxable year 2002. The

Kepco moved for partial reconsideration, but the CTA Second Division denied it.

On February 20, 2008, the CTA En Banc dismissed the petition[18] and ruled that in order
for Kepco to be entitled to its claim for refund/issuance of tax credit certificate representing
unutilized input VAT attributable to its zero-rated sales for taxable year 2002, it must comply
with the substantiation requirements under the appropriate Revenue Regulations, i.e. Revenue
Regulations 7-95.[19] Thus, it concluded that the Court in Division was correct in disallowing a
portion of Kepcos claim for refund on the ground that input taxes on Kepcos purchase of goods
and services were not supported by invoices and receipts printed with TIN-VAT.[20]
ISSUE:

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED ITS

DISCRETION AMOUNTING TO LACK OF EXCESS OF JURISDICTION
WHEN IT DISALLOWED PETITIONERS CLAIM ON THE GROUND
 THAT TIN-VAT IS NOT IMPRINTED ON THE INVOICES AND
OFFICIAL RECEIPTS.

III.

THE COURT OF TAX APPEALS EN BANC GRAVELY ABUSED ITS

DISCRETION WHEN IT MADE A DISTINCTION BETWEEN INVOICES
AND OFFICIAL RECEIPTS AS SUPPORTING DOCUMENTS TO
CLAIM FOR AN INPUT VAT REFUND.[23]

At the outset, the Court has noticed that although this petition is denominated as Petition
for Review on Certiorari under Rule 45 of the Rules of Court, Kepco, in its assignment of errors,
impugns against the CTA En Banc grave abuse of discretion amounting to lack or excess of
jurisdiction, which are grounds in a petition for certiorari under Rule 65 of the Rules of
Court. Time and again, the Court has emphasized that there is a whale of difference between a
Rule 45 petition (Petition for Review on Certiorari) and a Rule 65 petition (Petition for
Certiorari.) A Rule 65 petition is an original action that dwells on jurisdictional errors of
whether a lower court acted without or in excess of its jurisdiction or with grave abuse of
discretion.[24] A Rule 45 petition, on the other hand, is a mode of appeal which centers on the
review on the merits of a judgment, final order or award rendered by a lower court involving
purely questions of law.[25] Thus, imputing jurisdictional errors against the CTA is not proper in
this Rule 45 petition. Kepco failed to follow the correct procedure. On this point alone, the Court
can deny the subject petition outright.

At any rate, even if the Court would disregard this procedural flaw, the petition would
still fail.

Kepco argues that the 1997 National Internal Revenue Code (NIRC) does not require the
imprinting of the word zero-rated on invoices and/or official receipts covering zero-rated
sales.[26] It claims that Section 113 in relation to Section 237 of the 1997 NIRC does not mention
the requirement of imprinting the words zero-rated to purchases covering zero-rated
transactions.[27] Only Section 4.108-1 of Revenue Regulation No. 7-95 (RR No. 7-95) required
the imprinting of the word zero-rated on the VAT invoice or receipt.[28]Thus, Section 4.108-1 of
RR No. 7-95 cannot be considered as a valid legislation considering the long settled rule that
administrative rules and regulations cannot expand the letter and spirit of the law they seek to
enforce.[29]

The Court does not agree.

The issue of whether the word zero-rated should be imprinted on invoices and/or official receipts
as part of the invoicing requirement has been settled in the case of Panasonic Communications
Imaging Corporation of the Philippines vs. Commissioner of Internal Revenue[30] and restated in
the later case of J.R.A. Philippines, Inc. v. Commissioner.[31]In the first case, Panasonic
Communications Imaging Corporation (Panasonic), a VAT-registered entity, was engaged in the
production and exportation of plain paper copiers and their parts and accessories. From April
1998 to March 31, 1999, Panasonic generated export sales amounting to US$12,819,475.15 and
US$11,859,489.78 totaling US$24,678,964.93. Thus, it paid input VAT of P9,368,482.40 that it
attributed to its zero-rated sales. It filed applications for refund or tax credit on what it had
paid. The CTA denied its application. Panasonics export sales were subject to 0% VAT under
Section 106(A)(2)(a)(1) of the 1997 NIRC but it did not qualify for zero-rating because the word
zero-rated was not printed on Panasonics export
invoices. This omission, according to the CTA, violated the invoicing requirements of Section
4.108-1 of RR No. 7-95. Panasonic argued, however, that in requiring the printing on its sales
invoices of the word zero-rated, the Secretary of Finance unduly expanded, amended, and
modified by a mere regulation (Section 4.108-1 of RR No. 7-95) the letter and spirit of Sections
113 and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337.[32] Panasonic stressed
that Sections 113 and 237 did not necessitate the imprinting of the word zero-rated for its zero-
rated sales receipts or invoices. The BIR integrated this requirement only after the enactment of
R.A. No. 9337 on November 1, 2005, a law that was still inexistent at the time of the
transactions. Denying Panasonics claim for refund, the Court stated:

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority

granted to the Secretary of Finance under Section 245 of the 1977 NIRC
(Presidential Decree 1158) for the efficient enforcement of the tax code and
of course its amendments. The requirement is reasonable and is in accord
with the efficient collection of VAT from the covered sales of goods and
services. As aptly explained by the CTAs First Division, the appearance of
the word zero-rated on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their purchases
when no VAT was actually paid. If, absent such word, a successful claim
for input VAT is made, the government would be refunding money it did
not collect.
Further, the printing of the word zero-rated on the invoice helps
segregate sales that are subject to 10% (now 12%) VAT from those sales
that are zero-rated. Unable to submit the proper invoices, petitioner
Panasonic has been unable to substantiate its claim for refund.[33]
 Following said ruling, Section 4.108-1 of RR 7-95[34] neither expanded nor supplanted
the tax code but merely supplemented what the tax code already defined and discussed. In fact,
the necessity of indicating zero-rated into VAT invoices/receipts became more apparent when
the provisions of this revenue regulation was later integrated into RA No. 9337,[35] the
amendatory law of the 1997 NIRC. Section 113, in relation to Section 237 of the 1997 NIRC, as
amended by RA No. 9337, now reads:
SEC. 113. Invoicing and Accounting Requirements for VAT-
Registered Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or
properties; and
(2) A VAT official receipt for every lease of goods or properties, and
for every sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT Official
Receipt. - The following information shall be indicated in the VAT invoice
or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed
by his taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to
pay to the seller with the indication that such amount includes the value-
added tax: Provided, That:
(a) The amount of the tax shall be shown as a separate item
in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the term
"VAT-exempt sale" shall be written or printed prominently on
the invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-added
tax, the term "zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves goods, properties or services some of
which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and zero-
rated components, and the calculation of the value-added tax on
each portion of the sale shall be shown on the invoice or
receipt: Provided, That the seller may issue separate invoices or
receipts for the taxable, exempt, and zero-rated components of the
sale.
(3) The date of transaction, quantity, unit cost and description of
the goods or properties or nature of the service; and
 (4) In the case of sales in the amount of one thousand pesos
(P1,000) or more where the sale or transfer is made to a VAT-registered
person, the name, business style, if any, address and taxpayer
identification number (TIN) of the purchaser, customer or client.
(C) 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.
xxxx
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. -
All persons subject to an internal revenue tax shall, for each sale and
transfer of merchandise or for services rendered valued at Twenty-five
pesos (P25.00) or more, issue duly registered receipts or sale 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 where the receipt is issued to cover
payment made as rentals, commissions, compensation 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.
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. [Emphases supplied]

Evidently, as it failed to indicate in its VAT invoices and receipts that the transactions
were zero-rated, Kepco failed to comply with the correct substantiation requirement for zero-
rated transactions.

Kepco then argues that non-compliance of invoicing requirements should not result in the
denial of the taxpayers refund claim. Citing Atlas Consolidated Mining & Development
Corporation vs. Commissioner of Internal Revenue,[36] it claims that a party who fails to issue
VAT official receipts/invoices for its sales should only be imposed penalties as provided under
Section 264 of the 1997 NIRC.[37]
 The Court has read the Atlas decision, and has not come across any categorical ruling
that refund should be allowed for those who had not complied with the substantiation
requirements. It merely recited Section 263 which provided for penalties in case of Failure or
refusal to Issue Receipts or Sales or Commercial Invoices, Violations related to the Printing of
such Receipts or Invoices and Other Violations. It does not categorically say that the claimant
should be refunded. At any rate, Section 264 (formerly Section 263)[38] of the 1997 NIRC was
not intended to excuse the compliance of the substantive invoicing requirement needed to justify
a claim for refund on input VAT payments.

Furthermore, Kepco insists that Section 4.108.1 of Revenue Regulation 07-95 does not
require the word TIN-VAT to be imprinted on a VAT-registered persons supporting invoices and
official receipts[39] and so there is no reason for the denial of its P4,720,725.63 claim of input
tax.[40]

In this regard, Internal Revenue Regulation 7-95 (Consolidated Value-Added Tax

Regulations) is clear. Section 4.108-1 thereof reads:

Only VAT registered persons are required to print their TIN

followed by the word VAT in their invoice 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.

Contrary to Kepcos allegation, the regulation specifically requires the VAT registered
person to imprint TIN-VAT on its invoices or receipts. Thus, the Court agrees with the CTA
when it wrote: [T]o be considered a VAT invoice, the TIN-VAT must be printed, and not merely
stamped. Consequently, purchases supported by invoices or official receipts, wherein the TIN-
VAT is not printed thereon, shall not give rise to any input VAT. Likewise, input VAT on
purchases supported by invoices or official receipts which are NON-VAT are disallowed because
these invoices or official receipts are not considered as VAT Invoices.[41]

Kepco further argues that under Section 113(A) of the 1997 NIRC, invoices and official
receipts are used interchangeably for purposes of substantiating input VAT.[42]Hence, it claims
that the CTA should have accepted its substantiation of input VAT on (1) P64,509.50 on
purchases of goods with official receipts and (2) P256,689.98 on purchases of services with
invoices.[43]

The Court is not persuaded.

Under the law, a VAT invoice is necessary for every sale, barter or exchange of goods or
properties while a VAT official receipt properly pertains to every lease of goods or properties,
and for every sale, barter or exchange of services.[44] In Commissioner of Internal Revenue v.
Manila Mining Corporation,[45] the Court distinguished an invoice from a receipt, thus:

A sales or commercial invoice is a written account of goods sold or

services rendered indicating the prices charged therefor or a list by
whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer
goods and services.

A receipt on the other hand is a written acknowledgment of the fact

of payment in money or other settlement between seller and buyer of
goods, debtor or creditor, or person rendering services and client or
customer.

In other words, the VAT invoice is the sellers best proof of the sale of the goods or
services to the buyer while the VAT receipt is the buyers best evidence of the payment of goods
or services received from the seller. Even though VAT invoices and receipts are normally issued
by the supplier/seller alone, the said invoices and receipts, taken collectively, are necessary to
substantiate the actual amount or quantity of goods sold and their selling price (proof of
transaction), and the best means to prove the input VAT payments (proof of payment).[46] Hence,
VAT invoice and VAT receipt should not be confused as referring to one and the same
thing. Certainly, neither does the law intend the two to be used alternatively.

Although it is true that the CTA is not strictly governed by technical rules of
evidence,[47] the invoicing and substantiation requirements must, nevertheless, be followed
because it is the only way to determine the veracity of Kepcos claims. Verily, the CTA En
Banc correctly disallowed the input VAT that did not meet the required standard of
substantiation.

The CTA is devoted exclusively to the resolution of tax-related issues and has
unmistakably acquired an expertise on the subject matter. In the absence of abuse or reckless
exercise of authority,[48] the CTA En Bancs decision should be upheld.
 The Court has always decreed that tax refunds are in the nature of tax exemptions which
represent a loss of revenue to the government. These exemptions, therefore, must not rest on
vague, uncertain or indefinite inference, but should be granted only by a clear and unequivocal
provision of law on the basis of language too plain to be mistaken. Such exemptions must be
strictly construed against the taxpayer, as taxes are the lifeblood of the government.[49]

WHEREFORE, the petition is DENIED.

SO ORDERED.
THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE
Petitioner,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,
FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:

July 28, 2006

x---------------------------------------------------------------------------------x

DECISION

TINGA, J.:

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

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

Pursuant to a government program of privatization, NDC decided to sell to private

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

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

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one
hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph
11.02 of the contract stipulated that [v]alue-added tax, if any, shall be for the account of the
PURCHASER.[5] Per arrangement, an irrevocable confirmed Letter of Credit previously filed as
bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a
formal request for a ruling on whether or not the sale of the vessels was subject to VAT had
already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed
that should no favorable ruling be received from the BIR, NDC was authorized to draw on the
Letter of Credit upon written demand the amount needed for the payment of the VAT on the
stipulated due date, 20 December 1988.[6]
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88
dated 14 December 1988 from the BIR, holding that the sale of the vessels was subject to the
10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its
transactions incident to its normal VAT registered activity of leasing out personal property
including sale of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT].[7]

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

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

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

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

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

To the mind of the Court, the arguments raised in the present petition have already been
adequately discussed and refuted in the rulings assailed before us. Evidently, the petition should
be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for upholding
the refund of VAT payments, and the subsequent disquisitions by the lower courts on the
applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately
irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.[15] It is the end user of consumer goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the end users by the providers of these goods or
services[16] who in turn may credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT).[17] The final purchase by the
end consumer represents the final link in a production chain that itself involves several
transactions and several acts of consumption. The VAT system assures fiscal adequacy through
the collection of taxes on every level of consumption,[18] yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their respective VAT liabilities to
the next link of the chain until finally the end consumer shoulders the entire tax liability.

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

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

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,

September 30, 1955 (97 Phil. 992), the term carrying on business does not mean
the performance of a single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the acts normally incident
thereof; while doing business conveys the idea of business being done, not from
time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
 REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of
business is what is usually done in the management of trade or business. [Idmi v.
Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol.
10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that course

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

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

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

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

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

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

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

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
 EN BANC

November 29, 2016

G.R. No. 210588

SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF

INTERNAL REVENUE KIM S. JACINTO-HENARES, Petitioners
vs.
REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE PLASTIC
ENTERPRISES CORPORATION, Respondents

DECISION

BRION, J.:

This is a direct recourse to this Court from the Regional Trial Court (RTC), Branch 58,
Angeles City, through a petition for review on certiorari1 under Rule 45 of the Rules of
Court on a pure question of law. The petition seeks the reversal of the November 8,
2013 decision2 of the RTC in SCA Case No. 12-410. In the assailed decision, the RTC
declared Revenue Regulation (RR) No. 2-2012 unconstitutional and without force and
effect.

The Facts

In response to reports of smuggling of petroleum and petroleum products and to ensure

the correct taxes are paid and collected, petitioner Secretary of Finance Cesar V.
Purisima - pursuant to his authority to interpret tax laws3 and upon the recommendation
of petitioner Commissioner of Internal Revenue (CIR) Kim S. Jacinto-Henares signed
RR 2-2012 on February 17, 2012.

The RR requires the payment of value-added tax (VAT) and excise tax on the
importation of all petroleum and petroleum products coming directly from abroad and
brought into the Philippines, including Freeport and economic zones (FEZs).4 It then
allows the credit or refund of any VAT or excise tax paid if the taxpayer proves that the
petroleum previously brought in has been sold to a duly registered FEZ locator and
used pursuant to the registered activity of such locator.5
In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ
of a petroleum product, and must thereafter prove the use of the petroleum product for
the locator's registered activity in order to secure a credit for the taxes paid.

On March 7, 2012, Carmelo F. Lazatin, in his capacity as Pampanga First District

Representative, filed a petition for prohibition and injunction6 against the petitioners to
annul and set aside RR 2-2012.

Lazatin posits that Republic Act No. (RA) 94007 treats the Clark Special Economic Zone
and Clark Freeport Zone (together hereinafter referred to as Clark FEZ) as a separate
customs territory and allows tax and duty-free importations of raw materials, capital and
equipment into the zone. Thus, the imposition of VAT and excise tax, even on the
importation of petroleum products into FEZs (like Clark FEZ), directly contravenes the
law.

The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in

the proceedings as a co-petitioner and accordingly entered its appearance and moved
for leave of court to file its petition-in- intervention.8

EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is
implemented. EPEC insists that RR 2-2012's mechanism of requiring even locators to
pay the tax first and to subsequently claim a credit or to refund the taxes paid effectively
removes the locators' tax-exempt status.

The RTC initially issued a temporary restraining order to stay the implementation of RR
2-2012. It eventually issued a writ of preliminary injunction in its order dated April 4,
2012.

The petitioners questioned the issuance of the writ. On May 17, 2012, they filed a
petition for certiorari9 before the Court of Appeals (CA) assailing the RTC's order. The
CA granted the petition10 and denied the respondents' subsequent motion for
reconsideration.11

The respondents stood their ground by filing a petition for review on certiorari before this
Court (G.R. No. 208387) to reinstate the RTC's injunction against the implementation of
RR 2-2012, and by moving for the issuance of a temporary restraining order and/or writ
of preliminary injunction. We denied the motion but nevertheless required the petitioners
to comment on the petition.

The proceedings before the RTC in the meanwhile continued. On April 18, 2012,
petitioner Lazatin amended his original petition, converting it to a petition for declaratory
relief.12 The RTC admitted the amended petition and allowed EPEC to intervene.

In its decision dated November 8, 2013, the RTC ruled in favor of Lazatin and EPEC.
First, on the procedural aspect, the RTC held that the original petition's amendment is
allowed by the rules and that amendments are largely preferred; it allowed the
amendment in the exercise of its sound judicial discretion to avoid multiplicity of suits
and to give the parties an opportunity to thresh out the issues and finally reach a
conclusion.13

Second, the R TC held that Lazatin and EPEC had legal standing to question the
validity of RR 2-2012. Lazatin's allegation that RR 2-2012 effectively amends and
modifies RA 9400 gave him standing as a legislator: the amendment of a tax law is a
power that belongs exclusively to Congress. Lazatin's allegation, according to the RTC,
sufficiently shows how his rights, privileges, and prerogatives as a member of Congress
were impaired by the issuance of RR 2-2012.

The RTC also ruled that the case warrants a relaxation on the rules on legal standing
because the issues touched upon are of transcendental importance. The trial court
considered the encompassing effect that RR 2- 2012 may have in the numerous
freeport and economic zones in the Philippines, as well as its potential impact on
hundreds of investors operating within the zones.

The RTC then held that even if Lazatin does not have legal standing, EPEC' s
intervention cured this defect: EPEC, as a locator within the Clark FEZ, would be
adversely affected by the implementation of RR 2-2012.

Finally, the RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400

because it imposes taxes that, by law, are not due in the first place.14 Since RA 9400
clearly grants tax and duty-free incentives to Clark FEZ locators, a revocation of these
incentives by an RR directly contravenes the express intent of the Legislature.15 In
effect, the petitioners encroached upon the prerogative to enact, amend, or repeal laws,
which the Constitution exclusively granted to Congress.

The Petition

The petitioners anchor their present petition on two arguments: 1) respondents have no
legal standing, and 2) RR 2-2012 is valid and constitutional.

The petitioners submit that the Lazatin and EPEC do not have legal standing to assail
the validity of RR 2-2012.

First, the petitioners claim that Lazatin does not have the requisite legal standing as he
failed to exactly show how the implementation of RR 2-2012 would impair the exercise
his official functions. Respondent Lazatin merely generally alleged that his constitutional
prerogatives to pass or amend laws were gravely impaired or were about to be impaired
by the issuance of RR 2-2012. He did not specify the power that he, as a legislator,
would be encroached upon.
While the Clark FEZ is within the district that respondent Lazatin represents, the
petitioners emphasize that Lazatin failed to show that he is authorized to file a case on
behalf of the locators in the FEZ, the local government unit, or his constituents in
general.16 To the petitioners, if RR 2- 2012 ever caused injury to the locators or to any
of Lazatin's constituents, only these injured parties possess the personality to question
the petitioners' actions; respondent Lazatin cannot claim this right on their behalf. 17

The petitioners claim, too, that the RTC should not have brushed aside the rules on
standing on account of transcendental importance. To them, this case does not involve
public funds, only a speculative loss of profits upon the implementation of RR 2-2012;
nor is Lazatin a party with more direct and specific interest to raise the issues in his
petition.18 Citing Senate v. Ermita,19 the petitioners argue that the rules on standing
cannot be relaxed.

Second, petitioners also argue that EPEC does not have legal standing to intervene.
That EPEC will ultimately bear the VAT and excise tax as an end-user, is
misguided.20 The burden of payment of VAT and excise tax may be shifted to the
buyer21 and this burden, from the point of view of the transferee, is no longer a tax but
merely a component of the cost of goods purchased. The statutory liability for the tax
remains with the seller. Thus, EPEC cannot say that when the burden is passed on to it,
RR 2-2012 effectively imposes tax on it as a Clark FEZ locator.

The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers
of petroleum products. If EPEC is indeed a locator, then it enjoys tax and duty
exemptions granted by RA 9400 so long as it does not bring the petroleum or petroleum
products to the Philippine customs territory.22

The petitioners legally argue that RR 2-2012 is valid and constitutional.

First, petitioners submit that RR 2-2012's issuance and implementation are within their
powers to undertake.23 RR 2-2012 is an administrative issuance that enjoys the
presumption of validity in the manner that statutes enjoy this presumption; thus, it
cannot be nullified without clear and convincing evidence to the contrary. 24

Second, petitioners contend that while RA 9400 does grant tax and customs duty
incentives to Clark FEZ locators, there are conditions before these benefits may be
availed of. The locators cannot invoke outright exemption from VAT and excise tax on
its importations without first satisfying the conditions set by RA 9400, that is, the
importation must not be removed from the FEZ and introduced into the Philippine
customs territory.25

These locators enjoy what petitioners call a qualified tax exemption. They must first pay
the corresponding taxes on its imported petroleum. Then, they must submit the
documents required under RR 2-2012. If they have sufficiently shown that the imported
products have not been removed from the FEZ, their earlier payment shall be subject to
a refund.
The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax
exemption privilege.1âwphi1 The regulation simply requires proof that a locator has
complied with the conditions for tax exemption. If the locator cannot show that the
goods were retained and/or consumed within the FEZ, such failure creates the
presumption that the goods have been introduced into the customs territory without the
appropriate permits.26 On the other hand, if they have duly proven the disposition of the
goods within the FEZ, their "advance payment" is subject to a refund. Thus, to the
petitioners, to the extent that a refund is allowable, there is in reality a tax exemption. 27

Counter-arguments

Respondents Lazatin and EPEC, maintaining that they have standing to question its
validity, insist that RR 2-2012 is unconstitutional.

Respondents have standing as

lawmaker and FEZ locator.

The respondents argue that a member of Congress has standing to protect the
prerogatives, powers, and privileges vested by the Constitution in his office. 28 As a
member of Congress, his standing to question executive issuances that infringe on the
right of Congress to enact, amend, or repeal laws has already been recognized. 29 He
suffers substantial injury whenever the executive oversteps and intrudes into his power
as a lawmaker.30

On the other hand, the respondents point out that RR 2-2012 explicitly covers FEZs.
Thus, being a Clark FEZ locator, EPEC is among the many businesses that would have
been directly affected by its implementation.31

RR 2-2012 illegally imposes taxes

on Clark FEZs.

The respondents underscore that RA 9400 provides FEZ locators certain incentives,
such as tax- and duty-free importations of raw materials and capital equipment. These
provisions of the law must be interpreted in a way that will give full effect to law's policy
and objective, which is to maximize the benefits derived from the FEZs in promoting
economic and social development.32

They admit that the law subjects to taxes and duties the goods that were brought into
the FEZ and subsequently introduced to the Philippine customs territory. However,
contrary to petitioners' position that locators' tax and duty exemptions are qualified, their
incentives apply automatically.

According to the respondents, petitioners' interpretation of the law contravenes the

policy laid down by RA 9400, because it makes the incentives subject to a suspensive
condition. They claim that the condition - the removal of the goods from the FEZ and
their subsequent introduction to the customs territory - is resolutory; locators enjoy the
granted incentives upon bringing the goods into the FEZ. It is only when the goods are
shown to have been brought into the customs territory will the proper taxes and duties
have to be paid.33 RR 2-2012 reverses this process by requiring the locators to pay
"advance" taxes and duties first and to subsequently prove that they are entitled to a
refund, thereafter.34 RR 2-2012 indeed allows a refund, but a refund of taxes that were
not due in the first place.35

The respondents add that even the refund mechanism under RR 2-2012 is problematic.
They claim that RR 2-2012 only allows a refund when the petroleum products brought
into the FEZ are subsequently sold to FEZ locators or to entities that similarly enjoy
exemption from direct and indirect taxes. The issuance does not envision a situation
where the petroleum products are directly brought into the FEZ and are consumed by
the same entity/locator.36Further, the refund process takes a considerable length of time
to secure, thus requiring cash outlay on the part of locators;37 even when the claim for
refund is granted, the refund will not be in cash, but in the form of a Tax Credit
Certificate (TCC).38

As the challenged regulation directly contravenes incentives legitimately granted by a

legislative act, the respondents argue that in issuing RR 2-2012, the petitioners not only
encroached upon congressional prerogatives and arrogated powers unto themselves;
they also effectively violated, brushed aside, and rendered nugatory the rigorous
process required in enacting or amending laws.39

Issues

We shall decide the following issues:

I. Whether respondents Lazatin and EPEC have legal standing to bring the action of
declaratory relief; and

II. Whether RR 2-2012 is valid and constitutional.

The Court's Ruling

We do not find the petition meritorious.

I. Respondents have legal

standing to file petition for
declaratory relief.

The party seeking declaratory relief must have a legal interest in the controversy for the
action to prosper.40 This interest must be material not merely incidental. It must be an
interest that which will be affected by the challenged decree, law or regulation. It must
be a present substantial interest, as opposed to a mere expectancy or a future,
contingent, subordinate, or consequential interest.41
Moreover, in case the petition for declaratory relief specifically involves a question of
constitutionality, the courts will not assume jurisdiction over the case unless the person
challenging the validity of the act possesses the requisite legal standing to pose the
challenge.42

Locus standi is a personal and substantial interest in a case such that the party has
sustained or will sustain direct injury as a result of the challenged governmental act. The
question is whether the challenging party alleges such personal stake in the outcome of
the controversy so as to assure the existence of concrete adverseness that would
sharpen the presentation of issues and illuminate the court in ruling on the constitutional
question posed.43

We rule that the respondents satisfy these standards.

Lazatin has legal standing as

a legislator.

Lazatin filed the petition for declaratory relief before the RTC in his capacity as a
member of Congress.44 He alleged that RR 2-2012 was issued directly contravening RA
9400, a legislative enactment. Thus, the regulation encroached upon the Congress'
exclusive power to enact, amend, or repeal laws.45 According to Lazatin, a member of
Congress has standing to challenge the validity of an executive issuance if it tends to
impair his prerogatives as a legislator.46

We agree with Lazatin.

In Biraogo v. The Philippine Truth Commission,47 we ruled that legislators have the legal
standing to ensure that the prerogatives, powers, and privileges vested by the
Constitution in their office remain inviolate. To this end, members of Congress are
allowed to question the validity of any official action that infringes on their prerogatives
as legislators.48

Thus, members of Congress possess the legal standing to question acts that amount to
a usurpation of the legislative power of Congress.49 Legislative power is exclusively
vested in the Legislature. When the implementing rules and regulations issued by the
Executive contradict or add to what Congress has provided by legislation, the issuance
of these rules amounts to an undue exercise of legislative power and an encroachment
of Congress' prerogatives.

To the same extent that the Legislature cannot surrender or abdicate its legislative
power without violating the Constitution,50 so also is a constitutional violation committed
when rules and regulations implementing legislative enactments are contrary to existing
statutes. No law can be amended by a mere administrative rule issued for its
implementation; administrative or executive acts are invalid if they contravene the laws
or to the Constitution.51
Thus, the allegation that RR 2-2012 - an executive issuance purporting to implement the
provisions of the Tax Code - directly contravenes RA 9400 clothes a member of
Congress with legal standing to question the issuance to prevent undue encroachment
of legislative power by the executive.

EPEC has legal standing as a

Clark FEZ locator.

EPEC intervened in the proceedings before the RTC based on the allegation that, as a
Clark FEZ locator, it will be directly affected by the implementation of RR 2-2012.52

We agree with EPEC.

It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and
applies to all petroleum and petroleum products that are imported directly from abroad
to the Philippines, including FEZs.53

As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum
products will be directly affected by RR 2-2012. Thus, its interest in the subject matter -
a personal and substantial one - gives it legal standing to question the issuance's
validity.

In sum, the respondents' respective interests in this case are sufficiently substantial to
be directly affected by the implementation of RR 2-2012. The RTC therefore did not err
when it gave due course to Lazatin's petition for declaratory relief as well as EPEC's
petition-in-intervention.

In light of this ruling, we see no need to rule on the claimed transcendental importance
of the issues raised.

II. RR 2-2012 is invalid and

unconstitutional.

On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional
because: a) it illegally imposes taxes upon FEZ enterprises, which, by law, enjoy tax-
exempt status, and b) it effectively amends the law (i.e., RA 7227, as amended by RA
9400) and thereby encroaches upon the legislative authority reserved exclusively by the
Constitution for Congress.

FEZ enterprises enjoy tax- and

duty-free incentives on its
importations.

In 1992, Congress enacted RA 7227 otherwise known as the "Bases Conversion and
Development Act of 1992" to enhance the benefits to be derived from the Subic and
Clark military reservations.54 RA 7227 established the Subic Special economic zone and
granted such special territory various tax and duty incentives.

To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the
legislature enacted RA 9400 to amend RA 7227.55 Subsequently, the Department of
Finance issued Department Order No. 3-200856 to implement RA 9400 (Implementing
Rules).

Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs
territory separate and distinct from the Philippines customs territory. Thus, as opposed
to importations into and establishments in the Philippines customs territory,57 which are
fully subject to Philippine customs and tax laws, importations into
and establishments located within the Clark FEZ (FEZ Enterprises )58 enjoy special
incentives, including tax and duty-free importation.59More specifically, Clark FEZ
enterprises shall be entitled to the freeport status of the zone and a 5% preferential
income tax rate on its gross income, in lieu of national and local taxes.60

RA 9400 and its Implementing Rules grant the following:

First, the law provides that importations of raw materials and capital equipment into the
FEZs shall be tax- and duty-free. It is the specific transaction (i.e., importation) that is
exempt from taxes and duties.

Second, the law also grants FEZ enterprises tax- and duty-free importation and a
preferential rate in the payment of income tax, in lieu of all national and local taxes.
These incentives exempt the establishment itself from taxation.

Thus, the Legislature intended FEZs to enjoy tax incentives in general - whether with
respect to the transactions that take place within its special jurisdiction, or
the persons/establishments within the jurisdiction. From this perspective, the tax
incentives enjoyed by FEZ enterprises must be understood to necessarily include the
tax exemption of importations of selected articles into the FEZ.

We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted
within the context and in a manner that promotes the legislative intent of RA 7227 61 and,
by extension, RA 9400. Thus, we recognized that FEZ enterprises are exempt from both
direct and indirect internal revenue taxes.62 In particular, they are considered VAT-
exempt entities.63

In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by
FEZ enterprises covers internal revenue taxes imposed on goods brought into the FEZ,
including the Clark FEZ, such as VAT and excise tax.

RR 2-2012 illegally imposes VAT and excise

tax on goods brought into the FEZs.
Section 3 of RR 2-2012 provides the following:

First, whenever petroleum and petroleum products are imported and/or brought
directly to the Philippines, the importer of these goods is required to pay the
corresponding VAT and excise tax due on the importation.

Second, the importer, as the payor of the taxes, may subsequently seek a refund of the
amount previously paid by filing a corresponding claim with the Bureau of
Customs (BOC).

Third, the claim shall only be granted upon showing that the necessary condition has
been fulfilled.

At first glance, this imposition - a mere tax administration measure according to the
petitioners - appears to be consistent with the taxation of similar imported articles under
the Tax Code, specifically under its Sections 10764 and 14865 (in relation with Sections
12966 and 13167).

However, RR 2-2012 explicitly covers even petroleum and petroleum products imported
and/or brought into the various FEZs in the Philippines. Hence, when an FEZ
enterprise brings petroleum and petroleum products into the FEZ, under RR 2-2012, it
shall be considered an importer liable for the taxes due on these products.

The crux of the controversy can be found in this feature of the challenged regulation.

The petitioners assert that RR 2-2012 simply implements the provisions of the Tax
Code on collection of internal revenue taxes, more specifically VAT and excise tax, on
the importation of petroleum and petroleum products. To them, FEZ enterprises enjoy
a qualified tax exemption such that they have to pay the tax due on the importation first,
and thereafter claim a refund, which shall be allowed only upon showing that the goods
were not introduced to the Philippine customs territory.

On the other hand, the respondents contend that RR 2-2012 imposes taxes on FEZ
enterprises, which in the first place are not liable for taxes. They emphasize that the tax
incentives under RA 9400 apply automatically upon the importation of the goods. The
proper taxes on the importation shall only be due if the enterprises can later show that
the goods were subsequently introduced to the Philippine customs territory.

Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to
VAT and excise tax, as we discussed above, it follows and we accordingly rule that the
taxes imposed by Section 3 of RR 2-2012 directly contravene these
exemptions. First, the regulation erroneously considers petroleum and petroleum
products brought into a FEZ as taxable importations. Second, it unreasonably burdens
FEZ enterprises by making them pay the corresponding taxes - an obligation from which
the law specifically exempts them - even if there is a subsequent opportunity to refund
the payments made.
Petroleum and petroleum products brought
into the FEZ and which remain therein are
not taxable importations.

RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and
petroleum products into FEZs. Strictly speaking, however, articles brought into these
FEZs are not taxable importations under the law based on the following considerations:

First, importation refers to bringing goods from abroad into the Philippine customs
jurisdiction. It begins from the time the goods enter the Philippine jurisdiction and is
deemed terminated when the applicable taxes and duties have been paid or the
goods have left the jurisdiction of the BOC.68

Second, under the Tax Code, imported goods are subject to VAT and excise tax. These
taxes shall be paid prior to the release of the goods from customs custody.69 Also, for
VAT purposes,70 an importer refers to any person who brings goods into the Philippines.

Third, the Philippine VAT system adheres to the cross border doctrine.71 Under this rule,
no VAT shall be imposed to form part of the cost of the goods destined for
consumption outside the Philippine customs territory.72 Thus, we have already ruled
before that an FEZ enterprise cannot be directly charged for the VAT on its sales, nor
can VAT be passed on to them indirectly as added cost to their purchases.73

Fourth, laws such as RA 7227, RA 7916, and RA 9400 have established certain special
areas as separate customs territories .74 In this regard, we have already held that such
jurisdictions, such as the Clark FEZ, are, by legal fiction, foreign territories.75

Fifth, the Implementing Rules provides that goods initially introduced into the FEZs
and subsequently brought out therefrom and introduced into the Philippine customs
territory shall be considered as importations and thereby subject to the VAT.76 One such
instance is the sale by any FEZ enterprise to a customer located in the customs
territory, which the VAT regulations refer to as a technical importation.77

We find it clear from all these that when goods (e.g., petroleum and petroleum products)
are brought into an FEZ, the goods remain to be in foreign territory and are not
therefore goods introduced into Philippine customs territory subject to Philippine
customs and tax laws.78

Stated differently, goods brought into and traded within an FEZ are generally beyond
the reach of national internal revenue taxes and customs duties enforced in the
Philippine customs territory. This is consistent with the incentive granted to FEZs
exempting the importation itself from taxes and duties.

Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As
long as the goods remain (e.g., sale and/or consumption of the article within the FEZ) in
the FEZ or re-exported to another foreign jurisdiction, they shall continue to be tax-
free.79 However, once the goods are introduced into the Philippine customs territory, it
ceases to enjoy the tax privileges accorded to FEZs. It shall then be considered as
an importation subject to all applicable national internal revenue taxes and customs
duties.

The tax exemption granted to FEZ

enterprises is an immunity from tax liability
and from the payment of the tax.

The respondents claim that when RR 2-2012 was issued, petroleum and petroleum
products brought into the FEZ by FEZ enterprises suddenly became subject to VAT and
excise tax, in direct contravention of RA 9400 (with respect to Clark FEZ enterprises).
Such imposition is not authorized under any law, including the Tax Code. 80

On the other hand, the petitioners argue that RR 2-2012 does not withdraw the tax
exemption privileges of FEZ enterprises.1âwphi1 As their tax exemption is
merely qualified, they cannot invoke outright exemption. Thus, FEZ enterprises are
required to pay internal revenue taxes first on their imported petroleum under RR 2-
2012. They may then refund their previous payment upon showing that the condition
under RA 9400 has been satisfied - that is, the goods have not been introduced to the
Philippines customs territory.81 To the petitioners, to the extent that a refund is
allowable, there is still in reality a tax exemption.82

We disagree with this contention.

First, FEZ enterprises bringing goods into the FEZ should not be considered
as importers subject to tax in the same manner that the very act of bringing goods into
these special territories does not make them taxable importations. We emphasize that
the exemption from taxes and duties under RA 9400 are granted not only
to importations into the FEZ, but also specifically to each FEZ enterprise. As discussed,
the tax exemption enjoyed by FEZ enterprises necessarily includes the tax exemption of
the importations of selected articles into the FEZ.

Second, the essence of a tax exemption is the immunity or freedom from a charge or
burden to which others are subjected.83 It is a waiver of the government's right to
collect84 the amounts that would have been collectible under our tax laws. Thus, when
the law speaks of a tax exemption, it should be understood as freedom from the
imposition and payment of a particular tax.

Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does
not amount to a tax exemption. Even if the possibility of a subsequent refund exists, the
fact remains that FEZ enterprises must still spend money and other resources to pay for
something they should be immune to in the first place. This completely contradicts the
essence of their tax exemption.
In the same vein, we cannot agree with the view that FEZ enterprises have the duty to
prove their entitlement to tax exemption first before fully enjoying the same; we find it
illogical to determine whether a person is exempted from tax without first determining if
he is subject to the tax being imposed. We have reminded the tax authorities to
determine first if a person is liable for a particular tax, applying the rule of strict
interpretation of tax laws, before asking him to prove his exemption therefrom.85 Indeed,
as entities exempted on taxes on importations, FEZ enterprises are clearly beyond the
coverage of any law imposing those very charges. There is no justifiable reason to
require them to prove that they are exempted from it.

More importantly, we have also recognized that the exemption from local and national
taxes granted under RA 7227, as amended by RA 9400, are ipso facto accorded to
FEZs. In case of doubt, conflicts with respect to such tax exemption privilege shall be
resolved in favor of these special territories.86

RR 2-2012 is unconstitutional.

According to the respondents, the power to enact, amend, or repeal laws belong
exclusively to Congress.87 In passing RR 2-2012, petitioners illegally amended the law -
a power solely vested on the Legislature.

We agree with the respondents.

The power of the petitioners to interpret tax laws is not absolute. The rule is that
regulations may not enlarge, alter, restrict, or otherwise go beyond the provisions of the
law they administer; administrators and implementors cannot engraft additional
requirements not contemplated by the legislature.88

It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision
it wishes to implement. While it purportedly establishes mere administration measures
for the collection of VAT and excise tax on the importation of petroleum and petroleum
products, not once did it mention the pertinent chapters of the Tax Code on VAT and
excise tax.

While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures

proposed by the issuance cannot be implemented at the expense of entities that have
been clearly granted statutory tax immunity.

REVISED PAGE

Tax exemptions are granted for specific public interests that the Legislature considers
sufficient to offset the monetary loss in the grant of exemptions.89 To limit the tax-free
importation privilege of FEZ enterprises by requiring them to pay subject to a refund
clearly runs counter to the Legislature's intent to create a free port where the "free flow
of goods or capital within, into, and out of the zones" is ensured.90
Finally, the State's inherent power to tax is vested exclusively in the Legislature.91 We
have since ruled that the power to tax includes the power to grant tax
exemptions.92 Thus, the imposition of taxes, as well as the grant and withdrawal of tax
exemptions, shall only be valid pursuant to a legislative enactment.

As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly

accorded by the legislative to FEZ enterprises, the *petitioners have arrogated upon
themselves a power reserved exclusively to Congress, in violation of the doctrine of
separation of powers.

In these lights, we hereby rule and declare that RR 2-2012 is null and void.

WHEREFORE, we hereby DISMISS the petition for lack of merit, and

accordingly AFFIRM decision of the Regional Trial Court dated November 8, 2013 2001
in SCA Case No. 12-410.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 150154. August 9, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA

INFORMATION EQUIPMENT (PHILS.), INC., respondent.

DECISION
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.