THIRD DIVISION for alleged deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.
69,10
April 5, 2017
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September
2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in
CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20%
interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the
National Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by duly licensed physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and
Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and
its Fourth Quarterly VAT Return on January 25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020
dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise
issued recommending the issuance of a Formal Assessment Notice (FAN) against
MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007
inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any
deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.
Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR
argued that since MEDICARD. does not actually provide medical and/or hospital services, but
merely arranges for the same, its services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the
provision of medical and/or hospital services by hospitals and/or clinics but include actual and
direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows
that it owns x-ray and laboratory facilities which it used in providing medical and laboratory
services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received
from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of
Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross
receipts because P5.6 Million of which represent advances for professional fees due from clients
which were paid by MEDICARD while the remainder was already previously subjected to VAT; (4)
the professional fees in the amount of Pl 1 Million should also be excluded because it represents
the amount of medical services actually and directly rendered by MEDICARD and/or its subsidiary
company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate should not
be applied on the entire amount but only for the period when the 12% VAT rate was already in
effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and deficiency
interest because it did not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also
submitted additional supporting documentary evidence in aid of its Protest thru a letter dated
March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May
15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of
deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency
taxes immediately. Should payment be made later, adjustment has to be made to impose interest
until date of payment. This is olir final decision. If you disagree, you may take an appeal to the
[CTA] within the period provided by law, otherwise, said assessment shall become final, executory
and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating
its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's
deficiency VAT assessment covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
[MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH elevated the matter to the CTA en banc.
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l
73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only
of the NIRC of 1997, as amended, computed as follows: insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA
Division in all other matters, thus:
Basic Deficiency VAT ₱l78,538,566.68
WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
Add: 25% Surcharge 44,634,641.67 GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:

Total ₱223.173.208.35 "WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH

In addition, [MEDICARD] is ordered to pay: MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis 1997, as amended, computed as follows:
deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007 until full payment
thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
Basic Deficiency VAT ₱76,187,687.58

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount Add: 25% Surcharge 44,046,921.90
of ₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25%
surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as Total ₱220,234.609.48
afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997.
In addition, [MEDICARD] is ordered to pay:
SO ORDERED.19
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l
76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance Section 249(B) of the NIRC of 1997, as amended; and
of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
(b) Delinquency interest at the rate of 20% per annum on the total amount of
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from ₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25%
questioning the validity of the assessment on the ground of lack of LOA since the assessment surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued as
issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD on afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997, as amended."
notice of the deficiencies and it in fact availed of the remedies provided by law without questioning
the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to
doctors, hospitals and clinics cannot be excluded from · the computation of its gross receipts SO ORDERED.22
under the provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself an
act of ownership and management over the funds by MEDICARD which is beyond the Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it
contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory facilities was denied.23 Hence, MEDICARD now seeks recourse to this Court via a petition for review
cannot be excluded from its gross receipts because the operation of these clinics and laboratory is on certiorari.
merely an incident to MEDICARD's main line of business as HMO and there is no evidence that
MEDICARD segregated the amounts pertaining to this at the time it received the premium from its The Issues
members; and (6) MEDICARD was not able to substantiate the amount pertaining to its January
2006 income and therefore has no basis to impose a 10% VAT rate.20
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
 2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY
PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS
GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA
is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR himself or his duly authorized representatives.
Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examinationof any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his
duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily
be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be
assessed through best-evidence obtainable, inventory-taking, or surveillance among others has
nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive
at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct any of these kinds of
examinations without prior authority.
With the advances in information and communication technology, the Bureau of Internal Revenue
(BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then
incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its
Reconciliation of Listing for Enforcement System (RELIEF System). 26 This system can detect tax
leaks by matching the data available under the BIR's Integrated Tax System (ITS) with data
gathered from third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to uncover under
declared income and over claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the
RELIEF System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD)
under the Information Systems Group (ISG) is responsible for: (1) coming up with the List of
Taxpayers with discrepancies within the threshold amount set by management for the issuance of
LN and for the system-generated LNs; and (2) sending the same to the taxpayer and to the Audit
Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID
under the Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for
transmitting the LNs to the investigating offices [Revenue District Office (RDO)/Large Taxpayers
District Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of
these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF
data discrepancy would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-
audit approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid
the assessment of the correct amount of tax. The no-contact-audit approach includes the process
of computerized matching of sales and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also
include the matching of data from other information or returns filed by the taxpayers with the BIR
such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books and
records, if the computerized/manual matching of sales and purchases/expenses appears to reveal
discrepancies, the same shall be communicated to the concerned taxpayer through the issuance
of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may
begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence
of an LOA with the aid of a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of perjury 27 are easily
rebutted and the taxpayer becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement
of an LOA before any investigation or examination of the taxpayer may be conducted. As provided
in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However,
for a Notice of Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued the same is properly
authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented
by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in
handing assessments against taxpayers'· issued LNs by reconciling various revenue issuances
which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to
prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and
assessment and collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the
LN, the concerned taxpayer will be given an opportunity to reconcile its records with those of the
BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the
subject taxpayer shall no longer be entitled to the abatement of interest and penalties after the
lapse of the sixty (60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the end of the One Hundred and
Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall
recommend the issuance of [LOA) to replace the LN. The head of the concerned investigating
office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format
in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with
the notation "This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to
approval.
8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary
List of LNs for conversion to LAs, to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from
issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN
against MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued
earlier was also not converted into an LOA contrary to the above quoted provision. Surprisingly,
the CIR did not even dispute the applicability of the above provision of RMO 32-2005 in the
present case which is clear and unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant
the reversal of the assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:
Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a
nullity.30 (Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same was issued
by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or
refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies,
particularly closure, criminal action, or audit and investigation. Since the law specifically requires
an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the
absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact Revenue
Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for
the purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA addressed to a
revenue officer is specifically required under the NIRC before an examination of a taxpayer may
be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer
that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for
30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN does not contain such a limitation.31 Simply put, LN is entirely different and serves
a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005,
that after an LN has serve its purpose, the revenue officer should have properly secured an LOA
before proceeding with the further examination and assessment of the petitioner. Unfortunarely,
this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of
the financial books or records being physically kept by MEDICARD was examined. To begin with,
Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being subject to
examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much
easier and faster. The ease by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory requirement under Section 6 and with its
own administrative issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the taxpayer's records: to prevent
undue harassment of a taxpayer and level the playing field between the government' s vast
resources for tax assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time responding to the BIR
exercise of its statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is properly authorized in the first place
by those to whom the discretion to exercise the power of examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the point
because the issue of their lack of authority was only brought up during the trial of the case. What
is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment
against MEDICARD had the prior approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially
finds merit in MEDICARD's substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A
Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money or
its equivalent actually received from members undiminished by any amount paid or payable to the
owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD explains
that its business as an HMO involves two different although interrelated contracts. One is between
a corporate client and MEDICARD, with the corporate client's employees being considered as
MEDICARD members; and the other is between the health care institutions/healthcare
professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members under specific
health related services for a specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides
that 20% of the membership fees per individual, regardless of the amount involved, already
includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would
earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also assails
CIR's inclusion in its gross receipts of its earnings from medical services which it actually and
directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid membership
fees and for a specified period of time, then MEDICARD is principally engaged in the sale of
services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) 32 of
the Tax Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a
dealer in securities whose gross receipts is the amount actually received as contract price without
allowing any deduction from the gross receipts.33 This restrictive tenor changed under RR No. 16-
2005. Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent representing the service
fee actually or constructively received during the taxable period for the services performed or to be
performed for another person, excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as payments for services
rendered, and advance payments actually or constructively received during the taxable period for
the services performed or to be performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the
definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007
does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of an
HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under the
RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation
for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of
the amount it received as membership fee does NOT actually compensate it but some other
person, which in this case are the medical service providers themselves. It is a well-settled
principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain and
ordinary acceptation and signification, unless it is evident that the legislature intended a technical
or special legal meaning to those words. The Court cannot read the word "presumed" in any other
way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base
under the NIRC does not contain any specific definition.36 Therefore, absent a statutory definition,
this Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross
receipts is understood as comprising the entire receipts without any deduction.37 Congress, under
Section 108, could have simply left the term gross receipts similarly undefined and its
interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope
of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the
services it performed or to the amount it received as advance payment for the services it will
render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members
will be able to avail of the pre-arranged medical services from its accredited healthcare providers
without the necessary protocol of posting cash bonds or deposits prior to being attended to or
admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services, which depends
upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the
former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its ·members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member
beforehand that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is
exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC
that would extend the definition of gross receipts even to amounts that do not only pertain to the
services to be performed: by another person, other than the taxpayer, but even to amounts that
were indisputably utilized not by MED ICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court adopted
the principal object and purpose object in determining whether the MEDICARD therein is engaged
in the business of insurance and therefore liable for documentary stamp tax. The Court held
therein that an HMO engaged in preventive, diagnostic and curative medical services is not
engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after .the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost when or after it
is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance company is
that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the
value added by the performance of the service by the taxpayer. It is, thus, this service and the
value charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to
VAT.40 But the Court's task however is not to weigh these policy considerations but to determine if
these considerations in favor of taxation can even be implied from the statute where the CIR
purports to derive her authority. This Court rules that they cannot because the language of the
NIRC is pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of
taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax
laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. A tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication. In answering the question of who is subject to tax statutes, it
is basic that in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 41 (Citation
omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in
authority should have been reasonably founded from the language of the statute. That language is relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act
wanting in this case. In the scheme of judicial tax administration, the need for certainty and No. 9337, for purposes of determining its Value-Added Tax liability, is hereby declared
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that to EXCLUDE the eighty percent (80%) of the amount of the contract price earmarked as fiduciary
Congress may not have the opportunity or competence to provide. The regulations these funds for the medical utilization of its members. Further, the Value-Added Tax deficiency
authorities issue are relied upon by taxpayers, who are certain that these will be followed by the assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having
courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd, been issued without a Letter of Authority by the Commissioner of Internal Revenue or his duly
erroneous or improper.42 The CIR's interpretation of gross receipts in the present case is patently authorized representatives.
erroneous for lack of both textual and non-textual support.
SO ORDERED.
As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership
and management over the funds, the Court does not agree.1âwphi1 On the contrary, it is
MEDICARD's act of earmarking or allocating 80% of the amount it received as membership fee at
the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of
the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's
right in relation to these amounts is a mere inchoate owner which would ripen into actual
ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal
year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of MEDICARD's healthcare
providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts
MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical
service providers should form part of its gross receipt for VAT purposes, after having paid the VAT
on the amount comprising the 20%. It is significant to note in this regard that MEDICARD
established that upon receipt of payment of membership fee it actually issued two official receipts,
one pertaining to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical utilization.:
Therefore, the absence of an actual and physical segregation of the amounts pertaining to two
different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption
under the law and from proving that indeed services were rendered by its healthcare providers for
which it paid the amount it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and
violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the
computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to
discuss the rest of the parties' arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of
the CTA en banc grounded as it is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent
for medical utilization of its members should not be included in the computation of its gross
receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is

hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated January 29,
2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET
 Republic of the Philippines Output Tax 34,422.89
SUPREME COURT
Manila Less: Input Tax

THIRD DIVISION On Domestic Purchases 4,765,458.58

On Importation of Goods 1,242,792.00

G.R. No. 183880 January 20, 2014
Total Available Input Tax 6,008,250.58
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. Excess Input Tax & Overpayment P 5,973,827.69
TOLEDO POWER, INC., Respondent.
However, an amended Quarterly VAT Return for the same quarter of 2001was filed on November
DECISION 22, 2001. The amended return shows unutilized input VAT credits of ₱5,909,588.96 arising from
petitioner’s taxable purchases for the third quarter of 2001 and the following other information:
PERALTA, J.:
Zero-rated Sales/Receipts P 143,000,032.37
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Court of Tax Appeals (CTA) En Banc Decision 1 dated May 7, 2008, and Taxable Sales-Sale of Scrap/Others 378,651.74
Resolution2 dated July 18, 2008.
Output Tax 34,422.89
The pertinent facts, as narrated by the CT A First Division, are as follows:
Less: Input Tax
Petitioner (herein respondent Toledo Power, Inc.) is a general partnership duly organized and On Domestic Purchases 4,718,099.85
existing under Philippine laws, with principal office at Sangi, Toledo City, Cebu. It is principally
engaged in the business of power generation and subsequent sale thereof to the National Power On Importation of Goods 1,225,912.00
Corporation (NPC), Cebu Electric Cooperative III (CEBECO), Atlas Consolidated Mining and
Development Corporation, Atlas Fertilizer Corporation and Cebu Industrial Park Development, Total Available Input Tax 5,944,011.85
Inc., and is registered with the Bureau of Internal Revenue (BIR) as a Value
Excess Input Tax & Overpayment P 5,909,588.96
Added Tax taxpayer in accordance with Section 236 of the National Internal Revenue Code
(NIRC) with Tax Identification No. 003-883-626-VAT and BIR Certificate of Registration bearing Thus, for the third quarter of 2001, petitioner allegedly has unutilized input VAT in the total amount
RDO Control No. 94-083-000300. of ₱5,909,588.96 on its domestic purchase of taxable goods and services and importation of
goods, which purchases and importations are all attributable to its zero-rated sale of power
On June 20, 2002, petitioner filed an application with the Energy Regulatory Commission (ERC) generation services to NPC, CEBECO, Atlas Consolidated Mining and Development Corporation,
for the issuance of a Certificate of Compliance pursuant to the Implementing Rules and Atlas Fertilizer Corporation and Cebu Industrial Park Development, Inc. Said input VAT of
Regulations of R.A. 9136, otherwise known as the "Electric Power Industry Reform Act of 2007" ₱5,909,588.96 paid by petitioner on its domestic purchase of goods and services for the third
(EPIRA). quarter of 2001 allegedly remained unutilized against output VAT liability in said period or even in
subsequent matters.
On October 25, 2001, petitioner filed with the BIR Revenue District Office (RDO) No. 83 at Toledo
City, Province of Cebu, its Quarterly VAT Return for the third quarter of 2001, declaring among On January 25, 2002, petitioner filed with the BIR RDO No. 83 at Toledo City, Province of Cebu,
others, the following: its Quarterly VAT Return for the fourth quarter of 2001 declaring, among others, the following:

Zero-rated Sales/Receipts P 143,000,032.37 Zero-rated Sales/Receipts P 127,259,720.44

Taxable Sales-Sale of Scrap/Others 378,651.74 Taxable Sales-Sale of Scrap/Others 309,697.50

 Output Tax 28,154.33 xxxx

Less: Input Tax After presenting its testimonial and documentary evidence, petitioner formally offered its evidence
on February 16, 2006. On March 24, 2006, this Court promulgated a Resolution admitting all the
On Domestic Purchases 1,374,608.64 exhibits offered by petitioner. Respondent, on the other hand, failed to adduce any evidence.
On Importation of Goods 1,873,327.00
In a Resolution dated July 6, 2006, this consolidated case was ordered submitted for decision with
Total Available Input Tax 3,247,935.64 only petitioner’s Memorandum, as respondent failed to file one within the period given by the
Court.3
Excess Input Tax & Overpayment P 3,219,781.31
Acting on the petition, the CTA First Division issued a Decision dated May 17, 2007 partially
granting Toledo Power, Inc.’s (TPI) refund claim or issuance of tax credit certificate. Pertinent
Thus, petitioner allegedly had an excess input VAT credits of ₱3,219,781.31 for the fourth quarter
portions of the Decision read:
of 2001 which remained unutilized against output VAT liability in said period or even in the
subsequent quarters.
In sum, petitioner was able to show its entitlement to the refund or issuance of tax credit certificate
in the amount of ₱8,553,050.44 computed as follows:
For the third and fourth quarters of 2001, petitioner incurred and accumulated input VAT from its
domestic purchase of goods and services, which are all attributable to its zero-rated sales of
power generation services to NPC, CEBECO, Atlas Consolidated Mining and Development Total Available Input VAT P 9,191,947.49

Corporation, Atlas Fertilizer Corporation and Cebu Industrial Park Development Inc., in the total Less: Disallowed Input VAT
amount of ₱9,129,370.27. Said excess and unutilized input VAT was allegedly not utilized against (₱20,696.34+₱52,363.64+₱277,207.50) 350,267.48
any output VAT liability in the subsequent quarters nor carried over to the succeeding taxable
quarters. Substantiated available input VAT P 8,841,680.01

Less: Output VAT 62,577.22

On September 30, 2003, pursuant to the procedure prescribed in Revenue Regulations No. 7-95,
as amended, petitioner filed with the BIR RDO No. 83, an administrative claim for refund or Substantiated Unutilized Input VAT P 8,779,102.79
unutilized input VAT for the third and fourth quarter of 2001 in the amounts of ₱5,909,588.96 and
₱3,219,781.31, respectively, or the aggregate amount of ₱9,129,370.27.
Multiply by the ratio of substantiated
zero-rated sales to the total zero-rated
Respondent (herein petitioner Commissioner of Internal Revenue) has not ruled upon petitioner’s sales
administrative claim and in order to preserve its right to file a judicial claim for the refund or
issuance of a tax credit certificate of its unutilized input VAT, petitioner filed a Petition for Substantiated zero-rated sales 263,300,858.02

Review to suspend the running of the two-year prescriptive period under Section 112(D) of the Total zero-rated sales 270,259,752.81
1997 NIRC and Section 4.106-2(c) of Revenue Regulations No. 7-95, as amended. On October
24, 2003, petitioner filed a Petition for Review for the refund or issuance of a tax credit certificate Refundable Input VAT P 8,553,050.44
in the amount of ₱5,909,588.96 for the third quarter of 2001, docketed as CTA Case No. 6805
and, on January 22, 2004, filed another Petition for Review for the refund or issuance of tax credit IN VIEW OF THE FOREGOING, the Petition for Review is PARTIALLY GRANTED. Respondent is
certificate in the amount of ₱3,219,781.31 for the fourth quarter of 2001, docketed as CTA Case hereby ORDERED to refund or to issue a tax credit certificate in favor of petitioner in the reduced
No. 6851, both for its unutilized input VAT paid by petitioner on its domestic purchases of goods amount of ₱8,553,050.44 representing the substantiated unutilized input VAT for the third and
and services and importation of goods attributable to zero-rated sales. fourth quarters of 2001.

On January 30, 2004, petitioner filed a Motion for Consolidation CTA Case Nos. 6805 and 6851, SO ORDERED.4
since these cases involve the same parties, same facts and issues. The said Motion was granted
in open court on February 27, 2004 and confirmed in a Resolution dated March 8, 2004.
The Commissioner of Internal Revenue (CIR), thereafter, filed a Motion for Reconsideration Undaunted by the adverse ruling of the CTA, the CIR now seeks recourse to this Court on the
against said Decision. However, the same was denied in a Resolution dated October 15, 2007. following ground:

On appeal to the CTA En Banc, the CIR argued that TPI failed to comply with the invoicing
requirements to prove entitlement to the refund or issuance of tax credit certificate. In addition, he
challenged the jurisdiction of the CTA First Division to entertain respondent’s petition for review for
failure on its part to comply with the provisions of Section 112 (C) of the Tax Code.
In a Decision dated May 7, 2008, the CTA En Banc affirmed with modification the First Division’s
assailed decision. It held –
THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENT IS
LIABLE TO REFUND PETITIONER FOR ALLEGED OVERPAYMENT OF VAT.6
In essence, two issues must be addressed to determine whether TPI is indeed entitled to its claim
for refund or issuance of tax credit certificate: (1) whether TPI complied with the 120+30 day rule
under Section 112 (C) of the Tax Code, and (2) whether TPI sufficiently complied with the
invoicing requirements under the Tax Code.

x x x after re-examination of the records of this case, out of the alleged Zero-rated sales Let us discuss the issues in seriatim.
amounting to ₱270,259,752.81, only the amount of ₱248,989,191.87 is fully substantiated.
Therefore, respondent is entitled to the refund or issuance of tax credit certificate in the amount of First, it must be emphasized that to validly claim a refund or tax credit of input tax, compliance with
₱8,088,151.07 computed as follows: the 120+30 day rule under Section 112 of the Tax Code is mandatory.

Total Available Input VAT P 9,191,947.49 Pertinent portions of Section 112 of the Tax Code, as amended by Republic Act No. 9337, 7 state:

Less: Disallowed Input VAT SEC. 112. Refunds or Tax Credits of Input Tax. –
(₱20,696.34+₱52,363.64+₱277,207.50) 350,267.48

Substantiated available input VAT
Less: Output VAT
Substantiated Unutilized Input VAT
Multiply by the ratio of substantiated
zero-rated sales to the total zero-rated
sales
Substantiated zero-rated sales
Total zero-rated sales
Refundable Input VAT
P 8,841,680.01 (A) Zero-rated or Effectively Zero-Rated Sales. – Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
62,577.22 when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such
P 8,779,102.79 input tax has not been applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods of properties or services, and the amount of creditable input tax
248,989,191.87 due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be
270,259,752.81 allocated proportionately on the basis of the volume of sales: Provided, finally, That for a person
making sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated
P 8,088,151.07 ratably between his zero-rated and non-zero-rated sales.

WHEREFORE, premises considered, the Petition for Review En Banc is DENIED for lack of merit.
Accordingly, the Decision dated May 17, 2007 and Resolution dated October 15, 2007 are
AFFIRMED with MODIFICATION. Petitioner is hereby ORDERED TO REFUND to respondent the
sum of EIGHT MILLION EIGHTY-EIGHT THOUSAND ONE HUNDRED FIFTY-ONE PESOS AND
SEVEN CENTAVOS (₱8,088,151.07) only for the third and fourth quarters of taxable year 2001.
SO ORDERED.5
In a Resolution dated July 18, 2008, the CTA En Banc denied the CIR’s motion for
reconsideration.
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support of
the application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals.
Section 112 decrees that a VAT-registered person, whose sales are zero-rated or effectively zero-
rated, may apply for the issuance of a tax credit or refund creditable input tax due or paid
attributable to such sales within two years after the close of the taxable quarter when the sales
were made. From the date of submission of complete documents in support of its application, the
CIR has 120 days to decide whether or not to grant the claim for refund or issuance of tax credit
certificate. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the CIR to act on the application within the given period, the taxpayer may, within 30
days from receipt of the decision denying the claim or after the expiration of the 120-day period,
appeal with the CTA the decision or inaction of the CIR.
Recently, in the consolidated cases of Commissioner of Internal Revenue v. San Roque Power
Corporation,8 (San Roque), the Court confirmed the mandatory and jurisdictional nature of the
120+30 day rule. It ratiocinated as follows:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112 (C) expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear, plain and unequivocal: "x x x the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents." Following
the verba legis doctrine, this law must be applied exactly as worded since it is clear, plain and
unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no "decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San Roque’s case, it filed its petition with the CTA a mere
13 days after it filed its administrative claim with the Commissioner. Indisputably, San Roque
knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one-hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis supplied.)
This law is clear, plain, and unequivocal.1avvphi1 Following the well-settled verba legis doctrine,
this law should be applied exactly as worded since it is clear, plain and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within
30 days from receipt of the Commissioner’s decision, or if the Commissioner does not act on the
taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days
from the expiration of the 120-day period.
xxxx
When Section 112 (C) states that "the taxpayer affected may, within thirty (30) days from receipt of
the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal
the decision or the unacted claim with the Court of Tax Appeals," the law does not make the
120+30 day periods optional just because the law uses the word "may." The word "may" simply
means that the taxpayer may or may not appeal the decision of the Commissioner within 30 days
from receipt of the decision, or within 30 days from the expiration of the 120-day period. Certainly
by no stretch of the imagination can the word "may" be construed as making the 120+30 day
periods optional, allowing the taxpayer to file a judicial claim one day after filing the administrative
claim with the Commissioner.
The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioner’s
decision if the two-year prescriptive period is about to expire, cannot apply because that rule was
adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to
do away with the old rule, so that under the VAT System the taxpayer will always have 30 days to
file the judicial claim even if the Commissioner acts only on the 120th day, or does not act at all
during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer
can no longer file a judicial claim for refund or credit of input VAT without waiting for the
Commissioner to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict
compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.9
In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund or
credit of unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support
of the administrative claim within which to decide whether to grant a refund or issue a tax
credit certificate. The 120-day period may extend beyond the two-year period from the
filing of the administrative claim if the claim is filed in the later part of the two-year period.
If the 120-day period expires without any decision from the CIR, then the administrative
claim may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s
decision denying the administrative claim or from the expiration of the 120-day period
without any action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day periods.10
Here, TPI filed its third and fourth quarterly VAT returns for 2001 on October 25, 2001 and
January 25, 2002, respectively. It then filed an administrative claim for refund of its unutilized input
VAT for the third and fourth quarters of 2001 on September 30, 2003. Thus, the CIR had 120 days
or until January 28, 2004, after the submission of TPI’s administrative claim and complete
documents in support of its application, within which to decide on its claim. Then, it is only after the
expiration of the 120-day period, if there is inaction on the part of the CIR, where TPI may elevate
its claim with the CTA within 30 days.
In the present case, however, it appears that TPI’s judicial claims for refund of its unutilized input
VAT covering the third and fourth quarters of 2001 were prematurely filed on October 24, 2003
and January 22, 2004, respectively.
However, although TPI’s judicial claim for the fourth quarter of 2001 has been filed prematurely,
the most recent pronouncements of the Court provide for a window wherein the same may be
entertained.
As held in the San Roque ponencia, strict compliance with the 120+30 day mandatory and
jurisdictional periods is not necessary when the judicial claims are filed between December 10,
2003 (issuance of BIR Ruling No. DA-489-03 which states that the taxpayer need not wait for the
120-day period to expire before it could seek judicial relief) to October 6, 2010 (promulgation of
the Aichi doctrine).
Clearly, therefore, TPI’s refund claim of unutilized input VAT for the third quarter of 2001 was
denied for being prematurely filed with the CTA, while its refund claim of unutilized input VAT for
the fourth quarter of 2001 may be entertained since it falls within the exception provided in the
Court’s most recent rulings.
With that settled, we now resolve the issue of whether TPI sufficiently complied with the invoicing
requirements under the Tax Code with respect to the fourth quarter of 2001.
Section 113 (A), in relation to Section 237 of the Tax Code, provides:
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –
(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or
receipt.1âwphi1 In addition to the information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer’s
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes value-added tax.
xxxx
SEC. 237. – Issuance of Receipts or Sales of Commercial Invoices. – All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued
at Twenty-five pesos (₱25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and
description of merchandise or nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos (₱100.00) or more, or regardless of the
amount, where the sale or transfer is made by a person liable to value-added tax to another
person also liable to value-added tax; or where the receipt is issued to cover payment made as
rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall
show the name, business style, if any, and address of the purchaser, customer or client: Provided,
further, That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipts shall further show the Taxpayer Identification Number (TIN) of the
purchaser.
Section 4.108-1 of Revenue Regulations No. 7-95 states:
Section 4.108-1. Invoicing Requirements – All VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue duly registered receipts or sales or commercial
invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser,
customer or client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.11
In the present case, we agree with the CTA’s findings that the words "zero-rated" appeared on the
VAT invoices/official receipts presented by the TPI in support of its refund claim. Although the
same was merely stamped and not pre-printed, the same is sufficient compliance with the law,
since the imprinting of the word "zero-rated" was required merely to distinguish sales subject to
10% VAT, those that are subject to 0% VAT (zero-rated) and exempt sales, to enable the Bureau
of Internal Revenue to properly implement and enforce the other VAT provisions of the Tax Code.
Moreover, it is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority.12
In Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue, 13 the Court held that it
accords the findings of fact by the CTA with the highest respect. It ruled that factual findings made
by the CTA can only be disturbed on appeal if they are supported by substantial evidence or there
is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and
convincing proof to the contrary, this Court must presume that the CTA rendered a decision which
is valid in every respect.14

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The

Commissioner of Internal Revenue is hereby ORDERED to refund or issue tax credit certificate in
favor of Toledo Power, Inc. only for the fourth quarter of 2001. This case is hereby REMANDED to
the Court of Tax Appeals for the proper computation of the refundable amount representing
unutilized input VAT for the fourth quarter of 2001.

SO ORDERED.
 Republic of the Philippines E 3,653,185,715.68 202,558.14 20,255.81 31,973,996.35 31,953,740.54
SUPREME COURT
Manila F 3,744,693,428.11 465,744.07 46,574.41 19,967,007.14 19,920,432.73
H 3,819,303,147.15 1,044,107.15 104,410.71 38,227,189.38 38,122,778.67
SECOND DIVISION
Total ₱14,915,836,460.42 ₱1,712,409.36 ₱171,240.93 ₱103,302,627.87 ₱103,131,386.94
G.R. No. 205055 July 18, 2014
On 21 December 2005, TSC filed an administrative claim for refund of its input VAT, which it
COMMISSIONER OF INTERNAL REVENUE, Petitioner, incurredfor the four quarters of 2004.
vs.
TEAM SUAL CORPORATION (formerly MIRANT SUAL CORPORATION), Respondent.
On 24 April 2006, due to the BIR’s inaction, TSC filed a petition for review with the Court of Tax
Appeals (CTA). TSC prayed for the refund or issuance of tax credit certificate for its alleged
DECISION unutilized input VAT for year 2004.

CARPIO, J.: The Court of Tax Appeals’ Ruling: Division

The Case
This is a petition for review1 assailing the Decision2 promulgated oh 27 July 2012 as well as the
Resolution3 promulgated on 6 December 2012 by the Court of Tax. Appeals En Banc (CTA EB) in
CTA EB No. 768. The CTA EB affirmed the 5 April 2011 Amended Decision 4 of the Special First
Division of the Court of Tax. Appeals (CTA Special First Division) in CTA Case No. 7470. The CTA
Special First Division granted the claim for refund or issuance of tax. credit certificate filed by
respondent Team Sual Corporation (TSC).5
In its 4 March 2010 Decision,6 the CTA Special First Division ruled that TSC’s sale of electric
power toNPC was effectively zero-rated. The CTA Special First Division found that TSC complied
with the five requirements to be entitled to a refund orissuance of tax credit certificate on its input
VAT, to wit:
1. That there must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;

The Facts
3. That such input taxes are attributable to zero-rated sales or effectively zero-rated sales;

TSC is a value-added tax (VAT) payer duly registered with the Bureau of Internal Revenue (BIR).
4. That the input taxes were not applied against any output VAT liability; and
It is principally engaged in the business of electric power generation and the sale of electric power
to National Power Corporation (NPC) under a Build-Operate-Transfer (BOT) Scheme.
5. That the claim for refund was filed within the two-year prescriptive period.7
On 19 December 2003, TSC applied for the VAT zero-rating of its sale of electric power to NPC for
the taxable year 2004. TSC’s application was subsequently approved by the BIR. The CTA Special First Division found that TSC is entitled to a refund or issuance of tax credit
certificate in the amount of ₱78,009,891.568 input VAT, upon disallowance of the amounts of: (1)
₱568,628,238.98 for being sales of electric power to Mirant Philippines Energy Corporation, Mirant
On 26 April 2004, 26 July 2004, 25 October 2004 and 25 January 2005, TSC filed its quarterly
Philippines Industrial Power Corporation, and Mirant Philippines Industrial Power II Corporation;
VAT returns for the four quarters of 2004 with the BIR, through the Electronic Filing and Payment
(2) ₱2,430,229,567.30 zero-rated sales to NPC for not being properly supported by VAT official
Scheme (EFPS). On 26 July 2004 and on 3 August 2005, TSC filed its amended quarterly VAT
receipts; and (3) ₱5,490,632.64 input VAT for failure to meet the substantiation requirement. The
returns for the first and fourth quarters of 2004, respectively.
CTA Special First Division likewise ruled that both the administrative and the judicial claims of TSC
were filed within the two-year prescriptive period.
The quarterly VAT returns for the four quarters of 2004 provide:
The dispositive portion of the CTA Special First Division’s 4 March 2010 Decision reads:
Zero-Rated Sales/ Excess Input WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly,
Exh. Taxable Sales Output VAT Input VAT respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the
Receipts VAT
amount ofSEVENTY EIGHT MILLION NINE THOUSAND EIGHT HUNDRED NINETY ONE
D ₱3,698,654,169.48 P0.00 P0.00 ₱13,134,435.00 ₱13,134,435.00 PESOS AND 56/100 (₱78,009,891.56) to petitioner, representing unutilized excess input VAT
attributable to its effectively zero-rated sales to NPC for the four quarters of taxable year 2004. SO
ORDERED.9
On 19 May 2010, the CTA Special First Division granted the motion for partial new trial filed by
TSC and allowed it to present in evidence the correct official receipts supporting the
₱2,430,229,567.30 zero-rated sales made to NPC. The CTA Special First Division likewise held in
abeyance the resolution of the motion for reconsideration filed by both parties.
In an Amended Decision dated 5 April 2011, the CTA Special First Division found that TSC is
entitled to a modified amount of ₱96,846,234.31 input VAT,10 upon: (1) allowing the amount of
₱2,430,229,567.30 zero-rated sales made to NPC; (2) disallowing the amount of ₱7,232,794.92
zero-rated sales because its official receipt was dated outside the period of claim; and (3) allowing
the amount of ₱3,094,606.10 input VAT for being properly substantiated.
The dispositive portion of the CTA Special First Division’s 5 April 2011 Amended Decision reads:
WHEREFORE, premises considered, respondent’s "Motion for Partial Reconsideration" is
herebyDENIED for lack of merit while petitioner’s "Motion for Partial Reconsideration" is hereby
PARTIALLY GRANTED.
Accordingly, petitioner’s claim for refund or issuance of tax credit certificate representing unutilized
input VAT for taxable year 2004 is GRANTED in the total adjusted amount of NINETY SIX
MILLION EIGHT HUNDRED FORTY SIX THOUSAND AND TWO HUNDRED THIRTY FOUR
PESOS AND 31/100 (₱96,846,234.31) or an additional EIGHTEEN MILLION EIGHT HUNDRED
THIRTY SIX THOUSAND AND THREE HUNDRED FORTY TWO PESOS AND 75/100
(₱18,836,342.75) on its previously granted claim of SEVENTY EIGHT MILLION NINE
THOUSAND EIGHT HUNDRED NINETY ONE PESOS AND 56/100 (₱78,009,891.56).
SO ORDERED.11
Thus, the Commissioner of Internal Revenue (CIR) filed a petition for review with the CTA EB.
The Court of Tax Appeals’ Ruling: En Banc
In a Decision dated 27 July 2012, the CTA EB found that TSC submitted the relevant documents
applicable to its claim. According to the CTA EB, the submitted documents constituted compliance
with the requirements of Revenue Memorandum Order No. (RMO) 53-98. Thus, the CTA EB ruled
that the judicial claim was not prematurely filed.
The dispositive portion of the CTA EB’s 27 July 2012 Decision reads:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE
COURSE, and, accordingly DISMISSED for lack of merit. The Amended Decision dated April 5,
2011 is hereby AFFIRMED.
SO ORDERED.12
In a Resolution dated 6 December2012, the CTA EB denied the motion for reconsideration filed by
the CIR for lack of merit. Hence, this petition.
The Issue
The CIR raises this sole issue for resolution:
THE [CTA EB] GRAVELY ERRED IN DENYING DUE COURSE TO [CIR]’S PETITION FOR
REVIEW IN [CTA] EB NO. 768 AND IN AFFIRMING THE DECISION OF ITS SPECIAL FIRST
DIVISION THAT [TSC] IS ENTITLED TO A REFUND OR TAX CREDIT CERTIFICATE IN THE
AMOUNT OF ₱96,846,234.31 BECAUSE IT WAS ABLE TO SUBMIT THE LEGALLY REQUIRED
DOCUMENTS IN ITS APPLICATION FOR REFUND.13
The Ruling of the Court
The petition lacks merit.
The relevant portions of Section 112 of the National Internal Revenue Code (NIRC), which provide
the requirements to enable the taxpayer to claim a refund or credit ofits input tax, state:
Sec. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-
rated oreffectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however,That in the case of zerorated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas(BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. — In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support of
the application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the
taxpayeraffected may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration ofthe one hundred twenty-day period, appeal the decision or the unacted claim
with the Court of Tax Appeals.14
Under Section 112(C) of the NIRC,the CIR has 120 days to decide the taxpayer’s claim from the
date of submission of complete documents in support of the application filed in accordance with
Section 112(A) of the NIRC. In Intel Technology v. Commissioner of Internal Revenue, 15 we ruled
that once the taxpayer has established by sufficient evidence that it is entitled to a refund or
issuance of a tax credit certificate, in accordance with the requirements of Section 112(A) of the
NIRC, its claim should be granted.
In Atlas Consolidated Mining v. Commissioner of Internal Revenue,16 we held that applications for
refund orcredit of input tax with the BIR must comply with the appropriate revenue regulations.
Thus, applications must be in accordance with Section 2 of Revenue Regulations No. 3-88 (RR 3-
88), amending Section 16 of Revenue Regulations No. 5-87, to wit:
SECTION 2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows:
SECTION 16. Refunds or tax credits of input tax.1âwphi1 –
xxxx
(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax Paid
(BIR Form No. 2552) shall be filed with the Revenue District Officeof the city or municipality where
the principal place of business of the applicant is located or directly with the Commissioner,
Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be
submitted together with the application. The original copy of the said invoice/receipt, however,
shall be presented for cancellation prior to the issuance of the Tax Credit Certificate or refund. In
addition, the following documents shall be attached whenever applicable:
xxxx
3. Effectively zero-rated sale of goods and services.
i) photocopy of approved application for zero-rate if filing for the first time.
ii) sales invoice or receipt showing name of the person or entity to whom the sale of
goods or services were delivered, date of delivery, amount of consideration, and
description of goods or services delivered.
iii) evidence of actual receipt of goods or services.
xxxx
5. In applicable cases, where the applicant’s zero-rated transactions are regulated by certain
government agencies, a statement therefrom showing the amount and description of sale of goods
and services, name of persons or entities (except in case of exports) to whom the goods or
services were sold, and date of transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount
of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction
during the period covered by the application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and
services, and the VAT paid (inputs) on purchases of goods and services cannot be directly
attributed to any of the aforementioned transactions, the following formula shall be used to
determine the creditable or refundable input tax for zero-rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
xxxx
We likewise applied RR 3-88 in AT&T Communications Services Philippines, Inc. v. Commissioner
of Internal Revenue,17 and held that only preponderance of evidence as applied in ordinary civil
cases is needed to substantiate a claim for tax refund.
In the present case, the CTA Special First Division found that TSC complied with the requirements
of Section 112(A) of the NIRC and granted its claim for refund or credit of ₱78,009,891.56 input
VAT. Upon a partial new trial, the CTA Special First Division increased the amount to
₱96,846,234.31. Upon appeal, the CTA EB concluded that TSC submitted the relevant documents
to substantiate its claim for refund or credit of input tax, to wit:
1. BIR Certificate of Registration (Annex "A", Petition for Review, CTA Case No. 7470,
vol. 1, p. 13);
2. Quarterly VAT returns for the first,second, third and fourth quarters of 2004 (Exhibits
"D", "E", "F", "G", & "H");
 3. Summary of Input Tax Payments for the first, second, third and fourth quarters of 2004 v. San Roque Power Corporation,25 we emphasized that compliance with the 120-day waiting
showing details of purchases of goods and service as well as the corresponding input tax period is mandatory and jurisdictional. In this case, when TSC filed its administrative claim on 21
paid(Exhibits "D" to "D-3", "E" to "E-5-b", "F" to "F-4-b", "H-3" to "H-4-c"); December 2005, the CIR had a period of 120 days, or until 20 April 2006, to act on the claim.
However, the CIR failed to act on TSC's claim within this 120-day period. Thus, TSC filed its
4. VAT official receipts and invoicesfor the first, second, third and fourth quarters of 2004 petition for review with the CTA on 24 April 2006 or within 30 days after the expiration of the 120-
(Exhibits"QQ"-7" to "QQ-21-d", "RR-17", "SS-1" to "SS-19" & "TT-1" to TT-18"); day period. Accordingly, we do not find merit in the CIR' s argument that the judicial claim was
prematurely filed.
5. Approved Certificate for Zero-Rate (Exhibit "A"); and
WHEREFORE, we DENY the petition for lack of merit. The Decision and Resolution of the Court
of Tax Appeals, dated 27 July 2012 and 6 December 2012, respectively, are AFFIRMED.
6. Application for Tax Credit/Refund (BIR Form 1914) (Exhibit "B-3")18
SO ORDERED.
We adopt the above-mentioned findings of fact of the CTA Special First Division, as affirmed by
the CTA EB. Whether TSC complied with the substantiation requirements of Section 112 of the
NIRC and RR 3-88 is a question of fact,19 which could only be answeredafter reviewing,
examining, evaluating, or weighing all over again the probative value of the evidence before the
CTA, which this Court does nothave reason to do in the present petition for review on certiorari.
The findings of fact of the CTA are not to be disturbed unless clearly shown to be unsupported by
substantial evidence.20 Since by the very nature of its functions, the CTA has developed an
expertise on this subject, the Court will not set aside lightly the conclusions reached by them,
unless there has been an abuse or improvident exercise of authority.21

The CIR, however, insists that TSC failed to submit the complete documents enumerated in RMO
53-98. Thus, the 120-day period given for it to decide allegedly did not commence.

The CIR’s reliance on RMO 53-98 is misplaced. There is nothing in Section 112 of the NIRC, RR
3-88 or RMO 53-98 itself that requires submission of the complete documents enumerated in
RMO 53-98 for a grant of a refund or credit of input VAT. The subject of RMO 53-98 states that it
is a "Checklist of Documents to be Submitted by a Taxpayer upon Auditof his Tax Liabilities x x x."
In this case, TSC was applying for a grant of refund or credit of its input tax. There was no
allegation of an audit being conducted by the CIR. Even assuming that RMO 53-98 applies, it
specifically states that some documents are required to be submitted by the taxpayer "if
applicable."22

Moreover, if TSC indeed failed to submit the complete documents in support of its application, the
CIR could have informed TSC of its failure, consistent with Revenue Memorandum Circular No.
(RMC) 42-03.23 However, the CIR did not inform TSC of the document it failed to submit, even up
to the present petition. The CIR likewise raised the issue of TSC’s alleged failure to submit the
complete documents only in its motion for reconsideration of the CTA Special First Division’s 4
March 2010 Decision. Accordingly, we affirm the CTA EB’s finding that TSC filed its administrative
claim on 21 December 2005, and submitted the complete documents in support of its application
for refund or credit of its input tax at the same time.

Under Section 112(C) of the NIRC, incase of failure on the part of the CIR to act on the
application, the taxpayer affected may, within 30 days after the expiration of the 120-day period,
appeal the unacted claim with the CTA. The charter of the CTA 24 also expressly provides that if
the Commissioner fails to decide within "a specific period" required by law, such "inaction shall be
deemed a denial" of the application for tax refund or credit. In Commissioner of Internal Revenue
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 183505 February 26, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, Respondents.
DECISION
DEL CASTILLO, J.:
When the intent of the law is not apparent as worded, or when the application of the law would
lead to absurdity or injustice, legislative history is all important. In such cases, courts may take
judicial notice of the origin and history of the law,1 the deliberations during the enactment,2 as well
as prior laws on the same subject matter3 to ascertain the true intent or spirit of the law.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic
Act (RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008
Resolution6 of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation
(First Asia) are domestic corporations duly organized and existing under the laws of the Republic
of the Philippines. Both are engaged in the business of operating cinema houses, among others.7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the
amount of ₱119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest
dated December 15, 2003.9
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT
deficiency, which the latter protested in a letter dated January 14, 2004.10
On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the
VAT deficiency for taxable year 2000 in the amount of ₱124,035,874.12.11
On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case
No. 7079.12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia
protested the PAN in a letter dated July 9, 2002.14
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which
was protested by First Asia in a letter dated December 12, 2002.15
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to
pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed
as CTA Case No. 7085.17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for
taxable year 2000 in the amount of ₱35,840,895.78. First Asia protested the PAN through a letter
dated April 22, 2004.18
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia
protested the same in a letter dated July 9, 2004.20
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency
in the amount of ₱35,840,895.78 for taxable year 2000.21
This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The
case was docketed as CTA Case No. 7111.22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of
₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-
letter dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was
protested by First Asia on December 14, 2004.23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the
taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004,
First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First
Asia, which the latter protested through a letter dated November 11, 2004. 24
On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay
the amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002
and 2003, respectively.25
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA
Case No. 7272.26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime
and First Asia.27
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272
with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM
Prime is a majority shareholder of First Asia. The motion was granted.28
Upon submission of the parties’ respective memoranda, the consolidated cases were submitted
for decision on the sole issue of whether gross receipts derived from admission tickets by
cinema/theater operators or proprietors are subject to VAT.29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for
Review. Resorting to the language used and the legislative history of the law, it ruled that the
activity of showing cinematographic films is not a service covered by VAT under the National
Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax
under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House
Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with
Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the
State’s Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of
its Partners in National Development,"30 the CTA First Division held that the House of
Representatives resolved that there should only be one business tax applicable to theaters and
movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC
of 1991. Further, it held that consistent with the State’s policy to have a viable, sustainable and
competitive theater and film industry, the national government should be precluded from imposing
its own business tax in addition to that already imposed and collected by local government units.
The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001,
which imposes VAT on gross receipts from admission to cinema houses, cannot be given force
and effect because it failed to comply with the procedural due process for tax issuances under
RMC No. 20-86.31 Thus, it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-
00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside.
SO ORDERED.32
Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The
CTA En Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s Motion
for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive
enumeration of what services are intended to be subject to VAT. And since the showing or
exhibition of motion pictures, films or movies by cinema operators or proprietors is not among the
enumerated activities contemplated in the phrase "sale or exchange of services," then gross
receipts derived by cinema/ theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of
motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As
regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the
same cannot be given force and effect for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses
from admission tickets [are] subject to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE
PAYING PUBLIC IS A SALE OF SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY
SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS
IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE
APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED
THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;
 (e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING
RESPONDENTS’ SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF
THE NIRC OF 1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE
TRIED BY THE HONORABLE COURT; and
(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF
THE NIRC.
(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;
(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely
subject to the amusement tax imposed by the Local Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38
Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors
of cinema/theater houses from admission tickets are subject to VAT.
Petitioner’s Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is
not exhaustive because it covers all sales of services unless exempted by law. He claims that the
CTA erred in applying the rules on statutory construction and in using extrinsic aids in interpreting
Section 108 because the provision is clear and unambiguous. Thus, he maintains that the
exhibition of movies by cinema operators or proprietors to the paying public, being a sale of
service, is subject to VAT.
Respondents’ Arguments
Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997
shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public
admission are not among the services subject to VAT. Respondents insist that gross receipts from
cinema/theater admission tickets were never intended to be subject to any tax imposed by the
national government. According to them, the absence of gross receipts from cinema/theater
admission tickets from the list of services which are subject to the national amusement tax under
Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the
fact that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished
administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land, air and water relative to
their transport of goods or cargoes; services of franchise grantees of telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those under Section 119
of this Code; services of banks, non-bank financial intermediaries and finance companies; and
non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity
and bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. The phrase "sale or
exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or
exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services,"
and "shall likewise include," indicate that the enumeration is by way of example only.39
Among those included in the enumeration is the "lease of motion picture films, films, tapes and
discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc:
"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything
in public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is
defined as "a contract by which one owning such property grants to another the right to possess,
use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price,
referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40
Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the determine
whether such activity falls under the phrase "similar services." The intent of the legislature must
therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors,
lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and
other places of amusement, including cockpits, race tracks, and cabaret. 42 In the case of theaters
or cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees,
or operators of such theaters or cinematographs before the gross receipts were divided between
the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by
transferring the power to impose amusement tax45 on admission from theaters, cinematographs,
concert halls, circuses and other places of amusements exclusively to the local government. Thus,
when the NIRC of 197746 was enacted, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.47
On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC
of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax
and percentage tax on certain services. It imposed VAT on sales of services under Section 102
thereof, which provides:
SECTION 102. Value-added tax on sale of services. — (a) Rate and base of tax. — There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of personal property; lessors or distributors
of cinematographic films; persons engaged in milling, processing, manufacturing or repacking
goods for others; and similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties: Provided That the following services
performed in the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, x x x
xxxx
"Gross receipts" means the total amount of money or its equivalent representing
the contract price, compensation or service fee, including the amount charged for
materials supplied with the services and deposits or advance payments actually
or constructively received during the taxable quarter for the service performed or
to be performed for another person, excluding value-added tax.
(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. —
If the tax is billed as a separate item in the invoice, the tax shall be based on the
gross receipts, excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined by
multiplying the gross receipts (including the amount intended to cover the tax or the tax
billed erroneously) by 1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.49
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which
clarified that the power to impose amusement tax on gross receipts derived from admission tickets
was exclusive with the local government units and that only the gross receipts of amusement
places derived from sources other than from admission tickets were subject to amusement tax
under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on
gross receipts arising from admission to places of amusement has been transferred to the local
governments to the exclusion of the national government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National Internal Revenue Code, including the value added
tax law under Executive Order No. 273, has amended the provisions of Section 11 of the Local
Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts
in places of amusement rests exclusively on the local government, to the exclusion of the national
government. Since the Bureau of Internal Revenue is an agency of the national government, then
it follows that it has no legal mandate to levy amusement tax on admission receipts in the said
places of amusement.
Considering the foregoing legal background, the provisions under Section 123 of the National
Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC)
pertaining to amusement taxes on places of amusement shall be implemented in accordance with
BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to
wit:
"x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed under
Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O.
273). The tax on gross receipts derived from admission tickets shall be levied and collected
by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended
x x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise
known as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the
power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than
thirty percent (30%) of the gross receipts from admission fees under Section 140 thereof. 50 In the
case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the local government before the gross receipts are divided
between said proprietors, lessees, or operators and the distributors of the cinematographic films.
However, the provision in the Local Tax Code expressly excluding the national government from
collecting tax from the proprietors, lessees, or operators of theaters, cinematographs, concert
halls, circuses and other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the
NIRC of 199751 was signed into law. Several amendments52 were made to expand the coverage of
VAT. However, none pertain to cinema/theater operators or proprietors. At present, only lessors or
distributors of cinematographic films are subject to VAT. While persons subject to amusement
tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54
Based on the foregoing, the following facts can be established:
(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater
operators or proprietors has always been considered as a form of entertainment subject
to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national
government.
(3) When the Local Tax Code was enacted, amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of amusements were
transferred to the local government.
(4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race
tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax
under the NIRC from the coverage of VAT.1auuphil
(7) When the Local Tax Code was repealed by the LGC of 1991, the local government
continued to impose amusement tax on admission tickets from theaters, cinematographs,
concert halls, circuses and other places of amusements.
(8) Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT.
(9) Only lessors or distributors of cinematographic films are included in the coverage of
VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the
amusement tax. This holds true even in the case of cinema/theater operators taxed under the
LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on
certain services. The mere fact that they are taxed by the local government unit and not by the
national government is immaterial. The Local Tax Code, in transferring the power to tax gross
receipts derived by cinema/theater operators or proprietor from admission tickets to the local
government, did not intend to treat cinema/theater houses as a separate class. No distinction
must, therefore, be made between the places of amusement taxed by the national government
and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax
imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in
injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed
under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it
will operate unjustly or lead to absurd results.56 Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."
And, in order to maintain the general public's trust and confidence in the Government this power
must be used justly and not treacherously.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated
that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be
under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal construed strictly against the government and in favor of the taxpayer.64
Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the
Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court
imposing taxes on gross receipts from admission of persons to cinema/theater and other places of of Tax Appeals En Banc holding that gross receipts derived by respondents from admission tickets
amusement had, thereafter, been transferred to the provincial government, to the exclusion of the in showing motion pictures, films or movies are not subject to value-added tax under Section 108
national or municipal government (Sections 11 & 13, Local Tax Code). However, the said of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution
provision containing the exclusive power of the provincial government to impose amusement tax, denying the motion for reconsideration are AFFIRMED.
had also been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the
Local Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the
SO ORDERED.
enactment of RA No. 7160, thus, eliminating the statutory prohibition on the national government
to impose business tax on gross receipts from admission of persons to places of amusement, led
the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of the old
Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was implemented
beginning January 1, 1996.58 (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
on the gross receipts of cinema/theater operators or proprietors derived from admission tickets.
The removal of the prohibition under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or proprietors.
Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the
taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed
as imposing a tax unless it does so clearly, expressly, and unambiguously. 59 As it is, the power to
impose amusement tax on cinema/theater operators or proprietors remains with the local
government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on
the gross receipts from admission to cinema houses must be struck down. We cannot
overemphasize that RMCs must not override, supplant, or modify the law, but must remain
consistent and in harmony with, the law they seek to apply and implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the
procedural due process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an
exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied
against him.61 The reason is obvious: it is both illogical and impractical to determine who are
exempted without first determining who are covered by the provision. 62 Thus, unless a statute
imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule
 Republic of the Philippines Deficiency VAT Due P 11,141,014.41
SUPREME COURT
Manila
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
SECOND DIVISION
(Assessment No. ST-EWT-97-0125-2000)
G.R. No. 178697 November 17, 2010
Basic Tax Due P 1,416,976.90

COMMISSIONER OF INTERNAL REVENUE, Petitioner, Add: Penalties

vs.
SONY PHILIPPINES, INC., Respondent. Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
DECISION
Deficiency EWT Due P 1,992,462.72
MENDOZA, J.:

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming (Assessment No. ST-LR1-97-0126-2000)
the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the
petition for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision Basic Tax Due P
cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency assessment for Add: Penalties
expanded withholding tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late Surcharge P 359,177.80
remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
Interest up to 3-31-2000 87,580.34
THE FACTS: Compromise 16,000.00 462,758.14

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA Penalties Due P 462,758.14
19734) authorizing certain revenue officers to examine Sony’s books of accounts and other
accounting records regarding revenue taxes for "the period 1997 and unverified prior
years." On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties LATE REMITTANCE OF FINAL WITHHOLDING TAX
was issued by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued
final assessment notices, the formal letter of demand and the details of discrepancies.4 Said (Assessment No. ST-LR2-97-0127-2000)
details of the deficiency taxes and penalties for late remittance of internal revenue taxes are as
Basic Tax Due P
follows:
Add: Penalties
DEFICIENCY VALUE -ADDED TAX (VAT) Surcharge P 1,729,690.71
(Assessment No. ST-VAT-97-0124-2000) Interest up to 3-31-2000 508,783.07
Basic Tax Due P 7,958,700.00 Compromise 50,000.00 2,288,473.78
Add: Penalties Penalties Due P 2,288,473.78
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41 LATE REMITTANCE OF INCOME PAYMENTS
(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P revenue taxes in the sum of ₱1,269,593.90:
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60
GRAND TOTAL P 15,895,632.655
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,
2000. Sony submitted relevant documents in support of its protest on the 16th of that same
month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice resulted in
an input VAT credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT
assessment on Sony’s motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions with five percent
(5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on rental expense since it found that the total rental
deposit of ₱10,523,821.99 was incurred from January to March 1998 which was again beyond the
coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld
the penalties for the late payment of VAT on royalties, for late remittance of final withholding tax
on royalty as of December 1997 and for the late remittance of EWT by some of Sony’s
branches.8 In sum, the CTA-First Division partly granted Sony’s petition by cancelling the
deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the
penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is
ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997
for lack of merit. However, the deficiency assessments for expanded withholding tax and penalties
for late remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding
tax in the amount of ₱1,035,879.70 and the following penalties for late remittance of internal
1. VAT on Royalty P 429,242.07
2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3)
of the 1997 Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable
for the deficiency VAT in the amount of ₱11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
₱10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on
time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed,
the CIR filed a petition for review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;
2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be
subjected to 10% withholding tax instead of the 5% tax rate;
 3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of ₱10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on
July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF
PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION
EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED
TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on
December 3, 2008, the Court resolved to give due course to the petition and to decide the case on
the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot
agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables
said revenue officer to examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that
the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess
a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the correct
amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said
reason, the CIR acting through its revenue officers went beyond the scope of their authority
because the deficiency VAT assessment they arrived at was based on records from January to
March 1998 or using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-
First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should
have done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase
"and unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other periods or years shall be
specifically indicated in the L/A.16 [Emphasis supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it
may, the CIR’s argument, that Sony’s advertising expense could not be considered as an input
VAT credit because the same was eventually reimbursed by Sony International Singapore (SIS), is
also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony. 17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the
CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input
VAT credits that should have been realized from the advertising expense of the latter. 18 It is
evident under Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a
VAT invoice is a legitimate business expense. This is confirmed by no less than CIR’s own
witness, Revenue Officer Antonio Aluquin.20 There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices in the name of
Sony and the latter paid for the same.21 Indubitably, Sony incurred and paid for advertising
expense/ services. Where the money came from is another matter all together but will definitely
not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income
and, thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input taxes
from such expenses. Thus, at the most, this is an additional income of our client subject to income
tax. We submit further that our client is not subject to VAT on the subsidy income as this was not
derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should
be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement
was not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or
aid in view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s
(Sony’s) advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony.
It was but a dole out by SIS and not in payment for goods or properties sold, bartered or
exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also
subject to VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for
Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the
CIR insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead
of the five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said
revenue regulation provides that the 10% rate is applied when the recipient of the commission
income is a natural person. According to the CIR, Sony’s schedule of Selling, General and
Administrative expenses shows the commission expense as "commission/dealer salesman
incentive," emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based
on Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker
is subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While
the commission expense in the schedule of Selling, General and Administrative expenses
submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive"
the same does not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such
expense is composed of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’
of P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-
94, which was the applicable rule during the subject period of examination and assessment as
specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April
1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July 2001 under
Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the
deficiency EWT assessment on the rental deposit. According to their findings, Sony incurred the
subject rental deposit in the amount of ₱10,523,821.99 only from January to March 1998. As
stated earlier, in the absence of the appropriate LOA specifying the coverage, the CIR’s deficiency SO ORDERED.
EWT assessment from January to March 1998, is not valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the
payment of final tax on royalty. Based on the same, Sony is required to deduct and withhold final
taxes on royalty payments when the royalty is paid or is payable. After which, the corresponding
return and remittance must be made within 10 days after the end of each month. The question
now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31,
the LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or otherwise disposed of by the
LICENSEE during such respective semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR
concurrently with the furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this,
the FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10,
1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on
or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

 Republic of the Philippines the four quarters of 2001;5 and that it had declared the input VAT of ₱9,795,427.89 in its amended
SUPREME COURT VAT returns for the four quarters on 2001, as follows:6
Manila
Exhibit Date Filed Period Covered Input VAT (P)
FIRST DIVISION
F May 25, 2001 1st quarter – 2001 1,903,443.96
G.R. No. 188260 November 13, 2013
I July 23, 2001 2nd quarter – 2001 2,166,051.96

LUZON HYDRO CORPORATION, Petitioner, L July 23, 2002 3rd quarter –2001 1,598,482.39
vs.
O July 24, 2002 4th quarter – 2001 4,127,449.58
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Total 9,795,427.89
DECISION
On November 26, 2001, the petitioner filed a written claim for refund or tax credit relative to its
BERSAMIN, J.: unutilized input VAT for the period from October 1999 to October 2001 aggregating
₱14,557,004.38.7 Subsequently, on July 24, 2002, it amended the claim for refund or tax credit to
This case involves a claim for refund or tax credit to cover petitioner Luzon Hydro Corporation's cover the period from October 1999 to May 2002 for ₱20,609,047.56.8
unutilized Input Value-Added Tax (VAT) worth 1 2,920,665 .16 corresponding to the four quarters
of taxable year 2001. The BIR, through Revenue Examiner Felicidad Mangabat of Revenue District Office No. 2 in Vigan
City, concluded an investigation, and made a recommendation in its report dated August 19, 2002
The Case favorable to the petitioner’s claim for the period from January 1, 2001 to December 31, 2001.9

The petitioner brought this action in the Court of Tax Appeals (CTA) after the Commissioner of
Internal Revenue (respondent) did not act on the claim (CTA Case No. 6669). The CTA 2nd
Division denied the claim on May 2, 2008 on the ground that the petitioner did not prove that it had
zero-rated sales for the four quarters of 2001.1 The CT A En Banc denied the petitioner's motion
for reconsideration, and affirmed the decision of the CTA 2nd Division through its decision dated
May 5, 2009.2 Hence, the petitioner appeals the decision of the CTA En Banc.
Antecedents
Respondent Commissioner of Internal Revenue (Commissioner) did not ultimately act on the
petitioner’s claim despite the favorable recommendation. Hence, on April 14, 2003, the petitioner
filed its petition for review in the CTA, praying for the refund or tax credit certificate (TCC)
corresponding to the unutilized input VAT paid for the four quarters of 2001 totalling
₱9,795,427.88.10
Answering on May 29, 2003,11 the Commissioner denied the claim, and raised the following
special and affirmative defenses, to wit:

The petitioner, a corporation duly organized under the laws of the Philippines, has been registered xxxx
with the Bureau of Internal Revenue (BIR) as a VAT taxpayer under Taxpayer Identification No.
004-266-526. It was formed as a consortium of several corporations, namely: Northern Mini Hydro 7. The petitioner has failed to demonstrate that the taxes sought to be refunded were
Corporation, Aboitiz Equity Ventures, Inc., Ever Electrical Manufacturing, Inc. and Pacific Hydro erroneously or illegally collected;
Limited.
8. In an action for tax refund, the burden is upon the taxpayer to prove that he is entitled
Pursuant to the Power Purchase Agreement entered into with the National Power Corporation thereto, and failure to sustain the same is fatal to the action for tax refund;
(NPC), the electricity produced by the petitioner from its operation of the Bakun Hydroelectric
Power Plant was to be sold exclusively to NPC.3 Relative to its sale to NPC, the petitioner was
9. It is incumbent upon petitioner to show compliance with the provisions of Section 112
granted by the BIR a certificate for Zero Rate for VAT purposes in the periods from January 1,
and Section 229, both of the National Internal Revenue Code, as amended;
2000 to December 31, 2000; February 1, 2000 to December 31, 2000 (Certificate No. Z-162-
2000); and from January 2, 2001 to December 31, 2001 (Certificate No. 2001-269).4
10. Claims for refund are construed strictly against the claimant for the same partakes the
nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, G.R.
The petitioner alleged herein that it had incurred input VAT in the amount of ₱9,795,427.89 on its
domestic purchases of goods and services used in its generation and sales of electricity to NPC in
 No. L-13509, January 30, 1970, 31 SCRA 95) and as such they are looked upon [with]
disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121);
11. Taxes paid and collected are presumed to have been made in accordance with the
law and regulations, hence, not refundable.12
xxxx
On October 30, 2003, the parties submitted a Joint Stipulation of Facts and Issues,13 which the
CTA in Division approved on November 10, 2003. The issues to be resolved were consequently
the following:
1. Whether or not the input value added tax being claimed by petitioner is supported by
sufficient documentary evidence;
2. Whether petitioner has excess and unutilized input VAT from its purchases of domestic
goods and services, including capital goods in the amount of ₱9,795,427.88;
3. Whether or not the input VAT being claimed by petitioner is attributable to its zero-rated
sale of electricity to the NPC;
4.Whether or not the operation of the Bakun Hydroelectric Power Plant is directly
connected and attributable to the generation and sale of electricity to NPC, the sole
business of petitioner; and 5. Whether or not the claim filed by the petitioner was filed
within the reglementary period provided by law.14
While the case was pending hearing, the Commissioner, through the Assistant Commissioner for
Assessment Services, informed the petitioner by the letter dated March 3, 2005 that its claim had
been granted in the amount of ₱6,874,762.72, net of disallowances of ₱2,920,665.16.
Accompanying the letter was the TCC for ₱6,874,762.72 (TCC No. 00002618).15
On May 3, 2005, the petitioner filed a Motion for Leave of Court to Amend Petition for Review in
consideration of the partial grant of the claim through TCC No. 00002618. The CTA in Division
granted the motion on May 11, 2005, and admitted the Amended Petition for Review, whereby the
petitioner sought the refund or tax credit in the reduced amount of ₱2,920,665.16. The CTA in
Division also directed the respondent to file a supplemental answer within ten days from notice. 16
When no supplemental answer was filed within the period thus allowed, the CTA in Division
treated the answer filed on May 16, 2003 as the Commissioner’s answer to the Amended Petition
for Review.17
Thereafter, the petitioner presented testimonial and documentary evidence to support its claim. On
the other hand, the Commissioner submitted the case for decision based on the pleadings. 18 On
May 2, 2007, the case was submitted for decision without the memorandum of the
Commissioner.19
Ruling of the CTA in Division
The CTA in Division promulgated its decision in favor of the respondent denying the petition for
review, viz:
In petitioner’s VAT returns for the four quarters of 2001, no amount of zero-rated sales was
declared. Likewise, petitioner did not submit any VAT official receipt of payments for services
rendered to NPC. The only proof submitted by petitioner is a letter from Regional Director Rene Q.
Aguas, Revenue Region No. 1, stating that the financial statements and annual income tax return
constitute sufficient secondary proof of effectively zero-rated and that based on their examination
and evaluation of the financial statements and annual income tax return of petitioner for taxable
year 2000, it had annual gross receipts of Ph₱187,992,524.00. This Court cannot give credence to
the said letter as it refers to taxable year 2000, while the instant case refers to taxable year 2001.
Without zero-rated sales for the four quarters of 2001, the input VAT payments of
Ph₱9,795,427.88 (including the present claim of Ph₱2,920,665.16) allegedly attributable thereto
cannot be refunded. It is clear under Section 112 (A) of the NIRC of 1997 that the refund/tax credit
of unutilized input VAT is premised on the existence of zero-rated or effectively zero-rated sales.
xxxx
For petitioner’s non-compliance with the first requisite of proving that it had effectively zero-rated
sales for the four quarters of 2001, the claimed unutilized input VAT payments of
Ph₱2,920,665.16 cannot be granted.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.
SO ORDERED.20
On May 21, 2008, the petitioner moved to reconsider the decision of the CTA in
Division.21 However, the CTA in Division denied the petitioner’s motion for reconsideration on
September 5, 2008.22
Decision of the CTA En Banc
On October 17, 2008, the petitioner filed a petition for review in the CTA En Banc (CTA E.B No.
420), posing the main issue whether or not the CTA in Division erred in denying its claim for refund
or tax credit upon a finding that it had not established its having effectively zero-rated sales for the
four quarters of 2001.
On May 5, 2009, the CTA En Banc promulgated the assailed decision affirming the Division, and
denying the claim for refund or tax credit, stating:
The other argument of petitioner that even if the tax credit certificate will not be used as evidence,
it was able to prove that it has zero-rated sale as shown in its financial statements and income tax
returns quoting the letter opinion of Regional Director Rene Q. Aguas that the statements and the
return are considered sufficient to establish that it generated zero-rated sale of electricity is bereft
of merit. As found by the Court a quo, the letter opinion refers to taxable year 2000, while the
instant case covers taxable year 2001; hence, cannot be given credence. Even assuming for the
sake of argument that the financial statements, the return and the letter opinion relates to 2001,
the same could not be taken plainly as it is because there is still a need to produce the supporting
documents proving the existence of such zero-rated sales, which is wanting in this case.
Considering that there are no zero-rated sales to speak of for taxable year 2001, petitioner is,
therefore, not entitled to a refund of Ph₱2,920,665.16 input tax allegedly attributable thereto since
it is basic requirement under Section 112 (A) of the NIRC that there should exists a zero-rated
sales in order to be entitled to a refund of unutilized input tax.
It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayer and
that the claimant has the burden of proof to establish the factual basis of its claim for tax credit or
refund. Failure in this regard, petitioner’s claim must therefore, fail.
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.
SO ORDERED.23
On June 10, 2009, the CTA En Banc also denied the petitioner’s motion for reconsideration.24
Issue
Aggrieved, the petitioner has appealed, urging as the lone issue: –
WHETHER THE CTA EN BANC COMMITTED A REVERSIBLE ERROR IN AFFIRMING THE
DECISION OF THE CTA.
In its August 3, 2009 petition for review,25 the petitioner has argued as follows:
(1) Its sale of electricity to NPC was automatically zero-rated pursuant to Republic Act No.
9136 (EPIRA Law); hence, it need not prove that it had zero-rated sales in the period from
January 1, 2001 to December 31, 2001 by the presentation of VAT official receipts that
would contain all the necessary information required under Section 113 of the National
Internal Revenue Code of 1997, as implemented by Section 4.108-1 of Revenue
Regulations No. 7-95. Evidence of sale of electricity to NPC other than official receipts
could prove zero-rated sales.
(2) The TCC, once issued, constituted an administrative opinion that deserved
consideration and respect by the CTA En Banc.
(3) The CTA En Banc was devoid of any authority to determine the existence of the
petitioner’s zero-rated sales, inasmuch as that would constitute an encroachment on the
powers granted to an administrative agency having expertise on the matter.
(4) The CTA En Banc manifestly overlooked evidence not disputed by the parties and
which, if properly considered, would justify a different conclusion.26
The petitioner has prayed for the reversal of the decision of the CTA En Banc, and for the remand
of the case to the CTA for the reception of its VAT official receipts as newly discovered evidence.
It has supported the latter relief prayed for by representing that the VAT official receipts had been
misplaced by Edwin Tapay, its former Finance and Accounting Manager, but had been found only
after the CTA En Banc has already affirmed the decision of the CTA in Division. In the alternative,
it has asked that the Commissioner allow the claim for refund or tax credit of ₱2,920,665.16.
In the comment submitted on December 3, 2009,27 the Commissioner has insisted that the
petitioner’s claim cannot be granted because it did not incur any zero-rated sale; that its failure to
comply with the invoicing requirements on the documents supporting the sale of services to NPC
resulted in the disallowance of its claim for the input tax; and the claim should also be denied for
not being substantiated by appropriate and sufficient evidence.
In its reply filed on February 4, 2010,28 the petitioner reiterated its contention that it had
established its claim for refund or tax credit; and that it should be allowed to present the official
receipts in a new trial.
Ruling of the Court
The petition is without merit.
Section 112 of the National Internal Revenue Code 1997 provides:
SEC. 112. Refunds or Tax Credits of Input Tax.—
(A) Zero-rated or Effectively Zero-rated Sales--Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales.
xxxx
A claim for refund or tax credit for unutilized input VAT may be allowed only if the following
requisites concur, namely: (a) the taxpayer is VAT-registered; (b) the taxpayer is engaged in zero-
rated or effectively zero-rated sales; (c) the input taxes are due or paid; (d) the input taxes are not
transitional input taxes; (e) the input taxes have not been applied against output taxes during and
in the succeeding quarters; (f) the input taxes claimed are attributable to zero-rated or effectively
zero-rated sales; (g) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and
108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; (h) where
there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input
taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume; and (i) the claim is filed within two years
after the close of the taxable quarter when such sales were made.29
The petitioner did not competently establish its claim for refund or tax credit.1avvphi1 We agree
with the CTA En Banc that the petitioner did not produce evidence showing that it had zero-rated
sales for the four quarters of taxable year 2001. As the CTA En Banc precisely found, the
petitioner did not reflect any zero-rated sales from its power generation in its four quarterly VAT
returns, which indicated that it had not made any sale of electricity. Had there been zero-rated
sales, it would have reported them in the returns. Indeed, it carried the burden not only that it was
entitled under the substantive law to the allowance of its claim for refund or tax credit but also that
it met all the requirements for evidentiary substantiation of its claim before the administrative
official concerned, or in the de novo litigation before the CTA in Division.30
Although the petitioner has correctly contended here that the sale of electricity by a power
generation company like it should be subject to zero-rated VAT under Republic Act No. 9136,31 its
assertion that it need not prove its having actually made zero-rated sales of electricity by
presenting the VAT official receipts and VAT returns cannot be upheld. It ought to be reminded
that it could not be permitted to substitute such vital and material documents with secondary
evidence like financial statements.
We further find to be lacking in substance and bereft of merit the petitioner’s insistence that the
CTA En Banc should not have disregarded the letter opinion by BIR Regional Director Rene Q.
Aguas to the effect that its financial statements and its return were sufficient to establish that it had
generated zero-rated sale of electricity. To recall, the CTA En Banc rejected the insistence
because, firstly, the letter opinion referred to taxable year 2000 but this case related to taxable
year 2001, and, secondly, even assuming for the sake of argument that the financial statements,
the return and the letter opinion had related to taxable year 2001, they still could not be taken at
face value for the purpose of approving the claim for refund or tax credit due to the need to
produce the supporting documents proving the existence of the zero-rated sales, which did not
happen here. In that respect, the CTA En Banc properly disregarded the letter opinion as
irrelevant to the present claim of the petitioner.
We further see no reason to grant the prayer of the petitioner for the remand of this case to enable
it to present before the CTA newly discovered evidence consisting in VAT official receipts.
Ordinarily, the concept of newly discovered evidence is applicable to litigations in which a litigant
seeks a new trial or the re-opening of the case in the trial court. Seldom is the concept appropriate
when the litigation is already on appeal, particularly in this Court. The absence of a specific rule on
newly discovered evidence at this late stage of the proceedings is not without reason. The
propriety of remanding the case for the purpose of enabling the CTA to receive newly discovered
evidence would undo the decision already on appeal and require the examination of the pieces of
newly discovered evidence, an act that the Court could not do by virtue of its not being a trier of
facts. Verily, the Court has emphasized in Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue32 that a judicial claim for tax refund or tax credit
brought to the CTA is by no means an original action but an appeal by way of a petition for review
of the taxpayer’s unsuccessful administrative claim; hence, the taxpayer has to convince the CTA
that the quasi-judicial agency a quo should not have denied the claim, and to do so the taxpayer
should prove every minute aspect of its case by presenting, formally offering and submitting its
evidence to the CTA, including whatever was required for the successful prosecution of the
administrative claim as the means of demonstrating to the CTA that its administrative claim should
have been granted in the first place.
Nonetheless, on the proposition that we may relax the stringent rules of procedure for the sake of
rendering justice, we still hold that the concept of newly discovered evidence may not apply
herein. In order that newly discovered evidence may be a ground for allowing a new trial, it must
be fairly shown that: (a) the evidence is discovered after the trial; (b) such evidence could not have
been discovered and produced at the trial even with the exercise of reasonable diligence; (c) such
evidence is material, not merely cumulative, corroborative, or impeaching; and (d) such evidence
is of such weight that it would probably change the judgment if admitted.33
The first two requisites are not attendant. To start with, the proposed evidence was plainly not
newly discovered considering the petitioner s admission that its former Finance and Accounting
Manager had misplaced the VAT official receipts. If that was true, the misplaced receipts were
forgotten evidence. And, secondly, the receipts, had they truly existed, could have been sooner
discovered and easily produced at the trial with the exercise of reasonable diligence. But the
petitioner made no convincing demonstration that it had exercised reasonable diligence. The
Court cannot accept its tender of such receipts and return now, for, indeed, the non-production of
documents as vital and material as such receipts and return were to the success of its claim for
refund or tax credit was improbable, as it goes against the sound business practice of safekeeping
relevant documents precisely to ensure their future use to support an eventual substantial claim
for refund or tax credit.
WHEREFORE, the Court DENIES the petition for review on certiorari for its lack of merit;
AFFIRMS the decision dated May 5, 2009 of the Court of Tax Appeals En Bane; and ORDERS the
petitioner to pay the costs of suit.
SO ORDERED.
 SECOND DIVISION
March 12, 2014
G.R. No. 169778
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SILICON PHILIPPINES, INC. (formerly INTEL PHILIPPINES MANUFACTURING,
INC.), Respondents.
DECISION
PEREZ, J.:
To obviate the possibility that its decision inay be rendered void, the Court can, by its own
initiative, rule on the question ofjurisdiction, although not raised by the parties. 1 As a corollary
thereto, to inquire into the existence of jurisdiction over the subject matter is the primary concern
of a court, for thereon would depend the validity of its entire proceedings.2
Before the Court is a Petition for Review on Certiorari seeking to reverse and set aside the 16
September 2005 Decision3 of the Court ·of Appeals (CA) in CA-G.R. SP No. 80886 granting
respondent's claim for refund of input Value Added Tax (VAT) on domestic purchases of goods
and services attributable to zero-rated sales in the amount of P21,338,910.44 for the period
covering 1 April 1998 to 30 June 1998.
The Facts
The factual antecedents of the case are as follows:
Petitioner is the duly appointed Commissioner of Internal Revenue empowered to perform the
duties of said office including, among others, the power to decide, approve and grant refunds or
tax credits of erroneously or excessively paid taxes.
Respondent Silicon Philippines, Inc., on the other hand, is a corporation duly organized and
existing under and by virtue of the laws of the Philippines, engaged primarily in the business of
designing, developing, manufacturing, and exporting advance and large-scale integrated circuits
components (ICs).
On 6 May 1999, respondent filed with the One-Stop Shop Inter- Agency Tax Credit and Duty
Drawback Center of the Department of Finance (DOF) an application for Tax Credit/Refund of
VAT paid for the second quarter of 1998 in the aggregate amount of P29,559,050.44, representing
its alleged unutilized input tax.
Thereafter, since no final action has been taken by petitioner on respondent’s administrative claim
for refund, respondent filed a Petition for Review before the Court of Tax Appeals (CTA) on 30
June 2000 docketed as CTA Case No. 6129.
The Ruling of the CTA
In a Decision dated 26 May 2003,4 the CTA partially granted respondent’s Petition and ordered
petitioner to issue a tax credit certificate in favor of the former in the reduced amount of
P8,179,049.00 representing input VAT on importation of capital goods, the dispositive portion of
which are quoted hereunder as follows:
WHEREFORE, the instant petition is PARTIALLY GRANTED. [Petitioner] is hereby ORDERED to
ISSUE A TAX CREDIT CERTIFICATE to [respondent] in the amount of P8,179,049.00
representing input VAT on importation of capital goods. However, petitioner’s (respondent’s) claim
for refund of input VAT in the sum of P21,338,910.44 attributable to zero-rated sales is hereby
DENIED for lack of merit.5
The CTA denied respondent’s claim for refund of input VAT on domestic purchases of goods and
services attributable to zero-rated sales on the ground that the export sales invoices presented in
support thereto do not have Bureau of Internal Revenue (BIR) permit to print, while the sales
invoices do not show that the sale was "zero-rated," all in violation of Sections 1136 and 2387 of
the National Internal Revenue Code (NIRC) of 1997, as amended, and Section 4.108-1 of
Revenue Regulations (RR) No. 7- 95.8
As to respondent’s claim for refund of input VAT on capital goods, the CTA looked into
respondent’s compliance with the requirements set forth in the case of Air Liquid Philippines v.
Commissioner of Internal Revenue and Commissioner of Customs, CTA Case No. 5652, 26 July
2000, and held that said claim be partially denied considering that only the amount of
P8,179,049.00 have been validly supported by documentary evidence such as suppliers’ invoices,
official receipts, import declarations, import remittances and airway bills, showing the actual
payment of VAT on the importation of capital goods as required by Section 4.104-5(b) of RR No.
7- 95.9
Relevant thereto, the CTA likewise made a factual finding that both the administrative and judicial
claims of respondent were timely filed within the two-year prescriptive period required by the NIRC
of 1997, as amended, reckoned from the date of filing the original quarterly VAT Return for the
second quarter of taxable year 1998, or on 27 July 1998.10
On 4 November 2003, the CTA denied respondent’s Partial Motion for Reconsideration (on the
denial of its claim for tax credit or refund of input VAT paid in the sum of P21,338,910.44) for lack
of merit.11
Aggrieved, respondent appealed to the CA by filing a Petition for Review under Rule 43 of the
Rules of Court on 10 December 2003, docketed as CA-G.R. SP No. 80886.
The Ruling of the CA
The CA found that respondent’s failure to secure a BIR authority or permit to print invoices or
receipts does not completely destroy the integrity of its export sales invoices in support of its claim
for refund, since the BIR permit to print is not among those required to be stated in the sales
invoices or receipts to be issued by a taxpayer pursuant to Sections 113 and 237 of the NIRC of
1997, as amended. In addition, the BIR permit to print was only mentioned under Section 238 of
the same code, which merely stated that the securement of the BIR authority to print by all
persons engaged in business is necessary before a printer can print receipts or sales or
commercial invoices issued in the course of one’s business. Clearly, it does not state that the
same must be shown in the receipts or invoices. Thus, the omission to indicate the said BIR
authority or permit to print does not totally militate against the evidentiary weight of respondent’s
export sales invoices as to defeat its claim for refund.
Moreover, it was the CA’s ruling that the omission to reflect the word "zero-rated" in its invoices is
not fatal to respondent’s case considering that the absence of the word "zero-rated" in the
invoices, although truly helpful in facilitating the determination of whether the sales are subject to
the normal rate of ten percent (10%) tax or the preferential rate at zero percent, does not
necessarily mean that the sales are not in fact "zero-rated." Sections 113 and 237 of the NIRC of
1997, as amended, are silent on the requisite of printing the word "zero-rated" in the invoices.
Accordingly, upon its findings of compliance with Section 112(A) of the NIRC of 1997, as
amended, the CA reversed and set-aside the CTA decision dated 26 May 2003, and granted
respondent’s claim for tax refund/credit in the total amount of P21,338,910.44 in its Decision dated
16 September 2005.12
Consequently, this Petition for Review wherein petitioner seeks the reversal of the aforementioned
decision on the sole ground that the CA gravely erred on a question of law when it ordered a
refund of respondent’s VAT Input taxes on the basis of unauthorized and illegally printed receipts
in violation of the provisions of the NIRC of 1997, as amended.13
The Issue
The core issue for the Court’s resolution is whether or not respondent is entitled to its claim for
refund or issuance of a tax credit certificate in its favor in the amount of P21,338,910.44
representing its unutilized creditable input taxes for the period covering 1 April 1998 to 30 June
1998 (second quarter), pursuant to the applicable provisions of the NIRC of 1997, as amended.
Our Ruling
At the outset, it bears emphasis that the determination of the issue presented in this case requires
a review of the factual findings of the CTA, and of the CA.
It is well settled that in a petition for review on certiorari under Rule 45 of the Rules of Court, only
questions of law may be raised.14 The Court is not a trier of facts and does not normally undertake
the re-examination of the evidence presented by the contending parties during the trial of the case
considering that the findings of facts of the CA are conclusive and binding on the Court 15 – and
they carry even more weight when the CA affirms the factual findings of the trial court. 16 However,
the Court had recognized several exceptions to this rule, to wit: (1) when the findings are
grounded entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting;
(6) when in making its findings the CA went beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant and the appellee; (7) when the findings are
contrary to the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based;
(9) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on the supposed absence
of evidence and contradicted by the evidence on record; and (11) when the CA manifestly
overlooked certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.17
Records of this case reveal that the CTA made a factual finding that both the administrative and
judicial claims of respondent were timely filed within the two-year prescriptive period required by
the NIRC of 1997, as amended, reckoned from the date of filing the original quarterly VAT Return
for the second quarter of taxable year 1998, or on 27 July 1998.18 This was the CTA’s legal basis
why it took cognizance of the appeal, tried the case on the merits, and rendered its judgment on
26 May 2003.19 Likewise, the same finding was affirmed and adopted by the CA in the assailed 16
September 2005 decision20 by expressing that respondent "filed the application for tax refund or
credit within the prescribed period of two (2) years after the close of the taxable quarter when the
sales were made"21 in accordance with Section 112(A) of the NIRC of 1997, as amended.
However, upon an assiduous review of the said factual findings, applicable provisions of the NIRC
of 1997, as amended, and existing jurisprudential pronouncements, this Court finds it apropos to
determine whether or not the CTA indeed properly acquired jurisdiction over respondent’s instant
claim taking into consideration the timeliness of the filing of its judicial claim as provided under
Section 112 of the NIRC of 1997, as amended. Simply put, a negative finding as to the timeliness
of respondent’s judicial claim, once properly considered, would definitely result in a different
conclusion, being jurisdictional in nature.
It should be recalled that the CTA is a court of special jurisdiction. As such, it can only take
cognizance of such matters as are clearly within its jurisdiction. 22 In view thereof, although the
parties have not raised the issue of jurisdiction, nevertheless, this Court may motu
proprio determine whether or not the CTA has jurisdiction over respondent’s judicial claim for
refund taking into consideration, the factual and legal allegations contained in the pleadings filed
by both parties and found by the court a quo.
Section 7 of Republic Act (RA) No. 1125,23 which was thereafter amended by RA No.
9282,24 defines the appellate jurisdiction of the CTA. The said provision, in part, reads:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided.
(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue;
x x x x25 (Emphasis supplied)
Furthermore, Section 11 of the same law prescribes how the said appeal should be taken, to wit:
Section 11. Who may appeal; effect of appeal. – Any person, association or corporation adversely
affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or
any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax
Appeals within thirty days after the receipt of such decision or ruling.
x x x x26 (Emphasis and underscoring supplied)
Pertinent to the instant case, it is worth mentioning that Section 112 of the NIRC of 1997, as
amended, was already the applicable law at the time that respondent filed its administrative and
judicial claims, which categorically provides as follows:
Section 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT- registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: x x x
xxxx
(D)27 Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty- day period, appeal the decision or
the unacted claim with the Court of Tax Appeals.
x x x x (Emphasis and underscoring supplied)
Based on the foregoing provisions, prior to seeking judicial recourse before the CTA, a VAT-
registered person may apply for the issuance of a tax credit certificate or refund of creditable input
tax attributable to zero- rated or effectively zero-rated sales within two (2) years after the close of
taxable quarter when the sales or purchases were made.
Additionally, further reading of the provisions of Section 112 shows that under paragraph (D)
thereof, the Commissioner of Internal Revenue is given a 120-day period, from submission of
complete documents in support of the administrative claim within which to act on claims for
refund/applications for issuance of the tax credit certificate. Upon denial of the claim or
application, or upon expiration of the 120-day period, the taxpayer only has 30 days within
which to appeal said adverse decision or unacted claim before the CTA.
In the consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation
v. Commissioner of Internal Revenue (San Roque),28 the Court En Banc finally settled the issue on
the proper interpretation of Section 112 of the NIRC of 1997, as amended, pertaining to the proper
observance of the prescriptive periods provided therein. The relevant portion of the discussions
pertinent to the focal issue in the present case are quoted hereunder as follows:
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing.
Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any
petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its
judicial claim long after the expiration of the 120-day period, in fact 426 days after the lapse of the
120-day period. In any event, whether governed by jurisprudence before, during, or after the Atlas
case, Philex’s judicial claim will have to be rejected because of late filing. Whether the two-year
prescriptive period is counted from the date of payment of the output VAT following
the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input
VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably
filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the
Commissioner on Philex’s claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period
to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial"
decision of the Commissioner final and unappealable. The right to appeal to the CTA from a
decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a
constitutional right. The exercise of such statutory privilege requires strict compliance with the
conditions attached by the statute for its exercise. Philex failed to comply with the statutory
conditions and must thus bear the consequences.29 (Emphasis and italics supplied)
Undoubtedly, it becomes apparent from the foregoing jurisprudential pronouncements and the
applicable provisions of Section 112 of the NIRC of 1997, as amended, that a taxpayer-claimant
only had a limited period of thirty (30) days from the expiration of the 120-day period of inaction of
the Commissioner of Internal Revenue to file its judicial claim with this Court. Failure to do so, the
judicial claim shall prescribe or be considered as filed out of time.
Applying the foregoing discussion in the case at bench, although respondent has indeed complied
with the required two-year period within which to file a refund/tax credit claim with the BIR by filing
its administrative claim on 6 May 1999 (within the period from the close of the subject second
quarter of taxable year 1998 when the relevant sales or purchases were made), it appears
however, that respondent’s corresponding judicial claim filed with the CTA on 30 June 2000 was
filed beyond the 30- day period, detailed hereunder as follows:
Taxable Filing date of the Last day of the 120-day period Last day of the Filing date
year administrative under Section 112(C) from the 30-day period to of
1998 claim date of filing of the administrative judicially appeal Petition for
claim in case of inaction said inaction Review
2nd Quarter 6 May 1999 3 September 199930 3 October 1999 30
(1 April 1998 2000
to 30 June
1998)
Notably, Section 112(D) specifically states that in case of failure on the part of the Commissioner
of Internal Revenue to act on the application within the 120-day period prescribed by law,
respondent only has thirty (30) days after the expiration of the 120-day period to appeal the
unacted claim with the CTA. Since respondent’s judicial claim for the aforementioned quarter was
filed before the CTA only on 30 June 2000,31 which was way beyond the mandatory 120+30 days
to seek judicial recourse, such non- compliance with the said mandatory period of thirty (30) days
is fatal to its refund claim on the ground of prescription.
In the more recent consolidated cases of Mindanao II Geothermal Partnership v. Commissioner of
Internal Revenue, and Mindanao I Geothermal Partnership v. Commissioner of Internal
Revenue,32 the Second Division of this Court, in applying therein the ruling in the San Roque case,
provided a Summary of Rules on Prescriptive Periods Involving VAT as a guide for all parties
concerned, to wit:
We summarize the rules on the determination of the prescriptive period for filing a tax refund
or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:
(1)An administrative claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made.
(2)The CIR has 120 days from the date of submission of complete documents in support
of the administrative claim within which to decide whether to grant a refund or issue a tax
credit certificate. The 120-day period may extend beyond the two-year period from the
filing of the administrative claim if the claim is filed in the later part of the two- year period.
If the 120-day period expires without any decision from the CIR, then the administrative
claim may be considered to be denied by inaction.
(3)A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIR’s decision denying the administrative claim or from the expiration of the 120-
day period without any action from the CIR.
(4)All taxpayers, however, can rely on BIR Ruling No. DA- 489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day
periods.33 (Emphasis supplied)
To recapitulate, the mandatory rule is that a judicial claim must be filed with the CTA within thirty
the (30) days from the receipt of the Commissioner’s decision denying the administrative claim or from
the expiration of the 120-day period without any action from the Commissioner. Otherwise, said
judicial claim shall be considered as filed out of time.
June This Court is mindful that when respondent filed its administrative claim on 6 May 1999, and its
corresponding judicial claim on 30 June 2000, the NIRC of 1997, as amended, was already in
effect. Clearly therefore, the strict observance in applying the provisions of Section 112 of the
NIRC of 1997 is proper. Hence, failure of respondent to observe the 30-day period under said
Section through its belated filing of the Petition for Review before the CTA warrants a dismissal
with prejudice for lack of jurisdiction.
Parenthetically, it must be emphasized that jurisdiction over the subject matter or nature of an
action is fundamental for a court to act on a given controversy, 34 and is conferred only by law and
not by the consent or waiver upon a court which, otherwise, would have no jurisdiction over the
subject matter or nature of an action. Lack of jurisdiction of the court over an action or the subject
matter of an action cannot be cured by the silence, acquiescence, or even by express consent of
the parties.35 If the court has no jurisdiction over the nature of an action, its only jurisdiction is to
dismiss the case. The court could not decide the case on the merits.36
As regards the prints on the supporting receipts or invoices, it is worth mentioning that the High
Court already ruled on the significance of imprinting the word "zero-rated" for zero-rated sales
covered by its receipts or invoices, pursuant to Section 4.108-1 of Revenue Regulations No. 7-
95.37
Thus, in Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of
Internal Revenue,38 the Second Division of this Court enunciated:
But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to
March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the
Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on 9
December 1995 and took effect on 1 January 1996. It already required the printing of the
word "zero-rated" on the invoices covering zero-rated sales. When R.A. 9337 amended the
1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code.
This conversion from regulation to law did not diminish the binding force of such regulation with
respect to acts committed prior to the enactment of that law.
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of
Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its amendments.1âwphi1 The requirement is
reasonable and is in accord with the efficient collection of VAT from the covered sales of goods
and services. As aptly explained by the CTA’s First Division, the appearance of the word "zero-
rated" on the face of invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT was actually paid. If, absent such
word, a successful claim for input VAT is made, the government would be refunding money
it did not collect.
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.

xxxx

This Court held that, since the "BIR authority to print" is not one of the items required to be
indicated on the invoices or receipts, the BIR erred in denying the claim for refund. Here, however,
the ground for denial of petitioner Panasonic’s claim for tax refund—the absence of the word
"zero-rated" on its invoices—is one which is specifically and precisely included in the above
enumeration. Consequently, the BIR correctly denied Panasonic’s claim for tax refund.39
(Emphasis supplied)

Clearly, the foregoing pronouncement affirms that absence or non- printing of the word "zero-
rated" in respondent’s invoices is fatal to its claim for the refund and/or tax credit representing its
unutilized input VAT attributable to its zero-rated sales.

On the other hand, while this Court considers the importance of imprinting the word "zero-rated" in
said invoices, the same does not apply to the phrase "BIR authority to print." In Intel Technology
Philippines, Inc. v. Commissioner of Internal Revenue,40 the Court ruled that there is no law or BIR
rule or regulation requiring the taxpayer-claimant's authority from the BIR to print its sales invoices
(BIR authority to print) to be reflected or indicated therein. It stressed "that while entities engaged
in business are required to secure from the BIR an authority to print receipts or invoices and to
issue duly registered receipts or invoices, it is not required that the BIR authority to print be
reflected or indicated therein."41

All told, the CTA has no jurisdiction over respondent's judicial appeal considering that its Petition
for Review was filed beyond the mandatory 30-day period pursuant to Section 112(D) of the NIRC
of 1997, as amended. Consequently, respondent's instant claim for refund must be denied.

WHEREFORE, the petition is GRANTED. Accordingly, the 16 September 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 80886 is hereby REVERSED and SET ASIDE. The Petition
for Review filed before the Court of Tax Appeals docketed as CTA Case No. 6129 is DISMISSED
for lack ofjurisdiction. No costs.

SO ORDERED.
 FIRST DIVISION before the BIR Revenue District Office No. 51, Pasay City Branch.

[ G.R. No. 193321, October 19, 2016 ] For failure of the BIR to act on its claim, respondent Takenaka filed a Petition for Review with this
Court, docketed as C.T.A. Case No. 6886.

TAKENAKA CORPORATION-PHILIPPINE BRANCH, PETITIONER, VS. COMMISSIONER OF After trial on the merits, on November 4, 2008, the Former First Division rendered a Decision
INTERNAL REVENUE, RESPONDENT. partly granting the Petition for Review and ordering herein petitioner CIR to refund to respondent
Takenaka the reduced amount of P53,374,366.52, with a Concurring and Dissenting Opinion from
DECISION Presiding Justice Ernesto D. Acosta.

BERSAMIN, J.: Not satisfied, on November 26, 2008, respondent Takenaka filed a "Motion for Reconsideration".

The petitioner as taxpayer appeals before the Court the adverse decision entered on March 29, During the deliberation of respondent Takenaka's "Motion for Reconsideration", Associate Justice
2010[1] and the resolution issued on August 12, 2010[2] in C.T.A. EB No. 514, whereby the Court of Caesar A. Casanova changed his stand and concurred with Presiding Justice Ernesto D. Acosta,
Tax Appeals (CTA) En Banc respectively denied its claim for refund of excess input value-added while the original Ponente, Associate Justice Lovell R. Bautista, maintained his stand. Thus,
tax (VAT) arising from its zero-rated sales of services for taxable year 2002, and denied its respondent Takenaka's "Motion for Reconsideration" was granted by the Former First Division in
ensuing motion for reconsideration. its Amended Decision dated March 16, 2009, with a Dissenting Opinion from Associate Justice
Lovell R. Bautista.
The factual and procedural antecedents, as narrated by the CTA En Banc, are quoted below:
On April 7, 2009, petitioner CIR filed a "Motion for Reconsideration" of the Amended Decision,
which the Former First Division denied in a Resolution dated June 29, 2009, with Associate
Respondent Takenaka, as a subcontractor, entered into an On-Shore Construction Contract with Justice Lovell R. Bautista reiterating his Dissenting Opinion.[3]
Philippine Air Terminal Co., Inc. (PIATCO) for the purpose of constructing the Ninoy Aquino
Terminal III (NAIA-IPT3).
Consequently, the respondent filed a petition for review in the CTA En Banc to seek the reversal
PIATCO is a corporation duly organized and existing under the laws of the Philippines and was of the March 16, 2009 decision and the June 29, 2009 resolution of the CTA Former First
duly registered with the Philippine Economic Zone Authority (PEZA), as an Ecozone Division.[4]
Developer/Operator under RA 7916.
On March 29, 2010, the CTA En Banc promulgated its decision disposing thusly:
Respondent Takenaka filed its Quarterly VAT Returns for the four quarters of taxable year 2002
on April 24, 2002, July 22, 2002, October 22, 2002 and January 22, 2003, respectively.
Subsequently, respondent Takenaka amended its quarterly VAT returns several times. In its final WHEREFORE, premises considered, the present Petition for Review is hereby GRANTED.
amended Quarterly VAT Returns, the following were indicated thereon: Accordingly, the Amended Decision dated March 16, 2009 and Resolution dated June 29, 2009
rendered by the Former First Division are hereby REVERSED and SET ASIDE, and another one
Exh. Year Zero-rate Input VAT is hereby entered DENYING respondent Takenaka's claimed input tax attributable to its zero rated
Taxable Sales Output VAT
2002 Sales/Receipts This Quarter Excess sales of services for taxable year 2002 in the amount of P143,997,333.40.
Q 1st P854,160,170.42P5,292,340.00P529,234.00 P52,044,766.05 P51,515,532.05
II 2nd 599,459,273.90 60,588,638.09 60,588,638.09 SO ORDERED.[5]
DDD 3rd 480,168,744.90 55,234,736.15 55,234,736.15
VVV 4th 304,283,730.15 30,494,993.51 30,494,993.51
P2.23 Later on, through the resolution dated August 12, 2010,[6] the CTA En Banc denied the petitioner's
TOTAL P5,292,340.00P529,234.00 P198,363,133.80P197,833,899.80
8,071,899.37 motion for reconsideration.

Hence, this petition for review on certiorari.

On January 13, 2003, the BIR issued VAT Ruling No. 011-03 which states that the sales of goods
and services rendered by respondent Takenaka to PIATCO are subject to zero-percent (0%) VAT
and requires no prior approval for zero rating based on Revenue Memorandum Circular 74-99. Issue

On April 11, 2003, respondent Takenaka filed its claim for tax refund covering the aforesaid period
The lone issue is whether or not the sales invoices presented by the petitioner were sufficient as P51,515,532.
March 31, September 8, March
evidence to prove its zero-rated sale of services to Philippine Air Terminal Co., Inc. (PIATCO), 05, 1st quarter March 31, 2004 April 11, 2003
2002 2003 10, 2004
thereby entitling it to claim the refund of its excess input VAT for taxable year 2002. of 2002
P60,588,638.
09,
Ruling of the Court June 30, 2002 June 30, 2004
2nd quarter of
2002
P55,234,736.
We deny the appeal September 30, September 30,
15, 3rd quarter
2002 2004
of 2002
First of all, the Court deems it appropriate to determine the timeliness of the petitioner's judicial
claim for refund in order to ascertain whether or not the CTA properly acquired jurisdiction thereof. P30,494,993.
December 31, December 31,
Well-settled is the rule that the issue of jurisdiction over the subject matter may at any time either 51, 4th quarter
2002 2004
be raised by the parties or considered by the Court motu proprio. As such, the jurisdiction of the of 2002
CTA over the appeal could still be determined by this Court despite its not being raised as an
issue by the parties.[7]
Based on the foregoing, the petitioner's situation is actually a case of late filing and is similar with
In Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue,[8] the Court has the case of Philex Mining Corporation in Commissioner of Internal Revenue v. San Roque Power
underscored that: Corporation.[9]

An administrative claim must be filed with the CIR within two years after the close of the
(1)
taxable quarter when the zero-rated or effectively zero-rated sales were made.
The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend beyond the two-year period from the filing of the
(2)
administrative claim if the claim is filed in the later part of the two-year period. If the 120-day
period expires without any decision from the CIR, then the administrative claim may be
considered to be denied by inaction.
A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR's
(3) decision denying the administrative claim or from the expiration of the 120-day period without
any action from the CIR.
The petitioner timely filed its administrative claim on April 11, 2003, within the two-year prescriptive
period after the close of the taxable quarter when the zero-rated sales were made. The
respondent had 120 days, or until August 9, 2003, to decide the petitioner's claim. Considering
that the respondent did not act on the petitioner's claim on or before August 9, 2003, the latter had
until September 8, 2003, the last day of the 30-day period, within which to file its judicial claim.
However, it brought its petition for review in the CTA only on March 10, 2004, or 184 days after the
last day for the filing. Clearly, the petitioner belatedly brought its judicial claim for refund, and the
CTA did not acquire jurisdiction over the petitioner's appeal.
We note, however, that the petitioner's judicial claim was brought well within the two-year
prescriptive period. Be that as it may, it must be stressed that the two-year prescriptive period
refers to the period within which the taxpayer can file an administrative claim, not the judicial claim
with the CTA.[10] Accordingly, the CTA should have denied petitioner's claim for tax refund or credit
for lack of jurisdiction.

All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance Nonetheless, the CTA did not err in denying the claim for refund on the ground that the petitioner
(4) on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an had not established its zero-rated sales of services to PIATCO through the presentation of official
exception to the mandatory andjurisdictional 120+30 day periods. receipts. In this regard, as evidence of an administrative claim for tax refund or tax credit, there is
a certain distinction between a receipt and an invoice. The Court has reiterated the distinction
in Northern Mindanao Power Corporation v. Commissioner of Internal Revenue[11] in this wise:
In this case, the following dates are relevant to determine the timeliness of the petitioner's claim
for refund, to wit:
Section 113 of the NIRC of 1997 provides that 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
Amount Close Actual date Last day for goods or properties; as well as to every sale, barter or exchange of services.
Last day for Actual filing
Claimed and of quarter w of filing filing judicial cl
filing administra of judicial cl The Court has in fact distinguished an invoice from a receipt in Commissioner of Internal Revenue
Taxable hen of administra aim
tive claim for aim v. Manila Mining Corporation:
Period cove sales were tive claim for with CTA (120
refund (2 years) with CTA
red made refund +30)
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" oh 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.

A VAT invoice is the seller's best proof of the sale of goods or services to the buyer, while a VAT
receipt is the buyer's best evidence of the payment of goods or services received from the seller.
A VAT invoice and a VAT receipt should not be confused and made to refer to one and the same
thing. Certainly, neither does the law intend the two to be used alternatively. (Bold underscoring
supplied for emphasis)

The petitioner submitted sales invoices, not official receipts, to support its claim for refund. In light
of the aforestated distinction between a receipt and an invoice, the submissions were inadequate
for the purpose thereby intended. The Court concurs with the conclusion of the CTA En Banc,
therefore, that "[w]ithout proper VAT official receipts issued to its clients, the payments received by
respondent Takenaka for providing services to PEZA-registered entities cannot qualify for VAT
zero-rating. Hence, it cannot claim such sales as zero-rated VAT not subject to output tax."[12]

Under VAT Ruling No. 011-03, the sales of goods and services rendered by the petitioner to
PIATCO were subject to zero-percent (0%) VAT, and required no prior approval for zero rating
based on Revenue Memorandum Circular 74-99.[13] This notwithstanding, the petitioner's claim for
refund must still be denied for its failure as the taxpayer to comply with the substantiation
requirements for administrative claims for tax refund or tax credit. The Court explains why
in Western Mindanao Power Corporation v. Commissioner of Internal Revenue:[14]

In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of
the claim under substantive law. It must also show satisfaction of all the documentary and
evidentiary requirements for an administrative claim for a refund or tax credit. Hence, the mere
fact that petitioner's application for zero-rating has been approved by the CIR does not, by
itself, justify the grant of a refund or tax credit. The taxpayer claiming the refund must
further comply with the invoicing and accounting requirements mandated by the NIRC, as
well as by revenue regulations implementing them. (Bold underscoring supplied for emphasis)

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision
promulgated on March 29, 2010 in C.T.A. EB No. 514; and DIRECTS the petitioner to pay the
costs of suit.

SO ORDERED.
 EN BANC Internal Revenue (CIR) did not act on the administrative claim for tax refund or tax credit, Chevron
elevated its claim to the CTA by petition for review on June 29, 2009.8 The case, docketed as CTA
September 1, 2105 Case No. 7939, was raffled to the CTA’s First Division.

G.R. No. 210836 The CTA First Division denied Chevron’s judicial claim for tax refund or tax credit through its
decision dated July 31, 2012,9 and later on also denied Chevron’s Motion for Reconsideration on
November 20, 2012.10
CHEVRON PHILIPPINES INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. In due course, Chevron appealed to the CTA En Banc (CTA EB No. 964), which, in the decision
dated September 30, 2013,11 affirmed the ruling of the CTA First Division, stating that there was
nothing in Section 135(c) of the NIRC that explicitly exempted Chevron as the seller of the
RESOLUTION
imported petroleum products from the payment of the excise taxes; and holding that because it did
not fall under any of the categories exempted from paying excise tax, Chevron was not entitled to
BERSAMIN, J.: the tax refund or tax credit.

Excise tax on petroleum products is essentially a tax on property, the direct liability for which The CTA En Banc noted that:
pertains to the statutory taxpayer (i.e., manufacturer, producer or importer). Any excise tax paid by
the statutory taxpayer on petroleum products sold to any of the entities or agencies named in
Considering that an excise tax is in the nature of an indirect tax where the tax burden can be
Section 135 of the National Internal Revenue Code (NIRC) exempt from excise tax is deemed
shifted, Section 135(c) of the NIRC of 1997, as amended, should be construed as prohibiting the
illegal or erroneous, and should be credited or refunded to the ayor pursuant to Section 204 of the
shifting of the burden of the excise tax to tax-exempt entities who buys petroleum products from
NIRC. This is because the exemption granted under Section 135 of the NIRC must be construed
the manufacturer/seller by incorporating the excise tax component as an added cost in the price
in favor of the property itself, that is, the petroleum products.
fixed by the manufacturer/seller.

The Case
xxxx

Before the Court is the Motion for Reconsideration filed by petitioner Chevron Philippines, Inc.
The above discussion is in line with the pronouncement made by the Supreme Court in the case
(Chevron)1 vis-a-vis the resolution promulgated on March 19, 2014,2 whereby the Court’s Second
of Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation (Shell case),
Division denied its petition for review on certiorari for failure to show any reversible error on the
involving Shell’s claim for excise tax refund for petroleum products sold to international carriers.
part of the Court of Tax Appeals (CTA) En Banc. The CTA En Banc had denied Chevron’s claim
The Supreme Court held that the exemption from excise tax payment on petroleum products
for tax refund or tax credit for the excise taxes paid on its importation of petroleum products that it
under Section 135(a) of the NIRC of 1997, as amended, is conferred on international carriers who
had sold to the Clark Development Corporation (CDC), an entity exempt from direct and indirect
purchased the same for their use or consumption outside the Philippines. The oil companies which
taxes.
sold such petroleum products to international carriers are not entitled to a refund of excise taxes
previously paid on the petroleum products sold. x x x
The Motion for Reconsideration was later on referred to the Court En Banc after the Second
Division noted that the CTA En Banc had denied Chevron’s claim for the tax refund or tax credit xxxx
based on the ruling promulgated in Commissioner of Internal Revenue v. Pilipinas Shell Petroleum
Corporation (Pilipinas Shell) on April 25, 2012,3 but which ruling was meanwhile reversed upon
reconsideration by the First Division through the resolution promulgated on February 19, Accordingly, petitioner is not entitled to any refund or issuance of tax credit certificate on excise
2014.4 The Court En Banc accepted the referral last June 16, 2015. taxes paid on its importation of petroleum products sold to CDC pursuant to the doctrine laid down
by the Supreme Court in the Shell case.12
Antecedents
Chevron sought reconsideration, but the CTA En Banc denied its motion for that purpose in the
resolution dated January 7, 2014.13
Chevron sold and delivered petroleum products to CDC in the period from August 2007 to
December 2007.5 Chevron did not pass on to CDC the excise taxes paid on the importation of the
petroleum products sold to CDC in taxable year 2007;6 hence, on June 26, 2009, it filed an Chevron appealed to the Court,14 but the Court (Second Division) denied the petition for review on
administrative claim for tax refund or issuance of tax credit certificate in the amount of certiorari through the resolution promulgated on March 19, 2014 for failure to show any reversible
P6,542,400.00.7Considering that respondent Commissioner of error on the part of the CTA En Banc.
Hence, Chevron has filed the Motion for Reconsideration, submitting that it was entitled to the tax
refund or tax credit because ruling promulgated on April 25, 2012 in Pilipinas Shell, 15 on which the
CTA En Banc had based its denial of the claim of Chevron, was meanwhile reconsidered by the
Court’s First Division on February 19, 2014.16
Issue
The lone issue for resolution is whether Chevron was entitled to the tax refund or the tax credit for
the excise taxes paid on the importation of petroleum products that it had sold to CDC in 2007.
Ruling of the Court
Chevron’s Motion for Reconsideration is meritorious.
Pilipinas Shell concerns the manufacturer’s entitlement to refund or credit of the excise taxes paid
on the petroleum products sold to international carriers exempt from excise taxes under Section
135(a) of the NIRC.
However, the issue raised here is whether the importer (i.e., Chevron) was entitled to the refund or
credit of the excise taxes it paid on petroleum products sold to CDC, a tax-exempt entity under
Section 135(c) of the NIRC.
Notwithstanding that the claims for refund or credit of excise taxes were premised on different
subsections of Section 135 of the NIRC, the basic tax principle applicable was the same in both
cases – that excise tax is a tax on property; hence, the exemption from the excise tax expressly
granted under Section 135 of the NIRC must be construed in favor of the petroleum products on
which the excise tax was initially imposed.
Accordingly, the excise taxes that Chevron paid on its importation of petroleum products
subsequently sold to CDC were illegal and erroneous, and should be credited or refunded to
Chevron in accordance with Section 204 of the NIRC.
We explain.
Under Section 12917 of the NIRC, as amended, excise taxes are imposed on two kinds of goods,
namely: (a) goods manufactured or produced in the Philippines for domestic sales or consumption
or for any other disposition; and (b) things imported. Undoubtedly, the excise tax imposed under
Section 129 of the NIRC is a tax on property.18
With respect to imported things, Section 131 of the NIRC declares that excise taxes on imported
things shall be paid by the owner or importer to the Customs officers, conformably with the
regulations of the Department of Finance and before the release of such articles from the customs
house, unless the imported things are exempt from excise taxes and the person found to be in
possession of the same is other than those legally entitled to such tax exemption. For this
purpose, the statutory taxpayer is the importer of the things subject to excise tax.
Chevron, being the statutory taxpayer, paid the excise taxes on its importation of the petroleum
products.19
Section 135 of the NIRC states:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. –
Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption
outside the Philippines: Provided, That the petroleum products sold to these international
carriers shall be stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other
international agreement for their use or consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes. (Emphasis supplied.)
Pursuant to Section 135(c), supra, petroleum products sold to entities that are by law exempt from
direct and indirect taxes are exempt from excise tax. The phrase which are by law exempt from
direct and indirect taxes describes the entities to whom the petroleum products must be sold in
order to render the exemption operative. Section 135(c) should thus be construed as an
exemption in favor of the petroleum products on which the excise tax was levied in the first place.
The exemption cannot be granted to the buyers – that is, the entities that are by law exempt from
direct and indirect taxes – because they are not under any legal duty to pay the excise tax.
CDC was created to be the implementing and operating arm of the Bases Conversion and
Development Authority to manage the Clark Special Economic Zone (CSEZ).20 As a duly-
registered enterprise in the CSEZ, CDC has been exempt from paying direct and indirect taxes
pursuant to Section 2421 of Republic Act No. 7916 (The Special Economic Zone Act of 1995), in
relation to Section 15 of Republic Act No. 9400 (Amending Republic Act No. 7227, otherwise
known as the Bases Conversion Development Act of 1992).22
Inasmuch as its liability for the payment of the excise taxes accrued immediately upon importation
and prior to the removal of the petroleum products from the customshouse, Chevron was bound to
pay, and actually paid such taxes. But the status of the petroleum products as exempt from the
excise taxes would be confirmed only upon their sale to CDC in 2007 (or, for that matter, to any of
the other entities or agencies listed in Section 135 of the NIRC). Before then, Chevron did not
have any legal basis to claim the tax refund or the tax credit as to the petroleum products.
Consequently, the payment of the excise taxes by Chevron upon its importation of petroleum
products was deemed illegal and erroneous upon the sale of the petroleum products to CDC.
Section 204 of the NIRC explicitly allowed Chevron as the statutory taxpayer to claim the refund or
the credit of the excise taxes thereby paid, viz.:
SEC 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. –
The Commissioner may –
paid ·on the petroleum products sold to Clark Development Corporation in the period from August
2007 to December 2007, or to issue a tax credit certificate of that amount to Chevron Philippines,
Inc.
No pronouncement on costs of suit.

xxxx

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

It is noteworthy that excise taxes are considered as a kind of indirect tax, the liability for the
payment of which may fall on a person other than whoever actually bears the burden of the
tax.23 Simply put, the statutory taxpayer may shift the economic burden of the excise tax payment
to another – usually the buyer.

In cases involving excise tax exemptions on petroleum products under Section 135 of the NIRC,
the Court has consistently held that it is the statutory taxpayer, not the party who only bears the
economic burden, who is entitled to claim the tax refund or tax credit. 24 But the Court has also
made clear that this rule does not apply where the law grants the party to whom the economic
burden of the tax is shifted by virtue of an exemption from both direct and indirect taxes. In which
case, such party must be allowed to claim the tax refund or tax credit even if it is not considered as
the statutory taxpayer under the law.25

The general rule applies here because Chevron did not pass on to CDC the excise taxes paid on
the importation of the petroleum products, the latter being exempt from indirect taxes by virtue of
Section 24 of Republic

Act No. 7916, in relation to Section 15 of Republic Act No. 9400, not because Section 135(c) of
the NIRC exempted CDC from the payment of excise tax.1âwphi1

Accordingly, conformably with Section 204(C) of the NIRC, supra, and pertinent jurisprudence,
Chevron was entitled to the refund or credit of the excise taxes erroneously paid on the
importation of the petroleum products sold to CDC.

WHEREFORE, the Court GRANTS petitioner Chevron Philippines, Inc. 's Motion for
Reconsideration; DIRECTS respondent Commissioner of Internal Revenue to refund the excise
taxes in the amount of P6,542,400.00
 Republic of the Philippines Deficiency Income Tax
SUPREME COURT
Manila Taxable Net Income per Return P 54,107.36

FIRST DIVISION Adjustments per investigation Section 28

Overstatement of gain/loss on auction sales

G.R. No. 173373 July 29, 2013
Gain/Loss per F/S P 4,914,967.50
H. TAMBUNTING PAWNSHOP, INC., Petitioner,
vs. Gain/Loss per Audit 133,057.40 4,781,910.00
COMMISSIONER OF INTERNAL REVENUE, Respondent. --------------------

Unsupported Security/Janitorial Expenses

DECISION
Per F/S 2,183,573.02
BERSAMIN, J.:
Per Audit 358,800.00 1,824,773.02
--------------------
To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and
documentary bases of its claim. Unsupported Rent Expenses

Antecedents Per F/S 2,293,631.13

Per Audit 434,406.77 1,859,224.35

H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly licensed and authorized to --------------------
engage in the pawnshop business, appeals the adverse decision promulgated on April 24,
2006,1 whereby the Court of Tax Appeals En Bane (CTA En Bane) affirmed the decision of the Unsupported Interest Expenses 1,155,154.28
CTA First Division ordering it to pay deficiency income taxes in the amount of ₱4,536,687.15 for
taxable yaar 1997, plus 20% delinquency interest computed from August 29, 2000 until full Unsupported Management & Professional Fees 96,761.00
payment, but cancelling the compromise penalties for lack of basis.
Unsupported Repairs & Maintenance 348,074.68
On June 26, 2000, the Bureau of Internal Revenue (BIR), through then Acting Regional Director Unsupported 13th Month Pay & Bonus 317,730.73
Lucien E. Sayuno of Revenue Region No. 6 in Manila, issued assessment notices and demand
letters, all numbered 32-1-97, assessing Tambunting for deficiency percentage tax, income tax Disallowed Loss on Fire & Theft 906,560.00
and compromise penalties for taxable year 1997,2 as follows: --------------------

Taxable Net Income per Investigation P 11,344,295.43

Deficiency Percentage Tax
Taxable Sales/Receipts ₱12,749,135.25
============
Percentage Tax due (5%) P 637,456.76
Add: 20% Interest up to 7-26-00 320,513.24
--------------------
Total Percentage Tax Due P 957,970.00
============
============
Income Tax Due (35%) P 3,970,503.40
Less Income Tax Paid 18,937.57
---------------------
Deficiency Income Tax 3,951,565.83
Add: 20% Interest to 7-26-00 1,799,938.23
---------------------
Total Income Tax Due 5,751,504.06
 Compromise Penalties Bonuses

Late Payment of Income Tax 25,000.00 Loss on Fire 906,560.00 - -

Late Payment of Percentage Tax 20,000.00 -------------------- -------------------- --------------------

Total P 12,216,452.34 P 926,264.17 P 3,314,004.95
Failure to Pay Withholding Tax Return for ============= ============= =============
the Months of April and May 24,000.00
----------------- Apparently, petitioner is still liable for deficiency income tax in the reduced amount of
₱4,536,687.15, computed as follows:
69,000.00
==========
Net Income Per Return ₱54,107.36
On July 26, 2000, Tambunting instituted an administrative protest against the assessment notices Add: Overstatement of Gain/Loss on Auction Sales
and demand letters with the Commissioner of Internal Revenue.3
Gain/Loss on Auction Sales per F/S ₱4,914,967.50
On February 21, 2001, Tambunting brought a petition for review in the CTA, pursuant to Section
Gain/Loss on Auction Sales per Court’s
228 of the National Internal Revenue Code of 1997,4 citing the inaction of the Commissioner of
Verification 133,057.40 4,781,910.00
Internal Revenue on its protest within the 180-day period prescribed by law.
------------------
On October 8, 2004, the CTA First Division rendered a decision, the pertinent portion of which is
hereunder quoted, to wit: Unsupported Security/Janitorial Services

Security, Janitorial Services per F/S ₱2,183,573.02

In view of all the foregoing verification, petitioner’s allowable deductions are summarized below:
Security, Janitorial Services
per Court’s Verification 736,044.26 1,447,528.76
Per Petitioner's
Financial Per BIR's Per Court's ------------------
Particulars Statement Examination Verification
Unsupported Rent Expenses
Loss on Auction
Sale P 4,914,967.50 P 133,057.40 P 133,057.40 Rent Expenses per F/S ₱2,293,631.13
Security & Janitorial Rent Expenses per Court’s
Services 2,183,573.02 358,800.00 736,044.26 Verification 642,619.10 1,651,012.03
Rent Expense 2,293,631.13 434,406.77 642,619.10 ------------------
Interest Expense 1,155,154.28 - 1,155,154.28 Unsupported Management & Professional Fees 96,761.00
Professional & Unsupported Repairs & Maintenance
Management Fees 96,761.00 - -
(₱348,074.68 - ₱329,399.18) 18,675.50
Repairs &
Maintenance 348,074.68 - 329,399.18 Disallowed Loss on Fire & Theft 906,560.00
---------------
13th
Month pay & 317,730.73 - 317,730.73 Net Income
 P 8,956,554.65 Tambunting argues that the CTA should have allowed its deductions because it had been able to
============= point out the provisions of law authorizing the deductions; that it proved its entitlement to the
deductions through all the documentary and testimonial evidence presented in court; 9 that the
Income Tax Due Thereon P 3,134,794.13 provisions of Section 34 (A)(1)(b) of the 1997 National Internal Revenue Code, governing the
types of evidence to prove a claim for deduction of expenses, were applicable because the law
Less: Amount Paid 18,937.57 took effect during the pendency of the case in the CTA;10 that the CTA had allowed deductions for
ordinary and necessary expenses on the basis of cash vouchers issued by the taxpayer or
------------------ certifications issued by the payees evidencing receipt of interest on loans as well as agreements
relating to the imposition of interest;11 that it had thus shown beyond doubt that it had incurred the
Balance P 3,115,856.56 losses in its auction sales;12 and that it substantially complied with the requirements of Revenue
Regulations No. 12-77 on the deductibility of its losses.13
Add: 20% Interest until 7-26-00 1,420,830.59

------------------
TOTAL INCOME TAX DUE ₱4,536,687.15
=============
WHEREFORE, petitioner is ORDERED to PAY the respondent the amount of ₱4,536,687.15
representing deficiency income tax for the year 1997, plus 20% delinquency interest computed
from August 29, 2000 until full payment thereof pursuant to Section 249 (C) of the National
Internal Revenue Code. However, the compromise penalties in the sum of ₱49,000.00 is hereby
CANCELLED for lack of legal basis.
SO ORDERED.5
After its motion for reconsideration was denied for lack of merit on February 18,
2005,6 Tambunting filed a petition for review in the CTA En Banc, arguing that the First Division
erred in disallowing its deductions on the ground that it had not substantiated them by sufficient
evidence.
On December 5, 2006, the Commissioner of Internal Revenue filed a comment, 14 stating that the
conclusions of the CTA were entitled to respect,15 due to its being a highly specialized body
specifically created for the purpose of reviewing tax cases;16 and that the petition involved factual
and evidentiary matters not reviewable by the Court in an appeal by certiorari.17
On March 22, 2007, Tambunting reiterated its arguments in its reply.18
Ruling
The petition has no merit.
At the outset, the Court agrees with the CTA En Banc that because this case involved
assessments relating to transactions incurred by Tambunting prior to the effectivity of Republic Act
No. 8424 (National Internal Revenue Code of 1997, or NIRC of 1997), the provisions governing
the propriety of the deductions was Presidential Decree 1158 (NIRC of 1977). In that regard, the
pertinent provisions of Section 29 (d) (2) & (3)of the NIRC of 1977 state:
xxxx

On April 24, 2006, the CTA En Banc denied Tambunting’s petition for review,7 disposing:
WHEREFORE, the Court en banc finds no reversible error to warrant the reversal of the assailed
Decision and Resolution promulgated on October 8, 2004 and February 11, 2005, respectively,
the instant Petition for Review is hereby DISMISSED. Accordingly, the aforesaid Decision and
Resolution are hereby AFFIRMED in toto.
SO ORDERED.
On June 29, 2006, the CTA En Banc also denied Tambunting’s motion for reconsideration for its
lack of merit.8
Issues
Hence, this appeal by petition for review on certiorari.
(2) By corporation. — In the case of a corporation, all losses actually sustained and
charged off within the taxable year and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation,
the losses deductible are those actually sustained during the year incurred in business or
trade conducted within the Philippines, and losses actually sustained during the year in
transactions
entered into for profit in the Philippines although not connected with their business or trade, when
such losses are not compensated for by insurance or otherwise. The Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, is hereby authorized to promulgate
rules and regulations prescribing, among other things, the time and manner by which the taxpayer
shall submit a declaration of loss sustained from casualty or from robbery, theft, or embezzlement
during the taxable year: Provided, That the time to be so prescribed in the regulations shall not be
less than 30 days nor more than 90 days from the date of the occurrence of the casualty or
robbery, theft, or embezzlement giving rise to the loss.
The CTA En Banc ruled thusly:
To prove the loss on auction sale, petitioner submitted in evidence its "Rematado" and "Subasta"
books and the "Schedule of Losses on Auction Sale". The "Rematado" book contained a record of
items foreclosed by the pawnshop while the "Subasta" book contained a record of the auction sale
of pawned items foreclosed.
However, as elucidated by the petitioner, the gain or loss on auction sale represents the difference
between the capital (the amount loaned to the pawnee, the unpaid interest and other expenses
incurred in connection with such loan) and the price for which the pawned articles were sold, as
reflected in the "Subasta" Book. Furthermore, it explained that the amounts appearing in the
"Rematado" book do not reflect the total capital of petitioner as it merely reflected the amounts
loaned to the pawnee. Likewise, the amounts appearing in the "Subasta" book, are not
representative of the amount of sale made during the "subastas" since not all articles are
eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it was able to show beyond doubt that it
incurred the amount of losses on auction sale claimed as deduction from its gross income for the
taxable year 1997. And that the documents/records submitted in evidence as well as the facts
contained therein were neither contested nor controverted by the respondent, hence, admitted.
xxxx
In this case, petitioner's reliance on the entries made in the "Subasta" book were not sufficient to
substantiate the claimed deduction of loss on auction sale. As admitted by the petitioner, the
contents in the "Rematado" and "Subasta" books do not reflect the true amounts of the total
capital and the auction sale, respectively. Be that as it may, petitioner still failed to adduce
evidence to substantiate the other expenses alleged to have been incurred in connection with the
sale of pawned items.
As correctly held by the Court's Division in the assailed decision, and We quote:
x x x The remaining evidence is neither conclusive to sustain its claim of loss on auction sale in
the aggregate amount of ₱4,915,967.50. While it appears that the basis of respondent is not
strong, petitioner, nevertheless, should not rely on the weakness of such evidence but on the
strength of its own documents. The facts essential for the proper disposition of the said
controversy were available to the petitioner. Petitioner should have endeavored to make the facts
clear to this court. Sad to say, it failed to dispute the same with clear and convincing proof. x x x19
We affirm the aforequoted ruling of the CTA En Banc.
The rule that tax deductions, being in the nature of tax exemptions, are to be construed in
strictissimi juris against the taxpayer is well settled.20 Corollary to this rule is the principle that
when a taxpayer claims a deduction, he must point to some specific provision of the statute in
which that deduction is authorized and must be able to prove that he is entitled to the deduction
which the law allows.21 An item of expenditure, therefore, must fall squarely within the language of
the law in order to be deductible.22 A mere averment that the taxpayer has incurred a loss does
not automatically warrant a deduction from its gross income.
As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The
subasta books it presented were not the proper evidence of such losses from the auctions
because they did not reflect the true amounts of the proceeds of the auctions due to certain items
having been left unsold after the auctions. The rematado books did not also prove the amounts of
capital because the figures reflected therein were only the amounts given to the pawnees. It is
interesting to note, too, that the amounts received by the pawnees were not the actual values of
the pawned articles but were only fractions of the real values.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977 provides:
(a) Expenses. — (1) Business expenses.— (A) In general. — All ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually rendered;
traveling expenses while away from home in the pursuit of a trade, profession or business, rentals
or other payments required to be made as a condition to the continued use or possession, for the
purpose of the trade, profession or business, of property to which the taxpayer has not taken or is
not taking title or in which he has no equity.
The requisites for the deductibility of ordinary and necessary trade or business expenses, like
those paid for security and janitorial services, management and professional fees, and rental
expenses, are that: (a) the expenses must be ordinary and necessary; (b) they must have been
paid or incurred during the taxable year; (c) they must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) they must be supported by receipts, records or other
pertinent papers.23
In denying Tambunting’s claim for deduction of its security and janitorial expenses, management
and professional fees, and its rental expenses, the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial expenses paid to Pathfinder Investigation
were not duly substantiated. The certification issued by Mr. Balisado was not the proper document
required by law to substantiate its expenses. Petitioner should have presented the official receipts
or invoices to prove its claim as provided for under Section 238 of the National Internal Revenue
Code of 1977, as amended, to wit:
"SEC. 238. Issuance of receipts or sales or commercial invoices. — All persons subject to an
internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued
at ₱25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost and description of merchandise or nature of
service; Provided, That in the case of sales, receipts or transfers in the amount of ₱100.00 or
more, or, regardless of amount, where the sale or transfer is made by persons subject to value-
added tax to other persons also subject to value-added tax; or, where the receipts 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 purchases, 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 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.
With regard to the misclassified items of expenses, petitioner's statements were self-serving,
likewise it failed to substantiate its allegations by clear and convincing evidence as provided under
the foregoing provision of law.
Bearing in mind the principle in taxation that deductions from gross income partake the nature of
tax exemptions which are construed in strictissimi juris against the taxpayer, the Court en banc is
not inclined to believe the self-serving statements of petitioner regarding the misclassified items of
office supplies, advertising and rent expenses.
Among the expenses allegedly incurred, courts may consider only those supported by credible
evidence and which appear to have been genuinely incurred in connection with the trade or
business of the taxpayer.24
xxxx
As previously discussed, the proper substantiation requirement for an expense to be allowed is
the official receipt or invoice. While the rental payments were subjected to the applicable
expanded withholding taxes, such returns are not the documents required by law to substantiate
the rental expense. Petitioner should have submitted official receipts to support its claim.
Moreover, the issue on the submission of cash vouchers as evidence to prove expenses incurred
has been addressed by this Court in the assailed Resolution, to wit:
"The trend then was to allow deductions based on cash vouchers which are signed by the payees.
It bears to note that the cases cited by petitioner are pronouncements by this Court in 1980, 1982
and 1989.
However, latest jurisprudence has deviated from such interpretation of the law. Thus, this Court
held in the case of Pilmico-Mauri Foods Corporation vs. Commissioner of Internal Revenue C.T.A.
Case No. 6151, December 15, 2004;
[P]etitioner’s contention that the NIRC of 1977 did not impose substantiation requirements on
deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section
237] provides:
xxxx
From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue
receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise
imposed a responsibility upon the purchaser to keep and preserve the original copy of the invoice
or receipt for a period of three years from the close of the taxable year in which the invoice or
receipt was issued. The rationale behind the latter requirement is the duty of the taxpayer to keep
adequate records of each and every transaction entered into in the conduct of its business. So
that when their books of accounts are subjected to a tax audit examination, all entries therein
could be shown as adequately supported and proven as legitimate business transactions. Hence,
petitioner’s claim that the NIRC of 1977 did not require substantiation requirements is erroneous."
In order that the cash vouchers may be given probative value, these must be validated with official
receipts.25
xxxx
Petitioner’s management and professional fees were disallowed as these were supported merely
by cash vouchers, which the Court’s Division correctly found to have little probative value. 26
Again, we affirm the foregoing holding of the CTA En Banc for the reasons therein stated. To
reiterate, deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled
to the deduction claimed.27 Tambunting did not discharge its burden of substantiating its claim for
deductions due to the inadequacy of its documentary support of its claim. Its reliance on
withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease was futile
because such documents had scant probative value. As the CTA En Banc succinctly put it, the law
required Tambunting to support its claim for deductions with the corresponding official receipts
issued by the service providers concerned.
Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of P.D. 1158 (NIRC of 1977)
then in effect, is clear enough, to wit:
(2) By corporation. — In the case of a corporation, all losses actually sustained and
charged off within the taxable year and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation,
the losses deductible are those actually sustained during the year incurred in business or
trade conducted within the Philippines, and losses actually sustained during the year in
transactions entered into for profit in the Philippines although not connected with their
business or trade, when such losses are not compensated for by insurance or otherwise.
The Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, is hereby authorized to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft, or embezzlement during the taxable year:
Provided, That the time to be so prescribed in the regulations shall not be less than 30
days nor more than 90 days from the date of the occurrence of the casualty or robbery,
theft, or embezzlement giving rise to the loss.
The implementing rules for deductible losses are found in Revenue Regulations No. 12-77, as
follows:
SECTION 1. Nature of deductible losses.— Any loss arising from fires, storms or other casualty,
and from robbery, theft or embezzlement, is allowable as a deduction under Section 30 (d) for the
taxable year in which the loss is sustained. The term "casualty" is the complete or partial
destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual
nature. It denotes accident, some sudden invasion by hostile agency, and excludes progressive
deterioration through steadily operating cause. Generally, theft is the criminal appropriation of
another’s property for the use of the taker. Embezzlement is the fraudulent appropriation of
another's property by a person to whom it has been entrusted or into whose hands it has lawfully
come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the burden of proving and
substantiating his claim for deduction for losses allowed under Section 30 (d) and should comply
with the following substantiation requirements:
(a) A declaration of loss which must be filed with the Commissioner of Internal Revenue
or his deputies within a certain period prescribed in these regulations after the occurrence
of the casualty, robbery, theft or embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature and occurrence of
the event and amount of the loss.
SECTION 3. Declaration of loss. — Within forty-five days after the date of the occurrence of
casualty or robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who
intends to claim the loss as a deduction for the taxable year in which the loss was sustained shall
file a sworn declaration of loss with the nearest Revenue District Officer. The sworn declaration of
loss shall contain, among other things, the following information:
(a) The nature of the event giving rise to the loss and the time of its occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or other basis of the property;
depreciation allowed or allowable if any; value of property before and after the event; cost
of repair;
(d) Amount of insurance or other compensation received or receivable.
Evidence to support these items should be furnished, if available. Examples are purchase
contracts and deeds, receipted bills for improvements, and pictures and competent appraisals of
the property before and after the casualty.
SECTION 4. Proof of loss.— (a) In general. — The declaration of loss, being one of the essential
requirements of substantiation of a claim for a loss deduction, is subject to verification and does
not constitute sufficient proof of the loss that will justify its deductibility for income tax purposes.
Therefore, the mere filing of a declaration of loss does not automatically entitle the taxpayer to
deduct the alleged loss from gross income. The failure, however, to submit the said declaration of
loss within the period prescribed in these regulations will result in the disallowance of the casualty
loss claimed in the taxpayer's income tax return. The taxpayer should therefore file a declaration
of loss and should be prepared to support and substantiate the information reported in the said
declaration with evidence which he should gather immediately or as soon as possible after the
occurrence of the casualty or event causing the loss.
xxxx
(b) Casualty loss. — Photographs of the property as it existed before it was damaged will be
helpful in showing the condition and value of the property prior to the casualty. Photographs taken
after the casualty which show the extent of damage will be helpful in establishing the condition and
value of the property after it was damaged. Photographs showing the condition and value of the
property after it was repaired, restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in determining the
amount of loss sustained, the taxpayer should be prepared to come forward with documentary
proofs, such as cancelled checks, vouchers, receipts and other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records and be made
available to a revenue examiner, upon audit of his income tax return and the declaration of loss.
(c) Robbery, theft or embezzlement losses. - To support the deduction for losses arising from
robbery, theft or embezzlement, the taxpayer must prove by credible. evidence all the elements of
the loss, the amount of the loss, and the proper year of the deduction. The taxpayer bears the
burden of proof, and no deduction will be allowed unless he shows the property was stolen, rather
than misplaced or lost. A mere disappearance of property is not enough, nor is a mere error or
shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other
hand, a mere report of alleged theft or robbery to the police authorities is not a conclusive proof of
the loss arising therefrom. (Bold underscoring supplied for emphasis)
In the context of the foregoing rules, the CT A En Bane aptly rejected Tam bunting's claim for
deductions due to losses from fire and theft. The documents it had submitted to support the claim,
namely: (a) the certification from the Bureau of Fire Protection in Malolos; (b) the certification from
the Police Station in Malolos; (c) the accounting entry for the losses; and (d) the list of properties
lost, were not enough. What were required were for Tambunting to submit the sworn declaration of
loss mandated by Revenue Regulations 12-77. Its failure to do so was prejudicial to the claim
because the sworn declaration of loss was necessary to forewarn the BIR that it had suffered a
loss whose extent it would be claiming as a deduction of its tax liability, and thus enable the BIR to
conduct its own investigation of the incident leading to the loss. Indeed, the documents
Tambunting submitted to the BIR could not serve the purpose of their submission without the
sworn declaration of loss.
WHEREFORE, the Court AFFIRMS the decision promulgated on April 24, 2006; and ORDERS
petitioner to pay the costs of suit.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 175707 November 19, 2014
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
x-----------------------x
G.R. No. 180035
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
x-----------------------x
G.R. No. 181092
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
The Court has consolidated these three petitions as they involve the same parties, similar facts
and common questions of law. This is not the first time that Fort Bonifacio Development
Corporation (FBDC) has come to this Court about these issues against the very same
respondents, and the Court En Banc has resolved them in two separate, recent cases 1 that are
applicable here for reasons to be discussed below.
G.R. No. 175707 is an appeal by certiorari pursuant to Rule 45 of the 1997 Rules of Civil
Procedure from (a) the Decision2 dated April 22, 2003 of the Court of Appeals in CA-G.R. SP No.
61516 dismissing FBDC's Petition for Review with regard to the Decision of the Court of Ta:x
Appeals (CTA) dated October 13, 2000 in CTA Case No. 5885, and from (b) the Court of Appeals
Resolution3 dated November 30, 2006 denying its Motion for Reconsideration.
G.R. No. 180035 is likewise an appeal by certiorari pursuant to Rule 45 from (a) the Court of
Appeals Decision4 dated April 30, 2007 in CAG.R. SP No. 76540 denying FBDC’s Petition for
Review with respect to the CTA Resolution5 dated March 28, 2003 in CTA Case No. 6021, and
from (b) the Court of Appeals Resolution6 dated October 8, 2007 denying its Motion for
Reconsideration.
The CTA Resolution reconsidered and reversed its earlier Decision7 dated January 30, 2002
ordering respondents in CTA Case No. 6021 to refund or issue a tax credit certificate infavor of
petitioner in the amount of ₱77,151,020.46, representing "VAT erroneously paid by or illegally
collected from petitioner for the first quarter of 1998, and instead denied petitioner’s Claim for
Refund therefor."8
G.R. No. 181092 is also an appeal by certiorari pursuant to Rule 45 from the Court of Appeals
Decision9 dated December 28, 2007 in CA-G.R. SP No. 61158 dismissing FBDC’s petition for
review with respect to the CTA Decision10 dated September 29, 2000 in CTA Case No. 5694. The
aforesaid CTA Decision, which the Court of Appeals affirmed, denied petitioner’s Claim for Refund
in the amount of ₱269,340,469.45, representing "VAT erroneously paid by or illegally collected
from petitioner for the fourth quarter of 1996."11
The facts are not in dispute.
Petitioner FBDC (petitioner) is a domestic corporation duly registered and existing under Philippine
laws. Its issued and outstanding capital stock is owned in part by the Bases Conversion
Development Authority, a wholly owned government corporation created by Republic Act No. 7227
for the purpose of "accelerating the conversion of military reservations into alternative productive
uses and raising funds through the sale of portions of said military reservationsin order to promote
the economic and social development of the country in general."12 The remaining fifty-five per cent
(55%) is owned by Bonifacio Land Corporation, a consortium of private domestic corporations. 13
Respondent Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue
(BIR). Respondent Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, is
the chief of the aforesaid District Office.
The parties entered into a Stipulation of Facts, Documents, and Issue14 before the CTA for each
case. It was established before the CTA that petitioner is engaged in the development and sale of
real property. It is the owner of, and is developing and selling, parcels of land within a "newtown"
development area known as the Fort Bonifacio Global City (the Global City), located within the
former military camp known as Fort Bonifacio, Taguig, Metro Manila.15 The National Government,
by virtue of Republic Act No. 722716 and Executive Order No. 40,17 was the one that conveyed to
petitioner these parcels of land on February 8, 1995.
In May 1996, petitioner commenced developing the Global City, and since October 1996, had
been selling lots to interested buyers.18 At the time of acquisition, value-added tax (VAT) was not
yet imposed on the sale of real properties. Republic Act No. 7716(the Expanded Value-Added Tax
[E-VAT] Law),19 which took effect on January 1, 1996, restructured the VAT system by further
amending pertinent provisions of the National Internal Revenue Code (NIRC). Section 100 of the
old NIRC was so amended by including "real properties" in the definition of the term "goods or
properties," thereby subjecting the sale of "real properties" to VAT. The provision, as amended,
reads:
SEC. 100. Value-Added Tax on Sale of Goods or Properties. — (a) Rate and Base of Tax. —
There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.
(1) The term "goods or properties" shall mean all tangible and intangible objects which are capable
of pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business[.]
While prior to Republic Act No. 7716, real estate transactions were not subject to VAT, they
became subject to VAT upon the effectivity of said law. Thus, the sale of the parcels of land by
petitioner became subject to a 10% VAT, and this was later increased to 12%, pursuant to
Republic Act No. 9337.20 Petitioner afterwards becamea VAT-registered taxpayer.
On September 19, 1996, in accordance with Revenue Regulations No. 7-95 (Consolidated VAT
Regulations), petitioner submitted to respondent BIR, Revenue District No. 44, Taguig and
Pateros, an inventory list of its properties as of February 29, 1996. The total book value of
petitioner’s land inventory amounted to ₱71,227,503,200.00.21
On the basis of Section 105 of the NIRC,22 petitioner claims a transitional or presumptive input tax
creditof 8% of ₱71,227,503,200.00, the total value of the real properties listed in its inventory, or a
total input tax credit of ₱5,698,200,256.00.23 After the value of the real properties was reduced
dueto a reconveyance by petitioner to BCDA of a parcel of land, petitioner claims that it is entitled
to input tax credit in the reduced amountof ₱4,250,475,000.48.24
What petitioner seeks to be refunded are the actual VAT payments made by it in cash, which it
claims were either erroneously paid by or illegally collected from it. 25 Each Claim for Refund is
based on petitioner’s position that it is entitled to a transitional input tax credit under Section 105 of
the old NIRC, which more than offsets the aforesaid VAT payments.
G.R. No. 175707
Petitioner’s VAT returns filed with the BIR show that for the second quarter of 1997, petitioner
received the total amount of ₱5,014,755,287.40 from its sales and lease of lots, on which the
output VAT payable was ₱501,475,528.74.26 The VAT returns likewise show that petitioner made
cash payments totaling ₱486,355,846.78 and utilized its input tax credit of ₱15,119,681.96 on
purchases of goods and services.27
On February 11, 1999, petitioner filed with the BIR a claim for refundof the amount of
₱486,355,846.78 which it paid in cash as VAT for the second quarter of 1997.28
On May 21, 1999, petitioner filed with the CTA a petition for review29 by way of appeal, docketed
as CTA Case No. 5885, from the alleged inaction by respondents of petitioner’s claim for refund
with the BIR. On October 1, 1999, the parties submitted tothe CTA a Stipulation of Facts,
Documents and Issue.30 On October 13, 2000, the CTA issued its Decision 31 in CTA Case No.
5885 denying petitioner’s claim for refund for lack of merit.
On November 23, 2000, petitioner filed with the Court of Appeals a Petition for Review of the
aforesaid CTA Decision, which was docketed as CA-G.R SP No. 61516. On April 22, 2003, the CA
issued its Decision32 dismissing the Petition for Review. On November 30, 2006, the Court of
Appeals issued its Resolution33 denying petitioner’s Motion for Reconsideration.
On December 21, 2006, this Petition for Review was filed.
Petitioner submitted its Memorandum34 on November 7, 2008 while respondents filed their
"Comment"35 on May 4, 2009.36
On December 2, 2009, petitioner submitted a Supplement37 to its Memorandum dated November
6, 2008,stating that the said case is intimately related to the cases of Fort Bonifacio Development
Corporation v. Commissioner of Internal Revenue, G.R. No. 158885, and Fort Bonifacio
Development Corporation v. Commissioner of Internal Revenue," G.R. No. 170680, which were
already decided by this Court, and which involve the same parties and similar facts and issues. 38
Except for the amounts of tax refund being claimed and the periods covered for each claim, the
facts in this case and in the other two consolidated cases below are thesame. The parties entered
into similar Stipulations in the other two cases consolidated here.39
G.R. No. 180035
We quote relevant portions of the parties’ Stipulation of Facts, Documents and Issue in CTA Case
No. 602140 below:
1.11. Per VAT returns filed by petitioner with the BIR, for the second quarter of 1998,
petitioner derived the total amount of ₱903,427,264.20 from its sales and lease of lots, on
which the output VAT payable to the Bureau of Internal Revenue was ₱90,342,726.42.
1.12. The VAT returns filed by petitioner likewise show that to pay said amount of
₱90,342,726.42 due to the BIR, petitioner made cash payments totalling ₱77,151,020.46
and utilized its regular input tax credit of ₱39,878,959.37 on purchases of goods and
services.
1.13. On November 22, 1999, petitioner filed with the BIR a claim for refund of the amount
of ₱77,151,020.46 which it paid as valueadded tax for the first quarter of 1998.
 1.14. Earlier, on October 8, 1998 and November 17, 1998, February 11, 1999, May 11,
1999, and September 10, 1999, based on similar grounds, petitioner filed with the BIR
claims for refund of the amounts of ₱269,340,469.45, ₱359,652,009.47,
₱486,355,846.78, ₱347,741,695.74, and ₱15,036,891.26, representing value-added
taxes paid by it on proceeds derived from its sales and lease of lots for the quarters
ended December 31, 1996, March 31, 1997, June 30, 1997, September 30, 1997, and
December 31, 1997, respectively. After deducting these amounts of ₱269,340,469.45,
₱359,652,009.47, ₱486,355,846.78, ₱347,741,695.74, and ₱15,036,891.26 from the total
amount of ₱5,698,200,256.00 claimed by petitioner as input tax credit, the remaining
input tax credit more than sufficiently covers the amount of ₱77,151,020.46 subject of
petitioner’s claim for refund of November 22, 1999.
1.15. As of the date of the Petition, no action had been taken by respondents on
petitioner’s claim for refund of November 22, 1999.41 (Emphases ours.)
The petition in G.R. No. 180035 "seeks to correct the unauthorized limitation of the term ‘real
properties’ to ‘improvements thereon’ by Revenue Regulations 7-95 and the error of the Court of
Tax Appeals and Court of Appeals in sustaining the aforesaid Regulations." 42 This theory of
petitioner is the same for all three cases now before us.
On March 14, 2013, petitioner filed a Motion for Consolidation43 of G.R. No. 180035 with G.R. No.
175707.
Petitioner submitted its Memorandum44 on September 15, 2009 while respondents filed theirson
September 22, 2009.45
G.R. No. 181092
The facts summarized below are found in the parties’ Stipulation of Facts, Documents and Issue in
CTA Case No. 569446:
1.09. Per VAT returns filed by petitioner with the BIR, for the fourth quarter of 1996,
petitioner derived the total amount of ₱3,498,888,713.60 from its sales and lease of lots,
on which the output VAT payableto the Bureau of Internal Revenue was₱318,080,792.14.
1.10. The VAT returns filed by petitioner likewise show that to pay said amount of
₱318,080,792.14 due to the BIR, petitioner made cash payments totalling
₱269,340,469.45 and utilized (a) part of the total transitional/presumptive input tax credit
of ₱5,698,200,256.00 being claimed by it to the extent of ₱28,413,783.00; and (b) its
regular input tax credit of ₱20,326,539.69 on purchases of goods and services.
1.11. On October 8, 1998 petitioner filed with the BIR a claim for refund of the amounts of
₱269,340,469.45, which it paid as valueadded tax.
1.12. As of the date of the Petition, no action had been taken by respondents on
petitioner’s claim for refund.47 (Emphases ours.)
Petitioner submitted its Memorandum48 on January 18, 2010 while respondents filed theirs on
October 14, 2010.49
On March 14, 2013, petitioner filed a Motion for Consolidation50 of G.R. No. 181092 with G.R. No.
175707.
On January 23, 2014, petitioner filed a Motion to Resolve51 these consolidated cases, alleging that
the parties had already filed their respective memoranda; and, more importantly, that the principal
issue in these cases, whether petitioner is entitled to the 8% transitional input tax granted in
Section 105 (now Section 111[A]) of the NIRC based on the value of its inventory of land, and as a
consequence, to a refund of the amounts it paid as VAT for the periods in question, had already
been resolved by the Supreme Court En Bancin its Decision dated April 2, 2009 in G.R. Nos.
158885 and 170680, as well as its Decision dated September 4, 2012 in G.R. No. 173425.
Petitioner further alleges that said decided cases involve the same parties, facts, and issues as
the cases now before this Court.52
THEORY OF PETITIONER
Petitioner claims that "the 10% value-added tax is based on the gross selling price or gross value
in money of the ‘goods’ sold, bartered or exchanged."53 Petitioner likewise claims thatby definition,
the term "goods" was limited to "movable, tangible objects which is appropriable or transferable"
and that said term did not originally include "real property."54 It was previously defined as follows
under Revenue Regulations No. 5-87:
(p) "Goods" means any movable, tangible objects which is appropriable or transferrable. Republic
Act No. 7716 (E-VAT Law, January 1, 1996) expanded the coverage of the original VAT Law
(Executive Order No. 273), specifically Section 100 of the old NIRC. According to petitioner, while
under Executive Order No. 273, the term "goods" did not include real properties, Republic Act No.
7716, in amending Section 100, explicitly included in the term "goods" "real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business."
Consequently, the sale, barter, or exchange of real properties was made subject to a VAT
equivalent to 10% (later increased to 12%, pursuant to Republic Act No. 9337) of the gross selling
price of real properties.
Among the new provisions included by Executive Order No. 273 in the NIRC was the following:
SEC. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax
orany person who elects to be a VAT registered person shall, subject to the filing of an inventory
as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials
and supplies equivalent to 8%of the value of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax.
According to petitioner, the E-VAT Law, Republic Act No. 7716, did not amend Section 105. Thus,
Section 105, as quoted above, remained effective even after the enactment of Republic Act No.
7716.
Previously, or on December 9, 1995, the Secretary of Finance and the Commissioner of Internal
Revenue issued Revenue Regulations No. 7-95, which included the following provisions:
SECTION 4.100-1. Value-added tax on sale of goods or properties. — VAT is imposed and
collected on every sale, barter or exchange or transactions "deemed sale" of taxable goods or
properties at the rate of 10% of the gross selling price.
"Gross selling price" means the total amount of money or its equivalent which the purchaser pays
or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or
properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall
form part of the gross selling price. In the case of sale, barter or exchange of real property subject
to VAT, gross selling price shall mean the consideration stated in the sales document or the zonal
value whichever is higher. Provided however, in the absence of zonal value, gross selling price
refers to the market value shown in the latest declaration or the consideration whichever is higher.
"Taxable sale" refers to the sale, barter, exchange and/or lease of goods or properties, including
transactions "deemed sale" and the performance of service for a consideration, all of which are
subject to tax under Sections 100 and 102 of the Code.
Any person otherwise required to register for VAT purposes who fails to register shall also be
liable to VAT on his sale of taxable goods or properties as defined in the preceding paragraph.
The sale of goods subject to excise tax is also subject to VAT, except manufactured petroleum
products (other than lubricating oil, processed gas, grease, wax and petrolatum).
"Goods or properties" refer to all tangible and intangible objects which are capable of pecuniary
estimation and shall include:
1. Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business.
xxxx
SECTION 4.104-1. Credits for input tax. —
"Input tax"means the value-added tax due from or paid by a VAT registered person on importation
of goodsor local purchases of goods or services, including lease or use of property, from another
VAT-registered person in the course ofhis trade or business. It shall also include the transitional or
presumptive input tax determined in accordance with Section 105 of the Code.
xxxx
SECTION 4.105-1. Transitional input tax on beginning inventories. — Taxpayers who became
VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum
turnover of ₱500,000.00 or who voluntarily register even if their turnover does not exceed
₱500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December
31, 1995 on the following; (a) goods purchased for sale in their present condition; (b) materials
purchased for further processing, but which have not yet undergone processing; (c) goods which
have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for
sale or for use in the course of the taxpayer's trade or business as a VAT-registered person.
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after effectivity of E.O. 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is
higher, which amount may be allowed as tax credit against the output tax of the VAT-registered
person.
The value allowed for income tax purposes on inventories shall be the basis for the computation of
the 8% excluding goods that are exempt from VAT under SECTION 103. Only VAT-registered
persons shall be entitled to presumptive input tax credits.
xxxx
TRANSITORY PROVISIONS
(a) Presumptive Input Tax Credits—
(i) For goods, materials or supplies not for sale but purchased for use in business in their
present condition, which are not intended for further processing and are on hand as of
December 31, 1995, a presumptive input tax equivalent to 8% of the value of the goods or
properties shall be allowed.
(ii) For goods or properties purchased with the object of resale in their present condition,
the same presumptive input tax equivalent to 8% of the value of the goods unused as of
December 31, 1995 shall be allowed, which amount may also be credited against the
output tax of a VAT-registered person.
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of
improvements constructed on or after January 1, 1988 (the effectivityof E.O. 273) shall be
allowed.
For purposes of sub-paragraph (i), (ii) and (iii) above, an inventory as of December 31, 1995 of
such goods or properties and improvements showing the quantity, description, and amount should
be filed with the RDO not later than January 31, 1996. (Emphases supplied.)
Petitioner argues that Section 4.100-1 of Revenue Regulations No. 7-95 explicitly limited the term
"goods" as regards real properties to "improvements, such as buildings, roads, drainage systems,
and other similar structures," thereby excluding the real property itself from the coverage of the
term "goods" as it is used in Section 105 of the NIRC. This has brought about, as a consequence,
the issues involved in the instant case.
Petitioner claims that the "Court of Appeals erred in not holding that Revenue Regulations No. 6-
97 has effectively repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter
limited the transitional/presumptive input tax credit which may be claimed under Section 105 of the
NIRC to the ‘improvements’ on real properties."55 Petitioner argues that the provision in Section
4.105-1 of Revenue Regulations No. 7-95 stating that in the case of real estate dealers, the basis
of the input tax credit shall be the improvements, has been deleted by Revenue Regulations No.
6-97, dated January 2, 1997,which amended Revenue Regulations No. 7-95. Revenue
Regulations No. 6-97 was issued to implement Republic Act No. 8241 (the law amending Republic
Act No. 7716, the E-VAT Law), which took effect on January 1, 1997. Petitioner notes that Section
4.105-1 of Revenue Regulations No. 6-97 is but a reenactment of Section 4.105-1 of Revenue
Regulations No. 7-95, with the only difference being that the following paragraph in Revenue
Regulations No. 7-95 was deleted:
However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of E.O. 273 (January 1, 1988).
Petitioner calls this an express repeal, and with the deletion of the above paragraph, what stands
and should be applied "is the statutory definition in Section 100 of the NIRC of the term ‘goods’ in
Section 105 thereof."56
Petitioner contends that the relevant provision now states that "[t]he transitional input tax credit
shall be eight percent (8%) of the value of the beginning inventory x x x on such goods, materials
and supplies." It no longer limits the allowable transitional input tax credit to "improvements" on the
real properties. The amendment recognizes that the basis of the 8% input tax credit should not be
confinedto the value of the improvements. Petitioner further contends that the Commissioner of
Internal Revenue has in fact corrected the mistake in Revenue Regulations No. 7-95.57
Petitioner argues that Revenue Regulations No. 6-97, being beneficial to the taxpayer, should be
given a retroactive application.58 Petitioner states that the transactions involved inthese
consolidated cases took place after Revenue Regulations No. 6-97 took effect, under the
provisions of which the transitional input tax credit with regardto real properties would be based on
the value of the land inventory and not limited to the value of the improvements.
Petitioner assigns another error: the Court of Appeals erred in holding that Revenue Regulations
No. 7-95 isa valid implementation of the NIRC and in according it great respect, and should have
held that the same is invalid for being contrary to the provisions of Section 105 of the
NIRC.59 Petitioner contends that Revenue Regulations No. 7-95 is not valid for being contrary to
the express provisions of Section 105 of the NIRC, and in fact amends the same, for it limited the
scope of Section 105 "to less than what the law provides."60 Petitioner elaborates:
[Revenue Regulations No. 7-95] illegally constricted the provisions of the aforesaid section. It
delimited the coverage of Section 105 and practically amended it in violation of the fundamental
principle that administrative regulations are subordinate to the law. Based on the numerous
authorities cited above, Section 4.105-1 and the Transitory Provisions of Revenue Regulations
No. 7-95 are invalid and ineffective insofar as they limit the input tax credit to 8% of the value of
the "improvements" on land, for being contrary to the express provisions of Section 105, in relation
to Section 100, of the NIRC, and the Court of Appeals should have so held.61 Petitioner likewise
raises the following arguments:
● The rule that the construction given by the administrative agency charged with the enforcement
of the law should be accorded great weight by the courts, does not apply here. 62 ● x x x Section
4.105-1 of Revenue Regulations No. 7-95 neither exclude[s] nor prohibit[s] that the 8% input tax
credit may also [be] based on the taxpayer’s inventory of land.63
● The issuance of Revenue Regulations No. 7-95 by the [BIR], which changed the statutory
definition of "goods" with regard to the application of Section 105 of the NIRC, and the declaration
of validity of said regulations by the Court of Appeals and Court of Tax Appeals, was in violation of
the fundamental principle of separation of powers.64
xxxx
Insofar, therefore, as Revenue Regulation[s] No. 7-95 limited the scope of the term "goods" under
Section 105, to "improvements" on real properties, contrary to the definition of "goods" in Section
100, [RR] No. 7-95 decreed "what the law shall be", now "how the law may be enforced", and is,
consequently, of no effect because it constitutes undue delegation of legislative power.
xxxx
[T]he transgression by the BIR and the CTA and CA of the basic principle of separation of powers,
including the fundamental rule of nondelegation of legislative power, is clear. 65 Furthermore,
petitioner claims that:
SINCE THE PROVISIONS OF SECTION 105 OF THE [NIRC] IN RELATION TO
SECTION 100 THEREOF, ARE CLEAR, THERE WAS NO BASIS AND NECESSITY
FOR THE BUREAU OF INTERNAL REVENUE AND THE COURT OF APPEALS AND
THE COURT OF TAX APPEALS TO INTERPRET AND CONSTRUE THE SAME.66
PETITIONER IS CLEARLY ENTITLED TO THE TRANSITIONAL/PRESUMPTIVE INPUT
TAX CREDIT GRANTED IN SECTION 105 OF THE NIRCAND HENCE TO A REFUND
OF THE VALUE-ADDED TAX PAID BY IT FOR THE SECOND QUARTER OF 1997.67
Petitioner insists that there was no basis and necessity for the BIR, the CTA, and the Court of
Appeals to interpret and construe Sections 100 and 105 of the NIRC because "where the law
speaks in clear and categorical language, or the terms of the statute are clear and unambiguous
and free from doubt, there is no room for interpretation or construction and no interpretation or
construction is called for; there is only room for application." 68 Petitioner asserts that legislative
intent is determined primarily from the language of the statute; legislative intent has to be
discovered from the four corners of the law; and thus, where no ambiguity appears, it may be
presumed conclusivelythat the clear and explicit terms of a statute express the legislative
intention.69
So looking at the cases now before us, petitioner avers that the Court of Appeals, the CTA, and
the BIR did not merely interpret and construe Section 105, and that they virtually amended the
said section, for it is allegedly clear from Section 105 of the old NIRC, in relation to Section 100,
that "legislative intent is to the effect that the taxpayer is entitled to the input tax credit based on
the value of the beginning inventory of land, not merely on the improvements thereon, and
irrespective of any prior payment of sales tax or VAT."70
THEORY OF RESPONDENTS
Petitioner’s claims for refund were consistently denied in the three cases now before us. Even if
inone case, G.R. No. 180035, petitioner succeeded in getting a favorable decision from the CTA,
the grant of refund or tax credit was subsequently reversed on respondents’ Motion for
Reconsideration, and such denial ofpetitioner’s claim was affirmed by the Court of Appeals.
Respondents’ reasons for denying petitioner’s claims are summarized in their Comment in G.R.
No. 175707, and we quote:
REASONS WHY PETITION SHOULD BE DENIED OR DISMISSED
1. The 8% input tax credit provided for in Section 105 of the NIRC, in relation to Section
100 thereof, is based on the value of the improvements on the land.
2. The taxpayer is entitled to the input tax credit provided for in Section 105 of the NIRC
only if it has previously paid VAT or sales taxes on its inventory of land.
3. Section 4.105-1 of Revenue Regulations No. 7-95 of the BIR is valid, effective and has
the force and effect of law, which implemented Section 105 of the NIRC.71
In respondents’ Comment72 dated November 3, 2008 in G.R. No. 180035, they averred that
petitioner’s claim for the 8% transitional/presumptive input tax is "inconsistent with the purpose
and intent of the law in granting such tax refund or tax credit." 73 Respondents raise the following
arguments:
1. The transitional input tax provided under Section 105 in relation to Section 100 of the
Tax Code, as amended by EO No. 273 effective January 1, 1988, is subject to certain
conditions which petitioner failed to meet.74
2. The claim for petitioner for transitional input tax is in the nature of a tax exemption
which should be strictly construed against it.75
3. Revenue Regulations No. 7-95 is valid and consistent with provisions of the
NIRC.76 Moreover, respondents contend that:
"[P]etitioner is not legally entitled to any transitional input tax credit, whether it be the 8%
presumptive inputtax credit or any actual input tax credit in respect of its inventory of land brought
into the VAT regime beginning January 1, 1996, in view of the following:
1. VAT free acquisition of the raw land.– petitioner purchased and acquired, from the Government,
the aforesaid raw land under a VAT free sale transaction. The Government, as a vendor, was tax-
exempt and accordingly did not pass on any VAT or sales tax as part of the price paid therefor by
the petitioner.
2. No transitory input tax on inventory of land is allowed. Section 105 of the Code, as amended by
Republic Act No. 7716, and as implemented by Section 4.105-1 of Revenue Regulations No. 7-95,
expressly provides that no transitional input tax credit shall be allowed to real estate dealers in
respect of their beginning inventory of land brought into the VAT regime beginning January 1,
1996 (supra). Likewise, the Transitory Provisions [(a) (iii)] of Revenue Regulations No. 7-95
categorically states that "for real estate dealers, the presumptive input tax of 8% of the book value
of improvements constructed on or after January 1, 1998 (effectivity of E.O. 273) shall be
allowed." For purposes of subparagraphs (i), (ii) and (iii) above, an inventory as of December 31,
1995 ofsuch goods or properties and improvements showing the quantity, description, and amount
should be filed with the RDO not later than January 31, 1996. It is admitted that petitioner filed its
inventory listing of real properties on September 19, 1996 or almost nine (9) months late in
contravention [of] the requirements in Revenue Regulations No. 7-95."77
Respondents, quoting the Civil Code,78 argue that Section 4.105-1 of Revenue Regulations No. 7-
95 has the force and effect of a law since it is not contrary to any law or the Constitution.
Respondents add that "[w]hen the administrative agency promulgates rules and regulations, it
makes a new law with the force and effect of a valid law x x x."79
ISSUES
The main issue before us now is whether or not petitioner is entitled to a refund of the amounts of:
1) ₱486,355,846.78 in G.R. No. 175707, 2) ₱77,151,020.46 for G.R. No. 180035, and 3)
₱269,340,469.45 in G.R. No. 181092, which it paid as value-added tax, or to a tax credit for said
amounts.
To resolve the issue stated above, it is also necessary to determine:
● Whether the transitional/presumptive input tax credit under Section 105 of the NIRC may be
claimed only on the "improvements" on real properties;
● Whether there must have been previous payment of sales tax or value added tax by petitioner
on its land before it may claim the input tax credit granted by Section 105 of the NIRC;
● Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the NIRC;
and
● Whether the issuance of Revenue Regulations No. 7-95 by the BIR, and declaration of validity of
saidRegulations by the Court of Tax Appeals and the Court of Appeals, was in violation of the
fundamental principle of separation of powers.
THE RULINGS BELOW
A. G.R. No. 175707
1. CTA Case No. 5885 Decision (October 13, 2000)
The CTA traced the history of "transitional input tax credit" from the original VAT Law of 1988
(Executive Order No. 273) up to the Tax Reform Act of 1997 and looked into Section 105 of the
Tax Code. According to the CTA, the BIR issued Revenue Regulations No. 5-87, specifically
Section 26(b),80 to implement the provisions of Section 105. The CTA concluded from these
provisions that "the purpose of granting transitional input tax credit to be utilized as payment for
output VAT is primarily to give recognition to the sales tax component of inventories which would
qualify as input tax credit had such goods been acquired during the effectivity of the VAT Law of
1988."81 The CTA stated that the purpose of transitional input tax credit remained the same even
after the amendments introduced by the E-VAT Law.82 The CTA held that "the rationale in granting
the transitional input tax credit also serves as its condition for its availment as a benefit"83 and that
"[i]nherent in the law is the condition of prior payment of VAT or sales taxes." 84 The CTA excluded
petitioner from availing of the transitional input tax credit provided by law, reasoning that "to base
the 8% transitional input tax on the book value of the land isto negate the purpose of the law in
granting such benefit. It would be tantamount to giving an undeserved bonus to real estate dealers
similarly situated as petitioner which the Government cannot afford to provide." 85 Furthermore, the
CTA held that respondent was correct in basing the 8% transitional input tax credit on the value of
the improvements on the land, citing Section 4.105-1 of Revenue Regulations No. 7-95, which the
CTA claims is consistent and in harmony with the law it seeks to implement. Thus, the CTA denied
petitioner’s claim for refund.86
2. CA-G.R. No. 61516 Decision (April 22, 2003)
The Court of Appeals affirmed the CTA and ruled that petitioner is not entitled to refund or tax
credit in the amount of ₱486,355,846.78 and stated that "Revenue Regulations No. 7-95 is a valid
implementation of the NIRC."87 According to the Court of Appeals:
"[P]etitioner acquired the contested property from the National Government under a VAT-free
transaction. The Government, as a vendor was outside the operation of the VATand ergo, could
not possibly have passed on any VAT or sales tax as part of the purchase price to the petitioner
as vendee."88
x x x [T]he grant of transitional input tax credit indeed presupposes that the manufacturers,
producers and importers should have previously paid sales taxes on their inventories. They were
given the benefit of transitional input tax credits, precisely, to make up for the previously paid sales
taxes which were now abolished by the VAT Law. It bears stressing that the VAT Law took the
place of privilege taxes, percentage taxes and sales taxes on original or subsequent sale of
articles. These taxes were substituted by the VAT at the constant rate of 0% or 10%.89
3. CA-G.R. No. 61516 Resolution (November 30, 2006)
Upon petitioner’s Motion for Reconsideration, the Court of Appeals affirmed its decision, but we
find the following statement by the appellate court worthy of note:
We concede that the inventory restrictions under Revenue Regulation No. 7-95 limiting the
coverage of the inventory only to acquisition cost of the materials used in building "improvements"
has already been deleted by Revenue Regulation 6-97. This notwithstanding, we are poised to
sustain our earlier ruling as regards the refund presently claimed.90
B. G.R. No. 180035
1. CTA Case No. 6021 Decision (January 30, 2002)
The CTA sustained petitioner’s position and held that respondent erred in basing the transitional
input tax credit of real estate dealers on the value of the improvements.91 The CTA ratiocinated as
follows:
This Court, in upholding the position taken by the petitioner, is convinced that Section 105 of the
Tax Code is clear in itself. Explicit therefrom is the fact that a taxpayer shall be allowed a
transitional/presumptive input tax credit based on the value of its beginning inventory of goods
which is defined in Section 100 as to encompass even real property. x x x.92
The CTA went on to point out inconsistencies it had found between the transitory provisions of
Revenue Regulations No. 7-95 and the law it sought to implement, in the following manner:
Notice that letter (a)(ii) of the x x x transitory provisions 93 states that goods or properties
purchased with the object of resalein their present condition comes with the corresponding 8%
presumptive input tax of the value of the goods, which amount may alsobe credited against the
output tax of a VAT-registered person. It must be remembered that Section 100 as amended by
Republic Act No. 7716 extends the term "goods or properties" to real properties held primarily for
sale to customers or held for lease in the ordinary course of trade or business. This provision
alone entitles Petitioner to the 8%presumptive input tax of the value of the land (goods or
properties) sold. However in letter (a)(iii) of the same Transitory Provisions, Respondent
apparently changed his (sic) course when it declared that real estate dealers are only entitled to
the 8% of the value of the improvements. This glaring inconsistency between the two provisions
prove that Revenue Regulations No. 7-95 was not a result of an intensive study and analysis and
may have been haphazardly formulated.94
The CTA held that the implementing regulation, which provides that the 8% transitional input tax
shall bebased on the improvements only of the real properties, is neither valid nor effective. 95 The
CTA also sustained petitioner’s argument that Revenue Regulations No. 7-95 provides no specific
date as to when the inventory list should be submitted. The relevant portion of the CTA decision
reads:
The only requirement is that the presumptive input tax shall be supported by an inventory of goods
asshown in a detailed list to be submitted to the BIR. Moreover, the requirement of filing an
inventory of goods not later than January 31, 1996 inthe transitory provision of the same
regulation refers to the recognition of presumptive input tax on goods or properties on hand as of
December 31, 1995 of taxpayers already liable to VAT as of that date.
Clearly, Petitioner is entitled to the presumptive input tax in the amount of ₱5,698,200,256.00,
computed as follows:
Book Value of Inventory x x x ₱71,227,503,200.00
Multiply by Presumptive
Input Tax rate _____ 8%
Available Presumptive Input Tax ₱5,698,200,256.00
The failure of the Petitioner to consider the presumptive input tax in the computation of its output
tax liability for the 1st quarter of 1998 results to overpayment of the VAT for the same period.
To prove the fact of overpayment, Petitioner presented the original Monthly VAT Declaration for
the month of January 1998 showing the amount of ₱77,151,020.46 as the cash component of the
value-added taxes paid (Exhibits E-14 & E-14-A) which is the subject matter of the instant claim
for refund.
In Petitioner’s amended quarterly VAT return for the 1st quarter of 1998 (Exhibit D-1), Petitioner
deducted the amount of ₱77,151,020.46 from the total available input tax toshow that the amount
being claimed would no longer be available as input tax credit.
In conclusion, the Petitioner has satisfactorily proven its entitlement to the refund of value-added
taxes paid for the first quarter of taxable year 1998.
WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondents are
hereby ORDERED to REFUND or issue a TAX CREDIT CERTIFICATE in favor of the Petitioner
the total amount of ₱77,151,020.46 representing the erroneously paid value-added tax for the first
quarter of 1998.96
2. CTA Case No. 6021 Resolution (March 28, 2003)
The CTA reversedits earlier ruling upon respondents’ motion for reconsideration and thus denied
petitioner’s claim for refund. The CTA reasoned and concluded as follows:
The vortex of the controversy in the instant case actually involves the question of whether or not
Section 4.105-1 of Revenue Regulations No. 7-95, issued by the Secretary of Finance upon
recommendation of the Commissioner of Internal Revenue, is valid and consistent with and not
violative of Section 105 of the Tax Code, in relation to Section 100 (a)(1)(A).
xxxx
We agree with the position taken by the respondents that Revenue Regulations No. 7-95 is not
contrary to the basic law which it seeks to implement. As clearly worded, Section 105 of the Tax
Code provides that a person who becomes liable to value-added tax or any person who elects to
be a VAT-registered person shall be allowed 8% transitional input tax subject to the filing of an
inventory as prescribed by regulations.
Section 105, which requires the filing of an inventory for the grant of the transitional input tax, is
couched in a manner where there is a need for an implementing rule or regulation tocarry its
intendment. True to its wordings, the BIR issued Revenue Regulations No. 7-95 (specifically
Section 4.105-1) which succinctly mentioned that the basis of the presumptive input tax shall be
the improvements in case of real estate dealers.97
xxxx
WHEREFORE, in view of the foregoing, the instant Motion for Reconsideration filed by
respondents is hereby GRANTED. Accordingly, petitioner’s claim for refund of the alleged
overpaid Value-Added Tax in the amount of ₱77,151,020.46 covering the first quarter of 1998 is
hereby DENIEDfor lack of merit.98
3. CA-G.R. SP No. 76540 Decision (April 30, 2007)
The Court of Appeals affirmed the CTA’s Resolution denying petitioner’s claim for refund, and we
quote portions of the discussion from the Court of Appeals decision below:
To Our mind, the key to resolving the jugular issue of this controversy involves a deeper analysis
on how the much-contested transitional input tax credit has been encrypted in the country’s
valueadded tax (VAT) system.
xxxx
x x x [T]he Commissioner of Internal Revenue promulgated Revenue Regulations No. 7-95which
laid down, among others, the basis of the transitional input tax credit for real estate dealers: 99 x x x
x
The Regulation unmistakably allows credit for transitional input tax of any person who becomes
liable to VAT or who elects to be a VAT registered person. More particularly, real estate dealers
who were beforehand not subject to VAT are allowed a tax credit to cushion the staggering effect
of the newly imposed 10% output VAT liability under RA No. 7716.
Bearing in mind the purpose of the transitional input tax credit under the VAT system, We find it
incongruous to grant petitioner’s claim for tax refund. We take note of the fact that petitioner
acquired the Global City lots from the National Government. The transaction was not subject to
any sales or business tax. Since the seller did not pass on any tax liability to petitioner, the latter
may not claim tax credit. Clearly then, petitioner cannot simply demand that it is entitled to the
transitional input tax credit.
xxxx
Another point.Section 105 of the National Internal Revenue Code, as amended by EO No. 273,
explicitly provides that the transitional input tax credit shall be based on "the beginning inventory of
goods, materials and supplies orthe actual value-added tax paid on such goods, materials and
supplies, whichever is higher." Note that the law did not simply say – the transitional input tax
credit shall be 8% of the beginning inventory of goods, materials and supplies.
Instead, lawmakers went on to say that the creditable input tax shall be whichever is higher
between the value of the inventory and the actual VAT paid. Necessarily then, a comparison of
these two figures would have to be made. This strengthens Our view that previous payment of the
VAT is indispensable to determine the actual value of the input tax creditable against the output
tax. So too, this is in consonance with the present tax credit method adopted in this jurisdiction
whereby an entity can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.
We proceed to traverse another argument raised in this controversy. Petitioner insists that the
term "goods" which was one of the bases in computing the transitional inputtax credit must be
construed so as to include real properties held primarily for sale to customers. Petitioner posits
that respondent Commissioner practically rewrote the law when it issued Revenue Regulations
No. 7-95 which limited the basis of the 8% transitional input tax credit to the value of
improvements alone.
Petitioner is clearly mistaken.
The term "goods" has been defined to mean any movable or tangible objects which are
appreciable or tangible. More specifically, the word "goods" is always used to designate wares,
commodities, and personal chattels; and does not include chattels real."Real property" on the
other hand, refers to land, and generally whatever is erected or growing upon or affixed to land. It
is therefore quite absurd to equate "goods" as being synonymous to "properties". The vast
difference between the terms "goods" and "real properties" is so obvious that petitioner’s assertion
must be struckdown for being utterly baseless and specious.
Along this line, We uphold the validity of Revenue Regulations No. 7-95. The authority of the
Secretary of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all
needful rules and regulations for the effective enforcement of internal revenue laws cannot be
controverted. Neither can it be disputed that such rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more
fundamental than either of the above, however, is that all such issuances must not override, but
must remain consistent and in harmony with, the law they seek to apply and implement.
Administrative rules and regulations are intended to carry out, neither to supplant nor to modify,
the law. Revenue Regulations No. 7-95 is clearly not inconsistent with the prevailing statute
insofar as the provision on transitional inputtax credit is concerned.100
4. CA-G.R. SP No. 76540 Resolution (October 8, 2007)
In this Resolution, the Court of Appeals denied petitioner’s Motion for Reconsideration of its
Decision dated April 30, 2007.
C. G.R. No. 181092
1. CTA Case No. 5694 Decision (September 29, 2000)
The CTA ruled that petitioner is not automatically entitled to the 8% transitional input tax allowed
under Section 105 of the Tax Code based solely on its inventory of real properties, and cited the
rule on uniformity in taxation duly enshrined in the Constitution.101 According to the CTA:
As defined under the above Section 104 of the Tax Code, an "input tax" means the VAT paid by a
VAT-registered person in the course of his trade or business on importation ofgoods or services
from a VAT registered person; and that such tax shall include the transitional input tax determined
in accordance with Section 105 of the Tax Code,supra.102
Applying the rule on statutory construction that particular words, clauses and phrases should not
be studied as detached and isolated expressions, but the whole and every part of the statute must
be considered in fixing the meaning of any of its parts in order to produce a harmonious whole, the
phrase "transitional input tax" found in Section 105 should be understood to encompass goods,
materials and supplies which are subject to VAT, in line with the context of "input tax" as defined in
Section 104, most especially that the latter includes, and immediately precedes, the former under
its statutory meaning. Petitioner’s contention that the 8% transitional input tax is statutorily
presumed to the extent that its real properties which have not been subjected to VAT are entitled
thereto, would directly contradict "input tax" as defined in Section 104 and would invariably cause
disharmony.103
The CTA held that the 8% transitional input tax should not be viewed as an outright grant or
presumption without need of prior taxes having been paid. Expounding on this, the CTA said: The
simple instance in the aforesaid paragraphs of requiring the tax on the materials, supplies or
goods comprising the inventory to be currently unutilized as deferred sales tax credit before the
8% presumptive input tax can be enjoyed readily leads to the inevitable conclusion that such 8%
tax cannot be just granted toany VAT liable person if he has no priorly paid creditable sales taxes.
Legislative intent thus clearly points to priorly paid taxes on goods, materials and supplies before a
VAT registered person can avail of the 8% presumptive input tax.104
Anent the applicability to petitioner’s case of the requirement under Article VI, Section 28, par. 1 of
the Constitution that the rule of taxation shall be uniform and equitable, the CTA held thus:
Granting arguendo that Petitioner is statutorily presumed to be entitled to the 8% transitional input
tax as provided in Section 105, even without having previously paid any tax on its inventory of
goods, Petitioner would be placed at a more advantageous position than a similar VAT-registered
person who also becomes liable to VAT but who has actually paid VAT on his purchases of goods,
materials and supplies. This is evident from the alternative modes of acquiring the proper amount
of transitional input tax under Section 105, supra. One is by getting the equivalent amount of 8%
tax based on the beginning inventory of goods, materials and supplies and the other is by the
actual VAT paid on such goods, materials and supplies, whichever is higher.
As it is supposed to work, the transitional input tax should answer for the 10% output VAT liability
thata VAT-registered person will incur once he starts business operations. While a VAT-registered
person who is allowed a transitional input tax based on his actual payment of 10% VAT on his
purchases can utilize the same to pay for his output VAT liability, a similar VAT-registered person
like herein Petitioner, when allowed the alternative 8% transitional input tax, can offset his output
VAT liability equally through such 8% tax even without having paid any previous tax. This obvious
inequity that may arise could not have been the intention and purpose of the lawmakers in
granting the transitional input tax credit. x x x105
Evidently, Petitioner is not similarly situated both as to privileges and liabilities to that of a VAT-
registered person who has paid actual 10% input VAT on his purchases of goods, materials and
supplies. The latter person will not earn anything from his transitional input tax which, to
emphasize, has been paid by him because the same will just offset his 10% output VAT liability.
On the other hand, herein Petitioner will earn gratis the amount equivalent to 10% output VAT it
has passed on to buyers for the simple reason that it has never previously paid any input tax on its
goods. Its gain will be facilitated by herein claim for refund if ever granted. This is the reason why
we do not see any incongruity in Section 4.105-1 of Revenue Regulations No. 7-95 as it relates to
Section 105 of the 1996 Tax Code, contrary to the contention of Petitioner. Section 4.105-1
(supra), which bases the transitional input tax credit on the value of the improvements, is
consistent with the purpose of the law x x x.106
2. CA-G.R. SP No. 61158 Decision (December 28, 2007) The Court of Appeals affirmed the CTA’s
denial of petitioner’s claim for refund and upheld the validity of the questioned Revenue
Regulation issued by respondent Commissioner ofInternal Revenue, reasoning as follows:
Sec. 105 of the NIRC, as amended, provides that the allowance for the 8% input tax on the
beginning inventory of a VAT-covered entity is "subject to the filing of an inventory as prescribed
by regulations." This means that the legislature left to the BIR the determination of what will
constitute the beginning inventory ofgoods, materials and supplies which will, in turn, serve as the
basis for computing the 8% input tax.
While the power to tax cannot be delegated to executive agencies, details as to the enforcement
and administration of an exercise of such power may be left to them, including the power to
determine the existence of facts on which its operation depends x x x. Hence, there is no
gainsaying that the CIR and the Secretary of Finance, in limiting the application of the input tax of
real estate dealers to improvements constructed on or after January 1, 1988, merely exercised
their delegated authority under Sec. 105, id., to promulgate rules and regulations defining what
should be included in the beginning inventory of a VAT-registered entity.
xxxx
In the instant case, We find that, contrary to petitioner’s attacks against its validity, the limitation on
the beginning inventory of real estate dealers contained in Sec. 4.105-1 of RR No. 7-95 is
reasonable and consistent with the natureof the input VAT. x x x.
Based on the foregoing antecedents, it is clear why the second paragraph of Sec. 4.105-1 of RR
No. 7-95 limits the transitional input taxes of real estate dealers to the value of improvements
constructed on or after January 1, 1988. Since the sale of the land was not subject to VAT or other
sales taxes prior to the effectivity of Rep. Act No. 7716, real estate dealers at that time had no
input taxes to speak of. With this in mind, the CIR correctly limited the application of the 8%
transitional input tax to improvements on real estate dealers constructed on or after January 1,
1988 when the VAT was initially implemented. This is, as it should be, for to grant petitioner a
refund or credit for input taxes it never paid would be tantamount to unjust enrichment.
As petitioner itself observes, the input tax credit provided for by Sec. 105 of the NIRC is a
mechanism used to grant some relief from burden some taxes. It follows, therefore, that not having
been burdened by VAT or any other sales tax on its inventory of land prior to the effectivity of Rep.
Act No. 7716, petitioner is not entitled to the relief afforded by Sec. 105, id.107
The Court of Appeals ruled that petitioner is not similarly situated as those business entities which
previously paid taxes on their inputs, and stressed that "a tax refund or credit x x x is in the nature
of a tax exemption which must be construed strictissimi juris against the taxpayer x x x." 108
THIS COURT’S RULING
As previously stated, the issues here have already been passed upon and resolved by this Court
En Banc twice, in decisions that have reached finality, and we are bound by the doctrine of stare
decisis to apply those decisions to these consolidated cases, for they involve the same facts,
issues, and even parties.
Thus, we find for the petitioner.
DISCUSSION
The errors assigned by petitioner to the Court of Appeals and the arguments offered by
respondents to support the denial of petitioner’s claim for tax refund have already been dealt with
thoroughly by the Court En Banc in Fort Bonifacio Development Corporation v. Commissioner of
Internal Revenue, G.R. Nos. 158885 and 170680 (Decision - April 2, 2009; Resolution - October 2,
2009); and Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R.
No. 173425 (Decision - September 4, 2012; Resolution - January 22, 2013).
The Court En Bancdecided on the following issues in G.R. Nos. 158885 and 170680:
1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of
real properties by real estate dealers, is the 8% transitional input tax credit in Section 105
applied only to the improvements on the real property or is it applied on the value of the
entire real property?
2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue
Regulations No. 7-95 valid in limiting the 8% transitional input tax to the improvements on
the real property?
Subsequently, in G.R. No. 173425, the Court resolved issues that are identical to the ones raised
here by petitioner,109 thus:
 3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated
Revenue Regulations No. 7-95 insofar as the latter limited the transitional/presumptive
input tax credit which may be claimed under Section 105 of the National Internal Revenue
Code to the "improvements" on real properties.
3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105
of the National Internal Revenue Code.
3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal
Revenue, and declaration of validity of said Regulations by the Court of Tax Appeals and
Court of Appeals, [were] in violation of the fundamental principle of separation of powers.
3.05.d. Whether there is basis and necessity to interpret and construe the provisions of
Section 105 of the National Internal Revenue Code.
3.05.e. Whether there must have been previous payment of business tax [sales tax or
value-added tax]110 by petitioner on its land before it may claim the input tax credit
granted by Section 105 of the National Internal Revenue Code.
3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the
purpose of the transitional/presumptive input tax provided for in Section 105 of the
National Internal Revenue Code.
3.05.g. Whether the economic and socialobjectives in the acquisition of the subject
property by petitioner from the Government should be taken into consideration.111
The Court’s pronouncements in the decided cases regarding these issues are discussed below.
The doctrine of stare decisis et non quieta movere, which means "to abide by, or adhere to,
decided cases,"112 compels us to apply the rulings by the Court tothese consolidated cases before
us. Under the doctrine of stare decisis, "when this Court has once laid down a principle of law as
applicable to a certainstate of facts, it will adhere to that principle, and apply it to all future cases,
where facts are substantially the same; regardless of whether the parties and property are the
same."113 This is to provide stability in judicial decisions, as held by the Court in a previous case:
Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the
sake of certainty, a conclusion reached in one case should be applied to those that follow if the
facts are substantially the same, even though the parties may be different. It proceeds from the
first principle of justice that, absent any powerful countervailing considerations, like cases ought to
be decided alike.114
More importantly, we cannot depart from the legal precedents as laid down by the Court En Banc.
It is provided in the Constitution that "no doctrine or principle of law laid down by the court in a
decision rendered en bancor in division may be modified or reversed except by the court sitting en
banc."115
What is left for this Court to do is to reiterate the rulings in the aforesaid legal precedents and
apply them to these consolidated cases.
As regards the main issue, the Court conclusively held that petitioner is entitled to the 8%
transitional input tax on its beginning inventory of land, which is granted in Section 105
(nowSection 111[A]) of the NIRC, and granted the refund of the amounts petitioner had paid as
output VAT for the different tax periods in question.116
Whether the transitional/presumptive
input tax credit under Section 105 of the
NIRC may be claimed only on the
"improvements" on real properties.
The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows: On
its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods, materials
and supplies, based on which inventory the transitional input tax credit is computed. It can be
conceded that when it was drafted Section 105 could not have possibly contemplated concerns
specific to real properties, as real estate transactions were not originally subject to VAT. At the
same time, when transactions on real properties were finally made subject to VAT beginning
withRep. Act No. 7716, no corresponding amendment was adopted as regards Section 105 to
provide for a differentiated treatment in the application of the transitional input tax credit with
respect to real properties or real estate dealers.
It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate
transactions subject to VAT for the first time. Prior to the amendment, Section 100 had imposed
the VAT "on every sale, barter or exchange of goods", without however specifying the kind of
properties that fall within or under the generic class "goods" subject to the tax.
Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT)
law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several
respects, some of which we will enumerate. First, it made every sale, barter or exchange of
"goods or properties" subject to VAT. Second, it generally defined "goods or properties" as "all
tangible and intangible objects which are capable of pecuniary estimation." Third, it included a
non-exclusive enumeration of various objects that fall under the class "goods or properties"
subject to VAT, including "[r]eal properties held primarily for sale to customers or held for lease in
the ordinary courseof trade or business."
From these amendments to Section 100, is there any differentiated VAT treatment on
realproperties or real estate dealers that would justify the suggested limitations on the application
of the transitional input tax on them? We see none.
Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held
for lease in the ordinary course of trade or business" that are subject to the VAT, and not when the
real estate transactions are engaged in by persons who do not sell or lease properties in the
ordinary course of trade or business. It is clear that those regularly engaged in the real estate
business are accorded the same treatment as the merchants of other goods or properties
available in the market. In the same way that a milliner considers hats as his goods and a rancher
considers cattle as his goods, a real estate dealer holds real property, whether ornot it contains
improvements, as his goods.117 (Citations omitted, emphasis added.)
xxxx
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the
transitional input tax credit. Goods, as commonly understood in the business sense, refers to the
product which the VAT registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods". Such real properties are
the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such
"real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business." Said definition was taken from the very statutory language of Section 100 of the Old
NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only
contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the
same revenue regulation itself has provided.118 (Emphasis added.)
The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that
Section 105 of the old NIRC, on the transitional input tax credit, remained intact despite the
enactment of Republic Act No. 7716. Section 105 was amended by Republic Act No. 8424, and
the provisions on the transitional input tax credit are now embodied in Section 111(A) of the new
NIRC, which reads:
Section 111. Transitional/Presumptive Input Tax Credits.—
(A) Transitional Input Tax Credits.— A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of [F]inance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent for 8% of the value of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax.119
In G.R. Nos. 158885 and 170680, the Court asked, "If the plain text of Republic Act No. 7716 fails
to supply any apparent justification for limiting the beginning inventory of real estate dealers only
to the improvements on their properties, how then were the Commissioner of Internal Revenue
and the courts a quoable to justify such a view?"120 The Court then answered this question in this
manner:
IV.
The fact alone that the denial of FBDC's claims is in accord with Section 4.105-1 of RR 7-95 does
not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716,
the incongruence cannot by itself justify the denial of the claims. We need to inquire into the
rationale behind Section 4.105-1, as well as the question whether the interpretation of the law
embodied therein is validated by the law itself.
xxxx
It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-
VAT registered people would have been prejudiced by the inability to credit against the output
VAT their payments by way of sales tax on their existing stocks in trade. Yet that inequity was
precisely addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The
provision authorized VAT-registered persons to invoke a "presumptive input tax equivalent to 8%
of the value of the inventory as of December 31, 1987 of materials and supplies which are not for
sale, the tax on which was not taken up or claimed as deferred sales tax credit," and a similar
presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of
goods for sale, the tax on which was not taken up or claimed as deferred sales tax
credit.121 (Emphasis ours.)
Whether there must have been previous
payment of sales tax or value-added tax
by petitioner on its land before petitioner
may claim the input tax credit granted by
Section 105 (now Section 111[A]) of the NIRC.
The Court discussed this matter lengthily in its Decision in G.R. Nos. 158885 and 170680, and we
quote:
Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for
the introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only,
as hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then
Section 25 alone would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing
for the transitional input tax credit under Section 105, thereby assuring that the tax credit would
endure long after the last goods made subject to sales tax have been consumed.
If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the
purported causal link between those two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times; that fact simply belies the
absence of any relationship between such tax credit and the long-abolished sales taxes.
Obviously then, the purpose behind the transitional input tax credit is not confined to the transition
from sales tax to VAT.
x x x Section 105 states that the transitional input tax credits become available either to (1) a
person who becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear
language of the law entitles new trades or businesses to avail of the tax credit once they become
VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New NIRC,
may be claimed by a newly-VAT registered person such as when a business as it commences
operations.
x x x [I]t is not always true that the acquisition of such goods, materials and supplies entail the
payment of taxes on the part of the new business. In fact, this could occur as a matter of course by
virtue of the operation of various provisions of the NIRC, and not only on account of a specially
legislated exemption.
xxxx
The interpretation proffered by the CTA would exclude goods and properties which are acquired
through sale not in the ordinary course of trade or business, donation or through succession, from
the beginning inventory on which the transitional input tax credit is based. This prospect all but
highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or
even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any
other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the beginning
inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of
goods, materials and supplies. During that period of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it
derived from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayer's income by affording the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage when the person is yet unable to credit input
VAT payments.
There is another point that weighs against the CTA's interpretation. Under Section 105 of the Old
NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or the actual
value-added tax paid on such goods, materials and supplies, whichever is higher." If indeed the
transitional input tax credit is premised on the previous payment of VAT, then it does not make
sense to afford the taxpayer the benefit of such credit based on "8% of the value of such
inventory" should the same prove higher than the actual VAT paid. This intent that the CTA
alluded to could have been implemented with ease had the legislature shared such intent by
providing the actual VAT paid as the sole basis for the rate of the transitional input tax credit.
The CTA harped on the circumstance that FBDC was excused from paying any tax on the
purchase of its properties from the national government, even claiming that to allow the
transitional input tax credit is "tantamount to giving an undeserved bonusto real estate dealers
similarly situated as [FBDC] which the Government cannot afford to provide." Yet the tax laws in
question, and all tax laws in general, are designed to enforce uniform tax treatment to persons or
classes of persons who share minimum legislated standards. The common standard for the
application of the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax
laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has
become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the
subsequent tax laws are all decidedly neutral and accommodating in ascertaining who should be
entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious
perspective.122 (Citations omitted, emphases ours.)
The Court En Bancin its Resolution in G.R. No. 173425 likewise discussed the question of prior
payment of taxes as a prerequisite before a taxpayer could avail of the transitional input tax credit.
The Court found that petitioner is entitled to the 8% transitional input tax credit, and clearly said
that the fact that petitioner acquired the Global City property under a tax-free transaction makes
no difference as prior payment of taxes is not a prerequisite.123 We quote pertinent portions of the
resolution below:
This argument has long been settled. To reiterate, prior payment of taxes is not necessary before
a taxpayer could avail of the 8% transitional input tax credit. This position is solidly supported by
law and jurisprudence, viz.:
First.Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a
taxpayer to avail of the 8% transitional input tax credit, all that is required from the taxpayer is to
file a beginning inventory with the Bureau of Internal Revenue (BIR). It was never mentioned in
Section 105 that prior payment of taxes is a requirement. x x x.
xxxx
Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to
require it now would be tantamount to judicial legislation which, to state the obvious, is not
allowed.
Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior
payment of taxes is not required before a taxpayer could avail of transitional input tax credit. As
we have declared in our September 4, 2012 Decision, "[t]ax credit is not synonymous to tax
refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the
taxing authority. Tax credit, on the other hand, is an amount subtracted directly from one's total tax
liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment."
Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax
credit is no longer novel. It has long been settled by jurisprudence. x x x.
Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., this Court had
already declared that prior payment of taxes is not required in order toavail of a tax credit. x x
x124 (Citations omitted, emphases ours.)
The Court has thus categorically ruled that prior payment of taxes is not required for a taxpayer
toavail of the 8% transitional input tax credit provided in Section 105 of the old NIRC and that
petitioner is entitled to it, despite the fact that petitioner acquired the Global City property under a
tax-free transaction.125 The Court En Banc held:
Contrary to the view of the CTA and the CA, there is nothing in the abovequoted provision to
indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax
credit. Obviously, all that is required is for the taxpayerto file a beginning inventory with the BIR.
To require prior payment of taxes x x x is not only tantamount to judicial legislation but would also
render nugatory the provision in Section 105 of the old NIRC that the transitional input tax credit
shall be "8% of the value of [the beginning] inventory or the actual [VAT] paid on such goods,
materials and supplies, whichever is higher" because the actual VAT (now 12%) paid on the
goods, materials, and supplies would always be higher than the 8% (now 2%) of the beginning
inventory which, following the view of Justice Carpio, would have to exclude all goods, materials,
and supplies where no taxes were paid. Clearly, limiting the value of the beginning inventory only
to goods, materials, and supplies, where prior taxes were paid, was not the intention of the law.
Otherwise, it would have specifically stated that the beginning inventory excludes goods,
materials, and supplies where no taxes were paid.126
Whether Revenue Regulations No. 7-95 is
a valid implementation of Section 105 of
the NIRC.
In the April 2, 2009 Decision inG.R. Nos. 158885 and 170680, the Court struck down Section
4.105-1 ofRevenue Regulations No. 7-95 for being in conflict with the law.127 The decision reads in
part as follows:
[There] is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the
restriction imposed on realestate brokers and their ability to claim the transitional input tax credit
based on the value of their real properties. In addition, the very idea of excluding the real
properties itself from the beginning inventory simply runs counter to what the transitional input tax
credit seeks to accomplish for persons engaged in the sale of goods, whether or not such "goods"
take the form of real properties or more mundane commodities.
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the
transitional input tax credit. Goods, as commonly understood in the business sense, refers to the
product which the VAT registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods". Such real properties are
the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such
"real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business." Said definition was taken from the very statutory language of Section 100 of the Old
NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only
contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the
same revenue regulation itself has provided.
The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the
inventory of goods, materials and supplies upon which the transitional input VAT would be based
"shall be left to regulation by the appropriate administrative authority". This is based on the phrase
"filing of an inventory as prescribed by regulations" found in Section 105. Nonetheless, Section
105 does include the particular properties to be included in the inventory, namely goods, materials
and supplies. It is questionable whether the CIR has the power to actually redefine the concept of
"goods", as she did when she excluded real properties from the class of goods which real estate
companies in the business of selling real properties may include in their inventory. The authority to
prescribe regulations can pertain to more technical matters, such as how to appraise the value of
the inventory or what papers need to be filed to properly itemize the contents of such inventory.
But such authority cannot go as far as to amend Section 105 itself, which the Commissioner had
unfortunately accomplished in this case.
It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or regulation is to be valid. In case of conflict
between a statute and an administrative order, the former must prevail. Indeed, the CIR has no
power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC
absent statutory authority or basis to make and justify such limitation. A contrary conclusion would
mean the CIR could very well moot the law or arrogate legislative authority unto himself by
retaining sole discretion to provide the definition and scope of the term "goods." 128 (Emphasis
added.)
Furthermore, in G.R. No. 173425, the Court held:
Section 4.105-1 of RR 7-95 is
inconsistent with Section 105 of the
old NIRC
As regards Section 4.105-1 ofRR 7-95 which limited the 8% transitional input tax credit to the
value of the improvements on the land, the same contravenes the provision of Section 105 of the
old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716, which defines
"goods or properties," to wit:
xxxx
In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled
that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of
the improvement of the real properties, is a nullity. Pertinent portions of the Resolution read:
As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene
the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of
the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the
Secretary of Finance. The rules and regulations that administrative agencies promulgate, which
are the product of a delegated legislative power to create new and additional legal provisions that
have the effect of law, should be within the scope of the statutory authority granted by the
legislature to the objects and purposes of the law, and should not be in contradiction to, but in
conformity with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it
is intended to implement. Any rule that is not consistent with the statute itself is null and void.
While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond itsterms, or in any way modify explicit provisions
of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend
an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative
or administrative ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional
input tax credit under Section 105 is a nullity.
As we see it then, the 8% transitional input tax creditshould not be limited to the value of the
improvements on the real properties but should include the value of the real properties as
well.129 (Citations omitted, emphasis ours.)
Whether the issuance of Revenue
Regulations No. 7-95 by the BIR, and
declaration of validity of said Regulations
by the CTA and the Court of Appeals,
was in violation of the fundamental
principle of separation of powers.
In the Resolution dated October 2, 2009 in G.R. Nos. 158885 and 170680 the Court denied the
respondents’ Motion for Reconsideration with finality and held:
[The April 2, 2009 Decision] held that the CIR had no power to limit the meaning and coverage of
the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification
to make such limitation. This it did when it restrictedthe application of Section 105 in the case of
real estate dealers only to improvements on the real property belonging to their beginning
inventory.
xxxx
The statutory definition of the term "goods or properties" leaves no room for doubt. It states: "Sec.
100. Value-added tax on sale of goods or properties.— (a) Rate and base of tax. — x x x (1) The
term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of
pecuniary estimation and shall include:
(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business; x x x."
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:
"Sec. 105. Transitional Input [T]ax Credits.— A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as
prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax."
The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties
held primarily for sale to c[u]st[o]mers or held for lease in the ordinary course of business." Having
been defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same
code could not have a different meaning. This has been explained in the Decision dated April 2,
2009, thus:
xxxx
Section 4.105-1 of RR 7-95 restricted the definition of "goods," viz.:
"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of EO 273 (January 1, 1988)."
As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene
the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of
the term"goods" is concerned. This is a legislative act beyond the authority of the CIR and the
Secretary of Finance. The rules and regulations that administrative agencies promulgate, which
are the product of a delegated legislative power to create new and additional legal provisions that
have the effect of law, should be within the scope of the statutory authority granted bythe
legislature to the objects and purposes of the law, and should not be in contradiction to, but in
conformity with, the standards prescribed by law.
To be valid, an administrative ruleor regulation must conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law
itis intended to implement. Any rule that is not consistent with the statute itself is null and void.
While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to
implement statutes, they are without authority to limit the scope of the statute to less than what it
provides, or extend or expand the statute beyond itsterms, or in any way modify explicit provisions
of the law. Indeed, a quasi-judicial body or an administrative agency for that mattercannot amend
an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative
or administrative ruling, the basic law prevails.
To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional
inputtax credit under Section 105 is a nullity.
On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue.1âwphi1 RR
6-97 was basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97
deleted the following paragraph:
"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the
improvements, such as buildings, roads, drainage systems, and other similar structures,
constructed on or after the effectivity of E.O. 273 (January 1, 1988)."
It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to
improvements on real properties. The particular provision of RR 7-95 has effectively been
repealed by RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the 2) ₱77,151,020.46 paid as output value-added tax for the first quarter of 1998 (G.R. No.
definition of real properties as goods is concerned. The failure to add a specific repealing clause 180035); and
would not necessarily indicate that there was no intent to repeal RR 7-95. The fact that the
aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy 3) ₱269,340,469.45 paid as output value-added tax for the fourth quarter of 1996 (G.R.
between the provisions of RR 6-97 and RR 7-95. No. 181092).

xxxx SO ORDERED.

As pointed out in Our Decision ofApril 2, 2009, to give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were previously paid on the properties in the
beginning inventory and there is a law imposing the tax which is presumed to have been paid, is to
impose conditions or requisites to the application of the transitional tax input credit which are not
found in the law. The courts must not read into the law what is not there. To do so will violate the
principle of separation of powers which prohibits this Court from engaging in judicial
legislation.130 (Emphases added.)

As the Court En Banc held in G.R. No. 173425, the issues in this case are not novel. These same
issues have been squarely ruled upon by this Court in the earlier decided casesthat have attained
finality.131

It is now this Court’s duty to apply the previous rulings to the present case. Once a case has been
decided one way, any other case involving exactly the same point at issue, as in the present case,
should be decided in the same manner.132

Thus, we find that petitioner is entitled to a refund of the amounts of: 1) ₱486,355,846.78 in G.R.
No. 175707, 2) ₱77,151,020.46 in G.R. No. 180035, and 3) ₱269,340,469.45 in G.R. No. 181092,
which petitioner paid as value-added tax, or toa tax credit for said amounts. WHEREFORE, in
view of the foregoing, the consolidated petitions are hereby GRANTED. The following are
REVERSED and SET ASIDE:

1) Under G.R. No. 175707, the Decisiondated April 22, 2003 of the Court of Appeals in
CA-G.R. SP No. 61516 and its subsequent Resolution dated November 30, 2006;

2) Under G.R. No. 180035, the Decisiondated April 30, 2007 of the Court of Appeals in
CA-G.R. SP No. 76540 and its subsequent Resolution dated October 8, 2007; and

3) Under G.R. No. 181092, the Decisiondated December 28, 2007 of the Court of
Appeals in CA-G.R. SP No. 61158.

Respondent Commissioner of Internal Revenue is ordered to REFUND, OR, IN THE

ALTERNATIVE, TO ISSUE A TAX CREDIT CERTIFICATE to petitioner Fort Bonifacio
Development Corporation, the following amounts:

1) ₱486,355,846. 78 paid as output value-added tax for the second quarter of 1997 (G.R.
No. 175707);
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored
the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act
8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll
fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s
tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on public
service; and that, since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from notice. 2 Later,
the Court issued another resolution treating the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should seek
the meaning and intent of the law from the words used in the statute; and that the imposition of
VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and
circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating agreements
(TOAs) between the government and tollway operators. At any rate, the non-impairment clause
cannot limit the State’s sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since
this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises.
Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since only the Congress can modify VAT
rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR
RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance
in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities
that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this
reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including
tollway operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and
 2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax
and not a tax on services; b) will impair the tollway operators’ right to a reasonable return
of investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather
than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their
action. The government has sought reconsideration of the Court’s resolution, 7 however, arguing
that petitioners’ allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the petition does not meet
the requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial,
quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides,
petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of
law against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the
case has far-reaching implications and raises questions that need to be resolved for the public
good.8 The Court has also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority. 9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact,
not only on the more than half a million motorists who use the tollways everyday, but more so on
the government’s effort to raise revenue for funding various projects and for reducing budgetary
deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the government. A belated
declaration of nullity of the BIR action would make any attempt to refund to the motorists what they
paid an administrative nightmare with no solution. Consequently, it is not only the right, but the
duty of the Court to take cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved are of
great importance to the public. The same may be said of the requirement of locus standi which is a
mere procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties. The third paragraph of
Section 108 defines "sale or exchange of services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity
by generation companies, transmission, and distribution companies; services of franchise
grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is
not exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish concrete limits to its application.
Thus, every activity that can be imagined as a form of "service" rendered for a fee should be
deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate expressways, also called tollways,
at the operators’ expense. Tollways serve as alternatives to regular public highways that meander
through populated areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their expense, the operators
are allowed to collect government-approved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of
the tollway facilities over which the operator enjoys private proprietary rights 12 that its contract and
the law recognize. In this sense, the tollway operator is no different from the following service
providers under Section 108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
 4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties." This means that "services" to be subject to VAT need not
fall under the traditional concept of services, the personal or professional kinds that require the
use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they also
come under the specific class described in Section 108 as "all other franchise grantees" who are
subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than ₱10 million
and gas and water utilities) that Section 11913 spares from the payment of VAT. The word
"franchise" broadly covers government grants of a special right to do an act or series of acts of
public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees"
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the "franchise grantees" it speaks of are those who hold legislative franchises.
Petitioners give no reason, and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted by local
authorities, as agents of the state, constitute as much a legislative franchise as though the grant
had been made by Congress itself.15 The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues in the form of a special law, but
also to those granted by administrative agencies to which the power to grant franchises has been
delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The
construction, operation, and maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant
to the exercise of its delegated powers under P.D. 1112.17 The franchise in this case is evidenced
by a "Toll Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes
such services from the term "sale of services" under Section 108 of the Code. But, again, nothing
in Section 108 supports this contention. The reverse is true. In specifically including by way of
example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-
covered businesses, Section 108 opens other companies rendering public service for a fee to the
imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls
or charges for its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,20 "statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently, the meaning
and intention of the law must first be sought "in the words of the statute itself, read and considered
in their natural, ordinary, commonly accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount
to taxing a tax.21 Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code,
like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the
Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as
one for public use. Someone must pay for the maintenance of the road, either the public indirectly
through the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as "one
intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the
road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for public use. Such fees are often
termed user’s tax. This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular public facility. A user’s
tax is more equitable – a principle of taxation mandated in the 1987 Constitution."23 (Underscoring
supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must
also pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque
City could sell airport lands and buildings under MIAA administration at public auction to satisfy
unpaid real estate taxes. Since local governments have no power to tax the national government,
the Court held that the City could not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department framework."24 Thus, its airport
lands and buildings are properties of public dominion beyond the commerce of man under Article
420(1)25 of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are user’s tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed
and collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible
from motorists, for the construction and maintenance of certain roadways. The tax in such a case
goes directly to the government for the replenishment of resources it spends for the roadways.
This is not the case here. What the government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the toll fees essentially end up as
earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities, therefore, they are
not government exactions that can be properly treated as a tax. Taxes may be imposed only by
the government under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the
seller’s liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed
as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts and not
necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway
user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected
by the alleged diminution in return of investments that may result from the VAT imposition. She
has no interest at all in the profits to be earned under the TOAs. The interest in and right to
recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion
that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if
VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither
can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make
the VAT on tollway operations impractical and incapable of implementation. They cite the fact that,
in order to claim input VAT, the name, address and tax identification number of the tollway user
must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to
implement the VAT – by rounding off the toll rate and putting any excess collection in an escrow
account – is also illegal, while the alternative of giving "change" to thousands of motorists in order
to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it, 35 the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on. Besides, any concern
about how the VAT on tollway operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt
the BIR’s discretion on the matter, absent any clear violation of law or the Constitution.
exclusive discretion in matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of
Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE
the Court’s temporary restraining order dated August 13, 2010.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which SO ORDERED.
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)36 of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations
with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-
inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities.
Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who have
not questioned the circular’s validity. They are thus the ones who have a right to challenge the
circular in a direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code. Tollway operators are not among the franchise
grantees subject to franchise tax under the latter provision. Neither are their services among the
VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified
by clear statutory grant and based on language in the law too plain to be mistaken.37 But as the
law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to
simply apply the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Court’s role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be properly referred to Congress. The Court
has no discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises