1
SECOND DIVISION
G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of
Appeals dated September 22, 1993 affirming the Decision2 and
a Resolution 3 of the Court Of Tax Appeals which denied the
claims of the petitioner for tax refund and tax credits,
and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for
review, is DENIED due course. The Decision of the Court of Tax
Appeals dated May 20, 1993 and its resolution dated July 20,
1993, are hereby AFFIRMED in toto.
SO ORDERED.4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of
overpaid income tax for 1985 in the amount of P5,299,749.95 is
hereby denied for having been filed beyond the reglementary
period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The
petition for review is dismissed for lack of merit.
SO ORDERED.5
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under Philippine
laws, filed its quarterly income tax returns for the first and
second quarters of 1985, reported profits, and paid the total
income tax of P5,016,954.00. The taxes due were settled by
applying PBCom's tax credit memos and accordingly, the Bureau
of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85
and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it
filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the
year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the BIR
withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the
first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund
of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of
Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA). The
petition was docketed as CTA Case No. 4309 entitled: "Philippine
Bank of Communications vs. Commissioner of Internal
Revenue."
The losses petitioner incurred as per the summary of
petitioner's claims for refund and tax credit for 1985 and 1986,
filed before the Court of Tax Appeals, are as follows:
1985 1986
——— ———
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00 —
Tax Withheld at Source 282,795.50 234,077.69
———————— ———————
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as
P5,299,749.95. A forty five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated
on the outset, denied the request of petitioner for a tax refund
or credit in the sum amount of P5,299,749.95, on the ground
that it was filed beyond the two-year reglementary period
provided for by law. The petitioner's claim for refund in 1986
amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against
its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration
of the CTA's decision but the same was denied due course for
lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision
and resolution of the CTA with the Court of Appeals. However
on September 22, 1993, the Court of Appeals affirmed in
toto the CTA's resolution dated July 20, 1993. Hence this
petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom — which relied in good faith on the
formal assurances of BIR in RMC No. 7-85 and did not
immediately file with the CTA a petition for review asking for the
refund/tax credit of its 1985-86 excess quarterly income tax
payments — can be prejudiced by the subsequent BIR rejection,
applied retroactivity, of its assurances in RMC No. 7-85 that the
prescriptive period for the refund/tax credit of excess quarterly
income tax payments is not two years but ten (10).7
II. Whether the Court of Appeals seriously erred in affirming the
CTA decision which denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987
and that PBCom availed of tax-crediting that year.8
Simply stated, the main question is: Whether or not the Court of
Appeals erred in denying the plea for tax refund or tax credits on
the ground of prescription, despite petitioner's reliance on RMC
No. 7-85, changing the prescriptive period of two years to ten
years?
Petitioner argues that its claims for refund and tax credits are
not yet barred by prescription relying on the applicability of
Revenue Memorandum Circular No. 7-85 issued on April 1,

1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code
and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under
Article 1144 of the Civil Code. The pertinent portions of the
circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS
CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE
FINAL ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax
payments, corporations file claims for recovery of overpaid
income tax with the Court of Tax Appeals within the two-year
period from the date of payment, in accordance with sections
292 and 295 of the National Internal Revenue Code. It is obvious
that the filing of the case in court is to preserve the judicial right
of the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of
erroneously or illegally paid tax under the provisions of Sections
292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may
request for the refund of the overpaid income tax or claim for
automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising
from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated
June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-
audited which consist mainly of checking mathematical accuracy
of the figures of the return. After which, the refund or tax credit
is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.
2
In this regard, therefore, there is no need to file petitions for
review in the Court of Tax Appeals in order to preserve the right
to claim refund or tax credit the two year period. As already
stated, actions hereon by the Bureau are immediate after only a
cursory pre-audit of the income tax returns. Moreover, a
taxpayer may recover from the Bureau of Internal Revenue
excess income tax paid under the provisions of Section 86 of the
Tax Code within 10 years from the date of payment considering
that it is an obligation created by law (Article 1144 of the Civil
Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a
position contrary to its declared circular if it would result to
injustice to taxpayers. Citing ABS CBN Broadcasting Corporation
vs. Court of Tax Appeals 10 petitioner claims that rulings or
circulars promulgated by the Commissioner of Internal Revenue
have no retroactive effect if it would be prejudicial to taxpayers,
In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or
where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal
Revenue Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings— Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of
the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers
except in the following cases:
a). where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
b). where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through
Solicitor General, argues that the two-year prescriptive period
for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April 15
following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this
principle, to wit ACCRA Investments Corp. vs. Court of Appeals,
et al., 11 and Commissioner of Internal Revenue vs. TMX
Sales, Inc., et al.. 12 Respondent Commissioner also states that
since the Final Adjusted Income Tax Return of the petitioner for
the taxable year 1985 was supposed to be filed on April 15,
1986, the latter had only until April 15, 1988 to seek relief from
the court. Further, respondent Commissioner stresses that
when the petitioner filed the case before the CTA on November
18, 1988, the same was filed beyond the time fixed by law, and
such failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence
on the matter, we find that, contrary to the petitioner's
contention, the relaxation of revenue regulations by RMC 7-85 is
not warranted as it disregards the two-year prescriptive period
set by law.
Basic is the principle that "taxes are the lifeblood of the nation."
The primary purpose is to generate funds for the State to
finance the needs of the citizenry and to advance the common
weal. 13 Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily
be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of
utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered
with as little as possible. 14
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because the BIR
being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by
incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977
(now Sec. 229, NIRC of 1997) provides for the prescriptive
period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. — No
suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or

of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress.
In any case, no such suit or proceedings shall begun after the
expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment; Provided however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where
on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
(Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two
(2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should
be computed from the time of filing the Adjustment Return and
final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co., 15 this Court explained the application of Sec. 230
of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence
to run only from the time that the refund is ascertained, which
can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. . . . As we
have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and
70 18 on Quarterly Corporate Income Tax Payment and Section
321 should be considered in conjunction with it 19”
When the Acting Commissioner of Internal Revenue issued RMC
7-85, changing the prescriptive period of two years to ten years
on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is
3
widely accepted that the interpretation placed upon a statute by
the executive officers, whose duty is to enforce it, is entitled to
great respect by the courts. Nevertheless, such interpretation is
not conclusive and will be ignored if judicially found to be
erroneous. 20 Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in
harmony with the law they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement a law
cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void
because it is not only inconsistent with but is contrary to the
provisions and spirit of Act. No 4003 as amended, because
whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO
No 37-1 fixed no period, that is to say, it establishes an absolute
ban for all time. This discrepancy between Act No. 4003 and
FAO No. 37-1 was probably due to an oversight on the part of
Secretary of Agriculture and Natural Resources. Of course, in
case of discrepancy, the basic Act prevails, for the reason that
the regulation or rule issued to implement a law cannot go
beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men
in the offices of Department Heads who draft rules and
regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they
intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case.23”
Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. 24 As
pointed out by the respondent courts, the nullification of RMC
No. 7-85 issued by the Acting Commissioner of Internal Revenue
is an administrative interpretation which is not in harmony with
Sec. 230 of 1977 NIRC. for being contrary to the express
provision of a statute. Hence, his interpretation could not be
given weight for to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue,
after promulgating RMC No. 7-85, is estopped by the principle of
non-retroactively of BIR rulings. Again We do not agree. The
Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment
because this is an obligation created by law, was issued by the
Acting Commissioner of Internal Revenue. On the other hand,
the decision, stating that the taxpayer should still file a claim for
a refund or tax credit and corresponding petition fro review
within the
two-year prescription period, and that the lengthening of the
period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive mandate
of Sec. 230, NIRC, - was the ruling and judicial interpretation of
the Court of Tax Appeals. Estoppel has no application in the case
at bar because it was not the Commissioner of Internal Revenue
who denied petitioner's claim of refund or tax credit. Rather, it
was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the
Commissioner of Internal Revenue is an administrative
interpretation which is out of harmony with or contrary to the
express provision of a statute (specifically Sec. 230, NIRC),
hence, cannot be given weight for to do so would in effect
amend the statute.25”
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying
or interpreting statutes as part of the legal system of the
country. But administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau head could not
operate to vest a taxpayer with shield against judicial action. For
there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such
wrong interpretation could not place the Government in
estoppel to correct or overrule the same. 27 Moreover, the non-
retroactivity of rulings by the Commissioner of Internal Revenue
is not applicable in this case because the nullity of RMC No. 7-85
was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that,
as repeatedly held by this Court, a claim for refund is in the
nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.28
On the second issue, the petitioner alleges that the Court of
Appeals seriously erred in affirming CTA's decision denying its
claim for refund of P234,077.69 (tax overpaid in 1986), based on
mere speculation, without proof, that PBCom availed of the
automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC)
provides that any excess of the total quarterly payments over
the actual income tax computed in the adjustment or final
corporate income tax return, shall either(a) be refunded to the

corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment
return (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the
administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986
— the Court of Tax Appeals, after examining the adjusted final
corporate annual income tax return for taxable year 1986, found
out that petitioner opted to apply for automatic tax credit. This
was the basis used (vis-avis the fact that the 1987 annual
corporate tax return was not offered by the petitioner as
evidence) by the CTA in concluding that petitioner had indeed
availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative. 30”
That the petitioner opted for an automatic tax credit in
accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact which
we must respect. Moreover, the 1987 annual corporate tax
return of the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the findings of fact
by respondent courts, there being no showing of gross error or
abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the
Court of Appeals appealed from is AFFIRMED, with COSTS
against the petitioner.1âwphi1.nêt
SO ORDERED.
EN BANC
G.R. No. 187485 February 12, 2013
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. SAN ROQUE POWER CORPORATION, Respondent.
G.R. No. 196113
4
TAGANITO MINING CORPORATION, Petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Cases
G.R. No. 187485 is a petitiOn for review1 assailing the
Decision2 promulgated on 25 March 2009 as well as the
Resolution3 promulgated on 24 April 2009 by the Court of Tax
Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB
affirmed the 29 November 2007 Amended Decision4 as well as
the 11 July 2008 Resolution5 of the Second Division of the Court
of Tax Appeals (CTA Second Division) in CTA Case No. 6647. The
CTA Second Division ordered the Commissioner of Internal
Revenue (Commissioner) to refund or issue a tax credit for
P483,797,599.65 to San Roque Power Corporation (San Roque)
for unutilized input value-added tax (VAT) on purchases of
capital goods and services for the taxable year 2001.
G.R. No. 196113 is a petition for review6 assailing the
Decision7 promulgated on 8 December 2010 as well as the
Resolution8 promulgated on 14 March 2011 by the CTA EB in
CTA EB No. 624. In its Decision, the CTA EB reversed the 8
January 2010 Decision9 as well as the 7 April 2010 Resolution10of
the CTA Second Division and granted the CIR’s petition for
review in CTA Case No. 7574. The CTA EB dismissed, for having
been prematurely filed, Taganito Mining Corporation’s
(Taganito) judicial claim for P8,365,664.38 tax refund or credit.
G.R. No. 197156 is a petition for review11 assailing the
Decision12promulgated on 3 December 2010 as well as the
Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA
EB No. 569. The CTA EB affirmed the 20 July 2009 Decision as
well as the 10 November 2009 Resolution of the CTA Second
Division in CTA Case No. 7687. The CTA Second Division denied,
due to prescription, Philex Mining Corporation’s (Philex) judicial
claim for P23,956,732.44 tax refund or credit.
On 3 August 2011, the Second Division of this Court
resolved14 to consolidate G.R. No. 197156 with G.R. No. 196113,
which were pending in the same Division, and with G.R. No.
187485, which was assigned to the Court En Banc. The Second
Division also resolved to refer G.R. Nos. 197156 and 196113 to
the Court En Banc, where G.R. No. 187485, the lower-numbered
case, was assigned.
G.R. No. 187485
CIR v. San Roque Power Corporation
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[CIR] is the duly appointed Commissioner of Internal Revenue,
empowered, among others, to act upon and approve claims for
refund or tax credit, with office at the Bureau of Internal
Revenue ("BIR") National Office Building, Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with
principal office at Barangay San Roque, San Manuel, Pangasinan.
It was incorporated in October 1997 to design, construct, erect,
assemble, own, commission and operate power-generating
plants and related facilities pursuant to and under contract with
the Government of the Republic of the Philippines, or any
subdivision, instrumentality or agency thereof, or any
governmentowned or controlled corporation, or other entity
engaged in the development, supply, or distribution of energy.
As a seller of services, [San Roque] is duly registered with the
BIR with TIN/VAT No. 005-017-501. It is likewise registered with
the Board of Investments ("BOI") on a preferred pioneer status,
to engage in the design, construction, erection, assembly, as
well as to own, commission, and operate electric power-
generating plants and related activities, for which it was issued
Certificate of Registration No. 97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power
Purchase Agreement ("PPA") with the National Power
Corporation ("NPC") to develop hydro-potential of the Lower
Agno River and generate additional power and energy for the
Luzon Power Grid, by building the San Roque Multi-Purpose
Project located in San Manuel, Pangasinan. The PPA provides,
among others, that [San Roque] shall be responsible for the
design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and
maintain the same, subject to NPC instructions. During the

cooperation period of twenty-five (25) years commencing from
the completion date of the Power Station, NPC will take and pay
for all electricity available from the Power Station.
On the construction and development of the San Roque Multi-
Purpose Project which comprises of the dam, spillway and
power plant, [San Roque] allegedly incurred, excess input VAT in
the amount of ₱559,709,337.54 for taxable year 2001 which it
declared in its Quarterly VAT Returns filed for the same year.
[San Roque] duly filed with the BIR separate claims for refund, in
the total amount of ₱559,709,337.54, representing unutilized
input taxes as declared in its VAT returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended
Quarterly VAT Returns for the year 2001 since it increased its
unutilized input VAT to the amount of ₱560,200,283.14.
Consequently, [San Roque] filed with the BIR on even date,
separate amended claims for refund in the aggregate amount of
₱560,200,283.14.
[CIR’s] inaction on the subject claims led to the filing by [San
Roque] of the Petition for Review with the Court [of Tax
Appeals] in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was
submitted for decision.15
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division initially denied San Roque’s claim. In its
Decision16 dated 8 March 2006, it cited the following as bases
for the denial of San Roque’s claim: lack of recorded zero-rated
or effectively zero-rated sales; failure to submit documents
specifically identifying the purchased goods/services related to
the claimed input VAT which were included in its Property, Plant
and Equipment account; and failure to prove that the related
construction costs were capitalized in its books of account and
subjected to depreciation.
The CTA Second Division required San Roque to show that it
complied with the following requirements of Section 112(B) of
Republic Act No. 8424 (RA 8424)17 to be entitled to a tax refund
or credit of input VAT attributable to capital goods imported or
locally purchased: (1) it is a VAT-registered entity; (2) its input
taxes claimed were paid on capital goods duly supported by VAT
invoices and/or official receipts; (3) it did not offset or apply the
claimed input VAT payments on capital goods against any output
5
VAT liability; and (4) its claim for refund was filed within the two-
year prescriptive period both in the administrative and judicial
levels.
The CTA Second Division found that San Roque complied with
the first, third, and fourth requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted
(par. 4, Facts Admitted, Joint Stipulation of Facts, Records, p.
157). It was also established that the instant claim of
₱560,200,823.14 is already net of the ₱11,509.09 output tax
declared by [San Roque] in its amended VAT return for the first
quarter of 2001. Moreover, the entire amount of
₱560,200,823.14 was deducted by [San Roque] from the total
available input tax reflected in its amended VAT returns for the
last two quarters of 2001 and first two quarters of 2002 (Exhibits
M-6, O-6, OO-1 & QQ-1). This means that the claimed input
taxes of ₱560,200,823.14 did not form part of the excess input
taxes of ₱83,692,257.83, as of the second quarter of 2002 that
was to be carried-over to the succeeding quarters. Further, [San
Roque’s] claim for refund/tax credit certificate of excess input
VAT was filed within the two-year prescriptive period reckoned
from the dates of filing of the corresponding quarterly VAT
returns.
For the first, second, third, and fourth quarters of 2001, [San
Roque] filed its VAT returns on April 25, 2001, July 25, 2001,
October 23, 2001 and January 24, 2002, respectively (Exhibits
"H, J, L, and N"). These returns were all subsequently amended
on March 28, 2003 (Exhibits "I, K, M, and O"). On the other
hand, [San Roque] originally filed its separate claims for refund
on July 10, 2001, October 10, 2001, February 21, 2002, and May
9, 2002 for the first, second, third, and fourth quarters of 2001,
respectively, (Exhibits "EE, FF, GG, and HH") and subsequently
filed amended claims for all quarters on March 28, 2003
(Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for Review
was filed on April 10, 2003. Counting from the respective dates
when [San Roque] originally filed its VAT returns for the first,
second, third and fourth quarters of 2001, the administrative
claims for refund (original and amended) and the Petition for
Review fall within the two-year prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration
on 7 April 2006. In its 29 November 2007 Amended
Decision,19 the CTA Second Division found legal basis to partially
grant San Roque’s claim. The CTA Second Division ordered the
Commissioner to refund or issue a tax credit in favor of San
Roque in the amount of ₱483,797,599.65, which represents San
Roque’s unutilized input VAT on its purchases of capital goods
and services for the taxable year 2001. The CTA based the
adjustment in the amount on the findings of the independent
certified public accountant. The following reasons were cited for
the disallowed claims: erroneous computation; failure to
ascertain whether the related purchases are in the nature of
capital goods; and the purchases pertain to capital goods.
Moreover, the reduction of claims was based on the following:
the difference between San Roque’s claim and that appearing
on its books; the official receipts covering the claimed input VAT
on purchases of local services are not within the period of the
claim; and the amount of VAT cannot be determined from the
submitted official receipts and invoices. The CTA Second Division
denied San Roque’s claim for refund or tax credit of its
unutilized input VAT attributable to its zero-rated or effectively
zero-rated sales because San Roque had no record of such sales
for the four quarters of 2001.
The dispositive portion of the CTA Second Division’s 29
November 2007 Amended Decision reads:
WHEREFORE, [San Roque’s] "Motion for New Trial and/or
Reconsideration" is hereby PARTIALLY GRANTED and this Court’s
Decision promulgated on March 8, 2006 in the instant case is
hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the
alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of [San
Roque] in the reduced amount of Four Hundred Eighty Three
Million Seven Hundred Ninety Seven Thousand Five Hundred
Ninety Nine Pesos and Sixty Five Centavos (₱483,797,599.65)
representing unutilized input VAT on purchases of capital goods
and services for the taxable year 2001.
SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on
20 December 2007. The CTA Second Division issued a Resolution
dated 11 July 2008 which denied the CIR’s motion for lack of
merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB
praying for the denial of San Roque’s claim for refund or tax

credit in its entirety as well as for the setting aside of the 29
November 2007 Amended Decision and the 11 July 2008
Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIR’s petition for review and affirmed
the challenged decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo
Power, Inc.21 and Revenue Memorandum Circular No. 49-
03,22 as its bases for ruling that San Roque’s judicial claim was
not prematurely filed. The pertinent portions of the Decision
state:
More importantly, the Court En Banc has squarely and
exhaustively ruled on this issue in this wise:
It is true that Section 112(D) of the abovementioned provision
applies to the present case. However, what the petitioner failed
to consider is Section 112(A) of the same provision. The
respondent is also covered by the two (2) year prescriptive
period. We have repeatedly held that the claim for refund with
the BIR and the subsequent appeal to the Court of Tax Appeals
must be filed within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas
Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue that the two-year prescriptive
period for filing a claim for input tax is reckoned from the date
of the filing of the quarterly VAT return and payment of the tax
due. If the said period is about to expire but the BIR has not yet
acted on the application for refund, the taxpayer may interpose a
petition for review with this Court within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if,
however, the Collector (now Commissioner) takes time in
deciding the claim, and the period of two years is about to end,
the suit or proceeding must be started in the Court of Tax
Appeals before the end of the two-year period without awaiting
the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and
Commissioner of Internal Revenue vs. The Honorable Court of
Tax Appeals and Planters Products, Inc., the Supreme Court held
that the taxpayer need not wait indefinitely for a decision or
ruling which may or may not be forthcoming and which he has no
legal right to expect. It is disheartening enough to a taxpayer to
keep him waiting for an indefinite period of time for a ruling or
6
decision of the Collector (now Commissioner) of Internal
Revenue on his claim for refund. It would make matters more
exasperating for the taxpayer if we were to close the doors of
the courts of justice for such a relief until after the Collector
(now Commissioner) of Internal Revenue, would have, at his
personal convenience, given his go signal.
This Court ruled in several cases that once the petition is filed,
the Court has already acquired jurisdiction over the claims and
the Court is not bound to wait indefinitely for no reason for
whatever action respondent (herein petitioner) may take. At
stake are claims for refund and unlike disputed assessments, no
decision of respondent (herein petitioner) is required before one
can go to this Court. (Emphasis supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue
Memorandum Circular No. 49-03 dated August 18, 2003, that
[the CIR] knows that claims for VAT refund or tax credit filed
with the Court [of Tax Appeals] can proceed simultaneously with
the ones filed with the BIR and that taxpayers need not wait for
the lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption
of procedures in handling refund cases that are aligned to the
statutory requirements that refund cases should be elevated to
the Court of Tax Appeals before the lapse of the period
prescribed by law, certain provisions of RMC No. 42-2003 are
hereby amended and new provisions are added thereto.
In consonance therewith, the following amendments are being
introduced to RMC No. 42-2003, to wit:
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is
hereby revised to read as follows:
In cases where the taxpayer has filed a "Petition for Review" with
the Court of Tax Appeals involving a claim for refund/TCC that is
pending at the administrative agency (Bureau of Internal Revenue
or OSS-DOF), the administrative agency and the tax court may act
on the case separately. While the case is pending in the tax court
and at the same time is still under process by the administrative
agency, the litigation lawyer of the BIR, upon receipt of the
summons from the tax court, shall request from the head of the
investigating/processing office for the docket containing
certified true copies of all the documents pertinent to the claim.
The docket shall be presented to the court as evidence for the
BIR in its defense on the tax credit/refund case filed by the
taxpayer. In the meantime, the investigating/processing office of
the administrative agency shall continue processing the
refund/TCC case until such time that a final decision has been
reached by either the CTA or the administrative agency.
If the CTA is able to release its decision ahead of the evaluation of
the administrative agency, the latter shall cease from processing
the claim. On the other hand, if the administrative agency is able
to process the claim of the taxpayer ahead of the CTA and the
taxpayer is amenable to the findings thereof, the concerned
taxpayer must file a motion to withdraw the claim with the
CTA.23 (Emphasis supplied)
G.R. No. 196113
Taganito Mining Corporation v. CIR
The Facts
The CTA Second Division’s narration of the pertinent facts is as
follows:
Petitioner, Taganito Mining Corporation, is a corporation duly
organized and existing under and by virtue of the laws of the
Philippines, with principal office at 4th Floor, Solid Mills Building,
De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered
with the Securities and Exchange Commission with Certificate of
Registration No. 138682 issued on March 4, 1987 with the
following primary purpose:
To carry on the business, for itself and for others, of mining lode
and/or placer mining, developing, exploiting, extracting, milling,
concentrating, converting, smelting, treating, refining, preparing
for market, manufacturing, buying, selling, exchanging, shipping,
transporting, and otherwise producing and dealing in nickel,
chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron,
steel, limestone, and all kinds of ores, metals and their by-
products and which by-products thereof of every kind and
description and by whatsoever process the same can be or may
hereafter be produced, and generally and without limit as to
amount, to buy, sell, locate, exchange, lease, acquire and deal in
lands, mines, and mineral rights and claims and to conduct all
business appertaining thereto, to purchase, locate, lease or
otherwise acquire, mining claims and rights, timber rights, water
rights, concessions and mines, buildings, dwellings, plants
machinery, spare parts, tools and other properties whatsoever
which this corporation may from time to time find to be to its
advantage to mine lands, and to explore, work, exercise,
 7

develop or turn to account the same, and to acquire, develop Exhibit(s) Quarter Nature of Mode of filing Filing purchases and importations of capital goods amounting to
and utilize water rights in such manner as may be authorized or the Return Date P6,050,933.95, the details of which are summarized as follows:
permitted by law; to purchase, hire, make, construct or
otherwise, acquire, provide, maintain, equip, alter, erect, Period Zero- Input VAT on Input VAT Total Input
L to L-4 1st Original Electronic April
improve, repair, manage, work and operate private roads, Covered Rated Domestic on VAT
15,
barges, vessels, aircraft and vehicles, private telegraph and Sales Purchases and Domestic
2005
telephone lines, and other communication media, as may be Importations Purchases
needed by the corporation for its own purpose, and to of Goods and and
M to M-3 Amended Electronic July
purchase, import, construct, machine, fabricate, or otherwise Services Importatio
20,
acquire, and maintain and operate bridges, piers, wharves, ns
2005
wells, reservoirs, plumes, watercourses, waterworks, aqueducts, of Capital
shafts, tunnels, furnaces, cook ovens, crushing works, gasworks, Goods
N to N-4 Amended Electronic Octob
electric lights and power plants and compressed air plants,
er 18,
chemical works of all kinds, concentrators, smelters, smelting 01/01/05 P551,179, P1,491,880.56 P239,803.2 P1,731,68
2006
plants, and refineries, matting plants, warehouses, workshops, - 871.58 2 3.78
factories, dwelling houses, stores, hotels or other buildings, 03/31/05
Q to Q-3 2nd Original Electronic July
engines, machinery, spare parts, tools, implements and other
20,
works, conveniences and properties of any description in 04/01/05 64,677,53 204,364.17 5,811,130. 6,015,494.
2005
connection with or which may be directly or indirectly conducive - 0.78 73 90
to any of the objects of the corporation, and to contribute to, 06/30/05
subsidize or otherwise aid or take part in any operations; R to R-4 Amended Electronic Octob
er 18,
07/01/05 480,784,2 144,887.67 - 144,887.6
and is a VAT-registered entity, with Certificate of Registration 2006
- 87.30 7
(BIR Form No. 2303) No. OCN 8RC0000017494. Likewise,
09/30/05
[Taganito] is registered with the Board of Investments (BOI) as U to U-4 3rd Original Electronic Octob
an exporter of beneficiated nickel silicate and chromite ores, er 19,
10/01/05 350,212,3 473,598.03 - 473,598.0
with BOI Certificate of Registration No. EP-88-306. 2005
- 45.02 3
Respondent, on the other hand, is the duly appointed 12/31/05
V to V-4 Amended Electronic Octob
Commissioner of Internal Revenue vested with authority to
er 18,
exercise the functions of the said office, including inter alia, the TOTAL P1,446,85 P2,314,730.43 P6,050,933 P8,365,66
2006
power to decide refunds of internal revenue taxes, fees and 4,034.68 .95 4.38
other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code (NIRC) Y to Y-4 4th Original Electronic Januar On November 14, 2006, [Taganito] filed with [the CIR], through
or other laws administered by Bureau of Internal Revenue (BIR) y 20, BIR’s Large Taxpayers Audit and Investigation Division II (LTAID
under Section 4 of the NIRC. He holds office at the BIR National 2006 II), a letter dated November 13, 2006 claiming a tax
Office Building, Diliman, Quezon City. credit/refund of its supposed input VAT amounting to
Z to Z-4 Amended Electronic Octob ₱8,365,664.38 for the period covering January 1, 2004 to
[Taganito] filed all its Monthly VAT Declarations and Quarterly er 18, December 31, 2004. On the same date, [Taganito] likewise filed
Vat Returns for the period January 1, 2005 to December 31, 2006 an Application for Tax Credits/Refunds for the period covering
2005. For easy reference, a summary of the filing dates of the January 1, 2005 to December 31, 2005 for the same amount.
original and amended Quarterly VAT Returns for taxable year As can be gleaned from its amended Quarterly VAT Returns,
2005 of [Taganito] is as follows: [Taganito] reported zero-rated sales amounting to On November 29, 2006, [Taganito] sent again another letter
P1,446,854,034.68; input VAT on its domestic purchases and dated November 29, 2004 to [the CIR], to correct the period of
importations of goods (other than capital goods) and services the above claim for tax credit/refund in the said amount of
amounting to P2,314,730.43; and input VAT on its domestic

₱8,365,664.38 as actually referring to the period covering
January 1, 2005 to December 31, 2005.
As the statutory period within which to file a claim for refund for
said input VAT is about to lapse without action on the part of the
[CIR], [Taganito] filed the instant Petition for Review on February
17, 2007.
In his Answer filed on March 28, 2007, [the CIR] interposes the
following defenses:
4. [Taganito’s] alleged claim for refund is subject to
administrative investigation/examination by the Bureau of
Internal Revenue (BIR);
5. The amount of ₱8,365,664.38 being claimed by [Taganito] as
alleged unutilized input VAT on domestic purchases of goods
and services and on importation of capital goods for the period
January 1, 2005 to December 31, 2005 is not properly
documented;
6. [Taganito] must prove that it has complied with the provisions
of Sections 112 (A) and (D) and 229 of the National Internal
Revenue Code of 1997 (1997 Tax Code) on the prescriptive
period for claiming tax refund/credit;
7. Proof of compliance with the prescribed checklist of
requirements to be submitted involving claim for VAT refund
pursuant to Revenue Memorandum Order No. 53-98, otherwise
there would be no sufficient compliance with the filing of
administrative claim for refund, the administrative claim thereof
being mere proforma, which is a condition sine qua non prior to
the filing of judicial claim in accordance with the provision of
Section 229 of the 1997 Tax Code. Further, Section 112 (D) of
the Tax Code, as amended, requires the submission of complete
documents in support of the application filed with the BIR before
the 120-day audit period shall apply, and before the taxpayer
could avail of judicial remedies as provided for in the law. Hence,
[Taganito’s] failure to submit proof of compliance with the
above-stated requirements warrants immediate dismissal of the
petition for review.
8. [Taganito] must prove that it has complied with the invoicing
requirements mentioned in Sections 110 and 113 of the 1997
Tax Code, as amended, in relation to provisions of Revenue
Regulations No. 7-95.
8
9. In an action for refund/credit, the burden of proof is on the
taxpayer to establish its right to refund, and failure to sustain
the burden is fatal to the claim for refund/credit (Asiatic
Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of Internal
Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670);
10. Claims for refund are construed strictly against the claimant
for the same partake the nature of exemption from
taxation (Commissioner of Internal Revenue vs. Ledesma, 31
SCRA 95) and as such, they are looked upon with
disfavor (Western Minolco Corp. vs. Commissioner of Internal
Revenue, 124 SCRA 1211).
SPECIAL AND AFFIRMATIVE DEFENSES
11. The Court of Tax Appeals has no jurisdiction to entertain the
instant petition for review for failure on the part of [Taganito] to
comply with the provision of Section 112 (D) of the 1997 Tax
Code which provides, thus:
Section 112. Refunds or Tax Credits of Input Tax. –
xxx xxx xxx
(D) Period within which refund or Tax Credit of Input Taxes shall
be Made. – In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred (120) days from the date of submission
of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.
In cases of full or partial denial 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 dayperiod, appeal the decision or the unacted
claim with the Court of Tax Appeals. (Emphasis supplied.)
12. As stated, [Taganito] filed the administrative claim for refund
with the Bureau of Internal Revenue on November 14, 2006.
Subsequently on February 14, 2007, the instant petition was
filed. Obviously the 120 days given to the Commissioner to
decide on the claim has not yet lapsed when the petition was
filed. The petition was prematurely filed, hence it must be
dismissed for lack of jurisdiction.
During trial, [Taganito] presented testimonial and documentary
evidence primarily aimed at proving its supposed entitlement to
the refund in the amount of ₱8,365,664.38, representing input
taxes for the period covering January 1, 2005 to December 31,
2005. [The CIR], on the other hand, opted not to present
evidence. Thus, in the Resolution promulgated on January 22,
2009, this case was submitted for decision as of such date,
considering [Taganito’s] "Memorandum" filed on January 19,
2009 and [the CIR’s] "Memorandum" filed on December 19,
2008.24
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division partially granted Taganito’s claim. In its
Decision25 dated 8 January 2010, the CTA Second Division found
that Taganito complied with the requirements of Section 112(A)
of RA 8424, as amended, to be entitled to a tax refund or credit
of input VAT attributable to zero-rated or effectively zero-rated
sales.26
The pertinent portions of the CTA Second Division’s Decision
read:
Finally, records show that [Taganito’s] administrative claim filed
on November 14, 2006, which was amended on November 29,
2006, and the Petition for Review filed with this Court on
February 14, 2007 are well within the two-year prescriptive
period, reckoned from March 31, 2005, June 30, 2005,
September 30, 2005, and December 31, 2005, respectively, the
close of each taxable quarter covering the period January 1,
2005 to December 31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax
credit certificate in the amount of ₱8,249,883.33 representing
unutilized input VAT for the four taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for
Review is hereby PARTIALLY GRANTED. Accordingly, [the CIR] is
hereby ORDERED to REFUND to [Taganito] the amount of EIGHT
MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT
HUNDRED EIGHTY THREE PESOS AND THIRTY THREE CENTAVOS
(P8,249,883.33) representing its unutilized input taxes
attributable to zero-rated sales from January 1, 2005 to
December 31, 2005.
SO ORDERED.27

The Commissioner filed a Motion for Partial Reconsideration on
29 January 2010. Taganito, in turn, filed a Comment/Opposition
on the Motion for Partial Reconsideration on 15 February 2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division
denied the CIR’s motion. The CTA Second Division ruled that the
legislature did not intend that Section 112 (Refunds or Tax
Credits of Input Tax) should be read in isolation from Section
229 (Recovery of Tax Erroneously or Illegally Collected) or vice
versa. The CTA Second Division applied the mandatory statute of
limitations in seeking judicial recourse prescribed under Section
229 to claims for refund or tax credit under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review
before the CTA EB assailing the 8 January 2010 Decision and the
7 April 2010 Resolution in CTA Case No. 7574 and praying that
Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s
petition for review and reversed and set aside the challenged
decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax
Code both set forth the reckoning of the two-year prescriptive
period for filing a claim for tax refund or credit over input VAT to
be the close of the taxable quarter when the sales were made.
The CTA EB also relied on this Court’s rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc. (Aichi)30 and Commisioner of Internal Revenue v.
Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year
prescriptive period to file a refund for input VAT arising from
zero-rated sales should be reckoned from the close of the
taxable quarter when the sales were made. Aichi further
emphasized that the failure to await the decision of the
Commissioner or the lapse of 120-day period prescribed in
Section 112(D) amounts to a premature filing.
The CTA EB found that Taganito filed its administrative claim on
14 November 2006, which was well within the period prescribed
under Section 112(A) and (B) of the 1997 Tax Code. However,
the CTA EB found that Taganito’s judicial claim was prematurely
filed. Taganito filed its Petition for Review before the CTA
Second Division on 14 February 2007. The judicial claim was
filed after the lapse of only 92 days from the filing of its
9
administrative claim before the CIR, in violation of the 120-day
period prescribed in Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby
GRANTED. The assailed Decision dated January 8, 2010 and
Resolution dated April 7, 2010 of the Special Second Division of
this Court are hereby REVERSED and SET ASIDE. Another one is
hereby entered DISMISSING the Petition for Review filed in CTA
Case No. 7574 for having been prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that
Taganito timely filed its claim before the CTA. Justice Bautista
read Section 112(C) of the 1997 Tax Code (Period within which
Refund or Tax Credit of Input Taxes shall be Made) in
conjunction with Section 229 (Recovery of Tax Erroneously or
Illegally Collected). Justice Bautista also relied on this Court’s
ruling in Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue (Atlas),34 which
stated that refundable or creditable input VAT and illegally or
erroneously collected national internal revenue tax are the
same, insofar as both are monetary amounts which are
currently in the hands of the government but must rightfully be
returned to the taxpayer. Justice Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of
seeking judicial redress for refund or tax credit of excess or
unutilized input tax with this Court, either within 30 days from
receipt of the denial of its claim, or after the lapse of the 120-
day period in the event of inaction by the Commissioner,
provided that both administrative and judicial remedies must be
undertaken within the 2-year period.35
Taganito filed its Motion for Reconsideration on 29 December
2010. The Commissioner filed an Opposition on 26 January
2011. The CTA EB denied for lack of merit Taganito’s motion in a
Resolution36 dated 14 March 2011. The CTA EB did not see any
justifiable reason to depart from this Court’s rulings
in Aichi and Mirant.
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the
laws of the Republic of the Philippines, which is principally
engaged in the mining business, which includes the exploration
and operation of mine properties and commercial production
and marketing of mine products, with office address at 27 Philex
Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of
Internal Revenue ("BIR"), the government entity tasked with the
duties/functions of assessing and collecting all national internal
revenue taxes, fees, and charges, and enforcement of all
forfeitures, penalties and fines connected therewith, including
the execution of judgments in all cases decided in its favor by
[the Court of Tax Appeals] and the ordinary courts, where she
can be served with court processes at the BIR Head Office, BIR
Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for
the third quarter of taxable year 2005 and Amended VAT Return
for the same quarter on December 1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit
of the amount of ₱23,956,732.44 with the One Stop Shop
Center of the Department of Finance. However, due to [the
CIR’s] failure to act on such claim, on October 17, 2007,
pursuant to Sections 112 and 229 of the NIRC of 1997, as
amended, [Philex] filed a Petition for Review, docketed as C.T.A.
Case No. 7687.
In [her] Answer, respondent CIR alleged the following special
and affirmative defenses:
4. Claims for refund are strictly construed against the taxpayer
as the same partake the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were
erroneously or illegally paid. Failure on the part of [Philex] to
prove the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the
amount being refunded.37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009,
denied Philex’s claim due to prescription. The CTA Second

Division ruled that the two-year prescriptive period specified in
Section 112(A) of RA 8424, as amended, applies not only to the
filing of the administrative claim with the BIR, but also to the
filing of the judicial claim with the CTA. Since Philex’s claim
covered the 3rd quarter of 2005, its administrative claim filed on
20 March 2006 was timely filed, while its judicial claim filed on
17 October 2007 was filed late and therefore barred by
prescription.
On 10 November 2009, the CTA Second Division denied Philex’s
Motion for Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a
reversal of the 20 July 2009 Decision and the 10 November 2009
Resolution of the CTA Second Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied
Philex’s petition and affirmed the CTA Second Division’s Decision
and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s]
administrative claim for refund was filed within the two-year
prescriptive period; however, as to its judicial claim for
refund/credit, records show that on March 20, 2006, [Philex]
applied the administrative claim for refund of unutilized input
VAT in the amount of ₱23,956,732.44 with the One Stop Shop
Center of the Department of Finance, per Application No.
52490. From March 20, 2006, which is also presumably the date
[Philex] submitted supporting documents, together with the
aforesaid application for refund, the CIR has 120 days, or until
July 18, 2006, within which to decide the claim. Within 30 days
from the lapse of the 120-day period, or from July 19, 2006 until
August 17, 2006, [Philex] should have elevated its claim for
refund to the CTA. However, [Philex] filed its Petition for Review
only on October 17, 2007, which is 426 days way beyond the 30-
day period prescribed by law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed
426 days late. Thus, the Petition for Review in CTA Case No.
7687 should have been dismissed on the ground that the
Petition for Review was filed way beyond the 30-day prescribed
period; thus, no jurisdiction was acquired by the CTA in Division;
and not due to prescription.
10
WHEREFORE, premises considered, the instant Petition for
Review is hereby DENIED DUE COURSE, and accordingly,
DISMISSED. The assailed Decision dated July 20, 2009, dismissing
the Petition for Review in CTA Case No. 7687 due to
prescription, and Resolution dated November 10, 2009 denying
[Philex’s] Motion for Reconsideration are hereby AFFIRMED,
with modification that the dismissal is based on the ground that
the Petition for Review in CTA Case No. 7687 was filed way
beyond the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition
for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San
Roque’s] claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the
amended decision of the Court of Tax Appeals (Second Division)
granting [San Roque’s] claim for refund of alleged unutilized
input VAT on its purchases of capital goods and services for the
taxable year 2001 in the amount of P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and
acted with grave abuse of discretion tantamount to lack or
excess of jurisdiction in erroneously applying the Aichi doctrine
in violation of [Taganito’s] right to due process.
II. The Court of Tax Appeals committed serious error and acted
with grave abuse of discretion amounting to lack or excess of
jurisdiction in erroneously interpreting the provisions of Section
112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged
prescription. The fact is that the petition was filed with the CTA
within the period set by prevailing court rulings at the time it
was filed.
II. The CTA En Banc erred in retroactively applying the Aichi
ruling in denying the petition in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax
Code applicable to the present cases:
Section 105:
Persons Liable. — Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 106 to
108 of this Code.
The value-added tax is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or
services at the time of the effectivity of Republic Act No. 7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits. —
(B) Excess Output or Input Tax. — If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters: [Provided, That the input tax inclusive of
input VAT carried over from the previous quarter that may be
credited in every quarter shall not exceed seventy percent (70%)
of the output VAT:]43 Provided, however, That any input tax
attributable to zero-rated sales by a VAT-registered person may
at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.
Section 112:44
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.
(B) Capital Goods.- A VAT — registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid
on capital goods imported or locally purchased, to the extent
that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years
after the close of the taxable quarter when the importation or
purchase was made.
(C) Cancellation of VAT Registration. — A person whose
registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of status
under Section 106(C) of this Code may, within two (2) years
from the date of cancellation, apply for the issuance of a tax
credit certificate for any unused input tax which may be used in
payment of his other internal revenue taxes
(D) Period within which Refund or Tax Credit of Input Taxes shall
be Made. — In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application
filed in accordance with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
11
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
(E) Manner of Giving Refund. — Refunds shall be made upon
warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by
the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Provided, that refunds under this paragraph shall be subject to
post audit by the Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected. — No suit or
proceeding shall be maintained in any court for the recovery of
any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed
with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where
on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended
administrative claim with the Commissioner on 28 March 2003,
San Roque filed a Petition for Review with the CTA docketed as
CTA Case No. 6647. From this we gather two crucial facts: first,
San Roque did not wait for the 120-day period to lapse before
filing its judicial claim; second, San Roque filed its judicial claim
more than four (4) years before the Atlas45 doctrine, which was
promulgated by the Court on 8 June 2007.
Clearly, San Roque failed to comply with the 120-day waiting
period, the time expressly given by law to the Commissioner to
decide whether to grant or deny San Roque’s application for tax
refund or credit. It is indisputable that compliance with the 120-
day waiting period is mandatory and jurisdictional. The waiting
period, originally fixed at 60 days only, was part of the provisions
of the first VAT law, Executive Order No. 273, which took effect
on 1 January 1988. The waiting period was extended to 120 days
effective 1 January 1998 under RA 8424 or the Tax Reform Act
of 1997. Thus, the waiting period has been in our statute books
for more than fifteen (15) years before San Roque filed its judicial
claim.
Failure to comply with the 120-day waiting period violates a
mandatory provision of law. It violates the doctrine of
exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect
that the CTA does not acquire jurisdiction over the taxpayer’s
petition. Philippine jurisprudence is replete with cases upholding
and reiterating these doctrinal principles.46
The charter of the CTA expressly provides that its jurisdiction is
to review on appeal "decisions of the Commissioner of Internal
Revenue in cases involving x x x refunds of internal revenue
taxes."47 When a taxpayer prematurely files a judicial claim for
tax refund or credit with the CTA without waiting for the
decision of the Commissioner, there is no "decision" of the
Commissioner to review and thus the CTA as a court of special
jurisdiction has no jurisdiction over the appeal. The charter of
the CTA also expressly provides that if the Commissioner fails to
decide within "a specific period" required by law, such "inaction
shall be deemed a denial"48 of the application for tax refund or
credit. It is the Commissioner’s decision, or inaction "deemed a
denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for
review.49
San Roque’s failure to comply with the 120-
day mandatory period renders its petition for review with the
CTA void. Article 5 of the Civil Code provides, "Acts executed
against provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity." San
Roque’s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that
such void petition cannot be legitimized "except when the law

itself authorizes [its] validity." There is no law authorizing the
petition’s validity.
It is hornbook doctrine that a person committing a void act
contrary to a mandatory provision of law cannot claim or
acquire any right from his void act. A right cannot spring in favor
of a person from his own void or illegal act. This doctrine is
repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions which
are against the law or which infringe upon the rights of
others."50 For violating a mandatory provision of law in filing its
petition with the CTA, San Roque cannot claim any right arising
from such void petition. Thus, San Roque’s petition with the CTA
is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory
and jurisdictional nature of the 120-day period just because the
Commissioner merely asserts that the case was prematurely
filed with the CTA and does not question the entitlement of San
Roque to the refund. The mere fact that a taxpayer has
undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not
entitle him as a matter of right to a tax refund or credit. Strict
compliance with the mandatory and jurisdictional conditions
prescribed by law to claim such tax refund or credit is essential
and necessary for such claim to prosper. Well-settled is the rule
that tax refunds or credits, just like tax exemptions, are strictly
construed against the taxpayer.51 The burden is on the taxpayer
to show that he has strictly complied with the conditions for the
grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional
conditions mandated by law simply because the Commissioner
chose not to contest the numerical correctness of the claim for
tax refund or credit of the taxpayer. Non-compliance with
mandatory periods, non-observance of prescriptive periods, and
non-adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the
Commissioner questions the numerical correctness of the claim
of the taxpayer. This Court should not establish the precedent
that non-compliance with mandatory and jurisdictional
conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent
will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will
have to be decided on the numerical correctness of the
12
amounts claimed, regardless of non-compliance with mandatory 2nd Quarter, 20 July 1990 21 August 1990 20 July
and jurisdictional conditions. 1990 1992
Close of
San Roque cannot also claim being misled, misguided or
Quarter
confused by the Atlas doctrine because San Roque filed its
30 June 1990
petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist at
the time San Roque failed to comply with the 120- day period. 3rd Quarter, 18 October 21 November 9
Thus, San Roque cannot invoke the Atlas doctrine as an excuse 1990 1990 1990 October
for its failure to wait for the 120-day period to lapse. In any Close of 1992
event, the Atlas doctrine merely stated that the two-year Quarter
prescriptive period should be counted from the date of payment 30 September
of the output VAT, not from the close of the taxable quarter 1990
when the sales involving the input VAT were
made. The Atlas doctrine does not interpret, expressly or 4th Quarter, 20 January 19 February 14
impliedly, the 120+3052 day periods. 1990 1991 1991 January
Close of 1993
In fact, Section 106(b) and (e) of the Tax Code of 1977 as Quarter
amended, which was the law cited by the Court in Atlas as the 31 December
applicable provision of the law did not yet provide for the 30- 1990
day period for the taxpayer to appeal to the CTA from the
decision or inaction of the Commissioner.53 Thus, Atlas paid the output VAT at the time it filed the quarterly tax
the Atlas doctrine cannot be invoked by anyone to disregard returns on the 20th, 18th, and 20th day after the close of the
compliance with the 30-day mandatory and jurisdictional period. taxable quarter. Had the twoyear prescriptive period been
Also, the difference between the Atlas doctrine on one hand, counted from the "close of the taxable quarter" as expressly
and the Mirant54 doctrine on the other hand, is a mere 20 days. stated in the law, the tax refund claims of Atlas would have
The Atlas doctrine counts the two-year prescriptive period from already prescribed. In contrast, the Mirant doctrine counts the
the date of payment of the output VAT, which means within 20 two-year prescriptive period from the "close of the taxable
days after the close of the taxable quarter. The output VAT at quarter when the sales were made" as expressly stated in the
that time must be paid at the time of filing of the quarterly tax law, which means the last day of the taxable quarter. The 20-day
returns, which were to be filed "within 20 days following the end difference55 between the Atlas doctrine and the
of each quarter." later Mirant doctrine is not material to San Roque’s claim for tax
refund.
Thus, in Atlas, the three tax refund claims listed below were
deemed timely filed because the administrative claims filed with Whether the Atlas doctrine or the Mirant doctrine is applied to
the Commissioner, and the petitions for review filed with the San Roque is immaterial because what is at issue in the present
CTA, were all filed within two years from the date of payment of case is San Roque’s non-compliance with the 120-day
the output VAT, following Section 229: mandatory and jurisdictional period, which is counted from the
date it filed its administrative claim with the Commissioner. The
Date of 120-day period may extend beyond the two-year prescriptive
Date of Filing
Date of Filing Filing period, as long as the administrative claim is filed within the
Period Return
Administrative Petition two-year prescriptive period. However, San Roque’s fatal
Covered & Payment of
Claim With mistake is that it did not wait for the Commissioner to decide
Tax
CTA within the 120-day period, a mandatory period whether
the Atlas or the Mirant doctrine is applied.

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)56 expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear,
plain, and unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents." Following the verba
legis doctrine, this law must be applied exactly as worded since
it is clear, plain, and unequivocal. The taxpayer cannot simply
file a petition with the CTA without waiting for the
Commissioner’s decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because
there will be no "decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San Roque’s case, it filed
its petition with the CTA a mere 13 days after it filed its
administrative claim with the Commissioner. Indisputably, San
Roque knowingly violated the mandatory 120-day period, and it
cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day
period to appeal to the CTA the decision or inaction of the
Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis
supplied)
This law is clear, plain, and unequivocal. Following the well-
settled verba legis doctrine, this law should be applied exactly as
worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the
Commissioner to the CTA within 30 days from receipt of the
Commissioner’s decision, or if the Commissioner does not act on
the taxpayer’s claim within the 120-day period, the taxpayer
may appeal to the CTA within 30 days from the expiration of the
120-day period.
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with
the CTA without waiting for the 120-day period to lapse. Also,
like San Roque, Taganito filed its judicial claim before the
promulgation of the Atlas doctrine. Taganito filed a Petition for
Review on 14 February 2007 with the CTA. This is almost four
13
months before the adoption of the Atlas doctrine on 8 June Unlike San Roque and Taganito, Philex’s case is not one of
2007. Taganito is similarly situated as San Roque - both cannot premature filing but of late filing. Philex did not file any petition
claim being misled, misguided, or confused by with the CTA within the 120-day period. Philex did not also file
the Atlas doctrine. any petition with the CTA within 30 days after the expiration of
the 120-day period. Philex filed its judicial claim long after the
However, Taganito can invoke BIR Ruling No. DA-489-0357 dated expiration of the 120-day period, in fact 426 days after the lapse
10 December 2003, which expressly ruled that the "taxpayer- of the 120-day period. In any event, whether governed by
claimant need not wait for the lapse of the 120-day period before jurisprudence before, during, or after the Atlas case, Philex’s
it could seek judicial relief with the CTA by way of Petition for judicial claim will have to be rejected because of late
Review." Taganito filed its judicial claim after the issuance of BIR filing. Whether the two-year prescriptive period is counted from
Ruling No. DA-489-03 but before the adoption of the date of payment of the output VAT following
the Aichi doctrine. Thus, as will be explained later, Taganito is the Atlas doctrine, or from the close of the taxable quarter
deemed to have filed its judicial claim with the CTA on time. when the sales attributable to the input VAT were made
c. G.R. No. 197156 – Philex Mining Corporation v. CIR following the Mirant and Aichi doctrines, Philex’s judicial claim
was indisputably filed late.
Philex (1) filed on 21 October 2005 its original VAT Return for
the third quarter of taxable year 2005; (2) filed on 20 March The Atlas doctrine cannot save Philex from the late filing of its
2006 its administrative claim for refund or credit; (3) filed on 17 judicial claim. The inaction of the Commissioner on Philex’s claim
October 2007 its Petition for Review with the CTA. The close of during the 120-day period is, by express provision of law,
the third taxable quarter in 2005 is 30 September 2005, which is "deemed a denial" of Philex’s claim. Philex had 30 days from the
the reckoning date in computing the two-year prescriptive expiration of the 120-day period to file its judicial claim with the
period under Section 112(A). CTA. Philex’s failure to do so rendered the "deemed a denial"
decision of the Commissioner final and inappealable. The right
Philex timely filed its administrative claim on 20 March 2006, to appeal to the CTA from a decision or "deemed a denial"
within the two-year prescriptive period. Even if the two-year decision of the Commissioner is merely a statutory privilege, not
prescriptive period is computed from the date of payment of a constitutional right. The exercise of such statutory privilege
the output VAT under Section 229, Philex still filed its requires strict compliance with the conditions attached by the
administrative claim on time. Thus, the Atlas doctrine is statute for its exercise.59 Philex failed to comply with the
immaterial in this case. The Commissioner had until 17 July 2006, statutory conditions and must thus bear the consequences.
the last day of the 120-day period, to decide Philex’s claim. Since
the Commissioner did not act on Philex’s claim on or before 17 II. Prescriptive Periods under Section 112(A) and (C)
July 2006, Philex had until 17 August 2006, the last day of the There are three compelling reasons why the 30-day period need
30-day period, to file its judicial claim. The CTA EB held that 17 not necessarily fall within the two-year prescriptive period, as
August 2006 was indeed the last day for Philex to file its judicial long as the administrative claim is filed within the two-year
claim. However, Philex filed its Petition for Review with the CTA prescriptive period.
only on 17 October 2007, or four hundred twenty-six (426) days
after the last day of filing. In short, Philex was late by one year First, Section 112(A) clearly, plainly, and unequivocally provides
and 61 days in filing its judicial claim. As the CTA EB correctly that the taxpayer "may, within two (2) years after the close of
found: the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of the creditable
Evidently, the Petition for Review in C.T.A. Case No. 7687 was input tax due or paid to such sales." In short, the law states that
filed 426 days late. Thus, the Petition for Review in C.T.A. Case the taxpayer may apply with the Commissioner for a refund or
No. 7687 should have been dismissed on the ground that the credit "within two (2) years," which means at anytime within two
Petition for Review was filed way beyond the 30-day prescribed years. Thus, the application for refund or credit may be filed by
period; thus, no jurisdiction was acquired by the CTA Division; x the taxpayer with the Commissioner on the last day of the two-
x x58 (Emphasis supplied)

year prescriptive period and it will still strictly comply with the
law. The twoyear prescriptive period is a grace period in favor of
the taxpayer and he can avail of the full period before his right
to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall
decide the application for refund or credit "within one hundred
twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with
Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in
accordance with Subsection A" means that the application in
Section 112(A) is the administrative claim that the
Commissioner must decide within the 120-day period. In short,
the two-year prescriptive period in Section 112(A) refers to the
period within which the taxpayer can file an administrative claim
for tax refund or credit. Stated otherwise, the two-year
prescriptive period does not refer to the filing of the judicial claim
with the CTA but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase ‘within two years x x
x apply for the issuance of a tax credit or refund’ refers to
applications for refund/credit with the CIR and not to appeals
made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall
within the two-year prescriptive period (equivalent to 730
days60), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the appeal to the
CTA being filed beyond the two-year prescriptive period. Thus, if
the taxpayer files his administrative claim on the 611th day, the
Commissioner, with his 120-day period, will have until the 731st
day to decide the claim. If the Commissioner decides only on the
731st day, or does not decide at all, the taxpayer can no longer
file his judicial claim with the CTA because the two-year
prescriptive period (equivalent to 730 days) has lapsed. The 30-
day period granted by law to the taxpayer to file an appeal
before the CTA becomes utterly useless, even if the taxpayer
complied with the law by filing his administrative claim within
the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year
prescriptive period adds a condition that is not found in the law.
It results in truncating 120 days from the 730 days that the law
grants the taxpayer for filing his administrative claim with the
14
Commissioner. This Court cannot interpret a law to defeat,
wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its
clear, plain, and unequivocal language. The taxpayer can file his
administrative claim for refund or credit at anytime within the
two-year prescriptive period. If he files his claim on the last day
of the two-year prescriptive period, his claim is still filed on time.
The Commissioner will have 120 days from such filing to decide
the claim. If the Commissioner decides the claim on the 120th
day, or does not decide it on that day, the taxpayer still has 30
days to file his judicial claim with the CTA. This is not only the
plain meaning but also the only logical interpretation of Section
112(A) and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under
Section 229 because at the time the input VAT is collected the
amount paid is correct and proper. The input VAT is a tax liability
of, and legally paid by, a VAT-registered seller61 of goods,
properties or services used as input by another VAT-registered
person in the sale of his own goods, properties, or services. This
tax liability is true even if the seller passes on the input VAT to
the buyer as part of the purchase price. The second VAT-
registered person, who is not legally liable for the input VAT, is
the one who applies the input VAT as credit for his own output
VAT.62 If the input VAT is in fact "excessively" collected as
understood under Section 229, then it is the first VAT-registered
person - the taxpayer who is legally liable and who is deemed to
have legally paid for the input VAT - who can ask for a tax refund
or credit under Section 229 as an ordinary refund or
credit outside of the VAT System. In such event, the second VAT-
registered taxpayer will have no input VAT to offset against his
own output VAT.
In a claim for refund or credit of "excess" input VAT under
Section 110(B) and Section 112(A), the input VAT is not
"excessively" collected as understood under Section 229. At the
time of payment of the input VAT the amount paid is the correct
and proper amount. Under the VAT System, there is no claim or
issue that the input VAT is "excessively" collected, that is, that
the input VAT paid is more than what is legally due. The person
legally liable for the input VAT cannot claim that he overpaid the
input VAT by the mere existence of an "excess" input VAT. The
term "excess" input VAT simply means that the input VAT
available as credit exceeds the output VAT, not that the input
VAT is excessively collected because it is more than what is
legally due. Thus, the taxpayer who legally paid the input VAT
cannot claim for refund or credit of the input VAT as
"excessively" collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial
claim for refund is two years from the date of payment of the
tax "erroneously, x x x illegally, x x x excessively or in any manner
wrongfully collected." The prescriptive period is reckoned from
the date the person liable for the tax pays the tax. Thus, if the
input VAT is in fact "excessively" collected, that is, the person
liable for the tax actually pays more than what is legally due, the
taxpayer must file a judicial claim for refund within two years
from his date of payment. Only the person legally liable to pay
the tax can file the judicial claim for refund. The person to whom
the tax is passed on as part of the purchase price has no
personality to file the judicial claim under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive
period for filing a judicial claim for "excess" input VAT is two
years from the close of the taxable quarter when the sale was
made by the person legally liable to pay the output VAT. This
prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid
for more than two years but this does not bar the filing of a
judicial claim for "excess" VAT under Section 112(A), which has a
different reckoning period from Section 229. Moreover, the
person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the
VAT refund or credit does not claim that the input VAT was
"excessively" collected from him, or that he paid an input VAT
that is more than what is legally due. He is not the taxpayer who
legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the
value added by the taxpayer in the chain of transactions. For
simplicity and efficiency in tax collection, the VAT is imposed not
just on the value added by the taxpayer, but on the entire selling
price of his goods, properties or services. However, the taxpayer
is allowed a refund or credit on the VAT previously paid by those
who sold him the inputs for his goods, properties, or services.
The net effect is that the taxpayer pays the VAT only on the
value that he adds to the goods, properties, or services that he
actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only
against his output VAT. The only exception is when the taxpayer
is expressly "zero-rated or effectively zero-rated" under the law,
like companies generating power through renewable sources of
energy.64 Thus, a non zero-rated VAT-registered taxpayer who
has no output VAT because he has no sales cannot claim a tax
refund or credit of his unused input VAT under the VAT System.
Even if the taxpayer has sales but his input VAT exceeds his
output VAT, he cannot seek a tax refund or credit of his "excess"
input VAT under the VAT System. He can only carry-over and
apply his "excess" input VAT against his future output VAT. If such
"excess" input VAT is an "excessively" collected tax, the taxpayer
should be able to seek a refund or credit for such "excess" input
VAT whether or not he has output VAT. The VAT System does
not allow such refund or credit. Such "excess" input VAT is not
an "excessively" collected tax under Section 229. The "excess"
input VAT is a correctly and properly collected tax. However,
such "excess" input VAT can be applied against the output VAT
because the VAT is a tax imposed only on the value added by the
taxpayer. If the input VAT is in fact "excessively" collected under
Section 229, then it is the person legally liable to pay the input
VAT, not the person to whom the tax was passed on as part of
the purchase price and claiming credit for the input VAT under
the VAT System, who can file the judicial claim under Section
229.
Any suggestion that the "excess" input VAT under the VAT
System is an "excessively" collected tax under Section 229 may
lead taxpayers to file a claim for refund or credit for such
"excess" input VAT under Section 229 as an ordinary tax refund
or credit outside of the VAT System. Under Section 229, mere
payment of a tax beyond what is legally due can be claimed as a
refund or credit. There is no requirement under Section 229 for
an output VAT or subsequent sale of goods, properties, or
services using materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be
refunded or credited is a tax that is "erroneously, x x x illegally, x
x x excessively or in any manner wrongfully collected." In short,
there must be a wrongful payment because what is paid, or part
of it, is not legally due. As the Court held in Mirant, Section 229
should "apply only to instances of erroneous payment or illegal
collection of internal revenue taxes." Erroneous or wrongful
payment includes excessive payment because they all refer to
payment of taxes not legally due. Under the VAT System, there is
no claim or issue that the "excess" input VAT is "excessively or in
15
any manner wrongfully collected." In fact, if the "excess" input
VAT is an "excessively" collected tax under Section 229, then the
taxpayer claiming to apply such "excessively" collected input
VAT to offset his output VAT may have no legal basis to make
such offsetting. The person legally liable to pay the input VAT
can claim a refund or credit for such "excessively" collected tax,
and thus there will no longer be any "excess" input VAT. This will
upend the present VAT System as we know it.
IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of
input VAT must comply with the two-year prescriptive period
under Section 229, should be effective only from its
promulgation on 8 June 2007 until its abandonment on 12
September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of
payment of the output VAT. Prior to the Atlas doctrine, the two-
year prescriptive period for claiming refund or credit of input
VAT should be governed by Section 112(A) following the verba
legis rule. The Mirant ruling, which abandoned
the Atlas doctrine, adopted the verba legis rule, thus applying
Section 112(A) in computing the two-year prescriptive period in
claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods
under Section 112(C) because the application of the 120+30 day
periods was not in issue in Atlas. The application of the 120+30
day periods was first raised in Aichi, which adopted the verba
legis rule in holding that the 120+30 day periods are mandatory
and jurisdictional. The language of Section 112(C) is plain, clear,
and unambiguous. When Section 112(C) states that "the
Commissioner shall grant a refund or issue the tax credit within
one hundred twenty (120) days from the date of submission of
complete documents," the law clearly gives the Commissioner
120 days within which to decide the taxpayer’s claim. Resort to
the courts prior to the expiration of the 120-day period is a
patent violation of the doctrine of exhaustion of administrative
remedies, a ground for dismissing the judicial suit due to
prematurity. Philippine jurisprudence is awash with cases
affirming and reiterating the doctrine of exhaustion of
administrative remedies.65 Such doctrine is basic and
elementary.
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 rule66 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.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated
15 April 2003
There is nothing in RMC 49-03 that states, expressly or
impliedly, that the taxpayer need not wait for the 120-day
period to expire before filing a judicial claim with the CTA. RMC
49-03 merely authorizes the BIR to continue processing the

administrative claim even after the taxpayer has filed its judicial
claim, without saying that the taxpayer can file its judicial claim
before the expiration of the 120-day period. RMC 49-03 states:
"In cases where the taxpayer has filed a ‘Petition for Review’
with the Court of Tax Appeals involving a claim for refund/TCC
that is pending at the administrative agency (either the Bureau
of Internal Revenue or the One- Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the Department of
Finance), the administrative agency and the court may act on
the case separately." Thus, if the taxpayer files its judicial claim
before the expiration of the 120-day period, the BIR will
nevertheless continue to act on the administrative claim
because such premature filing cannot divest the Commissioner
of his statutory power and jurisdiction to decide the
administrative claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the
120- day period, the Commissioner can still continue to evaluate
the administrative claim. There is nothing new in this because
even after the expiration of the 120-day period, the
Commissioner should still evaluate internally the administrative
claim for purposes of opposing the taxpayer’s judicial claim, or
even for purposes of determining if the BIR should actually
concede to the taxpayer’s judicial claim. The internal
administrative evaluation of the taxpayer’s claim
must necessarily continue to enable the BIR to oppose
intelligently the judicial claim or, if the facts and the law warrant
otherwise, for the BIR to concede to the judicial claim, resulting
in the termination of the judicial proceedings.
What is important, as far as the present cases are concerned, is
that the mere filing by a taxpayer of a judicial claim with the CTA
before the expiration of the 120-day period cannot operate to
divest the Commissioner of his jurisdiction to decide an
administrative claim within the 120-day mandatory
period, unless the Commissioner has clearly given cause for
equitable estoppel to apply as expressly recognized in Section
246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for
equitable estoppel under Section 246 of the Tax Code. BIR
Ruling No. DA-489-03 expressly states that the "taxpayer-
claimant need not wait for the lapse of the 120-day period before
it could seek judicial relief with the CTA by way of Petition for
16
Review." Prior to this ruling, the BIR held, as shown by its
position in the Court of Appeals,68 that the expiration of the
120-day period is mandatory and jurisdictional before a judicial
claim can be filed.
There is no dispute that the 120-day period is mandatory and
jurisdictional, and that the CTA does not acquire jurisdiction
over a judicial claim that is filed before the expiration of the
120-day period. There are, however, two exceptions to this rule.
The first exception is if the Commissioner, through a specific
ruling, misleads a particular taxpayer to prematurely file a
judicial claim with the CTA. Such specific ruling is applicable only
to such particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued
under Section 4 of the Tax Code, misleads all taxpayers into
filing prematurely judicial claims with the CTA. In these cases,
the Commissioner cannot be allowed to later on question the
CTA’s assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246 of
the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA
8424, expressly grants to the Commissioner the power to
interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To
Decide Tax Cases. — The power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by
the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to
interpret tax laws, taxpayers acting in good faith should not be
made to suffer for adhering to general interpretative rules of the
Commissioner interpreting tax laws, should such interpretation
later turn out to be erroneous and be reversed by the
Commissioner or this Court. Indeed, Section 246 of the Tax Code
expressly provides that a reversal of a BIR regulation or ruling
cannot adversely prejudice a taxpayer who in good faith relied
on the BIR regulation or ruling prior to its reversal. Section 246
provides as follows:
Sec. 246. Non-Retroactivity of Rulings. — Any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner
may be relied upon by taxpayers from the time the rule is issued
up to its reversal by the Commissioner or this Court. Section 246
is not limited to a reversal only by the Commissioner because
this Section expressly states, "Any revocation, modification or
reversal" without specifying who made the revocation,
modification or reversal. Hence, a reversal by this Court is
covered under Section 246.
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a
difficult question of law. The abandonment of the Atlas doctrine
did not result in Atlas, or other taxpayers similarly situated,
being made to return the tax refund or credit they received or
could have received under Atlas prior to its abandonment. This
Court is applying Mirant and Aichi prospectively. Absent fraud,
bad faith or misrepresentation, the reversal by this Court of a
general interpretative rule issued by the Commissioner, like the
reversal of a specific BIR ruling under Section 246, should also
apply prospectively. As held by this Court in CIR v. Philippine
Health Care Providers, Inc.:70

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this
Court held that under Section 246 of the 1997 Tax Code, the
Commissioner of Internal Revenue is precluded from adopting a
position contrary to one previously taken where injustice would
result to the taxpayer. Hence, where an assessment for
deficiency withholding income taxes was made, three years
after a new BIR Circular reversed a previous one upon which the
taxpayer had relied upon, such an assessment was prejudicial to
the taxpayer. To rule otherwise, opined the Court, would be
contrary to the tenets of good faith, equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp.1âwphi1 in the later cases of Commissioner
of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal
Revenue v. Mega Gen. Mdsg. Corp., Commissioner of Internal
Revenue v. Telefunken Semiconductor (Phils.) Inc.,
and Commissioner of Internal Revenue v. Court of Appeals. The
rule is that the BIR rulings have no retroactive effect where a
grossly unfair deal would result to the prejudice of the taxpayer,
as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation, wherein the taxpayer was entitled to tax refunds or
credits based on the BIR’s own issuances but later was suddenly
saddled with deficiency taxes due to its subsequent ruling
changing the category of the taxpayer’s transactions for the
purpose of paying its VAT, this Court ruled that applying such
ruling retroactively would be prejudicial to the taxpayer.
(Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a
general interpretative rule applicable to all taxpayers or a
specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule
because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop Inter-Agency
Tax Credit and Drawback Center of the Department of Finance.
This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner
the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do
in cases like the tax claim of Lazi Bay Resources Development,
17
Inc., where the taxpayer did not wait for the lapse of the 120-
day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.
Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from
the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held
that the 120+30 day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive
effect for four reasons: first, it is admittedly an erroneous
interpretation of the law; second, prior to its issuance, the BIR
held that the 120-day period was mandatory and jurisdictional,
which is the correct interpretation of the law; third, prior to its
issuance, no taxpayer can claim that it was misled by the BIR
into filing a judicial claim prematurely; and fourth, a claim for tax
refund or credit, like a claim for tax exemption, is strictly
construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-
489-03 because it filed its judicial claim prematurely on 10 April
2003, before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003. To repeat, San Roque cannot claim that it was
misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San
Roque filed its judicial claim. At the time San Roque filed its
judicial claim, the law as applied and administered by the BIR
was that the Commissioner had 120 days to act on
administrative claims. This was in fact the position of the BIR
prior to the issuance of BIR Ruling No. DA-489-03. Indeed, San
Roque never claimed the benefit of BIR Ruling No. DA-489-03 or
RMC 49-03, whether in this Court, the CTA, or before the
Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14
February 2007, after the issuance of BIR Ruling No. DA-489-03
on 10 December 2003. Truly, Taganito can claim that in filing its
judicial claim prematurely without waiting for the 120-day
period to expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-
03, which shields the filing of its judicial claim from the vice of
prematurity.
Philex’s situation is not a case of premature filing of its judicial
claim but of late filing, indeed very late filing. BIR Ruling No. DA-
489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to
act on an administrative claim. Philex cannot claim the benefit of
BIR Ruling No. DA-489-03 because Philex did not file its judicial
claim prematurely but filed it long after the lapse of the 30-day
period following the expiration of the 120-day period. In fact,
Philex filed its judicial claim 426 days after the lapse of the 30-
day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this
Court had already made a ruling that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period. The effect of
the claim of the dissenting opinions is that San Roque’s failure to
wait for the 120-day mandatory period to lapse is
inconsequential, thus allowing San Roque to claim the tax
refund or credit. However, the five cases cited by the dissenting
opinions do not support even remotely the claim that this Court
had already made such a ruling. None of these five cases
mention, cite, discuss, rule or even hint that compliance with the
120-day mandatory period is inconsequential as long as the
administrative and judicial claims are filed within the two-year
prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue
was whether any output VAT was actually passed on to Toshiba
that it could claim as input VAT subject to tax credit or refund.
The Commissioner argued that "although Toshiba may be a VAT-
registered taxpayer, it is not engaged in a VAT-taxable business."
The Commissioner cited Section 4.106-1 of Revenue Regulations
No. 75 that "refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in
VAT-taxable business." In the words of the Court, "Ultimately,
however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its
input VAT on its purchases of capital goods and services, to
which this Court answers in the affirmative." Nowhere in this
case did the Court discuss, state, or rule that the filing dates of
the administrative and judicial claims are inconsequential, as
long as they are within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated:
"The issues to be resolved in the instant case are (1) whether
the absence of the BIR authority to print or the absence of the
TIN-V in petitioner’s export sales invoices operates to forfeit its
entitlement to a tax refund/credit of its unutilized input VAT

attributable to its zero-rated sales; and (2) whether petitioner’s
failure to indicate "TIN-V" in its sales invoices automatically
invalidates its claim for a tax credit certification." Again,
nowhere in this case did the Court discuss, state, or rule that the
filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year
prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the
Court stated: "x x x the CTA First Division, conceding that
petitioner’s transactions fall under the classification of zero-
rated sales, nevertheless denied petitioner’s claim ‘for lack of
substantiation,’ x x x." The Court quoted the ruling of the First
Division that "valid VAT official receipts, and not mere sale
invoices, should have been submitted" by petitioner to
substantiate its claim. The Court further stated: "x x x the CTA En
Banc, x x x affirmed x x x the CTA First Division," and
"petitioner’s motion for reconsideration having been denied x x
x, the present petition for review was filed." Clearly, the sole
issue in this case is whether petitioner complied with the
substantiation requirements in claiming for tax refund or credit.
Again, nowhere in this case did the Court discuss, state, or rule
that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year
prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the
Court put the issue in this manner: "Simply put, the sole issue
the petition raises is whether or not the CTA erred in granting
respondent Ironcon’s application for refund of
its excess creditable VAT withheld." The Commissioner argued
that "since the NIRC does not specifically grant taxpayers the
option to refund excess creditable VAT withheld, it follows that
such refund cannot be allowed." Thus, this case is solely about
whether the taxpayer has the right under the NIRC to ask for a
cash refund of excess creditable VAT withheld. Again, nowhere
in this case did the Court discuss, state, or rule that the filing
dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year
prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu
Toyo was exempt or subject to VAT. Compliance with the 120-
day period was never an issue in Cebu Toyo. As the Court
explained:
18
Both the Commissioner of Internal Revenue and the Office of
the Solicitor General argue that respondent Cebu Toyo
Corporation, as a PEZA-registered enterprise, is exempt from
national and local taxes, including VAT, under Section 24 of Rep.
Act No. 7916 and Section 109 of the NIRC. Thus, they contend
that respondent Cebu Toyo Corporation is not entitled to any
refund or credit on input taxes it previously paid as provided
under Section 4.103-1 of Revenue Regulations No. 7-95,
notwithstanding its registration as a VAT taxpayer. For petitioner
claims that said registration was erroneous and did not confer
upon the respondent any right to claim recognition of the input
tax credit.
The respondent counters that it availed of the income tax
holiday under E.O. No. 226 for four years from August 7, 1995
making it exempt from income tax but not from other taxes such
as VAT. Hence, according to respondent, its export sales are not
exempt from VAT, contrary to petitioner’s claim, but its export
sales is subject to 0% VAT. Moreover, it argues that it was able to
establish through a report certified by an independent Certified
Public Accountant that the input taxes it incurred from April 1,
1996 to December 31, 1997 were directly attributable to its
export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim
for refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on
record, we find the petition bereft of merit.
Petitioner’s contention that respondent is not entitled to refund
for being exempt from VAT is untenable. This argument turns a
blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that
under said statute, the respondent had two options with respect
to its tax burden. It could avail of an income tax holiday
pursuant to provisions of E.O. No. 226, thus exempt it from
income taxes for a number of years but not from other internal
revenue taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D. No. 66 and
pay only the preferential tax rate of 5% under Rep. Act No.
7916. Both the Court of Appeals and the Court of Tax Appeals
found that respondent availed of the income tax holiday for four
(4) years starting from August 7, 1995, as clearly reflected in its
1996 and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under
E.O. No. 226. Hence, respondent is not exempt from VAT and it
correctly registered itself as a VAT taxpayer. In fine, it is engaged
in taxable rather than exempt transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was
exempt from VAT or subject to VAT at 0% tax rate. If subject to
0% VAT rate, the taxpayer could claim a refund or credit of its
input VAT. Again, nowhere in this case did the Court discuss,
state, or rule that the filing dates of the administrative and
judicial claims are inconsequential, as long as they are within the
two-year prescriptive period.
While this Court stated in the narration of facts in Cebu
Toyo that the taxpayer "did not bother to wait for the Resolution
of its (administrative) claim by the CIR" before filing its judicial
claim with the CTA, this issue was not raised before the Court.
Certainly, this statement of the Court is not a binding precedent
that the taxpayer need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not passed
upon by the Court, does not have any value as precedent. As this
Court has explained as early as 1926:
It is contended, however, that the question before us was
answered and resolved against the contention of the appellant
in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no
question was raised nor was it even suggested that said section
216 did not apply to a public officer. That question was not
discussed nor referred to by any of the parties interested in that
case. It has been frequently decided that the fact that a statute
has been accepted as valid, and invoked and applied for many
years in cases where its validity was not raised or passed on,
does not prevent a court from later passing on its validity, where
that question is squarely and properly raised and
presented. Where a question passes the Court sub silentio, the
case in which the question was so passed is not binding on the
Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor should it
be considered as a precedent. (U.S. vs. Noriega and Tobias, 31
Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch
[U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs.
Burke, 146 U.S. 82.) For the reasons given in the case of McGirr
vs. Hamilton and Abreu, supra, the decision in the case
of Bautista vs. Fajardo, supra, can have no binding force in the
interpretation of the question presented here.76 (Emphasis
supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is
mandatory or optional, was not even raised as an issue by any of

the parties. The Court never passed upon this issue. Thus, Cebu
Toyo does not constitute binding precedent on the nature of the
120-day period.
There is also the claim that there are numerous CTA decisions
allegedly supporting the argument that the filing dates of the
administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period. Suffice it to
state that CTA decisions do not constitute precedents, and do
not bind this Court or the public. That is why CTA decisions are
appealable to this Court, which may affirm, reverse or modify
the CTA decisions as the facts and the law may warrant. Only
decisions of this Court constitute binding precedents, forming
part of the Philippine legal system.77 As held by this Court in The
Philippine Veterans Affairs Office v. Segundo:78
x x x Let it be admonished that decisions of the Supreme Court
"applying or interpreting the laws or the Constitution . . . form
part of the legal system of the Philippines," and, as it were,
"laws" by their own right because they interpret what the laws
say or mean. Unlike rulings of the lower courts, which bind the
parties to specific cases alone, our judgments are universal in
their scope and application, and equally mandatory in character.
Let it be warned that to defy our decisions is to court contempt.
(Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa
v. Pepsi Cola Products Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched
in Article 8 of the Civil Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the
Constitution shall form a part of the legal system of the
Philippines.
It enjoins adherence to judicial precedents. It requires our courts
to follow a rule already established in a final decision of the
Supreme Court. That decision becomes a judicial precedent to
be followed in subsequent cases by all courts in the land. The
doctrine of stare decisis is based on the principle that once a
question of law has been examined and decided, it should be
deemed settled and closed to further argument. (Emphasis
supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
19
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own
express terms, applies only if the taxpayer files the judicial claim
"after" the lapse of the 60-day period, a period with which San
Roque failed to comply. Under Section 4.106-2(c), the 60-day
period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative
regulation can never prevail over a later contrary law, more so in
this case where the later law was enacted precisely to amend
the prior administrative regulation and the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax. —
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be
made - In proper cases, the Commissioner shall grant a refund
or issue the tax credit for creditable input taxes within sixty (60)
days from the date of submission of complete documents in
support of the application filed in accordance with
subparagraphs (a) and (b) hereof. In case of full or partial denial
of the claim for tax refund or tax credit, or the failure on the part
of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30)
days from receipt of the decision denying the claim or after the
expiration of the sixty-day period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits
of input tax — (a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall
be made. — In proper cases, the Commissioner shall grant a tax
credit/refund for creditable input taxes within sixty (60) days
from the date of submission of complete documents in support
of the application filed in accordance with subparagraphs (a)
and (b) above.
In case of full or partial denial of the claim for tax credit/refund
as decided by the Commissioner of Internal Revenue, the
taxpayer may appeal to the Court of Tax Appeals within thirty
(30) days from the receipt of said denial, otherwise the decision
will become final. However, if no action on the claim for tax
credit/refund has been taken by the Commissioner of Internal
Revenue after the sixty (60) day period from the date of
submission of the application but before the lapse of the two (2)
year period from the date of filing of the VAT return for the
taxable quarter, the taxpayer may appeal to the Court of Tax
Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax —
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall
be made. — In proper cases, the Commissioner shall grant the
refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application
filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the hundred
twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977
Tax Code, as amended by RA 7716, the Commissioner has a 60-
day period to act on the administrative claim. This 60-day period
is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change
this, so that the 60-day period is no longer mandatory and
jurisdictional? The obvious answer is no.
Section 4.106-2(c) itself expressly states that if, "after the sixty
(60) day period," the Commissioner fails to act on the
administrative claim, the taxpayer may file the judicial claim
even "before the lapse of the two (2) year period." Thus, under

Section 4.106-2(c) the 60-day period is still mandatory and
jurisdictional.
Section 4.106-2(c) did not change Section 106(d) as amended by
RA 7716, but merely implemented it, for two
reasons. First, Section 4.106-2(c) still expressly requires
compliance with the 60-day period. This cannot be
disputed.1âwphi1
Second, under the novel amendment introduced by RA 7716,
mere inaction by the Commissioner during the 60-day period
is deemed a denial of the claim. Thus, Section 4.106-2(c) states
that "if no action on the claim for tax refund/credit has been
taken by the Commissioner after the sixty (60) day period," the
taxpayer "may" already file the judicial claim even long
before the lapse of the two-year prescriptive period. Prior to the
amendment by RA 7716, the taxpayer had to wait until the two-
year prescriptive period was about to expire if the Commissioner
did not act on the claim.80 With the amendment by RA 7716, the
taxpayer need not wait until the two-year prescriptive period is
about to expire before filing the judicial claim because mere
inaction by the Commissioner during the 60-day period is
deemed a denial of the claim. This is the meaning of the phrase
"but before the lapse of the two (2) year period" in Section 4.106-
2(c). As Section 4.106- 2(c) reiterates that the judicial claim can
be filed only "after the sixty (60) day period," this period remains
mandatory and jurisdictional. Clearly, Section 4.106-2(c) did not
amend Section 106(d) but merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-
2(c) of Revenue Regulations No. 7-95, an administrative
issuance, amended Section 106(d) of the Tax Code to make the
period given to the Commissioner non-mandatory, still the 1997
Tax Code, a much later law, reinstated the original intent and
provision of Section 106(d) by extending the 60-day period to
120 days and re-adopting the original wordings of Section 106(d).
Thus, Section 4.106-2(c), a mere administrative issuance,
becomes inconsistent with Section 112(D), a later law.
Obviously, the later law prevails over a prior inconsistent
administrative issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and
categorical that the Commissioner has 120 days to act on an
administrative claim. The taxpayer can file the judicial claim
(1) only within thirty days after the Commissioner partially or fully
denies the claim within the 120- day period, or (2) only within
20
thirty days from the expiration of the 120- day period if the
Commissioner does not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax
Code on 1 January 1998, or more than five years before San
Roque filed its administrative claim on 28 March 2003, the law
has been clear: the 120- day period is mandatory and
jurisdictional. San Roque’s claim, having been filed
administratively on 28 March 2003, is governed by the 1997 Tax
Code, not the 1977 Tax Code. Since San Roque filed its judicial
claim before the expiration of the 120-day mandatory and
jurisdictional period, San Roque’s claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which
expressly provides that the taxpayer can only file the judicial
claim "after" the lapse of the 60-day period from the filing of the
administrative claim. San Roque filed its judicial claim just 13
days after filing its administrative claim. To recall, San Roque filed
its judicial claim on 10 April 2003, a mere 13 days after it filed its
administrative claim.
Even if, contrary to all principles of statutory construction as well
as plain common sense, we gratuitously apply now Section
4.106-2(c) of Revenue Regulations No. 7-95, still San Roque
cannot recover any refund or credit because San Roque did not
wait for the 60-day period to lapse, contrary to the express
requirement in Section 4.106-2(c). In short, San Roque does not
even comply with Section 4.106-2(c). A claim for tax refund or
credit is strictly construed against the taxpayer, who must prove
that his claim clearly complies with all the conditions for
granting the tax refund or credit. San Roque did not comply with
the express condition for such statutory grant.
A final word. Taxes are the lifeblood of the nation. The
Philippines has been struggling to improve its tax efficiency
collection for the longest time with minimal success.
Consequently, the Philippines has suffered the economic
adversities arising from poor tax collections, forcing the
government to continue borrowing to fund the budget deficits.
This Court cannot turn a blind eye to this economic malaise by
being unduly liberal to taxpayers who do not comply with
statutory requirements for tax refunds or credits. The tax refund
claims in the present cases are not a pittance. Many other
companies stand to gain if this Court were to rule otherwise.
The dissenting opinions will turn on its head the well-settled
doctrine that tax refunds are strictly construed against the
taxpayer.
WHEREFORE, the Court hereby (1) GRANTS the petition of the
Commissioner of Internal Revenue in G.R. No. 187485
to DENY the P483,797,599.65 tax refund or credit claim of San
Roque Power Corporation; (2) GRANTS the petition of Taganito
Mining Corporation in G.R. No. 196113 for a tax refund or credit
of P8,365,664.38; and (3) DENIES the petition of Philex Mining
Corporation in G.R. No. 197156 for a tax refund or credit of
P23,956,732.44.
SO ORDERED.
EN BANC
G.R. No. 187485 October 8, 2013
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. SAN ROQUE POWER CORPORATION, Respondent.
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CARPIO, J.:
This Resolution resolves the Motion for Reconsideration and the
Supplemental Motion for Reconsideration filed by San Roque
Power Corporation (San Roque) in G.R. No. 187485, the
Comment to the Motion for Reconsideration filed by the
Commissioner of Internal Revenue (CIR) in G.R. No. 187485, the
Motion for Reconsideration filed by the CIR in G.R.No. 196113,
and the Comment to the Motion for Reconsideration filed by
Taganito Mining Corporation (Taganito) in G.R. No. 196113.

San Roque prays that the rule established in our 12 February
2013 Decision be given only a prospective effect, arguing that
"the manner by which the Bureau of Internal Revenue (BIR) and
the Court of Tax Appeals(CTA) actually treated the 120 + 30 day
periods constitutes an operative fact the effects and
consequences of which cannot be erased or undone."1
The CIR, on the other hand, asserts that Taganito Mining
Corporation's (Taganito) judicial claim for tax credit or refund
was prematurely filed before the CTA and should be disallowed
because BIR Ruling No. DA-489-03 was issued by a Deputy
Commissioner, not by the Commissioner of Internal Revenue.
We deny both motions.
The Doctrine of Operative Fact
The general rule is that a void law or administrative act cannot
be the source of legal rights or duties. Article 7 of the Civil Code
enunciates this general rule, as well as its exception: "Laws are
repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse, or custom or
practice to the contrary. When the courts declared a law to be
inconsistent with the Constitution, the former shall be void and
the latter shall govern. Administrative or executive acts, orders
and regulations shall be valid only when they are not contrary to
the laws or the Constitution."
The doctrine of operative fact is an exception to the general
rule, such that a judicial declaration of invalidity may not
necessarily obliterate all the effects and consequences of a void
act prior to such declaration.2 In Serrano de Agbayani v.
Philippine National Bank,3 the application of the doctrine of
operative fact was discussed as follows:
The decision now on appeal reflects the orthodox view that an
unconstitutional act, for that matter an executive order or a
municipal ordinance likewise suffering from that infirmity,
cannot be the source of any legal rights or duties. Nor can it
justify any official act taken under it. Its repugnancy to the
fundamental law once judicially declared results in its being to
all intents and purposes a mere scrap of paper. As the new Civil
Code puts it: "When the courts declare a law to be inconsistent
with the Constitution, the former shall be void and the latter
shall govern. Administrative or executive acts, orders and
regulations shall be valid only when they are not contrary to the
laws of the Constitution." It is understandable why it should be
21
so, the Constitution being supreme and paramount. Any
legislative or executive act contrary to its terms cannot survive.
Such a view has support in logic and possesses the merit of
simplicity. It may not however be sufficiently realistic. It does
not admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force
and had to be complied with. This is so as until after the
judiciary, in an appropriate case, declares its invalidity, it is
entitled to obedience and respect. Parties may have acted under
it and may have changed their positions. What could be more
fitting than that in a subsequent litigation regard be had to what
has been done while such legislative or executive act was in
operation and presumed to be valid in all respects. It is now
accepted as a doctrine that prior to its being nullified, its
existence as a fact must be reckoned with. This is merely to
reflect awareness that precisely because the judiciary is the
governmental organ which has the final say on whether or not a
legislative or executive measure is valid, a period of time may
have elapsed before it can exercise the power of judicial review
that may lead to a declaration of nullity. It would be to deprive
the law of its quality of fairness and justice then, if there be no
recognition of what had transpired prior to such adjudication.
In the language of an American Supreme Court decision: "The
actual existence of a statute, prior to such a determination of
unconstitutionality, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot
always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in
various aspects, with respect to particular relations, individual
and corporate, and particular conduct, private and official." This
language has been quoted with approval in a resolution in
Araneta v. Hill and the decision in Manila Motor Co., Inc. v.
Flores. An even more recent instance is the opinion of Justice
Zaldivar speaking for the Court in Fernandez v. Cuerva and Co.
(Boldfacing and italicization supplied)
Clearly, for the operative fact doctrine to apply, there must be a
"legislative or executive measure," meaning a law or executive
issuance, that is invalidated by the court. From the passage of
such law or promulgation of such executive issuance until its
invalidation by the court, the effects of the law or executive
issuance, when relied upon by the public in good faith, may have
to be recognized as valid. In the present case, however, there is
no such law or executive issuance that has been invalidated by
the Court except BIR Ruling No. DA-489-03.
To justify the application of the doctrine of operative fact as an
exemption, San Roque asserts that "the BIR and the CTA in
actual practice did not observe and did not require refund
seekers to comply with the120+30 day periods."4This is glaring
error because an administrative practice is neither a law nor an
executive issuance. Moreover, in the present case, there is even
no such administrative practice by the BIR as claimed by San
Roque.
In BIR Ruling No. DA-489-03 dated 10 December 2003, the
Department of Finance’s One-Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center (DOF-OSS) asked the BIR to rule on
the propriety of the actions taken by Lazi Bay Resources
Development, Inc. (LBRDI). LBRDI filed an administrative claim
for refund for alleged input VAT for the four quarters of 1998.
Before the lapse of 120 days from the filing of its administrative
claim, LBRDI also filed a judicial claim with the CTA on 28March
2000 as well as a supplemental judicial claim on 29 September
2000.In its Memorandum dated 13 August 2002 before the BIR,
the DOF-OSS pointed out that LBRDI is "not yet on the right
forum in violation of the provision of Section 112(D) of the
NIRC" when it sought judicial relief before the CTA. Section
112(D) provides for the 120+30 day periods for claiming tax
refunds.
The DOF-OSS itself alerted the BIR that LBRDI did not follow
the120+30 day periods. In BIR Ruling No. DA-489-03, Deputy
Commissioner Jose Mario C. Buñag ruled that "a taxpayer-
claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of
Petition for Review." Deputy Commissioner Buñag, citing the
7February 2002 decision of the Court of Appeals (CA) in
Commissioner of Internal Revenue v. Hitachi Computer Products
(Asia) Corporation5 (Hitachi), stated that the claim for refund
with the Commissioner could be pending simultaneously with a
suit for refund filed before the CTA.
Before the issuance of BIR Ruling No. DA-489-03 on 10
December 2003, there was no administrative practice by the BIR
that supported simultaneous filing of claims. Prior to BIR Ruling
No. DA-489-03, the BIR considered the 120+30 day periods
mandatory and jurisdictional.
Thus, prior to BIR Ruling No. DA-489-03, the BIR’s actual
administrative practice was to contest simultaneous filing of
claims at the administrative and judicial levels, until the CA
declared in Hitachi that the BIR’s position was wrong. The CA’s
Hitachi decision is the basis of BIR Ruling No. DA-489-03 dated

10 December 2003 allowing simultaneous filing. From then on
taxpayers could rely in good faith on BIR Ruling No. DA-489-03
even though it was erroneous as this Court subsequently
decided in Aichi that the 120+30 day periods were mandatory
and jurisdictional.
We reiterate our pronouncements in our Decision 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.
Section112(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 verbalegis
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-daymandatory 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 x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the
taxpayer.1âwphi1One 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.6
22
San Roque’s argument must, therefore, fail. The doctrine of
operative fact is an argument for the application of equity and
fair play. In the present case, we applied the doctrine of
operative fact when we recognized simultaneous filing during
the period between 10 December 2003, when BIR Ruling No.
DA-489-03 was issued, and 6 October 2010, when this Court
promulgated Aichi declaring the 120+30 day periods mandatory
and jurisdictional, thus reversing BIR Ruling No. DA-489-03.
The doctrine of operative fact is in fact incorporated in Section
246 of the Tax Code, which provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any
of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers,
except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Under Section 246, taxpayers may rely upon a rule or ruling
issued by the Commissioner from the time the rule or ruling is
issued up to its reversal by the Commissioner or this Court. The
reversal is not given retroactive effect. This, in essence, is the
doctrine of operative fact. There must, however, be a rule or
ruling issued by the Commissioner that is relied upon by the
taxpayer in good faith. A mere administrative practice, not
formalized into a rule or ruling, will not suffice because such a
mere administrative practice may not be uniformly and
consistently applied. An administrative practice, if not
formalized as a rule or ruling, will not be known to the general
public and can be availed of only by those within formal contacts
with the government agency.
Since the law has already prescribed in Section 246 of the Tax
Code how the doctrine of operative fact should be applied,
there can be no invocation of the doctrine of operative fact
other than what the law has specifically provided in Section 246.
In the present case, the rule or ruling subject of the operative
fact doctrine is BIR Ruling No. DA-489-03 dated 10 December
2003. Prior to this date, there is no such rule or ruling calling for
the application of the operative fact doctrine in Section 246.
Section246, being an exemption to statutory taxation, must be
applied strictly against the taxpayer claiming such exemption.
San Roque insists that this Court should not decide the present
case in violation of the rulings of the CTA; otherwise, there will
be adverse effects on the national economy. In effect, San
Roque’s doomsday scenario is a protest against this Court’s
power of appellate review. San Roque cites cases decided by the
CTA to underscore that the CTA did not treat the 120+30 day
periods as mandatory and jurisdictional. However, CTA or CA
rulings are not the executive issuances covered by Section 246
of the Tax Code, which adopts the operative fact doctrine. CTA
or CA decisions are specific rulings applicable only to the parties
to the case and not to the general public. CTA or CA decisions,
unlike those of this Court, do not form part of the law of the
land. Decisions of lower courts do not have any value as
precedents. Obviously, decisions of lower courts are not binding
on this Court. To hold that CTA or CA decisions, even if reversed
by this Court, should still prevail is to turn upside down our legal
system and hierarchy of courts, with adverse effects far worse
than the dubious doomsday scenario San Roque has conjured.
San Roque cited cases7 in its Supplemental Motion for
Reconsideration to support its position that retroactive
application of the doctrine in the present case will violate San
Roque’s right to equal protection of the law. However, San
Roque itself admits that the cited cases never mentioned the
issue of premature or simultaneous filing, nor of compliance
with the 120+30 day period requirement. We reiterate that "any
issue, whether raised or not by the parties, but not passed upon
by the Court, does not have any value as
precedent."8 Therefore, the cases cited by San Roque to bolster
its claim against the application of the 120+30 day period
requirement do not have any value as precedents in the present
case.
Authority of the Commissioner
to Delegate Power
In asking this Court to disallow Taganito’s claim for tax refund or
credit, the CIR repudiates the validity of the issuance of its own
BIR Ruling No. DA-489-03. "Taganito cannot rely on the

pronouncements in BIR Ruling No. DA-489-03, being a mere
issuance of a Deputy Commissioner."9
Although Section 4 of the 1997 Tax Code provides that the
"power to interpret the provisions of this Code and other tax
laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance,"
Section 7 of the same Code does not prohibit the delegation of
such power. Thus, "the Commissioner may delegate the powers
vested in him under the pertinent provisions of this Code to any
or such subordinate officials with the rank equivalent to a
division chief or higher, subject to such limitations and
restrictions as may be imposed under rules and regulations to
be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner."
WHEREFORE, we DENY with FINALITY the Motions for
Reconsideration filed by San Roque Power Corporation in G.R.
No. 187485,and the Commissioner of Internal Revenue in G.R.
No. 196113.
SO ORDERED.
THIRD DIVISION
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to set aside the decision of the Court of
Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case
No. 5136.
The antecedent facts as found by the Court of Tax Appeals are
not disputed, to wit:
[Respondent], a domestic corporation organized and operating
under the Philippine laws, entered into a license agreement with
SC Johnson and Son, United States of America (USA), a non-
resident foreign corporation based in the U.S.A. pursuant to
23
which the [respondent] was granted the right to use the September 595,956 148,989 59,596 89,393
trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the October 634,405 158,601 63,441 95,161
products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and
November 620,885 155,221 62,089 93,133
Son, U. S. A.
December 383,276 95,819 36,328 57,491
The said License Agreement was duly registered with the
Technology Transfer Board of the Bureau of Patents, Trade
Marks and Technology Transfer under Certificate of Registration Jan 1993 602,451 170,630 68,245 102,368
No. 8064 (Exh. "A").
February 565,845 141,461 56,585 84,877
For the use of the trademark or technology, [respondent] was
obliged to pay SC Johnson and Son, USA royalties based on a March 547,253 136,813 54,725 82,088
percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid April 660,810 165,203 66,081 99,122
for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
May 603,076 150,769 60,308 90,461
On October 29, 1993, [respondent] filed with the International
Tax Affairs Division (ITAD) of the BIR a claim for refund of ———— ———— ———— ———
overpaid withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's] case fall squarely P6,421,770 P1,605,443 P642,177 P963,2661
within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was ======== ======== ======== ========
approved by the Technology Transfer Board, the preferential tax
rate of 10% should apply to the [respondent]. We therefore
The Commissioner did not act on said claim for refund. Private
submit that royalties paid by the [respondent] to SC Johnson
respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a
and Son, USA is only subject to 10% withholding tax pursuant to
petition for review before the Court of Tax Appeals (CTA) where
the most-favored nation clause of the RP-US Tax Treaty [Article
the case was docketed as CTA Case No. 5136, to claim a refund
13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
of the overpaid withholding tax on royalty payments from July
Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the
1992 to May 1993.
Court of Appeals], par. 12). [Respondent's] claim for there fund
of P963,266.00 was computed as follows:
On May 7, 1996, the Court of Tax Appeals rendered its decision
in favor of S.C. Johnson and ordered the Commissioner of
Gross 25% 10%
Internal Revenue to issue a tax credit certificate in the amount
of P963,266.00 representing overpaid withholding tax on royalty
Month/ Royalty Withholding Withholding payments, beginning July, 1992 to May, 1993.2
Year Fee Tax Paid Tax Balance The Commissioner of Internal Revenue thus filed a petition for
review with the Court of Appeals which rendered the decision
subject of this appeal on November 7, 1996 finding no merit in
——— ——— ——— ——— ———
the petition and affirming in toto the CTA ruling.3
July 1992 559,878 139,970 55,988 83,982
This petition for review was filed by the Commissioner of
Internal Revenue raising the following issue:
August 567,935 141,984 56,794 85,190

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON
AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION"
TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US
Tax Treaty, which is known as the "most favored nation" clause,
the lowest rate of the Philippine tax at 10% may be imposed on
royalties derived by a resident of the United States from sources
within the Philippines only if the circumstances of the resident
of the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching
credit" provision as that provided under Article 24 of the RP-
West Germany Tax Treaty, the tax on royalties under the RP-US
Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Even assuming
that the phrase "paid under similar circumstances" refers to the
payment of royalties, and not taxes, as held by the Court of
Appeals, still, the "most favored nation" clause cannot be
invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty
remittances for that matter, these must necessarily refer to
circumstances that are tax-related. Finally, petitioner argues
that since S.C. Johnson's invocation of the "most favored nation"
clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the
provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the
instant petition should be denied (1) because it contains a
defective certification against forum shopping as required under
SC Circular No. 28-91, that is, the certification was not executed
by the petitioner herself but by her counsel; and (2) that the
"most favored nation" clause under the RP-US Tax Treaty refers
to royalties paid under similar circumstances as those royalties
subject to tax in other treaties; that the phrase "paid under
similar circumstances" does not refer to payment of the tax but
to the subject matter of the tax, that is, royalties, because the
"most favored nation" clause is intended to allow the taxpayer
in one state to avail of more liberal provisions contained in
another tax treaty wherein the country of residence of such
taxpayer is also a party thereto, subject to the basic condition
that the subject matter of taxation in that other tax treaty is the
same as that in the original tax treaty under which the taxpayer
is liable; thus, the RP-US Tax Treaty speaks of "royalties of the
same kind paid under similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped from insisting on
24
her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for
the reason that said interpretation is embodied in Revenue
Memorandum Circular ("RMC") 39-92 which was already
abandoned by the Commissioner's predecessor in 1993; and
was expressly revoked in BIR Ruling No. 052-95 which stated
that royalties paid to an American licensor are subject only to
10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US
Tax Treaty in relation to the RP-West Germany Tax Treaty. Said
ruling should be given retroactive effect except if such is
prejudicial to the taxpayer pursuant to Section 246 of the
National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification
against forum shopping was signed by petitioner's counsel is not
a fatal defect as to warrant the dismissal of this petition since
Circular No. 28-91 applies only to original actions and not to
appeals, as in the instant case. Moreover, the requirement that
the certification should be signed by petitioner and not by
counsel does not apply to petitioner who has only the Office of
the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax
Treaty refers to the payment of royalties and not taxes, still the
presence or absence of a "matching credit" provision in the said
RP-US Tax Treaty would constitute a material circumstance to
such payment and would be determinative of the said clause's
application.1âwphi1.nêt
We address first the objection raised by private respondent that
the certification against forum shopping was not executed by
the petitioner herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its Solicitors, Atty.
Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH
THE SUPREME COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS
AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of
multiple petitions and complaints involving the same issues in
the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies
have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the
Supreme Court or the Court of Appeals, the petitioner aside
from complying with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath to all of the
following facts or undertakings: (a) he has not theretofore
commenced any other action or proceeding involving the same
issues in the Supreme Court, the Court of Appeals, or any
tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following
sanctions: (a) it shall be a cause for the summary dismissal of the
multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum
shopping should be attached to petitions filed before this Court
and the Court of Appeals. Petitioner's allegation that Circular
No. 28-91 applies only to original actions and not to appeals as
in the instant case is not supported by the text nor by the
obvious intent of the Circular which is to prevent multiple
petitions that will result in the same issue being resolved by
different courts.
Anent the requirement that the party, not counsel, must certify
under oath that he has not commenced any other action
involving the same issues in this Court or the Court of Appeals or
any other tribunal or agency, we are inclined to accept
petitioner's submission that since the OSG is the only lawyer for
the petitioner, which is a government agency mandated under
Section 35, Chapter 12, title III, Book IV of the 1987
Administrative Code4 to be represented only by the Solicitor
General, the certification executed by the OSG in this case
constitutes substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of
contention in this appeal is the interpretation of Article 13 (2)
(b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-
resident foreign corporation. The provision states insofar as
pertinent
that —

1) Royalties derived by a resident of one of the Contracting
States from sources within the other Contracting State may be
taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not
exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of
activities; and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis
of the quoted provision, it is entitled to the concessional tax rate
of 10 percent on royalties based on Article 12 (2) (b) of the RP-
Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting
State in which they arise, and according to the law of that State,
but the tax so charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the
use of, or the right to use, any patent, trademark, design or
model, plan, secret formula or process, or from the use of or the
right to use, industrial, commercial, or scientific equipment, or
for information concerning industrial, commercial or scientific
experience.
25
For as long as the transfer of technology, under Philippine law, is
subject to approval, the limitation of the tax rate mentioned
under b) shall, in the case of royalties arising in the Republic of
the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent
authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows
a tax credit of 20 percent of the gross amount of such royalties
against German income and corporation tax for the taxes
payable in the Philippines on such royalties where the tax rate is
reduced to 10 or 15 percent under such treaty. Article 24 of the
RP-Germany Tax Treaty states —
1) Tax shall be determined in the case of a resident of the
Federal Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit
for foreign tax, there shall be allowed as a credit against German
income and corporation tax payable in respect of the following
items of income arising in the Republic of the Philippines, the tax
paid under the laws of the Philippines in accordance with this
Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b) the
Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is reduced to 10 or
15 per cent according to paragraph 2 of Article 12, 20 percent of
the gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-
US Tax Treaty are not paid under circumstances similar to those
in the RP-West Germany Tax Treaty since there is no provision
for a 20 percent matching credit in the former convention and
private respondent cannot invoke the concessional tax rate on
the strength of the most favored nation clause in the RP-US Tax
Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax
Treaty, the Philippine tax paid on income from sources within
the Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to
paragraph 2 of Article 12 of the RP-West Germany Tax Treaty,
the credit shall be 20% of the gross amount of such royalty. To
illustrate, the royalty income of a German resident from sources
within the Philippines arising from the use of, or the right to use,
any patent, trade mark, design or model, plan, secret formula or
process, is taxed at 10% of the gross amount of said royalty
under certain conditions. The rate of 10% is imposed if credit
against the German income and corporation tax on said royalty
is allowed in favor of the German resident. That means the rate
of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of West
Germany. The clear intent of the "matching credit" is to soften
the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as
that provided under the RP-West Germany Tax Treaty. Hence,
the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the "most favored nation"
clause in the RP-West Germany Tax Treaty cannot be availed of
in interpreting the provisions of the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax
Appeals, which was upheld by the Court of Appeals, that the
phrase "paid under similar circumstances in Article 13 (2) (b), (iii)
of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The
respondent court held that "Words are to be understood in the
context in which they are used", and since what is paid to a
resident of a third state is not a tax but a royalty "logic instructs"
that the treaty provision in question should refer to royalties of
the same kind paid under similar circumstances.

The above construction is based principally on syntax or
sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances
of payment thereof are the same for all the recipients of such
royalties and there is no disparity based on nationality in the
circumstances of such payment.6On the other hand, a cursory
reading of the various tax treaties will show that there is no
similarity in the provisions on relief from or avoidance of double
taxation7 as this is a matter of negotiation between the
contracting parties.8 As will be shown later, this dissimilarity is
true particularly in the treaties between the Philippines and the
United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties
which the Philippines has entered into for the avoidance of
double taxation.9 The purpose of these international
agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. 10 More
precisely, the tax conventions are drafted with a view towards
the elimination of international juridical double taxation, which
is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject
matter and for identical periods. 11 The apparent rationale for
doing away with double taxation is of encourage the free flow of
goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in
creating robust and dynamic economies. 12 Foreign investments
will only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of
a contracting state and derives income from, or owns capital in,
the other contracting state and both states impose tax on that
income or capital. In order to eliminate double taxation, a tax
treaty resorts to several methods. First, it sets out the respective
rights to tax of the state of source or situs and of the state of
residence with regard to certain classes of income or capital. In
some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or
capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is
limited. 14
26
The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case, the
treaties make it incumbent upon the state of residence to allow
relief in order to avoid double taxation. There are two methods
of relief — the exemption method and the credit method. In the
exemption method, the income or capital which is taxable in the
state of source or situs is exempted in the state of residence,
although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's
remaining income or capital. On the other hand, in the credit
method, although the income or capital which is taxed in the
state of source is still taxable in the state of residence, the tax
paid in the former is credited against the tax levied in the latter.
The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing
the tax rate is that the Philippines will give up a part of the tax in
the expectation that the tax given up for this particular
investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase
"royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because
the royalties are paid for the right to use property or rights, i.e.
trademarks, patents and technology, located within the
Philippines. 17 The United States is the state of residence since
the taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and the state
of source are both permitted to tax the royalties, with a restraint
on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief
from double taxation is the allowance of a tax credit to citizens
or residents of the United States (in an appropriate amount
based upon the taxes paid or accrued to the Philippines) against
the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable
year. 19 Under Article 13 thereof, the Philippines may impose
one of three rates — 25 percent of the gross amount of the
royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments
and engaged in preferred areas of activities; or the lowest rate
of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third
state.
Given the purpose underlying tax treaties and the rationale for
the most favored nation clause, the concessional tax rate of 10
percent provided for in the RP-Germany Tax Treaty should apply
only if the taxes imposed upon royalties in the RP-US Tax Treaty
and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must
prove that the RP-US Tax Treaty grants similar tax reliefs to
residents of the United States in respect of the taxes imposable
upon royalties earned from sources within the Philippines as
those allowed to their German counterparts under the RP-
Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not
contain similar provisions on tax crediting. Article 24 of the RP-
Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount
of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross
amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following
manner:
1) In accordance with the provisions and subject to the
limitations of the law of the United States (as it may be
amended from time to time without changing the general
principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United
States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year,
shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying
such dividends with respect to the profits out of which such
dividends are paid. Such appropriate amount shall be based
upon the amount of tax paid or accrued to the Philippines, but
the credit shall not exceed the limitations (for the purpose of

limiting the credit to the United States tax on income from
sources within the Philippines or on income from sources
outside the United States) provided by United States law for the
taxable year. . . .
The reason for construing the phrase "paid under similar
circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax
Treaty as referring to taxes is anchored upon a logical reading of
the text in the light of the fundamental purpose of such treaty
which is to grant an incentive to the foreign investor by lowering
the tax and at the same time crediting against the domestic tax
abroad a figure higher than what was collected in the
Philippines.
In one case, the Supreme Court pointed out that laws are not
just mere compositions, but have ends to be achieved and that
the general purpose is a more important aid to the meaning of a
law than any rule which grammar may lay down. 20 It is the duty
of the courts to look to the object to be accomplished, the evils
to be remedied, or the purpose to be subserved, and should
give the law a reasonable or liberal construction which will best
effectuate its purpose. 21 The Vienna Convention on the Law of
Treaties states that a treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms
of the treaty in their context and in the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double
taxation is to encourage foreign investors to invest in the
Philippines — a crucial economic goal for developing
countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures
to minimize, if not completely eliminate, the tax burden laid
upon the income or capital of the investor. Thus, if the rates of
tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the
part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the
tax burden imposed upon the investor would remain unrelieved.
If the state of residence does not grant some form of tax relief
to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime,
should it impose a lower tax rate on the royalty earnings of the
investor, and it would be better to impose the regular rate
rather than lose much-needed revenues to another country.
27
At the same time, the intention behind the adoption of the
provision on "relief from double taxation" in the two tax treaties
in question should be considered in light of the purpose behind
the most favored nation clause.
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which
has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the
most favored nation. 26 The essence of the principle is to allow
the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence
of such taxpayer is also a party provided that the subject matter
of taxation, in this case royalty income, is the same as that in the
tax treaty under which the taxpayer is liable. Both Article 13 of
the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on royalties
for the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite the absence of
a matching credit (20% for royalties) would derogate from the
design behind the most grant equality of international
treatment since the tax burden laid upon the income of the
investor is not the same in the two countries. The similarity in
the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax
exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against
the person or entity claiming the exemption. 27 The burden of
proof is upon him who claims the exemption in his favor and he
must be able to justify his claim by the clearest grant of organic
or statute law. 28 Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties
under the RP-US Tax Treaty is paid under similar circumstances
as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is
GRANTED. The decision dated May 7, 1996 of the Court of Tax
Appeals and the decision dated November 7, 1996 of the Court
of Appeals are hereby SET ASIDE.
SO ORDERED.
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila
Branch (petitioner) under Rule 45 of the 1997 Rules of Civil
Procedure assailing the Court of Tax Appeals En Banc (CTA En
Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July
2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal
Revenue Code (NIRC) of 1997, petitioner withheld and remitted
to respondent on 21 October 2003 the amount of PHP
67,688,553.51, which represented the fifteen percent (15%)
branch profit remittance tax (BPRT) on its regular banking unit
(RBU) net income remitted to Deutsche Bank Germany (DB
Germany) for 2002 and prior taxable years.5
Believing that it made an overpayment of the BPRT, petitioner
filed with the BIR Large Taxpayers Assessment and Investigation
Division on 4 October 2005 an administrative claim for refund or
issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-
Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim,
petitioner filed a Petition for Review7 with the CTA on 18
October 2005. Petitioner reiterated its claim for the refund or
issuance of its tax credit certificate for the amount of PHP
22,562,851.17 representing the alleged excess BPRT paid on
branch profits remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that
petitioner indeed paid the total amount of PHP 67,688,553.51
representing the 15% BPRT on its RBU profits amounting to PHP
451,257,023.29 for 2002 and prior taxable years. Records also
disclose that for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or PHP
330,175,961.88 at the exchange rate of PHP 63.804:1 EURO),
which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the
ground that the application for a tax treaty relief was not filed
with ITAD prior to the payment by the former of its BPRT and
actual remittance of its branch profits to DB Germany, or prior
to its availment of the preferential rate of ten percent (10%)
under the RP-Germany Tax Treaty provision. The court a quo
held that petitioner violated the fifteen (15) day period
mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines)
Operations Corporation (formerly Southern Energy Asia-Pacific
Operations [Phils.], Inc.) v. Commissioner of Internal
Revenue9 (Mirant) where the CTA En Banc ruled that before the
benefits of the tax treaty may be extended to a foreign
corporation wishing to avail itself thereof, the latter should first
invoke the provisions of the tax treaty and prove that they
indeed apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision
dated 29 August 2008 and Resolution dated 14 January 2009.
Citing Mirant, the CTA En Banc held that a ruling from the ITAD
of the BIR must be secured prior to the availment of a
preferential tax rate under a tax treaty. Applying the principle of
stare decisis et non quieta movere, the CTA En Banc took into
consideration that this Court had denied the Petition in G.R. No.
168531 filed by Mirant for failure to sufficiently show any
28
reversible error in the assailed judgment.11 The CTA En Banc
ruled that once a case has been decided in one way, any other
case involving exactly the same point at issue should be decided
in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief
application under RMO No. 1-2000 cannot be relaxed for
petitioner, unlike in CBK Power Company Limited v.
Commissioner of Internal Revenue.12 In that case, the rule was
relaxed and the claim for refund of excess final withholding
taxes was partially granted. While it issued a ruling to CBK Power
Company Limited after the payment of withholding taxes, the
ITAD did not issue any ruling to petitioner even if it filed a
request for confirmation on 4 October 2005 that the remittance
of branch profits to DB Germany is subject to a preferential tax
rate of 10% pursuant to Article 10 of the RP-Germany Tax
Treaty.
ISSUE
This Court is now confronted with the issue of whether the
failure to strictly comply with RMO No. 1-2000 will deprive
persons or corporations of the benefit of a tax treaty.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its
head office shall be subject to a tax of 15% based on the total
profits applied for or earmarked for remittance without any
deduction of the tax component. However, petitioner invokes
paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of
Germany has a branch in the Republic of the Philippines, this
branch may be subjected to the branch profits remittance tax
withheld at source in accordance with Philippine law but shall
not exceed 10% of the gross amount of the profits remitted by
that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend
to a branch in the Philippines, remitting to its head office in
Germany, the benefit of a preferential rate equivalent to 10%
BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which
requires that any availment of the tax treaty relief must be
preceded by an application with ITAD at least 15 days before the
transaction. The Order was issued to streamline the processing
of the application of tax treaty relief in order to improve
efficiency and service to the taxpayers. Further, it also aims to
prevent the consequences of an erroneous interpretation
and/or application of the treaty provisions (i.e., filing a claim for
a tax refund/credit for the overpayment of taxes or for
deficiency tax liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO
No. 1-2000.
Petitioner argues that, considering that it has met all the
conditions under Article 10 of the RP-Germany Tax Treaty, the
CTA erred in denying its claim solely on the basis of RMO No. 1-
2000. The filing of a tax treaty relief application is not a
condition precedent to the availment of a preferential tax rate.
Further, petitioner posits that, contrary to the ruling of the CTA,
Mirant is not a binding judicial precedent to deny a claim for
refund solely on the basis of noncompliance with RMO No. 1-
2000.
Respondent counters that the requirement of prior application
under RMO No. 1-2000 is mandatory in character. RMO No. 1-
2000 was issued pursuant to the unquestioned authority of the
Secretary of Finance to promulgate rules and regulations for the
effective implementation of the NIRC. Thus, courts cannot
ignore administrative issuances which partakes the nature of a
statute and have in their favor a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is
mandatory, and noncompliance with this prerequisite is fatal to
the taxpayer’s availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a
binding precedent. The Court has clarified this matter in
Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue14 as follows:

It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result, our ruling in that
case has already become final. When a minute resolution denies
or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together
with its findings of fact and legal conclusions, are deemed
sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata.
However, if other parties or another subject matter (even with
the same parties and issues) is involved, the minute resolution is
not binding precedent. Thus, in CIR v. Baier-Nickel, the Court
noted that a previous case, CIR v. Baier-Nickel involving the
same parties and the same issues, was previously disposed of by
the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled
that the previous case "ha(d) no bearing" on the latter case
because the two cases involved different subject matters as they
were concerned with the taxable income of different taxable
years.
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly
applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the
justices, unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso
of Section 4(3) of Article VIII speaks of a decision. Indeed, as a
rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice.
(Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid
down in that Decision cannot bind this Court in cases of a similar
nature. There are differences in parties, taxes, taxable periods,
and treaties involved; more importantly, the disposition of that
case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
29
Our Constitution provides for adherence to the general
principles of international law as part of the law of the
land.15The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and
obligations under the treaty must be performed by them in
good faith.16 More importantly, treaties have the force and
effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments
will only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate."19
Simply put, tax treaties are entered into to minimize, if not
eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty
or double tax agreements.
"A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may
be necessary to ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional
requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when
the RP-Germany Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under said
agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-
2000 which would indicate a deprivation of entitlement to a tax
treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO
No. 1-2000, but the CTA’s outright denial of a tax treaty relief for
failure to strictly comply with the prescribed period is not in
harmony with the objectives of the contracting state to ensure
that the benefits granted under tax treaties are enjoyed by duly
entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required by
RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply
within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application
for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence
over the objective of RMO No. 1-2000.1âwphi1 Logically,
noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by
RMO No. 1-2000 involve an administrative procedure, these
may be remedied through other system management processes,
e.g., the imposition of a fine or penalty. But we cannot totally
deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any
erroneous interpretation and/or application of the treaty
provisions. The objective of the BIR is to forestall assessments
against corporations who erroneously availed themselves of the
benefits of the tax treaty but are not legally entitled thereto, as
well as to save such investors from the tedious process of claims
for a refund due to an inaccurate application of the tax treaty
provisions. However, as earlier discussed, noncompliance with
the 15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief
especially in claims for refund.
The underlying principle of prior application with the BIR
becomes moot in refund cases, such as the present case, where
the very basis of the claim is erroneous or there is excessive
payment arising from non-availment of a tax treaty relief at the

first instance. In this case, petitioner should not be faulted for
not complying with RMO No. 1-2000 prior to the transaction. It
could not have applied for a tax treaty relief within the period
prescribed, or 15 days prior to the payment of its BPRT,
precisely because it erroneously paid the BPRT not on the basis
of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as
prescribed by the NIRC. Hence, the prior application
requirement becomes illogical. Therefore, the fact that
petitioner invoked the provisions of the RP-Germany Tax Treaty
when it requested for a confirmation from the ITAD before filing
an administrative claim for a refund should be deemed
substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the
taxpayer a remedy for tax recovery when there has been an
erroneous payment of tax.1âwphi1 The outright denial of
petitioner’s claim for a refund, on the sole ground of failure to
apply for a tax treaty relief prior to the payment of the BPRT,
would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied – though
belatedly – for a tax treaty relief, in substantial compliance with
RMO No. 1-2000. A ruling by the BIR would have confirmed
whether petitioner was entitled to the lower rate of 10% BPRT
pursuant to the RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second
Division found as follows:
Based on the evidence presented, both documentary and
testimonial, petitioner was able to establish the following facts:
a. That petitioner is a branch office in the Philippines of
Deutsche Bank AG, a corporation organized and existing under
the laws of the Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance
Return of Final Income Taxes Withheld under BIR Form No.
1601-F and remitted the amount of ₱67,688,553.51 as branch
profits remittance tax with the BIR; and
30
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas
having issued a clearance, petitioner remitted to Frankfurt Head
Office the amount of EUR5,174,847.38 (or ₱330,175,961.88 at
63.804 Peso/Euro) representing its 2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner
represented the 15% BPRT on its RBU net income, due for
remittance to DB Germany amounting to PHP 451,257,023.29
for 2002 and prior taxable years.23
Likewise, both the administrative and the judicial actions were
filed within the two-year prescriptive period pursuant to Section
229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of
a preferential tax rate of 10% BPRT in accordance with the RP-
Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34
on its RBU net income amounting to PHP 451,257,023.29 for
2002 and prior taxable years, applying the 10% BPRT. Thus, it is
proper to grant petitioner a refund ofthe difference between
the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10%
BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is
GRANTED. Accordingly, the Court of Tax Appeals En Banc
Decision dated 29 May 2009 and Resolution dated 1 July 2009
are REVERSED and SET ASIDE. A new one is hereby entered
ordering respondent Commissioner of Internal Revenue to
refund or issue a tax credit certificate in favor of petitioner
Deutsche Bank AG Manila Branch the amount of TWENTY TWO
MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT
HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP
22,562,851.17), Philippine currency, representing the
erroneously paid BPRT for 2002 and prior taxable years.
SO ORDERED.
SECOND DIVISION
January 11, 2016
G.R. No. 169507
AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the
Philippines, through a general sales agent, is a resident foreign
corporation doing business in the Philippines. As such, it is
taxable under Section 28(A)(l), and not Section 28(A)(3) of the
1997 National Internal Revenue Code, subject to any applicable
tax treaty to which the Philippines is a signatory. Pursuant to
Article 8 of the Republic of the Philippines-Canada Tax Treaty,
Air Canada may only be imposed a maximum tax of 1 ½% of its
gross revenues earned from the sale of its tickets in the
Philippines.
This is a Petition for Review1 appealing the August 26, 2005
Decision2 of the Court of Tax Appeals En Banc, which in turn
affirmed the December 22, 2004 Decision3 and April 8, 2005
Resolution4 of the Court of Tax Appeals First Division denying Air
Canada’s claim for refund.
Air Canada is a "foreign corporation organized and existing
under the laws of Canada[.]"5 On April 24, 2000, it was granted
an authority to operate as an offline carrier by the Civil
Aeronautics Board, subject to certain conditions, which
authority would expire on April 24, 2005.6 "As an off-line carrier,
[Air Canada] does not have flights originating from or coming to
the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd.,
Corp. (Aerotel) as its general sales agent in the
Philippines.8 Aerotel "sells [Air Canada’s] passage documents in
the Philippines."9
For the period ranging from the third quarter of 2000 to the
second quarter of 2002, Air Canada, through Aerotel, filed
quarterly and annual income tax returns and paid the income
tax on Gross Philippine Billings in the total amount of
₱5,185,676.77,10 detailed as follows:
1âwphi1
 31
Applicable Quarter[/]Year Date Filed/Paid Amount of document: Provided, That tickets revalidated, exchanged and/or
Tax indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which
3rd Qtr 2000 November 29, 2000 P 395,165.00
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another
Annual ITR 2000 April 16, 2001 381,893.59
airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point
1st Qtr 2001 May 30, 2001 522,465.39
of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
2nd Qtr 2001 August 29, 2001 1,033,423.34
To prevent the running of the prescriptive period, Air Canada
3rd Qtr 2001 November 29, 2001 765,021.28 filed a Petition for Review before the Court of Tax Appeals on
November 29, 2002.15 The case was docketed as C.T.A. Case No.
Annual ITR 2001 April 15, 2002 328,193.93 6572.16
On December 22, 2004, the Court of Tax Appeals First Division
1st Qtr 2002 May 30, 2002 594,850.13
rendered its Decision denying the Petition for Review and,
hence, the claim for refund.17 It found that Air Canada was
2nd Qtr 2002 August 29, 2002 1,164,664.11 engaged in business in the Philippines through a local agent that
sells airline tickets on its behalf. As such, it should be taxed as a
TOTAL P 11
resident foreign corporation at the regular rate of
5,185,676.77 32%.18 Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a
On November 28, 2002, Air Canada filed a written claim for
"permanent establishment"19 in the Philippines under Article
refund of alleged erroneously paid income taxes amounting to
V(2)(i) of the Republic of the Philippines-Canada Tax Treaty20 by
₱5,185,676.77 before the Bureau of Internal
the appointment of the local sales agent, "in which [the]
Revenue,12 Revenue District Office No. 47-East Makati.13It found
petitioner uses its premises as an outlet where sales of [airline]
basis from the revised definition14 of Gross Philippine Billings
tickets are made[.]"21
under Section 28(A)(3)(a) of the 1997 National Internal Revenue
Code: Air Canada seasonably filed a Motion for Reconsideration, but
the Motion was denied in the Court of Tax Appeals First
SEC. 28. Rates of Income Tax on Foreign Corporations. -
Division’s Resolution dated April 8, 2005 for lack of merit.22 The
(A) Tax on Resident Foreign Corporations. - First Division held that while Air Canada was not liable for tax on
its Gross Philippine Billings under Section 28(A)(3), it was
.... nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the
(3) International Carrier. - An international carrier doing Philippines pursuant to Section 28(A)(1).23
business in the Philippines shall pay a tax of two and onehalf
percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined On May 9, 2005, Air Canada appealed to the Court of Tax
hereunder: Appeals En Banc.24 The appeal was docketed as CTA EB No. 86.25
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to In the Decision dated August 26, 2005, the Court of Tax Appeals
the amount of gross revenue derived from carriage of persons, En Banc affirmed the findings of the First Division.26 The En Banc
excess baggage, cargo and mail originating from the Philippines in ruled that Air Canada is subject to tax as a resident foreign
a continuous and uninterrupted flight, irrespective of the place of corporation doing business in the Philippines since it sold airline
sale or issue and the place of payment of the ticket or passage
tickets in the Philippines.27 The Court of Tax Appeals En Banc
disposed thus:
WHEREFORE, premises considered, the instant petition is
hereby DENIED DUE COURSE, and accordingly, DISMISSED for
lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international
carrier selling passage documents through a general sales agent
in the Philippines, is a resident foreign corporation within the
meaning of Section 28(A)(1) of the 1997 National Internal
Revenue Code;
Second, whether petitioner Air Canada is subject to the 2½% tax
on Gross Philippine Billings pursuant to Section 28(A)(3). If not,
whether an offline international carrier selling passage
documents through a general sales agent can be subject to the
regular corporate income tax of 32%30 on taxable income
pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax
Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is
enforceable;
b. Whether the appointment of a local general sales agent in the
Philippines falls under the definition of "permanent
establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of
₱5,185,676.77 pertaining allegedly to erroneously paid tax on
Gross Philippine Billings from the third quarter of 2000 to the
second quarter of 2002.
Petitioner claims that the general provision imposing the regular
corporate income tax on resident foreign corporations provided
under Section 28(A)(1) of the 1997 National Internal Revenue
Code does not apply to "international carriers,"31 which are
especially classified and taxed under Section 28(A)(3).32 It adds
that the fact that it is no longer subject to Gross Philippine
Billings tax as ruled in the assailed Court of Tax Appeals Decision
"does not render it ipso facto subject to 32% income tax on

taxable income as a resident foreign corporation."33 Petitioner
argues that to impose the 32% regular corporate income tax on
its income would violate the Philippine government’s covenant
under Article VIII of the Republic of the Philippines-Canada Tax
Treaty not to impose a tax higher than 1½% of the carrier’s gross
revenue derived from sources within the Philippines.34 It would
also allegedly result in "inequitable tax treatment of on-line and
off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale
of airline tickets in the Philippines was income from services and
not income from sales of personal property.36 Petitioner cites
the deliberations of the Bicameral Conference Committee on
House Bill No. 9077 (which eventually became the 1997 National
Internal Revenue Code), particularly Senator Juan Ponce Enrile’s
statement,37 to reveal the "legislative intent to treat the revenue
derived from air carriage as income from services, and that the
carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of
taxation in taxation of services, petitioner claims that its income
derived "from services rendered outside the Philippines [was]
not subject to Philippine income taxation."39
Petitioner further contends that by the appointment of Aerotel
as its general sales agent, petitioner cannot be considered to
have a "permanent establishment"40 in the Philippines pursuant
to Article V(6) of the Republic of the Philippines-Canada Tax
Treaty.41 It points out that Aerotel is an "independent general
sales agent that acts as such for . . . other international airline
companies in the ordinary course of its business."42 Aerotel sells
passage tickets on behalf of petitioner and receives a
commission for its services.43 Petitioner states that even the
Bureau of Internal Revenue—through VAT Ruling No. 003-04
dated February 14, 2004—has conceded that an offline
international air carrier, having no flight operations to and from
the Philippines, is not deemed engaged in business in the
Philippines by merely appointing a general sales agent.44 Finally,
petitioner maintains that its "claim for refund of erroneously
paid Gross Philippine Billings cannot be denied on the ground
that [it] is subject to income tax under Section 28 (A) (1)"45 since
it has not been assessed at all by the Bureau of Internal Revenue
for any income tax liability.46
On the other hand, respondent maintains that petitioner is
subject to the 32% corporate income tax as a resident foreign
corporation doing business in the Philippines. Petitioner’s total
32
payment of ₱5,185,676.77 allegedly shows that petitioner was
earning a sizable income from the sale of its plane tickets within
the Philippines during the relevant period.47 Respondent further
points out that this court in Commissioner of Internal Revenue v.
American Airlines, Inc.,48 which in turn cited the cases involving
the British Overseas Airways Corporation and Air India, had
already settled that "foreign airline companies which sold tickets
in the Philippines through their local agents . . . [are] considered
resident foreign corporations engaged in trade or business in
the country."49 It also cites Revenue Regulations No. 6-78 dated
April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines
by offline international airlines either by themselves or through
their agents."50
Respondent further contends that petitioner is not entitled to its
claim for refund because the amount of ₱5,185,676.77 it paid as
tax from the third quarter of 2000 to the second quarter of 2001
was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its
failure to pay the right amount of tax since the National Internal
Revenue Code became operative on January 1, 1998 and by
2000, petitioner should have already been aware of the
implications of Section 28(A)(3) and the decided cases of this
court’s ruling on the taxability of offline international carriers
selling passage tickets in the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals’ ruling that
petitioner, as an offline international carrier with no landing
rights in the Philippines, is not liable to tax on Gross Philippine
Billings under Section 28(A)(3) of the 1997 National Internal
Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business
in the Philippines shall pay a tax of two and one-half percent (2
1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to
the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point
of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
Under the foregoing provision, the tax attaches only when the
carriage of persons, excess baggage, cargo, and mail originated
from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is
clearly not liable for the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for
income tax purposes. Petitioner falls within the definition of
resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code, thus, it may be subject to
32%53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the preceding
taxable year from all sources within the Philippines: Provided,
That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate
shall be thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent
(32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not
substantially changed throughout the amendments of the
National Internal Revenue Code. All versions refer to "a foreign

corporation engaged in trade or business within the
Philippines."
Commonwealth Act No. 466, known as the National Internal
Revenue Code and approved on June 15, 1939, defined
"resident foreign corporation" as applying to "a foreign
corporation engaged in trade or business within the Philippines
or having an office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as
amended by Republic Act No. 6110, approved on August 4,
1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized,
authorized, or existing under the laws of any foreign country,
except a foreign life insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received
in the preceding taxable year from all sources within the
Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977
amending certain sections of the 1939 National Internal
Revenue Code. Section 24(b)(2) on foreign resident corporations
was amended, but it still provides that "[a] corporation
organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding
taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue
v. British Overseas Airways Corporation58declared British
Overseas Airways Corporation, an international air carrier with
no landing rights in the Philippines, as a resident foreign
corporation engaged in business in the Philippines through its
local sales agent that sold and issued tickets for the airline
company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. Each case must be
judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
33
performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be
regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one
of a temporary character.["]
BOAC, during the periods covered by the subject-assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of
trips — each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and
(4) consequently allocating to the various airline companies on
the basis of their participation in the services rendered through
the mode of interline settlement as prescribed by Article VI of
the Resolution No. 850 of the IATA Agreement." Those activities
were in exercise of the functions which are normally incident to,
and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular
sale of tickets, its main activity, is the very lifeblood of the airline
business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the
period covered by the assessments. Accordingly, it is a resident
foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within
the Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991
also provides guidance with its definition of "doing business"
with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison"
offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in
the country for a period or periods totalling one hundred eighty
(180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and
object of the business organization: Provided, however, That the
phrase "doing business" shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise
of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its
own account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a
representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account" is
not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing
business" includes "appointing representatives or
distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one
hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by
the [Civil Aeronautics] Board, but who maintains office or who
has designated or appointed agents or employees in the
Philippines, who sells or offers for sale any air transportation in
behalf of said foreign air carrier and/or others, or negotiate for,
or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such
transportation."63
"Anyone desiring to engage in the activities of an off-line carrier
[must] apply to the [Civil Aeronautics] Board for such
authority."64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on
the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade
or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are
incidental and beneficial to the purpose of petitioner’s business.
The activities of Aerotel bring direct receipts or profits to
petitioner.66 There is nothing on record to show that Aerotel
solicited orders alone and for its own account and without

interference from, let alone direction of, petitioner. On the
contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of
[the latter,]"67 and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner
is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an
authority to operate as an offline carrier in the Philippines for a
period of five years, or from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is
taxable on its income derived from sources within the
Philippines. Petitioner’s income from sale of airline tickets,
through Aerotel, is income realized from the pursuit of its
business activities in the Philippines.
III
However, the application of the regular 32% tax rate under
Section 28(A)(1) of the 1997 National Internal Revenue Code
must consider the existence of an effective tax treaty between
the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of
Internal Revenue,70 this court held that Section 28(A)(3)(a) does
not categorically exempt all international air carriers from the
coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is
applicable to a taxpayer, then the general rule under Section
28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does
not apply, an international air carrier would be liable for the tax
under Section 28(A)(1).71
This court in South African Airways declared that the correct
interpretation of these provisions is that: "international air
carrier[s] maintain[ing] flights to and from the Philippines . . .
shall be taxed at the rate of 2½% of its Gross Philippine Billings[;]
while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other
activities in the country [like sale of airline tickets] will be taxed
at the rate of 32% of such [taxable] income."72
In this case, there is a tax treaty that must be taken into
consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign
states "for purposes of eliminating double taxation on income
and capital, preventing fiscal evasion, promoting mutual trade
34
and investment, and according fair and equitable tax treatment
to foreign residents or nationals."73 Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of
a tax treaty:
The purpose of these international agreements is to reconcile
the national fiscal legislations of the contracting parties in order
to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are
drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the
movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in
creating such a climate.75 (Emphasis in the original, citations
omitted)
Observance of any treaty obligation binding upon the
government of the Philippines is anchored on the constitutional
provision that the Philippines "adopts the generally accepted
principles of international law as part of the law of the
land[.]"76 Pacta sunt servanda is a fundamental international law
principle that requires agreeing parties to comply with their
treaty obligations in good faith.77
Hence, the application of the provisions of the National Internal
Revenue Code must be subject to the provisions of tax treaties
entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue,78 this court stressed the binding effects of tax treaties.
It dealt with the issue of "whether the failure to strictly comply
with [Revenue Memorandum Order] RMO No. 1-200079 will
deprive persons or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the administrative
issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles
of international law as part of the law of the land. The time-
honored international principle of pacta sunt servanda demands
the performance in good faith of treaty obligations on the part of
the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must
be performed by them in good faith. More importantly, treaties
have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments
will only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate." Simply put,
tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why
they are also known as double tax treaty or double tax
agreements.
"A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may be
necessary to ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional
requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when
the RPGermany Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under said
agreement.
....
Bearing in mind the rationale of tax treaties, the period of
application for the availment of tax treaty relief as required by
RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the

availment of tax relief for the failure of a taxpayer to apply
within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application
for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence
over the objective of RMO No. 1-2000. Logically, noncompliance
with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied
through other system management processes, e.g., the
imposition of a fine or penalty. But we cannot totally deprive
those who are entitled to the benefit of a treaty for failure to
strictly comply with an administrative issuance requiring prior
application for tax treaty relief.81 (Emphasis supplied, citations
omitted)
On March 11, 1976, the representatives82 for the government of
the Republic of the Philippines and for the government of
Canada signed the Convention between the Philippines and
Canada for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty
defines "permanent establishment" as a "fixed place of business
in which the business of the enterprise is wholly or partly carried
on."84
Even though there is no fixed place of business, an enterprise of
a Contracting State is deemed to have a permanent
establishment in the other Contracting State if under certain
conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-
Canada Tax Treaty states that "[a] person acting in a Contracting
State on behalf of an enterprise of the other Contracting State
(other than an agent of independent status to whom paragraph
6 applies) shall be deemed to be a permanent establishment in
the first-mentioned State if . . . he has and habitually exercises in
that State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of
goods or merchandise for that enterprise[.]" The provision
35
seems to refer to one who would be considered an agent under
Article 186885 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of
a Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State merely because it
carries on business in that other State through a broker, general
commission agent or any other agent of an independent status,
where such persons are acting in the ordinary course of their
business."
Considering Article XV86 of the same Treaty, which covers
dependent personal services, the term "dependent" would
imply a relationship between the principal and the agent that is
akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the
principal where the latter exercises comprehensive control and
detailed instructions over the means and results of the activities
of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as
The Civil Aeronautics Act of the Philippines, defines a general
sales agent as "a person, not a bonafide employee of an air
carrier, who pursuant to an authority from an airline, by itself or
through an agent, sells or offers for sale any air transportation,
or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides,
furnishes, contracts or arranges for, such air
transportation."88 General sales agents and their property,
property rights, equipment, facilities, and franchise are subject
to the regulation and control of the Civil Aeronautics Board.89 A
permit or authorization issued by the Civil Aeronautics Board is
required before a general sales agent may engage in such an
activity.90
Through the appointment of Aerotel as its local sales agent,
petitioner is deemed to have created a "permanent
establishment" in the Philippines as defined under the Republic
of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales
agent to perform the sale of transportation on petitioner and
handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-
approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air
Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and
entirely for the benefit of AC in every matter relating to this
Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the
reissuance, in the Territory of the GSA [Philippines], of traffic
documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of
timetables, fare sheets, tariffs and publicity material provided by
AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media
and reference of any press or public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual written sales plan
on or before a date to be determined by AC and in a form
acceptable to AC;
....
q) Submission of proposals for AC’s approval of passenger sales
agent incentive plans at a reasonable time in advance of
proposed implementation.
r) Provision of assistance on request, in its relations with
Governmental and other authorities, offices and agencies in the
Territory [Philippines].
....

u) Follow AC guidelines for the handling of baggage claims and
customer complaints and, unless otherwise stated in the
guidelines, refer all such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency
Agreement, Aerotel will "provide at its own expense and
acceptable to [petitioner Air Canada], adequate and suitable
premises, qualified staff, equipment, documentation, facilities
and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and
incidental to the Agency."92 "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions . . . or those
of any subcontractor."93 In remuneration for its services, Aerotel
would be paid by petitioner a commission on sales of
transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized
expenses supported by original supplier invoices."95
Aerotel is required to keep "separate books and records of
account, including supporting documents, regarding all
transactions at, through or in any way connected with
[petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent
all carriers in an unbiased way."97 Aerotel cannot "accept
additional appointments as General Sales Agent of any other
carrier without the prior written consent of [petitioner Air
Canada]."98
The Passenger General Sales Agency Agreement "may be
terminated by either party without cause upon [no] less than 60
days’ prior notice in writing[.]"99 In case of breach of any
provisions of the Agreement, petitioner may require Aerotel "to
cure the breach in 30 days failing which [petitioner Air Canada]
may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent
status:
First, Aerotel must give petitioner written notice "within 7 days
of the date [it] acquires or takes control of another entity or
merges with or is acquired or controlled by another person or
entity[.]"101 Except with the written consent of petitioner,
Aerotel must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated
with the International Air Transport Association or a non-
affiliated passenger sales agent nor shall an affiliated passenger
36
sales agent acquire a substantial interest in Aerotel as to
influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report
on any interests held by [it], its owners, directors, officers,
employees and their immediate families in companies and other
entities in the aviation industry or . . . industries related to
it[.]"103 Petitioner may require that any interest be divested
within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into
any contract on behalf of petitioner without the express written
consent of the latter;105 it must act according to the standards
required by petitioner;106 "follow the terms and provisions of
the [petitioner Air Canada] GSA Manual [and all] written
instructions of [petitioner Air Canada;]"107 and "[i]n the absence
of an applicable provision in the Manual or instructions, [Aerotel
must] carry out its functions in accordance with [its own]
standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by
[petitioner Air Canada] for all transportation over [its]
services[.]"109 All use of petitioner’s name, logo, and marks must
be with the written consent of petitioner and according to
petitioner’s corporate standards and guidelines set out in the
Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or
in connection with the transportation sold by Aerotel are for the
account of petitioner, except in the case of negligence of
Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms
of the Passenger General Sales Agency Agreement executed
between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel, and liability to
such third party is enforceable against petitioner. While Aerotel
maintains a certain independence and its activities may not be
devoted wholly to petitioner, nonetheless, when representing
petitioner pursuant to the Agreement, it must carry out its
functions solely for the benefit of petitioner and according to
the latter’s Manual and written instructions. Aerotel is required
to submit its annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation
business of petitioner. It is a conduit or outlet through which
petitioner’s airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the
Philippines-Canada Tax Treaty, the "business profits" of an
enterprise of a Contracting State is "taxable only in that State[,]
unless the enterprise carries on business in the other
Contracting State through a permanent
establishment[.]"113 Thus, income attributable to Aerotel or
from business activities effected by petitioner through Aerotel
may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping
and Air Transport) of the same Treaty, the tax imposed on
income derived from the operation of ships or aircraft in
international traffic should not exceed 1½% of gross revenues
derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue
Code on its taxable income116 from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of 1½% of gross
revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to petitioner as a
"foreign corporation organized and existing under the laws of
Canada[.]"117
Tax treaties form part of the law of the land,118 and
jurisprudence has applied the statutory construction principle
that specific laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified
on December 21, 1977 and became valid and effective on that
date. On the other hand, the applicable provisions120 relating to
the taxability of resident foreign corporations and the rate of
such tax found in the National Internal Revenue Code became
effective on January 1, 1998.121 Ordinarily, the later provision
governs over the earlier one.122 In this case, however, the
provisions of the Republic of the Philippines-Canada Tax Treaty
are more specific than the provisions found in the National
Internal Revenue Code.
These rules of interpretation apply even though one of the
sources is a treaty and not simply a statute.

Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid
and effective unless concurred in by at least two-thirds of all the
Members of the Senate.
This provision states the second of two ways through which
international obligations become binding. Article II, Section 2 of
the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with
international obligations that become binding through
ratification.
"Valid and effective" means that treaty provisions that define
rights and duties as well as definite prestations have effects
equivalent to a statute. Thus, these specific treaty provisions
may amend statutory provisions. Statutory provisions may also
amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are
not international obligations erga omnes. We are also not
required to rule in this case on the effect of international
customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from
sources within a Contracting State derived by an enterprise of
the other Contracting State from the operation of ships or
aircraft in international traffic may be taxed in the first-
mentioned State but the tax so charged shall not exceed the
lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived by an enterprise
of a third State."
The Agreement between the government of the Republic of the
Philippines and the government of Canada on Air Transport,
entered into on January 14, 1997, reiterates the effectivity of
Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the
provisions of Article VIII of the Convention between the
Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on
Income, signed at Manila on March 31, 1976 and entered into
37
force on December 21, 1977, and any amendments thereto, in
respect of the operation of aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage
of passenger is income derived from international operation of
aircraft. The sale of tickets is closely related to the international
operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have
agreed to have our right to tax limited to a certain
extent[.]"124 Thus, we are bound to extend to a Canadian air
carrier doing business in the Philippines through a local sales
agent the benefit of a lower tax equivalent to 1½% on business
profits derived from sale of international air transportation.
V taxes is more properly liable for taxes other than that paid.
Finally, we reject petitioner’s contention that the Court of Tax
Appeals erred in denying its claim for refund of erroneously paid
Gross Philippine Billings tax on the ground that it is subject to
income tax under Section 28(A)(1) of the National Internal
Revenue Code because (a) it has not been assessed at all by the
Bureau of Internal Revenue for any income tax liability;125 and
(b) internal revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et
al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of
Internal Revenue,129 we have ruled that "[i]n an action for the
refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should
have been paid in lieu of the taxes paid."130 The determination
of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a
refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no
jurisdiction to subject it to 6% capital gains tax or other taxes at
the first instance. The Court of Tax Appeals has no power to
make an assessment.
As earlier established, the Court of Tax Appeals has no
assessment powers. In stating that petitioner’s transactions are
subject to capital gains tax, however, the Court of Tax Appeals
was not making an assessment. It was merely determining the
proper category of tax that petitioner should have paid, in view
of its claim that it erroneously imposed upon itself and paid the
5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner
should have paid is an incidental matter necessary for the
resolution of the principal issue, which is whether petitioner was
entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with
the issue of the proper taxes that are due from petitioner. A
claim for tax refund carries the assumption that the tax returns
filed were correct. If the tax return filed was not proper, the
correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must
determine if a taxpayer claiming refund of erroneously paid
In South African Airways v. Commissioner of Internal
Revenue, South African Airways claimed for refund of its
erroneously paid 2½% taxes on its gross Philippine billings. This
court did not immediately grant South African’s claim for refund.
This is because although this court found that South African
Airways was not subject to the 2½% tax on its gross Philippine
billings, this court also found that it was subject to 32% tax on its
taxable income.
In this case, petitioner’s claim that it erroneously paid the 5%
final tax is an admission that the quarterly tax return it filed in
2000 was improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of Tax Appeals
has the duty to determine if petitioner was indeed not liable for
the 5% final tax and, instead, liable for taxes other than the 5%
final tax. As in South African Airways, petitioner’s request for
refund can neither be granted nor denied outright without such
determination.
If the taxpayer is found liable for taxes other than the
erroneously paid 5% final tax, the amount of the taxpayer’s
liability should be computed and deducted from the refundable
amount.
Any liability in excess of the refundable amount, however, may
not be collected in a case involving solely the issue of the
taxpayer’s entitlement to refund. The question of tax deficiency
is distinct and unrelated to the question of petitioner’s
entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court

cannot be expected to perform the BIR’s duties whenever it fails
to do so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the
rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s
claim for refund of allegedly erroneously paid tax on its Gross
Philippine Billings, on the ground that it was liable instead for
the regular 32% tax on its taxable income received from sources
within the Philippines. Its determination of petitioner’s liability
for the 32% regular income tax was made merely for the
purpose of ascertaining petitioner’s entitlement to a tax refund
and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an
issue. Besides, the cases cited are based on different
circumstances. In both cited cases,133 the taxpayer claimed that
his (its) tax liability was off-set by his (its) claim against the
government.
Specifically, in Republic v. Mambulao Lumber Co., et al.,
Mambulao Lumber contended that the amounts it paid to the
government as reforestation charges from 1947 to 1956, not
having been used in the reforestation of the area covered by its
license, may be set off or applied to the payment of forest
charges still due and owing from it.134Rejecting Mambulao’s
claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors
of each other. Consequently, the law on compensation is
inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when
two persons in their own right are creditors and debtors of each
other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they
are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao
Lumber Company. So, it is crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation
refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue
taxes, such as the forest charges in question, can not be the
subject of set-off or compensation.
38
A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-
off, which are construed uniformly, in the light of public policy,
to exclude the remedy in an action or any indebtedness of the
state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or
transaction sued on. * * *. (80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-
settled that no set-off is admissible against demands for taxes
levied for general or local governmental purposes. The reason
on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of
a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of
individual taxpayers is not required. * * * If the taxpayer can
properly refuse to pay his tax when called upon by the Collector,
because he has a claim against the governmental body which is
not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer’s claim
is disputed, the collection of the tax must await and abide the
result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur.
766–767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not
all requisites of legal compensation provided under Article 1279
were present.136 In that case, a portion of Francia’s property in
Pasay was expropriated by the national government,137 which
did not immediately pay Francia. In the meantime, he failed to
pay the real property tax due on his remaining property to the
local government of Pasay, which later on would auction the
property on account of such delinquency.138 He then moved to
set aside the auction sale and argued, among others, that his
real property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the
national government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal
compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279,
to wit:
(1) that each one of the obligors be bound principally and that
he be at the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We
have consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
....
There are other factors which compel us to rule against the
petitioner. The tax was due to the city government while the
expropriation was effected by the national
government. Moreover, the amount of ₱4,116.00 paid by the
national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in
his testimony that he knew about the ₱4,116.00 deposited with
the bank but he did not withdraw it. It would have been an easy
matter to withdraw ₱2,400.00 from the deposit so that he could
pay the tax obligation thus aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases
of Caltex Philippines, Inc. v. Commission on Audit141 and Philex
Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he
may have against the government. Taxes cannot be the subject
of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction
between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its

sovereign capacity."144 Rejecting Philex Mining’s assertion that
the imposition of surcharge and interest was unjustified because
it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still had pending claims for
VAT input credit/refund with the Bureau of Internal Revenue,
this court explained:
To be sure, we cannot allow Philex to refuse the payment of its
tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is
that it is compulsory rather than a matter of bargain. Hence, a
tax does not depend upon the consent of the taxpayer. If any tax
payer can defer the payment of taxes by raising the defense that
it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer
cannot refuse to pay his taxes when they fall due simply because
he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against
the government. Moreover, Philex’s theory that would
automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving
the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.145 (Citations
omitted)
In sum, the rulings in those cases were to the effect that the
taxpayer cannot simply refuse to pay tax on the ground that the
tax liabilities were off-set against any alleged claim the taxpayer
may have against the government. Such would merely be in
keeping with the basic policy on prompt collection of taxes as
the lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on
account of the Court of Tax Appeals’ finding of its liability for
another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.
Squarely applicable is South African Airways where this court
rejected similar arguments on the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals
erred in denying petitioner’s supplemental motion for
39
reconsideration alleging bringing to said court’s attention the
existence of the deficiency income and business tax assessment
against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right
of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at
the same time be liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the assumption that the tax
return is valid, that is, the facts stated therein are true and
correct. The deficiency assessment, although not yet final,
created a doubt as to and constitutes a challenge against the
truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis
for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of
1977, which was the applicable law when the claim of Citytrust
was filed, provides that "(w)hen an assessment is made in case
of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or
contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits
unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements
or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the
proper assessment and the tax due would inevitably result in
multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced
to institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved. This
would necessarily require and entail additional efforts and
expenses on the part of the Government, impose a burden on
and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or
expenses, it is both logically necessary and legally appropriate
that the issue of the deficiency tax assessment against Citytrust
be resolved jointly with its claim for tax refund, to determine
once and for all in a single proceeding the true and correct
amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore
conceded, it would be only just and fair that the taxpayer and
the Government alike be given equal opportunities to avail of
remedies under the law to defeat each other’s claim and to
determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would
[be] necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res
judicata on both parties as to all the matters subject thereof or
necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter
XI of the 1997 NIRC. The above pronouncements are, therefore,
still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax
return that it filed was correct. Given, however, the finding of
the CTA that petitioner, although not liable under Sec.
28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the
correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund.146 (Emphasis
supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner
of Internal Revenue, 147 this court upheld the denial of the claim
for refund based on the Court of Tax Appeals' finding that the
taxpayer had, through erroneous deductions on its gross
income, underpaid its Gross Philippine Billing tax on cargo
revenues for 1999, and the amount of underpayment was even
greater than the refund sought for erroneously paid Gross
Philippine Billings tax on passenger revenues for the same
taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid
by petitioner was computed at the rate of 1 ½% of its gross
revenues amounting to P345,711,806.08149 from the third
quarter of 2000 to the second quarter of 2002. It is quite
 40

apparent that the tax imposable under Section 28(A)(l) of the

1997 National Internal Revenue Code [32% of t.axable income,
that is, gross income less deductions] will exceed the maximum
ceiling of 1 ½% of gross revenues as decreed in Article VIII of the
Republic of the Philippines-Canada Tax Treaty. Hence, no refund
is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August

26, 2005 and Resolution dated April 8, 2005 of the Court of Tax
Appeals En Banc are AFFIRMED.

SO ORDERED.