G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents. ROMERO, J.: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88 47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88 43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13 90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3 ========= ========= ========= ========= In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5 In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52. Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8 Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides: In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended. Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12 WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED. Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996.
13

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14 Period Covered Tax Credit Date By Claims For Certificate of VAT refund/credit Number Issue Amount 1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95 In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, offset its excise tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place. We see no merit in this contention. In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. 17 There 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. 18 We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot be subject to set-off or compensation, thus: 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. The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, 20 which reiterated that: . . . 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. Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, 21 is no longer without any support in statutory law. It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23 We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. 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. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer 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. 27 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. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to grant its tax claim for VAT input credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. 34 In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: 36 The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of. Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken. More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: xxx xxx xxx (c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law. Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. 39 In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong. In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED.

THIRD DIVISION COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versusMANILA MINING CORPORATION, Respondent. G.R. No. 153204 Promulgated: August 31, 2005 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x DECISION CARPIO MORALES, J.: Being assailed via petition for review on certiorari is the April 12, 2002 Decision[1] of the Court of Appeals reversing that of the Court of Tax Appeals (CTA)[2] which granted the claim of respondent, Manila Mining Corporation, in consolidated CTA Case Nos. 4968 and 4991, for refund or issuance of tax credit certificates in the amounts of P5,683,035.04 and P8,173,789.60 representing its input value added tax (VAT) payments for taxable year 1991. Respondent, a mining corporation duly organized and existing under Philippines laws, is registered with the Bureau of Internal Revenue (BIR) as a VAT-registered enterprise under VAT Registration Certificate No. 32-6-00632.[3] In 1991, respondents sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas) amounted to P200,832,364.70.[4] On April 22, 1991, July 23, 1991, October 21, 1991 and January 20, 1992, it filed its VAT Returns for the 1st, 2nd, 3rd and 4th quarters of 1991, respectively, with the BIR through the VAT Unit at Revenue District Office No. 47 in East Makati.[5] Respondent, relying on a letter dated October 10, 1988 from then BIR Deputy Commissioner Victor Deoferio that: xxx under Sec. 2 of E.O. 581 as amended, gold sold to the Central Bank is considered an export sale which under Section 100(a)(1) of the NIRC, as amended by E.O. 273, is subject to zero-rated if such sale is made by a VAT-registered person[,][6] (Underscoring supplied) filed on April 7, 1992 with the Commissioner of Internal Revenue (CIR), through the BIR-VAT Division (BIR-VAT), an application for tax refund/credit of the input VAT it paid from July 1- December 31, 1999 in the amount of P8,173,789.60. Petitioner subsequently filed on March 5, 1991 another application for tax refund/credit of input VAT it paid the amount of P5,683,035.04 from January 1 June 30, 1991. As the CIR failed to act upon respondents application within sixty (60) days from the dates of filing,[7] it filed on March 22, 1993 a Petition for Review against the CIR before the CTA which docketed it as CTA Case No. 4968,[8] seeking the issuance of tax credit certificate or refund in the amount of P5,683,035.04 covering its input VAT payments for the 1st and 2nd quarters of 1991. And it filed on May 24, 1993 another Petition for Review, docketed as CTA Case No. 4991, seeking the issuance of tax credit certificates in the amount of P8,173,789.60 covering its input VAT payments for the 3rd and 4th quarters of 1991.[9] To the petition in CTA Case No. 4968 the CIR filed its Answer[10] admitting that respondent filed its VAT returns for the 1st and 2nd quarters of 1991 and an application for credit/refund of input VAT payment. It, however, specifically denied the veracity of the amounts stated in respondents VAT returns and application for credit/refund as the same continued to be under investigation. On May 26, 1993, respondent filed in CTA Case No. 4968 a Request for Admissions[11] of, among other facts, the following: xxx

5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex C ([Schedule of VAT INPUT on Domestic Purchase of Goods and Services for the quarter ending March 31, 1991] consisting of 24 pages) and Annex C-1 (Summary of Importation, 2 pages) were submitted to BIR-VAT, as required, for domestic purchases of goods and services (1st semester, 1991) for a total net claimable of P5,268,401.90; while its VAT input tax paid for importation was P679,853.00; (Emphasis and underscoring supplied) xxx By Reply[12] of August 11, 1993, the CIR specifically denied the veracity and accuracy of the amounts indicated in respondents Request for Admissions,[13] among other things. The CIRs Reply, however, was not verified, prompting respondent to file on August 30, 1993 a SUPPLEMENT (To Annotation of Admission) alleging that as the reply was not under oath, an implied admission of [its requests] ar[ose] as a consequence thereof.[14] On September 27, 1993, the CIR filed a Motion to Admit Reply, which Reply was verified and attached to the motion, alleging that its Reply of August 11, 1993 was submitted within the period for submission thereof, but, however, was incomplete [due to oversight] as to the signature of the administering officer in the verification.[15] By Resolution[16] of February 28, 1994, the CTA, finding that the matters subject of respondents Request for Admissions are relevant to the facts stated in the petition for review and there being an implied admission by the CIR under Section 2 of Rule 26 of the then Revised Rules of Court reading: Section 2. Implied Admission. Each of the matters of which an admission is requested shall be deemed admitted unless xxx the party to whom the request is directed serves upon the party requesting the admission a sworn statement either denying specifically the matters of which an admission is requested xxx. (Emphasis and underscoring supplied), granted respondents Request for Admissions and denied the CIRs Motion to Admit Reply. With respect to CTA Case No. 4991, respondent also filed a Request for Admissions dated May 27, 1993 of the following facts: xxx 2. Petitioners 3rd and 4th Quarters 1991 VAT Returns were submitted and filed with the BIR-VAT Divisions on October 21, 1991 and January 20, 1991, respectively and subsequently, on April 7, 1993 petitioner filed and submitted its application for tax credit on VAT paid for the 2nd semester of 1990; xxx 4. That attached to the transmittal letter [forwarded petitioners application for tax refund credit] of March 31, 1992 (Annex B) are the following documents: a. Copies of invoices and other supporting documents; b. VAT Registration Certificate; c. VAT returns for the third and fourth quarters of 1990; d. Beginning and ending inventories of raw materials, work-in process, finished goods and materials and supplies; e. Zero-rated sales to Central Bank of the Philippines; f. Certification that the Company will not file any tax credit with the Board of Investments and Bureau of Customs. which completely documented the petitioners claim for refund as required. 5. That the original copies of the Official Receipts and Sales Invoices, reflected in Annex C (consisting of 35 pages) and Annex C-1 (Summary of Importation, 2 pages) were submitted to BIR-VAT, as required, to show domestic purchases of goods and services (2nd semester, 1991) which established that the total net claimable of P7,953,816.38; while its VAT input tax paid for importation was P563,503.00; x x x[17]

To the Request for Admission the CIR filed a Manifestation and Motion alleging that as the issues had not yet been joined, respondents request is baseless and premature[18] under Section 1, Rule 26 of the Revised Rules of Court.[19] In the meantime, the CIR filed on August 16, 1993 its Answer,[20] it averring that sales of gold to the Central Bank may not be legally considered export sales for purposes of Section 100(a) in relation to Section 100(a)(1)[21] of the Tax Code; and that assuming that a refund is proper, respondent must demonstrate that it complied with the provisions of Section 204(3) in relation to Section 230 of the Tax Code.[22] The CIR subsequently filed on March 25, 1992 its Reply to respondents Request for Admission in CTA No. 4991, it admitting that respondent filed its VAT returns and VAT applications for tax credit for the 3rd and 4th quarters of 1991, but specifically denying the correctness and veracity of the amounts indicated in the schedules and summary of importations, VAT services and goods, the total input and output taxes, including the amount of refund claimed.[23] By Resolution[24] of February 22, 1994, the CTA, in CTA Case No. 4991, admitted the matters covered by respondents Request for Admission except those specifically denied by the CIR. In the same Resolution, the CTA consolidated Case Nos. 4968 and 4991, they involving the same parties and substantially the same factual and legal issues. Joint hearings of CTA Case Nos. 4968 and 4991 were thus conducted. Through its Chief Accountant Danilo Bautista, respondent claimed that in 1991, it sold a total of 20,288.676 ounces of gold to the Central Bank valued at P200,832,364.70, as certified by the Director of the Mint and Refinery Department of the Central Bank[25] and that in support of its application for refund filed with the BIR, it submitted copies of all invoices and official receipts covering its input VAT payments to the VAT Division of the BIR, the summary and schedules of which were certified by its external auditor, the Joaquin Cunanan & Co.[26] Senior Audit Manager of Joaquin Cunanan & Co., Irene Ballesteros, who was also presented by respondent, declared that she conducted a special audit work for respondent for the purpose of determining its actual input VAT payments for the second semester of 1991 and examined every original suppliers invoice, official receipts, and other documents supporting the payments;[27] and that there were no discrepancies or errors between the summaries and schedules of suppliers invoices prepared by respondent and the VAT invoices she examined.[28] Following the filing by respondent of its formal offer of evidence in both cases,[29] the CTA, by Resolution[30] of July 18, 1995, admitted the same. Upon the issue of whether respondents sales of gold to the BSP during the four quarters of 1991 are subject to 10% VAT under Section 100 of the Tax Code or should be considered zero-rated under paragraph a(2) of said Section 100, the CTA held that said sales are not subject to 10% output VAT, citing Atlas Consolidated Mining and Development Corporation v. Court of Appeals,[31] Manila Mining Corporation v. Commissioner of Internal Revenue,[32] and Benguet Corporation v. Commissioner of Internal Revenue.[33] Nonetheless, the CTA denied respondents claim for refund of input VAT for failure to prove that it paid the amounts claimed as such for the year 1991, no sales invoices, receipts or other documents as required under Section 2(c)(1) of Revenue Regulations No. 3-88 having been presented.[34] The CTA explained that a mere listing of VAT invoices and receipts, even if certified to have been previously examined by an independent certified public accountant, would not suffice to establish the truthfulness and accuracy of the contents of such invoices and receipts unless offered and actually verified by it (CTA) in accordance with CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which requires that photocopies of invoices, receipts and other documents covering said accounts of payments be pre-marked by the party concerned and submitted to the court.[35] Respondents motion for reconsideration[36] of the CTA decision having been denied by Resolution[37] of February 11, 1999, respondent brought the case to the Court of Appeals before which it contended that the CTA erred in denying the refund for insufficiency of evidence, it arguing that in light of the admissions by the CIR of the matters subject of it Requests for Admissions, it was relieved of the burden of submitting the purchase invoices and/or receipts to support its claims.[38]

By Decision[39] of April 12, 2002, the Court of Appeals reversed the decision of the CTA and granted respondents claim for refund or issuance of tax credit certificates in the amounts of P5,683,035.04 for CTA Case No. 4968 and P8,173,789.60 for CTA Case No. 4991. In granting the refund, the appellate court held that there was no need for respondent to present the photocopies of the purchase invoices or receipts evidencing the VAT paid in view of Rule 26, Section 2 of the Revised Rules of Court[40] and the Resolutions of the CTA holding that the matters requested in respondents Request for Admissions in CTA No. 4968 were deemed admitted by the CIR[41] in light of its failure to file a verified reply thereto. The appellate court further held that the CIRs reliance on the best evidence rule is misplaced since this rule does not apply to matters which have been judicially admitted.[42] Hence, the present petition for review,[43] the CIR arguing that respondents failure to submit documentary evidence to confirm the veracity of its claims is fatal; and that the CTA, being a court of record, is not expected to go out of its way and dig into the records of the BIR to supply the insufficient evidence presented by a party, and in fact it may set a definite rule that only evidence formally presented will be considered in deciding cases before it.[44] Respondent, in its Comment,[45] avers that it complied with the provisions of Section 2(c)(1) of Revenue Regulation No. 3-88 when it submitted the original receipts and invoices to the BIR, which fact of submission had been deemed admitted by petitioner, as confirmed by the CTA in its Resolutions in both cases granting respondents Requests for Admissions therein. To respondents Comment the Office of the Solicitor General (OSG), on behalf of petitioner, filed its Reply,[46] arguing that the documents required to be submitted to the BIR under Revenue Regulation No. 388 should likewise be presented to the CTA to prove entitlement to input tax credit.[47] In addition, it argues that, contrary to respondents position, a certification by an independent Certified Public Accountant (CPA) as provided under CTA Circulars 1-95 and 10-97 does not relieve respondent of the onus of adducing in evidence the invoices, receipts and other documents to show the input VAT paid on its purchase of goods and services.[48] The pivotal issue then is whether respondent adduced sufficient evidence to prove its claim for refund of its input VAT for taxable year 1991 in the amounts of P5,683,035.04 and P8,173,789.60. The petition is impressed with merit. In Commissioner of Internal Revenue v. Benguet Corporation,[49] this Court had the occasion to note that as early as 1988, the BIR issued several VAT rulings to the effect that sales of gold to the Central Bank by a VAT-registered person or entity are considered export sales. The transactions in question occurred during the period from 1988 and 1991. Under Sec. 99 of the National Internal Revenue Code (NIRC), as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero rated) depending on the classification of the transaction under Sec. 100 of the NIRC. xxx xxx In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to the Central Bank. On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared that [t]he sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by Executive Order No. 273. The BIR came out with at least six (6) other issuances, reiterating the zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February 1990. x x x[50] (Italics in the original; underscoring supplied)

As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the seller respondent herein, which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers.[51] For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by purchase invoices or official receipts.[52] This respondent failed to do. Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the requirements in claiming tax credits/refunds. Sec.2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as follows: Sec. 16. Refunds or tax credits of input tax. (a) Zero-rated sales of goods and services Only a VAT-registered person may be granted a tax credit or refund of value-added taxes paid corresponding to the zero-rated sales of goods and services, to the extent that such taxes have not been applied against output taxes, upon showing of proof of compliance with the conditions stated in Section 8 of these Regulations. For export sales, the application should be filed with the Bureau of Internal Revenue within two years from the date of exportation. For other zero-rated sales, the application should be filed within two years after the close of the quarter when the transaction took place. xxx (c) Claims for tax credits/refunds. - Application for Tax Credit/Refund of Value-Added Tax Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or municipality where the principal place of business of the applicant is located or directly with the Commissioner, Attention: VAT Division. A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the application. The original copy of the said invoice/receipt, however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate or refund. xxx (Emphasis and underscoring supplied) Under Section 8 of RA 1125,[53] the CTA is described as a court of record. As cases filed before it are litigated de novo, party litigants should prove every minute aspect of their cases. No evidentiary value can be given the purchase invoices or receipts submitted to the BIR as the rules on documentary evidence require that these documents must be formally offered before the CTA.[54] This Court thus notes with approval the following findings of the CTA xxx [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not ipso facto mean that [the seller] is entitled to the amount of refund sought as it is required by law to present evidence showing the input taxes it paid during the year in question. What is being claimed in the instant petition is the refund of the input taxes paid by the herein petitioner on its purchase of goods and services. Hence, it is necessary for the Petitioner to show proof that it had indeed paid the said input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not adduce in evidence the sales invoice, receipts or other documents showing the input value added tax on the purchase of goods and services. [55] xxx Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo) where the parties must present their evidence accordingly if they desire the Court to take such evidence into consideration.[56] (Emphasis and underscoring supplied)

A sales or commercial invoice is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services.[57] A receipt on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer.[58] These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quantity of goods sold and their selling price,[59] and taken collectively are the best means to prove the input VAT payments. Respondent contends, however, that the certification of the independent CPA attesting to the correctness of the contents of the summary of suppliers invoices or receipts which were examined, evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its claims. There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either expressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified by an independent CPA, suffice as evidence of input VAT payments. Thus CTA Circular No. 1-95 provides: 1. The party who desires to introduce as evidence such voluminous documents must present: (a) a Summary containing the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification must properly be identified by a competent witness from the accounting firm. 2. The method of individual presentation of each and every receipt or invoice or other documents for marking, identification and comparison with the originals thereof need not be done before the Court or the Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, invoices or documents should be ready for verification and comparison in case of doubt on the authenticity of the particular documents presented is raised during the hearing of the case.[60] (Underscoring supplied) The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-consuming procedure of presenting, identifying and marking of documents before the Court. It does not relieve respondent of its imperative task of pre-marking photocopies of sales receipts and invoices and submitting the same to the court after the independent CPA shall have examined and compared them with the originals. Without presenting these pre-marked documents as evidence from which the summary and schedules were based, the court cannot verify the authenticity and veracity of the independent auditors conclusions.[61] There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation No. 5-87,[62] all purchases covered by invoices other than a VAT invoice shall not be entitled to a refund of input VAT. The CTA disposition of the matter is thus in order. Mere listing of VAT invoices and receipts, even if certified to have been previously examined by an independent certified public accountant, would not suffice to establish the truthfulness and accuracy of the contents thereof unless offered and actually verified by this Court. CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, requires that the photocopies of invoices, receipts and other documents covering said accounts or payments must be pre-marked by the party and submitted to this Court.[63] (Underscoring supplied)

There being then no showing of abuse or improvident exercise of the CTAs authority, this Court is not inclined to set aside the conclusions reached by it, which, by the very nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject.[64] While the CTA is not governed strictly by technical rules of evidence,[65] as rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or invoices is not mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of respondents claims. The records further show that respondent miserably failed to substantiate its claim for input VAT refund for the first semester of 1991. Except for the summary and schedules of input VAT payments prepared by respondent itself, no other evidence was adduced in support of its claim. As for respondents claim for input VAT refund for the second semester of 1991, it employed the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a certification that: We have examined the information shown below concerning the input tax payments made by the Makati Office of Manila Mining Corporation for the period from July 1 to December 31, 1991. Our examination included inspection of the pertinent suppliers invoices and official receipts and such other auditing procedures as we considered necessary in the circumstances. xxx[66] As the certification merely stated that it used auditing procedures considered necessary and not auditing procedures which are in accordance with generally accepted auditing principles and standards, and that the examination was made on input tax payments by the Manila Mining Corporation, without specifying that the said input tax payments are attributable to the sales of gold to the Central Bank, this Court cannot rely thereon and regard it as sufficient proof of respondents input VAT payments for the second semester. Finally, respecting respondents argument that it need not prove the amount of input VAT it paid for the first semester of taxable year 1991 as the same was proven by the implied admission of the CIR, which was confirmed by the CTA when it admitted its Request for Admission,[67] the same does not lie. Respondents Requests for Admission do not fall within Section 2 Rule 26 of the Revised Rules of Court.[68] What respondent sought the CIR to admit are the total amount of input VAT payments it paid for the first and second semesters of taxable year 1991, which matters have already been previously alleged in respondents petition and specifically denied by the CIR in its Answers dated May 10, 1993 and August 16, 1993 filed in CTA Case Nos. 4869 and 4991, respectively. As Concrete Aggregates Corporation v. Court of Appeals[69] holds, admissions by an adverse party as a mode of discovery contemplates of interrogatories that would clarify and tend to shed light on the truth or falsity of the allegations in a pleading, and does not refer to a mere reiteration of what has already been alleged in the pleadings; otherwise, it constitutes an utter redundancy and will be a useless, pointless process which petitioner should not be subjected to.[70] Petitioner controverted in its Answers the matters set forth in respondents Petitions for Review before the CTA the requests for admission being mere reproductions of the matters already stated in the petitions. Thus, petitioner should not be required to make a second denial of those matters it already denied in its Answers.[71] As observed by the CTA, petitioner did in fact file its reply to the Request for Admissions in CTA Case No. 4869 and specifically denied the veracity and accuracy of the figures indicated in respondents summary. The Motion to Admit Reply was, however, denied by the CTA as the original Reply was not made under oath. That the Reply was not made under oath is merely a formal and not a substantive defect and may be dispensed with.[72] Although not under oath, petitioners reply to the request readily showed that its intent was to deny the matters set forth in the Request for Admissions. As for respondents Request for Admission in CTA Case No. 4991, petitioner timely filed its reply and specifically denied the accuracy and veracity of the contents of the schedules and summaries which listed the input VAT payments allegedly paid by respondent for the second semester of 1991.

For failure of respondent then not only to strictly comply with the rules of procedure but also to establish the factual basis of its claim for refund, this Court has to deny its claim. A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.[73] WHEREFORE, the petition is hereby GRANTED. The assailed Decision of the Court of Appeals dated April 12, 2002 is hereby REVERSED and SET ASIDE. The Court of Tax Appeals Decision dated November 24, 1998 is hereby REINSTATED.

SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 158885 October 2, 2009 FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF, ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 170680 FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE. Respondents. RESOLUTION Before us is respondents Motion for Reconsideration of our Decision dated April 2, 2009 which granted the consolidated petitions of petitioner Fort Bonifacio Development Corporation, the dispositive portion of which reads: WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner the amount of P28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No pronouncement as to costs. The Motion for Reconsideration raises the following arguments: I SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT TO VAT FOR THE FIRST TIME. II SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON REAL PROPERTIES. III REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95. The instant motion for reconsideration lacks merit. The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It amended several provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise accommodated the potential burdens of the shift to the VAT system by allowing newly VAT-registered persons to avail of a transitional input tax credit as provided for in Section 105 of the Old NIRC. Section 105 as amended by EO 273 reads: Sec. 105. Transitional Input Tax Credits. A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8%

of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first time value-added-tax on sale of real properties. The amendment reads: Sec. 100. Value-added-tax on sale of goods or properties. (a) Rate and base of tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods, or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.1avvph!1 (1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the enactment of RA 7716. Section 105 however was amended with the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Republic Act (RA) 8424. The provisions on the transitional input tax credit are now embodied in Section 111(A) of the New NIRC, which reads: Section 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. [Emphasis ours.] The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporations (FBDC) presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 795) and Revenue Memorandum Circular 3-96 (RMC 3-96). Specifically, Section 4.105-1 of RR 7-95 provides: Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayers trade or business as a VAT-registered person. However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988). The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person. In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-95 for being in conflict with the law. It held that the CIR had no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such limitation. This it did when it restricted the application of Section 105 in the case of real estate dealers only to improvements on the real property belonging to their beginning inventory. A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is the cardinal rule in statutory construction that a statutes clauses and phrases must not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts in order to produce a harmonious whole. Every part of the statute must be interpreted with reference

to the context, i.e., that every part of the statute must be considered together with other parts of the statute and kept subservient to the general intent of the whole enactment.1 In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe the constituent parts together; ascertain the legislative intent from the whole act; consider each and every provision thereof in the light of the general purpose of the statute; and endeavor to make every part effective, harmonious and sensible.2 The statutory definition of the term "goods or properties" leaves no room for doubt. It states: Sec. 100. Value-added tax on sale of goods or properties. (a) Rate and base of tax. xxx. (1) The term goods or properties shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx. The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states: Sec. 105. Transitional Input tax Credits. A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for sale to costumers or held for lease in the ordinary course of business." Having been defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could not have a different meaning. This has been explained in the Decision dated April 2, 2009, thus: Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit. Goods, as commonly understood in the business sense, refers to the product which the VATregistered person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their "goods." Such real properties are the operating assets of the real estate dealer. Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided. Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz: However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988). As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are the product of a delegated legislative power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not consistent with the statute itself is null and void. 4 While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasijudicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.5 To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under Section 105 is a nullity. On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following paragraph: However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of E.O. 273 (January 1, 1988). It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 697 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods is concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95. We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio. At the outset, it must be stressed that FBDC sought the refund of the total amount of P347,741,695.74 which it had itself paid in cash to the BIR. It is argued that the transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and that there should be a law imposing the tax presumed to have been paid. The thesis is anchored on the argument that without any VAT or other input business tax imposed by law on the real properties at the time of the sale, the 8% transitional input tax cannot be presumed to have been paid. The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of "eight percent (8%) of the value of such inventory" followed by the clause "or the actual value-added tax paid on such goods, materials and supplies," the implication is clear that under the first clause, "eight percent (8%) of the value of such inventory," the law does not contemplate the payment of any prior tax on such inventory. This is distinguished from the second clause, "the actual value-added tax paid on the goods, materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed. Had the intention of the law been to limit the amount to the actual VAT paid, there would have been no need to explicitly allow a claim based on 8% of the value of such inventory. The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was paid, whether or not it was actually paid, requires a transaction where a tax has been imposed by law, is utterly without basis in law. The rationale behind the provisions of Section 105 was aptly elucidated in the Decision sought to be reconsidered, thus: It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments.

As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive construction that transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and there is a law imposing the tax which is presumed to have been paid, is to impose conditions or requisites to the application of the transitional tax input credit which are not found in the law. The courts must not read into the law what is not there. To do so will violate the principle of separation of powers which prohibits this Court from engaging in judicial legislation.6 WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of merit. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 183505 February 26, 2010 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION, Respondents. DECISION DEL CASTILLO, J.: When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of the law,1 the deliberations during the enactment,2 as well as prior laws on the same subject matter3 to ascertain the true intent or spirit of the law. This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the Court of Tax Appeals (CTA). Factual Antecedents Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are domestic corporations duly organized and existing under the laws of the Republic of the Philippines. Both are engaged in the business of operating cinema houses, among others.7 CTA Case No. 7079 On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated December 15, 2003.9 On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency, which the latter protested in a letter dated January 14, 2004.10 On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency for taxable year 2000 in the amount of P124,035,874.12.11 On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.12 CTA Case No. 7085 On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.14 Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by First Asia in a letter dated December 12, 2002.15 On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for taxable year 1999.16 Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7085.17 CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year 2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.18 Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested the same in a letter dated July 9, 2004.20 On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount of P35,840,895.78 for taxable year 2000.21 This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was docketed as CTA Case No. 7111.22 CTA Case No. 7272 Re: Assessment Notice No. 008-02 A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004.23 Re: Assessment Notice No. 003-03 A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. 24 On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.25 Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7272.26 Consolidated Petitions The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and First Asia.27 On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First Asia. The motion was granted.28 Upon submission of the parties respective memoranda, the consolidated cases were submitted for decision on the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are subject to VAT.29 Ruling of the CTA First Division On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review. Resorting to the language used and the legislative history of the law, it ruled that the activity of showing cinematographic films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the States Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in National Development,"30 the CTA First Division held that the House of Representatives resolved that there should only be one business tax applicable to theaters and movie

houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that consistent with the States policy to have a viable, sustainable and competitive theater and film industry, the national government should be precluded from imposing its own business tax in addition to that already imposed and collected by local government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it disposed of the case as follows: IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondents Decisions denying petitioners protests against deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside. SO ORDERED.32 Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated December 14, 2006.33 Ruling of the CTA En Banc Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En Banc however denied36 the Petition for Review and dismissed37 as well petitioners Motion for Reconsideration. The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema operators or proprietors is not among the enumerated activities contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with RMC No. 20-86. Issue Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred: (1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from admission tickets [are] subject to the 10% VAT because: (a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF SERVICE; (b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997; (c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED; (d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS; (e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997; (f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC. (2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage; (3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to the amusement tax imposed by the Local Government Code; and (4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38 Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are subject to VAT. Petitioners Arguments Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA erred in applying the rules on statutory construction and in using extrinsic aids in interpreting Section 108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or proprietors to the paying public, being a sale of service, is subject to VAT. Respondents Arguments Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not among the services subject to VAT. Respondents insist that gross receipts from cinema/theater admission tickets were never intended to be subject to any tax imposed by the national government. According to them, the absence of gross receipts from cinema/theater admission tickets from the list of services which are subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished administrative ruling. Our Ruling The petition is bereft of merit. The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive Section 108 of the NIRC of the 1997 reads: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of

whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase "sale or exchange of services" shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxxx (7) The lease of motion picture films, films, tapes and discs; and (8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. x x x x (Emphasis supplied) A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise include," indicate that the enumeration is by way of example only.39 Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc: "Exhibition" in Blacks Law Dictionary is defined as "To show or display. x x x To produce anything in public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x40 Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase "similar services." The intent of the legislature must therefore be ascertained. The legislature never intended operators or proprietors of cinema/theater houses to be covered by VAT Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement, including cockpits, race tracks, and cabaret.42 In the case of theaters or cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by transferring the power to impose amusement tax45 on admission from theaters, cinematographs, concert halls, circuses and other places of amusements exclusively to the local government. Thus, when the NIRC of 197746 was enacted, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.47 On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof, which provides: SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, x x x xxxx "Gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax. (b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is billed as a separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax. (2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed separately or is billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts (including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied) Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage of VAT.49 On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the power to impose amusement tax on gross receipts derived from admission tickets was exclusive with the local government units and that only the gross receipts of amusement places derived from sources other than from admission tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read: Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross receipts arising from admission to places of amusement has been transferred to the local governments to the exclusion of the national government. xxxx Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory laws which amended the National Internal Revenue Code, including the value added tax law under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of amusement rests exclusively on the local government, to the exclusion of the national government. Since the Bureau of Internal Revenue is an agency of the national government, then it follows that it has no legal mandate to levy amusement tax on admission receipts in the said places of amusement. Considering the foregoing legal background, the provisions under Section 123 of the National Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit: "x x x Accordingly, only the gross receipts of the amusement places derived from sources other than from admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts derived from admission tickets shall be levied and collected by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied) On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees under Section 140 thereof.50 In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several amendments52 were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to amusement tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54 Based on the foregoing, the following facts can be established: (1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors has always been considered as a form of entertainment subject to amusement tax. (2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government. (3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements were transferred to the local government. (4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks. (5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services. (6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC from the coverage of VAT.1auuphil (7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements. (8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax under the NIRC from the coverage of VAT. (9) Only lessors or distributors of cinematographic films are included in the coverage of VAT. These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government. To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd results.56 Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT. On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit: The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that: Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross receipts from admission of persons to cinema/theater and other places of amusement had, thereafter, been transferred to the provincial government, to the exclusion of the national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the provincial government to impose amusement tax, had also been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the national government to impose business tax on gross receipts from admission of persons to places of amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1, 1996.58 (Emphasis supplied) We disagree. The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously.59 As it is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government. Revenue Memorandum Circular No. 28-2001 is invalid Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with, the law they seek to apply and implement.60 In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the procedural due process for tax issuances as prescribed under RMC No. 20-86. Rule on tax exemption does not apply Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him.61 The reason is obvious: it is both illogical and impractical to determine who are exempted without first determining who are covered by the provision.62 Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.64 WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax Appeals En Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 168129 April 24, 2007 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent. DECISION SANDOVAL-GUTIERREZ, J.: For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeking to reverse the Decision1 dated February 18, 2005 and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449. The factual antecedents of this case, as culled from the records, are: The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing under the laws of the Republic of the Philippines. Pursuant to its Articles of Incorporation,2 its primary purpose is "To establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization."1^vvphi1.net On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added Tax (VAT) on the sale of goods and services. This E.O. took effect on January 1, 1988. Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the services it provides to the participants in its health care program are exempt from the payment of the VAT. On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt from the VAT coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali of Revenue Region No. 8 in a letter dated April 22, 1994. Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect, amending further the National Internal Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became effective. This new Tax Code substantially adopted and reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT. In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for deficiency in its payment of the VAT and documentary stamp taxes (DST) for taxable years 1996 and 1997. On October 20, 1999, respondent filed a protest with the BIR. On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in the amount of P100,505,030.26 and DST in the amount of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter were four (4) assessment notices. On February 23, 2000, respondent filed another protest questioning the assessment notices. Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000, respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No. 6166. On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25%

surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT deficiency.1awphi1.nt Accordingly, VAT Ruling No. 231-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED. Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the deficiency VAT. In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus: WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED. Accordingly, the VAT assessment issued by herein respondent against petitioner for the taxable years 1996 and 1997 is hereby WITHDRAWN and SET ASIDE. SO ORDERED. The CTA held: Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since it does not actually render medical service but merely acts as a conduit between the members and petitioner's accredited and recognized hospitals and clinics. However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable, this court resolves to grant petitioner's "Motion for Partial Reconsideration." We are in accord with the view of petitioner that it is entitled to the benefit of non-retroactivity of rulings guaranteed under Section 246 of the Tax Code, in the absence of showing of bad faith on its part. Section 246 of the Tax Code 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, x x x. Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the respondent itself has confirmed petitioner's entitlement to VAT exemption under Section 103 of the Tax Code. In saying so, respondent has actually broadened the scope of "medical services" to include the case of the petitioner. This VAT ruling was even confirmed subsequently by Regional Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of the petitioner sufficiently described the business of petitioner and there is no way BIR could be misled by the said representation as to the real nature of petitioner's business. Such being the case, this court is convinced that petitioner's reliance on the said ruling is premised on good faith. The facts of the case do not show that petitioner deliberately committed mistakes or omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue. Thus, in the absence of such proof, this court upholds the application of Section 246 of the Tax Code. Consequently, the pronouncement made by the BIR in VAT Ruling No. 23188 as to the VAT exemption of petitioner should be upheld. Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 76449. In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution. Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its Resolution4 dated May 9, 2005. Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's services are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years 1996 and 1997. Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT Law), provides: SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of service" means the performance of all kinds of services in the Philippines for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors x x x. Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus: SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax: xxx (l) Medical, dental, hospital and veterinary services except those rendered by professionals xxx The import of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. In Commissioner of International Revenue v. Seagate Technology (Philippines),7 we defined an exempt transaction as one involving goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT, under the Tax Code, without regard to the tax status of the party in the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this definition. In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its services as follows: Under the prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health Care's health care program are entitled to preventive, diagnostic, and corrective medical services to be dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff participating in said group practice health care delivery system established and operated by Health Care. Such medical services will be dispensed in a hospital or clinic owned, operated, or accredited by Health Care. To be entitled to receive such medical services from Health Care, an individual must enroll in Health Care's health care program and pay an annual fee. Enrollment in Health Care's health care program is on a year-to-year basis and enrollees are issued identification cards. From the foregoing, the CTA made the following conclusions: a) Respondent "is not actually rendering medical service but merely acting as a conduit between the members and their accredited and recognized hospitals and clinics." b) It merely "provides and arranges for the provision of pre-need health care services to its members for a fixed prepaid fee for a specified period of time." c) It then "contracts the services of physicians, medical and dental practitioners, clinics and hospitals to perform such services to its enrolled members;" and d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then negotiates with them regarding payment schemes, financing and other procedures in the delivery of health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon this Court, more so where these do not conflict with the findings of the Court of Appeals.9 Perforce, as respondent does not actually provide medical and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the same, its services are not VAT-exempt. Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to this rule are: (1) 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; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT liabilities has retroactive application. In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent "deliberately committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled by the said representation as to the real nature" of said business. In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a health maintenance organization is not an indication of bad faith or a deliberate attempt to make false representations." As "the term health maintenance organization did not as yet have any particular significance for tax purposes," respondent's failure "to include a term that has yet to acquire its present definition and significance cannot be equated with bad faith." We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service Commission v. Maala,10 we described good faith as "that state of mind denoting honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even through technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render transaction unconscientious." According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance organization," which is subject to VAT, is not tantamount to bad faith. We note that the term "health maintenance organization" was first recorded in the Philippine statute books only upon the passage of "The National Health Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3) thereof defines a health maintenance organization as "an entity that provides, offers, or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium." Under this law, a health maintenance organization is one of the classes of a "health care provider." It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health maintenance organization" was yet unknown or had no significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88. In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 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. in the later cases of Commissioner of Internal Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,14 and

Commissioner of Internal Revenue v. Court of Appeals.15 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,16 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. WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 76449. No costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 125355 March 30, 2000 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents. PARDO, J.: What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that Commonwealth Management and Services Corporation, is liable for value added tax for services to clients during taxable year 1988. Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.1wphi1.nt On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows: Taxable sale/receipt P1,679,155.00 ============ 10% tax due thereon 167,915.50 25% surcharge 41,978.88 20% interest per annum 125,936.63 Compromise penalty for late payment 16,000.00 TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 ============ 3 COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of P6,077.00. On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT. On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT. On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the dispositive portion of which reads: WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency valueadded tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency.5 On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals. After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis. 6 The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties,7 where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services. On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorari assailing the decision of the Court of Appeals. On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996, COMASERCO complied with the resolution.8 We give due course to the petition. At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon. Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service. We agree with the Commissioner. Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides that: Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9 COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT. We disagree. On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended law provides that:

Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 106 and 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented. The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services. Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." 11 On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1 At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions. Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its

functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 15 There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT. WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853. No costs. SO ORDERED.

SECOND DIVISION [G.R. No. 150154. August 9, 2005] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., respondent. DECISION CHICO-NAZARIO, J.: In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No. 59106,[1] affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,[2] which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the first and second quarters of 1996. There is hardly any dispute as to the facts giving rise to the present Petition. Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the Securities and Exchange Commission on 07 July 1995,[3] with the primary purpose of engaging in the business of manufacturing and exporting of electrical and mechanical machinery, equipment, systems, accessories, parts, components, materials and goods of all kinds, including, without limitation, to those relating to office automation and information technology, and all types of computer hardware and software, such as HDD, CD-ROM and personal computer printed circuit boards.[4] On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Bian, Laguna.[5] Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a withholding agent.[6] Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of P13,118,542.00[7] and P5,128,761.94,[8] respectively, or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in the amount of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amount of P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA during the hearings. In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several Special and Affirmative Defenses, to wit 5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to investigation by the Bureau of Internal Revenue. 6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes sought to be refunded were erroneously or illegally collected. 7. Petitioner must prove the allegations supporting its entitlement to a refund. 8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of the tax. 9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an exemption from taxation.[12]

After evaluating the evidence submitted by respondent Toshiba,[13] the CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba in the amount of P16,188,045.44.[14] In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for Reconsideration for lack of merit.[15] The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs Petition for Review and affirmed the CTA Decision dated 10 March 2000. Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of Appeals based on the following grounds 1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court the arguments relied upon by him in the petition, is fatal to his cause. 2. The Court of Appeals erred in not holding that respondent being registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code. 3. The Court of Appeals erred in not holding that since respondents business is not subject to VAT, the capital goods and services it purchased are considered not used in VAT taxable business, and, therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said Regulations. 4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input taxes it paid on zero-rated transactions.[16] Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this Court answers in the affirmative. I An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%). Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977, as amended, which reads: SEC. 106. Refunds or tax credits of creditable input tax. (b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.[17] Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as follows Sec. 4.106-1. Refunds or tax credits of input tax. ... (b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent

that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made. Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations. Capital goods or properties refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services. (Underscoring ours.) Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended SEC. 103. Exempt transactions. The following shall be exempt from value-added tax. (q) Transactions which are exempt under special laws, except those granted under Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory.[18] Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known as The Special Economic Zone Act of 1995, as amended. According to the said section, [e]xcept for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid The five percent (5%) preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law, Rep. Act No. 7916, as amended. It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VATexempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),[19] this Court already made such distinction An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VATexempt or not of the party to the transaction An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon. Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,[20] under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory. It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone has been described as . . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.[21] The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.[22] Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory;[23] thus, creating the fiction that the ECOZONE is a foreign territory.[24] As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise? The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT.[25] Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,[26] the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a PEZA Registered Enterprise. (1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended: (a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code. (b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. (2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime: (a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the cross border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. (3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latters PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and the Cross Border Doctrine of the VAT system. This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular. Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is VAT-registered or not. Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT. II Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under Executive Order No. 226, as amended, were deemed subject to VAT. In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning thus In the first place, respondent could not have paid input taxes on its purchases of goods and services from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, 1997 Tax Code). Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides: SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own purchases of goods and services related to its zero-rated sale of goods and services to respondent. On the other hand, respondent, as the buyer in such zero-rated sale of goods and services, could not have paid input taxes for which it can claim as tax credit or refund.[27] Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-2,[28] in relation to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which allows the tax credit/refund of input VAT on zero-rated sales of goods, properties or services. Instead, respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which allows a VAT-registered person to apply for tax credit/refund of the input VAT on its capital goods. While in the former, the seller of the goods, properties or services is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capital goods. Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application for tax credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually passed on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-registered supplier from the Customs Territory did not charge any output VAT to respondent Toshiba believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goods and it could not claim any tax credit/refund thereof. The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of Appeals, and even this Court,[30] cannot be lightly disregarded considering the great number of PEZA-registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges. According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.[31] The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT. Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer and non-pioneer enterprises for six-year and four-year periods, respectively.[32] Those availing of this incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent (10%) VAT. This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latters type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present Petition took place during the first and second quarters of 1996, way before the issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR itself. Since respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted by respondent Toshiba consisting of receipts, invoices, and vouchers, from its suppliers from the Customs Territory. Accordingly, this Court gives due respect to and adopts herein the CTAs findings that the suppliers of capital goods from the Customs Territory did pass on output VAT to respondent Toshiba and the amount of input VAT which respondent Toshiba could claim as credit/refund. Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July 2003, the BIR answered the following question Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated without seeking prior approval from the BIR effective October 1999. 1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT invoices/receipts? A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can claim VAT credit provided: a. The taxpayer-claimant is VAT-registered; b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the purchaser prior to the implementation of RMC No. 74-99; and c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared the sales to the PEZA-registered purchaser as taxable sales in its VAT returns. For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZAregistered companies, regardless of the type or class of PEZA registration, should be denied. Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZAregistered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof depending on whether the given conditions are met. Respondent Toshibas claim for tax credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent Toshibas application for tax credit/refund of its input VAT, when such claim had already been determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even approve applications filed by other similarly-situated PEZA-registered enterprises at the administrative level. III Findings of fact by the CTA are respected and adopted by this Court. Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for tax credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised and threshed out in the lower courts. Giving it credence would belie petitioner CIRs assertion that it is raising only issues of law in its Petition that may be resolved without need for reception of additional evidences. Once more, this Court respects and

adopts the finding of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No. 226, as amended. WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CAG.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount of P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996. SO ORDERED.

FIRST DIVISION COMMISSIONER OF INTERNAL REVENUE, Petitioner SEKISUI JUSHI PHILIPPINES, INC., Respondent.

G.R. No. 149671 - versus Promulgated: July 21, 2006

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x DECISION PANGANIBAN, CJ: Business enterprises registered with the Philippine Export Zone Authority (PEZA) may choose between two fiscal incentive schemes: (1) to pay a five percent preferential tax rate on its gross income and thus be exempt from all other taxes; or (b) to enjoy an income tax holiday, in which case it is not exempt from applicable national revenue taxes including the value-added tax (VAT). The present respondent, which availed itself of the second tax incentive scheme, has proven that all its transactions were export sales. Hence, they should be VAT zero-rated. The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the August 16, 2001 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 64679. The assailed Decision upheld the April 26, 2001 Decision[3] of the Court of Tax Appeals (CTA) in CTA Case No. 5751. The CA Decision disposed as follows: WHEREFORE, premises considered, the present petition for review is hereby DENIED DUE COURSE and accordingly DISMISSED for lack of merit. The Decision dated April 26, 2001 of the Court of Tax Appeals in CTA Case No. 5751 is hereby AFFIRMED and UPHELD.[4] On the other hand, the dispositive portion of the CTA Decision reads: WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. [Petitioner] is hereby ordered to refund or to issue a Tax Credit Certificate in favor of the [Respondent] in the amount of P4,377,102.26 representing excess input taxes paid for the period covering January 1 to June 30, 1997.[5] The Facts The uncontested[6] facts are narrated by the CA as follows: Respondent is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office located at the Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is principally engaged in the business of manufacturing, importing, exporting, buying, selling, or otherwise dealing in, at wholesale such goods as strapping bands and other packaging materials and goods of similar nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products. Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer, respondent filed its quarterly returns with the BIR, for the period January 1 to June 30, 1997, reflecting therein input taxes in the amount of P4,631,132.70 paid by it in connection with its domestic purchase of capital goods and services. Said input taxes remained unutilized since respondent has not engaged in any business activity or transaction for which it may be liable for output tax and for which said input taxes may be credited. On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-DOF) two (2) separate applications for tax credit/refund of VAT input taxes paid for the period January 1 to March 31, 1997 and April 1 to June 30, 1997, respectively. There being no action on its application for tax credit/refund under Section 112 (B) of the 1997 National Internal Revenue Code (Tax Code), as amended, private respondent filed, within the two (2)year prescriptive period under Section 229 of said Code, a petition for review with the Court of Tax Appeals on March 26, 1999.

Petitioner filed its Answer to the petition asseverating that: (1) said claim for tax credit/refund is subject to administrative routinary investigation by the BIR; (2) respondent miserably failed to show that the amount claimed as VAT input taxes were erroneously collected or that the same were properly documented; (3) taxes due and collected are presumed to have been made in accordance with law, hence, not refundable; (4) the burden of proof is on the taxpayer to establish his right to a refund in an action for tax refund. Failure to discharge such duty is fatal to his action; (5) respondent should show that it complied with the provisions of Section 204 in relation to Section 229 of the 1997 Tax Code; and (6) claims for refund are strictly construed against the taxpayer as it partakes of the nature of a tax exemption. Hence, petitioner prayed for the denial of respondents petition.[7] Ruling of the Court of Tax Appeals The CTA ruled that respondent was entitled to the refund. While the company was registered with the PEZA as an ecozone and was, as such, exempt from income tax, it availed itself of the fiscal incentive under Executive Order No. 226. It thereby subjected itself to other internal revenue taxes like the VAT.[8] The CTA then found that only input taxes amounting to P4,377,102.26 were duly substantiated by invoices and Official Receipts,[9] while those amounting to P254,313.43 had not been sufficiently proven and were thus disallowed.[10] Ruling of the Court of Appeals The Court of Appeals upheld the Decision of the CTA. According to the CA, respondent had complied with the procedural and substantive requirements for a claim by 1) submitting receipts, invoices, and supporting papers as evidence; 2) paying the subject input taxes on capital goods; 3) not applying the input taxes against any output tax liability; and 4) filing the claim within the two-year prescriptive period under Section 229 of the 1997 Tax Code.[11] Hence, this Petition.[12] The Issue Petitioner raises this sole issue for our consideration: Whether or not respondent is entitled to the refund or issuance of tax credit certificate in the amount of P4,377,102.26 as alleged unutilized input taxes paid on domestic purchase of capital goods and services for the period covering January 1 to June 30, 1997.[13] The Courts Ruling The Petition has no merit. Sole Issue: Entitlement to Refund To support the issue raised, petitioner advances the following arguments: I. The Court of Appeals erred in not holding that respondent being registered with the Philippine Economic Zone Authority (PEZA) as an [e]cozone [e]xport [e]nterprise, its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now Sec. 109) of the Tax Code, as amended by R.A. 7716. II. The Court of Appeals erred in not holding that since respondent is EXEMPT from Value-Added Tax (VAT), the capital goods and services it purchased are considered not used in VAT taxable business, hence, is not allowed any tax credit/refund on VAT input tax previously paid on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95, and of input taxes paid on services pursuant to Section 4.103-1 of the same regulations.

III. The Court of Appeals erred in not holding that tax refunds being in the nature of tax exemptions are construed strictissimi juris against claimants.[14] These issues have previously been addressed by this Court in Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.),[15] Commissioner of Internal Revenue v. Cebu Toyo Corporation,[16] and Commissioner of Internal Revenue v. Seagate Technology (Philippines).[17] An entity registered with the PEZA as an ecozone[18] may be covered by the VAT system. Section 23 of Republic Act 7916, as amended, gives a PEZA-registered enterprise the option to choose between two fiscal incentives: a) a five percent preferential tax rate on its gross income under the said law; or b) an income tax holiday provided under Executive Order No. 226 or the Omnibus Investment Code of 1987, as amended. If the entity avails itself of the five percent preferential tax rate under the first scheme, it is exempt from all taxes, including the VAT;[19] under the second, it is exempt from income taxes for a number of years,[20] but not from other national internal revenue taxes like the VAT.[21] The CA and CTA found that respondent had availed itself of the fiscal incentive of an income tax holiday under Executive Order No. 226. This Court respects that factual finding. Absent a sufficient showing of error, findings of the CTA as affirmed by the CA are deemed conclusive.[22] Moreover, a perusal of the pleadings and supporting documents before us indicates that when it registered as a VAT-entity -- a fact admitted by the parties -- respondent intended to avail itself of the income tax holiday.[23] Verily, being a question of fact, the type of fiscal incentive chosen cannot be a subject of this Petition, which should raise only questions of law. By availing itself of the income tax holiday, respondent became subject to the VAT. It correctly registered as a VAT taxpayer, because its transactions were not VAT-exempt. Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory[24] and is regarded in law as foreign soil.[25] Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports[26] and treated as export sales.[27] These sales are zero-rated or subject to a tax rate of zero percent.[28] Notwithstanding the fact that its purchases should have been zero-rated, respondent was able to prove that it had paid input taxes in the amount of P4,377,102.26. The CTA found, and the CA affirmed, that this amount was substantially supported by invoices and Official Receipts;[29] and petitioner has not challenged the computation. Accordingly, this Court upholds the findings of the CTA and the CA. On the other hand, since 100 percent of the products of respondent are exported,[30] all its transactions are deemed export sales and are thus VAT zero-rated. It has been shown that respondent has no output tax with which it could offset its paid input tax.[31] Since the subject input tax it paid for its domestic purchases of capital goods and services remained unutilized, it can claim a refund for the input VAT previously charged by its suppliers.[32] The amount of P4,377,102.26 is excess input taxes that justify a refund. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. No costs, as petitioner is a government agency. SO ORDERED.

THIRD DIVISION COMMISSIONER OF G.R. No. 146984 INTERNAL REVENUE Petitioner, - versus , MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, Respondents. Promulgated: July 28, 2006 x---------------------------------------------------------------------------------x DECISION Tinga, J.: The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a more unequivocal rationale than that utilized by the rulings under review. The fact that the sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT. The facts are culled primarily from the ruling of the CTA. Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, Kloeckner type vessels.[1] The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.[2] The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay a value added tax of 10% on the value of the vessels.[3] On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private respondents).[4] The bid was approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines. On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that [v]alue-added tax, if any, shall be for the account of the PURCHASER.[5] Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of the VAT on the stipulated due date, 20 December 1988.[6] In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its transactions incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT].[7] Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to

an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989. On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 39588, 568-88 and 007-89, as well as the refund of the VAT payment made amounting to P15,120,000.00.[8] The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that [VAT] is imposed on any sale or transactions deemed sale of taxable goods (including capital goods, irrespective of the date of acquisition). The CIR argued that the sale of the vessels were among those transactions deemed sale, as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified change of ownership of business as a circumstance that gave rise to a transaction deemed sale. In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition.[9] The CTA ruled that the sale of a vessel was an isolated transaction, not done in the ordinary course of NDCs business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the vessels could not be deemed sale, and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption provision, but a classification provision which warranted the resolution of doubts in favor of the taxpayer. The CIR appealed the CTA Decision to the Court of Appeals,[10] which on 11 March 1997, rendered a Decision reversing the CTA.[11] While the appellate court agreed that the sale was an isolated transaction, not made in the course of NDCs regular trade or business, it nonetheless found that the transaction fell within the classification of those deemed sale under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought about a change of ownership in NMC. The Court of Appeals also applied the principle governing tax exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the government.[12] However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February 2001.[13] This time, the appellate court ruled that the change of ownership of business as contemplated in R.R. No. 5-87 must be a consequence of the retirement from or cessation of business by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the classification of transactions deemed sale was a classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.[14] To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant. A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage.[15] It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services[16] who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).[17] The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption,[18] yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations,[19] the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered.[20] We cite with approval the CTAs explanation on this point: In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term carrying on business does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while doing business conveys the idea of business being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of business is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)]. What is clear therefore, based on the aforecited jurisprudence, is that course of business or doing business connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property.[21] This finding is confirmed by the Revised Charter[22] of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property.[23] The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court,[24] should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is captioned Value-added tax on sale of goods, and it expressly states that [t]here shall be levied, assessed and collected on every sale, barter or exchange of goods, a value added tax x x x. Section 100 should be read in light of Section 99, which lays down the general rule on which persons are liable for VAT in the first place and on what transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is liable for VAT in the first place under Section 99. It would have been a different matter if Section 100 purported to define the phrase in the course of trade or business as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a means of ascertaining whether the sale of the vessels was in the course of trade or business, and thus subject to VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of in the course of trade or business, but instead the identification of the transactions which may be deemed as sale. It would become necessary to ascertain whether under those two provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the first place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the purpose of determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT. Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to

Section 99 of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100. In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those involving change of ownership of business. However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such change of ownership is only an attending circumstance to retirement from or cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation.[25] Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the change of ownership of business as only a circumstance that attends those transactions deemed sale, which are otherwise stated in the same section.[26] WHEREFORE, the petition is DENIED. No costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 81311 June 30, 1988 KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners, vs. HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent. G.R. No. 81820 June 30, 1988 KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and alliances, petitioners, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents. G.R. No. 81921 June 30, 1988 INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners, vs. The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent. G.R. No. 82152 June 30, 1988 RICARDO C. VALMONTE, petitioner, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET, respondent. Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311. Jaime C. Opinion for individual petitioners in G.R. No. 81311. Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820. Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820. Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921. PADILLA, J.: These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses and other provisions of the 1987 Constitution. The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the Solicitor General, only the third requisite that the constitutional question should be raised at the earliest opportunity has been complied with. He also questions the legal standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution.

Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions. But, before resolving the issues raised, a brief look into the tax law in question is in order. The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross receipts realized from the sale of services. The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery. The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt. Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority to issue EO 273 on 25 July 1987. The contention is without merit. It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states: Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to exercise legislative powers. On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides: Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress is convened. It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to legislate. Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987). He contends that the word "convene" is synonymous with "the date when the elected members of Congress assumed office." The contention is without merit. The word "convene" which has been interpreted to mean "to call together, cause to assemble, or convoke," 1 is clearly different from assumption of office by the individual members of Congress or their taking the oath of office. As an example, we call to mind the interim National Assembly

created under the 1973 Constitution, which had not been "convened" but some members of the body, more particularly the delegates to the 1971 Constitutional Convention who had opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of office. To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would already be deemed to be in session after the individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special election to elect a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict between the President and the Cabinet as to whether or not the President and the Cabinet as to whether or not the President can re-assume the powers and duties of his office, would also be redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the declaration of martial law or the suspension of the privilage of the writ of habeas corpus. The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of said Constitution had intended to terminate the exercise of legislative powers by the President at the beginning of the term of office of the members of Congress, they should have so stated (but did not) in clear and unequivocal terms. The Court has not power to re-write the Constitution and give it a meaning different from that intended. The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been defined, as follows: Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834), or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. (Tavera-Luna, Inc. vs. Nable, 38 Off. Gaz. 62). 2 Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT had been extensively discussed by this framers and other government agencies involved in its implementation, even under the past administration. As the Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the exercise of her legislative powers. The legislative process started long before the signing when the data were gathered, proposals were weighed and the final wordings of the measure were drafted, revised and finalized. Certainly, it cannot be said that the President made a jump, so to speak, on the Congress, two days before it convened." 3 Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states: Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify the nullification of a law. there must be a clear and unequivocal breach of the Constitution, not a doubtful and argumentative implication. 4 As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of Baguio vs. De Leon, 5 said:

... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court, stated: "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." There was no occasion in that case to consider the possible effect on such a constitutional requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; . . ." About two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued; "Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution." To satisfy this requirement then, all that is needed as held in another case decided two years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation." This Court is on record as accepting the view in a leading American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) that "inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153). The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public. 6 The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly discriminates against customs brokers. The contested provision states: Sec. 103. Exempt transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships; The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read: Sec. 102. Value-added tax on sale of services. There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof call for the exercise or use of the physical or mental faculties: ... With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted.

At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now. The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are made to believe. In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the political branches of the government. The Court, following the time-honored doctrine of separation of powers, cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to impede its application or continued implementation. WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 149073 February 16, 2005 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU TOYO CORPORATION, respondent. DECISION QUISUMBING, J.: In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed the Resolutions dated May 31, 20002 and August 2, 2000,3 of the Court of Tax Appeals (CTA) ordering the Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue a tax credit certificate in favor of Cebu Toyo Corporation in the sum of P2,158,714.46, representing the unutilized input value-added tax (VAT) payments. The facts, as culled from the records, are as follows: Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various optical components used in television sets, cameras, compact discs and other similar devices. Its principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws of Japan. Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to the provisions of Presidential Decree No. 66.4 It is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.5 As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)6 of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63. On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input payments. Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the two-year prescriptive period pursuant to Section 2307 of the Tax Code. Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and services related to such zero-rated activities are available as tax credits or refunds. The petitioners position is that respondent was not entitled to a refund or tax credit since: (1) it failed to show that the tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been made in accordance with law; and (3) claims for refund are strictly construed against the claimant as these partake of the nature of tax exemption. Initially, the CTA denied the petition for insufficiency of evidence.8 The tax court sustained respondents argument that it was a VAT-registered entity. It also found that the petition was timely, as it was filed within the prescription period. The CTA also ruled that the respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan Export Processing Zone were export sales subject to VAT at 0% rate. It

found that the input VAT covered by respondents claim was not applied against any output VAT. However, the tax court decreed that the petition should nonetheless be denied because of the respondents failure to present documentary evidence to show that there were foreign currency exchange proceeds from its export sales. The CTA also observed that respondent failed to submit the approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation and the certification of constructive inward remittance. Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1) proof of its inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP approval on its Agreement of Offsetting nor do they require certification on the amount constructively remitted; (3) it was not legally required to prove foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had complied with the substantiation requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input tax. On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to wit: WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted. Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion of which shall now read as follows: WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of P2,158,714.46 representing unutilized input tax payments. SO ORDERED.9 In granting partial reconsideration, the tax court found that there was no need for BSP approval of the Agreement of Offsetting since the same may be categorized as an inter-company open account offset arrangement. Hence, the respondent need not present proof of foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of the Tax Code. However, the CTA stressed that respondent must still prove that there was an actual offsetting of accounts to prove that constructive foreign currency exchange proceeds were inwardly remitted as required under Section 106(A)(2)(a). The CTA found that only the amount of Y274,043,858.00 covering respondents sales to Toyo Lens Corporation and purchases from said mother company for the period August 7, 1996 to August 26, 1997 were actually offset against respondents related accounts receivable and accounts payable as shown by the Agreement for Offsetting dated August 30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable subsidiary ledgers corroborated the amount. The tax court also found that out of the total export sales for the period April 1, 1996 to December 31, 1997 amounting to Y700,654,606.15, respondents sales to MEPZ enterprises amounted only to Y136,473,908.05 of said total. Thus, allocating the input taxes supported by receipts to the export sales, the CTA determined that the refund/credit amounted to only P2,158,714.46,11 computed as follows:

Total Input Taxes Claimed by respondent Less: Exceptions made by SGV a.) 1996 b.) 1997 Validly Supported Input Taxes Allocation: Verified Zero-Rated Sales a.) Toyo Lens Corporation b.) MEPZ Enterprises Divided by Total Zero-Rated Sales Quotient Multiply by Allowable Input Tax Amount Refundable Y274,043,858.00 136,473,908.05 P651,256.17 104,129.13

P4,439,827.21

WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals. SO ORDERED.19

755,385.30 P3,684,441.91

The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The appellate court held as untenable herein petitioners argument that respondent is not entitled to a refund because it is VAT-exempt since the evidence showed that it is a VAT-registered enterprise subject to VAT at the rate of 0%. It agreed with the ruling of the tax court that respondent had two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then the 0% VAT rate would be applicable to it and any unutilized input VAT should be refunded to respondent upon proper application with and substantiation by the BIR.1awphi1.nt Hence, the instant petition for review now before us, with herein petitioner alleging that: I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716. II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95.20 In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the Court of Tax Appeals resolution granting a refund in the amount of P2,158,714.46 representing unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997. 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 10921 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 4.103-122 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 petitioners 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. Petitioners 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

Y410,517,766.05 Y700,654,606.15 0.5859 P3,684,441.91 P2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that respondent was not entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section 2413 of Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus, since respondent was not subject to VAT, the Commissioner contended that the capital goods it purchased must be deemed not used in VAT taxable business and therefore it was not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95.16 Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1) that respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondents business is not subject to VAT, the capital goods it purchased are considered not used in a VAT taxable business and therefore is not entitled to a refund of input taxes.17 The respondent opposed the Commissioners Motion for Reconsideration and prayed that the CTA resolution be modified so as to grant it the entire amount of tax refund or credit it was seeking. On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It held that the grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not applicable since respondent has availed of the income tax holiday incentive under Executive Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section 2318 of Rep. Act No. 7916. The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an exemption from payment of income taxes for 4 or 6 years depending on whether the registration was as a pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT. The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R. SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and reiterating its claim that respondent is not entitled to a refund of input taxes since it is VAT-exempt. On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor, thus:

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. Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or services.23 An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt.24 Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person.25 Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund.261awphi1.nt In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure that goods are provided free of VAT. While the zero rating and the exemption are computationally the same, they actually differ in several aspects, to wit: (a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the output tax; (b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. (c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional for VAT-exempt persons. In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT taxpayer per Certificate of Registration of the BIR.27 Further, the records show that the respondent is subject to VAT as it availed of the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which the Court of Tax Appeals computed at P2,158,714.46, but which we findafter recomputationshould be P2,158,714.52. The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.28 In this case, we find no cogent reason to deviate from this well-entrenched principle. Thus, we are persuaded that indeed the Court of Appeals committed no reversible error in affirming the assailed ruling of the Court of Tax Appeals.

WHEREFORE, the petition is DENIED for lack of merit.l^vvphi1.net The assailed Decision dated July 6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of respondent in the amount of P2,158,714.52 representing unutilized input tax payments. No pronouncement as to costs. SO ORDERED.

THIRD DIVISION [G.R. No. 153866. February 11, 2005] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES), respondent. DECISION PANGANIBAN, J.: Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt transactions has little significance, because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such refund or credit. The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows: WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.[3] The Facts The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows: As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows: 1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission to do business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu; 2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties of his office, including, among others, the duty to act and approve claims for refund or tax credit; 3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of recording components primarily used in computers for export. Such registration was made on 6 June 1997; 4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification No. 97-083-000600-V issued on 2 April 1997; 5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent]; 6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu; 7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for VAT refund. The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of the two-year prescriptive period. For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by [petitioners] Bureau; 2. Since taxes are presumed to have been collected in accordance with laws and regulations, the [respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected x x x; 3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that: A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund. 4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications; 5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As [respondents] business is not subject to VAT, the capital goods and services it alleged to have purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations. 6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on filing of a written claim for refund within two (2) years from the date of payment of tax. On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4] Ruling of the Court of Appeals The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999. The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still subject to the payment of other national internal revenue taxes, like the VAT. Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were - to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet offset against any output VAT liability. Hence this Petition.[5] Sole Issue Petitioner submits this sole issue for our consideration: Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999.[6]

The Courts Ruling The Petition is unmeritorious. Sole Issue: Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is entitled to the fiscal incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12] Preferential Tax Treatment Under Special Laws If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activities.[13] Even so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.[14] Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226[15] is chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and real property taxes.[17] A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -extends[20] to that zone the provision stating that no local or national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and maintained.[22] Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.[23] In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-produced materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities[25] and exemption from PD 1853.[26] From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person,[28] however, is entitled to their credits. Nature of the VAT and the Tax Credit Method Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business[29] as they pass along the production and distribution chain, the tax being limited only to the value added[30] to such goods, properties or services by the seller, transferor or lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.[32] As such,

it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.[33] In either case, though, the same conclusion is arrived at. The law[34] that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method.[35] Such method adopted the mechanics and selfenforcement features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada.[36] Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.[37] If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.[42] Should the input taxes result from zero-rated or effectively zerorated transactions or from the acquisition of capital goods,[43] any excess over the output taxes shall instead be refunded[44] to the taxpayer or credited[45] against other internal revenue taxes.[46] Zero-Rated and Effectively Zero-Rated Transactions Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source. Zero-rated transactions generally refer to the export sale of goods and supply of services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax,[49] but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of services[51] to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate.[52] Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. Zero Rating and Exemption In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not. Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales.[55] Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers. In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is not allowed any tax refund of or credit for input taxes paid.[58] Exempt Transaction and Exempt Party The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction.[59] An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VATexempt or not -- of the party to the transaction.[60] Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.[61] Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services.[62] While the liability is imposed on one person, the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt. Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,[64] depending again on the application of the destination principle.[65] If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,[67] unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,[68] because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory.[69] This means that in such zone is created the legal fiction of foreign territory.[70] Under the crossborder principle[71] of the VAT system being enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT,[73] then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone. Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country.[74] An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone.[76] If respondent is located in an export processing zone[77] within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent would indeed be subject to a zero rate.[80] Tax Exemptions Broad and Express Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that no taxes, local and national, shall be imposed on business establishments operating within the ecozone.[81] Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly. Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property taxes that presently are imposed on land owned by developers.[82] This similar and repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or national taxes on business enterprises within the ecozone. Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be subject to x x x internal revenue laws and regulations under PD 66[83] -- the original charter of PEZA (then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law modify such exemption. Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately redounds to the benefit of the national economy by enticing more business investments and creating more employment opportunities.[85] Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x x[86] if brought to the ecozones restricted area[87] for manufacturing by registered export enterprises,[88] of which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.[89] Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI) under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their products;[91] on required supplies and spare part for consigned equipment;[92] and on foreign and domestic merchandise, raw materials, equipment and the like -except those prohibited by law -- brought into the zone for manufacturing.[93] In addition, they are given credits for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively used for the manufacture of their products,[94] as well as for the value of such taxes imposed on domestic raw materials and supplies that are used in the manufacture of their export products and that form part thereof.[95] Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.[98] And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production of export goods,[99] and for locally produced raw materials, capital equipment and spare parts used by exporters of non-traditional products[100] -- shall also be continuously enjoyed by similar exporters within the ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax exemptions and credits. Tax Refund as Tax Exemption To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104] Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims;[106] and of showing, by words too plain to be mistaken, that the legislature intended to exempt them.[107] In the present case, all the cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.[108] Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the following considerations: First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such laws[109] will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered suppliers sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone -regardless of the class or type of the latters PEZA registration -- is legally entitled to a zero rate.[111] Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul. In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export processing zones, seeks to encourage and promote foreign commerce as a means of x x x strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the development of the country.[112] RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic zones, the government shall actively encourage, promote, induce and accelerate a sound and balanced industrial, economic and social development of the country x x x through the establishment, among others, of special economic zones x x x that shall effectively attract legitimate and productive foreign investments.[113] Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall x x x meet the tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and result in increased volume and value of exports for the economy.[114] Fiscal incentives that are costefficient and simple to administer shall be devised and extended to significant projects to compensate for market imperfections, to reward performance contributing to economic development,[115] and to stimulate the establishment and assist initial operations of the enterprise.[116] Wisely accorded to ecozones created under RA 7916[117] was the governments policy -- spelled out earlier in RA 7227 -- of converting into alternative productive uses[118] the former military reservations and their extensions,[119] as well as of providing them incentives[120] to enhance the benefits that would be derived from them[121] in promoting economic and social development.[122] Finally, under RA 7844, the State declares the need to evolve export development into a national effort[123] in order to win international markets. By providing many export and tax incentives,[124] the State is able to drive home the point that exporting is indeed the key to national survival and the means through which the economic goals of increased employment and enhanced incomes can most expeditiously be achieved.[125] The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase economic activity; and x x x create a robust environment for business to enable firms to compete better in the regional as well as the global market.[126] After all, international competitiveness requires economic and tax incentives to lower the cost of goods produced for export. State actions that affect global competition need to be specific and selective in the pricing of particular goods or services.[127] All these statutory policies are congruent to the constitutional mandates of providing incentives to needed investments,[128] as well as of promoting the preferential use of domestic materials and locally produced goods and adopting measures to help make these competitive.[129] Tax credits for domestic inputs strengthen backward linkages. Rightly so, the rule of law and the existence of credible and efficient public institutions are essential prerequisites for sustainable economic development.[130] VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that respondent did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the

day for petitioner to challenge the VAT-registered status of respondent, given the latters prior representation before the lower courts and the mode of appeal taken by petitioner before this Court. The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among the incentives it gives to such enterprises.[133] Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT law. Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions against the income tax holiday privilege of respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that issues and arguments not adequately and seriously brought below cannot be raised for the first time on appeal.[136] This is a matter of procedure[137] and a question of fairness.[138] Failure to assert within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it.[139] The BIR regulations additionally requiring an approved prior application for effective zero rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of such regulations is not within the statutory authority x x x granted by the legislature.[141] First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter.[142] The courts will not countenance one that overrides the statute it seeks to apply and implement.[143] Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayers transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.[144] Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty.[145] Respondents registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed[146] by both the administrative officials and the applicant. Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws. A VAT-registered status, as well as compliance with the invoicing requirements,[147] is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayers negligence -a result not at all contemplated. Administrative convenience cannot thwart legislative mandate. Tax Refund or Credit in Order Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime. The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from all taxes. Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited. Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. Compliance with All Requisites for VAT Refund or Credit As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.[150] First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit. Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1, 1996, respondent would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916. There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below: MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-sourced inputs x x x. xxx xxx xxx

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

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x.[153] And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.[154] Summary To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 151135 July 2, 2004 CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION QUISUMBING, J.: For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate courts Resolution,3 dated December 19, 2001, denying the motion for reconsideration. Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital supplies for export. Petitioners place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-000133. From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6 Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998. Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998. When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax. In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR. On October 13, 2000, the CTA decided CTA Case No. 5895 as follows: WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT. SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA. Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax. The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the petitioners Makati and Pasay City offices. Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex. Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus: WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contexs claim for refund of erroneously paid taxes is DENIED accordingly. SO ORDERED.13 In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and services. Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied. Hence, the instant petition raising as issues for our resolution the following: A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS. B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998. On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials. The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller. At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.19 Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have preferential treatment in the following ways: (a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties). The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt.21 (b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.22 Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firms business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax.23

Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24 On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services. Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund. The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on to it by its suppliers. While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations" provide: Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. The following sales by VAT-registered persons shall be subject to 0%: (a) Export Sales "Export Sales" shall mean ... (5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. ... (c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate." Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies. WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs. SO ORDERED.