1

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.

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.:
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.

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

2
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

3
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 conveneonce 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.

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

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.

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:

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:

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

Sec. 28 (1) The rule of taxation shall

be uniform and equitable. The
Congress shall evolve a progressive
system of taxation.

4
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

5
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 valueadded 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: ...

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.

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.

WHEREFORE, the petitions are DISMISSED. Without

pronouncement as to costs

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.

COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
CEBU TOYO CORPORATION, respondent.

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

G.R. No. 149073

February 16, 2005

DECISION
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of
Appeals, in CA-G.R. SP No. 60304, affirmed
the Resolutionsdated 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:

6
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 nonresident 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 VATregistered 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 ofP2,158,714.46 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

7
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
toY136,473,908.05 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

P651,256.17

b.) 1997

104,129.13

Validly
Supported
Input Taxes
Allocation:
Verified ZeroRated Sales
a.) Toyo
Lens

Y274,043,858.0
0

Corporatio
n
b.) MEPZ
Enterprises
Divided by
Total ZeroRated Sales
Quotient
Multiply by
Allowable
Input Tax
Amount
Refundable

136,473,908.05 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 2413of 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

P4,439,827.21 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
P3,684,441.91 amount of tax refund or credit it was seeking.
755,385.30

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-

8
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:
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
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

9
taxes, including VAT under P.D. No. 66 and pay only
the preferential tax rate of 5% under Rep. Act No.
7916. Both the Court of Appeals and the Court of Tax
Appeals found that respondent availed of the income
tax holiday for four (4) years starting from August 7,
1995, as clearly reflected in its 1996 and 1997 Annual
Corporate Income Tax Returns, where respondent
specified that it was availing of the tax relief under
E.O. No. 226. Hence, respondent is not exempt from
VAT and it correctly registered itself as a VAT
taxpayer. In fine, it is engaged in taxable rather than
exempt transactions.
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 VATregistered 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 valueadded tax at 0% if made by a VAT-registered
person.25 Under the value-added tax system, a zerorated 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 VATregistered 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 atP2,158,714.46, 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 ofP2,158,714.52
representing unutilized input tax payments. No
pronouncement as to costs.
SO ORDERED.

10
[G.R. No. 153866. February 11, 2005]

COMMISSIONER
OF
REVENUE, petitioner,
vs.
TECHNOLOGY
(PHILIPPINES), respondent.

INTERNAL
SEAGATE

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 VATregistered 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. 97-083000600-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;

11
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

12
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.

In the same vein, respondent benefits under RA

7844 from negotiable tax credits[24] for locallyproduced 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]

[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]

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-

13
rated or effectively zero-rated transactions or from the
acquisition of capital goods,[43] any excess over the
output taxes shall instead be refunded [44] to the
taxpayer or credited[45] against other internal revenue
taxes.[46]
Zero-Rated and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect,
zero-rated transactions differ from effectively zerorated transactions as to their source.
Zero-rated transactions generally refer to the
export sale of goods and supply of services. [47] The
tax rate is set at zero.[48] When applied to the tax
base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions
charges no output tax,[49] but can claim a refund of or
a tax credit certificate for the VAT previously charged
by suppliers.
Effectively zero-rated transactions, however, refer
to the sale of goods[50] or supply of services[51] to
persons or entities whose exemption under special
laws or international agreements to which the
Philippines is a signatory effectively subjects such
transactions to a zero rate.[52] Again, as applied to the
tax base, such rate does not yield any tax chargeable
against the purchaser. The seller who charges zero
output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT
previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and
exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle[53] to the
exportation of goods, automatic zero rating [54] is
primarily intended to be enjoyed by the seller who is
directly and legally liable for the VAT, making such
seller internationally competitive by allowing the
refund or credit of input taxes that are attributable to
export sales.[55] Effective zero rating, on the contrary,
is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is total
relief for the purchaser from the burden of the tax.
[56]
But in an exemption there is only partial relief,
[57]
because the purchaser is not allowed any tax
refund of or credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either
be the transaction itself or any of the parties to the
transaction.[59]
An exempt transaction, on the one hand, involves
goods or services which, by their nature, are
specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax
status -- VAT-exempt or not -- of the party to
the transaction.[60] Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any
tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person
or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which
the Philippines is a signatory, and by virtue of which
its taxable transactions become exempt from the VAT.
[61]
Such party is also not subject to the VAT, but may
be allowed a tax refund of or credit for input taxes
paid, depending on its registration as a VAT or nonVAT 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,

14
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

15
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
[103]
taxpayer
and liberally in favor of the taxing
authority.[104]
Tax refunds are in the nature of such exemptions.
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.
[105]

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 VATregistered suppliers sale of goods, property or
services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of
the class or type of the latters PEZA registration -- is
legally entitled to a zero rate.[111]
Second, the policies of the law should prevail.
Ratio legis est anima. The reason for the law is its
very soul.
In PD 66, the urgent creation of the EPZA which
preceded the PEZA, as well as the establishment of
export processing zones, seeks to encourage and
promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the
development of the country.[112]
RA 7916, as amended by RA 8748, declared that
by creating the PEZA and integrating the special
economic zones, the government shall actively
encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social
development of the country x x x through the
establishment, among others, of special economic
zones x x x that shall effectively attract legitimate and
productive foreign investments.[113]
Under EO 226, the State shall encourage x x x
foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,]
accelerate development of less developed regions of
the country[,] and result in increased volume and
value of exports for the economy.[114] Fiscal incentives
that are cost-efficient and simple to administer shall
be devised and extended to significant projects to
compensate for market imperfections, to reward
performance contributing to economic development,
[115]
and to stimulate the establishment and assist
initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA
7916[117] was the governments policy -- spelled out
earlier in RA 7227 -- of converting into alternative
productive uses[118] the former military reservations
and their extensions,[119] as well as of providing them
incentives[120] to enhance the benefits that would be

16
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.

17
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 nonpioneer 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.
xxxxxxxxx
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]

18
And third, no question as to either the filing of
such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under
all the special laws cited above is broad enough to
cover even the enforcement of internal revenue laws,
including prescription.[154]
Summary
To summarize, special laws expressly grant
preferential tax treatment to business establishments
registered and operating within an ecozone, which by
law is considered as a separate customs territory. As
such, respondent is exempt from all internal revenue
taxes, including the VAT, and regulations pertaining
thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax
regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions
intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior
application for the effective zero rating of its
transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites
for claiming a tax refund of or credit for the input VAT
paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the
Decision AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 153204 August 31, 2005
COMMISSIONER OF INTERNAL
REVENUE, Petitioners,
vs.
MANILA MINING CORPORATION, Respondent.
DECISION
CARPIO MORALES, J.:
Being assailed via petition for review on certiorari is
the April 12, 2002 Decision1 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 ofP5,683,035.04
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. 326-00632.3
In 1991, respondents sales of gold to the Central
Bank (now Bangko Sentral ng Pilipinas) amounted
toP200,832,364.70.4 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 ofP8,173,789.60.
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
Answer10 admitting that respondent filed its VAT

19
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 Reply12 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

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
asworn 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;

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 Resolution16 of February 28, 1994, the CTA,
finding that the matters subject of respondents
Request for Admissions are "relevant to the facts

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;

20
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 ofP7,953,816.38; while its VAT input tax
paid for importation was P563,503.00;
x x x17
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 premature18 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 Resolution24 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
Bank25 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 Resolution30 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

21
invoices, receipts or other documents as required
under Section 2(c)(1) of Revenue Regulations No. 388 having been presented.34 The CTA explained that
a mere listingof 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 reconsideration36 of the CTA
decision having been denied by Resolution37 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 Decision39 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 andP8,173,789.60 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 Court40 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 CIR41 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,46arguing that the documents required to be
submitted to the BIR under Revenue Regulation No.
3-88 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

22
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

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.

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 x50 (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

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 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:

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 factomean 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

23
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 settlementbetween 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 premarking photocopies of sales receipts and invoices
and submitting the same to the courtafter the
independent CPA shall have examined and compared
them with the originals. Without presenting these pre-

24
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
thefirst 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. xxx66
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
Appeals69 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

25
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.

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

26
(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.

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.

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.

SO ORDERED.

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.

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.

On October 20, 1999, respondent filed a protest with

the BIR.

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:

SO ORDERED.
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

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

27
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. 23188 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.
231-88 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.

28
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. 23188 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."

29
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."

This Court has consistently reaffirmed its ruling

in ABS-CBN Broadcasting Corp. in the later cases
ofCommissioner 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.
G.R. No. 158885

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.

April 2, 2009

FORT BONIFACIO DEVELOPMENT

CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
REGIONAL DIRECTOR, REVENUE REGION NO. 8,
CHIEF, ASSESSMENT DIVISION, REVENUE
REGION NO. 8, BIR, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170680

April 2, 2009

FORT BONIFACIO DEVELOPMENT

CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and
REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS,
BUREAU OF INTERNAL REVENUE, Respondents.
DECISION

30
TINGA, J.:
The value-added tax (VAT) system was first
introduced in the Philippines on 1 January 1988, with
the tax imposable on "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."1 The first VAT law is found in Executive Order
No. 273 (E.O. 273), which amended several
provisions of the then National Internal Revenue
Code of 1986 (Old NIRC). E.O. No. 273 likewise
accommodated the potential burdens of the shift to
the VAT system by allowing newly liable VATregistered persons to avail of a transitional input tax
credit, as provided for in Section 105 of the old NIRC,
as amended by E.O. No. 273. Said Section 105 is
quoted, thus:
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.2
There are other measures contained in E.O. No. 273
which were similarly intended to ease the shift to the
VAT system. These measures also took the form of
"transitional input taxes which can be credited against
output tax,"3and are found in Section 25 of E.O. No.
273, the section entitled "Transitory Provisions." Said
transitory provisions, which were never incorporated
in the Old NIRC, read:
Sec. 25. Transitory provisions. (a) All VAT-registered
persons shall be allowed transitional input taxes
which can be credited against output tax in the same
manner as provided in Sections 104 of the National
Internal Revenue Code as follows:
1) The balance of the deferred sales tax credit
account as of December 31, 1987 which are
accounted for in accordance with regulations
prescribed therefor;

2) A presumptive input tax equivalent to 8% of

the value of the inventory as of December 31,
1987 of materials and supplies which are not
for sale, the tax on which was not taken up or
claimed as deferred sales tax credit; and
3) A presumptive input tax equivalent to 8% of
the value of the inventory as of December 31,
1987 as goods for sale, the tax on which was
not taken up or claimed as deferred sales tax
credit.
Tax credit prescribed in paragraphs (2) and (3) above
shall be allowed only to a VAT-registered person who
files an inventory of the goods referred to in said
paragraphs as provided in regulations.
(b) Any unused tax credit certificate issued prior to
January 1, 1988 for excess tax credits which are
applicable against advance sales tax shall be
surrendered to, and replaced by the Commissioner
with new tax credit certificates which can be used in
payment for value-added tax liabilities.
(c) Any person already engaged in business whose
gross sales or receipts for a 12-month period from
September 1, 1986 to August 1, 1987, exceed the
amount of P200,000.00, or any person who has been
in business for less than 12 months as of August 1,
1987 but expects his gross sales or receipts to
exceed P200,000 on or before December 31, 1987,
shall apply for registration on or before October 29,
1987.4
On 1 January 1996, Republic Act (Rep. Act) No. 7716
took effect.5 It amended provisions of the Old NIRC
principally by restructuring the VAT system. It was
under Rep. Act No. 7716 that VAT was imposed for
the first time on the sale of real properties. This was
accomplished by amending Section 100 of the NIRC
to include "real properties" among the "goods or
properties," the sale, barter or exchange of which is
made subject to VAT. The relevant portions of Section
100, as amended by Rep. Act No. 7716, thus read:
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

31
exchange of goods or properties, a value-added tax
equivalent to 10% of the gross selling price or gross
value in money of the goods, or properties sold,
bartered or exchanged, such tax to be paid by the
seller or transferor.
(1) The term 'goods or properties' shall mean all
tangible and intangible objects which are capable of
pecuniary estimation and shall include:
(A) Real properties held primarily for sale to
customers or held for lease in the ordinary course of
trade or business; xxx6
The provisions of Section 105 of the NIRC, on the
transitional input tax credit, had remained intact
despite the enactment of Rep. Act No. 7716. Said
provisions would however be amended following the
passage of the new National Internal Revenue Code
of 1997 (New NIRC), also officially known as Rep Act
No. 8424. The section on the transitional input tax
credit was renumbered from Section 105 of the Old
NIRC to Section 111(A) of the New NIRC. The new
amendments on the transitional input tax credit are
relatively minor, hardly material to the case at bar.
They are highlighted below for easy reference:
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 eight percent
(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.7 (Emphasis
supplied).
Rep. Act No. 8424 also made part of the NIRC, for the
first time, the concept of "presumptive input tax
credits," with Section 111(b) of the New NIRC
providing as follows:
(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of

sardines, mackerel and milk, and in manufacturing
refined sugar and cooking oil, shall be allowed a
presumptive input tax, creditable against the output
tax, equivalent to one and one-half percent (1 1/2%)
of the gross value in money of their purchases of
primary agricultural products which are used as inputs
to their production.
As used in this Subsection, the term 'processing' shall
mean pasteurization, canning and activities which
through physical or chemical process alter the exterior
texture or form or inner substance of a product in
such manner as to prepare it for special use to which
it could not have been put in its original form or
condition.
(2) Public works contractors shall be allowed a
presumptive input tax equivalent to one and one-half
percent (1 1/2%) of the contract price with respect to
government contracts only in lieu of actual input taxes
therefrom.8
What we have explained above are the statutory
antecedents that underlie the present petitions for
review. We now turn to the factual antecedents.
I.
Petitioner Fort Bonifacio Development Corporation
(FBDC) is engaged in the development and sale of
real property. On 8 February 1995, FBDC acquired by
way of sale from the national government, a vast tract
of land that formerly formed part of the Fort Bonifacio
military reservation, located in what is now the Fort
Bonifacio Global City (Global City) in Taguig
City.9 Since the sale was consummated prior to the
enactment of Rep. Act No. 7716, no VAT was paid
thereon. FBDC then proceeded to develop the tract of
land, and from October, 1966 onwards it has been
selling lots located in the Global City to interested
buyers.10
Following the effectivity of Rep. Act No. 7716, real
estate transactions such as those regularly engaged
in by FBDC have since been made subject to VAT. As
the vendor, FBDC from thereon has become obliged
to remit to the Bureau of Internal Revenue (BIR)
output VAT payments it received from the sale of its
properties to the Bureau of Internal Revenue (BIR).

32
FBDC likewise invoked its right to avail of the
transitional input tax credit and accordingly submitted
an inventory list of real properties it owned, with a
total book value ofP71,227,503,200.00.11
On 14 October 1996, FBDC executed in favor of
Metro Pacific Corporation two (2) contracts to sell,
separately conveying two (2) parcels of land within
the Global City in consideration of the purchase prices
atP1,526,298,949.00 and P785,009,018.00, both
payable in installments.12 For the fourth quarter of
1996, FBDC earned a total of P3,498,888,713.60
from the sale of its lots, on which the output VAT
payable to the BIR wasP318,080,792.14. In the
context of remitting its output VAT payments to the
BIR, FBDC paid a total ofP269,340,469.45 and
utilized (a) P28,413,783.00 representing a portion of
its then total transitional/presumptive input tax credit
of P5,698,200,256.00, which petitioner allocated for
the two (2) lots sold to Metro Pacific; and (b) its
regular input tax credit of P20,326,539.69 on the
purchase of goods and services.13
Between July and October 1997, FBDC sent two (2)
letters to the BIR requesting appropriate action on
whether its use of its presumptive input VAT on its
land inventory, to the extent of P28,413,783.00 in
partial payment of its output VAT for the fourth quarter
of 1996, was in order. After investigating the matter,
the BIR recommended that the claimed presumptive
input tax credit be disallowed.14 Consequently, the BIR
issued to FBDC a Pre-Assessment Notice (PAN)
dated 23 December 1997 for deficiency VAT for the
4th quarter of 1996. This was followed by a letter of
respondent Commissioner of Internal Revenue
(CIR),15 addressed to and received by FBDC on 5
March 1998, disallowing the presumptive input tax
credit arising from the land inventory on the basis of
Revenue Regulation 7-95 (RR 7-95) and Revenue
Memorandum Circular 3-96 (RMC 3-96). Section
4.105-1 of RR 7-95 provided the basis in main for the
CIRs opinion, the section reading, thus:
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.
The CIR likewise cited from the Transitory Provisions
of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits xxx
(iii) For real estate dealers, the presumptive input tax
of 8% of the book value of improvements on or after
January 1, 1988 (the effectivity of E.O. 273) shall be
allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above,
an inventory as of December 31, 1995 of such goods
or properties and improvements showing the quantity,
description and amount filed with the RDO not later
than Janaury 31, 1996.
xxx
Consequently, FBDC received an Assessment Notice
in the amount of P45,188,708.08, representing
deficiency VAT for the 4th quarter of 1996, including
surcharge, interest and penalty. After respondent
Regional Director denied FBDCs motion for
reconsideration/protest, FBDC filed a petition for
review with the Court of Tax Appeals (CTA), docketed
as C.T.A. Case No. 5665.16 On 11 August 2000, the
CTA rendered a decision affirming the assessment
made by the respondents.17 FBDC assailed the CTA

33
decision through a petition for review filed with the
Court of Appeals, docketed as CA-G.R. SP No.
60477. On 15 November 2002, the Court of Appeals
rendered a decision affirming the CTA decision, but
removing the surcharge, interests and penalties, thus
reducing the amount due to P28,413,783.00.18 From
said decision, FBDC filed a petition for review with
this Court, the first of the two petitions now before us,
seeking the reversal of the CTA decision dated 11
August 2000 and a pronouncement that FBDC is
entitled to the transitional/presumptive input tax credit
of P28,413,783.00. This petition has been docketed
as G.R. No. 158885.
The second petition, which is docketed as G.R. No.
170680, involves the same parties and legal issues,
but concerns the claim of FBDC that it is entitled to
claim a similar transitional/presumptive input tax
credit, this time for the third quarter of 1997. A brief
recital of the anteceding facts underlying this second
claim is in order.
For the third quarter of 1997, FBDC derived the total
amount of P3,591,726,328.11 from its sales and lease
of lots, on which the output VAT payable to the BIR
was P359,172,632.81.19 Accordingly, FBDC made
cash payments totaling P347,741,695.74 and utilized
its regular input tax credit of P19,743,565.73 on
purchases of goods and services.20 On 11 May 1999,
FBDC filed with the BIR a claim for refund of the
amount ofP347,741,695.74 which it had paid as VAT
for the third quarter of 1997.21 No action was taken on
the refund claim, leading FBDC to file a petition for
review with the CTA, docketed as CTA Case No.
5926. Utilizing the same valuation22 of 8% of the total
book value of its beginning inventory of real properties
(or P71,227,503,200.00) FBDC argued that its input
tax credit was more than enough to offset the VAT
paid by it for the third quarter of 1997.23
On 17 October 2000, the CTA promulgated its
decision24 in CTA Case No. 5926, denying the claim
for refund. FBDC then filed a petition for review with
the Court of Appeals, docketed as CA-G.R. SP No.
61517. On 3 October 2003, the Court of Appeals
rendered a decision25 affirming the judgment of the
CTA. As a result, FBDC filed its second petition,
docketed as G.R. No. 170680.
II.

The two petitions were duly consolidated26 and called

for oral argument on 18 April 2006. During the oral
arguments, the parties were directed to discuss the
following issues:
1. In determining the 10% value-added tax in
Section 100 of the [Old NIRC] on the sale of
real properties by real estate dealers, is the
8% transitional input tax credit in Section 105
applied only to the improvements on the real
property or is it applied on the value of the
entire real property?
2. Are Section 4.105.1 and paragraph (a)(III)
of the Transitory Provisions of Revenue
Regulations No. 7-95 valid in limiting the 8%
transitional input tax to the improvements on
the real property?
While the two issues are linked, the main issue is
evidently whether Section 105 of the Old NIRC may
be interpreted in such a way as to restrict its
application in the case of real estate dealers only to
the improvements on the real property belonging to
their beginning inventory, and not the entire real
property itself. There would be no controversy before
us if the Old NIRC had itself supplied that limitation,
yet the law is tellingly silent in that regard. RR 7-95,
which imposes such restrictions on real estate
dealers, is discordant with the Old NIRC, so it is
alleged.
III.
On its face, there is nothing in Section 105 of the Old
NIRC that prohibits the inclusion of real properties,
together with the improvements thereon, in the
beginning inventory of goods, materials and supplies,
based on which inventory the transitional input tax
credit is computed. It can be conceded that when it
was drafted Section 105 could not have possibly
contemplated concerns specific to real properties, as
real estate transactions were not originally subject to
VAT. At the same time, when transactions on real
properties were finally made subject to VAT beginning
with Rep. Act No. 7716, no corresponding
amendment was adopted as regards Section 105 to
provide for a differentiated treatment in the application
of the transitional input tax credit with respect to real
properties or real estate dealers.

34
It was Section 100 of the Old NIRC, as amended by
Rep. Act No. 7716, which made real estate
transactions subject to VAT for the first time. Prior to
the amendment, Section 100 had imposed the VAT
"on every sale, barter or exchange of goods," without
however specifying the kind of properties that fall
within or under the generic class "goods" subject to
the tax.
Rep. Act No. 7716, which significantly is also known
as the Expanded Value-Added Tax (EVAT) law,
expanded the coverage of the VAT by amending
Section 100 of the Old NIRC in several respects,
some of which we will enumerate. First, it made every
sale, barter or exchange of "goods or properties"
subject to VAT.27 Second, it generally defined "goods
or properties" as "all tangible and intangible objects
which are capable of pecuniary estimation."28 Third, it
included a non-exclusive enumeration of various
objects that fall under the class "goods or properties"
subject to VAT, including "[r]eal properties held
primarily for sale to customers or held for lease in the
ordinary course of trade or business."29
From these amendments to Section 100, is there any
differentiated VAT treatment on real properties or real
estate dealers that would justify the suggested
limitations on the application of the transitional input
tax on them? We see none.
Rep. Act No. 7716 clarifies that it is the real properties
"held primarily for sale to customers or held for lease
in the ordinary course of trade or business" that are
subject to the VAT, and not when the real estate
transactions are engaged in by persons who do not
sell or lease properties in the ordinary course of trade
or business. It is clear that those regularly engaged in
the real estate business are accorded the same
treatment as the merchants of other goods or
properties available in the market. In the same way
that a milliner considers hats as his goods and a
rancher considers cattle as his goods, a real estate
dealer holds real property, whether or not it contains
improvements, as his goods.
Had Section 100 itself supplied any differentiation
between the treatment of real properties or real estate
dealers and the treatment of the transactions
involving other commercial goods, then such differing
treatment would have constituted the statutory basis

for the CIR to engage in such differentiation which

said respondent did seek to accomplish in this case
through Section 4.105-1 of RR 7-95. Yet the
amendments introduced by Rep. Act No. 7716 to
Section 100, coupled with the fact that the said law
left Section 105 intact, reveal the lack of any
legislative intention to make persons or entities in the
real estate business subject to a VAT treatment
different from those engaged in the sale of other
goods or properties or in any other commercial trade
or business.
If the plain text of Rep. Act No. 7716 fails to supply
any apparent justification for limiting the beginning
inventory of real estate dealers only to the
improvements on their properties, how then were the
CIR and the courts a quo able to justify such a view?
IV.
The fact alone that the denial of FBDCs claims is in
accord with Section 4.105-1 of RR 7-95 does not, of
course, put this inquiry to rest. If Section 4.105-1 is
itself incongruent to Rep. Act No. 7716, the
incongruence cannot by itself justify the denial of the
claims. We need to inquire into the rationale behind
Section 4.105-1, as well as the question whether the
interpretation of the law embodied therein is validated
by the law itself.
The CTA, in its rulings, proceeded from a thesis which
is not readily apparent from the texts of the laws we
have cited. The transitional input tax credit is
conditioned on the prior payment of sales taxes or the
VAT, so the CTA observed. The introduction of the
VAT through E.O. No. 273 and its subsequent
expansion through Rep. Act No. 7716 subjected
various persons to the tax for the very first time,
leaving them unable to claim the input tax credit
based on their purchases before they became subject
to the VAT. Hence, the transitional input tax credit was
designed to alleviate that relatively iniquitous loss.
Given that rationale, according to the CTA, it would be
improper to allow FBDC, which had acquired its
properties through a tax-free purchase, to claim the
transitional input tax credit. The CTA added that
Section 105.4.1 of RR 7-95 is consonant with its
perceived rationale behind the transitional input tax
credit since the materials used for the construction of

35
improvements would have most likely involved the
payment of VAT on their purchase.
Concededly, this theory of the CTA has some sense,
extravagantly extrapolated as it is though from the
seeming silence on the part of the provisions of the
law. Yet ultimately, the theory is woefully limited in
perspective.
It is correct, as pointed out by the CTA, that upon the
shift from sales taxes to VAT in 1987 newly-VAT
registered people would have been prejudiced by the
inability to credit against the output VAT their
payments by way of sales tax on their existing stocks
in trade. Yet that inequity was precisely addressed by
a transitory provision in E.O. No. 273 found in Section
25 thereof. The provision authorized VAT-registered
persons to invoke a "presumptive input tax equivalent
to 8% of the value of the inventory as of December
31, 1987 of materials and supplies which are not for
sale, the tax on which was not taken up or claimed as
deferred sales tax credit", and a similar presumptive
input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of goods for sale,
the tax on which was not taken up or claimed as
deferred sales tax credit.30
Section 25 of E.O. No. 273 perfectly remedies the
problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If
the core purpose of the tax credit is only, as hinted by
the CTA, to allow for some mode of accreditation of
previously-paid sales taxes, then Section 25 alone
would have sufficed. Yet E.O. No. 273 amended the
Old NIRC itself by providing for the transitional input
tax credit under Section 105, thereby assuring that
the tax credit would endure long after the last goods
made subject to sales tax have been consumed.
If indeed the transitional input tax credit is integrally
related to previously paid sales taxes, the purported
causal link between those two would have been
nonetheless extinguished long ago. Yet Congress has
reenacted the transitional input tax credit several
times; that fact simply belies the absence of any
relationship between such tax credit and the longabolished sales taxes. Obviously then, the purpose
behind the transitional input tax credit is not confined
to the transition from sales tax to VAT.

There is hardly any constricted definition of

"transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime.
Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to
becoming a VAT-registered person. Such transition
does not take place merely by operation of law, E.O.
No. 273 or Rep. Act No. 7716 in particular. It could
also occur when one decides to start a business.
Section 105 states that the transitional input tax
credits become available either to (1) a person who
becomes liable to VAT; or (2) any person who elects
to be VAT-registered. The clear language of the law
entitles new trades or businesses to avail of the tax
credit once they become VAT-registered. The
transitional input tax credit, whether under the Old
NIRC or the New NIRC, may be claimed by a newlyVAT registered person such as when a business as it
commences operations. If we view the matter from
the perspective of a starting entrepreneur, greater
clarity emerges on the continued utility of the
transitional input tax credit.
Following the theory of the CTA, the new enterprise
should be able to claim the transitional input tax credit
because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials and
supplies in its beginning inventory. Consequently, as
the CTA held below, if the new enterprise has not paid
VAT in its purchases of such goods, materials and
supplies, then it should not be able to claim the tax
credit. However, it is not always true that the
acquisition of such goods, materials and supplies
entail the payment of taxes on the part of the new
business. In fact, this could occur as a matter of
course by virtue of the operation of various provisions
of the NIRC, and not only on account of a specially
legislated exemption.
Let us cite a few examples drawn from the New
NIRC. If the goods or properties are not acquired from
a person in the course of trade or business, the
transaction would not be subject to VAT under Section
105.31 The sale would be subject to capital gains
taxes under Section 24(D),32 but since capital gains is
a tax on passive income it is the seller, not the buyer,
who generally would shoulder the tax.
If the goods or properties are acquired through
donation, the acquisition would not be subject to VAT

36
but to donors tax under Section 98 instead.33 It is the
donor who would be liable to pay the donors
tax,34 and the donation would be exempt if the donors
total net gifts during the calendar year does not
exceed P100,000.00.35
If the goods or properties are acquired through testate
or intestate succession, the transfer would not be
subject to VAT but liable instead for estate tax under
Title III of the New NIRC.36 If the net estate does not
exceedP200,000.00, no estate tax would be
assessed.37
The interpretation proffered by the CTA would exclude
goods and properties which are acquired through sale
not in the ordinary course of trade or business,
donation or through succession, from the beginning
inventory on which the transitional input tax credit is
based. This prospect all but highlights the ultimate
absurdity of the respondents' position. Again, nothing
in the Old NIRC (or even the New NIRC) speaks of
such a possibility or qualifies the previous payment of
VAT or any other taxes on the goods, materials and
supplies as a pre-requisite for inclusion in the
beginning inventory.
It is apparent that the transitional input tax credit
operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the
acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition
from non-VAT to VAT status, the transitional input tax
credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of the
income it derived from its sales as output VAT. The
transitional input tax credit mitigates this initial
diminution of the 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.
There is another point that weighs against the CTAs
interpretation. Under Section 105 of the Old NIRC, the
rate of the transitional input tax credit is "8% of the
value of such inventory or the actual value-added tax
paid on such goods, materials and supplies,
whichever is higher."38 If indeed the transitional input
tax credit is premised on the previous payment of
VAT, then it does not make sense to afford the

taxpayer the benefit of such credit based on "8% of

the value of such inventory" should the same prove
higher than the actual VAT paid. This intent that the
CTA alluded to could have been implemented with
ease had the legislature shared such intent by
providing the actual VAT paid as the sole basis for the
rate of the transitional input tax credit.
The CTA harped on the circumstance that FBDC was
excused from paying any tax on the purchase of its
properties from the national government, even
claiming that to allow the transitional input tax credit is
"tantamount to giving an undeserved bonus to real
estate dealers similarly situated as [FBDC] which the
Government cannot afford to provide." Yet the tax
laws in question, and all tax laws in general, are
designed to enforce uniform tax treatment to persons
or classes of persons who share minimum legislated
standards. The common standard for the application
of the transitional input tax credit, as enacted by E.O.
No. 273 and all subsequent tax laws which reinforced
or reintegrated the tax credit, is simply that the
taxpayer in question has become liable to VAT or has
elected to be a VAT-registered person. E.O. No. 273
and the subsequent tax laws are all decidedly neutral
and accommodating in ascertaining who should be
entitled to the tax credit, and it behooves the CIR and
the CTA to adopt a similarly judicious perspective.
IV.
Given the fatal flaws in the theory offered by the CTA
as supposedly underlying the transitional input tax
credit, is there any other basis to justify the limitations
imposed by the CIR through RR 7-95? We discern
nothing more. As seen in our discussion, there is no
logic that coheres with either E.O. No. 273 or Rep. Act
No. 7716 which supports the restriction imposed on
real estate brokers and their ability to claim the
transitional input tax credit based on the value of their
real properties. In addition, the very idea of excluding
the real properties itself from the beginning inventory
simply runs counter to what the transitional input tax
credit seeks to accomplish for persons engaged in the
sale of goods, whether or not such "goods" take the
form of real properties or more mundane
commodities.
Under Section 105, the beginning inventory of
"goods" forms part of the valuation of the transitional

37
input tax credit. Goods, as commonly understood in
the business sense, refers to the product which the
VAT-registered person offers for sale to the public.
With respect to real estate dealers, it is the real
properties themselves which constitute their "goods."
Such real properties are the operating assets of the
real estate dealer.

105 of the Old NIRC absent statutory authority or

basis to make and justify such limitation. A contrary
conclusion would mean the CIR could very well moot
the law or arrogate legislative authority unto himself
by retaining sole discretion to provide the definition
and scope of the term "goods."
V.

Section 4.100-1 of RR No. 7-95 itself includes in its

enumeration of "goods or properties" such "real
properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business."
Said definition was taken from the very statutory
language of Section 100 of the Old NIRC. By limiting
the definition of goods to "improvements" in Section
4.105-1, the BIR not only contravened the definition of
"goods" as provided in the Old NIRC, but also the
definition which the same revenue regulation itself
has provided.
The Court of Tax Appeals claimed that under Section
105 of the Old NIRC the basis for the inventory of
goods, materials and supplies upon which the
transitional input VAT would be based "shall be left to
regulation by the appropriate administrative authority".
This is based on the phrase "filing of an inventory as
prescribed by regulations" found in Section 105.
Nonetheless, Section 105 does include the particular
properties to be included in the inventory, namely
goods, materials and supplies. It is questionable
whether the CIR has the power to actually redefine
the concept of "goods," as she did when she excluded
real properties from the class of goods which real
estate companies in the business of selling real
properties may include in their inventory. The authority
to prescribe regulations can pertain to more technical
matters, such as how to appraise the value of the
inventory or what papers need to be filed to properly
itemize the contents of such inventory. But such
authority cannot go as far as to amend Section 105
itself, which the Commissioner had unfortunately
accomplished in this case.
It is of course axiomatic that a rule or regulation must
bear upon, and be consistent with, the provisions of
the enabling statute if such rule or regulation is to be
valid.39 In case of conflict between a statute and an
administrative order, the former must
prevail.40 Indeed, the CIR has no power to limit the
meaning and coverage of the term "goods" in Section

At this juncture, we turn to some of the points raised

in the dissent of the esteemed Justice Antonio T.
Carpio.
The dissent adopts the CTAs thesis that the
transitional input tax credit applies only when taxes
were previously paid on the properties in the
beginning inventory. Had the dissenting view won, it
would have introduced a new requisite to the
application of the transitional input tax credit and
required the taxpayer to supply proof that it had
previously paid taxes on the acquisition of goods,
materials and supplies comprising its beginning
inventory. We have sufficiently rebutted this thesis,
but the dissent adds a twist to the argument by using
the term "presumptive input tax credit" to imply that
the transitional input tax credit involves a presumption
that there was a previous payment of taxes.
Let us clarify the distinction between the presumptive
input tax credit and the transitional input tax credit. As
with the transitional input tax credit, the presumptive
input tax credit is creditable against the output VAT. It
necessarily has come into existence in our tax
structure only after the introduction of the VAT. As
quoted earlier,41 E.O. No. 273 provided for a
"presumptive input tax credit" as one of the transitory
measures in the shift from sales taxes to VAT, but
such presumptive input tax credit was never
integrated in the NIRC itself. It was only in 1997, or
eleven years after the VAT was first introduced, that
the presumptive input tax credit was first incorporated
in the NIRC, more particularly in Section 111(B) of the
New NIRC. As borne out by the text of the
provision,42 it is plain that the presumptive input tax
credit is highly limited in application as it may be
claimed only by "persons or firms engaged in the
processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil;"43 and
"public works contractors."44

38
Clearly, for more than a decade now, the term
"presumptive input tax credit" has contemplated a
particularly idiosyncratic tax credit far divorced from
its original usage in the transitory provisions of E.O.
No. 273. There is utterly no sense then in latching on
to the term as having any significant meaning for the
purpose of the cases at bar.
The dissent, in arguing for the effectivity of Section
4.105-1 of RR 7-95, ratiocinates in this manner: (1)
Section 4.105-1 finds basis in Section 105 of the Old
NIRC, which provides that the input tax is allowed on
the "beginning inventory of goods, materials and
supplies;" (2) input taxes must have been paid on
such goods, materials and supplies; (3) unlike real
property itself, the improvements thereon were
already subject to VAT even prior to the passage of
Rep. Act No. 7716; (4) since no VAT was paid on the
real property prior to the passage of Rep. Act No.
7716, it could not form part of the "beginning inventory
of goods, materials and supplies."
This chain of premises have already been debunked.
It is apparent that the dissent believes that only those
"goods, materials and supplies" on which input VAT
was paid could form the basis of valuation of the input
tax credit. Thus, if the VAT-registered person acquired
all the goods, materials and supplies of the beginning
inventory through a sale not in the ordinary course of
trade or business, or through succession or donation,
said person would be unable to receive a transitional
input tax credit. Yet even RR 7-95, which imposes the
restriction only on real estate dealers permits such
other persons who obtained their beginning inventory
through tax-free means to claim the transitional input
tax credit. The dissent thus betrays a view that is even
more radical and more misaligned with the language
of the law than that expressed by the CIR.
VI.
A final observation. Section 4.105.1 of RR No. 7-95,
insofar as it disallows real estate dealers from
including the value of their real properties in the
beginning inventory of goods, materials and supplies,
has in fact already been repealed. The offending
provisions were deleted with the enactment of
Revenue Regulation No. 6-97 (RR 6-97) dated 2
January 1997, which amended RR 7-95.45 The repeal
of the basis for the present assessments by RR 6-97

only highlights the continuing absurdity of the position

of the BIR towards FBDC.
FBDC points out that while the transactions involved
in G.R. No. 158885 took place during the effectivity of
RR 7-95, the transactions involved in G.R. No.
170680 in fact took place after RR No. 6-97 had taken
effect. Indeed, the assessments subject of G.R. No.
170680 were for the third quarter of 1997, or several
months after the effectivity of RR 6-97. That fact
provides additional reason to sustain FBDCs claim for
refund of its 1997 Third Quarter VAT payments.
Nevertheless, since the assailed restrictions
implemented by RR 7-95 were not sanctioned by law
in the first place there is no longer need to dwell on
such fact.
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.
SO ORDERED.
R. No. 187485

October 8, 2013

COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
SAN ROQUE POWER
CORPORATION, Respondent.
x-----------------------x
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.

39
x-----------------------x
G.R. No. 197156
PHILEX MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
RESOLUTION
CARPIO, J.:
This Resolution resolves the Motion for
Reconsideration and the Supplemental Motion for
Reconsideration filed by San Roque Power
Corporation (San Roque) in G.R. No. 187485, the
Comment to the Motion for Reconsideration filed by
the Commissioner of Internal Revenue (CIR) in G.R.
No. 187485, the Motion for Reconsideration filed by
the CIR in G.R.No. 196113, and the Comment to the
Motion for Reconsideration filed by Taganito Mining
Corporation (Taganito) in G.R. No. 196113.
San Roque prays that the rule established in our 12
February 2013 Decision be given only a prospective
effect, arguing that "the manner by which the Bureau
of Internal Revenue (BIR) and the Court of Tax
Appeals(CTA) actually treated the 120 + 30 day
periods constitutes an operative fact the effects and
consequences of which cannot be erased or
undone."1
The CIR, on the other hand, asserts that Taganito
Mining Corporation's (Taganito) judicial claim for tax
credit or refund was prematurely filed before the CTA
and should be disallowed because BIR Ruling No.
DA-489-03 was issued by a Deputy Commissioner,
not by the Commissioner of Internal Revenue.
We deny both motions.
The Doctrine of Operative Fact
The general rule is that a void law or administrative
act cannot be the source of legal rights or duties.
Article 7 of the Civil Code enunciates this general
rule, as well as its exception: "Laws are repealed only
by subsequent ones, and their violation or nonobservance shall not be excused by disuse, or

custom or practice to the contrary. When the courts

declared a law to be inconsistent with the
Constitution, the former shall be void and the latter
shall govern. Administrative or executive acts, orders
and regulations shall be valid only when they are not
contrary to the laws or the Constitution."
The doctrine of operative fact is an exception to the
general rule, such that a judicial declaration of
invalidity may not necessarily obliterate all the effects
and consequences of a void act prior to such
declaration.2 In Serrano de Agbayani v. Philippine
National Bank,3 the application of the doctrine of
operative fact was discussed as follows:
The decision now on appeal reflects the orthodox
view that an unconstitutional act, for that matter an
executive order or a municipal ordinance likewise
suffering from that infirmity, cannot be the source of
any legal rights or duties. Nor can it justify any official
act taken under it. Its repugnancy to the fundamental
law once judicially declared results in its being to all
intents and purposes a mere scrap of paper. As the
new Civil Code puts it: "When the courts declare a law
to be inconsistent with the Constitution, the former
shall be void and the latter shall govern.
Administrative or executive acts, orders and
regulations shall be valid only when they are not
contrary to the laws of the Constitution." It is
understandable why it should be so, the Constitution
being supreme and paramount. Any legislative or
executive act contrary to its terms cannot survive.
Such a view has support in logic and possesses the
merit of simplicity. It may not however be sufficiently
realistic. It does not admit of doubt that prior to the
declaration of nullity such challenged legislative or
executive act must have been in force and had to be
complied with. This is so as until after the judiciary, in
an appropriate case, declares its invalidity, it is
entitled to obedience and respect. Parties may have
acted under it and may have changed their positions.
What could be more fitting than that in a subsequent
litigation regard be had to what has been done while
such legislative or executive act was in operation and
presumed to be valid in all respects. It is now
accepted as a doctrine that prior to its being nullified,
its existence as a fact must be reckoned with. This is
merely to reflect awareness that precisely because
the judiciary is the governmental organ which has the

40
final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed
before it can exercise the power of judicial review that
may lead to a declaration of nullity. It would be to
deprive the law of its quality of fairness and justice
then, if there be no recognition of what had transpired
prior to such adjudication.
In the language of an American Supreme Court
decision: "The actual existence of a statute, prior to
such a determination of unconstitutionality, is an
operative fact and may have consequences which
cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be
considered in various aspects, with respect to
particular relations, individual and corporate, and
particular conduct, private and official." This language
has been quoted with approval in a resolution in
Araneta v. Hill and the decision in Manila Motor Co.,
Inc. v. Flores. An even more recent instance is the
opinion of Justice Zaldivar speaking for the Court in
Fernandez v. Cuerva and Co. (Boldfacing and
italicization supplied)
Clearly, for the operative fact doctrine to apply, there
must be a "legislative or executive measure,"
meaning a law or executive issuance, that is
invalidated by the court. From the passage of such
law or promulgation of such executive issuance until
its invalidation by the court, the effects of the law or
executive issuance, when relied upon by the public in
good faith, may have to be recognized as valid. In the
present case, however, there is no such law or
executive issuance that has been invalidated by the
Court except BIR Ruling No. DA-489-03.
To justify the application of the doctrine of operative
fact as an exemption, San Roque asserts that "the
BIR and the CTA in actual practice did not observe
and did not require refund seekers to comply with
the120+30 day periods."4 This is glaring error
because an administrative practice is neither a law
nor an executive issuance. Moreover, in the present
case, there is even no such administrative practice by
the BIR as claimed by San Roque.
In BIR Ruling No. DA-489-03 dated 10 December
2003, the Department of Finances One-Stop Shop
Inter-Agency Tax Credit and Duty Drawback Center

(DOF-OSS) asked the BIR to rule on the propriety of

the actions taken by Lazi Bay Resources
Development, Inc. (LBRDI). LBRDI filed an
administrative claim for refund for alleged input VAT
for the four quarters of 1998. Before the lapse of 120
days from the filing of its administrative claim, LBRDI
also filed a judicial claim with the CTA on 28March
2000 as well as a supplemental judicial claim on 29
September 2000.In its Memorandum dated 13 August
2002 before the BIR, the DOF-OSS pointed out that
LBRDI is "not yet on the right forum in violation of the
provision of Section 112(D) of the NIRC" when it
sought judicial relief before the CTA. Section 112(D)
provides for the 120+30 day periods for claiming tax
refunds.
The DOF-OSS itself alerted the BIR that LBRDI did
not follow the120+30 day periods. In BIR Ruling No.
DA-489-03, Deputy Commissioner Jose Mario C.
Buag ruled that "a taxpayer-claimant need not wait
for the lapse of the 120-day period before it could
seek judicial relief with the CTA by way of Petition for
Review." Deputy Commissioner Buag, citing the
7February 2002 decision of the Court of Appeals (CA)
in Commissioner of Internal Revenue v. Hitachi
Computer Products (Asia) Corporation5 (Hitachi),
stated that the claim for refund with the Commissioner
could be pending simultaneously with a suit for refund
filed before the CTA.
Before the issuance of BIR Ruling No. DA-489-03 on
10 December 2003, there was no administrative
practice by the BIR that supported simultaneous filing
of claims. Prior to BIR Ruling No. DA-489-03, the BIR
considered the 120+30 day periods mandatory and
jurisdictional.
Thus, prior to BIR Ruling No. DA-489-03, the BIRs
actual administrative practice was to contest
simultaneous filing of claims at the administrative and
judicial levels, until the CA declared in Hitachi that the
BIRs position was wrong. The CAs Hitachi decision is
the basis of BIR Ruling No. DA-489-03 dated 10
December 2003 allowing simultaneous filing. From
then on taxpayers could rely in good faith on BIR
Ruling No. DA-489-03 even though it was erroneous
as this Court subsequently decided in Aichi that the
120+30 day periods were mandatory and
jurisdictional.

41
We reiterate our pronouncements in our Decision as
follows:
At the time San Roque filed its petition for review with
the CTA, the 120+30 day mandatory periods were
already in the law. Section112(C) expressly grants the
Commissioner 120 days within which to decide the
taxpayers claim. The law is clear, plain, and
unequivocal: "x x x the Commissioner shall grant a
refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days
from the date of submission of complete documents."
Following the verbalegis doctrine, this law must be
applied exactly as worded since it is clear, plain, and
unequivocal. The taxpayer cannot simply file a
petition with the CTA without waiting for the
Commissioners decision within the 120daymandatory and jurisdictional period. The CTA will
have no jurisdiction because there will be no
"decision" or "deemed a denial" decision of the
Commissioner for the CTA to review. In San Roques
case, it filed its petition with the CTA a mere 13 days
after it filed its administrative claim with the
Commissioner. Indisputably, San Roque knowingly
violated the mandatory 120-day period, and it cannot
blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a
30-day period to appeal to the CTA the decision or
inaction of the Commissioner x x x.
xxxx
To repeat, a claim for tax refund or credit, like a claim
for tax exemption, is construed strictly against the
taxpayer.1wphi1 One of the conditions for a judicial
claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and
jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to
prosper, whether before, during, or after the effectivity
of the Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the Aichi
doctrine was adopted, which again reinstated the
120+30 day periods as mandatory and jurisdictional.6
San Roques argument must, therefore, fail. The
doctrine of operative fact is an argument for the
application of equity and fair play. In the present case,

we applied the doctrine of operative fact when we

recognized simultaneous filing during the period
between 10 December 2003, when BIR Ruling No.
DA-489-03 was issued, and 6 October 2010, when
this Court promulgated Aichi declaring the 120+30
day periods mandatory and jurisdictional, thus
reversing BIR Ruling No. DA-489-03.
The doctrine of operative fact is in fact incorporated in
Section 246 of the Tax Code, which provides:
SEC. 246. Non-Retroactivity of Rulings. - Any
revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers, except
in the following cases:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
(b) Where the facts subsequently gathered by
the Bureau of Internal Revenue are materially
different from the facts on which the ruling is
based; or
(c) Where the taxpayer acted in bad faith.
(Emphasis supplied)
Under Section 246, taxpayers may rely upon a rule or
ruling issued by the Commissioner from the time the
rule or ruling is issued up to its reversal by the
Commissioner or this Court. The reversal is not given
retroactive effect. This, in essence, is the doctrine of
operative fact. There must, however, be a rule or
ruling issued by the Commissioner that is relied upon
by the taxpayer in good faith. A mere administrative
practice, not formalized into a rule or ruling, will not
suffice because such a mere administrative practice
may not be uniformly and consistently applied. An
administrative practice, if not formalized as a rule or
ruling, will not be known to the general public and can
be availed of only by those within formal contacts with
the government agency.

42
Since the law has already prescribed in Section 246
of the Tax Code how the doctrine of operative fact
should be applied, there can be no invocation of the
doctrine of operative fact other than what the law has
specifically provided in Section 246. In the present
case, the rule or ruling subject of the operative fact
doctrine is BIR Ruling No. DA-489-03 dated 10
December 2003. Prior to this date, there is no such
rule or ruling calling for the application of the
operative fact doctrine in Section 246. Section246,
being an exemption to statutory taxation, must be
applied strictly against the taxpayer claiming such
exemption.
San Roque insists that this Court should not decide
the present case in violation of the rulings of the CTA;
otherwise, there will be adverse effects on the
national economy. In effect, San Roques doomsday
scenario is a protest against this Courts power of
appellate review. San Roque cites cases decided by
the CTA to underscore that the CTA did not treat the
120+30 day periods as mandatory and jurisdictional.
However, CTA or CA rulings are not the executive
issuances covered by Section 246 of the Tax Code,
which adopts the operative fact doctrine. CTA or CA
decisions are specific rulings applicable only to the
parties to the case and not to the general public. CTA
or CA decisions, unlike those of this Court, do not
form part of the law of the land. Decisions of lower
courts do not have any value as precedents.
Obviously, decisions of lower courts are not binding
on this Court. To hold that CTA or CA decisions, even
if reversed by this Court, should still prevail is to turn
upside down our legal system and hierarchy of courts,
with adverse effects far worse than the dubious
doomsday scenario San Roque has conjured.

San Roque cited cases7 in its Supplemental Motion

for Reconsideration to support its position that
retroactive application of the doctrine in the present
case will violate San Roques right to equal protection
of the law. However, San Roque itself admits that the
cited cases never mentioned the issue of premature
or simultaneous filing, nor of compliance with the
120+30 day period requirement. We reiterate that
"any issue, whether raised or not by the parties, but
not passed upon by the Court, does not have any
value as precedent."8 Therefore, the cases cited by
San Roque to bolster its claim against the application
of the 120+30 day period requirement do not have
any value as precedents in the present case.
Authority of the Commissioner
to Delegate Power
In asking this Court to disallow Taganitos claim for tax
refund or credit, the CIR repudiates the validity of the
issuance of its own BIR Ruling No. DA-489-03.
"Taganito cannot rely on the pronouncements in BIR
Ruling No. DA-489-03, being a mere issuance of a
Deputy Commissioner."9
Although Section 4 of the 1997 Tax Code provides
that the "power to interpret the provisions of this Code
and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance," Section 7 of the
same Code does not prohibit the delegation of such
power. Thus, "the Commissioner may delegate the
powers vested in him under the pertinent provisions of
this Code to any or such subordinate officials with the
rank equivalent to a division chief or higher, subject to
such limitations and restrictions as may be imposed
under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner."
WHEREFORE, we DENY with FINALITY the Motions
for Reconsideration filed by San Roque Power
Corporation in G.R. No. 187485,and the
Commissioner of Internal Revenue in G.R. No.
196113.
SO ORDERED.

43