1.

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

G.R. No. 193007 July 19, 2011

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

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax (VAT) by
the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he
sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the
Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past
administration.

Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of
the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno C.
Aquino III’s assumption of office in 2010, the BIR revived the idea and would impose the
challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to
include toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is
a "user’s tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the formula for computing toll fees,
its imposition would violate the non-impairment clause of the constitution.

ISSUE:

Whether or not toll fees collected by tollway operators be subjected to value- added tax.

RULING:

Yes, toll fees collected by tollway operators can be subjected to value-added tax.

The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties. The third paragraph of Section
108 defines "sale or exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing
or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport
of goods or cargoes; common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the Philippines; sales of
electricity by generation companies, transmission, and distribution companies;services of
franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of this Code and non-life
insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive. By qualifying "services" with the words "all kinds," Congress has given
the term "services" an all-encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VAT’s reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of "service" rendered for a fee
should be deemed included unless some provision of law especially excludes it.

Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis
for the services that tollway operators render. Essentially, tollway operators construct, maintain,
and operate expressways, also called tollways, at the operators’ expense. Tollways serve as
alternatives to regular public highways that meander through populated areas and branch out to
local roads. Traffic in the regular public highways is for this reason slow-moving. In
consideration for constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such operators could fully
recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private proprietary rights that
its contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

 4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons

who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of
services" rendered for a fee "regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties." This means that "services" to be subject to
VAT need not fall under the traditional concept of services, the personal or professional kinds
that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services,"
they also come under the specific class described in Section 108 as "all other franchise grantees"
who are subject to VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of less than
₱10 million and gas and water utilities) that Section 119 spares from the payment of VAT. The
word "franchise" broadly covers government grants of a special right to do an act or series of acts
of public concern.

Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public improvements
are activities of public consequence that necessarily require a special grant of authority from the
state.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes
in any sense. A tax is imposed under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are
collected by private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities, therefore, they
are not government exactions that can be properly treated as a tax. Taxes may be imposed only by
the government under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership.

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability
for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the
amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is
transferred is not the seller’s liability but merely the burden of the VAT.
 Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in
order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in
the course of trade or business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.

VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will
not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of
the toll fees that one has to pay in order to use the tollways.

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

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

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

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716
or the Expanded Value-Added Tax law was passed. It is only now, however, that the executive
has earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.

2.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

G.R. No. 152609 June 29, 2005

 As a general rule, the value-added tax (VAT) system uses the destination principle.
However, our VAT law itself provides for a clear exception, under which the supply of service
shall be zero-rated when the following requirements are met: (1) the service is performed in the
Philippines; (2) the service falls under any of the categories provided in Section 102(b) of the Tax
Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance
with the regulations of the Bangko Sentral ng Pilipinas. Since respondent’s services meet these
requirements, they are zero-rated. Petitioner’s Revenue Regulations that alter or revoke the
above requirements are ultra vires and invalid.

AMEX Philippines is a Philippine branch of American Express International, Inc., a

corporation duly organized and existing under and by virtue of the laws of the State of Delaware,
U.S.A., and is engaged primarily to facilitate the collections of Amex-HK receivables from card
members situated in the Philippines and payment to service establishments in the Philippines.

Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue
District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988
and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-
004868

On April 13, 1999, respondent filed with the BIR a letter-request for the refund of its
1997 excess input taxes in the amount of ₱3,751,067.04, which amount was arrived at after
deducting from its total input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only
for the third and fourth quarters of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively.
[Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax
attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person
may at his option be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.’

There being no immediate action on the part of the [petitioner], [respondent’s] petition
was filed on April 15, 1999.

"In support of its Petition for Review, the following arguments were raised by [respondent]:

A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in accordance with
existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent
(0%). According to [respondent], being a VAT-registered entity, it is subject to the VAT imposed
under Title IV of the Tax Code, to wit:

‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase "sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors: stock, real estate,
commercial, customs and immigration brokers; lessors of personal property; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; and similar services regardless of whether o[r] not the performance
thereof calls for the exercise or use of the physical or mental faculties: Provided That the
following services performed in the Philippines by VAT-registered persons shall be subject to
0%:

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration
is paid for in acceptable foreign currency which is remitted inwardly to the Philippines
and accounted for in accordance with the rules and regulations of the BSP. x x x.’

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the
pertinent portion of which reads as follows:

‘In Reply, please be informed that, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the Central [B]ank of the Philippines, your service
income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code
as amended].4 For this, there is no need to file an application for zero-rate.’

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues
are available as tax refund in accordance with Section 106 (now Section 112) of the [Tax Code]
and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:

‘Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those
covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may,
within two (2) years after the close of the taxable quarter when such sales were made, apply for
the issuance of tax credit certificate or refund of the input taxes due or attributable to such sales,
to the extent that such input tax has not been applied against output tax. x x x. [Section 106(a) of
the Tax Code]’5

‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate
shall not result in any output tax. The input tax on his purchases of goods or services related to
such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of
these Regulations. x x x.’ [Section 8(a), [RR] 5-87].’

ISSUE:

Whether or not the AMEX Philippines is entitled to the tax refund allegedly representing
excess input VAT for the year 1997.

RULING:
 Yes, AMEX Philippines is entitled to the tax refund. Section 102 of the Tax
Code11 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 ten percent
(10%) of gross receipts derived from the sale or exchange of services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those performed
or rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods
for others; x x x services of banks, non-bank financial intermediaries and finance companies; x x
x and similar services regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise
include:

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;

‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any such knowledge or information as is
mentioned in subparagraph (3);

xxxxxxxxx

‘(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or scheme;

xxxxxxxxx

"The term 'gross receipts’ means the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be performed
for another person, excluding value-added tax.

"(b) Transactions subject to zero percent (0%) rate. -- The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]

‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP];’"

xxxxxxxxx
 The law is very clear. Under the last paragraph quoted above, services performed by
VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking
of goods for persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP, are zero-
rated.

Respondent is a VAT-registered person that facilitates the collection and payment of

receivables belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in the Philippines is not in the same category as
"processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. In reply
to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent
earned from its parent company’s regional operating centers (ROCs) was automatically zero-rated
effective January 1, 1988.

Service has been defined as "the art of doing something useful for a person or company
for a fee" or "useful labor or work rendered or to be rendered by one person to another." For
facilitating in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign currency,
respondent renders service falling under the category of zero rating. Pursuant to the Tax Code, a
VAT of zero percent should, therefore, be levied upon the supply of that service.

For sure, the ancillary business of facilitating the said collection is different from
the main business of issuing credit cards. Under the credit card system, the credit card company
extends credit accommodations to its card holders for the purchase of goods and services from its
member establishments, to be reimbursed by them later on upon proper billing. Given the
complexities of present-day business transactions, the components of this system can certainly
function as separate billable services.

Under RA 8484, the credit card that is issued by banks18 in general, or by non-banks in
particular, refers to "any card x x x or other credit device existing for the purpose of obtaining x x
x goods x x x or services x x x on credit;" and is being used "usually on a revolving basis." This
means that the consumer-credit arrangement that exists between the issuer and the holder of the
credit card enables the latter to procure goods or services "on a continuing basis as long as the
outstanding balance does not exceed a specified limit." The card holder is, therefore, given "the
power to obtain present control of goods or service on a promise to pay for them in the future."

Business establishments may extend credit sales through the use of the credit card
facilities of a non-bank credit card company to avoid the risk of uncollectible accounts from their
customers. Under this system, the establishments do not deposit in their bank accounts the credit
card drafts23 that arise from the credit sales. Instead, they merely record their receivables from the
credit card company and periodically send the drafts evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement between them
usually provides for discounts to be taken by the company upon its redemption of the drafts. At
the end of each month, it then bills its credit card holders for their respective drafts redeemed
during the previous month. If the holders fail to pay the amounts owed, the company sustains the
loss.
 In the present case, respondent’s role in the consumer credit process described above
primarily consists of gathering the bills and credit card drafts of different service establishments
located in the Philippines and forwarding them to the ROCs outside the country. Servicing the bill
is not the same as billing. For the former type of service alone, respondent already gets paid.

Contrary to petitioner’s assertion, respondent can sell its services to another branch of the
same parent company. In fact, the business concept of a transfer price allows goods and services
to be sold between and among intra-company units at cost or above cost. A branch may be
operated as a revenue center, cost center, profit center or investment center, depending upon the
policies and accounting system of its parent company. Furthermore, the latter may choose not to
make any sale itself, but merely to function as a control center, where most or all of its expenses
are allocated to any of its branches.

The VAT is a tax on consumption "expressed as a percentage of the value added to goods
or services"purchased by the producer or taxpayer. As an indirect tax44 on services, its main
object is the transaction itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the Philippines. These services must be
regularly conducted in this country; undertaken in "pursuit of a commercial or an economic
activity;" for a valuable consideration; and not exempt under the Tax Code, other special laws, or
any international agreement.

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all
these requirements.

First, respondent regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a clearly
separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period of time;
on a significant scale; with a reasonable degree of frequency; and not at random,
fortuitous or attenuated.

Third, for this service, respondent definitely receives consideration in foreign currency
that is accounted for in conformity with law.

Finally, respondent is not an entity exempt under any of our laws or international
agreements.

As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular
type of service with theconsumption of its output abroad. In the present case, the facilitation of
the collection of receivables is different from the utilization or consumption of the outcome of
such service. While the facilitation is done in the Philippines, the consumption is not. Respondent
renders assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills of
service establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioner’s administrative interpretation, does
not imply that the service be done abroad in order to be zero-rated.
 Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services,
the term means the performance or "successful completion of a contractual duty, usually resulting
in the performer’s release from any past or future liability x x x."54 The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the
drafts and bills it has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when
their destination is determined. Instead, there can only be a "predetermined end of a
course"55 when determining the service "location or position x x x for legal
purposes."56 Respondent’s facilitation service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the Philippines. Under the destination principle, as
petitioner asserts, such service is subject to VAT at the rate of 10 percent.

However, the law clearly provides for an exception to the destination principle; that is,
for a zero percent VAT rate for services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
[BSP]."57 Thus, for the supply of service to be zero-rated as an exception, the law merely requires
that first, the service be performed in the Philippines; second, the service fall under any of the
categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second
category found in Section 102(b) of the Tax Code, because it is a service other than "processing,
manufacturing or repacking of goods" as mentioned in the provision. Undisputed is the fact that
such service meets the statutory condition that it be paid in acceptable foreign currency duly
accounted for in accordance with BSP rules. Thus, it should be zero-rated.

Again, contrary to petitioner’s stand, for the cost of respondent’s service to be zero-rated,
it need not be tacked in as part of the cost of goods exported. The law neither imposes such
requirement nor associates services with exported goods. It simply states that
the services performed by VAT-registered persons in the Philippines -- services other than the
processing, manufacturing or repacking of goods for persons doing business outside this country -
- if paid in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different
from the product that arises from the rendition of such service. The activity that creates the
income must not be confused with the main business in the course of which that income is
realized.

The law neither makes a qualification nor adds a condition in determining the tax situs of
a zero-rated service. Under this criterion, the place where the service is rendered determines the
jurisdiction60 to impose the VAT.61Performed in the Philippines, such service is necessarily
subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection" 63 to it,
in order to enforce a zero rate.64 The place of payment is immaterial;65much less is the place
where the output of the service will be further or ultimately used.

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero
rating of services other than the processing, manufacturing or repacking of goods -- in general
and without qualifications -- when paid for by the person to whom such services are rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with the BSP
(then Central Bank) regulations. Section 8 of RR 5-87 states:

"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate
shall not result in any output tax. The input tax on his purchases of goods or services related to
such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of
these Regulations.

xxxxxxxxx

" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons
are zero-rated:

‘(1) Services in connection with the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines, where such goods are actually shipped out of the
Philippines to said persons or their assignees and the services are paid for in acceptable foreign
currency inwardly remitted and duly accounted for under the regulations of the Central Bank of
the Philippines.

xxxxxxxxx

‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above
which are paid for by the person or entity to whom the service is rendered in acceptable foreign
currency inwardly remitted and duly accounted for in accordance with Central Bank regulations.
Where the contract involves payment in both foreign and local currency, only the service
corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid for in
local currency shall be subject to VAT at the rate of 10%.’"

RR 7-95, otherwise known as the "Consolidated VAT Regulations," 69 reiterates the

above-quoted provision and further presents as examples only the services performed in the
Philippines by VAT-registered hotels and other service establishments. Again, the condition
remains that these services must be paid in acceptable foreign currency inwardly remitted and
accounted for in accordance with the rules and regulations of the BSP. The term "other service
establishments" is obviously broad enough to cover respondent’s facilitation service. Section
4.102-2 of RR 7-95 provides thus:

"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered

person, which is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with these regulations.

"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:

‘(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP;
 ‘(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP;’"

xxxxxxxxx

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as

follows:

"Section 4.102-2(b)(2) -- ‘Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as
well as services by a resident to a non-resident foreign client such as project studies, information
services, engineering and architectural designs and other similar services, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP.’"

Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-

95, the amendment introduced by RR 5-96 further enumerates specific services entitled to zero
rating. Although superfluous, these sample services are meant to be merely illustrative. In this
provision, the use of the term "as well as" is not restrictive. As a prepositional phrase with an
adverbial relation to some other word, it simply means "in addition to, besides, also or too."

Neither the law nor any of the implementing revenue regulations aforequoted
categorically defines or limits the services that may be sold or exchanged for a fee, remuneration
or consideration. Rather, both merely enumerate the items of service that fall under the term "sale
or exchange of services."71

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a refund of the
substantial amount of excess input taxes to which it is entitled.

Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of
legislative approval of administrative interpretation by reenactment clearly obtains. This principle
means that "the reenactment of a statute substantially unchanged is persuasive indication of the
adoption by Congress of a prior executive construction."91

The legislature is presumed to have reenacted the law with full knowledge of the contents
of the revenue regulations then in force regarding the VAT, and to have approved or confirmed
them because they would carry out the legislative purpose. The particular provisions of the
regulations we have mentioned earlier are, therefore, re-enforced. "When a statute is susceptible
of the meaning placed upon it by a ruling of the government agency charged with its enforcement
and the [l]egislature thereafter [reenacts] the provisions [without] substantial change, such action
is to some extent confirmatory that the ruling carries out the legislative purpose." 92

In sum, having resolved that transactions of respondent are zero-rated, the Court upholds
the former’s entitlement to the refund as determined by the appellate court. Moreover, there is no
conflict between the decisions of the CTA and CA. This Court respects the findings and
conclusions of a specialized court like the CTA "which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax cases and has necessarily developed
an expertise on the subject."

Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is

completely freed from the VAT, because the seller is entitled to recover, by way of a refund or as
an input tax credit, the tax that is included in the cost of purchases attributable to the sale or
exchange.94 "[T]he tax paid or withheld is not deducted from the tax base." 95 Having been applied
for within the reglementary period,96 respondent’s refund is in order.

3.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.

G.R. No. 146984 July 28, 2006

The term "carrying on business" does not mean the performance of a single disconnected
act, but means conducting, prosecuting and continuing business by performing progressively all
the acts normally incident thereof; while "doing business" conveys the idea of business being
done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS)

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

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

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

The Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines,
Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
that "[v]alue-added tax, if any, shall be for the account of the PURCHASER." 5 Per arrangement,
an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC
as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether
or not the sale of the vessels was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in
behalf of private respondents. Thus, the parties agreed that should no favorable ruling be received
from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the
amount needed for the payment of the VAT on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-
88 dated 14 December 1988 from the BIR, holding that the sale of the vessels was subject to the
10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its
"transactions incident to its normal VAT registered activity of leasing out personal property
including sale of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT]."

ISSUE:

Whether or not the sale by the National Development Company (NDC) of five (5) of its
vessels to the private respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale.

RULING:

No, the same is not subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The fact that the sale
was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as
outside the coverage of VAT.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a
tax on consumption, even though it is assessed on many levels of transactions on the basis of a
fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the end users by the providers of these goods or
services who in turn may credit their own VAT liability (or input VAT) from the VAT payments
they receive from the final consumer (or output VAT). The final purchase by the end consumer
represents the final link in a production chain that itself involves several transactions and several
acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on
every level of consumption, yet assuages the manufacturers or providers of goods and services by
enabling them to pass on their respective VAT liabilities to the next link of the chain until finally
the end consumer shoulders the entire tax liability.

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

That the sale of the vessels was not in the ordinary course of trade or business of NDC
was appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first
decision which it eventually reconsidered.20We cite with approval the CTA’s explanation on this
point:
 In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955
(97 Phil. 992), the term "carrying on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss.
65, cited in Words & Phrases, Vol. 10, (1984)].

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

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

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

4.

G.R. No. 81311 June 30, 1988

KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC.,

HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C.
VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.

G.R. No. 81820 June 30, 1988

KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor
federations and alliances,petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER
OF INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents.

G.R. No. 81921 June 30, 1988

INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and

JESUS B. BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.

G.R. No. 82152 June 30, 1988

 RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF
INTERNAL REVENUE and SECRETARY OF BUDGET, respondent.

To justify the nullification of a law. there must be a clear and unequivocal breach of the
Constitution, not a doubtful and argumentative implication.

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 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.

ISSUE:

Whether or not EO 273 is unconstitutional on the Ground that the President had no
authority to issue the same.

RULING:

No, EO 273 is not unconstitutional. 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.

The word "convene" which has been interpreted to mean "to call together, cause to
assemble, or convoke," 1 is clearly different from assumption of office by the individual
members of Congress or their taking the oath of office. As an example, we call to mind the
interim National Assembly created under the 1973 Constitution, which had not been "convened"
but some members of the body, more particularly the delegates to the 1971 Constitutional
Convention who had opted to serve therein by voting affirmatively for the approval of said
Constitution, had taken their oath of office.

The 1987 Constitution mentions a specific date when the President loses her power to
legislate. If the framers of said Constitution had intended to terminate the exercise of legislative
powers by the President at the beginning of the term of office of the members of Congress, they
should have so stated (but did not) in clear and unequivocal terms. The Court has not power to re-
write the Constitution and give it a meaning different from that intended.

The Court also finds no merit in the petitioners' claim that EO 273 was issued by the
President in grave abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse
of discretion" has been defined, as follows:

Grave abuse of discretion" implies such capricious and whimsical exercise of

judgment as is equivalent to lack of jurisdiction (Abad Santos vs. Province of
Tarlac, 38 Off. Gaz. 834), or, in other words, where the power is exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, and it
must be so patent and gross as to amount to an evasion of positive duty or to a
virtual refusal to perform the duty enjoined or to act at all in contemplation of
law. (Tavera-Luna, Inc. vs. Nable, 38 Off. Gaz. 62). 2

Petitioners have failed to show that EO 273 was issued capriciously and whimsically or
in an arbitrary or despotic manner by reason of passion or personal hostility. It appears that a
comprehensive study of the VAT had been extensively discussed by this framers and other
government agencies involved in its implementation, even under the past administration. As the
Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the
exercise of her legislative powers. The legislative process started long before the signing when
the data were gathered, proposals were weighed and the final wordings of the measure were
drafted, revised and finalized. Certainly, it cannot be said that the President made a jump, so to
speak, on the Congress, two days before it convened." 3

Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and
regressive, in violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which
states:

Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.

The petitioners" assertions in this regard are not supported by facts and circumstances to
warrant their conclusions. They have failed to adequately show that the VAT is oppressive,
discriminatory or unjust. Petitioners merely rely upon newspaper articles which are actually
hearsay and have evidentiary value. To justify the nullification of a law. there must be a clear and
unequivocal breach of the Constitution, not a doubtful and argumentative implication.

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform.
The court, in City of Baguio vs. De Leon, 5 said:

... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking
for the Court, stated: "A tax is considered uniform when it operates with the same
force and effect in every place where the subject may be found."

There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came
in Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation; . . ." About
two years later, Justice Tuason, speaking for this Court in Manila Race Horses
Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in
his opinion and continued; "Taking everything into account, the differentiation
against which the plaintiffs complain conforms to the practical dictates of justice
and equity and is not discriminatory within the meaning of the Constitution."

To satisfy this requirement then, all that is needed as held in another case decided
two years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or
ordinance in question "applies equally to all persons, firms and corporations
placed in similar situation." This Court is on record as accepting the view in a
leading American case (Carmichael v. Southern Coal and Coke Co., 301 US 495)
that "inequalities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation." (Lutz v. Araneta, 98
Phil. 148, 153).

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or services
by persons engage in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from
the tax are sales of farm and marine products, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the general public. 6

The Court likewise finds no merit in the contention of the petitioner Integrated Customs
Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the
National Internal Revenue Code, unduly discriminates against customs brokers. The contested
provision states:

Sec. 103. Exempt transactions. — The following shall be exempt from the value-
added tax:

xxx xxx xxx

(r) Service performed in the exercise of profession or calling (except customs

brokers) subject to the occupation tax under the Local Tax Code, and
professional services performed by registered general professional partnerships;

The phrase "except customs brokers" is not meant to discriminate against customs
brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code,
which makes the services of customs brokers subject to the payment of the VAT and to
distinguish customs brokers from other professionals who are subject to the payment of an
occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read:

Sec. 102. Value-added tax on sale of services. — There shall be levied, assessed
and collected, a value-added tax equivalent to 10% percent of gross receipts
derived by any person engaged in the sale of services. The phrase sale of
services" means the performance of all kinds of services for others for a fee,
remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; and similar services regardless of whether or not the
performance thereof call for the exercise or use of the physical or mental
faculties: ...

With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a
potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are
concerned, is averted.

At any rate, the distinction of the customs brokers from the other professionals who are
subject to occupation tax under the Local Tax Code is based upon material differences, in that the
activities of customs brokers (like those of stock, real estate and immigration brokers) partake
more of a business, rather than a profession and were thus subjected to the percentage tax under
Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273
abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not
protest the classification of customs brokers then, the Court sees no reason why it should protest
now.
 The Court takes note that EO 273 has been in effect for more than five (5) months now,
so that the fears expressed by the petitioners that the adoption of the VAT will trigger
skyrocketing of prices of basic commodities and services, as well as mass actions and
demonstrations against the VAT should by now be evident. The fact that nothing of the sort has
happened shows that the fears and apprehensions of the petitioners appear to be more imagined
than real. It would seem that the VAT is not as bad as we are made to believe.

In any event, if petitioners seriously believe that the adoption and continued application
of the VAT are prejudicial to the general welfare or the interests of the majority of the people,
they should seek recourse and relief from the political branches of the government. The Court,
following the time-honored doctrine of separation of powers, cannot substitute its judgment for
that of the President as to the wisdom, justice and advisability of the adoption of the VAT. The
Court can only look into and determine whether or not EO 273 was enacted and made effective as
law, in the manner required by, and consistent with, the Constitution, and to make sure that it was
not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this
regard, the Court finds no reason to impede its application or continued implementation.

5.

G.R. No. 104151 March 10, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and COURT OF TAX APPEALS, respondents.

G.R No. 105563 March 10, 1995

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS,respondents.

Tax statutes are to receive a reasonable construction with a view to carrying out their
purposes and intent. They should not be construed as to permit the taxpayer to easily evade the
payment of the tax

Atlas Consolidated Mining and Development Corporation (herein also referred to as

ACMDC) is a domestic corporation which owns and operates a mining concession at Toledo
City, Cebu, the products of which are exported to Japan and other foreign countries. On April 9,
1980, the Commissioner of Internal Revenue (also Commissioner, for brevity), acting on the basis
of the report of the examiners of the Bureau of Internal Revenue (BIR), caused the service of an
assessment notice and demand for payment of the amount of P12,391,070.51 representing
deficiency ad valorem percentage and fixed taxes, including increments, for the taxable year 1975
against ACMDC.

Likewise, on the basis. of the BIR examiner's report in another investigation separately
conducted, the Commissioner had another assessment notice, with a demand for payment of the
amount of P13,531,466.80 representing the 1976 deficiency ad valorem and business taxes with
P5,000.00 compromise penalty, served on ACMDC on September 23, 1980. 4
 ACMDC protested both assessments but the same were denied, hence it filed two
separate petitions for review in the Court of Tax Appeals. These two cases, being substantially
identical in most respects except for the taxable periods and the amounts involved, were
eventually consolidated.

The Court of Tax Appeals rendered a consolidated decision holding, inter alia, that
ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976
in the respective amounts of P11,276,540.79 and P12,882,760.80 thereby effectively sustaining
the theory of ACMDC that in computing the ad valorem tax on copper mineral, the refining and
smelting charges should be deducted, in addition to freight and insurance charges, from the
London Metal Exchange (LME) price of manufactured copper.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive
of interest, consisting of 25% surcharge for late payment of the ad valorem tax and late filing of
notice of removal of silver, gold and pyrite extracted during certain periods, and for alleged
deficiency manufacturer's sales tax and contractor's tax.

The Commissioner of Internal Revenue claims that the Court of Appeals and the tax court erred
in allowing the deduction of refining and smelting charges from the price of copper concentrates.

I. G.R No. 104151

ISSUE: Whether or the CA and the Tax Court erred in allowing the deduction of refining and
smelting charges from the price of copper concentrates.

RULING:

No, the Court of Appeals and the tax court did not err in allowing the deduction of
refining and smelting charges from the price of copper concentrates.

The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at
the time material to this controversy, read as follows:

Sec. 243. Ad valorem taxes on output of mineral lands not covered by lease. —
There is hereby imposed on the actual market value of the annual gross output of
the minerals mineral products extracted or produced from all mineral lands not
covered by lease, an ad valorem tax in the amount of two per centum of the value
of the output except gold which shall pay one and one-half per centum.

Before the minerals or mineral products are removed from the mines, the
Commissioner of Internal Revenue or his representatives shall first be notified of
such removal on a form prescribed for the purpose. (As amended by Rep. Act
No. 6110.)

Sec. 246. Definitions of the terms "gross output," "minerals" and "mineral
products." — Disposition of royalties and ad valorem taxes. The term "gross
output" shall be interpreted as the actual market value of minerals or mineral
products, or of bullion from each mine or mineral lands operated as a separate
entity without any deduction from mining, milling, refining, transporting,
handling, marketing, or any other expenses: Provided, however, That if the
 minerals or mineral products are sold or consigned. abroad by the lessee or owner
of the mine under C.I.F. terms, the actual cost of ocean freight and insurance
shall be deducted. The output of any group of contiguous mining claim shall not
be subdivided. The word "minerals" shall mean all inorganic substances found in
nature whether in solid, liquid, gaseous, or any intermediate state. The term
"mineral products" shall mean things produced by the lessee, concessionaire or
owner of mineral lands, at least eighty per cent of which things must be minerals
extracted by such lessee, concessionaire, or owner of mineral lands. Ten per
centum of the royalties and ad valorem taxes herein provided shall accrue to the
municipality and ten per centum to the province where the-mines are situated,
and eighty per centum to the National Treasury. (As amended by Rep. Acts Nos.
834, 1299, and by Rep. Act No. 1510, approved June 16, 1956)."

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on

the actual market value of the annual gross output of the minerals or mineral products extracted or
produced from all mineral lands not covered by lease. In computing the tax, the term "gross
output" shall be the actual market value of minerals or mineral products, or of bullion from each
mine or mineral lands operated as a separate entity, without any deduction for mining, milling,
refining, transporting, handling, marketing or any other expenses. If the minerals or mineral
products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the
actual cost of ocean freight and insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of production or
extraction of said minerals or mineral products, but on the price which the same — before or
without undergoing a process of manufacture — would command in the ordinary course of
business.

In the instant case, the allowance by the tax court of smelting and refining charges as
deductions is not contrary to the above-mentioned provisions of the tax code which ostensibly
prohibit any form of deduction except freight and insurance charges. A review of the records will
show that it was the London Metal Exchange price on wire bar which was used as tax base by
ACMDC for purposes of the 2% ad valorem tax on copper concentrates since there was no
available market price quotation in the commodity exchange or markets of the world for copper
concentrates nor was there any market quotation locally obtainable. 10 Hence, the charges for
smelting and refining were assessed not on the basis of the price of the copper extracted at the
mine site which is prohibited by law, but on the basis of the actual market value of the
manufactured copper which in this case is the price quoted for copper wire bar by the London
Metal Exchange.

The issue of whether the ad valorem tax should be based upon the value of the finished
product, or the value upon extraction of the raw materials or minerals used in the manufacture of
said finished products, has been passed upon by us in several cases wherein we held that the ad
valorem tax is to be computed on the basis of the market value of the mineral in its condition at
the time of such removal and before it undergoes a chemical change through manufacturing
process, as distinguished from a purely physical process which does not necessarily involve the
change or transformation of the raw material into a composite distinct product.

Therefore, the imposable ad valorem tax should be based on the selling price of the
quarried minerals, which is its actual market value, and not on the price of the manufactured
product. If the market value chosen for the reckoning is the value of the manufactured. or finished
product, as in the case at bar, then all expenses of processing or manufacturing should be
deducted in order to approximate as closely as is humanly possible the actual market value of the
raw mineral at the mine site.

It was copper ore that was extracted by ACMDC from its mine site which, through a
simple physical process of removing impurities therefrom, was converted into copper concentrate
In turn, this copper concentrate underwent the process of smelting and refining, and the finished
product is called copper cathode or copper wire bar.

The copper wire bar is the manufactured copper. It is not the mineral extracted from the
mine site nor can it be considered a mineral product since it has undergone a manufacturing
process.

Significantly, the finding that copper wire bar is a product of a manufacturing process
finds support in the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax code
which provides:

"Manufacturer" includes every person who by physical or chemical process alters

the exterior texture or form or inner substance of any raw material or
manufactured or partially manufactured product in such a manner as to prepare it
for a special use or uses to which it could not have been put in its original
condition, or who by any such process alters the quality of any such raw material
or manufactured or partially manufactured product so as to reduce it to
marketable shape or prepare it for any of the uses of industry, or who by any such
process combines any such raw material or manufactured or partially
manufactured products with other materials: or products of the same or different
kinds and in such manner that the finished product of such process or
manufacture can be put to a special use or uses to which such raw material or
manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to
others and not for his own use or consumption.

Moreover, it is also worth noting at this point that the decision of the tax court was based
on its previous ruling in the case of Atlas Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, 15 dated January 23, 1981, which we quote with approval:

. . . The controlling law is clear and specific; it should therefore be applied as

Since the mineral or mineral product removed from its bed or mine at Toledo
City by petitioner is copper concentrate as admitted by respondent himself, not
copper wire bar, the actual market value of such copper concentrate in its
condition at the time of such removal without any deduction from mining,
milling, refining, transporting, handling, marketing, or any other expenses should
be the basis of the 2% ad valorem tax.

The conclusion reached is rendered clearer when it is taken into consideration

that the ad valorem tax is a severance tax, a charge upon the privilege of severing
or extracting minerals from the earth, and is due and payable upon removal of the
mineral product from its bed or mine, the tax being computed on the basis of the
market value of the mineral in its condition at the time of such removal and
before its being substantially changed by chemical or manufacturing (as
 distinguished from purely physical) processing. (Cebu Portland Cement Co. vs.
Commissioner of Internal Revenue, supra.) Copper wire bars, as discussed
above,, have already undergone chemical or manufacturing processing in Japan,
they are not extracted or produced from the earth by petitioner in its mine site at
Toledo City. Since the ad valorem tax is computed on the basis of the actual
market value of the mineral in its condition at the time of its removal from the
earth, which in this case is copper concentrate, there is no basis therefore for an
assertion that such tax should be measured on the basis of the London Metal
Exchange price quotation of the manufactured wire bars without any deduction
of smelting and refining charges.The Court of Tax Appeals is not a mere superior
administrative agency or tribunal but is a part of the judicial system of the
Philippines. It was created by Congress pursuant to Republic Act No. 1125,
effective June 16, 1954, as a centralized court specializing in tax cases. It is a
regular court vested with exclusive appellate jurisdiction over cases arising under
the National Internal Revenue Code, the Tariff and Customs Code, and the
Assessment Law. 18

Although only the decisions of the Supreme Court establish jurisprudence or doctrines in
this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive effect and may
serve as judicial guides. It is even possible that such a conclusion or pronouncement can be raised
to the status of a doctrine if, after it has been subjected to test in the crucible of analysis and
revision the Supreme Court should find that it has merits and qualities sufficient for its
consecration as a rule of jurisprudence.

Furthermore, as a matter of practice and principle, the Supreme Court will not set aside
the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and
has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority on its part.

II. G.R. No. 105563

ISSUES:

A. Whether or not petitioner is liable for payment, of the 25% surcharge for alleged late
filing of notice of removal/late payment of the ad valorem tax on silver, gold and pyrite extracted
during the taxable year 1976.

B. Whether or not petitioner is liable for payment of the manufacturer' s sales tax and
surcharge during the taxable year 1975, plus interest, on grinding steel balls borrowed by its
competitor; and

C. 'Whether or not petitioner is liable for payment of the contractor's tax and surcharge on
the alleged lease of personal property during the taxable years 1975 and 1976 plus interest.

RULINGS:

A. Surcharge on Silver, Gold and Pyrite

 ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge
on silver, gold and pyrite extracted by it during tax year 1976.

Sec. 245 of the then tax code states:

Sec. 245. Time and manner of payment of royalties or ad valorem taxes. — The
royalties or ad valorem taxes as the case may be, shall be due and payable upon
the removal of the mineral products from the locality where mined. However, the
output of the mine may be removed from such locality without the pre-payment
of such royalties or ad valorem taxes if the lessee, owner, or operator shall file a
bond in the form and amount and with such sureties as the Commissioner of
Internal Revenue may require,. conditioned upon the payment of such royalties
or ad valorem taxes, in which case it shall be the duty of every lessee, owner, or
operator of a mine to make a true and complete return in duplicate under oath
setting forth the quantity and the actual market value of the output of his mine
removed during each calendar quarter and pay the royalties or ad valorem taxes
due thereon within twenty days after the close of said quarter.

In case the royalties or ad valorem taxes are not paid within the period prescribed
above, there shall be added thereto a surcharge of twenty-five per centum. Where
a false or fraudulent return is made, there shall be added to the royalties or ad
valorem taxes a surcharge of fifty per centum of their amount. The surcharge So,
added: shall be collected in the same manner and as part of the royalties or ad
valorem taxes, as the case may be.

Under the aforesaid provision, the payment of the ad valorem tax shall be made upon
removal of the mineral products from the mine site or if payment cannot be made, by filing a
bond in the form and amount to be approved by the Commissioner conditioned upon the payment
of the said tax.

In the instant case, the records show that the payment of the ad valorem tax on gold,
silver and pyrite was belatedly made. ACMDC, however, maintains that it should not be required
to pay the 25% surcharge because the correct quantity of gold and silver could be determined
only after the copper concentrates had gone through the process of smelting and refining in Japan
while the amount of pyrite cannot be determined until after the flotation process separating the
copper mineral from the waste material was finished.

Prefatorily, it must not be lost sight of that bad faith is ; not essential for the imposition of
the 25% surcharge for late payment of the ad valorem tax.

The other allegation of ACMDC is that there was no removal of pyrite from the mine site
because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation, whose plant
is located inside the mineral concession of ACMDC in Sangi, Toledo City. ACMDC, however, is
already barred by estoppel in pais from putting that matter in issue.

An ad valorem tax on pyrite for the same tax year was already declared and paid by
ACMDC. In fact, that payment was used as the basis for computing the 25% surcharge. It was
only when ACMDC was assessed for the 25% surcharge that said issue was raised by it. Also, the
evidence shows that deliveries of pyrite were not exclusively made to its sister company, Atlas
Fertilizer Corporation. There were shipments of pyrite to other companies located outside of its
mine site, in addition to those delivered to its aforesaid sister company.

B. Manufacturer's Tax and Contractor's Tax

The manufacturer's tax is imposed under Section 186 of the tax code then in force which
provides:

Sec. 186. Percentage tax on sales of other articles. — There shall be levied,
assessed and collected once only on every original sale, barter, exchange, or
similar transaction either for nominal or valuable consideration, intended to
transfer ownership of, or title to, the articles not enumerated in sections one
hundred and eighty-four-A, one hundred and eighty five, one hundred and
eighty-five-A, one hundred eighty-five-B, and one hundred eighty-six-B, a tax
equivalent to seven per centum of the gross selling price or gross value in money
of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by
the manufacturer or producer: Provided, That where the articles subject to tax
under this Section are manufactured out of materials likewise subject to tax under
this section and section one hundred eighty-nine, the total cost of such materials,
as duly established, shall be deductible from the gross selling price or gross value
in money of such manufactured articles. (As amended by Rep. Act No. 6110 and
by Pres. Decree No. 69.)

On the other hand, the contractor's tax is provided for under Section 191 of the same
code, paragraph 17 of which declares that lessors of personal property shall be subject to a
contractor's tax of 3% of the gross receipts.

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on
Business and Occupation." These "privilege taxes on business" are taxes imposed upon the
privilege of engaging in business. They are essentially excise taxes. 27 To be held liable for the
payment of a privilege tax, the person or entity must be engaged in business, as shown by the fact
that the drafters of the tax code had purposely grouped said provisions under the general heading
adverted to above.

"To engage" is to embark on a business or to employ oneself therein. The word

"engaged" connotes more than a single act or a single transaction; it involves some continuity of
action. "To engage in business" is uniformly construed as signifying an employment or
occupation which occupies one's time, attention, and labor for the purpose of a livelihood or
profit. The expressions "engage in business," "carrying on business" or "doing business" do not
have different meanings, but separately or connectedly convey the idea of progression, continuity,
or sustained activity. "Engaged in business" means occupied or employed in business; carrying on
business" does not mean the performance of a single disconnected act, but means conducting,
prosecuting, and continuing business by performing progressively all the acts normally incident
thereto; while "doing business" conveys the idea of business being done, not from time to time,
but all the time.

The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient
to constitute carrying on a business according to the intent with which the act is done. A single
sale of liquor by one who intends to continue selling is sufficient to render him liable for
"engaging in or carrying on" the business of a liquor dealer.
 There may be a business without any sequence of acts, for if an isolated transaction,
which if repeated would be a transaction in a business, is proved to have been undertaken with the
intent that it should be the first of several transactions, that is, with the intent of carrying on a
business, then it is a first transaction in an existing business.

Thus, where the end sought is to make a profit, the act constitutes "doing- business." This
is not without basis. The term "business," as used in the law imposing a license tax on business,
trades, and so forth, ordinarily means business in the trade or commercial sense only, carried on
with a view to profit or livelihood; 31 It is thus restricted to activities or affairs where profit is the
purpose, or livelihood is the motive. Since the term "business" is being used without any
qualification in our aforesaid tax code, it should therefore be therefore be construed in its plain
and ordinary meaning, restricted to activities for profit or livelihood.

In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It
asserts that it is not engaged in the business of selling grinding steel balls, but it only produces
grinding steel balls solely for its own use or consumption, However, it admits having lent its
grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging in
business" hereinbefore discussed, we are inclined to agree with ACMDC that it should not and
cannot be held liable for the payment of the manufacturer's tax.

First, under the tax code then in force, the 7% manufacturer's sales tax is imposed on the
manufacturer for every original sale, barter, exchange and other similar transaction intended to
transfer ownership of articles. As hereinbefore quoted, and we repeat the same for facility of
reference, the term "manufacturer" is defined in the tax code as including "every person who by
physical or chemical process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured product in such manner as to prepare it for a
special use or uses to which it could not have been put in its original condition, or who by any
such process alters the quality of any such raw material or manufactured or partially
manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of
industry, or who by any such process combines any such raw material or manufactured or
partially manufactured products with other materials or products of the same or of different kinds
and in such manner that the finished product of such process or manufacture can be put to a
special use or uses to which such raw materials or manufactured or partially manufactured
products in their original condition could not have been put, and who in addition alters such raw
material or manufactured or partially manufactured products, or combines the same to produce
such finished products for the purpose of their sale or distribution to others and not for his own
use or consumption.

Thus, a manufacturer, in order to be subjected to the necessity of paying the percentage

tax imposed by Section 186 of the tax code, must be 'engaged' in the sale, barter or exchange of;
personal property. Under a statute which imposes a tax on persons engaged in the sale, barter or
exchange of merchandise, a person must be occupied or employed in the sale, barter or exchange
of personal property. A person can hardly be considered as occupied or employed in the sale,
barter or exchange of personal property when he has made one purchase and sale only.

Second, it cannot be legally asserted, for purposes of this particular assessment only, that
ACMDC was engaged in the business of selling grinding steel balls on the basis of the isolated
transaction entered into by it in 1975. There is no showing that said transaction was undertaken
by ACMDC with a view to gaining profit. therefrom and with the intent of carrying on a business
therein. On the contrary, what is clear for us is that the sale was more of an accommodation to the
other mining companies, and that ACMDC was subsequently replaced by other suppliers shortly
thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the
B.I.R. Investigation Team itself which found that —

ACMDC has a foundry shop located at Sangi, Toledo City, and manufactures
grinding steel balls for use in its ball mills in pulverizing the minerals before they
go to the concentrators, For the grinding steel balls manufactured by ACMDC
and used in its operation, we found it not subject to any business tax. But there
were times in 1975 when other mining companies were short of grinding steel
balls and ACMDC supplied them with these materials manufactured in its
foundry shop. According to the informant, these were merely accommodations
and they were replaced by the other suppliers. 35

At most, whatever profit ACMDC may have realized from that single transaction was just
incidental to its primordial purpose of accommodating other mining companies. Well-settled is
the rule that anything done as a mere incident to, or as a necessary consequence of, the principal
business is not ordinarily taxed as an independent business in itself. 36 Where a person or
corporation is engaged in a distinct business and, as a feature thereof, in an activity merely
incidental which serves no other person or business, the incidental and restricted activity is not
considered as intended to be separately taxed.

In fine, on this particular aspect, we are consequently of the considered opinion and so
hold that ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186
of the tax code.

The same conclusion; however, cannot be made with respect to the contractor's tax being
imposed on ACMDC. It cannot validly claim that the leasing out of its personal properties was
merely an isolated transaction. Its book of accounts shows that several distinct payments were
made for the use of its personal properties such as its plane, motor boat and dump truck. 38 The
series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be
deduced from the fact that for the tax years 1975 and 1976 there were profits earned and reported
therefor. It received a rental income of P630,171.56 for tax year 39 and P2,450,218.62 for tax
year 1976.

Considering that there was a series of transactions involved, plus the fact that there was
an apparent and protracted intention to profit from such activities, it can be safely concluded that
ACMDC was habitually engaged in the leasing out of its plane, motor boat and dump truck, and
is perforce subject to the contractor's tax.

The allegation of ACMDC that it did not realize any profit from the leasing out of its said
personal properties, since its income therefrom covered only the costs of operation such as
salaries and fuel, is not supported by any documentary or substantial evidence. We are not,
therefore, convinced by such disavowal.

Assessments are prima facie presumed correct and made in good faith. Contrary to the
theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has the duty of
proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. All presumptions are in favor
of tax assessments. 41 Verily, failure to present proof of error in assessments will justify judicial
affirmance of said assessment. 42

Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to
receive a reasonable construction with a view to carrying out their purposes and intent. They
should not be construed as to permit the taxpayer to easily evade the payment of the tax. On this
note, and under the confluence of the weighty. considerations and authorities earlier discussed,
the challenged assessment against ACMDC for contractor's tax must be upheld.