Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 153205             January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

D E C I S I O N

CARPIO, J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCOR’s two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended 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."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)."

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:

[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondent’s] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

x x x x

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services are not destined for consumption abroad, they are not of the same nature as project studies, information services, engineering and architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner, respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98, respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) 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 theBangko Sentral ng Pilipinas (BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioner’s interpretation of Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-rating. "This is indicated by the additional phrase ‘as well as services by a resident to a non-resident foreign client, such as project studies, information services and engineering and architectural designs and other similar services.’ In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for consumption abroad" in order to be VAT zero-rated.13

The Court of Appeals disagreed with petitioner’s argument that our VAT law generally follows the destination principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if indeed the ‘destination principle’ underlies and is the basis of the VAT laws, then petitioner’s proper remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that respondent’s services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s services are subject to 0% VAT and which respondent invoked in applying for refund of the output VAT.

Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions 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 Bangko Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent contends that its services which "constitute the actual operation and management of two (2) power barges in Mindanao" are not "even remotely similar to project studies, information services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondent’s services need not be "destined to be consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of services is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an export sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of services is doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing business in the Philippines. While the Consortium’s principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23 (Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance of NAPOCOR’s power barges cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondent’s services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As

the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),24 the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American Express26 is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.

Petitioner’s filing of his Answer before the CTA challenging respondent’s claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondent’s status will deprive respondent of a refund of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioner’s Answer dated 2 March 2000 before the CTA contesting respondent’s claim for refund, respondent’s services shall be subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 134467 November 17, 1999

ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

 

PANGANIBAN, J.:

A litigation is neither a game of technicalities nor a battle of wits and legalisms; rather, it is an abiding search for truth, fairness and justice. While stipulations of facts are normally binding on the declarant or the signatory thereto, a party may nonetheless be allowed to show that an admission made therein was the result of a "palpable mistake" that can be easily verified from the stipulated facts themselves and from other incontrovertible pieces of evidence admitted by the other party. A patently clerical mistake in the stipulation of facts, which would result in falsehood, unfairness and injustice, cannot be countenanced.

Statement of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, challenging in part the February 6, 1998 Decision 1 of the Court of Appeals 2 (CA) in CA-GR SP No. 34152 and its July 2, 1998 Resolution denying reconsideration.

The Court of Tax Appeals in CTA Case No. 4794 was reversed in the herein assailed CA Decision, which ruled as follows:

a. VAT Ruling No. 008-92, in imposing 10% VAT on sales of copper concentrates to PASAR, pyrite to PHILPHOS and gold to the Central Bank lacks legal bases, hence, of no effect.

b. VAT Ruling No. 059-92 (dated April 20, 1992) which applies retroactively to January 1, 1988 VAT Ruling No. 008-92 (dated January 23, 1992) is contrary to law.

c. Refund of input tax for zero-rated sale of goods to Board of Investment (BOI)-registered exporters shall be allowed only upon presentation of documents of liquidation evidencing the actual utilization of the raw materials in the manufacture of goods at least 70% of which have been actually exported (Revenue Regulations No. 2-88).

d. Revenue Regulations that automatically disallow VAT refunds on account of failure to faithfully comply with the documentary requirements enunciated thereunder are valid.

e. A VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed transitional input tax which shall be credited against output tax. Be that as it may, current input tax, excluding the presumptive input tax, may be credited against output tax on miscellaneous taxable sales if the suspended taxes on purchasers and

importations has not been fully paid. Further, direct offsetting of excess input over taxes against other internal revenue tax liabilities of the zero-rated taxpayer is not allowed.

f. Sec. 106(e) of the NIRC prescribing a sixty (60) day period from the date of filing of the VAT refund/tax credit applications within which the Commissioner shall refund the input tax is merely directory. Hence, no interest can be due as a result of the failure of the Commissioner to act on the petitioner's claim within sixty (60) days from the date of application therefor.

g. Motu proprio application of excess tax credits to other tax liabilities is not allowed.

WHEREFORE, premises considered, the assailed decision and resolution of the Court of Tax Appeals in C.T.A. Case no. 4794 are hereby REVERSED and SET ASIDE. Let the records of this case be remanded to the court a quo for a proper computation of the refundable amount which should be remitted, without interest, to the petitioner within sixty (60) days from the finality of this decision. No pronouncement as to costs. 3

Asking that the foregoing disposition be partially set aside, the instant Petition specifically prays for a new judgment declaring that:

(1) Petitioner was VAT registered beginning January 1, 1988 and continued to be so for the first quarter of 1990;

(2) In the computation of the amount to be refunded to petitioner, the totality of the sales to the EPZA-registered enterprise must be taken into account, not merely the proportion which such sales have to the actual exports of the enterprise.

(3) Section 21 of Revenue Regulations No. 5-87 insofar as it disallows input taxes for purchases not covered by VAT invoices is invalid and contrary to law. 4

The Facts

The facts are undisputed. They were culled by the Court of Appeals from the joint stipulation of the parties, which we quote:

The antecedent facts of the case as agreed to by the parties in the Joint Stipulation of Facts submitted to the Court of Tax Appeals on January 8, 1993, follow:

xxx xxx xxx

2. Petitioner is engaged in the business of mining, production and sale of various mineral products, consisting principally of copper concentrates and gold and duly registered with the BIR [Bureau of Internal Revenue] as a VAT [Value Added Tax] enterprise per its Registration No. 32-A-6-002224. (p. 250, BIR Records).

3. Respondent [BIR] duly approved petitioner's application for VAT zero-rating of the following sales:

a. Gold to the Central Bank (CB) [now referred to as the Bangko Sentral ng Pilipinas;]

b. Copper concentrates to the Philippines Smelting and Refining Corp. (PASAR); and

c. Pyrite [concentrated] to Philippine Phosphates, Inc. (Philphos).

The BIR's approval of sales to CB and PASAR was dated April 21, 1988 while zero-rating of sales to PHILPHOS was approved effective June 1, 1988.

4. PASAR and Philphos are both Board of Investments (BOI) and Export Processing Zone Authority (EPZA) registered export-oriented enterprises located in an EPZA zone.

5. On April 20, 1990, petitioner filed a VAT return with the BIR for the first quarter of 1990 whereby it declared its sales described in par. 3 hereof, i.e., to the CB, PASAR and Philphos, as zero-rated sales and therefore not subject to any output VAT . . ..

6. On or about July 24, 1990, petitioner filed a claim with respondent for refund/credit of VAT input taxes on its purchase of goods and services for the first quarter of 1990 in the total amount of P40,078,267.81 . . ..

7. On or about September 2, 1992, petitioner filed an Amended Application for tax credit/refund in the amount ofP 35,522,056.58 . . ..

8. On September 9, 1992, respondent resolved petitioner's claim for VAT refund/credit by allowing only P2,518,122.32 as refundable/creditable while disallowing P33,003,934.26, to wit:

a. Amount claimed P35,522,056.58

LESS: Disallowances

b. No O.R./Invoices/ 1,384,172.48

Proper Documents

c. Invoice without VAT 474,606.87

Registration Number

d. Invoice with Sold 31,499.04

to "Cash"

e. Invoice without 326,374.23

Authority to Print

f. VAT No. stamped/ 441,195.54

typewritten/handwritten

printed in 1988-1989

g. Others 71,088.09

h. Erroneous computation 85,382.58

i 2,814,318.83

——————

j. ALLOWANCE INPUT

P32,707,737.75

TAX

OTHER DEDUCTIONS:

k. Output tax due on 972,535.67

miscellaneous taxable sales

l. *Output tax due on sale 16,301,277.11

of gold to the Central Bank

(179,314,048.17 x 1/11)

m. **Input tax attributable to sales

to PASAR (submitted BOI

certification did not qualify as

required under RMO 22-92)

(465,095,536.14

————————

1,226,381,659.74 x

32,707,737.75) 12,404,150.65

n. ***Input tax attributable to

sales to PHILPHOS (No BOI

certificate from the BOI)

(18,809,519.07/

———————

1,226,381,659.74 x 501,652.00

32,707,737.75)

o. Penalty for issuance of 10,000.00 30,189,615.43

invoices without authority ———— ——————

to use loose leaf sales invoices

ALLOWANCE INPUT TAX P2,518,122.32

RECOMMENDED FOR

ISSUANCE OF TAX CREDIT

CERTIFICATE

9. A supplemental report of investigation was submitted by the BIR examiners on October 15, 1992 recommending the increase in allowable input tax credit from P 2,518,122.32 to P12,101,569.11 or an increment of P9,583,446.79 due to petitioner's submission of BOI certifications on the sales to PASAR which brought down the deduction of P12,404,150.65 to P2,518,122.32.

The parties further stipulated that the issues to be resolved are:

a. the validity of VAT Ruling No. 008-92 in connectionwith —

i. the applicability of 10% VAT rating with regard to sales of copper concentrates to PASAR and pyrite to PHILPHOS; and

ii. the application of 10% VAT on sales of gold to CB.

b. the validity of VAT Ruling No. 59-92 dated April 20, 1992 which applies retroactively VAT Ruling No. 008-92 dated January 23, 1992;

c. the applicability of Revenue Regulation 2-88 in that it requires the purchaser to export more than 70% of its total sales for the supplier, such as petitioner to be 100% zero-rated;

d. the validity of the disallowance of input taxes in the amount of P2,814,318.83 on the ground that the petitioner has not complied with Article 108(a) of the NIRC;

e. the validity of BIR Regulations that automatically disallow VAT refund for failure to present the required documents although the purchases can be substantiated by other documents;

f. the propriety of deducting the "output tax on miscellaneous taxable sales" from the current input tax instead of against petitioner's presumptive input tax (PIT) which, as per BIR findings, are sufficient to cover the amount assessed;

g. the mandatory nature of Section 106 (e) of the NIRC prescribing a specific period of sixty (60) days within which to process and grant applications for input VAT refund and the corresponding right given to claimants to apply VAT credits to other tax liabilities as allowed under Section 104(b) of the NIRC as well as interest for the delay in the grant of petitioner's claims for VAT refund/credit.

On November 8, 1993, the [Court of Tax Appeals] rendered a decision . . .. The petitioner moved for reconsideration of the decision, which mo[tion] the respondent court denied. 5

Ruling of the Court of Appeals

Ruling that the parties were bound by the above-quoted Joint Stipulation of Facts which it was powerless to modify, the Court of Appeals held: "[I]t is beyond cavil that the petitioner is registered with the BIR as a VAT enterprise effective August 15, 1990." 6 It upheld VAT Ruling No. 008-92 regarding the schedule of taxes to be imposed on VAT-registered entities, explaining that the "zero-percent rating" of BOI-registered enterprises shall be set in proportion to the amount of its actual exports; and that EPZA and BOI registrations were by themselves not enough for zero-rating to apply.

Finally, the CA ruled as mandatory the information which Revenue Regulation 5-87 required to be stated in VAT invoices and receipts, as such information had already been prescribed by Sections 108 (a) and 238 of the Tax Code and violations thereof were penalized under Sections 111 and 263 of the same Code.

On August 24, 1998, the present Petition was filed. 7 As the respondent commissioner did not appeal the CA Decision and Resolution, the Court shall take up in this review only the issues raised by Atlas Consolidated Mining and Development Corporation.

Issues

Petitioner submits, for the consideration of this Court, the following issues:

I

Whether or not the court a quo erred in upholding the finding of the Court of Tax Appeals that petitioner is not VAT-registered for the 1st quarter of 1990 despite clear evidence showing the date of effectivity of petitioner's VAT registration to be January 1, 1988.

II

Whether or not the court a quo erred in not holding that the totality of sales to EPZA-registered enterprises should be zero-rated, not merely the proportion which such sales have to the actual exports of the enterprise.

III

[Whether or not] the court a quo erred in not declaring as invalid Section 21 of Revenue Regulations No. 5-87, insofar as it went beyond the law by disallowing input VAT for purchases not covered by VAT invoices. 8

The Court's Ruling

The Petition is partly meritorious.

First Issue: VAT Registration

Petitioner contends that its sales to Philippine Phosphate, Inc. (Philphos) and Philippine Smelting and Refining Corporation (PASAR) should be zero-rated for the first quarter of 1990, and not only as of "August 15, 1990" as held by the CA, which allegedly ignored "clear evidence" that petitioner's VAT registration had been effected earlier, on January 1, 1988.

Respondent commissioner counters that by virtue of the Joint Stipulation of Facts, petitioner is bound by its admission therein that it was registered as a VAT enterprise effective only from August 15, 1990, well beyond the first quarter of 1990, the period for which it is applying for tax credit.

We agree with the Court of Appeals that, as a rule, a judicial admission, such as that made by petitioner in the Joint Stipulation of Facts, is binding on the declarant. However, such rule does not apply when there is a showing that (1) the admission was made through a "palpable mistake," or that (2) "no such admission was made." Indeed, Section 4 of Rule 129 of the Rules of Court states:

Sec. 4. Judicial Admissions. — An admission, verbal or written, made by a party in the course of the proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no such admission was made.

In the present case, we are convinced that a "palpable mistake" was committed. True, petitioner was VAT-registered under Registration No. 32-A-6-00224, as indicated in Item 2 of the Stipulation:

2. Petitioner is engaged in the business of mining, production and sale of various mineral products, consisting principally of copper concentrates and gold duly registered with the BIR as a VAT enterprise per its Registration No. 32-A-6-002224 (p. 250, BIR Records). 9

Moreover, the Registration Certificate, which in the said stipulation is alluded to as appearing on page 250 of the BIR Records, bears the number 32-0-004622 and became effective August 15, 1990. But the actual VAT Registration Certificate, which petitioner mentioned in the stipulation, is numbered 32-A-6-002224 and became effective on January 1, 1988, thereby showing that petitioner had been VAT-registered even prior to

the first quarter of 1990. Clearly, there exists a discrepancy, since the VAT registration number stated in the joint stipulation is NOT the one mentioned in the actual Certificate attached to the BIR Records.

The foregoing simply indicates that petitioner made a "palpable mistake" either in referring to the wrong BIR record, which was evident, or in attaching the wrong VAT Registration Certificate. The Court of Appeals should have corrected the unintended clerical oversight. In any event, the indelible fact is: the petitioner was VAT-registered as of January 1, 1988.

Similarly, in Philippine American General Insurance Company v.IAC, 10 this Court accepted the explanation and the subsequent proof of petitioner that the latter had made a mistake in stating the date when the Order denying its Motion for Reconsideration was actually received. Thus, the Court ruled that the appeal to the IAC had been filed on time. It explained:

In assailing the decision of the respondent Intermediate Appellate Court, petitioner maintains that it was error for respondent court to refuse to consider petitioner's evidence that the accrual date of receipt by it of the order denying the motion for reconsideration of the lower court's decision was November 15, 1982, not November 12, 1982, as mistakenly stated in the Notice of Appeal. Invoking Section 2 of Rule 129 of the Rules of Court, petitioner contends that a party is allowed to contradict an admission in its pleading if it is shown that the same was made through palpable mistake.

We find merit in the petition. Apart from the showing that notice of the trial court's order denying petitioner's motion for reconsideration was actually received by petitioner on November 15, 1982, the fact that the order was sent to the wrong address was apparently not considered by both the respondent appellate court and the trial court. . .

That herein petitioner's explanation of the discrepancy was made only after the CTA had promulgated its Decision is understandable. It was only when that promulgation was made that petitioner became aware of the clerical error in the Joint Stipulation of Facts. Hence, it explained in its Motion for Reconsideration therein that it had already been VAT-registered as early as the first quarter of 1988 under VAT Registration No. 32-A-6-002224. Petitioner attached to said Motion a copy of the Registration Certificate corresponding to the above number, showing January 1, 1988 as its registration date.

We note that petitioner also had another registration number, 32-0-004622, because sometime during the third quarter of 1990, it moved its principal place of business to a different revenue district. Its second registration as a VAT enterprise on August 15, 1990 was made in compliance with Section 3 of Revenue Memo Circular No. 6-88, which required it to re-register after it moved its principal place of business to another revenue district. The said Circular reads as follows:

Sec. 3. Time, Place and Manner of Registration. — Persons who are required to register under Section 2 of these regulations shall file an application for Non-VAT registration within 10 days from the commencement of the business with the Revenue District Officer, or any other authorized officer of the Bureau of Internal Revenue indicating the name of style of the business, place of residence, place where the business is conducted, and such other information as may be required by the Commissioner in the form prescribed therefor.

Persons transferring their place of business to another Revenue District shall likewise file their application for registration within 10 days from the date of transfer. 11

The above regulation implements Section 107 (a) of the Tax Code, which provides that registration shall be in the revenue district where the main office is located. The said provision states:

Sec. 107. Registration of value-added taxpayers.

(a) In general. — Any person subject to a value-added tax under Sections 100 and 102 of this Code shall register with the appropriate Revenue District Officer and pay an annual registration fee in the amount of One thousand pesos (P1,000.00) for every separate or distinct establishment or place of business and every year thereafter on or before the last day of January. Any person just commencing a business subject to the value-added tax must pay the fee before engaging therein.

A person who maintains a head or main office and branches in different places shall register with the Revenue District Office, collection agent, or authorized Treasurer of the municipality where each place of business or branch is situated. 12

Petitioner presented the two different Registration Certificates corresponding to the two registration numbers assigned to it. The Registration Certificate numbered 32-A-6-002224 listed petitioner's address as 8776 Paseo de Roxas, Makati, and its date of effectivity as January 1, 1988. The Registration Certificate numbered 32-0-004622 showed petitioner's address (head office) to be at the 15th Floor of the Pacific Star Building in Gil Puyat Street corner Makati Avenue, Makati, and its date of effectivity as August 15, 1990.

In view of the foregoing, we believe that petitioner should be taxed only for such amount and under such circumstances as are true, fair and equitable. After all, even the respondent commissioner, as shown in the other provisions of the joint stipulation, has granted it VAT exemption for the period even prior to the first quarter of 1990; that is, as early as January 1, 1988. In view of the foregoing, we stress that a litigation is neither a game of technicalities nor a battle of wits and legalisms. Rather, it is an abiding search for truth, fairness and justice. We believe, and so hold, that substantial justice is on the side of petitioner on this issue.

Second Issue: VAT Exemption of Sales

to Export-Oriented Enterprises

Regarding the second issue, petitioner criticizes the respondent commissioner, as its sales to PASAR and Philphos — both registered with the BOI (Board of Investments) and EPZA (Export Processing Zone Authority) as export-oriented entities — were zero-rated only in proportion to the actual exports made by the two, and not to the entirety of petitioner's sales to them.

Respondent, on the other hand, maintains that before zero-rating can be applied, petitioner must first show that the entities to which the raw materials have been sold are export-oriented, and that their export sales exceed 70 percent of their total annual production. Should these conditions be met, zero-rating would apply, but only in proportion to the exports actually made.

The Joint Stipulation of Facts expressly states that petitioner's sales of raw materials have been approved for zero-rating. Verily, the commissioner has already conceded that PASAR and Philphos qualify as export-oriented enterprises whose export sales exceed 70 percent of their total annual production, and that petitioner's sales to them thus qualify for zero-rating.

Finding that the respondent commissioner had indeed already approved the zero-rating of petitioner's past sales to PASAR and Philphos, the CA ruled:

Indeed, the BIR has already recognized and admitted that said transactions are zero-rated (paragraph 3, pages 1-2 of the Joint Stipulation of Facts; page 40-41 of the CTA Records). Said stance is demonstrated in the following acts of the BIR:

a. the grant of petitioner's applications for zero-rating of sales to PASAR AND PHILPHOS (Annexes "A" and "B", Joint Stipulation of Facts; pages 56-57 of the CTA Record);

b. Revenue Regulation No. 2-88, wherein it recognized sales to BOI-registered enterprises which export over 70% of its sales as zero-rated, subject to certain conditions (Annex "H", Joint Stipulation of Facts; pages 70-71 of the CTA Record);

c. VAT Ruling No. 271-88 (dated June 24, 1988), wherein it was recognized that sales to PHILPHOS are zero-rated (Annex "I", Joint Stipulation of Facts; p. 72 of the CTA Record);

d. Letter dated April 18, 1988, whereby it recognized that sales of copper concentrates to PASAR are zero-rated (Annex "J", Joint Stipulation of Facts; page 73 of the CTA Record); and

e. VAT Ruling No. 008-92, which states that the sale of raw materials to BOI-registered enterprises can qualify for zero-rating (Annex "N", Joint Stipulation of Facts; pages 79-82 of the CTA Record). 13

Finally, an examination of Section 4.100.2 of Revenue Regulation 7-95 14 in relation to Section 102 (b) of the Tax Code shows that sales to an export-oriented enterprise whose export sales exceed 70 percent of its annual production are to be zero-rated, provided the seller complies with other requirements, like registration with the BOI and the EPZA. The said Regulation does not even hint, much less expressly mention, that only a percentage of the sales would be zero-rated. The internal revenue commissioner cannot, by administrative fiat, amend the law by making compliance therewith more burdensome.

Third Issue:

Validity of Section 21 of Revenue Regulation 5-87

Petitioner contends that Section 21 of Revenue Regulation 5-87 is invalid, because it effectively legislates something not provided for in Section 108 of the Tax Code, which provides as follows:

Sec. 108. Invoicing and accounting requirements for VAT-registered persons. —

(a) Invoicing requirements. — A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 238, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax.

(b) Accounting requirements. — Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 100 and 102 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance. 15

On the other hand, Section 21 of Revenue Regulation 5-87 states:

Sec. 21. Invoicing Requirements. — (a) Invoice and/or receipts. — All VAT-registered persons who sell goods or services shall, for every sale, issue an invoice or receipt. The invoice should contain the information prescribed in Section 108(a) and 238. Only VAT-registered persons can print the VAT registration number in their invoice and receipt. Any invoice

bearing the VAT registration number of the seller shall be considered as "VAT Invoice." Value-Added Tax, whether indicated as a separate item or not in the "VAT Invoice" shall be allowed as input tax credits to those liable to the value-added tax. All purchases covered by invoices other than "VAT Invoice" shall not be entitled to input taxes. 16

Petitioner insists that while Section 108 of the Tax Code lists the information necessary for VAT Invoices, it is silent on the withholding of input tax credits for purchases that are not subjects to VAT.

We disagree. It is clear that a VAT invoice can be used only for the sale of goods and services that are subject to VAT. The corresponding taxes thereon shall be allowed as input tax credits for those subject to VAT. Section 108 expressly provides the invoicing and accounting entries required from VAT-registered persons. On the other hand, Section 111 of the Tax Code empowers the commissioner to suspend the business operations of VAT-registered persons for the specific violations listed therein. We quote below the latter provision:

Sec. 111. Power of the Commissioner to suspend the business operations of a taxpayer. — The Commissioner or his authorized representative is hereby empowered to suspend the business operations and temporarily close the business establishment of any person for any of the following violations:

(a) In the case of a VAT-registered person. —

(1) Failure to issue receipts or invoices;

(2) Failure to file a value-added tax return as required under Section 110;

(3) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipts for the taxable quarter.

(b) Failure of any person to register as required under Section 107. — The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements [are] prescribed by the Commissioner in the closure order.

Corollary thereto, punishment for other types of violations similar to but other than those listed in Section 111 are provided for in Section 263 of the Tax Code, which reads:

Sec. 263. Failure or refusal to issue receipts or sales or commercial invoices, violations related to the printing of such receipts or invoices and other violations. —

(a) Any person who, being required under Section 238 to issue receipts or sales or commercial invoices, fails or refuses to issue such receipts or invoices, issues receipts or invoices that do not truly reflect and/or contain all the information required to be shown therein, or uses multiple or double receipts or invoices, shall, upon conviction for each act or omission, be fined not less than one thousand pesos but not more than fifty thousand pesos and suffer imprisonment of not less than two years but not more than four years.

(b) Any person who commits any of the acts enumerated hereunder shall be penalized in the same manner and to the same extent as provided for in this Section:

1. Prints receipts or sales or commercial invoices without authority from the Bureau of Internal Revenue;

2. Prints double or multiple sets of invoices or receipts;

3. Prints unnumbered receipts or sales or commercial invoices, not bearing the name, business style, taxpayer identification number, and business address of the person or entity; or

4. Fails to submit the quarterly report required in Section 239.

A careful perusal of the violations specifically listed down in Sections 111 and 263 of the Tax Code shows that they do not encompass all possible types of violations of Section 108. Certainly, there are other ways of noncompliance with the requirements the latter has laid down, and these too must have their corresponding consequences. Section 21 of Revenue Regulation 5-87 is not invalid, as it simply prescribes the penalty for failure to comply with the accounting and invoicing requirements laid down in Section 108, a penalty similar to that found in Sections 111 and 263. In short, Section 108 provides the guidelines and necessary requirements for VAT invoices; Sections 111 and 263 of the Tax Code provide penalties for different types of violations of Section 108; and Section 21 of Revenue Regulation 5-87 specifies the penalty for a specific violation of Section 108.

Furthermore, we agree with respondent's position that the computation of the output VAT of the seller should be based on the selling price appearing on its own VAT invoice, not on the selling price appearing on that of the customer. Indeed, it is the duty of the seller to comply with the invoicing and accounting requirements laid down in, among others, Section 108 of the Tax Code.

However, this Court's ruling on the validity of Section 21 of Revenue Regulation 5-87 must be taken in conjunction with its pronouncement regarding the zero-rating given to the sales which petitioner made to Philphos and PASAR. As explained above, such sales are subject to zero-rating, as that rating was definitely approved by the respondent commissioner. His approval indubitably signified that petitioner had already complied with the requirements, invoicing or otherwise, necessary for the zero-rating of petitioner's sales of raw materials to Philphos and PASAR.

WHEREFORE, the Petition is hereby partially GRANTED and the assailed Decision is MODIFIED as follows: (1) petitioner is deemed VAT-registered for the first quarter of 1990 and beyond; and (2) it is the totality of petitioner's sales to Philphos and PASAR that must be taken into account, not merely the proportion of such sales to the actual exports of the said enterprises. Other than the above modifications, the challenged Decision is AFFIRMED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 158885               October 2, 2009

FORT BONIFACIO DEVELOPMENT CORPORATION Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, and CHIEF, ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 170680

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

R E S O L U T I O N

LEONARDO-DE CASTRO, J.:

Before us is respondents’ Motion for Reconsideration of our Decision dated April 2, 2009 which granted the consolidated petitions of petitioner Fort Bonifacio Development Corporation, the dispositive portion of which reads:

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents are hereby (1) restrained from collecting from petitioner the amount of P28,413,783.00 representing the transitional input tax credit due it for the fourth quarter of 1996; and (2) directed to refund to petitioner the amount of P347,741,695.74 paid as output VAT for the third quarter of 1997 in light of the persisting transitional input tax credit available to petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No pronouncement as to costs.

The Motion for Reconsideration raises the following arguments:

I

SECTION 100 OF THE OLD NATIONAL INTERNAL REVENUE CODE (OLD NIRC), AS AMENDED BY REPUBLIC ACT (R.A.) NO. 7716, COULD NOT HAVE SUPPLIED THE DISTINCTION BETWEEN THE TREATMENT OF REAL PROPERTIES OR REAL ESTATE DEALERS ON THE ONE HAND, AND THE TREATMENT OF TRANSACTIONS INVOLVING OTHER COMMERCIAL GOODS ON THE OTHER HAND, AS SAID DISTINCTION IS FOUND IN SECTION 105 AND, SUBSEQUENTLY, REVENUE REGULATIONS NO. 7-95 WHICH DEFINES THE INPUT TAX CREDITABLE TO A REAL ESTATE DEALER WHO BECOMES SUBJECT TO VAT FOR THE FIRST TIME.

II

SECTION 4.105.1 AND PARAGRAPH (A) (III) OF THE TRANSITORY PROVISIONS OF REVENUE REGULATIONS NO. 7-95 VALIDLY LIMIT THE 8% TRANSITIONAL INPUT TAX TO THE IMPROVEMENTS ON REAL PROPERTIES.

III

REVENUE REGULATIONS NO. 6-97 DID NOT REPEAL REVENUE REGULATIONS NO. 7-95.

The instant motion for reconsideration lacks merit.

The first VAT law, found in Executive Order (EO) No. 273 [1987], took effect on January 1, 1988. It amended several provisions of the National Internal Revenue Code of 1986 (Old NIRC). EO 273 likewise accommodated the potential burdens of the shift to the VAT system by allowing newly VAT-registered persons to avail of a transitional input tax credit as provided for in Section 105 of the Old NIRC. Section 105 as amended by EO 273 reads:

Sec. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old NIRC by imposing for the first time value-added-tax on sale of real properties. The amendment reads:

Sec. 100. Value-added-tax on sale of goods or properties. — (a) Rate and base of tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods, or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.1avvph!1

(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx

The provisions of Section 105 of the NIRC, on the transitional input tax credit, remain intact despite the enactment of RA 7716. Section 105 however was amended with the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Republic Act (RA) 8424. The provisions on the transitional input tax credit are now embodied in Section 111(A) of the New NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits. –

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. [Emphasis ours.]

The Commissioner of Internal Revenue (CIR) disallowed Fort Bonifacio Development Corporation’s (FBDC) 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). Specifically, Section 4.105-1 of RR 7-95 provides:

Sec. 4.105-1. Transitional input tax on beginning inventories. – Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayer’s trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person.

In the April 2, 2009 Decision sought to be reconsidered, the Court struck down Section 4.105-1 of RR 7-95 for being in conflict with the law. It held that the CIR had no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such limitation. This it did when it restricted the application of Section 105 in the case of real estate dealers only to improvements on the real property belonging to their beginning inventory.

A law must not be read in truncated parts; its provisions must be read in relation to the whole law. It is the cardinal rule in statutory construction that a statute’s clauses and phrases must not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts in order to produce a harmonious whole. Every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be considered together with other parts of the statute and kept subservient to the general intent of the whole enactment.1

In construing a statute, courts have to take the thought conveyed by the statute as a whole; construe the constituent parts together; ascertain the legislative intent from the whole act; consider each and every provision thereof in the light of the general purpose of the statute; and endeavor to make every part effective, harmonious and sensible.2

The statutory definition of the term "goods or properties" leaves no room for doubt. It states:

Sec. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – xxx.

(1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx.

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

Sec. 105. Transitional Input tax Credits. – A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for sale to costumers or held for lease in the ordinary course of business." Having been defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could not have a different meaning. This has been explained in the Decision dated April 2, 2009, thus:

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit. Goods, as commonly understood in the business sense, refers to the product which the VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute their "goods." Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided.

Section 4.105-1 of RR 7-95 restricted the definition of "goods", viz:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).

As mandated by Article 7 of the Civil Code,3 an administrative rule or regulation cannot contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are the product of a delegated legislative power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not consistent with the statute itself is null and void. 4

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.5

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following paragraph:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of E.O. 273 (January 1, 1988).

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods is concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95.

We now address the points raised in the dissenting opinion of the Honorable Justice Antonio T. Carpio.

At the outset, it must be stressed that FBDC sought the refund of the total amount of P347,741,695.74 which it had itself paid in cash to the BIR. It is argued that the transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and that there should be a law imposing the tax presumed to have been paid. The thesis is anchored on the argument that without any VAT or other input business tax imposed by law on the real properties at the time of the sale, the 8% transitional input tax cannot be presumed to have been paid.

The language of Section 105 is explicit. It precludes reading into the law that the transitional input tax credit is limited to the amount of VAT previously paid. When the aforesaid section speaks of "eight percent (8%) of the value of such inventory" followed by the clause "or the actual value-added tax paid on such goods,

materials and supplies," the implication is clear that under the first clause, "eight percent (8%) of the value of such inventory," the law does not contemplate the payment of any prior tax on such inventory. This is distinguished from the second clause, "the actual value-added tax paid on the goods, materials and supplies" where actual payment of VAT on the goods, materials and supplies is assumed. Had the intention of the law been to limit the amount to the actual VAT paid, there would have been no need to explicitly allow a claim based on 8% of the value of such inventory.

The contention that the 8% transitional input tax credit in Section 105 presumes that a previous tax was paid, whether or not it was actually paid, requires a transaction where a tax has been imposed by law, is utterly without basis in law. The rationale behind the provisions of Section 105 was aptly elucidated in the Decision sought to be reconsidered, thus:

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments.

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

WHEREFORE, premises considered, the Motion for Reconsideration is DENIED WITH FINALITY for lack of merit.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 172378               January 17, 2011

SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, INC.), Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

DEL CASTILLO, J.:

The burden of proving entitlement to a refund lies with the claimant.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the September 30, 2005 Decision1 and the April 20, 2006 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, is engaged in the business of designing, developing, manufacturing and exporting advance and large-scale integrated circuit components or "IC’s."3 Petitioner is registered with the Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer 4 and with the Board of Investments (BOI) as a preferred pioneer enterprise.5

On May 21, 1999, petitioner filed with the respondent Commissioner of Internal Revenue (CIR), through the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an application for credit/refund of unutilized input VAT for the period October 1, 1998 to December 31, 1998 in the amount of P31,902,507.50, broken down as follows:

AmountTax Paid on Imported/Locally PurchasedCapital Equipment

P 15,170,082.00

Total VAT paid on Purchases per InvoicesReceived During the Period for whichthis Application is Filed

16,732,425.50

Amount of Tax Credit/Refund Applied For P 31,902,507.50 6

Proceedings before the CTA Division

On December 27, 2000, due to the inaction of the respondent, petitioner filed a Petition for Review with the CTA Division, docketed as CTA Case No. 6212. Petitioner alleged that for the 4th quarter of 1998, it generated and recorded zero-rated export sales in the amount of P3,027,880,818.42, paid to petitioner in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;7 and that for the said period, petitioner paid input VAT in the total amount of P31,902,507.50,8 which have not been applied to any output VAT.9

To this, respondent filed an Answer10 raising the following special and affirmative defenses, to wit:

8. The petition states no cause of action as it does not allege the dates when the taxes sought to be refunded/credited were actually paid;

9. It is incumbent upon herein petitioner to show that it complied with the provisions of Section 229 of the Tax Code as amended;

10. Claims for refund are construed strictly against the claimant, the same being in the nature of exemption from taxes (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95; Manila Electric Co. vs. Commissioner of Internal Revenue, 67 SCRA 35);

11. One who claims to be exempt from payment of a particular tax must do so under clear and unmistakable terms found in the statute (Asiatic Petroleum vs. Llanes, 49 Phil. 466; Union Garment Co. vs. Court of Tax Appeals, 4 SCRA 304);

12. In an action for refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure to sustain the same is fatal to the action for refund. Furthermore, as pointed out in the case of William Li Yao vs. Collector (L-11875, December 28, 1963), amounts sought to be recovered or credited should be shown to be taxes which are erroneously or illegally collected; that is to say, their payment was an independent single act of voluntary payment of a tax believed to be due and collectible and accepted by the government, which had therefor become part of the State moneys subject to expenditure and perhaps already spent or appropriated; and

13. Taxes paid and collected are presumed to have been made in accordance with the law and regulations, hence not refundable.11

On November 18, 2003, the CTA Division rendered a Decision12 partially granting petitioner’s claim for refund of unutilized input VAT on capital goods. Out of the amount of P15,170,082.00, only P9,898,867.00 was allowed to be refunded because training materials, office supplies, posters, banners, T-shirts, books, and other similar items purchased by petitioner were not considered capital goods under Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95 (Consolidated Value-Added Tax Regulations).13 With regard to petitioner’s claim for credit/refund of input VAT attributable to its zero-rated export sales, the CTA Division denied the same because petitioner failed to present an Authority to Print (ATP) from the BIR;14 neither did it print on its export sales invoices the ATP and the word "zero-rated."15 Thus, the CTA Division disposed of the case in this wise:

WHEREFORE, in view of the foregoing the instant petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of P9,898,867.00 representing input VAT on importation of capital goods. However, the claim for refund of input VAT attributable to petitioner's alleged zero-rated sales in the amount of P16,732,425.50 is hereby DENIED for lack of merit.

SO ORDERED.16

Not satisfied with the Decision, petitioner moved for reconsideration.17 It claimed that it is not required to secure an ATP since it has a "Permit to Adopt Computerized Accounting Documents such as Sales Invoice and Official Receipts" from the BIR.18 Petitioner further argued that because all its finished products are exported to its mother company, Intel Corporation, a non-resident corporation and a non-VAT registered entity, the printing of the word "zero-rated" on its export sales invoices is not necessary.19

On its part, respondent filed a Motion for Partial Reconsideration20 contending that petitioner is not entitled to a credit/refund of unutilized input VAT on capital goods because it failed to show that the goods imported/purchased are indeed capital goods as defined in Section 4.106-1 of RR No. 7-95.21

The CTA Division denied both motions in a Resolution22 dated August 10, 2004. It noted that:

[P]etitioner’s request for Permit to Adopt Computerized Accounting Documents such as Sales Invoice and Official Receipt was approved on August 31, 2001 while the period involved in this case was October 31, 1998 to December 31, 1998 x x x. While it appears that petitioner was previously issued a permit by the BIR Makati Branch, such permit was only limited to the use of computerized books of account x x x. It was only on August 31, 2001 that petitioner was permitted to generate computerized sales invoices and official receipts [provided that the BIR Permit Number is printed] in the header of the document x x x.

x x x x

Thus, petitioner’s contention that it is not required to show its BIR permit number on the sales invoices runs counter to the requirements under the said "Permit." This court also wonders why petitioner was issuing computer generated sales invoices during the period involved (October 1998 to December 1998) when it did

not have an authority or permit. Therefore, we are convinced that such documents lack probative value and should be treated as inadmissible, incompetent and immaterial to prove petitioner’s export sales transaction.

x x x x

ACCORDINGLY, the Motion for Reconsideration and the Supplemental Motion for Reconsideration filed by petitioner as well as the Motion for Partial Reconsideration of respondent are hereby DENIED for lack of merit. The pronouncement in the assailed decision is REITERATED.

SO ORDERED 23

Ruling of the CTA En Banc

Undaunted, petitioner elevated the case to the CTA En Banc via a Petition for Review,24 docketed as EB Case No. 23.

On September 30, 2005, the CTA En Banc issued the assailed Decision25 denying the petition for lack of merit. Pertinent portions of the Decision read:

This Court notes that petitioner raised the same issues which have already been thoroughly discussed in the assailed Decision, as well as, in the Resolution denying petitioner's Motion for Partial Reconsideration.

With regard to the first assigned error, this Court reiterates that, the requirement of [printing] the BIR permit to print on the face of the sales invoices and official receipts is a control mechanism adopted by the Bureau of Internal Revenue to safeguard the interest of the government.

This requirement is clearly mandated under Section 238 of the 1997 National Internal Revenue Code, which provides that:

SEC. 238. Printing of Receipts or Sales or Commercial Invoice. – All persons who are engaged in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before a printer can print the same.

The above mentioned provision seeks to eliminate the use of unregistered and double or multiple sets of receipts by striking at the very root of the problem — the printer (H. S. de Leon, The National Internal Revenue Code Annotated, 7th Ed., p. 901). And what better way to prove that the required permit to print was secured from the Bureau of Internal Revenue than to show or print the same on the face of the invoices. There can be no other valid proof of compliance with the above provision than to show the Authority to Print Permit number [printed] on the sales invoices and official receipts.

With regard to petitioner’s failure to print the word "zero-rated" on the face of its export sales invoices, it must be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires that all value-added tax registered persons shall, for every sale or lease of goods or properties or services, issue duly registered invoices which must show the word "zero-rated" [printed] on the invoices covering zero-rated sales.

It is not enough that petitioner prove[s] that it is entitled to its claim for refund by way of substantial evidence. Well settled in our jurisprudence [is] that tax refunds are in the nature of tax exemptions and as such, they are regarded as in derogation of sovereign authority (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95).Thus, tax refunds are construed in strictissimi juris against the person or entity claiming the same (Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation, 204 SCRA 377; Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332).

In this case, not only should petitioner establish that it is entitled to the claim but it must most importantly show proof of compliance with the substantiation requirements as mandated by law or regulations.

The rest of the assigned errors pertain to the alleged errors of the First Division: in finding that the petitioner failed to comply with the substantiation requirements provided by law in proving its claim for refund; in reducing the amount of petitioner’s tax credit for input vat on importation of capital goods; and in denying petitioner’s claim for refund of input vat attributable to petitioner’s zero-rated sales.

It is petitioner’s contention that it has clearly established its right to the tax credit or refund by way of substantial evidence in the form of material and documentary evidence and it would be improper to set aside with haste the claimed input VAT on capital goods expended for training materials, office supplies, posters, banners, t-shirts, books and the like because Revenue Regulations No. 7-95 defines capital goods as to include even those goods which are indirectly used in the production or sale of taxable goods or services.

Capital goods or properties, as defined under Section 4.106-1(b) of Revenue Regulations No. 7-95, refer "to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29 (f), used directly or indirectly in the production or sale of taxable goods or services."

Considering that the items (training materials, office supplies, posters, banners, t-shirts, books and the like) purchased by petitioner as reflected in the summary were not duly proven to have been used, directly or indirectly[,] in the production or sale of taxable goods or services, the same cannot be considered as capital goods as defined above[. Consequently,] the same may not x x x then [be] claimed as such.

WHEREFORE, in view of the foregoing, this instant Petition for Review is hereby DENIED DUE COURSE and hereby DISMISSED for lack of merit. This Court's Decision of November 18, 2003 and Resolution of August 10, 2004 are hereby AFFIRMED in all respects.

SO ORDERED.26

Petitioner sought reconsideration of the assailed Decision but the CTA En Banc denied the Motion27 in a Resolution28 dated April 20, 2006.

Issues

Hence, the instant Petition raising the following issues for resolution:

(1) whether the CTA En Banc erred in denying petitioner’s claim for credit/ refund of input VAT attributable to its zero-rated sales in the amount of P16,732,425.00 due to its failure:

(a) to show that it secured an ATP from the BIR and to indicate the same in its export sales invoices; and

(b) to print the word "zero-rated" in its export sales invoices.29

(2) whether the CTA En Banc erred in ruling that only the amount of P9,898,867.00 can be classified as input VAT paid on capital goods.30

Petitioner’s Arguments

Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT attributable to its zero-rated sales has no legal basis because the printing of the ATP and the word "zero-rated" on the export sales invoices are not required under Sections 113 and 237 of the National Internal Revenue Code

(NIRC).31 And since there is no law requiring the ATP and the word "zero-rated" to be indicated on the sales invoices,32 the absence of such information in the sales invoices should not invalidate the petition33 nor result in the outright denial of a claim for tax credit/refund.34 To support its position, petitioner cites Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue,35 where Intel’s failure to print the ATP on the sales invoices or receipts did not result in the outright denial of its claim for tax credit/refund.36 Although the cited case only dealt with the printing of the ATP, petitioner submits that the reasoning in that case should also apply to the printing of the word "zero-rated."37Hence, failure to print of the word "zero-rated" on the sales invoices should not result in the denial of a claim.

As to the claim for refund of input VAT on capital goods, petitioner insists that it has sufficiently proven through testimonial and documentary evidence that all the goods purchased were used in the production and manufacture of its finished products which were sold and exported.38

Respondent’s Arguments

To refute petitioner’s arguments, respondent asserts that the printing of the ATP on the export sales invoices, which serves as a control mechanism for the BIR, is mandated by Section 238 of the NIRC;39 while the printing of the word "zero-rated" on the export sales invoices, which seeks to prevent purchasers of zero-rated sales or services from claiming non-existent input VAT credit/refund,40 is required under RR No. 7-95, promulgated pursuant to Section 244 of the NIRC.41 With regard to the unutilized input VAT on capital goods, respondent counters that petitioner failed to show that the goods it purchased/imported are capital goods as defined in Section 4.106-1 of RR No. 7-95. 42

Our Ruling

The petition is bereft of merit.

Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable to zero-rated sales under Section 112 (A) of the NIRC, and the other is a credit/refund of input VAT on capital goods pursuant to Section 112 (B) of the same Code.

Credit/refund of input VAT on zero-rated sales

In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A)43 of the NIRC lays down four requisites, to wit:

1) the taxpayer must be VAT-registered;

2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;

3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; and

4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax.

To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices, certifications of inward remittance, export declarations, and airway bills of lading for the fourth quarter of 1998. The CTA Division, however, found the export sales invoices of no probative value in establishing petitioner’s zero-rated sales for the purpose of claiming credit/refund of input VAT because petitioner failed to show that it has an ATP from the BIR and to indicate the ATP and the word "zero-rated" in its export sales invoices.44 The

CTA Division cited as basis Sections 113,45 23746 and 23847 of the NIRC, in relation to Section 4.108-1 of RR No. 7-95.48

We partly agree with the CTA.

Printing the ATP on the invoices or receipts is not required

It has been settled in Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue49 that the ATP need not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring it.50 Thus, in the absence of such law or regulation, failure to print the ATP on the invoices or receipts should not result in the outright denial of a claim or the invalidation of the invoices or receipts for purposes of claiming a refund.51

ATP must be secured from the BIR

But while there is no law requiring the ATP to be printed on the invoices or receipts, Section 238 of the NIRC expressly requires persons engaged in business to secure an ATP from the BIR prior to printing invoices or receipts. Failure to do so makes the person liable under Section 26452 of the NIRC.

This brings us to the question of whether a claimant for unutilized input VAT on zero-rated sales is required to present proof that it has secured an ATP from the BIR prior to the printing of its invoices or receipts.

We rule in the affirmative.

Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented. However, since the ATP is not indicated in the invoices or receipts, the only way to verify whether the invoices or receipts are duly registered is by requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or receipts would have no probative value for the purpose of refund. In the case of Intel, we emphasized that:

It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations implementing them require entities engaged in business to secure a BIR authority to print invoices or receipts and to issue duly registered invoices or receipts, it is not specifically required that the BIR authority to print be reflected or indicated therein. Indeed, what is important with respect to the BIR authority to print is that it has been secured or obtained by the taxpayer, and that invoices or receipts are duly registered.53 (Emphasis supplied)

Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of input VAT1awphi1

Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for credit/refund of input VAT on zero-rated sales.

In Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine Corporation of the Philippines) v. Commissioner of Internal Revenue,54 we upheld the denial of Panasonic’s claim for tax credit/refund due to the absence of the word "zero-rated" in its invoices. We explained that compliance with Section 4.108-1 of RR 7-95, requiring the printing of the word "zero rated" on the invoice covering zero-rated sales, is essential as this regulation proceeds from the rule-making authority of the Secretary of Finance under Section 24455 of the NIRC.

All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in the invoices or receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales. The failure to indicate the ATP

in the sales invoices or receipts, on the other hand, is not. In this case, petitioner failed to present its ATP and to print the word "zero-rated" on its export sales invoices. Thus, we find no error on the part of the CTA in denying outright petitioner’s claim for credit/refund of input VAT attributable to its zero-rated sales.

Credit/refund of input VAT on capital goods

Capital goods are defined under Section 4.106-1(b) of RR No. 7-95

To claim a refund of input VAT on capital goods, Section 112 (B)56 of the NIRC requires that:

1. the claimant must be a VAT registered person;

2. the input taxes claimed must have been paid on capital goods;

3. the input taxes must not have been applied against any output tax liability; and

4. the administrative claim for refund must have been filed within two (2) years after the close of the taxable quarter when the importation or purchase was made.

Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:

"Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and which are treated as depreciable assets under Section 29 (f),57 used directly or indirectly in the production or sale of taxable goods or services.

Based on the foregoing definition, we find no reason to deviate from the findings of the CTA that training materials, office supplies, posters, banners, T-shirts, books, and the other similar items reflected in petitioner’s Summary of Importation of Goods are not capital goods. A reduction in the refundable input VAT on capital goods fromP15,170,082.00 to P9,898,867.00 is therefore in order.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision dated September 30, 2005 and the Resolution dated April 20, 2006 of the Court of Tax Appeals En Banc are hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines

Supreme Court

Manila

SECOND DIVISION

Atlas consolidated mining and development corporation,

G.R. No. 159471

Petitioner,

- versus -

commissioner of internal revenue,

Respondent.

Present:

CARPIO, J., Chairperson,

PERALTA,

ABAD,

PEREZ,* and

MENDOZA, JJ.

Promulgated:

January 26, 2011

x--------------------------------------x

DECISION

PERALTA, J.:

For this Court's resolution is the Petition for Review on Certiorari under Rule 45 of the Revised Rules of Civil Procedure assailing the Decision[1] dated April 19, 2001 and Resolution[2] dated August 6, 2003 of the Court of Appeals (CA).

The facts, as shown in the records, are the following:

Under Section 100 of the Tax Code of the Philippines, petitioner is a zero-rated Value Added Tax (VAT) person for being an exporter of copper concentrates.  According to petitioner, on January 20, 1994, it filed its VAT return for the fourth quarter of 1993, showing a total input tax ofP863,556,963.74 and an excess VAT credit of P842,336,291.60 and, on January 25, 1996, it applied for a tax refund or a tax credit certificate for the latter amount with respondent Commissioner of Internal Revenue (CIR).  On the same date, petitioner filed the same claim for refund with the Court of Tax Appeals (CTA), claiming that the two-year prescriptive period provided for under Section 230 of the Tax Code for claiming a refund was about to expire.   The CIR failed to file his answer with the CTA; thus, the former declared the latter in default.

On August 24, 1998, the CTA rendered its Decision[3] denying petitioner's claim for refund due to petitioner's failure to comply with the documentary requirements prescribed under Section 16 of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 3-88, dated April 7, 1988.  The dispositive portion of the Decision reads:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DISMISSED for lack of merit.

SO ORDERED.[4]

Petitioner filed a Motion for Reconsideration[5] praying for the reopening of the case in order for it to present the required documents, together with its proof of non-availment for prior and succeeding quarters of the input VAT subject of petitioner's claim for refund. The CTA granted the motion in its Resolution[6] dated October 29, 1998.  Thereafter, in a Resolution[7] dated June 21, 2000, the CTA denied petitioner's claim. It ruled that the action has already prescribed and that petitioner has failed to substantiate its claim that it has not applied its alleged excess input taxes to any of its subsequent quarter's output tax liability.

The CTA's Decision and Resolution were questioned in the CA.  However, the CA affirmed in totothe said Decision and Resolution, disposing the case as follows:

WHEREFORE, the petition is DISMISSED for lack of merit.  The questioned Decision of the CTA dated August 24, 1998 and the Resolution dated June 21, 2000 are AFFIRMED in toto.

SO ORDERED.[8]

Subsequently, petitioner's Motion for Reconsideration[9] of the CA's Decision was denied in a Resolution[10] dated August 6, 2003.

Thus, the present petition.

Petitioner lists the following as grounds for his petition:

I

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S CLAIM FOR REFUND HAS PRESCRIBED, DESPITE FAILURE OF RESPONDENT AND THE COURT OF TAX APPEALS TO RAISE THE ISSUE OF PRESCRIPTION IN RESPONDENT'S ANSWER OR IN THE CTA'S ORIGINAL DECISION DATED 16 SEPTEMBER  1998.

II

THE COURT OF APPEALS ERRED IN UPHOLDING THE COURT OF TAX APPEALS' FINDING IN ITS DECISION DATED 24 AUGUST 1998 THAT PETITIONER, IN NOT SUBMITTING ITS EXPORT DOCUMENTS, FAILED TO PRESENT ADEQUATE PROOF THAT ITS INPUT TAXES ARE DIRECTLY ATTRIBUTABLE TO ITS EXPORT SALES.

III

THE COURT OF APPEALS ERRED IN UPHOLDING THE COURT OF TAX APPEALS’ FINDING THAT PETITIONER FAILED TO PRESENT ADEQUATE PROOF THAT IT HAD NOT APPLIED THE CLAIMED INPUT TAX TO ITS OUTPUT TAXES FROM PRIOR AND SUCCEEDING QUARTERS.[11]

Petitioner herein had, in the past, similar petitions with this Court regarding the denial of its claims for tax refund of the input VAT on its purchases of capital goods and on its zero-rated sales.  InAtlas Consolidated Mining and Development Corporation v. CIR,[12] petitioner filed with the Bureau of Internal Revenue (BIR) its VAT Return for the first quarter of 1992 and also alleged that it filed with the BIR the corresponding application for the refund/credit of its input VAT on its purchases of capital goods and on its zero-rated sales

in the amount of P26,030,460.00. Its application for refund/credit remained having been unresolved by the BIR, petitioner filed with the CTA, on April 20, 1994, a Petition for Review. Claiming to be a “zero-rated VAT person,” petitioner prayed that the CTA order the CIR to refund/credit petitioner with the amount of P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992.  Both, the CTA and the CA denied the claims of petitioner, ratiocinating that its claim has been filed beyond the prescriptive period provided by law and that evidence presented was insufficient.

In the present case, petitioner is basically asking this Court to review the factual findings of the CTA and the CA.  Petitioner insists that it had presented the necessary documents or copies thereof with the CTA that would prove that it is entitled to a tax refund.  Again, citing the earlier case of   Atlas Consolidated Mining and Development Corporation v. CIR,[13] this Court has expounded the nature and bases of claiming tax refund, thus:

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said applications must have been in accordance with Revenue Regulations No. 3-88, amending Section 16 of Revenue Regulations No. 5-87, which provided as follows –

SECTION 16. Refunds or tax credits of input tax. –

x x x x

(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. In addition, the following documents shall be attached whenever applicable:

x x x x

3. Effectively zero-rated sale of goods and services.

i) photocopy of approved application for zero-rate if filing for the first time.

ii) sales invoice or receipt showing name of the person or entity to whom the sale of goods or services were delivered, date of delivery, amount of consideration, and description of goods or services delivered.

iii) evidence of actual receipt of goods or services.

4. Purchase of capital goods.

i) original copy of invoice or receipt showing the date of purchase, purchase price, amount of value-added tax paid and description of the capital equipment locally purchased.

ii) with respect to capital equipment imported, the photocopy of import entry document for internal revenue tax purposes and the confirmation receipt issued by the Bureau of Customs for the payment of the value-added tax.

5. In applicable cases,

where the applicant’s zero-rated transactions are regulated by certain government agencies, a statement therefrom showing the amount and description of sale of goods and services, name of persons or entities (except in case of exports) to whom the goods or services were sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction during the period covered by the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and services, and the VAT paid (inputs) on purchases of goods and services cannot be directly attributed to any of the aforementioned transactions, the following formula shall be used to determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

x

Total Amount of Input Taxes

= Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR, and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file a Petition for Review before the CTA. If the taxpayer’s claim is supported by voluminous documents, such as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be governed by CTA Circular No. 1-95, as amended, reproduced in full below –

In the interest of speedy administration of justice, the Court hereby promulgates the following rules governing the presentation of voluminous documents and/or long accounts, such as receipts, invoices and vouchers, as evidence to establish certain facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrine enunciated in Compania Maritima vs. Allied Free Workers Union(77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after motion and approval by the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers, dates and amounts covered by the invoices or receipts and the amount/s of tax paid; and (b) a Certification of an independent Certified

Public Accountant attesting to the correctness of the contents of the summary after making an examination, evaluation and audit of the voluminous receipts and invoices. The name of the accountant or partner of the firm in charge must be stated in the motion so that he/she can be commissioned by the Court to conduct the audit and, thereafter, testify in Court relative to such summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for marking, identification and comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other documents covering the said accounts or payments to be introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary and CPA certification. Likewise, the originals of the voluminous receipts, invoices or accounts must be ready for verification and comparison in case doubt on the authenticity thereof is raised during the hearing or resolution of the formal offer of evidence.[14]

As to the evidence that must be presented, the provisions of the pertinent laws provide:

Section 106, Tax Code

Refunds or tax credits of input tax. - (a) Any VAT-registered person, whose sales are zero-rated, may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in case of zero-rated sales under Section 100 (a) (2) (A) (I), (ii) and (b) and Section 102 (b) (1) and (2), the acceptable foreign currency exchange proceeds thereof have been duly accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

Section 16 of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 3-88, dated April 7, 1988

A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the application.  The original copy of the said invoice/receipt, however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate or refund.  In addition, the following documents shall be attached whenever applicable:

1. Export Sales

i) Photocopy of export document showing the amount of export, the date and destination of the goods exported.  With respect to foreign currency denominated sale, the photocopy of the invoice or receipt evidencing the sale of the goods, as well as the name of the person to whom the goods were delivered.

ii) Statement from the Central Bank or any of its accredited agent banks that the proceeds of the sale in acceptable foreign currency has been inwardly remitted and accounted for in accordance with applicable banking regulations.

x x x x

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction during the period covered by the application for credit or refund.

The CTA, applying the abovementioned rules, in its Decision dated August 24, 1998, came out with the following factual findings:

The formal offer of evidence of the petitioner failed to include photocopy of its export documents, as required.  There is no way therefore, in determining the kind of goods and actual amount of export sales it allegedly made during the quarter involved.  This finding is very crucial when we try to relate it with the requirement of the aforementioned regulations that the input tax being claimed for refund or tax credit must be shown to be entirely attributable to the zero-rated transaction, in this case, export sales of goods.   Without the export documents, the purchase invoice/receipts submitted by the petitioner as proof of its input taxes cannot be verified as being directly attributable to the goods so exported.

Lastly, We cannot grant petitioner's claim for credit or refund of input taxes due to its failure to show convincingly that the same has not been applied to any of its output tax liability as provided under Section 106 (a) of the Tax Code.  There is no evidence to show that the amount herein claimed for refund when applied for on January 25, 1996 has not been priorly or thereafter applied to its output tax liability.[15]

The above factual findings of the CTA were even bolstered when it granted petitioner's motion for reconsideration allowing petitioner to submit the necessary documents and other pieces of evidence, so as to comply with the requirements provided for by law.  However, despite such allowance, petitioner still failed to comply.  Thus, in its Resolution[16] dated June 21, 2000, the CTA finally disposed the case by ruling that:

The Court finds and so holds that Petitioner failed again to present proof that it has not applied the alleged excess input taxes to any of its subsequent quarter's output tax liability.  In this Court's decision dated August 24, 1998, We already mentioned that petitioner failed to convince us that its input taxes have not been applied to any of its output tax liability as provided under Section 106 (a).  Now on its second opportunity to substantiate its claim, Petitioner again failed to prove this particular allegation.  Petitioner merely presented in evidence the following documents to show that it has not applied the amount of  P4,534,933.74, subject of the claim, to its 1994 first quarter output tax liability, to wit:

Exhibits

1.) Output/Input VAT (Per Return) Listings                         T

for the first quarter of 1994

2.) Schedule of Output Taxes for the month                        U, U-1 to U-2

of January 1994                                                              U-3 to U-5

3.) Schedule of Materials and Supplies for                           V, V-1 to V-9

for the first quarter of 1994

4.) Schedule of Output Taxes for the month                        W, W-1 to W-4

of February 1994

Nowhere in all the documents submitted to this Court by the Petitioner can We find its 1994 first quarter VAT return which, to Our mind and as repeatedly ruled in a litany of cases, is necessary for purposes of determining with particular certainty whether or not the claimed input taxes were applied to any of its output tax liability in the first quarter or in the succeeding quarters of 1994.  And there is no reason at this point for Us to digress from this ruling.[17]

The above factual findings were affirmed and accorded respect by the CA. Nevertheless, petitioner insists that it has submitted documents and other pieces of evidence, except those required by law, that would establish the existence of the input VAT for the fourth quarter of 1993 and that the excess input VAT claimed for refund or tax credit has not been applied to its output tax liability for prior and succeeding quarters.

The above argument, however, is flawed. It must be remembered that when claiming tax refund/credit, the VAT-registered taxpayer must be able to establish that it does have refundable or creditable input VAT, and the same has not been applied against its output VAT liabilities – information which are supposed to be reflected in the taxpayer’s VAT returns. Thus, an application for tax refund/credit must be accompanied by copies of the taxpayer’s VAT return/s for the taxable quarter/s concerned.[18] The CTA and the CA, based on their appreciation of the evidence presented, committed no error when they declared that petitioner failed to prove that it is entitled to a tax refund and this Court, not being a trier of   facts, must defer to their findings.  Again, as aptly ruled by this Court in Atlas:[19]

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is the general rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals, by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, is limited to reviewing or revising errors of law; findings of fact of the latter are conclusive. This Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh the probative value of the evidence presented.

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts."

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales in the amount it had declared in its returns; whether all the input VAT subject of its applications for refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied the input VAT against its output VAT liabilities, are all questions of fact which could only be answered after reviewing, examining, evaluating, or weighing the probative value of the evidence it presented, and which this Court does not have the jurisdiction to do in the present Petitions for Review on Certiorari under Rule 45 of the Revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact under particular circumstances, none of these exist in the instant cases. The Court of Appeals, in both cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of petitioner corporation, and the records bear out this finding. Petitioner corporation itself cannot dispute its non-compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the substantiation requirements under Revenue Regulations No. 2-88 should not have applied to it, while being conspicuously silent on the evidentiary requirements mandated by other relevant regulations.[20]

Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.  And, since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construedstrictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken.  Elsewise stated, taxation is the rule, exemption therefrom is the exception.[21]

Anent the issue of prescription, wherein petitioner questions the ruling of the CA that the former's claim for refund has prescribed, disregarding the failure of respondent Commissioner of Internal Revenue and the CTA to raise the said issue in their answer and original decision, respectively, this Court finds the same moot and academic.  Although it may appear that the CTA only brought up the issue of prescription in its later resolution and not in its original decision, its ruling on the merits of the application for refund, could only imply that the issue of prescription was not the main consideration for the denial of petitioner's claim for tax refund.  Otherwise, the CTA would have just denied the application on the ground of prescription.

WHEREFORE, the Petition is hereby DENIED for lack of merit. The Decision and Resolution of the Court of Appeals, dated April 19, 2001 and August 6, 2003, respectively, are hereby AFFIRMED.

--------------

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 180173               April 6, 2011

MICROSOFT PHILIPPINES, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

Before the Court is a petition1 for review on certiorari assailing the Decision2 dated 24 October 2007 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 258, which affirmed the Decision3 dated 31 August 2006 and Resolution4 dated 8 January 2007 of the CTA Second Division in CTA Case No. 6681.

The Facts

Petitioner Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer duly registered with the Bureau of Internal Revenue (BIR). Microsoft renders marketing services to Microsoft Operations Pte Ltd. (MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-resident foreign corporations. The services are paid for in acceptable foreign currency and qualify as zero-rated sales for VAT purposes under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of 1997,5 as amended. Section 108(B)(2) states:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –

(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 x x x;

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x

For the year 2001, Microsoft yielded total sales in the amount of P261,901,858.99. Of this amount,P235,724,614.68 pertain to sales derived from services rendered to MOP and MLI while P26,177,244.31 refer to sales to various local customers. Microsoft paid VAT input taxes in the amount of P11,449,814.99 on its domestic purchases of taxable goods and services.

On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT input taxes in the amount ofP11,449,814.99 with the BIR. The administrative claim for tax credit was filed within two years from the close of the taxable quarters when the zero-rated sales were made.

On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with the CTA.6 Microsoft claimed to be entitled to a refund of unutilized input VAT attributable to its zero-rated sales and prayed that judgment be rendered directing the claim for tax credit or refund of VAT input taxes for taxable year 2001.

On 16 June 2003, respondent Commissioner of Internal Revenue (CIR) filed his answer and prayed for the dismissal of the petition for review.

In a Decision dated 31 August 2006, the CTA Second Division denied the claim for tax credit of VAT input taxes. The CTA explained that Microsoft failed to comply with the invoicing requirements of Sections 113 and 237 of the NIRC as well as Section 4.108-1 of Revenue Regulations No. 7-957 (RR 7-95). The CTA stated that Microsoft's official receipts do not bear the imprinted word "zero-rated" on its face, thus, the official receipts cannot be considered as valid evidence to prove zero-rated sales for VAT purposes.

Microsoft filed a motion for reconsideration which was denied by the CTA Second Division in a Resolution dated 8 January 2007.

Microsoft then filed a petition for review with the CTA En Banc.8 In a Decision dated 24 October 2007, the CTA En Banc denied the petition for review and affirmed in toto the Decision dated 31 August 2006 and Resolution dated 8 January 2007 of the CTA Second Division. The CTA En Banc found no new matters that have not been considered and passed upon by the CTA Second Division and stated that the petition had only been a mere rehash of the arguments earlier raised.

Hence, this petition.

The Issue

The main issue is whether Microsoft is entitled to a claim for a tax credit or refund of VAT input taxes on domestic purchases of goods or services attributable to zero-rated sales for the year 2001 even if the word "zero-rated" is not imprinted on Microsoft's official receipts.

The Court’s Ruling

The petition lacks merit.

Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 do not provide that failure to indicate the word "zero-rated" in the invoices or receipts would result in the outright invalidation of these invoices or receipts and the disallowance of a claim for tax credit or refund.

At the outset, a tax credit or refund, like tax exemption, is strictly construed against the taxpayer.9 The taxpayer claiming the tax credit or refund has the burden of proving that he is entitled to the refund or credit, in this case VAT input tax, by submitting evidence that he has complied with the requirements laid down in the tax code and the BIR's revenue regulations under which such privilege of credit or refund is accorded.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VAT-registered persons state:

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. x x x

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax from compliance with the provisions of this Section.

Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which must appear on the face of the official receipts or invoices for every sale of goods by VAT-registered persons. At the time Microsoft filed its claim for credit of VAT input tax, RR 7-95 was already in effect. The provision states:

Sec. 4.108-1. Invoicing Requirements. – All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show:

1. the name, TIN and address of seller;

2. date of transaction;

3. quantity, unit cost and description of merchandise or nature of service;

4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;

5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and

6. the invoice value or consideration.

x x x

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices or receipts and this shall be considered as a "VAT invoice." All purchases covered by invoices other than a "VAT invoice" shall not give rise to any input tax. (Emphasis supplied)

The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing requirements to be able to file a claim for input taxes on domestic purchases for goods or services attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section 4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases covered by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's invoice, lacking the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input tax.

The subsequent enactment of Republic Act No. 933710 on 1 November 2005 elevating provisions of RR 7-95 into law merely codified into law administrative regulations that already had the force and effect of law. Such codification does not mean that prior to the codification the administrative regulations were not enforceable.

We have ruled in several cases11 that the printing of the word "zero-rated" is required to be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or refund. In Panasonic v. Commissioner of Internal Revenue,12 we held that the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the government may be refunding taxes it did not collect.

Here, both the CTA Second Division and CTA En Banc found that Microsoft's receipts did not indicate the word "zero-rated" on its official receipts. The findings of fact of the CTA are not to be disturbed unless clearly shown to be unsupported by substantial evidence.13 We see no reason to disturb the CTA's findings. Indisputably, Microsoft failed to comply with the invoicing requirements of the NIRC and its implementing revenue regulation to claim a tax credit or refund of VAT input tax for taxable year 2001.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24 October 2007 of the Court of Tax Appeals En Banc in CTA EB No. 258.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 178090               February 8, 2010

PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE PHILIPPINES (formerly MATSUSHITA BUSINESS MACHINE CORPORATION OF THE PHILIPPINES), Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

ABAD, J.:

This petition for review puts in issue the May 23, 2007 Decision1 of the Court of Tax Appeals (CTA) en banc inCTA EB 239, entitled "Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue," which affirmed the denial of petitioner’s claim for refund.

The Facts and the Case

Petitioner Panasonic Communications Imaging Corporation of the Philippines (Panasonic) produces and exports plain paper copiers and their sub-assemblies, parts, and components. It is registered with the Board of Investments as a preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is also a registered value-added tax (VAT) enterprise.

From April 1 to September 30, 1998 and from October 1, 1998 to March 31, 1999, petitioner Panasonic generated export sales amounting to US$12,819,475.15 and US$11,859,489.78, respectively, for a total of US$24,678,964.93. Believing that these export sales were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997 National Internal Revenue Code as amended by Republic Act (R.A.) 8424 (1997 NIRC),2 Panasonic paid input VAT of P4,980,254.26 and P4,388,228.14 for the two periods or a total of P9,368,482.40 attributable to its zero-rated sales.

Claiming that the input VAT it paid remained unutilized or unapplied, on March 12, 1999 and July 20, 1999 petitioner Panasonic filed with the Bureau of Internal Revenue (BIR) two separate applications for refund or tax credit of what it paid. When the BIR did not act on the same, Panasonic filed on December 16, 1999 a petition for review with the CTA, averring the inaction of the respondent Commissioner of Internal Revenue (CIR) on its applications.

After trial or on August 22, 2006 the CTA’s First Division rendered judgment,3 denying the petition for lack of merit. The First Division said that, while petitioner Panasonic’s export sales were subject to 0% VAT under Section 106(A)(2)(a)(1) of the 1997 NIRC, the same did not qualify for zero-rating because the word "zero-rated" was not printed on Panasonic’s export invoices. This omission, said the First Division, violates the invoicing requirements of Section 4.108-1 of Revenue Regulations (RR) 7-95.4

Its motion for reconsideration having been denied, on January 5, 2007 petitioner Panasonic appealed the First Division’s decision to the CTA en banc. On May 23, 2007 the CTA en banc upheld the First Division’s decision and resolution and dismissed the petition. Panasonic filed a motion for reconsideration of the en banc decision but this was denied. Thus, petitioner filed the present petition in accordance with R.A. 9282.5

The Issue Presented

The sole issue presented in this case is whether or not the CTA en banc correctly denied petitioner Panasonic’s claim for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales invoices did not state on their faces that its sales were "zero-rated."

The Court’s Ruling

The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports.6 For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed.

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes7 equal to the input taxes8that his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer.9

Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive.10

For the effective zero rating of such transactions, however, the taxpayer has to be VAT-registered and must comply with invoicing requirements.11 Interpreting these requirements, respondent CIR ruled that under Revenue Memorandum Circular (RMC) 42-2003, the taxpayer’s failure to comply with invoicing requirements will result in the disallowance of his claim for refund. RMC 42-2003 provides:

A-13. Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant.1avvphi1

If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer.

Petitioner Panasonic points out, however, that in requiring the printing on its sales invoices of the word "zero-rated," the Secretary of Finance unduly expanded, amended, and modified by a mere regulation (Section 4.108-1 of RR 7-95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337.12 Panasonic argues that the 1997 NIRC, which applied to its payments—specifically Sections 113 and 237—required the VAT-registered taxpayer’s receipts or invoices to indicate only the following information:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN);

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax;

(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and

(4) The name, business style, if any, address and taxpayer’s identification number (TIN) of the purchaser, customer or client.

Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the word "zero-rated" for zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only

after the enactment of R.A. 9337 on November 1, 2005, a law that did not yet exist at the time it issued its invoices.

But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the printing of the word "zero-rated" on the invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the enactment of that law.

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient enforcement of the tax code and of course its amendments.13 The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. As aptly explained by the CTA’s First Division, the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect.14

Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated.15 Unable to submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund.

Petitioner Panasonic’s citation of Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue16 is misplaced. Quite the contrary, it strengthens the position taken by respondent CIR. In that case, the CIR denied the claim for tax refund on the ground of the taxpayer’s failure to indicate on its invoices the "BIR authority to print." But Sec. 4.108-1 required only the following to be reflected on the invoice:

1. The name, taxpayer’s identification number (TIN) and address of seller;

2. Date of transaction;

3. Quantity, unit cost and description of merchandise or nature of service;

4. The name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;

5. The word "zero-rated" imprinted on the invoice covering zero-rated sales; and

6. The invoice value or consideration.

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

This Court will not set aside lightly the conclusions reached by the CTA 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.17 Besides, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax refunds in relation to the VAT are in the nature of such exemptions. The general rule is that claimants of tax refunds bear the burden of proving the factual basis of their claims. Taxes are the

lifeblood of the nation. Therefore, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government.18

WHEREFORE, the petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 182364               August 3, 2010

AT&T COMMUNICATIONS SERVICES PHILIPPINES, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CARPIO MORALES, J.:

AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation primarily engaged in the business of providing information, promotional, supportive and liaison services to foreign corporations such as AT&T Communications Services International Inc., AT&T Solutions, Inc., AT&T Singapore, Pte. Ltd.,, AT&T Global Communications Services, Inc. and Acer, Inc., an enterprise registered with the Philippine Economic Zone Authority (PEZA).

Under Service Agreements forged by petitioner with the above-named corporations, remuneration is paid in U.S. Dollars and inwardly remitted in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

For the calendar year 2002, petitioner incurred input VAT when it generated and recorded zero-rated sales in connection with its Service Agreements in the peso equivalent of P56,898,744.05. Petitioner also incurred input VAT from purchases of capital goods and other taxable goods and services, and importation of capital goods.

Despite the application of petitioner’s input VAT against its output VAT, an excess of unutilized input VAT in the amount of P2,050,736.69 remained. As petitioner’s unutilized input VAT could not be directly and exclusively attributed to either of its zero-rated sales or its domestic sales, an allocation of the input VAT was made which resulted in the amount of P1,801,826.82 as petitioner’s claim attributable to its zero-rated sales.

On March 26, 2004, petitioner filed with the Commissioner of Internal Revenue (respondent) an application for tax refund and/or tax credit of its excess/unutilized input VAT from zero-rated sales in the said amount ofP1,801,826.82.1

To prevent the running of the prescriptive period, petitioner subsequently filed a petition for review with the Court of Tax Appeals (CTA) which was docketed as CTA Case No. 6907 and lodged before its First Division.

In support of its claim, petitioner presented documents including its Summary of Zero-Rated Sales (Exhibit "DD") with corresponding supporting documents; VAT invoices on which were stamped "zero-rated" and bank credit advices (Exhibits "EE-1" to "EE-56"); copies of Service Agreements (Exhibits "N" to "Q"); and report of the commissioned certified public accountant (Exhibit "AA" to "AA-22").

After petitioner presented its evidence, respondent did not, despite notice, proffer any opposition to it. He was eventually declared to have waived his right to present evidence.1avvphi1

By Decision of February 23, 2007,2 the CTA First Division, conceding that petitioner’s transactions fall under the classification of zero-rated sales, nevertheless denied petitioner’s claim "for lack of substantiation," disposing as follows:

In reiteration, considering that the subject revenues pertain to gross receipts from services rendered by petitioner,valid VAT official receipts and not mere sales invoices should have been submitted in support thereof. Without proper VAT official receipts, the foreign currency payments received by petitioner from services rendered for the four (4) quarters of taxable year 2002 in the sum of US$1,102,315.48 with the peso equivalent of P56,898,744.05 cannot qualify for zero-rating for VAT purposes. Consequently, the claimed input VAT payments allegedly attributable thereto in the amount of P1,801,826.82 cannot be granted. It is clear from the provisions of Section 112 (A) of the NIRC of 1997 that there must be zero-rated or effectively zero-rated sales in order that a refund of input VAT could prosper.

x x x x3 (emphasis and underscoring supplied)

The CTA First Division, relying on Sections 1064 and 1085 of the Tax Code, held that since petitioner is engaged in sale of services, VAT Official Receipts should have been presented in order to substantiate its claim of zero-rated sales, not VAT invoices which pertain to sale of goods or properties.

On petition for review, the CTA En Banc, by Decision of February 18, 2008,6 affirmed that of the CTA First Division. Petitioner’s motion for reconsideration having been denied by Resolution of April 2, 2008, the present petition for review was filed.

The petition is impressed with merit.

A taxpayer engaged in zero-rated transactions may apply for tax refund or issuance of tax credit certificate for unutilized input VAT, subject to the following requirements: (1) the taxpayer is engaged in sales which are zero-rated (i.e., export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax; and (5) in case of zero-rated sales under Section 106 (A) (2) (a) (1) and (2), Section 106 (B) and Section 108 (B) (1) and (2), the acceptable foreign currency exchange proceeds thereof have been duly accounted for in accordance with BSP rules and regulations.7

Commissioner of Internal Revenue v. Seagate Technology (Philippines)8 teaches that petitioner, as zero-rated seller, hence, directly and legally liable for VAT, can claim a refund or tax credit certificate.

Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at zero. 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 but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. x x x

Applying the destination principle to the exportation of goods, automatic zero rating 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. (emphasis and underscoring supplied)

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: x x x

(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. x x x (emphasis and underscoring supplied)

Section 113 of the Tax Code does not create a distinction between a sales invoice and an official receipt.

Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer’s identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. (emphasis, italics and underscoring supplied)

Section 110 of the 1997 Tax Code in fact provides:

Section 110. Tax Credits –

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113hereof on the following transactions shall be creditable against the output tax:

(b) Purchase of services on which a value-added tax has actually been paid. (emphasis, italics and underscoring supplied)

Parenthetically, to determine the validity of petitioner’s claim as to unutilized input VAT, an invoice would suffice provided the requirements under Sections 113 and 237 of the Tax Code are met.1avvphi1

Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are proofs that a business transaction has been concluded, hence, should not be considered bereft of probative value.9 Only the preponderance of evidence threshold as applied in ordinary civil cases is needed to substantiate a claim for tax refund proper.10

IN FINE, the Court finds that petitioner has complied with the substantiation requirements to prove entitlement to refund/tax credit. The Court is not a trier of facts, however, hence the need to remand the case to the CTA for determination and computation of petitioner’s refund/tax credit.

WHEREFORE, the petition is GRANTED. The Decision of February 18, 2008 of the Court of Tax Appeals En Bancis REVERSED and SET ASIDE. Let the case be REMANDED to the Court of Tax Appeals First Division for the determination of petitioner’s tax credit/refund.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 180042               February 8, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.IRONCON BUILDERS AND DEVELOPMENT CORPORATION, Respondent.

D E C I S I O N

ABAD, J.:

This addresses the question of whether or not creditable value-added tax (VAT) withheld from a taxpayer in excess of its output VAT liability may be the subject of a tax refund in place of a tax credit.

The Facts and the Case

On May 10, 2001 respondent Ironcon Builders and Development Corporation (Ironcon) sought the refund by the Bureau of Internal Revenue (BIR) of its income tax overpayment and excess creditable VAT. When petitioner Commissioner of Internal Revenue (CIR) continued not to act on its claims, on July 1, 2002 Ironcon filed a petition for review with the Court of Tax Appeals (CTA) in CTA Case 6502, which was raffled to its Second Division.

After hearing, the Second Division held that in regard to the claim for overpaid income taxes, taxpayers have the option to either carry over the excess credit or ask for a refund. Here, respondent Ironcon filed two income tax returns for the year 2000, an original and an amended one. In the original return, Ironcon placed an "x" mark in a box corresponding to the option "To be carried over as tax credit next year/quarter." Although Ironcon’s amended return indicated a preference for "refund" of the overpaid tax, the Second Division ruled that Ironcon’s original choice is regarded as irrevocable, pursuant to Section 76 of Republic Act (R.A.) 8424 (the National Internal Revenue Code of 1997 or NIRC). Further, the Second Division found that

Ironcon actually carried over the credit for overpaid income taxes and applied it to the tax due for the year 2001. It, therefore, denied Ironcon’s claim for its refund.

As to the claim for VAT refund, the Second Division found that by the end of 2000, Ironcon had excess tax credit ofP3,135,990.69 carried over from 1999, allowable input tax of P15,242,271.43, and 6% creditable VAT ofP11,027,758.51, withheld and remitted by its clients. These amounts were deductible from Ironcon’s total output VAT liability of P20,073,422.63. Consequently, by the end of 2000 Ironcon’s actual excess creditable VAT wasP9,332,597.99 only as against its claim for refund of P18,053,715.64.

The CTA held, however, that input VAT payments should first be applied to the reported output VAT liability. Only after this deduction has been made will the 6% VAT withheld be applied to the amount of VAT payable. Thus, the excess of P9,332,597.99 mentioned above represents the excess 6% creditable VAT withheld, not creditable input VAT.

The CTA further ruled that since Ironcon had no more output VAT against which the excess creditable VAT withheld may be applied or credited, the VAT withheld had been excessively paid. Thus, the Court ruled that the excess amount may be refunded under Section 204(C) in relation to Section 229 of the NIRC. Before a refund may be granted, however, it must be shown that the claim was not used or carried over to the succeeding quarters.

Ironcon did not present before the Second Division its VAT returns for the succeeding quarters of 2001. Without this, the Second Division could not verify whether the tax credit was applied to output VAT liability in 2001. Thus, the Second Division also denied Ironcon’s claim for refund of excess creditable VAT.

Ironcon filed a motion for reconsideration, attaching to it its amended quarterly VAT returns for 2001. These were marked in open court as Exhibits "A-1," "B-1," "C-1," and "D-1." The CTA promulgated an Amended Decision on July 31, 2006, admitting the exhibits and ruling that Ironcon sufficiently proved that its excess creditable VAT withheld was not carried over or applied to any output VAT for 2001. Thus, the Court granted its application for the refund of unutilized excess creditable VAT of P9,332,597.99.

Petitioner CIR filed a motion for reconsideration of the amended decision, which the Second Division denied, prompting the CIR to elevate the matter to the CTA En Banc by way of a petition for review in CTA EB 235. The CTA En Banc denied the petition in a Decision dated August 9, 2007. It also denied the CIR’s motion for reconsideration, hence, this petition for review.1

Issue Presented

Simply put, the only issue the petition raises is whether or not the CTA erred in granting respondent Ironcon’s application for refund of its excess creditable VAT withheld.

The Court’s Ruling

Respondent Ironcon’s excess creditable VAT in this case consists of amounts withheld and remitted to the BIR by Ironcon’s clients. These clients were government agencies that applied the 6% withholding rate on their payments to Ironcon pursuant to Section 114 of the NIRC (prior to its amendment by R.A. 9337). Petitioner CIR’s main contention is that, since these amounts were withheld in accordance with what the law provides, they cannot be regarded as erroneously or illegally collected as contemplated in Sections 204(C) and 229 of the NIRC.

Petitioner CIR also points out that since the NIRC does not specifically grant taxpayers the option to refund excess creditable VAT withheld, it follows that such refund cannot be allowed. Excess creditable VAT withheld is much unlike excess income taxes withheld. In the latter case, Sections 76 and 58(D) of the NIRC specifically make the option to seek a refund available to the taxpayer. The CIR submits thus that the only

option available to taxpayers in case of excess creditable VAT withheld is to apply the excess credits to succeeding quarters.

But the amounts involved in this case are creditable withholding taxes, not final taxes subject to withholding. As the CTA correctly points out, taxes withheld on certain payments under the creditable withholding tax system are but intended to approximate the tax due from the payee.2 The withheld taxes remitted to the BIR are treated as deposits or advances on the actual tax liability of the taxpayer, subject to adjustment at the proper time when the actual tax liability can be fully and finally determined.3

For the year 2000, Ironcon’s actual VAT liability payable may be computed as follows:

Output taxes P 20,073,422.63

Less: allowable input taxes P 15,242,271.43

P 4,831,151.20

Less: tax credit (1999) P 3,135,990.69

VAT payable P 1,695,160.51

Respondent Ironcon’s clients had, however, already withheld and remitted P11,027,758.51 to the BIR in compliance with Section 114. As stated above, this withheld amount is to be treated as advance payment for Ironcon’s VAT liability payable and, therefore, the difference of P9,332,597.99 should be treated as Ironcon’s overpaid taxes.

The ruling in Citibank N.A. v. Court of Appeals, while dealing with excessive income taxes withheld, is also applicable to this case: "Consequently and clearly, the tax withheld during the course of the taxable year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable year."4

Even if the law does not expressly state that Ironcon’s excess creditable VAT withheld is refundable, it may be the subject of a claim for refund as an erroneously collected tax under Sections 204(C) and 229. It should be clarified that this ruling only refers to creditable VAT withheld pursuant to Section 114 prior to its amendment. After its amendment by R.A. 9337, the amount withheld under Section 114 is now treated as a final VAT, no longer under the creditable withholding tax system.5

The rule is that before a refund may be granted, respondent Ironcon must show that it had not used the creditable amount or carried it over to succeeding taxable quarters. Originally, the CTA’s Second Division said in its January 5, 2006 decision that Ironcon’s failure to offer in evidence its quarterly returns for 2001 was fatal to its claim. Ironcon filed a motion for reconsideration, attaching its 2001 returns, and, at the hearing of the motion, had these returns marked as Exhibits "A-1," "B-1," "C-1," and "D-1." Petitioner CIR argues that these Exhibits should be deemed inadmissible considering that they were offered only after trial had ended and should be treated as forgotten evidence.

Citing BPI-Family Savings Bank v. Court of Appeals,6 the CTA ruled that once a claim for refund has been clearly established, it may set aside technicalities in the presentation of evidence. Petitioner CIR points out, however, that the present case is not on all fours with BPI. The latter case dealt with the refund of creditable income taxes withheld, for which the NIRC specifically grants taxpayers the option to apply for refund of any excess.

But, considering the CTA’s finding in the present case that Ironcon had excess creditable VAT withheld for which it was entitled to a refund, it makes no sense to deny Ironcon the benefit of the BPI ruling that overlooks technicalities in the presentation of evidence. In BPI, this Court admitted an exhibit attached to the claimant’s motion for reconsideration, even if the claimant submitted it only after the trial.1avvphi1

"[The claimant] may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that [the claimant] x x x could not have applied the amount claimed as tax credits."7

Substantial justice dictates that the government should not keep money that does not belong to it at the expense of citizens.8 Since he ought to know the tax records of all taxpayers, petitioner CIR could have easily disproved the claimant’s allegations.9 That he chose not to amounts to a waiver of that right.10 Also, the CIR failed in this case to make a timely objection to or comment on respondent Ironcon’s offer of the documents in question despite an opportunity to do so.11 Taking all these circumstances together, it was sufficiently proved that Ironcon’s excess creditable VAT withheld was not carried over to succeeding taxable quarters.

WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Tax Appeals’ En Banc’s decision in CTA EB 235 dated August 9, 2007, its resolution dated October 11, 2007, as well as the amended decision of the Court of Tax Appeals’ Second Division in CTA Case 6502 dated July 31, 2006.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 151135             July 2, 2004

CONTEX CORPORATION, petitioner, vs.HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said

amount. Petitioner also assails the appellate court’s Resolution,3 dated December 19, 2001, denying the motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the amounts of   P 539,411.88 and   P 504,057.49 for 1997 and 1998, respectively .6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the petitioner’s Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex’s claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firm’s business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax.23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations" provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

"Export Sales" shall mean

. . .

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992.

. . .

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or

international agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 125355             March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

 

PARDO, J.:

What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that Commonwealth Management and Services Corporation, is liable for value added tax for services to clients during taxable year 1988.

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.1âwphi1.nêt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:

Taxable sale/receipt P1,679,155.00

===========

10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

——————

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3

===========

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of TaxAppeals4 a petition for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates.

COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency.5

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis. 6

The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties,7where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorariassailing the decision of the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996, COMASERCO complied with the resolution.8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides that:

Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended law provides that:

Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law

merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking orproject." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.

No costs.

SO ORDERED.1âwphi1.nêt

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 138051             June 10, 2004

JOSE Y. SONZA, petitioner, vs.ABS-CBN BROADCASTING CORPORATION, respondent.

D E C I S I O N

CARPIO, J.:

The Case

Before this Court is a petition for review on certiorari1 assailing the 26 March 1999 Decision2 of the Court of Appeals in CA-G.R. SP No. 49190 dismissing the petition filed by Jose Y. Sonza ("SONZA"). The Court of Appeals affirmed the findings of the National Labor Relations Commission ("NLRC"), which affirmed the Labor Arbiter’s dismissal of the case for lack of jurisdiction.

The Facts

In May 1994, respondent ABS-CBN Broadcasting Corporation ("ABS-CBN") signed an Agreement ("Agreement") with the Mel and Jay Management and Development Corporation ("MJMDC"). ABS-CBN was represented by its corporate officers while MJMDC was represented by SONZA, as President and General Manager, and Carmela Tiangco ("TIANGCO"), as EVP and Treasurer. Referred to in the Agreement as "AGENT," MJMDC agreed to provide SONZA’s services exclusively to ABS-CBN as talent for radio and television. The Agreement listed the services SONZA would render to ABS-CBN, as follows:

a. Co-host for Mel & Jay radio program, 8:00 to 10:00 a.m., Mondays to Fridays;

b. Co-host for Mel & Jay television program, 5:30 to 7:00 p.m., Sundays.3

ABS-CBN agreed to pay for SONZA’s services a monthly talent fee of P310,000 for the first year and P317,000 for the second and third year of the Agreement. ABS-CBN would pay the talent fees on the 10th and 25th days of the month.

On 1 April 1996, SONZA wrote a letter to ABS-CBN’s President, Eugenio Lopez III, which reads:

Dear Mr. Lopez,

We would like to call your attention to the Agreement dated May 1994 entered into by your goodself on behalf of ABS-CBN with our company relative to our talent JOSE Y. SONZA.

As you are well aware, Mr. Sonza irrevocably resigned in view of recent events concerning his programs and career. We consider these acts of the station violative of the Agreement and the station as in breach thereof. In this connection, we hereby serve notice of rescission of said Agreement at our instance effective as of date.

Mr. Sonza informed us that he is waiving and renouncing recovery of the remaining amount stipulated in paragraph 7 of the Agreement but reserves the right to seek recovery of the other benefits under said Agreement.

Thank you for your attention.

Very truly yours,

(Sgd.)JOSE Y. SONZA

President and Gen. Manager4

On 30 April 1996, SONZA filed a complaint against ABS-CBN before the Department of Labor and Employment, National Capital Region in Quezon City. SONZA complained that ABS-CBN did not pay his salaries, separation pay, service incentive leave pay, 13th month pay, signing bonus, travel allowance and amounts due under the Employees Stock Option Plan ("ESOP").

On 10 July 1996, ABS-CBN filed a Motion to Dismiss on the ground that no employer-employee relationship existed between the parties. SONZA filed an Opposition to the motion on 19 July 1996.

Meanwhile, ABS-CBN continued to remit SONZA’s monthly talent fees through his account at PCIBank, Quezon Avenue Branch, Quezon City. In July 1996, ABS-CBN opened a new account with the same bank where ABS-CBN deposited SONZA’s talent fees and other payments due him under the Agreement.

In his Order dated 2 December 1996, the Labor Arbiter5 denied the motion to dismiss and directed the parties to file their respective position papers. The Labor Arbiter ruled:

In this instant case, complainant for having invoked a claim that he was an employee of respondent company until April 15, 1996 and that he was not paid certain claims, it is sufficient enough as to confer jurisdiction over the instant case in this Office. And as to whether or not such claim would entitle complainant to recover upon the causes of action asserted is a matter to be resolved only after and as a result of a hearing. Thus, the respondent’s plea of lack of employer-employee relationship may be pleaded only as a matter of defense. It behooves upon it the duty to prove that there really is no employer-employee relationship between it and the complainant.

The Labor Arbiter then considered the case submitted for resolution. The parties submitted their position papers on 24 February 1997.

On 11 March 1997, SONZA filed a Reply to Respondent’s Position Paper with Motion to Expunge Respondent’s Annex 4 and Annex 5 from the Records. Annexes 4 and 5 are affidavits of ABS-CBN’s witnesses Soccoro Vidanes and Rolando V. Cruz. These witnesses stated in their affidavits that the prevailing practice in the television and broadcast industry is to treat talents like SONZA as independent contractors.

The Labor Arbiter rendered his Decision dated 8 July 1997 dismissing the complaint for lack of jurisdiction.6 The pertinent parts of the decision read as follows:

x x x

While Philippine jurisprudence has not yet, with certainty, touched on the "true nature of the contract of a talent," it stands to reason that a "talent" as above-described cannot be considered as an employee by reason of the peculiar circumstances surrounding the engagement of his services.

It must be noted that complainant was engaged by respondent by reason of his peculiar skills and talent as a TV host and a radio broadcaster. Unlike an ordinary employee, he was free to perform the services he undertook to render in accordance with his own style. The benefits conferred to complainant under the May 1994 Agreement are certainly very much higher than those generally given to employees. For one, complainant Sonza’s monthly talent fees amount to a staggering P317,000. Moreover, his engagement as a talent was covered by a specific contract. Likewise, he was not bound to render eight (8) hours of work per day as he worked only for such number of hours as may be necessary.

The fact that per the May 1994 Agreement complainant was accorded some benefits normally given to an employee is inconsequential. Whatever benefits complainant enjoyed arose from specific agreement by the parties and not by reason of employer-employee relationship. As correctly put by the respondent, "All these benefits are merely talent fees and other contractual benefits and should not be deemed as ‘salaries, wages and/or other remuneration’ accorded to an employee, notwithstanding the nomenclature appended to these benefits. Apropos to this is the rule that the term or nomenclature given to a stipulated benefit is not controlling, but the intent of the parties to the Agreement conferring such benefit."

The fact that complainant was made subject to respondent’s Rules and Regulations, likewise, does not detract from the absence of employer-employee relationship. As held by the Supreme Court, "The line should be drawn between rules that merely serve as guidelines towards the achievement of the mutually desired result without dictating the means or methods to be employed in attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use of such means. The first, which aim only to promote the result, create no employer-employee relationship unlike the second, which address both the result and the means to achieve it." (Insular Life Assurance Co., Ltd. vs. NLRC, et al., G.R. No. 84484, November 15, 1989).

x x x (Emphasis supplied)7

SONZA appealed to the NLRC. On 24 February 1998, the NLRC rendered a Decision affirming the Labor Arbiter’s decision. SONZA filed a motion for reconsideration, which the NLRC denied in its Resolution dated 3 July 1998.

On 6 October 1998, SONZA filed a special civil action for certiorari before the Court of Appeals assailing the decision and resolution of the NLRC. On 26 March 1999, the Court of Appeals rendered a Decision dismissing the case.8

Hence, this petition.

The Rulings of the NLRC and Court of Appeals

The Court of Appeals affirmed the NLRC’s finding that no employer-employee relationship existed between SONZA and ABS-CBN. Adopting the NLRC’s decision, the appellate court quoted the following findings of the NLRC:

x x x the May 1994 Agreement will readily reveal that MJMDC entered into the contract merely as an agent of complainant Sonza, the principal. By all indication and as the law puts it, the act of the agent is the act of the principal itself. This fact is made particularly true in this case, as admittedly MJMDC

‘is a management company devoted exclusively to managing the careers of Mr. Sonza and his broadcast partner, Mrs. Carmela C. Tiangco.’ (Opposition to Motion to Dismiss)

Clearly, the relations of principal and agent only accrues between complainant Sonza and MJMDC, and not between ABS-CBN and MJMDC. This is clear from the provisions of the May 1994 Agreement which specifically referred to MJMDC as the ‘AGENT’. As a matter of fact, when complainant herein unilaterally rescinded said May 1994 Agreement, it was MJMDC which issued the notice of rescission in behalf of Mr. Sonza, who himself signed the same in his capacity as President.

Moreover, previous contracts between Mr. Sonza and ABS-CBN reveal the fact that historically, the parties to the said agreements are ABS-CBN and Mr. Sonza. And it is only in the May 1994 Agreement, which is the latest Agreement executed between ABS-CBN and Mr. Sonza, that MJMDC figured in the said Agreement as the agent of Mr. Sonza.

We find it erroneous to assert that MJMDC is a mere ‘labor-only’ contractor of ABS-CBN such that there exist[s] employer-employee relationship between the latter and Mr. Sonza. On the contrary, We find it indubitable, that MJMDC is an agent, not of ABS-CBN, but of the talent/contractor Mr. Sonza, as expressly admitted by the latter and MJMDC in the May 1994 Agreement.

It may not be amiss to state that jurisdiction over the instant controversy indeed belongs to the regular courts, the same being in the nature of an action for alleged breach of contractual obligation on the part of respondent-appellee. As squarely apparent from complainant-appellant’s Position Paper, his claims for compensation for services, ‘13th month pay’, signing bonus and travel allowance against respondent-appellee are not based on the Labor Code but rather on the provisions of the May 1994 Agreement, while his claims for proceeds under Stock Purchase Agreement are based on the latter. A portion of the Position Paper of complainant-appellant bears perusal:

‘Under [the May 1994 Agreement] with respondent ABS-CBN, the latter contractually bound itself to pay complainant a signing bonus consisting of shares of stocks…with FIVE HUNDRED THOUSAND PESOS (P500,000.00).

Similarly, complainant is also entitled to be paid 13th month pay based on an amount not lower than the amount he was receiving prior to effectivity of (the) Agreement’.

Under paragraph 9 of (the May 1994 Agreement), complainant is entitled to a commutable travel benefit amounting to at least One Hundred Fifty Thousand Pesos (P150,000.00) per year.’

Thus, it is precisely because of complainant-appellant’s own recognition of the fact that his contractual relations with ABS-CBN are founded on the New Civil Code, rather than the Labor Code, that instead of merely resigning from ABS-CBN, complainant-appellant served upon the latter a ‘notice of rescission’ of Agreement with the station, per his letter dated April 1, 1996, which asserted that instead of referring to unpaid employee benefits, ‘he is waiving and renouncing recovery of the remaining amount stipulated in paragraph 7 of the Agreement but reserves the right to such recovery of the other benefits under said Agreement.’ (Annex 3 of the respondent ABS-CBN’s Motion to Dismiss dated July 10, 1996).

Evidently, it is precisely by reason of the alleged violation of the May 1994 Agreement and/or the Stock Purchase Agreement by respondent-appellee that complainant-appellant filed his complaint. Complainant-appellant’s claims being anchored on the alleged breach of contract on the part of respondent-appellee, the same can be resolved by reference to civil law and not to labor law. Consequently, they are within the realm of civil law and, thus, lie with the regular courts. As held in

the case of Dai-Chi Electronics Manufacturing vs. Villarama, 238 SCRA 267, 21 November 1994, an action for breach of contractual obligation is intrinsically a civil dispute.9 (Emphasis supplied)

The Court of Appeals ruled that the existence of an employer-employee relationship between SONZA and ABS-CBN is a factual question that is within the jurisdiction of the NLRC to resolve.10 A special civil action for certiorari extends only to issues of want or excess of jurisdiction of the NLRC.11 Such action cannot cover an inquiry into the correctness of the evaluation of the evidence which served as basis of the NLRC’s conclusion.12 The Court of Appeals added that it could not re-examine the parties’ evidence and substitute the factual findings of the NLRC with its own.13

The Issue

In assailing the decision of the Court of Appeals, SONZA contends that:

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE NLRC’S DECISION AND REFUSING TO FIND THAT AN EMPLOYER-EMPLOYEE RELATIONSHIP EXISTED BETWEEN SONZA AND ABS-CBN, DESPITE THE WEIGHT OF CONTROLLING LAW, JURISPRUDENCE AND EVIDENCE TO SUPPORT SUCH A FINDING.14

The Court’s Ruling

We affirm the assailed decision.

No convincing reason exists to warrant a reversal of the decision of the Court of Appeals affirming the NLRC ruling which upheld the Labor Arbiter’s dismissal of the case for lack of jurisdiction.

The present controversy is one of first impression. Although Philippine labor laws and jurisprudence define clearly the elements of an employer-employee relationship, this is the first time that the Court will resolve the nature of the relationship between a television and radio station and one of its "talents." There is no case law stating that a radio and television program host is an employee of the broadcast station.

The instant case involves big names in the broadcast industry, namely Jose "Jay" Sonza, a known television and radio personality, and ABS-CBN, one of the biggest television and radio networks in the country.

SONZA contends that the Labor Arbiter has jurisdiction over the case because he was an employee of ABS-CBN. On the other hand, ABS-CBN insists that the Labor Arbiter has no jurisdiction because SONZA was an independent contractor.

Employee or Independent Contractor?

The existence of an employer-employee relationship is a question of fact. Appellate courts accord the factual findings of the Labor Arbiter and the NLRC not only respect but also finality when supported by substantial evidence.15 Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.16 A party cannot prove the absence of substantial evidence by simply pointing out that there is contrary evidence on record, direct or circumstantial. The Court does not substitute its own judgment for that of the tribunal in determining where the weight of evidence lies or what evidence is credible.17

SONZA maintains that all essential elements of an employer-employee relationship are present in this case. Case law has consistently held that the elements of an employer-employee relationship are: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the

employer’s power to control the employee on the means and methods by which the work is accomplished.18 The last element, the so-called "control test", is the most important element.19

A. Selection and Engagement of Employee

ABS-CBN engaged SONZA’s services to co-host its television and radio programs because of SONZA’s peculiar skills, talent and celebrity status. SONZA contends that the "discretion used by respondent in specifically selecting and hiring complainant over other broadcasters of possibly similar experience and qualification as complainant belies respondent’s claim of independent contractorship."

Independent contractors often present themselves to possess unique skills, expertise or talent to distinguish them from ordinary employees. The specific selection and hiring of SONZA, because of his unique skills, talent and celebrity status not possessed by ordinary employees, is a circumstance indicative, but not conclusive, of an independent contractual relationship. If SONZA did not possess such unique skills, talent and celebrity status, ABS-CBN would not have entered into the Agreement with SONZA but would have hired him through its personnel department just like any other employee.

In any event, the method of selecting and engaging SONZA does not conclusively determine his status. We must consider all the circumstances of the relationship, with the control test being the most important element.

B. Payment of Wages

ABS-CBN directly paid SONZA his monthly talent fees with no part of his fees going to MJMDC. SONZA asserts that this mode of fee payment shows that he was an employee of ABS-CBN. SONZA also points out that ABS-CBN granted him benefits and privileges "which he would not have enjoyed if he were truly the subject of a valid job contract."

All the talent fees and benefits paid to SONZA were the result of negotiations that led to the Agreement. If SONZA were ABS-CBN’s employee, there would be no need for the parties to stipulate on benefits such as "SSS, Medicare, x x x and 13th month pay"20 which the law automatically incorporates into every employer-employee contract.21 Whatever benefits SONZA enjoyed arose from contract and not because of an employer-employee relationship.22

SONZA’s talent fees, amounting to P317,000 monthly in the second and third year, are so huge and out of the ordinary that they indicate more an independent contractual relationship rather than an employer-employee relationship. ABS-CBN agreed to pay SONZA such huge talent fees precisely because of SONZA’s unique skills, talent and celebrity status not possessed by ordinary employees. Obviously, SONZA acting alone possessed enough bargaining power to demand and receive such huge talent fees for his services. The power to bargain talent fees way above the salary scales of ordinary employees is a circumstance indicative, but not conclusive, of an independent contractual relationship.

The payment of talent fees directly to SONZA and not to MJMDC does not negate the status of SONZA as an independent contractor. The parties expressly agreed on such mode of payment. Under the Agreement, MJMDC is the AGENT of SONZA, to whom MJMDC would have to turn over any talent fee accruing under the Agreement.

C. Power of Dismissal

For violation of any provision of the Agreement, either party may terminate their relationship. SONZA failed to show that ABS-CBN could terminate his services on grounds other than breach of contract, such as retrenchment to prevent losses as provided under labor laws.23

During the life of the Agreement, ABS-CBN agreed to pay SONZA’s talent fees as long as "AGENT and Jay Sonza shall faithfully and completely perform each condition of this Agreement."24 Even if it suffered severe business losses, ABS-CBN could not retrench SONZA because ABS-CBN remained obligated to pay SONZA’s talent fees during the life of the Agreement. This circumstance indicates an independent contractual relationship between SONZA and ABS-CBN.

SONZA admits that even after ABS-CBN ceased broadcasting his programs, ABS-CBN still paid him his talent fees. Plainly, ABS-CBN adhered to its undertaking in the Agreement to continue paying SONZA’s talent fees during the remaining life of the Agreement even if ABS-CBN cancelled SONZA’s programs through no fault of SONZA.25

SONZA assails the Labor Arbiter’s interpretation of his rescission of the Agreement as an admission that he is not an employee of ABS-CBN. The Labor Arbiter stated that "if it were true that complainant was really an employee, he would merely resign, instead." SONZA did actually resign from ABS-CBN but he also, as president of MJMDC, rescinded the Agreement. SONZA’s letter clearly bears this out.26 However, the manner by which SONZA terminated his relationship with ABS-CBN is immaterial. Whether SONZA rescinded the Agreement or resigned from work does not determine his status as employee or independent contractor.

D. Power of Control

Since there is no local precedent on whether a radio and television program host is an employee or an independent contractor, we refer to foreign case law in analyzing the present case. The United States Court of Appeals, First Circuit, recently held in Alberty-Vélez v. Corporación De Puerto Rico Para La Difusión Pública ("WIPR")27 that a television program host is an independent contractor. We quote the following findings of the U.S. court:

Several factors favor classifying Alberty as an independent contractor. First, a television actress is a skilled position requiring talent and training not available on-the-job. x x x In this regard, Alberty possesses a master’s degree in public communications and journalism; is trained in dance, singing, and modeling; taught with the drama department at the University of Puerto Rico; and acted in several theater and television productions prior to her affiliation with "Desde Mi Pueblo." Second, Alberty provided the "tools and instrumentalities" necessary for her to perform. Specifically, she provided, or obtained sponsors to provide, the costumes, jewelry, and other image-related supplies and services necessary for her appearance. Alberty disputes that this factor favors independent contractor status because WIPR provided the "equipment necessary to tape the show." Alberty’s argument is misplaced. The equipment necessary for Alberty to conduct her job as host of "Desde Mi Pueblo" related to her appearance on the show. Others provided equipment for filming and producing the show, but these were not the primary tools that Alberty used to perform her particular function. If we accepted this argument, independent contractors could never work on collaborative projects because other individuals often provide the equipment required for different aspects of the collaboration. x x x

Third, WIPR could not assign Alberty work in addition to filming "Desde Mi Pueblo." Alberty’s contracts with WIPR specifically provided that WIPR hired her "professional services as Hostess for the Program Desde Mi Pueblo." There is no evidence that WIPR assigned Alberty tasks in addition to work related to these tapings. x x x28 (Emphasis supplied)

Applying the control test to the present case, we find that SONZA is not an employee but an independent contractor. The control test is the most important test our courts apply in distinguishing an employee from an independent contractor.29 This test is based on the extent of control the hirer exercises over a worker. The greater the supervision and control the hirer exercises, the more likely the worker is deemed an employee. The converse holds true as well – the less control the hirer exercises, the more likely the worker is considered an independent contractor.30

First, SONZA contends that ABS-CBN exercised control over the means and methods of his work.

SONZA’s argument is misplaced. ABS-CBN engaged SONZA’s services specifically to co-host the "Mel & Jay" programs. ABS-CBN did not assign any other work to SONZA. To perform his work, SONZA only needed his skills and talent. How SONZA delivered his lines, appeared on television, and sounded on radio were outside ABS-CBN’s control. SONZA did not have to render eight hours of work per day. The Agreement required SONZA to attend only rehearsals and tapings of the shows, as well as pre- and post-production staff meetings.31 ABS-CBN could not dictate the contents of SONZA’s script. However, the Agreement prohibited SONZA from criticizing in his shows ABS-CBN or its interests.32 The clear implication is that SONZA had a free hand on what to say or discuss in his shows provided he did not attack ABS-CBN or its interests.

We find that ABS-CBN was not involved in the actual performance that produced the finished product of SONZA’s work.33 ABS-CBN did not instruct SONZA how to perform his job. ABS-CBN merely reserved the right to modify the program format and airtime schedule "for more effective programming."34 ABS-CBN’s sole concern was the quality of the shows and their standing in the ratings. Clearly, ABS-CBN did not exercise control over the means and methods of performance of SONZA’s work.

SONZA claims that ABS-CBN’s power not to broadcast his shows proves ABS-CBN’s power over the means and methods of the performance of his work. Although ABS-CBN did have the option not to broadcast SONZA’s show, ABS-CBN was still obligated to pay SONZA’s talent fees... Thus, even if ABS-CBN was completely dissatisfied with the means and methods of SONZA’s performance of his work, or even with the quality or product of his work, ABS-CBN could not dismiss or even discipline SONZA. All that ABS-CBN could do is not to broadcast SONZA’s show but ABS-CBN must still pay his talent fees in full.35

Clearly, ABS-CBN’s right not to broadcast SONZA’s show, burdened as it was by the obligation to continue paying in full SONZA’s talent fees, did not amount to control over the means and methods of the performance of SONZA’s work. ABS-CBN could not terminate or discipline SONZA even if the means and methods of performance of his work - how he delivered his lines and appeared on television - did not meet ABS-CBN’s approval. This proves that ABS-CBN’s control was limited only to the result of SONZA’s work, whether to broadcast the final product or not. In either case, ABS-CBN must still pay SONZA’s talent fees in full until the expiry of the Agreement.

In Vaughan, et al. v. Warner, et al.,36 the United States Circuit Court of Appeals ruled that vaudeville performers were independent contractors although the management reserved the right to delete objectionable features in their shows. Since the management did not have control over the manner of performance of the skills of the artists, it could only control the result of the work by deleting objectionable features.37

SONZA further contends that ABS-CBN exercised control over his work by supplying all equipment and crew. No doubt, ABS-CBN supplied the equipment, crew and airtime needed to broadcast the "Mel & Jay" programs. However, the equipment, crew and airtime are not the "tools and instrumentalities" SONZA needed to perform his job. What SONZA principally needed were his talent or skills and the costumes necessary for his appearance.38Even though ABS-CBN provided SONZA with the place of work and the necessary equipment, SONZA was still an independent contractor since ABS-CBN did not supervise and control his work. ABS-CBN’s sole concern was for SONZA to display his talent during the airing of the programs.39

A radio broadcast specialist who works under minimal supervision is an independent contractor.40 SONZA’s work as television and radio program host required special skills and talent, which SONZA admittedly possesses. The records do not show that ABS-CBN exercised any supervision and control over how SONZA utilized his skills and talent in his shows.

Second, SONZA urges us to rule that he was ABS-CBN’s employee because ABS-CBN subjected him to its rules and standards of performance. SONZA claims that this indicates ABS-CBN’s control "not only [over] his manner of work but also the quality of his work."

The Agreement stipulates that SONZA shall abide with the rules and standards of performance "covering talents"41 of ABS-CBN. The Agreement does not require SONZA to comply with the rules and standards of performance prescribed for employees of ABS-CBN. The code of conduct imposed on SONZA under the Agreement refers to the "Television and Radio Code of the Kapisanan ng mga Broadcaster sa Pilipinas (KBP), which has been adopted by the COMPANY (ABS-CBN) as its Code of Ethics."42 The KBP code applies to broadcasters, not to employees of radio and television stations. Broadcasters are not necessarily employees of radio and television stations. Clearly, the rules and standards of performance referred to in the Agreement are those applicable to talents and not to employees of ABS-CBN.

In any event, not all rules imposed by the hiring party on the hired party indicate that the latter is an employee of the former.43 In this case, SONZA failed to show that these rules controlled his performance. We find that these general rules are merely guidelines towards the achievement of the mutually desired result, which are top-rating television and radio programs that comply with standards of the industry. We have ruled that:

Further, not every form of control that a party reserves to himself over the conduct of the other party in relation to the services being rendered may be accorded the effect of establishing an employer-employee relationship. The facts of this case fall squarely with the case of Insular Life Assurance Co., Ltd. vs. NLRC. In said case, we held that:

Logically, the line should be drawn between rules that merely serve as guidelines towards the achievement of the mutually desired result without dictating the means or methods to be employed in attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use of such means. The first, which aim only to promote the result, create no employer-employee relationship unlike the second, which address both the result and the means used to achieve it.44

The Vaughan case also held that one could still be an independent contractor although the hirer reserved certain supervision to insure the attainment of the desired result. The hirer, however, must not deprive the one hired from performing his services according to his own initiative.45

Lastly, SONZA insists that the "exclusivity clause" in the Agreement is the most extreme form of control which ABS-CBN exercised over him.

This argument is futile. Being an exclusive talent does not by itself mean that SONZA is an employee of ABS-CBN. Even an independent contractor can validly provide his services exclusively to the hiring party. In the broadcast industry, exclusivity is not necessarily the same as control.

The hiring of exclusive talents is a widespread and accepted practice in the entertainment industry.46 This practice is not designed to control the means and methods of work of the talent, but simply to protect the investment of the broadcast station. The broadcast station normally spends substantial amounts of money, time and effort "in building up its talents as well as the programs they appear in and thus expects that said talents remain exclusive with the station for a commensurate period of time."47 Normally, a much higher fee is paid to talents who agree to work exclusively for a particular radio or television station. In short, the huge talent fees partially compensates for exclusivity, as in the present case.

MJMDC as Agent of SONZA

SONZA protests the Labor Arbiter’s finding that he is a talent of MJMDC, which contracted out his services to ABS-CBN. The Labor Arbiter ruled that as a talent of MJMDC, SONZA is not an employee of ABS-CBN. SONZA insists that MJMDC is a "labor-only" contractor and ABS-CBN is his employer.

In a labor-only contract, there are three parties involved: (1) the "labor-only" contractor; (2) the employee who is ostensibly under the employ of the "labor-only" contractor; and (3) the principal who is deemed the real employer. Under this scheme, the "labor-only" contractor is the agent of the principal. The law makes the principal responsible to the employees of the "labor-only contractor" as if the principal itself directly hired or employed the employees.48 These circumstances are not present in this case.

There are essentially only two parties involved under the Agreement, namely, SONZA and ABS-CBN. MJMDC merely acted as SONZA’s agent. The Agreement expressly states that MJMDC acted as the "AGENT" of SONZA. The records do not show that MJMDC acted as ABS-CBN’s agent. MJMDC, which stands for Mel and Jay Management and Development Corporation, is a corporation organized and owned by SONZA and TIANGCO. The President and General Manager of MJMDC is SONZA himself. It is absurd to hold that MJMDC, which is owned, controlled, headed and managed by SONZA, acted as agent of ABS-CBN in entering into the Agreement with SONZA, who himself is represented by MJMDC. That would make MJMDC the agent of both ABS-CBN and SONZA.

As SONZA admits, MJMDC is a management company devoted exclusively to managing the careers of SONZA and his broadcast partner, TIANGCO. MJMDC is not engaged in any other business, not even job contracting. MJMDC does not have any other function apart from acting as agent of SONZA or TIANGCO to promote their careers in the broadcast and television industry.49

Policy Instruction No. 40

SONZA argues that Policy Instruction No. 40 issued by then Minister of Labor Blas Ople on 8 January 1979 finally settled the status of workers in the broadcast industry. Under this policy, the types of employees in the broadcast industry are the station and program employees.

Policy Instruction No. 40 is a mere executive issuance which does not have the force and effect of law. There is no legal presumption that Policy Instruction No. 40 determines SONZA’s status. A mere executive issuance cannot exclude independent contractors from the class of service providers to the broadcast industry. The classification of workers in the broadcast industry into only two groups under Policy Instruction No. 40 is not binding on this Court, especially when the classification has no basis either in law or in fact.

Affidavits of ABS-CBN’s Witnesses

SONZA also faults the Labor Arbiter for admitting the affidavits of Socorro Vidanes and Rolando Cruz without giving his counsel the

opportunity to cross-examine these witnesses. SONZA brands these witnesses as incompetent to attest on the prevailing practice in the radio and television industry. SONZA views the affidavits of these witnesses as misleading and irrelevant.

While SONZA failed to cross-examine ABS-CBN’s witnesses, he was never prevented from denying or refuting the allegations in the affidavits. The Labor Arbiter has the discretion whether to conduct a formal (trial-type) hearing after the submission of the position papers of the parties, thus:

Section 3. Submission of Position Papers/Memorandum

x x x

These verified position papers shall cover only those claims and causes of action raised in the complaint excluding those that may have been amicably settled, and shall be accompanied by all supporting documents including the affidavits of their respective witnesses which shall take the place of the latter’s direct testimony. x x x

Section 4. Determination of Necessity of Hearing. – Immediately after the submission of the parties of their position papers/memorandum, the Labor Arbiter shall motu propio determine whether there is need for a formal trial or hearing. At this stage, he may, at his discretion and for the purpose of making such determination, ask clarificatory questions to further elicit facts or information, including but not limited to the subpoena of relevant documentary evidence, if any from any party or witness.50

The Labor Arbiter can decide a case based solely on the position papers and the supporting documents without a formal trial.51 The holding of a formal hearing or trial is something that the parties cannot demand as a matter of right.52 If the Labor Arbiter is confident that he can rely on the documents before him, he cannot be faulted for not conducting a formal trial, unless under the particular circumstances of the case, the documents alone are insufficient. The proceedings before a Labor Arbiter are non-litigious in nature. Subject to the requirements of due process, the technicalities of law and the rules obtaining in the courts of law do not strictly apply in proceedings before a Labor Arbiter.

Talents as Independent Contractors

ABS-CBN claims that there exists a prevailing practice in the broadcast and entertainment industries to treat talents like SONZA as independent contractors. SONZA argues that if such practice exists, it is void for violating the right of labor to security of tenure.

The right of labor to security of tenure as guaranteed in the Constitution53 arises only if there is an employer-employee relationship under labor laws. Not every performance of services for a fee creates an employer-employee relationship. To hold that every person who renders services to another for a fee is an employee - to give meaning to the security of tenure clause - will lead to absurd results.

Individuals with special skills, expertise or talent enjoy the freedom to offer their services as independent contractors. The right to life and livelihood guarantees this freedom to contract as independent contractors. The right of labor to security of tenure cannot operate to deprive an individual, possessed with special skills, expertise and talent, of his right to contract as an independent contractor. An individual like an artist or talent has a right to render his services without any one controlling the means and methods by which he performs his art or craft. This Court will not interpret the right of labor to security of tenure to compel artists and talents to render their services only as employees. If radio and television program hosts can render their services only as employees, the station owners and managers can dictate to the radio and television hosts what they say in their shows. This is not conducive to freedom of the press.

Different Tax Treatment of Talents and Broadcasters

The National Internal Revenue Code ("NIRC")54 in relation to Republic Act No. 7716,55 as amended by Republic Act No. 8241,56 treats talents, television and radio broadcasters differently. Under the NIRC, these professionals are subject to the 10% value-added tax ("VAT") on services they render. Exempted from the VAT are those under an employer-employee relationship.57 This different tax treatment accorded to talents and broadcasters bolters our conclusion that they are independent contractors, provided all the basic elements of a contractual relationship are present as in this case.

Nature of SONZA’s Claims

SONZA seeks the recovery of allegedly unpaid talent fees, 13th month pay, separation pay, service incentive leave, signing bonus, travel allowance, and amounts due under the Employee Stock Option Plan. We agree

with the findings of the Labor Arbiter and the Court of Appeals that SONZA’s claims are all based on the May 1994 Agreement and stock option plan, and not on the Labor Code. Clearly, the present case does not call for an application of the Labor Code provisions but an interpretation and implementation of the May 1994 Agreement. In effect, SONZA’s cause of action is for breach of contract which is intrinsically a civil dispute cognizable by the regular courts.58

WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals dated 26 March 1999 in CA-G.R. SP No. 49190 is AFFIRMED. Costs against petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 155491               July 21, 2009

SMART COMMUNICATIONS, INC., Petitioner, vs.THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents.

R E S O L U T I O N

NACHURA, J.:

Before the Court is a Motion for Reconsideration1 filed by Smart Communications, Inc. (Smart) of the Decision2 of the Court dated September 16, 2008, denying its appeal of the Decision and Order of the Regional Trial Court (RTC) of Davao City, dated July 19, 2002 and September 26, 2002, respectively.

Briefly, the factual antecedents are as follows:

On February 18, 2002, Smart filed a special civil action for declaratory relief3 for the ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is exempt from payment of franchise tax to the City.

On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for reconsideration, which was denied by the trial court in an Order dated September 26, 2002. Smart filed an appeal before this Court, but the same was denied in a decision dated September 16, 2008. Hence, the instant motion for reconsideration raising the following grounds: (1) the "in lieu of all taxes" clause in Smart’s franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of strict construction against tax exemptions is not applicable; (2) the "in lieu of all taxes" clause is not rendered ineffective by the Expanded VAT Law; (3) Section 23 of Republic Act No. 79254 (RA 7925) includes a tax exemption; and (4) the imposition of a local franchise tax on Smart would violate the constitutional prohibition against impairment of the obligation of contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s legislative franchise contains the contentious "in lieu of all taxes" clause. The Section reads:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

xxx5

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause, contains the word "exemption," viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of the service authorized by the franchise.6

A review of the recent decisions of the Court on the matter of exemptions from local franchise tax and the interpretation of the word "exemption" found in Section 23 of RA 7925 is imperative in order to resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,7 Digitel used as an argument the "in lieu of all taxes" clauses/provisos found in the legislative franchises of Globe,8 Smart and Bell,9 vis-à-visSection 23 of RA 7925, in order to claim exemption from the payment of local franchise tax. Digitel claimed, just like the petitioner in this case, that it was exempt from the payment of any other taxes except the national franchise and income taxes. Digitel alleged that Smart was exempted from the payment of local franchise tax.

However, it failed to substantiate its allegation, and, thus, the Court denied Digitel’s claim for exemption from provincial franchise tax. Cited was the ruling of the Court in PLDT v. City of Davao,10 wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. Section 23 cannot be considered as having amended PLDT’s franchise so as to entitle it to exemption from the imposition of local franchise taxes. The Court further held that tax exemptions are highly disfavored and that a tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances when it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word "exemption" as used in the statute refers or pertains merely to an exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation and not to an exemption from the grantee’s tax liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,11 PLDT was a holder of a legislative franchise under Act No. 3436, as amended. On August 24, 1991, the terms and conditions of its

franchise were consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called "in-lieu-of-all taxes" clause. Under the said Section, PLDT shall pay a franchise tax equivalent to three percent (3%) of all its gross receipts, which franchise tax shall be "in lieu of all taxes." The issue that the Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925.lawph!l

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.

In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of Davao12 and PLDT v. City of Bacolod,13 in denying the claim for exemption from the payment of local franchise tax.

In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or municipaties.

The power to tax by local government units emanates from Section 5, Article X of the Constitution which empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 180345               November 25, 2009

SAN ROQUE POWER CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner San Roque Power Corporation assails the Decision1 of the Court of Tax Appeals (CTA) En Banc dated 20 September 2007 in CTA EB No. 248, affirming the Decision2 dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, which dismissed the claim of petitioner for the refund and/or issuance of a tax credit certificate in the amount of Two Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand Six Hundred Twenty Pesos and 18/100 (P249,397,620.18) allegedly representing unutilized input Value Added Tax (VAT) for the period covering January to December 2002.

Respondent, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the assessment and collection of all national internal revenue taxes, fees, and charges, including the Value Added Tax (VAT), imposed by Section 1083 of the National Internal Revenue Code (NIRC) of 1997. Moreover, it is empowered to grant refunds or issue tax credit certificates in accordance with Section 112 of the NIRC of 1997 for unutilized input VAT paid on zero-rated or effectively zero-rated sales and purchases of capital goods, to wit:

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

(B) Capital Goods—A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent the such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.

On the other hand, petitioner is a domestic corporation organized under the corporate laws of the Republic of the Philippines. On 14 October 1997, it was incorporated for the sole purpose of building and operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an indivisible project consisting of the power station, the dam, spillway, and other related facilities.4 It is registered with the Board of Investments (BOI) on a preferred pioneer status to engage in the design, construction, erection, assembly, as well as own, commission, and operate electric power-generating plants and related activities, for which it was issued the Certificate of Registration No. 97-356 dated 11 February 1998.5 As a seller of services, petitioner is registered with the BIR as a VAT taxpayer under Certificate of Registration No. OCN-98-006-007394.6

On 11 October 1997, petitioner entered into a Power Purchase Agreement (PPA) with the National Power Corporation (NPC) to develop the hydro potential of the Lower Agno River, and to be able to generate

additional power and energy for the Luzon Power Grid, by developing and operating the San Roque Multipurpose Project. The PPA provides that petitioner shall be responsible for the design, construction, installation, completion and testing and commissioning of the Power Station and it shall operate and maintain the same, subject to the instructions of the NPC. During the cooperation period of 25 years commencing from the completion date of the Power Station, the NPC shall purchase all the electricity generated by the Power Plant.7

Because of the exclusive nature of the PPA between petitioner and the NPC, petitioner applied for and was granted five Certificates of Zero Rate by the BIR, through the Chief Regulatory Operations Monitoring Division, now the Audit Information, Tax Exemption & Incentive Division. Based on these certificates, the zero-rated status of petitioner commenced on 27 September 1998 and continued throughout the year 2002.8

For the period January to December 2002, petitioner filed with the respondent its Monthly VAT Declarations and Quarterly VAT Returns. Its Quarterly VAT Returns showed excess input VAT payments on account of its importation and domestic purchases of goods and services, as follows9 :

Period Covered Date Filed Particulars Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 20, 2002 Tax Due for the Quarter (Box 13C) P 26,247.27

Input Tax carried over from previous qtr (22B)

296,124,429.21

Input VAT on Domestic Purchases for the Qtr  

(22D) 95,003,348.91

Input VAT on Importation of Goods for the Qtr

 

(22F) 20,758,668.00

Total Available Input tax (23) 411,886,446.12

VAT Refund/TCC Claimed (24A) 173,909,435.66

Net Creditable Input Tax (25) 237,977,010.46

VAT payable (Excess Input Tax) (26) (237,950,763.19)

Tax Payable (overpayment) (28) (237,950,763.19)

2nd Quarter

(April 1, 2002 to

June 30, 2002)

July 24, 2002 Tax Due for the Quarter (Box 13C) P blank

Input Tax carried over from previous qtr (22B)

237,950,763.19

Input VAT on Domestic Purchases for the Qtr  

(22D) 65,206,499.83

Input VAT on Importation of Goods for the Qtr

 

(22F) 18,485,758.00

Total Available Input tax (23) 321,643,021.02

VAT Refund/TCC Claimed (24A) 237,950,763.19

Net Creditable Input Tax (25) 83,692,257.83

VAT payable (Excess Input Tax) (26) (83,692,257.83)

Tax Payable (overpayment) (28) (83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002

Tax Due for the Quarter (Box 13C) P blankInput Tax carried over from previous qtr (22B) 199,428,027.47Input VAT on Domestic Purchases for the Qtr  (22D) 28,924,020.79Input VAT on Importation of Goods for the Qtr  (22F) 1,465,875.00Total Available Input tax (23) 229,817,923.26VAT Refund/TCC Claimed (24A) BlankNet Creditable Input Tax (25) 229,817,923.26VAT payable (Excess Input Tax) (26) (229,817,923.26)Tax Payable (overpayment) (28) (229,817,923.26)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003

Tax Due for the Quarter (Box 13C) P 34,996.36Input Tax carried over from previous qtr (22B) 114,082,153.62Input VAT on Domestic Purchases for the Qtr  (22D) 18,166,330.54Input VAT on Importation of Goods for the Qtr  (22F) 2,308,837.00Total Available Input tax (23) 134,557,321.16VAT Refund/TCC Claimed (24A) 83,692,257.83Net Creditable Input Tax (25) 50,865,063.33VAT payable (Excess Input Tax) (26) (50,830,066.97)Tax Payable (overpayment) (28) (50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29 May 2003, petitioner filed with the BIR four separate administrative claims for refund of Unutilized Input VAT paid for the period January to March 2002, April to June 2002, July to September 2002, and October to December 2002, respectively. In these letters addressed to the BIR, Carlos Echevarria (Echevarria), the Vice President and Director of Finance of petitioner, explained that petitioner’s sale of power to NPC are subject to VAT at zero percent rate, in accordance with Section 108(B)(3) of the NIRC.10 Petitioner sought to recover the total amount of P250,258,094.25, representing its unutilized excess VAT on its importation of capital and other taxable goods and services for the year 2002, broken down as follows11 :

Qtr

Involved

Output Tax Input Tax

    Domestic Purchases Importations Excess Input Tax

  (A) (B) (C) (D) = (B) + (C) –(A)

1st P 26,247.27 P95,003,348.91 P20,758,668.00 P115,735,769.84

2nd - 65,206,499.83 18,485,758.00 83,692,257.83

3rd - 28,924,020.79 1,465,875.00 30,389,895.79

4th 34,996.36 18,166,330.54 2,308,837.00 20,440,171.18

  P61,243.63 P207,300,200.07 P43,019,138.00 P250,258,094.44

Petitioner amended its Quarterly VAT Returns, particularly the items on (1) Input VAT on Domestic Purchases during the first quarter of 2002; (2) Input VAT on Domestic Purchases for the fourth quarter of 2002; and (3) Input VAT on Importation of Goods for the fourth quarter of 2002. The amendments read as follows12 :

Period Covered Date Filed Particulars Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C) P 26,247.27

Input Tax carried over from previous qtr (22B)

297,719,296.25

Input VAT on Domestic Purchases for the Qtr  

(22D) 95,126,981.69

   

(22F) 20,758,668.00

Total Available Input tax (23) 413,604,945.94

VAT Refund/TCC Claimed (24A) 175,544,002.27

Net Creditable Input Tax (25) 175,544,002.27

VAT payable (Excess Input Tax) (26) (238,060,943.67)

Tax Payable (overpayment) (28) (238,034,696.40)

2nd Quarter

(April 1, 2002 to

June 30, 2002)

April 24, 2003

Tax Due for the Quarter (Box 13C) P blank

Input Tax carried over from previous qtr (22B)

238,034,696.40

Input VAT on Domestic Purchases for the Qtr  

(22D) 65,206,499.83

Input VAT on Importation of Goods for the Qtr

 

(22F) 18,485,758.00

Total Available Input tax (23) 321,643,021.02

VAT Refund/TCC Claimed (24A) 237,950,763.19

Net Creditable Input Tax (25) 83,692,257.83

VAT payable (Excess Input Tax) (26) (83,692,257.83)

Tax Payable (overpayment) (28) (83,692,257.83)

3rd Quarter

(July 1, 2002 to

October 25, 2002

Tax Due for the Quarter (Box 13C) P blank

Input Tax carried over from previous qtr (22B)

83,692,257.83

Input VAT on Domestic Purchases for the  

September 30, 2002)

Qtr

(22D) 28,924,020.79

Input VAT on Importation of Goods for the Qtr

 

(22F) 1,465,875.00

Total Available Input tax (23) 114,082,153.62

VAT Refund/TCC Claimed (24A) Blank

Net Creditable Input Tax (25) 114,082,153.62

VAT payable (Excess Input Tax) (26) (114,082,153.62)

Tax Payable (overpayment) (28) (114,082,153.62)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003 Tax Due for the Quarter (Box 13C) P 34,996.36Input Tax carried over from previous qtr (22B) 114,082,153.62Input VAT on Domestic Purchases for the Qtr  (22D) 17,918,056.50Input VAT on Importation of Goods for the Qtr  (22F) 1,573,004.00Total Available Input tax (23) 133,573,214.12VAT Refund/TCC Claimed (24A) 83,692,257.83Net Creditable Input Tax (25) 49,880,956.29VAT payable (Excess Input Tax) (26) (49,845,959.93)Tax Payable (overpayment) (28) (49,845,959.93)

On 30 May 2003 and 31 July 2003, petitioner filed two letters with the BIR to amend its claims for tax refund or credit for the first and fourth quarter of 2002, respectively. Petitioner sought to recover a total amount ofP249,397,620.18 representing its unutilized excess VAT on its importation and domestic purchases of goods and services for the year 2002, broken down as follows13 :

Qtr

Involved

Date Filed Output Tax Input Tax

      Domestic Purchases Importations Excess Input Tax

    (A) (B) (C) (D) = (B) + (C) –(A)

1st 30-May-03 P26,247.27 P95,126,981.69 P20,758,668.00 P115,859,402.42

2nd 25-Oct-02 - 65,206,499.83 18,185,758.00 83,692,257.83

3rd 27-Feb-03 - 28,924,920.79 1,465,875,00 30,389,895.79

4th 31-Jul-03 34,996.36 17,918,056.50 1,573,004.00 19,456,064.14

    P61,243.63 P207,175,558.81 P42,283,305.00 P249,397,620.18

Respondent failed to act on the request for tax refund or credit of petitioner, which prompted the latter to file on 5 April 2004, with the CTA in Division, a Petition for Review, docketed as CTA Case No. 6916 before it could be barred by the two-year prescriptive period within which to file its claim. Petitioner sought the

refund of the amount of P249,397,620.18 representing its unutilized excess VAT on its importation and local purchases of various goods and services for the year 2002.14

During the proceedings before the CTA Second Division, petitioner presented the following documents, among other pieces of evidence: (1) Petitioner’s Amended Quarterly VAT return for the 4th Quarter of 2002 marked as Exhibit "A," showing the amount of P42,500,000.00 paid by NTC to petitioner for all the electricity produced during test runs; (2) the special audit report, prepared by the CPA firm of Punongbayan and Araullo through a partner, Angel A. Aguilar (Aguilar), and the attached schedules, marked as Exhibits "J-2" to "J-21"; (3) Sales Invoices and Official Receipts and related documents issued to petitioner for the year 2002, marked as Exhibits "J-4-A1" to "J-4-L265"; (4) Audited Financial Statements of Petitioner for the year 2002, with comparative figures for 2001, marked as Exhibit "K"; and (5) the Affidavit of Echevarria dated 9 February 2005, marked as Exhibit "L".15

During the hearings, the parties jointly stipulated on the issues involved:

1. Whether or not petitioner’s sales are subject to value-added taxes at effectively zero percent (0%) rate;

2. Whether or not petitioner incurred input taxes which are attributable to its effectively zero-rated transactions;

3. Whether or not petitioner’s importation and purchases of capital goods and related services are within the scope and meaning of "capital goods" under Revenue Regulations No. 7-95;

4. Whether or not petitioner’s input taxes are sufficiently substantiated with VAT invoices or official receipts;

5. Whether or not the VAT input taxes being claimed for refund/tax credit by petitioner (had) been credited or utilized against any output taxes or (had) been carried forward to the succeeding quarter or quarters; and

6. Whether or not petitioner is entitled to a refund of VAT input taxes it paid from January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos (P249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to refund or tax credit in the amount ofP249,397,620.18 representing its unutilized input VAT paid on importation and purchases of capital and other taxable goods and services from January 1 to December 31, 2002.

After a hearing on the merits, the CTA Second Division rendered a Decision16 dated 23 March 2006 denying petitioner’s claim for tax refund or credit. The CTA noted that petitioner based its claim on creditable input VAT paid, which is attributable to (1) zero-rated or effectively zero-rated sale, as provided under Section 112(A) of the NIRC, and (2) purchases of capital goods, in accordance with Section 112(B) of the NIRC. The court ruled that in order for petitioner to be entitled to the refund or issuance of a tax credit certificate on the basis of Section 112(A) of the NIRC, it must establish that it had incurred zero-rated sales or effectively zero-rated sales for the taxable year 2002. Since records show that petitioner did not make any zero-rated or effectively-zero rated sales for the taxable year 2002, the CTA reasoned that petitioner’s claim must be denied. Parenthetically, the court declared that the claim for tax refund or credit based on Section 112(B) of the NIRC requires petitioner to prove that it paid input VAT on capital goods purchased, based on the definition of capital goods provided under Section 4.112-1(b) of Revenue Regulations No. 7-95—i.e., goods or properties which have an estimated useful life of greater than one year, are treated as depreciable assets under Section 34(F) of the NIRC, and are used directly or indirectly in the production or sale of taxable goods and services. The CTA found that the evidence offered by petitioner—the suppliers’ invoices and official

receipts and Import Entries and Internal Revenue Declarations and the audit report of the Court-commissioned Independent Certified Public Accountant (CPA) are insufficient to prove that the importations and domestic purchases were classified as capital goods and properties entered as part of the "Property, Plant and Equipment" account of the petitioner. The dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.17

Not satisfied with the foregoing Decision dated 23 March 2006, petitioner filed a Motion for Reconsideration which was denied by the CTA Second Division in a Resolution dated 4 January 2007.18

Petitioner filed an appeal with the CTA En Banc, docketed as CTA EB No. 248. The CTA En Banc promulgated its Decision19 on 20 September 2007 denying petitioner’s appeal. The CTA En Banc reiterated the ruling of the Division that petitioner’s claim based on Section 112(A) of the NIRC should be denied since it did not present any records of any zero-rated or effectively zero-rated transactions. It clarified that since petitioner failed to prove that any sale of its electricity had transpired, petitioner may base its claim only on Section 112(B) of the NIRC, the provision governing the purchase of capital goods. The court noted that the report of the Court-commissioned auditing firm, Punongbayan & Araullo, dealt specifically with the unutilized input taxes paid or incurred by petitioner on its local and foreign purchases of goods and services attributable to its zero-rated sales, and not to purchases of capital goods. It decided that petitioner failed to prove that the purchases evidenced by the invoices and receipts, which petitioner presented, were classified as capital goods which formed part of its "Property, Plant and Equipment," especially since petitioner failed to present its books of account. The dispositive part of the said Decision reads:

WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby AFFIRMED.20

The CTA En Banc denied petitioner’s Motion for Reconsideration in a Resolution dated 22 October 2007.21

Hence, the present Petition for Review where the petitioner raises the following errors allegedly committed by the CTA En banc:

I

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE PETITIONER, THUS DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND

II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF LAW.22

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may claim a tax refund or credit in the amount ofP249,397,620.18 for creditable input tax attributable to zero-rated or effectively zero-rated sales pursuant to Section 112(A) of the NIRC or for input taxes paid on capital goods as provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and the evidence offered by the parties. It is an accepted doctrine that this Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh the probative value of the evidence presented. However, this rule does not apply where the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if considered would justify a different conclusion.23

After reviewing the records, this Court finds that petitioner’s claim for refund or credit is justified under Section 112(A) of the NIRC which states that:

SEC. 112. Refunds or Tax Credits of Input Tax.—

(A) Zero-rated or Effectively Zero-rated Sales—Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

To claim refund or tax credit under Section 112(A), petitioner must comply with the following criteria: (1) the taxpayer is VAT registered; (2) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional input taxes; (5) the input taxes have not been applied against output taxes during and in the succeeding quarters; (6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9) the claim is filed within two years after the close of the taxable quarter when such sales were made.24

Based on the evidence presented, petitioner complied with the abovementioned requirements. Firstly, petitioner had adequately proved that it is a VAT registered taxpayer when it presented Certificate of Registration No. OCN-98-006-007394, which it attached to its Petition for Review dated 29 March 2004 filed before the CTA in Division. Secondly, it is unquestioned that petitioner is engaged in providing electricity for NPC, an activity which is subject to zero rate, under Section 108(B)(3) of the NIRC. Thirdly, petitioner offered as evidence suppliers’ VAT invoices or official receipts, as well as Import Entries and Internal Revenue Declarations (Exhibits "J-4-A1" to "J-4-L265"), which were examined in the audit conducted by Aguilar, the Court-commissioned Independent CPA. Significantly, Aguilar noted in his audit report (Exhibit "J-2") that of the P249,397,620.18 claimed by petitioner, he identified items with incomplete documentation and errors in computation with a total amount of P3,266,009.78. Based on these findings, the remaining input VAT of P246,131,610.40 was properly documented and recorded in the books. The said report reads:

In performing the procedures referred under the Procedures Performed section of this report, no matters came to our attention that cause us to believe that the amount of input VAT applied for as tax credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31, 2002 should be adjusted except for input VAT claimed with incomplete documentation, those with various and other exceptions on the supporting documents and those with errors in computation totaling P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report. We have also ascertained that the input VAT claimed are properly recorded in the books and, except as

specifically identified in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly supported by original and appropriate suppliers’ VAT invoices and/or official receipts.25

Fourthly, the input taxes claimed, which consisted of local purchases and importations made in 2002, are not transitional input taxes, which Section 111 of the NIRC defines as input taxes allowed on the beginning inventory of goods, materials and supplies.26 Fifthly, the audit report of Aguilar affirms that the input VAT being claimed for tax refund or credit is net of the input VAT that was already offset against output VAT amounting to P26,247.27 for the first quarter of 2002 and P34,996.36 for the fourth quarter of 2002,27 as reflected in the Quarterly VAT Returns.28

The main dispute in this case is whether or not petitioner’s claim complied with the sixth requirement—the existence of zero-rated or effectively zero-rated sales, to which creditable input taxes may be attributed. The CTA in Division and en banc denied petitioner’s claim solely on this ground. The tax courts based this conclusion on the audited report, marked as Exhibit "J-2," stating that petitioner made no sale of electricity to NPC in 2002.29Moreover, the affidavit of Echevarria (Exhibit "L"), petitioner’s Vice President and Director for Finance, contained an admission that no commercial sale of electricity had been made in favor of NPC in 2002 since the project was still under construction at that time.30

However, upon closer examination of the records, it appears that on 2002, petitioner carried out a "sale" of electricity to NPC. The fourth quarter return for the year 2002, which petitioner filed, reported a zero-rated sale in the amount of P42,500,000.00.31 In the Affidavit of Echevarria dated 9 February 2005 (Exhibit "L"), which was uncontroverted by respondent, the affiant stated that although no commercial sale was made in 2002, petitioner produced and transferred electricity to NPC during the testing period in exchange for the amount ofP42,500,000.00, to wit:32

A: San Roque Power Corporation has had no sale yet during 2002. The P42,500,000.00 which was paid to us by Napocor was something similar to a more cost recovery scheme. The pre-agreed amount would be about equal to our costs for producing the electricity during the testing period and we just reflected this in our 4th quarter return as a zero-rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was not a commercial sale. In granting the tax benefit to VAT-registered zero-rated or effectively zero-rated taxpayers, Section 112(A) of the NIRC does not limit the definition of "sale" to commercial transactions in the normal course of business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition of the VAT, does not limit the term "sale" to commercial sales, rather it extends the term to transactions that are "deemed" sale, which are thus enumerated:

SEC 106. Value-Added Tax on Sale of Goods or Properties.

x x x x

(B) Transactions Deemed Sale.—The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable construction of the law that when the term "sale" is made to include certain transactions for the purpose of imposing a tax, these same transactions should be included in the term "sale" when considering the availability of an exemption or tax benefit from the same revenue measures. It is undisputed that during the fourth quarter of 2002, petitioner transferred to NPC all the electricity that was produced during the trial period. The fact that it was not transferred through a commercial sale or in the normal course of business does not deflect from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange proceeds is inapplicable where petitioner’s zero-rated sale of electricity to NPC did not involve foreign exchange and consisted only of a single transaction wherein NPC paid petitioner P42,500,000.00 in exchange for the electricity transferred to it by petitioner. Similarly, the eighth requirement is inapplicable to this case, where the only sale transaction consisted of an effectively zero-rated sale and there are no exempt or taxable sales that transpired, which will require the proportionate allocation of the creditable input tax paid.

The last requirement determines that the claim should be filed within two years after the close of the taxable quarter when such sales were made. The sale of electricity to NPC was reported at the fourth quarter of 2002, which closed on 31 December 2002. Petitioner had until 30 December 2004 to file its claim for refund or credit. For the period January to March 2002, petitioner filed an amended request for refund or tax credit on 30 May 2003; for the period July 2002 to September 2002, on 27 February 2003; and for the period October 2002 to December 2002, on 31 July 2003.33 In these three quarters, petitioners seasonably filed its requests for refund and tax credit. However, for the period April 2002 to May 2002, the claim was filed prematurely on 25 October 2002, before the last quarter had closed on 31 December 2002.34

Despite this lapse in procedure, this Court notes that petitioner was able to positively show that it was able to accumulate excess input taxes on various importations and local purchases in the amount of P246,131,610.40, which were attributable to a transfer of electricity in favor of NPC. The fact that it had filed its claim for refund or credit during the quarter when the transfer of electricity had taken place, instead of at the close of the said quarter does not make petitioner any less entitled to its claim. Given the special circumstances of this case, wherein petitioner was incorporated for the sole purpose of constructing or operating a power plant that will transfer all the electricity it generates to NPC, there is no danger that petitioner would try to fraudulently claim input tax paid on purchases that will be attributed to sale transactions that are not zero-rated. Substantial justice, equity and fair play are on the side of the petitioner. Technicalities and legalisms, however, exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law abiding citizens.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received something "when there [was] no right to demand it," and thus, it has the obligation to return it. Heavily militating against respondent Commissioner is the ancient principle that no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes.35

It bears emphasis that effective zero-rating is not intended as a benefit to the person legally liable to pay the tax, such as petitioner, but to relieve certain exempt entities, such as the NPC, from the burden of indirect tax so as to encourage the development of particular industries. Before, as well as after, the adoption of the VAT, certain special laws were enacted for the benefit of various entities and international agreements were

entered into by the Philippines with foreign governments and institutions exempting sale of goods or supply of services from indirect taxes at the level of their suppliers. Effective zero-rating was intended to relieve the exempt entity from being burdened with the indirect tax which is or which will be shifted to it had there been no exemption. In this case, petitioner is being exempted from paying VAT on its purchases to relieve NPC of the burden of additional costs that petitioner may shift to NPC by adding to the cost of the electricity sold to the latter.36

Section 13 of Republic Act No. 6395, otherwise known as the NPC Charter, further clarifies that it is the lawmakers’ intention that NPC be made completely exempt from all taxes, both direct and indirect:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities. - The corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities, and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of foreign goods, required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the corporation in the generation, transmission, utilization, and sale of electric power.

To limit the exemption granted to the NPC to direct taxes, notwithstanding the general and broad language of the statute will be to thwart the legislative intention in giving exemption from all forms of taxes and impositions, without distinguishing between those that are direct and those that are not.37

Congress granted NPC a comprehensive tax exemption because of the significant public interest involved. This is enunciated in Section 1 of Republic Act No. 6395:

Section 1. Declaration of Policy. Congress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and dispersal and the needs of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of government, including its financial institutions.

The ability of the NPC to provide sufficient and affordable electricity throughout the country greatly affects our industrial and rural development. Erroneously and unjustly depriving industries that generate electrical power of tax benefits that the law clearly grants will have an immediate effect on consumers of electricity and long term effects on our economy.

In the same breath, we cannot lose sight of the fact that it is the declared policy of the State, expressed in Section 2 of Republic Act No. 9136, otherwise known as the EPIRA Law, "to ensure and accelerate the total

electrification of the country;" "to enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors;" and "to promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy." Further, Section 6 provides that "pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value-added tax zero-rated.

Section 75 of said law succinctly declares that "this Act shall, unless the context indicates otherwise, be construed in favor of the establishment, promotion, preservation of competition and power empowerment so that the widest participation of the people, whether directly or indirectly is ensured."

The objectives as set forth in the EPIRA Law can only be achieved if government were to allow petitioner and others similarly situated to obtain the input tax credits available under the law. Denying petitioner such credits would go against the declared policies of the EPIRA Law.1 a vv p h i 1

The legislative grant of tax relief (whether in the EPIRA Law or the Tax Code) constitutes a sovereign commitment of Government to taxpayers that the latter can avail themselves of certain tax reliefs and incentives in the course of their business activities here. Such a commitment is particularly vital to foreign investors who have been enticed to invest heavily in our country’s infrastructure, and who have done so on the firm assurance that certain tax reliefs and incentives can be availed of in order to enable them to achieve their projected returns on these very long-term and heavily funded investments. While the government’s ability to keep its commitment is put in doubt, credit rating turns to worse; the costs of borrowing becomes higher and the harder it will be to attract foreign investors. The country’s earnest efforts to move forward will all be put to naught.

Having decided that petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC or on the basis of effectively zero-rated sales in the amount of P246,131,610.40, there is no more need to establish its right to make the same claim under Section 112(B) of the NIRC or on the basis of purchase of capital goods.

Finally, respondent contends that according to well-established doctrine, a tax refund, which is in the nature of a tax exemption, should be construed strictissimi juris against the taxpayer.38 However, when the claim for refund has clear legal basis and is sufficiently supported by evidence, as in the present case, then the Court shall not hesitate to grant the same.39

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Tax Appeals En Banc dated 20 September 2007 in CTA EB Case No. 248, affirming the Decision dated 23 March 2006 of the CTA Second Division in CTA Case No. 6916, is REVERSED. Respondent Commissioner of Internal Revenue is ordered to refund, or in the alternative, to issue a tax credit certificate to petitioner San Roque Power Corporation in the amount of Two Hundred Forty-Six Million One Hundred Thirty-One Thousand Six Hundred Ten Pesos and 40/100 (P246,131,610.40), representing unutilized input VAT for the period 1 January 2002 to 31 December 2002. No costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 174134               July 30, 2008

FIRST PLANTERS PAWNSHOP, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction.

The facts:

In a Pre-Assessment Notice dated July 7, 2003, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST.1 Petitioner protested the assessment for lack of legal and factual bases.2

Petitioner subsequently received a Formal Assessment Notice on December 29, 2003, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest.3 Petitioner filed a protest,4 which was denied by Acting Regional Director Anselmo G. Adriano per Final Decision on Disputed Assessment dated January 29, 2004.5

Petitioner then filed a petition for review with the Court of Tax Appeals (CTA).6 In a Decision dated May 9, 2005, the 2nd Division of the CTA upheld the deficiency assessment.7 Petitioner filed a motion for reconsideration8which was denied in a Resolution dated October 7, 2005.9

Petitioner appealed to the CTA En Banc which rendered a Decision dated June 7, 2006, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. The assailed Decision dated May 9, 2005 and Resolution dated October 7, 2005 are hereby AFFIRMED.

SO ORDERED.10

Petitioner sought reconsideration but this was denied by the CTA En Banc per Resolution dated August 14, 2006.11

Hence, the present petition for review under Rule 45 of the Rules of Court based on the following grounds:

I

THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN FINDING PETITIONER LIABLE FOR VAT.

II

THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN RULING THAT PETITIONER IS LIABLE FOR DST ON PAWN TICKETS.12

The determination of petitioner's tax liability depends on the tax treatment of a pawnshop business. Oddly, there has not been any definitive declaration in this regard despite the fact that pawnshops have long been in existence. All that has been stated is what pawnshops are not, but not what pawnshops are.

The BIR itself has maintained an ambivalent stance on this issue. Initially, in Revenue Memorandum Order No. 15-91 issued on March 11, 1991, a pawnshop business was considered as "akin to lending investor’s business activity" and subject to 5% percentage tax beginning January 1, 1991, under Section 116 of the Tax Code of 1977, as amended by E.O. No. 273.13

With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in 1994,14 the BIR abandoned its earlier position and maintained that pawnshops are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95. This was complemented by Revenue Memorandum Circular No. 45-01 dated October 12, 2001, which provided that pawnshop operators are liable to the 10% VAT based on gross receipts beginning January 1, 1996, while pawnshops whose gross annual receipts do not exceed P550,000.00 are liable for percentage tax, pursuant to Section 109(z) of the Tax Code of 1997.

CTA decisions affirmed the BIR's position that pawnshops are subject to VAT. In H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue,15 the CTA ruled that the petitioner therein was subject to 10% VAT under Section 108 of the Tax Code of 1997. Antam Pawnshop Corporation v. Commissioner of Internal Revenue16reiterates said ruling. It was the CTA's view that the services rendered by pawnshops fall under the general definition of "sale or exchange of services" under Section 108(A) of the Tax Code of 1997.

On July 15, 2003, the Court rendered Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.17 in which it was categorically ruled that while pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing percentage taxes.18 The Court gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were subjected to different tax treatments; second, Congress never intended pawnshops to be treated in the same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273.

In view of said ruling, the BIR issued Revenue Memorandum Circular No. 36-2004 dated June 16, 2004, canceling the previous lending investor's tax assessments on pawnshops. Said Circular stated, inter alia:

In view of the said Supreme Court decision, all assessments on pawnshops for percentage taxes as lending investors are hereby cancelled. This Circular is being issued for the sole purpose of resolving the tax liability of pawnshops to the 5% lending investors tax provided under the then Section 116 of the NIRC of 1977, as amended, and shall not cover issues relating to their other tax liabilities. All internal revenue officials are enjoined from issuing assessments on pawnshops for percentage taxes on lending investors, under the then Section 116 of the NIRC of 1977, as amended.

For purposes of the gross receipt tax provided for under Republic Act No. 9294, the pawnshops are now subject thereof. This shall however, be covered by another issuance.19

Revenue Memorandum Circular No. 37-2004 was issued on the same date whereby pawnshop businesses were allowed to settle their VAT liabilities for the tax years 1996-2002 pursuant to a memorandum of agreement entered into by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of the Philippines, Inc. The Circular likewise instructed all revenue officers to ensure that "all VAT due from pawnshops

beginning January 1, 2003, including increments thereto, if any, are assessed and collected from pawnshops under its jurisdiction."

In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on February 5, 2004 entitled, "An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-banking Functions and Other Non-bank Financial Intermediaries beginning January 01, 2004."20

Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin No. 2004-01 on February 10, 2004 advising all banks and non-bank financial intermediaries that they shall remain liable under the VAT system.

When R.A. No. 9238 took effect on February 16, 2004, the Department of Finance issued Revenue Regulations No. 10-2004 dated October 18, 2004, classifying pawnshops as Other Non-bank Financial Intermediaries. The BIR then issued Revenue Memorandum Circular No. 73-2004 on November 25, 2004, prescribing the guidelines and policies on the assessment and collection of 10% VAT for gross annual sales/receipts exceeding P550,000.00 or 3% percentage tax for gross annual sales/receipts not exceeding P550,000.00 of pawnshops prior to January 1, 2005.

In fine, prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Subsequently, with the Court's ruling in Lhuillier, pawnshops were then treated as VAT-able enterprises under the general classification of "sale or exchange of services" under Section 108(A) of the Tax Code of 1997, as amended. R.A. No. 9238 finally classified pawnshops as Other Non-bank Financial Intermediaries.

The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law, thus –

· Under the National Internal Revenue Code of 1977,21 pawnshops should have been levied the 5% percentage tax on gross receipts imposed on bank and non-bank financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997);

· With the imposition of the VAT under R.A. No. 7716 or the EVAT Law,22 pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of 1997);23

· This was restated by R.A. No. 8241,24 which amended R.A. No. 7716, although the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions, were made effective January 1, 1998;25

· R.A. No. 8424 or the Tax Reform Act of 199726 likewise imposed a 10% VAT under Section 108 but the levy, collection and assessment thereof were again deferred until December 31, 1999;27

· The levy, collection and assessment of the 10% VAT was further deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002;

· With no further deferments given by law, the levy, collection and assessment of the 10% VAT on banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were finally made effective beginning January 1, 2003;

· Finally, with the enactment of R.A. No. 9238, the services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking

functions were specifically exempted from VAT,28 and the 0% to 5% percentage tax on gross receipts on other non-bank financial intermediaries was reimposed under Section 122 of the Tax Code of 1997.29

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10% VAT under the general provision on "sale or exchange of services" as defined under Section 108(A) of the Tax Code of 1997, which states: "'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration x x x." Instead, due to the specific nature of its business, pawnshops were then subject to 10% VAT under the category of non-bank financial intermediaries, as provided in the same Section 108(A), which reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including x x x services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: x x x (Emphasis and underscoring supplied)

The tax treatment of pawnshops as non-bank financial intermediaries is not without basis.

R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks.30 R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided thatbanks shall refer to entities engaged in the lending of funds obtained in the form of deposits.31 R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks.32lavvphi1

Financial intermediaries, on the other hand, are defined as "persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others."33

It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial intermediary in that its principal function is lending.

A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage."

That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, viz.:

§ 4101Q.1 Financial Intermediaries

x x x

Non-bank financial intermediaries shall include the following:

(1) A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker x x x. (Emphasis supplied)

Revenue Regulations No. 10-2004, in fact, recognized these bases, to wit:

SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of Rev. Regs No. 9-2004 defining "Non-bank Financial Intermediaries, the term "pawnshop" as defined under Presidential Decree No. 114 which authorized its creation, to be a person or entity engaged in the business of lending money, all fall within the classification of Non-bank Financial Intermediaries and therefore, covered by Sec. 4 of R.A. No. 9238.

This classification is equally supported by Subsection 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Intermediaries and reiterated in BSP Circular No. 204-99, classifying pawnshops as one of Non-bank Financial Intermediaries within the supervision of the Bangko Sentral ng Pilipinas.

Ultimately, R.A. No. 9238 categorically confirmed the classification of pawnshops as non-bank financial intermediaries.

Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law,34 then petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be.

Lastly, petitioner is liable for documentary stamp taxes.

The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue,35 in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST, thus –

x x x the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of Appeals, it was held that:

x x x x

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. This is essentially the business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property delivered as security for loans.

Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For Pawnshops issued by the Central Bank to implement the Act, require every pawnshop or pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed by the pawnbroker and containing the following details: (1) name and residence of the pawner; (2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or his authorized agent; and (9) such other terms and conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central Bank Circular No. 445, prescribed a standard form of pawn tickets with entries for the required details on its face and the mandated terms and conditions of the pledge at the dorsal portion thereof.

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:

x x x x

True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshop’s obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioner’s assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.

The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose. Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section 195 unqualifiedly subjects all pledges to DST. It states that "[o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x." It is clear, categorical, and needs no further interpretation or construction. The explicit tenor thereof requires hardly anything than a simple application.

x x x x

In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and express; it cannot be made to rest on doubtful implications.

Under the principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled), once a case has been decided one way, any other case involving exactly the same point at issue, as in the case at bar, should be decided in the same manner.36

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated June 7, 2006 and Resolution dated August 14, 2006 of the Court of Tax Appeals En Banc is MODIFIED to the effect that the Bureau of Internal Revenue assessment for VAT deficiency in the amount of P541,102.79 for the year 2000 is REVERSED and SET ASIDE, while its assessment for DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest, is UPHELD.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 183505               February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION, Respondents.

D E C I S I O N

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity or injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of the law,1 the deliberations during the enactment,2 as well as prior laws on the same subject matter3 to ascertain the true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No. 9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the Court of Tax Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are domestic corporations duly organized and existing under the laws of the Republic of the Philippines. Both are engaged in the business of operating cinema houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40 for taxable year 2000.8 In response, SM Prime filed a letter-protest dated December 15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency, which the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency for taxable year 2000 in the amount of P124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.13 First Asia protested the PAN in a letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by First Asia in a letter dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the amount of P35,823,680.93 for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year 2000 in the amount of P35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested the same in a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount ofP35,840,895.78 for taxable year 2000.21

This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for the taxable year 2003 was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts ofP33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7272.26

Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and First Asia.27

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for decision on the sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review. Resorting to the language used and the legislative history of the law, it ruled that the activity of showing cinematographic films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the State’s Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in National Development,"30 the CTA First Division held that the House of Representatives resolved that there should only be one business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that consistent with the State’s policy to have a viable, sustainable and competitive theater and film industry, the national government should be precluded from imposing its own business tax in addition to that already imposed and collected by local government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.31 Thus, it disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent’s Decisions denying petitioners’ protests against deficiency value-added taxes are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02 are ORDEREDcancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En Banchowever denied36 the Petition for Review and dismissed37 as well petitioner’s Motion for Reconsideration.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema operators or proprietors is not among the enumerated activities contemplated in the phrase "sale or exchange of services," then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from admission tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’ SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to the amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive because it covers all sales of services unless exempted by law. He claims that the CTA erred in applying the rules on statutory construction and in using extrinsic aids in interpreting Section 108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or proprietors to the paying public, being a sale of service, is subject to VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not among the services subject to VAT. Respondents insist that gross receipts from cinema/theater admission tickets were never intended to be subject to any tax imposed by the national government. According to them, the absence of gross receipts from cinema/theater admission tickets from the list of services which are subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

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

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

x x x x

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise include," indicate that the enumeration is by way of example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of

time in exchange for periodic payment of a stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase "similar services." The intent of the legislature must therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement, including cockpits, race tracks, and cabaret.42 In the case of theaters or cinematographs, the taxes were first deducted, withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross receipts were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the distributors of the cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by transferring the power to impose amusement tax45 on admission from theaters, cinematographs, concert halls, circuses and other places of amusements exclusively to the local government. Thus, when the NIRC of 197746 was enacted, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.47

On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain services. It imposed VAT on sales of services under Section 102 thereof, which provides:

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

(1) Processing manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, x x x

x x x x

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

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. — If the tax is billed as a separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed separately or is billed erroneously in the invoice, the tax shall be determined by multiplying the gross

receipts (including the amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the power to impose amusement tax on gross receipts derived from admission tickets was exclusive with the local government units and that only the gross receipts of amusement places derived from sources other than from admission tickets were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross receipts arising from admission to places of amusement has been transferred to the local governments to the exclusion of the national government.

x x x x

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory laws which amended the National Internal Revenue Code, including the value added tax law under Executive Order No. 273, has amended the provisions of Section 11 of the Local Tax Code. Accordingly, the sole jurisdiction for collection of amusement tax on admission receipts in places of amusement rests exclusively on the local government, to the exclusion of the national government. Since the Bureau of Internal Revenue is an agency of the national government, then it follows that it has no legal mandate to levy amusement tax on admission receipts in the said places of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes on places of amusement shall be implemented in accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated November 5, 1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources other than from admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts derived from admission tickets shall be levied and collected by the city government pursuant to Section 23 of Presidential Decree No. 231, as amended x x x" or by the provincial government, pursuant to Section 11 of P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to impose amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees under Section 140 thereof.50 In the case of theaters or cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the local government before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. However, the provision in the Local Tax Code expressly excluding the national government from collecting tax from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several amendments52 were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films are

subject to VAT. While persons subject to amusement tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors has always been considered as a form of entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements were transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC from the coverage of VAT.1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10%55 VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd results.56 Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:

Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of 1939, computed on the amount paid for admission. With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated June 28, 1973, the power of imposing taxes on gross receipts from admission of persons to cinema/theater and other places of amusement had, thereafter, been transferred to the provincial government, to the exclusion of the national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive power of the provincial government to impose amusement tax, had also been repealed and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the national government to impose business tax on gross receipts from admission of persons to places of amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1, 1996.58 (Emphasis supplied)

We disagree.

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

Revenue Memorandum Circular No. 28-2001 is invalid

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

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

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him.61 The reason is obvious: it is both illogical and impractical to determine who are exempted without first determining who are covered by the provision.62Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is

the equally well-settled rule that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax AppealsEn Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.

SO ORDERED.