Republic of the Philippines

SUPREME COURTManila

SECOND DIVISION

 

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner, vs.COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

 

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already final and (u)nappealable-and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned

by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of his father, despite the pendency of the proceedings on probate of the will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to �

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased President Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of levying upon the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD

HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties (both personal and real) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an opportunity to contest the Notices in violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO

GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax returns covering the years 1982 to 1986, � all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252 � a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him (through his

caretaker) on September 12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel � but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late president, within 30 days from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of land owned by the Marcoses � to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of the BIR and requesting that they be

duly notified of any action taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos II, as well as the interest of the late president � copies of the aforesaid notices were, served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for the immediate payment of taxes, and should order the payment of the same only within the period fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition that the court having control over the administration proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due and collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased person a claim for taxes is presented by the government, the court has the authority to order payment by the administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative authority to deny the same. While there are cases where courts are required to perform certain duties mandatory and ministerial in character, the function of the court in a case of the present character is not one of them; and here, the court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same. According to the

respondent, claims for payment of estate and income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of a deceased person by his prospective heirs before final adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the legality of disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies,

without the cognition and authority of the court sitting in probate over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. � The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei publicae � taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent. They are exempted from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. � When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by implementing regulations within (30)

days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise, the decision shall become final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government, collection thereof may have been done in violation of the law. Thus, the manner and method in which the latter is enforced may be questioned separately, and irrespective of the finality of the former, because the Government does not have the unbridled discretion to enforce collection without regard to the clear provision of law." 14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the

BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in satisfaction of said assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of personal property were first issued by respondents, the latter should have complied with Revenue Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12 September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the period allowed by law, are thus void and of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already become final, executory, and demandable, the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. � (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

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(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may be assessed at any time within ten years after the omission, and any tax so assessed may

be collected by levy upon real property within three years following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the assessment should have been pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in several properties (both real and personal) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect the

enforcement of tax assessments over the properties indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations and assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 18 In this instance,

petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) � both alleging/claiming lack of notice � We find, after considering the facts and circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally given to the caretaker of petitioner also at his last known address on September 12, 1991 � the subsequent notices given thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos � Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices, petitioner never lifted a finger to protest the

assessments, (upon which the Levy and sale of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to the Court of Tax Appeals, � the tax assessments subject of this case, upon which the levy and sale of properties were based, could no longer be contested (directly or indirectly) via this instant petition for certiorari. 20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

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The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance petitioner's insistence that he was denied due process. Where there was an opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

- versus -

BENGUET CORPORATION,Respondent.

G.R. No. 145559

Present:

PUNO, J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, AZCUNA, and GARCIA, JJ.

Promulgated:

July 14, 2006

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D E C I S I O N

GARCIA, J.:

In this petition for review under Rule 45 of the

Rules of Court, petitioner Commissioner of Internal

Revenue seeks the reversal and setting aside of the

following Resolutions of the Court of Appeals (CA)

in CA-G.R. SP No. 38413, to wit:

1. Resolution dated May 10, 20001[1] insofar as it ordered petitioner to issue a tax credit to respondent Benguet Corporation in the amount of P49,749,223.31 representing input VAT/tax attributable to its sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas or BSP) covering the period from January 1, 1988 to July 31, 1989; and

1 [1] Penned by Associate Justice Romeo J. Callejo, Sr., now a member of this Court, and concurred in by Associate Justices Godardo A. Jacinto (ret.) and Candido V. Rivera (ret.); Rollo, pp. 20-34.

2. Resolution dated October 16, 20002[2] denying petitioner’s motion for reconsideration.

The facts, as narrated by the CA in its basic

Resolution of May 10, 2000, are:

[Respondent] is a domestic corporation engaged in mining business, specifically the exploration, development and operation of mining properties for purposes of commercial production and the marketing of mine products. It is a VAT-registered enterprise, with VAT Registration No. 31-0-000027 issued on January 1, 1988. Sometime in January 1988, [respondent] filed an application for zero-rating of its sales of mine products, which application was duly approved by the [petitioner] Commissioner of Internal Revenue.

On August 28, 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 378-88 which declared that the sale of gold to the Central Bank is considered an export sale and therefore subject to VAT at 0% rate. On December 14, 1988, then Deputy Commissioner Santos also

2 [2] Rollo, pp. 35-36.

issued Revenue Memorandum Circular (RMC) No. 59-88, again declaring that the sale of gold by a VAT-registered taxpayer to the Central Bank is subject to the zero-rate VAT. No less than five Rulings were subsequently issued by [petitioner] from 1988 to 1990 reiterating and confirming its position that the sale of gold by a VAT-registered taxpayer to the Central Bank is subject to the zero-rate VAT.

As a corollary, and in reliance, of the foregoing issuances, [respondent], during the six (6) taxable quarters in question covering the period January 1, 1988 to July 31, 1989, sold gold to the Central Bank and treated these sales as zero-rated – that is, subject to the 0% VAT. During the same period, [respondent] thus incurred input taxes attributable to said sales to the Central Bank. Consequently, [respondent] filed with the Commissioner of Internal Revenue applications for the issuance of Tax Credit Certificates for input VAT Credits attributable to its export sales - that is, inclusive of direct export sales and sale of gold to the Central Bank corresponding to the same taxable periods, to wit:

AMOUNT OF TAX CREDIT APPLIED FOR TAXABLE PERIOD

P34,449,817.7101Jan88 to 30 Apr88

P30,382,666.8601May88 to 31Jul88

P30,146,774.4701Aug88 to 31Oct88

P13,467,663.4101Nov88 to 31Jan89

P 7,030,261.2901Feb89 to 30Apr89

P18,263,960.28 01May89 to 31Jul89

(CTA Decision dated March 23, 1995; Pages 83-86, rollo)

Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued VAT Ruling No. 008-92 declaring and holding that the sales of gold to the Central Bank are considered domestic sales subject to 10% VAT instead of 0% VAT as previously held in BIR Issuances from 1998 to 1990. Subsequently, VAT Ruling No. 59-92, dated April 28, 1992, x x x were issued by [petitioner] reiterating the treatment of sales of gold to the Central Bank as domestic sales, and expressly countenancing the Retroactive application of VAT Ruling No. 008-92 to all such sales made starting January 1, 1988, ratiocinating, inter alia, that the mining companies will not be unduly prejudiced by a

retroactive application of VAT Ruling 008-92 because their claim for refund of input taxes are not lost because the same are allowable on its output taxes on the sales of gold to Central Bank; on its output taxes on other sales; and as deduction to income tax under Section 29 of the Tax Code.

On the basis of the aforequoted BIR Issuances, [petitioner] thus treated [respondent’s] sales of gold to the Central Bank as domestic sales subject to 10% VAT but allowed [respondent] a total tax credit of only P81,991,810.91 which corresponded to VAT input taxes attributable to its direct export sales (CTA Decision dated March 23, 1995; Page 87). Notwithstanding this finding of the [petitioner], [respondent] was not refunded the said amounts of tax credit claimed. Thus, to suspend the running of the two-year prescriptive period (Sec. 106, NIRC) for claiming refunds or tax credits, [respondent] instituted x x x consolidated Petitions for Review with the Court of Tax Appeals, praying for the issuance of “Tax Credit Certificates” for the following input VAT credits attributable to export sales transacted during the taxable quarters or periods in question, to wit:

CTA Case

Number Amount of Tax Credit Applied for Taxable Period

4429 P64,832,374.6701JAN88 to31JUL88

4495 P43,614,437.8801AUG88to31JAN89

4575 P 23,294,221.77 01FEB89 to31JUL89

P131,741,034.22 = TOTAL

Significantly, the total amount of P131,741,034.22, as hereinabove computed, corresponds to the total input VAT credits attributable to export sales made by [respondent] during the taxable periods set forth and therefore, represents a combination of input tax attributable to both (1) direct export sales and (2) sales of gold to the Central Bank. (Words in brackets added).3[3]

In a decision dated March 23, 1995,4[4] the

Court of Tax Appeals (CTA) dismissed respondent’s

aforementioned consolidated Petitions for Review and

3 [3] CA Resolution; Rollo, pp. 21-24.4 [4] Rollo, pp. 51-64.

denied the whole amount of its claim for tax credit of

P131,741,034.22. The tax court held that the alleged

prejudice to respondent as a result of the retroactive

application of VAT Ruling No. 008-92 issued on

January 23, 1992 to the latter’s gold sales to the

Central Bank (CB) from January 1, 1988 to July 31,

1989 is merely speculative and not actual and

imminent so as to proscribe said Ruling’s

retroactivity. The CTA further held that respondent

would not be unduly prejudiced considering that VAT

Ruling No. 59-92 which mandates the retroactivity of

VAT Ruling No. 008-92 likewise provides for

alternative remedies for the recovery of the input

VAT.

Its motion for reconsideration having been

denied by the tax court, respondent appealed to the

CA whereat its recourse was docketed as CA-G.R. SP

No. 38413.

At first, the CA, in a decision dated May 30,

1996,5[5] affirmed in toto that of the tax court.

However, upon respondent’s motion for

reconsideration, the CA, in the herein assailed basic

Resolution dated May 10, 2000, reversed itself by

setting aside its earlier decision of May 30, 1996 and

ordering herein petitioner to issue in respondent’s

favor a tax credit in the amount of P131,741,034.22,

to wit:

IN THE LIGHT OF ALL THE FOREGOING, [respondent’s] Motion for Reconsideration, x x x as supplemented, is

5 [5] Penned by Associate Justice Pacita Canizares-Nye (ret.), with former Associate Justice Pedro Ramirez (ret.) and former CA Associate Justice Romeo J. Callejo, Jr., concurring; Rollo, pp. 86-94.

GRANTED. The Decision of this Court, dated May 30, 1996, affirming the Decision of the Court of Tax Appeals x x x is SET ASIDE. The [petitioner Commissioner of Internal Revenue] is hereby ordered to issue [respondent] a TAX CREDIT in the amount of P131,741,034.22.

SO ORDERED.

In its reversal action, the CA ruled that the tax

credit in the total amount of P131,741,034.22 consists

of (1) P81,991,810.91, representing input VAT credits

attributable to direct export sales subject to 0% VAT,

and (2) P49,749,223.31, representing input VAT

attributable to sales of gold to the CB which were

subject to 0% when said sales were made in 1988 and

1989. In effect, the CA rejected the retroactive

application of VAT Ruling No. 008-92 to the subject

gold sales of respondent because of the resulting

prejudice to the latter despite the existence of

alternative modes for the recovery of the input VAT.

This time, it was petitioner who moved for a

reconsideration but his motion was denied by the CA

in its subsequent Resolution of October 16, 2000.

Hence, petitioner’s present recourse assailing

only that portion of the CA Resolution of May 10,

2000 allowing respondent the amount of

P49,749,223.31 as tax credit corresponding to the

input VAT attributable to its sales of gold to the CB

for the period January 1, 1988 to July 31, 1989. It is

petitioner’s sole contention that the CA erred in

rejecting the retroactive application of VAT Ruling

No. 008-92, dated January 23, 1992, subjecting sales

of gold to the CB to 10% VAT to respondent’s sales

of gold during the period from January 1, 1988 to July

31, 1989. Petitioner posits that, contrary to the ruling

of the appellate court, the retroactive application of

VAT Ruling No. 008-92 to respondent would not

prejudice the latter.

Initially, the Court, in its Resolution of January

24, 2001, 6[6] denied the Petition for lack of

verification and certification against forum shopping.

However, upon petitioner’s manifestation and motion

for reconsideration, the Court reinstated the Petition in

its subsequent Resolution of March 5, 2001.7[7]

The petition must have to fall.

We start with the well-entrenched rule that

rulings and circulars, rules and regulations,

promulgated by the Commissioner of Internal

6 [6] Rollo, pp. 95-96.7 [7] Rollo, p. 173.

Revenue, would have no retroactive application if to

so apply them would be prejudicial to the taxpayers.8

[8]

And this is as it should be, for the Tax Code,

specifically Section 246 thereof, is explicit that:

x x x Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document

8 [8] CIR v. Court of Appeals, Court of Tax Appeals & Alhambra Industries, Inc., G.R. No. 117982, February 6, 1997, 267 SCRA 557, 564; CIR v. Telefunken Semiconductor Phils., Inc., et al., G.R. No. 103915, October 23, 1995, 249 SCRA 401, 407; CIR v. Burroughs Limited and CTA, G.R. No. L-66653, June 19, 1986, 142 SCRA 324, 328; ABS-CBN Broadcasting Corporation v. CTA and CIR, G.R. No. L-52306, October 12, 1981, 108 SCRA 142, 148.

required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith.

There is no question, therefore, as to the

prohibition against the retroactive application of the

revocation, modification or reversal, as the case

maybe, of previously established Bureau on Internal

Revenue (BIR) Rulings when the taxpayer’s interest

would be prejudiced thereby. But even if prejudicial

to a taxpayer, retroactive application is still allowed

where: (a) a taxpayer deliberately misstates or omits

material facts from his return or any document

required by the BIR; (b) where subsequent facts

gathered by the BIR are materially different from

which the ruling is based; and (c) where the taxpayer

acted in bad faith.

As admittedly, respondent’s case does not fall

under any of the above exceptions, what is crucial to

determine then is whether the retroactive application

of VAT Ruling No. 008-92 would be prejudicial to

respondent Benguet Corporation.

The Court resolves the question in the

affirmative.

Input VAT or input tax represents the actual

payments, costs and expenses incurred by a VAT-

registered taxpayer in connection with his purchase of

goods and services. Thus, “input tax” means the

value-added tax paid by a VAT-registered

person/entity in the course of his/its trade or business

on the importation of goods or local purchases of

goods or services from a VAT-registered person.9[9]

On the other hand, when that person or entity

sells his/its products or services, the VAT-registered

taxpayer generally becomes liable for 10% of the

selling price as output VAT or output tax.10[10] Hence,

“output tax” is the value-added tax on the sale of

taxable goods or services by any person registered or

required to register under Section 107 of the (old) Tax

Code.11[11]

9 [9] Section 104 (a) of the (old) Tax Code, now Section 110 (A).

10 [10] Sec. 100 (a) of the (old) Tax Code. Said provision specifically reads: “Sec. 100 Value-added tax on sales of goods – (a) Rate and base of tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods sold, bartered or exchanged, such tax to be paid by the seller or transferor x x x”; now Sec. 106 (A).

11 [11] Section 104 (a) of the (old) Tax Code, now Section 110 (A).

The VAT system of taxation allows a VAT-

registered taxpayer to recover its input VAT either by

(1) passing on the 10% output VAT on the gross

selling price or gross receipts, as the case may be, to

its buyers, or (2) if the input tax is attributable to the

purchase of capital goods or to zero-rated sales, by

filing a claim for a refund or tax credit with the BIR.12

[12]

Simply stated, a taxpayer subject to 10% output

VAT on its sales of goods and services may recover

its input VAT costs by passing on said costs as output

VAT to its buyers of goods and services but it cannot

claim the same as a refund or tax credit, while a 12 [12] Sec. 104 (b) of the (old) Tax Code. Said provision

specifically reads:

(b) Excess Output or Input Tax. – x x x Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes subject to the provisions of Sec. 106; now Sec. 110 (B).

taxpayer subject to 0% on its sales of goods and

services may only recover its input VAT costs by

filing a refund or tax credit with the BIR.

Here, the claimed tax credit of input tax

amounting to P49,749,223.31 represents the costs or

expenses incurred by respondent in connection with

its gold production. Relying on BIR Rulings,

specifically VAT Ruling No. 378-88, dated August

28, 1988, and VAT Ruling No. 59-88, dated

December 14, 1988, both of which declared that sales

of gold to the CB are considered export sales subject

to 0%, respondent sold gold to the CB from January

1, 1988 to July 31, 1989 without passing on to the

latter its input VAT costs, obviously intending to

obtain a refund or credit thereof from the BIR at the

end of the taxable period. However, by the time

respondent applied for refund/credit of its input VAT

costs, VAT Ruling No. 008-92 dated January 23,

1992, treating sales of gold to the CB as domestic

sales subject to 10% VAT, and VAT Ruling No. 059-

92 dated April 28, 1992, retroactively applying said

VAT Ruling No. 008-92 to such sales made from

January 1, 1988 onwards, were issued. As a result,

respondent’s application for refund/credit was denied

and, as likewise found by the CA, it was even

subsequently assessed deficiency output VAT on

October 19, 1992 in the total amounts of

P252,283,241.95 for the year 1988, and

P244,318,148.56 for the year 1989.13[13]

Clearly, from the foregoing, the prejudice to

respondent by the retroactive application of VAT

Ruling No. 008-92 to its sales of gold to the CB from

January 1, 1988 to July 31, 1989 is patently evident.

13 [13] May 10, 2000, CA Resolution; Rollo, p. 27.

Verily, by reason of the denial of its claim for

refund/credit, respondent has been precluded from

recovering its input VAT costs attributable to its sales

of gold to the CB during the period mentioned, for the

following reasons:

First, because respondent could not pass on to

the CB the 10% output VAT which would be

retroactively imposed on said transactions, not having

passed the same at the time the sales were made on

the assumption that said sales are subject to 0%, and,

hence, maybe refunded or credited later. And second,

because respondent could not claim the input VAT

costs as a refund/credit as it has been prevented such

option, the sales in question having been retroactively

subjected to 10% VAT, ergo limiting recovery of said

costs to the application of the same against the output

tax which will result therefrom.

Indeed, respondent stands to suffer substantial

economic prejudice by the retroactive application of

the VAT Ruling in question.

But petitioner maintains otherwise, arguing that

respondent will not be unduly prejudiced since there

are still other available remedies for it to recover its

input VAT costs. Said remedies, so petitioner points

out, are for respondent to either (1) use said input

taxes in paying its output taxes in connection with its

other sales transactions which are subject to the 10%

VAT or (2) if there are no other sales transactions

subject to 10% VAT, treat the input VAT as cost and

deduct the same from income for income tax

purposes.

We are not persuaded.

The first remedy cannot be applied in this case.

As correctly found by the CA, respondent has clearly

shown that it has no “other transactions” subject to

10% VAT, and petitioner has failed to prove the

existence of such “other transactions” against which

to set off respondent’s input VAT.14[14]

Anent the second remedy, prejudice will still,

indubitably, result because treating the input VAT as

an income tax deductible expense will yield only a

partial and not full financial benefit of having the

input VAT refunded or used as a tax credit. We

quote with approval the CA’s observations in this

respect, thus:

14 [14] CA Resolution, May 10, 2000; Rollo, p. 30.

x x x even assuming that input VAT is still available for deduction, [respondent] still suffers prejudice. As a zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances), [respondent] could have claimed a cash refund or tax credit of the input VAT in the amount of P49,749,223.31. If it had been allowed a cash refund or tax credit, it could have used the full amount thereof to pay its other tax obligations (or, in the case of a cash refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash refund or tax credit and is limited to the so-called remedy of deducting the input VAT from gross income. But a cash refund or tax credit is not the same as a tax deduction. A tax deduction has less benefits than a tax credit. Consider the following differences;

2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section 104(b) of the Tax Code states;

“(b) Excess output or input tax. – xxx Any input tax attributable to xxx zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 106.”

On the other hand, a tax deduction may be used only against gross income for purposes of income tax. A tax deduction is not allowed against other internal revenue taxes such as excise taxes, documentary stamp taxes, and output VAT.

2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income tax liabilities (Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final income tax due (Section 106[b], Tax Code). This is illustrated in the example below:

Assume that in 1988, respondent had a gross income of P1,000,000,000 and deductible expenses in general (such as salaries, utilities, transportation, fuel and costs of sale) of P500,000,000. Assume also that [respondent] had input VAT of P131,741,034.22, the amount being claimed in the instant case. [Respondent’s] income tax liability, depending on whether it utilized the input tax as tax credit or tax deduction, would be as follows:

a. Tax credit

Gross Income (Section 28, Tax Code)

P1,000,000,000.00

Deductions (Section 29, Tax Code)(

500,000,000.00)Taxable Income (Section 27, Tax Code)

P 500,000.000.00

Tax rate (Section 24[a], Tax Code)

x 35%Tax Payable

P 175,000,000.00

Tax Credit

(131,741,034.22)

Tax due

P 43,258,965.78

b. Tax deduction

Gross income (Section 28, Tax Code)P1,000,000,000.00

DeductionsGeneral (Section 29, Tax Code)

P500,000,000.00

Input VAT (VAT Ruling No. 059-92)P131,741,034.22P

631,741,034.22)Taxable income (Section 27, Tax Code)

P 368,258,966.78

Tax rate (Section 24[a], Tax Code)x 35%

Tax payableP 128,890,638.02

Tax Credit -

Tax due______________

P 128,890,638.02

Thus, if the input VAT of P131,741,034.22 were to be credited against the income tax due, the income tax payable is only P43,258,965.78. On the other hand, if the input VAT were to be deducted from gross income before arriving at the net income, the income tax payable is P128,890,638.02. This is almost three (3) times the income tax payable if the input VAT were to be deducted from the income tax payable.

As can be seen from above, there is a substantial difference between a tax credit and a

tax deduction. A tax credit reduces tax liability while a tax deduction only reduces taxable income (emphasis supplied).

A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22, since tax liability is reduced by the said amount. A tax deduction is not fully utilized because the savings is only 35% or P46,109,361.98. In the above case, therefore, the use of input VAT as a tax deduction results in a loss of 65% of the input VAT, or P85,631,672.24, which [respondent] could have otherwise fully utilized as a tax credit.

x x x x x xx x x

x x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a recovery of the expense. The deduction of a bad debt, for instance, does not result in the recovery of the debt. On the other hand, a tax credit, because it can be fully utilized to reduce tax liability, is as good as cash and is thus effectively a full recovery of the input VAT cost.15[15] (Emphasis in the original; Words in brackets supplied).

15 [15] Rollo, pp. 30-33.

We may add that the prejudice which befell

respondent is all the more highlighted by the fact that

it has been issued assessments for deficiency output

VAT on the basis of the same sales of gold to the CB.

On a final note, the Court is fully cognizant of

the well-entrenched principle that the Government is

not estopped from collecting taxes because of

mistakes or errors on the part of its agents.16[16] But,

like other principles of law, this also admits of

exceptions in the interest of justice and fair play, as

where injustice will result to the taxpayer.17[17]

As this Court has said in ABS-CBN

Broadcasting Corporation v. Court of Tax Appeals

and the Commissioner of Internal Revenue:18[18] 16[16] CIR v. Court of Appeals, Court of Tax Appeals and Alhambra Industries, Inc., supra at p. 565.17[17] Ibid.18 [18] Supra at pp. 151-152

The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is indicative of legislative intention to support the principle of good faith. In fact, in the United States x x x it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. [Word in brackets supplied].

Here, when respondent sold gold to the CB, it

relied on the formal assurances of the BIR, i.e., VAT

Ruling No. 378-88 dated August 28, 1988 and VAT

Ruling RMC No. 59-88 dated December 14, 1988,

that such sales are zero-rated. To retroact a later

ruling – VAT Ruling No. 008-92 - revoking the grant

of zero-rating status to the sales of gold to the CB and

applying a new and contrary position that such sales

are now subject to 10%, is clearly inconsistent with

justice and the elementary requirements of fair play.

Accordingly, we find that the CA did not

commit a reversible error in holding that VAT Ruling

No. 008-92 cannot be retroactively applied to

respondent’s sales of gold to the CB during the period

January 1, 1988 to July 31, 1989, hence, it is entitled

to tax credit in the amount of P49,749,223.31

attributable to such sales.

IN VIEW WHEREOF, the instant petition is

DENIED and the assailed CA Resolutions are

AFFIRMED.

No costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

- versus -

MIRANT PAGBILAO CORPORATION (Formerly SOUTHERN ENERGY QUEZON, INC.), Respondent.

  G.R. No. 172129

Present:

QUISUMBING, CARPIO MORALES,TINGA,VELASCO, JR., andBRION, JJ.

Promulgated:

September 12, 2008

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

D E C I S I O N

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari

under Rule 45 assailing and seeking to set aside the

Decision19[1] dated December 22, 2005 of the Court of

Appeals (CA) in CA-G.R. SP No. 78280 which

modified the March 18, 2003 Decision20[2] of the Court

of Tax Appeals (CTA) in CTA Case No. 6133 entitled

Mirant Pagbilao Corporation (Formerly Southern

Energy Quezon, Inc.) v. Commissioner of Internal

Revenue and ordered the Bureau of Internal Revenue

(BIR) to refund or issue a tax credit certificate (TCC)

in favor of respondent Mirant Pagbilao Corporation

(MPC) in the amount representing its unutilized input

value added tax (VAT) for the second quarter of 1998.

19[1] Rollo, pp. 32-44. Penned by Associate Justice Rosmari D. Carandang and concurred in by Associate Justices Andres B. Reyes, Jr. and Monina Arevalo-Zenarosa.

20[2] Id. at 47-63. Penned by Presiding Judge Ernesto D. Acosta concurred in by Associate Judges Juanito C. Castañeda, Jr. and Lovell R. Bautista.

Also assailed is the CA’s Resolution21[3] of March 31,

2006 denying petitioner’s motion for reconsideration.

The Facts

MPC, formerly Southern Energy Quezon, Inc.,

and also formerly known as Hopewell (Phil.)

Corporation, is a domestic firm engaged in the

generation of power which it sells to the National

Power Corporation (NPC). For the construction of the

electrical and mechanical equipment portion of its

Pagbilao, Quezon plant, which appears to have been

undertaken from 1993 to 1996, MPC secured the

services of Mitsubishi Corporation (Mitsubishi) of

Japan.

21[3] Id. at 45-46.

Under Section 1322[4] of Republic Act No. (RA)

6395, the NPC’s revised charter, NPC is exempt from

all taxes. In Maceda v. Macaraig,23[5] the Court

construed the exemption as covering both direct and

indirect taxes.

22[4] Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other Charges by Government and Governmental Instrumentalities. – The [NPC] shall be non-profit and shall devote all its returns x x x as well as excess revenues from its operation, for expansion. To enable [NPC] to pay its indebtedness and obligations x x x [it] is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service x x x 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 x x x;

(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.

23[5] G.R. No. 88291, May 31, 1991, 197 SCRA 771.

In the light of the NPC’s tax exempt status,

MPC, on the belief that its sale of power generation

services to NPC is, pursuant to Sec. 108(B)(3) of the

Tax Code,24[6] zero-rated for VAT purposes, filed on

December 1, 1997 with Revenue District Office

(RDO) No. 60 in Lucena City an Application for

Effective Zero Rating. The application covered the

construction and operation of its Pagbilao power

station under a Build, Operate, and Transfer scheme.

Not getting any response from the BIR district

office, MPC refiled its application in the form of a

“request for ruling” with the VAT Review Committee

at the BIR national office on January 28, 1999. On

24 ?[6] Transactions Subject to Zero Percent (%) Rate. – The following services performed in the Philippines by VAT-registered persons shall be subject to zero-percent rate: x x x (3) Services rendered to persons whose exemption under special laws x x x effectively subjects the supply of such services to zero percent (0%) rate.

May 13, 1999, the Commissioner of Internal Revenue

issued VAT Ruling No. 052-99, stating that “the

supply of electricity by Hopewell Phil. to the NPC,

shall be subject to the zero percent (0%) VAT,

pursuant to Section 108 (B) (3) of the National

Internal Revenue Code of 1997.”

It must be noted at this juncture that consistent

with its belief to be zero-rated, MPC opted not to pay

the VAT component of the progress billings from

Mitsubishi for the period covering April 1993 to

September 1996—for the E & M Equipment Erection

Portion of MPC’s contract with Mitsubishi. This

prompted Mitsubishi to advance the VAT component

as this serves as its output VAT which is essential for

the determination of its VAT payment. Apparently, it

was only on April 14, 1998 that MPC paid Mitsubishi

the VAT component for the progress billings from

April 1993 to September 1996, and for which

Mitsubishi issued Official Receipt (OR) No. 0189 in

the aggregate amount of PhP 135,993,570.

On August 25, 1998, MPC, while awaiting

approval of its application aforestated, filed its

quarterly VAT return for the second quarter of 1998

where it reflected an input VAT of PhP

148,003,047.62, which included PhP 135,993,570

supported by OR No. 0189. Pursuant to the procedure

prescribed in Revenue Regulations No. 7-95, MPC

filed on December 20, 1999 an administrative claim

for refund of unutilized input VAT in the amount of

PhP 148,003,047.62.

Since the BIR Commissioner failed to act on its

claim for refund and obviously to forestall the running

of the two-year prescriptive period under Sec. 229 of

the National Internal Revenue Code (NIRC), MPC

went to the CTA via a petition for review, docketed as

CTA Case No. 6133.

Answering the petition, the BIR Commissioner,

citing Kumagai-Gumi Co. Ltd. v. CIR,25[7] asserted

that MPC’s claim for refund cannot be granted for this

main reason: MPC’s sale of electricity to NPC is not

zero-rated for its failure to secure an approved

application for zero-rating.

Before the CTA, among the issues stipulated by

the parties for resolution were, in gist, the following:

1. Whether or not [MPC] has unapplied or unutilized creditable input VAT for the 2nd

quarter of 1998 attributable to zero-rated sales to NPC which are proper subject for refund pursuant to relevant provisions of the NIRC;

25[7] CTA Case No. 4670, July 29, 1997.

2. Whether the creditable input VAT of MPC for said period, if any, is substantiated by documents; and

3. Whether the unutilized creditable input VAT for said quarter, if any, was applied against any of the VAT output tax of MPC in the subsequent quarter.

To provide support to the CTA in verifying and

analyzing documents and figures and entries

contained therein, the Sycip Gorres & Velayo (SGV),

an independent auditing firm, was commissioned.

The Ruling of the CTA

On the basis of its affirmative resolution of the

first issue, the CTA, by its Decision dated March 18,

2003, granted MPC’s claim for input VAT refund or

credit, but only for the amount of PhP 10,766,939.48.

The fallo of the CTA’s decision reads:

In view of all the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter of 1998 in the reduced amount of P10,766,939.48, computed as follows:

Claimed Input VAT P148,003,047.62

Less: Disallowances

a.) As summarized by SGV & Co. in its initial report (Exh. P)I. Input Taxes on Purchases of Services: 1. Supported by documents other than VAT Ors P 10,629.46 2. Supported by photocopied VAT OR 879.09II. Input Taxes on Purchases of Goods: 1. Supported by documents other than

VAT invoices 165,795.70 2. Supported by Invoices with TIN only 1,781.82 3. Supported by photocopied VAT

invoices 3,153.62III. Input Taxes on Importation of Goods: 1. Supported by photocopied documents

[IEDs and/or Bureau of Customs(BOC) Ors]

716,250.00 2. Supported by broker’s computations 91,601.00 990,090.69

b.) Input taxes without supporting documents assummarized in Annex A of SGV & Co.’s supplementary report (CTA records, page

134) 252,447.45

c.) Claimed input taxes on purchases of services fromMitsubishi Corp. for being substantiated by dubious OR 135,996,570.0026[8]

Refundable InputP10,766,939.48

SO ORDERED.27[9]

Explaining the disallowance of over PhP 137

million claimed input VAT, the CTA stated that most

of MPC’s purchases upon which it anchored its claims

26 ?[8] Should be 135,993,570.00 as per this petition and CA decision.27[9] Supra note 2, at 62.

for refund or tax credit have not been amply

substantiated by pertinent documents, such as but not

limited to VAT ORs, invoices, and other supporting

documents. Wrote the CTA:

We agree with the above SGV findings that out of the remaining taxes of P136,246,017.45, the amount of P252,477.45 was not supported by any document and should therefore be outrightly disallowed.

As to the claimed input tax of P135,993,570.00 (P136,246,017.45 less P252,477.45 ) on purchases of services from Mitsubishi Corporation, Japan, the same is found to be of doubtful veracity. While it is true that said amount is substantiated by a VAT official receipt with Serial No. 0189 dated April 14, 1998 x x x, it must be observed, however, that said VAT allegedly paid pertains to the services which were rendered for the period 1993 to 1996. x x x

The Ruling of the CA

Aggrieved, MPC appealed the CTA’s Decision

to the CA via a petition for review under Rule 43,

docketed as CA-G.R. SP No. 78280. On December

22, 2005, the CA rendered its assailed decision

modifying that of the CTA decision by granting most

of MPC’s claims for tax refund or credit. And in a

Resolution of March 31, 2006, the CA denied the BIR

Commissioner’s motion for reconsideration. The

decretal portion of the CA decision reads:

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed Decision of the Court of Tax Appeals dated March 18, 2003 is hereby MODIFIED. Accordingly, respondent Commissioner of Internal Revenue is ordered to refund or issue a tax credit certificate in favor of petitioner Mirant Pagbilao Corporation its unutilized input VAT payments directly attributable to its effectively zero-rated sales for the second quarter of 1998 in the total amount of P146,760,509.48.

SO ORDERED.28[10]

The CA agreed with the CTA on MPC’s

entitlement to (1) a zero-rating for VAT purposes for

its sales and services to tax-exempt NPC; and (2) a

refund or tax credit for its unutilized input VAT for

the second quarter of 1998. Their disagreement,

however, centered on the issue of proper

documentation, particularly the evidentiary value of

OR No. 0189.

The CA upheld the disallowance of PhP

1,242,538.14 representing zero-rated input VAT

claims supported only by photocopies of VAT

OR/Invoice, documents other than VAT Invoice/OR,

and mere broker’s computations. But the CA allowed

MPC’s refund claim of PhP 135,993,570 representing

28[10] Supra note 1, at 43.

input VAT payments for purchases of goods and/or

services from Mitsubishi supported by OR No. 0189.

The appellate court ratiocinated that the CTA erred in

disallowing said claim since the OR from Mitsubishi

was the best evidence for the payment of input VAT

by MPC to Mitsubishi as required under Sec. 110(A)

(1)(b) of the NIRC. The CA ruled that the legal

requirement of a VAT Invoice/OR to substantiate

creditable input VAT was complied with through OR

No. 0189 which must be viewed as conclusive proof

of the payment of input VAT. To the CA, OR No.

0189 represented an undisputable acknowledgment

and receipt by Mitsubishi of the input VAT payment

of MPC.

The CA brushed aside the CTA’s ruling and

disquisition casting doubt on the veracity and

genuineness of the Mitsubishi-issued OR No. 0189. It

reasoned that the issuance date of the said receipt,

April 14, 1998, must be taken conclusively to

represent the input VAT payments made by MPC to

Mitsubishi as MPC had no real control on the

issuance of the OR. The CA held that the use of a

different exchange rate reflected in the OR is of no

consequence as what the OR undeniably attests and

acknowledges was Mitsubishi’s receipt of MPC’s

input VAT payment.

The Issue

Hence, the instant petition on the sole issue of

“whether or not respondent [MPC] is entitled to the

refund of its input VAT payments made from 1993 to

1996 amounting to [PhP] 146,760,509.48.”29[11]

29[11] Rollo, p. 15.

The Court’s Ruling

As a preliminary matter, it should be stressed

that the BIR Commissioner, while making reference

to the figure PhP 146,760,509.48, joins the CA and

the CTA on their disposition on the propriety of the

refund of or the issuance of a TCC for the amount of

PhP 10,766,939.48. In fine, the BIR Commissioner

trains his sight and focuses his arguments on the core

issue of whether or not MPC is entitled to a refund for

PhP 135,993,570 (PhP 146,760,509.48 - PhP

10,766,939.48 = PhP 135,993,570) it allegedly paid as

creditable input VAT for services and goods

purchased from Mitsubishi during the 1993 to 1996

stretch.

The divergent factual findings and rulings of

the CTA and CA impel us to evaluate the evidence

adduced below, particularly the April 14, 1998 OR

0189 in the amount of PhP 135,996,570 [for US$

5,190,000 at US$1: PhP 26.203 rate of exchange].

Verily, a claim for tax refund may be based on a

statute granting tax exemption, or, as Commissioner

of Internal Revenue v. Fortune Tobacco

Corporation30[12] would have it, the result of

legislative grace. In such case, the claim is to be

construed strictissimi juris against the taxpayer,31[13]

meaning that the claim cannot be made to rest on

vague inference. Where the rule of strict interpretation

against the taxpayer is applicable as the claim for

refund partakes of the nature of an exemption, the

30 ?[12] G.R. Nos. 167274-75, July 21, 2008.31[13] Atlas Consolidated Mining and Development Corporation v.

Commissioner of Internal Revenue, G.R. No. 159490, February 18, 2008, citing Commissioner of Internal Revenue v. Solidbank Corp., G.R. No. 148191, November 25, 2003, 416 SCRA 436, 461.

claimant must show that he clearly falls under the

exempting statute. On the other hand, a tax refund

may be, as usually it is, predicated on tax refund

provisions allowing a refund of erroneous or excess

payment of tax. The return of what was erroneously

paid is founded on the principle of solutio indebiti, a

basic postulate that no one should unjustly enrich

himself at the expense of another. The caveat against

unjust enrichment covers the government.32[14] And as

decisional law teaches, a claim for tax refund proper,

as here, necessitates only the preponderance-of-

evidence threshold like in any ordinary civil case.33[15]

We apply the foregoing elementary principles

in our evaluation on whether OR 0189, in the

32 ?[14] Commissioner of Internal Revenue v. Fireman’s Fund Insurance Co., No. L-30644, March 9, 1987, 148 SCRA 315, cited in Commissioner of Internal Revenue v. Fortune Tobacco Corporation, supra. 33 ?[15] Commissioner of Internal Revenue v. Fortune Tobacco Corporation, ibid.

backdrop of the factual antecedents surrounding its

issuance, sufficiently proves the alleged unutilized

input VAT claimed by MPC.

The Court can review issues of fact where there are

divergent findings by the trial and appellate courts

As a matter of sound practice, the Court

refrains from reviewing the factual determinations of

the CA or reevaluate the evidence upon which its

decision is founded. One exception to this rule is

when the CA and the trial court diametrically differ in

their findings,34[16] as here. In such a case, it is

incumbent upon the Court to review and determine if

the CA might have overlooked, misunderstood, or

misinterpreted certain facts or circumstances of

weight, which, if properly considered, would justify a 34 ?[16] Uy v. Villanueva, G.R. No. 157851, June 29, 2007, 526 SCRA 73, 84.

different conclusion.35[17] In the instant case, the CTA,

unlike the CA, doubted the veracity of OR No. 0189

and did not appreciate the same to support MPC’s

claim for tax refund or credit.

Petitioner BIR Commissioner, echoing the

CTA’s stand, argues against the sufficiency of OR

No. 0189 to prove unutilized input VAT payment by

MPC. He states in this regard that the BIR can require

additional evidence to prove and ascertain payment of

creditable input VAT, or that the claim for refund or

tax credit was filed within the prescriptive period, or

had not previously been refunded to the taxpayer.

To bolster his position on the dubious character

of OR No. 0189, or its insufficiency to prove input

35 ?[17] Samala v. Court of Appeals, G.R. No. 130826, February 17, 2004, 423 SCRA 142, 146.

VAT payment by MPC, petitioner proffers the

following arguments:

(1) The input tax covered by OR No. 0189

pertains to purchases by MPC from Mitsubishi

covering the period from 1993 to 1996; however,

MPC’s claim for tax refund or credit was filed on

December 20, 1999, clearly way beyond the two-year

prescriptive period set in Sec. 112 of the NIRC;

(2) MPC failed to explain why OR No. 0189

was issued by Mitsubishi (Manila) when the invoices

which the VAT were originally billed came from the

Mitsubishi’s head office in Japan;

(3) The exchange rate used in OR No. 0189

was pegged at PhP 26.203: USD 1 or the exchange

rate prevailing in 1993 to 1996, when, on April 14,

1998, the date OR No. 0189 was issued, the exchange

rate was already PhP 38.01 to a US dollar;

(4) OR No. 0189 does not show or include

payment of accrued interest which Mitsubishi was

charging and demanded from MPC for having

advanced a considerable amount of VAT. The

demand, per records, is embodied in the May 12, 1995

letter of Mitsubishi to MPC;

(5) MPC failed to present to the CTA its VAT

returns for the second and third quarters of 1995,

when the bulk of the VAT payment covered by OR

No. 0189—specifically PhP 109,329,135.17 of the

total amount of PhP 135,993,570—was billed by

Mitsubishi, when such return is necessary to ascertain

that the total amount covered by the receipt or a large

portion thereof was not previously refunded or

credited; and

(6) No other documents proving said input

VAT payment were presented except OR No. 0189

which, considering the fact that OR No. 0188 was

likewise issued by Mitsubishi and presented before

the CTA but admittedly for payments made by MPC

on progress billings covering service purchases from

1993 to 1996, does not clearly show if such input

VAT payment was also paid for the period 1993 to

1996 and would be beyond the two-year prescriptive

period.

The petition is partly meritorious.

Belated payment by MPC of its obligation for

creditable input VAT

As no less found by the CTA, citing the SGV’s

report, the payments covered by OR No. 0189 were

for goods and service purchases made by MPC

through the progress billings from Mitsubishi for the

period covering April 1993 to September 1996—for

the E & M Equipment Erection Portion of MPC’s

contract with Mitsubishi.36[18] It is likewise undisputed

that said payments did not include payments for the

creditable input VAT of MPC. This fact is shown by

the May 12, 1995 letter37[19] from Mitsubishi where, as

earlier indicated, it apprised MPC of the advances

Mitsubishi made for the VAT payments, i.e., MPC’s

creditable input VAT, and for which it was holding

MPC accountable for interest therefor.

36 ?[18] Rollo, p. 57.37 ?[19] Id. at 60.

In net effect, MPC did not, for the VATable

MPC-Mitsubishi 1993 to 1996 transactions adverted

to, immediately pay the corresponding input VAT.

OR No. 0189 issued on April 14, 1998 clearly reflects

the belated payment of input VAT corresponding to

the payment of the progress billings from Mitsubishi

for the period covering April 7, 1993 to September 6,

1996. SGV found that OR No. 0189 in the amount of

PhP 135,993,570 (USD 5,190,000) was duly

supported by bank statement evidencing payment to

Mitsubishi (Japan).38[20] Undoubtedly, OR No. 0189

proves payment by MPC of its creditable input VAT

relative to its purchases from Mitsubishi.

OR No. 0189 by itself sufficiently proves payment

of VAT

38 ?[20] Id. at 57.

The CA, citing Sec. 110(A)(1)(B) of the NIRC,

held that OR No. 0189 constituted sufficient proof of

payment of creditable input VAT for the progress

billings from Mitsubishi for the period covering April

7, 1993 to September 6, 1996. Sec. 110(A)(1)(B) of

the NIRC pertinently 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 113 hereof on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

x x x x

(b) Purchase of services on which a value-added tax has been actually paid. (Emphasis ours.)

Without necessarily saying that the BIR is

precluded from requiring additional evidence to prove

that input tax had indeed paid or, in fine, that the

taxpayer is indeed entitled to a tax refund or credit for

input VAT, we agree with the CA’s above disposition.

As the Court distinctly notes, the law considers a

duly-executed VAT invoice or OR referred to in the

above provision as sufficient evidence to support a

claim for input tax credit. And any doubt as to what

OR No. 0189 was for or tended to prove should

reasonably be put to rest by the SGV report on which

the CTA notably placed much reliance. The SGV

report stated that “[OR] No. 0189 dated April 14,

1998 is for the payment of the VAT on the progress

billings” from Mitsubishi Japan “for the period April

7, 1993 to September 6, 1996 for the E & M

Equipment Erection Portion of the Company’s

contract with Mitsubishi Corporation (Japan).”39[21]

VAT presumably paid on April 14, 1998

While available records do not clearly indicate

when MPC actually paid the creditable input VAT

amounting to PhP 135,993,570 (USD 5,190,000) for

the aforesaid 1993 to 1996 service purchases, the

presumption is that payment was made on the date

appearing on OR No. 0189, i.e., April 14, 1998. In

fact, said creditable input VAT was reflected in

MPC’s VAT return for the second quarter of 1998.

The aforementioned May 12, 1995 letter from

Mitsubishi to MPC provides collaborating proof of

the belated payment of the creditable input VAT

39[21] Id.

angle. To reiterate, Mitsubishi, via said letter,

apprised MPC of the VAT component of the service

purchases MPC made and reminded MPC that

Mitsubishi had advanced VAT payments to which

Mitsubishi was entitled and from which it was

demanding interest payment. Given the scenario

depicted in said letter, it is understandable why

Mitsubishi, in its effort to recover the amount it

advanced, used the PhP 26.203: USD 1 exchange

formula in OR No. 0189 for USD 5,190,000.

No showing of interest payment not fatal to claim

for refund

Contrary to petitioner’s posture, the matter of

nonpayment by MPC of the interests demanded by

Mitsubishi is not an argument against the fact of

payment by MPC of its creditable input VAT or of the

authenticity or genuineness of OR No. 0189; for at the

end of the day, the matter of interest payment was

between Mitsubishi and MPC and may very well be

covered by another receipt. But the more important

consideration is the fact that MPC, as confirmed by

the SGV, paid its obligation to Mitsubishi, and the

latter issued to MPC OR No. 0189, for the VAT

component of its 1993 to 1996 service purchases.

The next question is, whether or not MPC is

entitled to a refund or a TCC for the alleged unutilized

input VAT of PhP 135,993,570 covered by OR No.

0189 which sufficiently proves payment of the input

VAT.

We answer the query in the negative.

Claim for refund or tax credit filed out of time

The claim for refund or tax credit for the

creditable input VAT payment made by MPC

embodied in OR No. 0189 was filed beyond the

period provided by law for such claim. Sec. 112(A) of

the NIRC pertinently reads:

(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: x x x. (Emphasis ours.)

The above proviso clearly provides in no

uncertain terms that unutilized input VAT payments

not otherwise used for any internal revenue tax due

the taxpayer must be claimed within two years

reckoned from the close of the taxable quarter

when the relevant sales were made pertaining to

the input VAT regardless of whether said tax was

paid or not. As the CA aptly puts it, albeit it

erroneously applied the aforequoted Sec. 112(A),

“[P]rescriptive period commences from the close of

the taxable quarter when the sales were made and not

from the time the input VAT was paid nor from the

time the official receipt was issued.”40[22] Thus, when

a zero-rated VAT taxpayer pays its input VAT a year

after the pertinent transaction, said taxpayer only has a

year to file a claim for refund or tax credit of the

unutilized creditable input VAT. The reckoning

frame would always be the end of the quarter when

the pertinent sales or transaction was made, regardless

when the input VAT was paid. Be that as it may, and

given that the last creditable input VAT due for the

period covering the progress billing of September 6,

40[22] Id. at 37.

1996 is the third quarter of 1996 ending on September

30, 1996, any claim for unutilized creditable input

VAT refund or tax credit for said quarter prescribed

two years after September 30, 1996 or, to be precise,

on September 30, 1998. Consequently, MPC’s claim

for refund or tax credit filed on December 10, 1999

had already prescribed.

Reckoning for prescriptive period underSecs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the

provisions of either Sec. 204(C) or 229 of the NIRC

which, for the purpose of refund, prescribes a

different starting point for the two-year prescriptive

limit for the filing of a claim therefor. Secs. 204(C)

and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.— The Commissioner may –

x x x x

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

x x x x

Sec. 229. Recovery of Tax Erroneously or Illegally Collected.— No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any

sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis ours.)

Notably, the above provisions also set a two-

year prescriptive period, reckoned from date of

payment of the tax or penalty, for the filing of a claim

of refund or tax credit. Notably too, both provisions

apply only to instances of erroneous payment or

illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC,

creditable input VAT is an indirect tax which can be

shifted or passed on to the buyer, transferee, or lessee

of the goods, properties, or services of the taxpayer.

The fact that the subsequent sale or transaction

involves a wholly-tax exempt client, resulting in a

zero-rated or effectively zero-rated transaction, does

not, standing alone, deprive the taxpayer of its right to

a refund for any unutilized creditable input VAT,

albeit the erroneous, illegal, or wrongful payment

angle does not enter the equation.

In Commissioner of Internal Revenue v.

Seagate Technology (Philippines), the Court

explained the nature of the VAT and the entitlement

to tax refund or credit of a zero-rated taxpayer:

Viewed broadly, the VAT is a uniform tax x x x levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business as they pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller, transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.  In either case, though, the same conclusion is arrived at.

The law that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method. Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe x x x. Under the present method that

relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required.  It is when the output taxes exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess 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 or credited against other internal revenue taxes.

x x x x

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 of or a tax credit certificate for the VAT

previously charged by suppliers.41[23]

(Emphasis added.)

Considering the foregoing discussion, it is clear

that Sec. 112(A) of the NIRC, providing a two-year

prescriptive period reckoned from the close of the

taxable quarter when the relevant sales or transactions

were made pertaining to the creditable input VAT,

applies to the instant case, and not to the other actions

which refer to erroneous payment of taxes.

As a final consideration, the Court wishes to

remind the BIR and other tax agencies of their duty to

treat claims for refunds and tax credits with proper

attention and urgency. Had RDO No. 60 and, later, the

BIR proper acted, instead of sitting, on MPC’s

underlying application for effective zero rating, the

matter of addressing MPC’s right, or lack of it, to tax

41[23] G.R. No. 153866, February 11, 2005, 451 SCRA 132, 141-143.

credit or refund could have plausibly been addressed

at their level and perchance freed the taxpayer and the

government from the rigors of a tedious litigation.

The all too familiar complaint is that the

government acts with dispatch when it comes to tax

collection, but pays little, if any, attention to tax

claims for refund or exemption. It is high time our tax

collectors prove the cynics wrong.

WHEREFORE, the petition is PARTLY

GRANTED. The Decision dated December 22, 2005

and the Resolution dated March 31, 2006 of the CA in

CA-G.R. SP No. 78280 are AFFIRMED with the

MODIFICATION that the claim of respondent MPC

for tax refund or credit to the extent of PhP

135,993,570, representing its input VAT payments for

service purchases from Mitsubishi Corporation of

Japan for the construction of a portion of its Pagbilao,

Quezon power station, is DENIED on the ground that

the claim had prescribed. Accordingly, petitioner

Commissioner of Internal Revenue is ordered to

refund or, in the alternative, issue a tax credit

certificate in favor of MPC, its unutilized input VAT

payments directly attributable to its effectively zero-

rated sales for the second quarter in the total amount

of PhP 10,766,939.48.

No pronouncement as to costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBINGAssociate Justice

Chairperson

CONCHITA CARPIO MORALES DANTE O. TINGA

Associate Justice

Associate Justice

ARTURO D. BRION Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

LEONARDO A. QUISUMBING

Associate Justice

Chairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

THIRD DIVISION  

COMMISSIONER OF                                         G.R. No. 152609INTERNAL REVENUE, 

Petitioner,                              Present:

                                                                            

    Panganiban, J.,

                                                                                         Chairman,

                                                                                 Sandoval-Gutierrez,

                - versus -                                                 Corona,

                                                                                 Carpio Morales, and

                                                                                 Garcia, JJ                                                                             AMERICAN EXPRESS INTERNATIONAL, INC.                            

Promulgated:(PHILIPPINE

BRANCH),                                          

Respondent.                             June 29, 2005

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

  

DECISION  

PANGANIBAN, J.:  

s a general rule, the value-

added tax (VAT) system uses

the destination principle. 

However, our VAT law itself provides

for a clear exception, under which

the supply of service shall be zero-

rated when the following

requirements are met: (1) the service

is performed in the Philippines; (2)

the service falls under any of the

categories provided in Section

102(b) of the Tax Code; and (3) it is

paid for in acceptable foreign

currency that is accounted for in

accordance with the regulations of

the Bangko Sentral ng Pilipinas. 

Since respondent’s services meet

these requirements, they are zero-

rated.  Petitioner’s Revenue

Regulations that alter or revoke the

A

above requirements are ultra vires

and invalid.

 

The Case

 

Before us is a Petition for

Review[1] under Rule 45 of the Rules

of Court, assailing the February 28,

2002 Decision[2] of the Court of

Appeals (CA) in CA-GR SP No.

62727.  The assailed Decision

disposed as follows:

 “WHEREFORE, premises

considered, the petition is hereby DISMISSED for lack of merit.  The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto.”[3]

   

The Facts

 

Quoting the CTA, the CA

narrated the undisputed facts as

follows:

 “[Respondent] is a Philippine

branch of American Express International, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City.  It is a servicing unit of American Express International, Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card members situated in the Philippines and payment to

service establishments in the Philippines.

 “Amex Philippines registered itself

with the Bureau of Internal Revenue (BIR), Revenue District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868.  For the period January 1, 1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as follows:

 Exhibit Period Covered Date Filed

     D 1997 1st Qtr.        April 18, 1997F 2nd Qtr.        July 21, 1997G 3rd Qtr.        October 2, 1997H 4th Qtr.        January 20, 1998     

 “On March 23, 1999, however,

[respondent] amended the aforesaid returns and declared the following:

  

  Taxabl Output Zero- Domestic Input

Exh  1997

eSales

VAT ratedSales

Purchases

VAT

             I   1st

qtr

P59,597.20

P5,959.72

P17,513,801.11

P6,778,182.30

P677,818.23

 J   2n

d

qtr

  67,517.20

  6,751.72

  17,937,361.51

  9,333,242.90

  933,324.29

 K   3r

d

qtr

  51,936.60

  5,193.66

  19,627,245.36

  8,438,357.00

  843,835.70

 L   4th

qtr

  67,994.30

  6,799.43

  25,231,225.22

13,080,822.10

1,308,082.21

                 Total

P247,045.30

P24,704.53

P80,309,633.20

P37,630,604.30

P3,763,060.43

  

“On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting

from its total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively.  [Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state:

 ‘Section 110. Tax

Credits. - 

x x x                 x x x                 x x x ‘(B) Excess Output or

Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person.  If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters.  Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited

against other internal revenue taxes, subject to the provisions of Section 112.’ “There being no immediate action

on the part of the [petitioner], [respondent’s] petition was filed on April 15, 1999.

 “In support of its Petition for

Review, the following arguments were raised by [respondent]:

 A. Export sales by a

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

‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services.  The phrase “sale of services” means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors: stock, real estate, commercial, customs and immigration

brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether o[r] not the performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1)                 x

x x(2)                

Service

s other than those mentioned in the preceding subparagraph, the consideration is paid for in acceptable foreign currenc

y which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the BSP. x x x.’

 In addition,

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

‘In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central [B]ank of the Philippines, your service income is automatically zero rated effective January 1, 1998.  [Section 102(a)(2) of the Tax Code as amended].[4]  For this, there is

no need to file an application for zero-rate.’

 B. Input taxes on

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

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

 (A) Zero-

rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-

rated, may, within two (2) years after the close of the taxable quarter when such sales were made, apply for the issuance of tax credit certificate or refund of the input taxes due or attributable to such sales, to the extent that such input tax has not been applied against output tax. x x x. [Section 106(a) of the Tax Code]’[5]

 ‘Section

8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added tax purposes.  A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not

result in any output tax.  The input tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations.  x x x.’ [Section 8(a), [RR] 5-87].’[6]

 “[Petitioner], in his Answer filed on

May 6, 1999, claimed by way of Special and Affirmative Defenses that:

 7. The claim for refund

is subject to investigation by the Bureau of Internal Revenue;

 8. Taxes paid and

collected are presumed to have been made in accordance with laws and regulations, hence, not refundable.  Claims for tax

refund are construed strictly against the claimant as they partake of the nature of tax exemption from tax and it is incumbent upon the [respondent] to prove that it is entitled thereto under the law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statu[t]e law.  An exemption from the common burden [cannot] be permitted to exist upon vague implications;

 9. Moreover,

[respondent] must prove that it has complied with the governing rules with reference to tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended, which are quoted as follows:

 ‘Section

204. Authority of the Commissioner to Compromise, Abate and Refund

or Credit Taxes. - The Commissioner may - x x x.

 (C) Credit

or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction.  No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the

Commissioner a claim for credit or refund within two (2) years after payment of the tax or penalty: Provided, however, That a return filed with an overpayment shall be considered a written claim for credit or refund.’

 ‘Section

229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected

without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest or duress.

 In any

case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after

payment: Provided, however, That the Commissioner may, even without written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.’

 “From the foregoing, the [CTA],

through the Presiding Judge Ernesto D. Acosta rendered a decision[7] in favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the decretal portion of which reads as follows:

 ‘WHEREFORE, in view

of all the foregoing, this Court finds the [petition] meritorious

and in accordance with law.  Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of P3,352,406.59 representing the latter’s excess input VAT paid for the year 1997.’”[8]

 

   

Ruling of the Court of Appeals  

          In affirming the CTA, the CA

held that respondent’s services fell

under the first type enumerated in

Section 4.102-2(b)(2) of RR 7-95, as

amended by RR 5-96.  More

particularly, its “services were not of

the same class or of the same nature

as project studies, information, or

engineering and architectural

designs” for non-resident foreign

clients; rather, they were “services

other than the processing,

manufacturing or repacking of goods

for persons doing business outside

the Philippines.”  The consideration

in both types of service, however,

was paid for in acceptable foreign

currency and accounted for in

accordance with the rules and

regulations of the Bangko Sentral ng

Pilipinas.

 

          Furthermore, the CA reasoned

that reliance on VAT Ruling No. 040-

98 was unwarranted.  By requiring

that respondent’s services be

consumed abroad in order to be

zero-rated, petitioner went

beyond the sphere of interpretation

and into that of legislation.  Even

granting that it is valid, the ruling

cannot be given retroactive effect,

for it will be harsh and oppressive to

respondent, which has already relied

upon VAT Ruling No. 080-89 for zero

rating.

 

          Hence, this Petition.[9]

 

The Issue 

 

Petitioner raises this sole issue

for our consideration:

           “Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year 1997.”[10]

   

The Court’s Ruling

 

The Petition is unmeritorious. 

 Sole Issue:

Entitlement to Tax Refund

            Section 102 of the Tax Code[11]

provides:

 “Sec. 102. Value-added tax on

sale of services and use or lease of properties. -- (a) Rate and base of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services x x x.

 “The phrase 'sale or exchange of

services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by x x x persons

engaged in milling, processing, manufacturing or repacking goods for others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include:

             x x x                

x x x                 x x x‘(3)      The supply of x

x x commercial knowledge or information;

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

            x x x                 x x x                 x x x

‘(6)      The supply of technical advice, assistance or services rendered in

connection with technical management or administration of any x x x commercial undertaking, venture, project or scheme;           x x x                       x x

x                       x x x "The term 'gross receipts’ means

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

 "(b)    Transactions subject to zero

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

 

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

 ‘(2)      Services other

than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP];’”

             x x x                

x x x                 x x x

   Zero Rating of“Other” Services

 

          The law is very clear.  Under

the last paragraph quoted above,

services performed by VAT-

registered persons in the Philippines

(other than the processing,

manufacturing or repacking of goods

for persons doing business outside

the Philippines), when paid in

acceptable foreign currency and

accounted for in accordance with the

rules and regulations of the BSP, are

zero-rated.

          Respondent is a VAT-

registered person that facilitates the

collection and payment of

receivables belonging to its non-

resident foreign client, for which it

gets paid in acceptable foreign

currency inwardly remitted and

accounted for in conformity with BSP

rules and regulations.  Certainly, the

service it renders in the Philippines

is not in the same category as

“processing, manufacturing or

repacking of goods” and should,

therefore, be zero-rated.  In reply to

a query of respondent, the BIR

opined in VAT Ruling No. 080-89 that

the income respondent earned from

its parent company’s regional

operating centers (ROCs) was

automatically zero-rated effective

January 1, 1988.[12]

 

          Service has been defined as

“the art of doing something useful

for a person or company for a fee”[13]

or “useful labor or work rendered or

to be rendered by one person to

another.”[14]  For facilitating in the

Philippines the collection and

payment of receivables belonging to

its Hong Kong-based foreign client,

and getting paid for it in duly

accounted acceptable foreign

currency, respondent renders service

falling under the category of zero

rating.  Pursuant to the Tax Code, a

VAT of zero percent should,

therefore, be levied upon the supply

of that service.[15]

  The Credit Card System and Its Components 

          For sure, the ancillary

business of facilitating the said

collection is different from the main

business of issuing credit cards.[16] 

Under the credit card system, the

credit card company extends credit

accommodations to its card holders

for the purchase of goods and

services from its member

establishments, to be reimbursed by

them later on upon proper billing. 

Given the complexities of present-

day business transactions, the

components of this system can

certainly function as separate

billable services.

 

          Under RA 8484,[17] the credit

card that is issued by banks[18] in

general, or by non-banks in

particular, refers to “any card x x x

or other credit device existing for the

purpose of obtaining x x x goods x x

x or services x x x on credit;”[19] and

is being used “usually on a revolving

basis.”[20]  This means that the

consumer-credit arrangement that

exists between the issuer and the

holder of the credit card enables the

latter to procure goods or services

“on a continuing basis as long as the

outstanding balance does not exceed

a specified limit.”[21]  The card holder

is, therefore, given “the power to

obtain present control of goods or

service on a promise to pay for them

in the future.”[22]

 

          Business establishments may

extend credit sales through the use

of the credit card facilities of a non-

bank credit card company to avoid

the risk of uncollectible accounts

from their customers.  Under

this system, the establishments do

not deposit in their bank accounts

the credit card drafts[23] that arise

from the credit sales.  Instead, they

merely record their receivables from

the credit card company and

periodically send the drafts

evidencing those receivables to the

latter.

 

          The credit card company, in

turn, sends checks as payment to

these business establishments, but it

does not redeem the drafts at full

price.  The agreement between them

usually provides for discounts to be

taken by the company upon its

redemption of the drafts.[24]  At the

end of each month, it then bills its

credit card holders for their

respective drafts redeemed during

the previous month.  If the holders

fail to pay the amounts owed, the

company sustains the loss.[25]

 

          In the present case,

respondent’s role in the consumer

credit[26]

process described above primarily

consists of gathering the bills and

credit card drafts of different service

establishments located in the

Philippines and forwarding them to

the ROCs outside the country. 

Servicing the bill is not the same as

billing.  For the former type of

service alone, respondent already

gets paid.

 

          The parent company -- to

which the ROCs and respondent

belong -- takes charge not only of

redeeming the drafts from the ROCs

and sending the checks to the

service establishments, but also of

billing the credit card holders for

their respective drafts that it has

redeemed.  While it usually imposes

finance charges[27] upon the holders,

none may be exacted by respondent

upon either the ROCs or the card

holders.

 

Branch and Home Office

           By designation alone,

respondent and the ROCs are

operated as branches.  This means

that each of them is a unit, “an

offshoot, lateral extension, or

division”[28] located at some distance

from the home office[29] of the parent

company; carrying separate

inventories; incurring their own

expenses; and generating their

respective incomes.  Each may

conduct sales operations in any

locality as an extension of the

principal office.[30]

 

          The extent of accounting

activity at any of these branches

depends upon company policy,[31] but

the financial reports of the entire

business enterprise -- the credit card

company to which they all belong --

must always show its financial

position, results of operation, and

changes in its financial position as a

single unit.[32]  Reciprocal accounts

are reconciled or eliminated,

because they lose all significance

when the branches and home office

are viewed as a single entity.[33]  In

like manner, intra-company profits or

losses must be offset against each

other for accounting purposes.

 

          Contrary to petitioner’s

assertion,[34] respondent can sell its

services to another branch of the

same parent company.[35]  In fact, the

business concept of a transfer price

allows goods and services to be sold

between and among intra-company

units at cost or above cost.[36]  A

branch may be operated as a

revenue center, cost center, profit

center or investment center,

depending upon the policies and

accounting system of its parent

company.[37]  Furthermore, the latter

may choose not to make any sale

itself, but merely to function as a

control center, where most or all of

its expenses are allocated to any of

its branches.[38]

 

          Gratia argumenti that the

sending of drafts and bills by service

establishments to respondent is

equivalent to the act of sending them

directly to its parent company

abroad, and that the parent

company’s subsequent redemption of

these drafts and billings of credit

card holders is also attributable to

respondent, then with greater reason

should the service rendered by

respondent be zero-rated under our

VAT system.  The service partakes of

the nature of export sales as

applied to goods,[39] especially when

rendered in the Philippines by a VAT-

registered person[40] that gets paid in

acceptable foreign currency

accounted for in accordance with

BSP rules and regulations.

 

VAT Requirements forthe Supply of Service 

          The VAT is a tax on

consumption[41] “expressed as a

percentage of the value added to

goods or services”[42] purchased by

the producer or taxpayer.[43]  As an

indirect tax[44] on services,[45] its main

object is the transaction[46] itself or,

more concretely, the performance of

all kinds of services[47] conducted in

the course of trade or business in the

Philippines.[48]  These services must

be regularly conducted in this

country; undertaken in “pursuit of a

commercial or an economic

activity;”[49] for a valuable

consideration; and not exempt under

the Tax Code, other special laws, or

any international agreement.[50]

 

          Without doubt, the

transactions respondent entered into

with its Hong Kong-based client

meet all these requirements.

 

          First, respondent regularly

renders in the Philippines the service

of facilitating the collection and

payment of receivables belonging to

a foreign company that is a clearly

separate and distinct entity.

 

          Second, such service is

commercial in nature; carried on

over a sustained period of time; on a

significant scale; with a reasonable

degree of frequency; and not at

random, fortuitous or attenuated. 

 

          Third, for this service,

respondent definitely receives

consideration in foreign currency

that is accounted for in conformity

with law.

 

          Finally, respondent is not an

entity exempt under any of our laws

or international agreements.

  Services Subject toZero VAT 

          As a general rule, the VAT

system uses the destination principle

as a basis for the jurisdictional reach

of the tax.[51]  Goods and services are

taxed only in the country where they

are consumed.  Thus, exports are

zero-rated, while imports are taxed.

 

          Confusion in zero rating arises

because petitioner equates the

performance of a particular type of

service with the consumption of its

output abroad.  In the present case,

the facilitation of the collection of

receivables is different from the

utilization or consumption of the

outcome of such service.  While the

facilitation is done in the Philippines,

the consumption is not.  Respondent

renders assistance to its foreign

clients -- the ROCs outside the

country -- by receiving the bills of

service establishments located here

in the country and forwarding them

to the ROCs abroad.  The

consumption contemplated by law,

contrary to petitioner’s

administrative interpretation,[52] does

not imply that the service be done

abroad in order to be zero-rated.

 

          Consumption is “the use of a

thing in a way that thereby exhausts

it.”[53]  Applied to services, the term

means the performance or

“successful completion of a

contractual duty, usually resulting in

the performer’s release from any

past or future liability x x x.”[54]  The

services rendered by respondent are

performed or successfully completed

upon its sending to its foreign client

the drafts and bills it has gathered

from service establishments here. 

Its services, having been performed

in the Philippines, are therefore also

consumed in the Philippines.

 

          Unlike goods, services cannot

be physically used in or bound for a

specific place when their destination

is determined.  Instead, there can

only be a “predetermined end of a

course”[55] when determining the

service “location or position x x x for

legal purposes.”[56]  Respondent’s

facilitation service has no physical

existence, yet takes place upon

rendition, and therefore upon

consumption, in the Philippines. 

Under the destination principle, as

petitioner asserts, such service is

subject to VAT at the rate of 10

percent.

 

Respondent’s Services Exempt from the Destination Principle            However, the law clearly

provides for an exception to the

destination principle; that is, for a

zero percent VAT rate for services

that are performed in the

Philippines, “paid for in acceptable

foreign currency and accounted for

in accordance with the rules and

regulations of the [BSP].”[57]  Thus,

for the supply of service to be zero-

rated as an exception, the law merely

requires that first, the service be

performed in the Philippines; second,

the service fall under any of the

categories in Section 102(b) of the

Tax Code; and, third, it be paid in

acceptable foreign currency

accounted for in accordance with

BSP rules and regulations.

 

          Indeed, these three

requirements for exemption from the

destination principle are met by

respondent.  Its facilitation service is

performed in the Philippines.  It falls

under the second category found in

Section 102(b) of the Tax Code,

because it is a service other than

“processing, manufacturing or

repacking of goods” as mentioned in

the provision.  Undisputed is the fact

that such service meets the statutory

condition that it be paid in

acceptable foreign currency duly

accounted for in accordance with

BSP rules.  Thus, it should be zero-

rated.

 

Performance of Service versusProduct Arising from Performance 

          Again, contrary to petitioner’s

stand, for the cost of respondent’s

service to be zero-rated, it need not

be tacked in as part of the cost of

goods exported.[58]  The law neither

imposes such requirement nor

associates services with exported

goods.  It simply states that the

services performed by VAT-registered

persons in the Philippines -- services

other than the processing,

manufacturing or repacking of goods

for persons doing business outside

this country -- if paid in acceptable

foreign currency and accounted for in

accordance with the rules and

regulations of the BSP, are zero-

rated.  The service rendered by

respondent is clearly different from

the product that arises from the

rendition of such service.  The activity

that creates the income must not be

confused with the main business in

the course of which that income is

realized.[59]

 

Tax Situs of aZero-Rated Service 

          The law neither makes a

qualification nor adds a condition in

determining the tax situs of a zero-

rated service.  Under this criterion,

the place where the service is

rendered determines the

jurisdiction[60] to impose the VAT.[61] 

Performed in the Philippines, such

service is necessarily subject to its

jurisdiction,[62] for the State

necessarily has to have “a

substantial connection”[63] to it, in

order to enforce a zero rate.[64]  The

place of payment is immaterial;[65]

much less is the place where the

output of the service will be further

or ultimately used.

  Statutory Construction

or Interpretation Unnecessary 

          As mentioned at the outset,

Section 102(b)(2) of the Tax Code is

very clear.  Therefore, no statutory

construction or interpretation is

needed.  Neither can conditions or

limitations be introduced where none

is provided for.  Rewriting the law is

a forbidden ground that only

Congress may tread upon.

 

          The Court may not construe a

statute that is free from doubt.[66] 

“[W]here the law speaks in clear and

categorical language, there is no

room for interpretation.  There is

only room for application.”[67]  The

Court has no choice but to “see to it

that its mandate is obeyed.”[68]

 

No Qualifications Under RR 5-87 

          In implementing the VAT

provisions of the Tax Code, RR 5-87

provides for the zero rating of

services other than the processing,

manufacturing or repacking of goods

-- in general and without

qualifications -- when paid for by the

person to whom such services are

rendered in acceptable foreign

currency inwardly remitted and duly

accounted for in accordance with the

BSP (then Central Bank)

regulations.  Section 8 of RR 5-87

states:

 “SECTION 8. Zero-rating. -- (a) In

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

 x x x                       x x x                       x

x x “        (c) Zero-rated sales of services. -- The following

services rendered by VAT-registered persons are zero-rated:

 ‘(1)     

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

of the Philippines.

  x x

x                x x x                 x x x

‘(3)      Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with Central Bank regulations.  Where the contract involves payment in both

foreign and local currency, only the service corresponding to that paid in foreign currency shall enjoy zero-rating.  The portion paid for in local currency shall be subject to VAT at the rate of 10%.’”

   

RR 7-95Broad Enough 

          RR 7-95, otherwise known as

the “Consolidated VAT Regulations,”[69]

reiterates the above-quoted provision

and further presents as examples only

the services performed in the

Philippines by VAT-registered hotels

and other service establishments. 

Again, the condition remains that

these services must be paid in

acceptable foreign currency inwardly

remitted and accounted for in

accordance with the rules and

regulations of the BSP.  The term

“other service establishments” is

obviously broad enough to cover

respondent’s facilitation service. 

Section 4.102-2 of RR 7-95 provides

thus:

 “SECTION 4.102-2. Zero-Rating.

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

 “(b) Transaction subject to zero-

rate. -- The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

 ‘(1)      Processing,

manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in

acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

 ‘(2)      Services other

than those mentioned in the preceding subparagraph, e.g. those rendered by hotels and other service establishments, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;’”

             x x x                

x x x                 x x x

 

 Meaning of “as well as” in RR 5-96 

          Section 4.102-2(b)(2) of RR 7-

95 was subsequently amended by RR

5-96 to read as follows:

 “Section 4.102-2(b)(2) -- ‘Services

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

  

          Aside from the already

scopious coverage of services in

Section 4.102-2(b)(2) of RR 7-95, the

amendment introduced by RR 5-96

further enumerates specific services

entitled to zero rating.  Although

superfluous, these sample services

are meant to be merely illustrative. 

In this provision, the use of the term

“as well as” is not restrictive.  As a

prepositional phrase with an

adverbial relation to some other

word, it simply means “in addition to,

besides, also or too.”[70]

 

          Neither the law nor any of the

implementing revenue regulations

aforequoted categorically defines or

limits the services that may be sold

or exchanged for a fee, remuneration

or consideration.  Rather, both

merely enumerate the items of

service that fall under the term “sale

or exchange of services.”[71]

 

Ejusdem GenerisInapplicable 

          The canon of statutory

construction known as ejusdem

generis or “of the same kind or

specie” does not apply to Section

4.102-2(b)(2) of RR 7-95 as amended

by RR 5-96.

          First, although the regulatory

provision contains an enumeration of

particular or specific words, followed

by the general phrase “and other

similar services,” such words do not

constitute a readily discernible class

and are patently not of the same

kind.[72]  Project studies involve

investments or marketing;

information services focus on data

technology; engineering and

architectural designs require

creativity.  Aside from calling for the

exercise or use of mental faculties or

perhaps producing written technical

outputs, no common denominator to

the exclusion of all others

characterizes these three services. 

Nothing sets them apart from other

and similar general services that may

involve advertising, computers,

consultancy, health care,

management, messengerial work --

to name only a few.

 

          Second, there is the regulatory

intent to give the general phrase

“and other similar services” a

broader meaning.[73]  Clearly, the

preceding phrase “as well as” is not

meant to limit the effect of “and

other similar services.”

 

          Third, and most important, the

statutory provision upon which this

regulation is based is by itself not

restrictive.  The scope of the word

“services” in Section 102(b)(2) of the

Tax Code is broad; it is not

susceptible of narrow interpretation.

[74]

 

VAT RulingNos. 040-98 and 080-89  

          VAT Ruling No. 040-98 relied

upon by petitioner is a less general

interpretation at the administrative

level,[75] rendered by the BIR

commissioner upon request of a

taxpayer to clarify certain provisions

of the VAT law.  As correctly held by

the CA, when this ruling states that

the service must be “destined for

consumption outside of the

Philippines”[76] in order to qualify for

zero rating, it contravenes both the

law and the regulations issued

pursuant to it.[77]  This portion of VAT

Ruling No. 040-98 is clearly ultra

vires and invalid.[78]

 

          Although “[i]t is widely

accepted that the interpretation

placed upon a statute by the

executive officers, whose duty is to

enforce it, is entitled to great respect

by the courts,”[79] this interpretation

is not conclusive and will have to be

“ignored if judicially found to be

erroneous”[80] and “clearly absurd x x

x or improper.”[81]  An administrative

issuance that overrides the law it

merely seeks to interpret, instead of

remaining consistent and in harmony

with it, will not be countenanced by

this Court.[82]

 

          In the present case,

respondent has relied upon VAT

Ruling No. 080-89, which clearly

recognizes its zero rating.  Changing

this status will certainly deprive

respondent of a refund of the

substantial amount of excess input

taxes to which it is entitled.

 

          Again, assuming arguendo that

VAT Ruling No. 040-98 revoked VAT

Ruling No. 080-89, such revocation

could not be given

retroactive effect if the application of

the latter ruling would only be

prejudicial to respondent.[83]  Section

246 of the Tax Code categorically

declares that “[a]ny revocation x x x

of x x x any of the rulings x x x

promulgated by the Commissioner

shall not be given retroactive

application if the revocation x x x will

be prejudicial to the taxpayers.”[84]

 

          It is also basic in law that “no x

x x rule x x x shall be given

retrospective effect[85] unless

explicitly stated.”[86]  No indication of

such retroactive application to

respondent does the Court find in

VAT Ruling No. 040-98.  Neither do

the exceptions enumerated in

Section 246[87] of the Tax Code apply.

          Though vested with the power

to interpret the provisions of the Tax

Code[88] and not bound by

predecessors’ acts or rulings, the

BIR commissioner may render a

different construction to a statute[89]

only if the new interpretation is in

congruence with the law. Otherwise,

no amount of interpretation can ever

revoke, repeal or modify what the

law says.

 

“Consumed Abroad” Not Required by Legislature 

          Interpellations on the subject

in the halls of the Senate also reveal

a clear intent on the part of the

legislators not to impose the

condition of being “consumed

abroad” in order for services

performed in the Philippines by a

VAT-registered person to be zero-

rated.  We quote the relevant

portions of the proceedings:

           “Senator Maceda:  Going back to Section 102 just for the moment. Will the

Gentleman kindly explain to me - I am referring to the lower part of the first paragraph with the ‘Provided’.  Section 102. ‘Provided that the following services performed in the Philippines by VAT registered persons shall be subject to zero percent.’  There are three here.  What is the difference between the three here which is subject to zero percent and Section 103 which is exempt transactions, to being with?           “Senator Herrera:  Mr. President, in the case of processing and manufacturing or repacking goods for persons doing business outside the Philippines which are subsequently exported, and where the services are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject to 0%.  But if these conditions are not complied with, they are subject to the VAT.           “In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the other one that he indicated are exempted from the very

beginning.  These three enumerations under Section 102 are zero-rated provided that these conditions indicated in these three paragraphs are also complied with.  If they are not complied with, then they are not entitled to the zero ratings.  Just like in the export of minerals, if these are not exported, then they cannot qualify under this provision of zero rating.           “Senator Maceda:  Mr. President, just one small item so we can leave this.  Under the proviso, it is required that the following services be performed in the Philippines.           “Under No. 2, services other than those mentioned above includes, let us say, manufacturing computers and computer chips or repacking goods for persons doing business outside the Philippines.  Meaning to say, we ship the goods to them in Chicago or Washington and they send the payment inwardly to the Philippines in foreign currency, and that is, of course, zero-rated.

           “Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I have some examples of these?           “Senator Herrera:  Which portion is the Gentleman referring to?           “Senator Maceda:  I am referring to the second paragraph, in the same Section 102.  The first paragraph is when one manufactures or packages something here and he sends it abroad and they pay him, that is covered.  That is clear to me.  The second paragraph says ‘Services other than those mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable foreign currency…’           “One example I could immediately think of -- I do not know why this comes to my mind tonight -- is for tourism or escort services.  For example, the services of the tour operator or tour escort -- just a good name for all kinds

of activities -- is made here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is made from outside and remitted into the country.           “Senator Herrera:  What is important here is that these services are paid in acceptable foreign currency remitted inwardly to the Philippines.           “Senator Maceda:  Yes, Mr. President.  Like those Japanese tours which include $50 for the services of a woman or a tourist guide, it is zero-rated when it is remitted here.           “Senator Herrera:  I guess it can be interpreted that way, although this tourist guide should also be considered as among the professionals.  If they earn more than P200,000, they should be covered. x x x                       x x x                       x

x x 

          Senator Maceda:  So, the services by Filipino citizens outside the Philippines are subject to VAT, and I am talking of all services.  Do big contractual engineers in Saudi Arabia pay VAT?           “Senator Herrera:  This provision applies to a VAT-registered person.   When he performs services in the Philippines, that is zero-rated.           “Senator Maceda:  That is right."[90]

   

Legislative ApprovalBy Reenactment 

          Finally, upon the enactment of

RA 8424, which substantially carries

over the particular provisions on

zero rating of services under Section

102(b) of the Tax Code, the principle

of legislative approval of

administrative interpretation by

reenactment clearly obtains.  This

principle means that “the

reenactment of a statute

substantially unchanged is

persuasive indication of the adoption

by Congress of a prior executive

construction.”[91]

 

          The legislature is presumed to

have reenacted the law with full

knowledge of the contents of the

revenue regulations then in force

regarding the VAT, and to have

approved or confirmed them because

they would carry out the legislative

purpose.  The particular provisions

of the regulations we have

mentioned earlier are, therefore, re-

enforced.  “When a statute is

susceptible of the meaning placed

upon it by a ruling of the government

agency charged with its enforcement

and the [l]egislature thereafter

[reenacts] the provisions [without]

substantial change, such action is to

some extent confirmatory that the

ruling carries out the legislative

purpose.”[92]

 

          In sum, having resolved that

transactions of respondent are zero-

rated, the Court upholds the former’s

entitlement to the refund as

determined by the appellate court. 

Moreover, there is no conflict

between the decisions of the CTA

and CA.  This Court respects the

findings and conclusions of a

specialized court like the CTA

“which, by the nature of its

functions, is dedicated exclusively to

the study and consideration of tax

cases and has necessarily developed

an expertise on the subject.”[93]

 

          Furthermore, under a zero-

rating scheme, the sale or exchange

of a particular service is completely

freed from the VAT, because the

seller is entitled to recover, by way

of a refund or as an input tax credit,

the tax that is included in the cost of

purchases attributable to the sale or

exchange.[94]  “[T]he tax paid or

withheld is not deducted from the tax

base.”[95]  Having been applied for

within the reglementary period,[96]

respondent’s refund is in order.

 

          WHEREFORE, the Petition is

hereby DENIED, and the assailed

Decision AFFIRMED.  No

pronouncement as to costs.

 

          SO ORDERED.

  

ARTEMIO V. PANGANIB

ANAssociate

Justice            Chairman,

Third Division  

W  E   C  O  N  C  U  R :  

 

ANGELINA SANDOVAL-GUTIERREZ

RENATO C. CORONA

Associate Justice Associate Justice         

CONCHITA CARPIO MORALES CANCIO C. GARCIAAssociate Justice Associate Justice

  

ATTESTATION            I attest that the conclusions in

the above Decision had been reached

in consultation before the case was

assigned to the writer of the opinion

of the Court’s Division.

  

ARTEMIO V. PANGANIBA

NAssociate JusticeChairman, Third

Division  

CERTIFICATION  

Pursuant to Section 13, Article

VIII of the Constitution, and the

Division Chairman’s Attestation, it is

hereby certified that the conclusions

in the above Decision had been

reached in consultation before the

case was assigned to the writer of

the opinion of the Court’s Division.

                                                           

HILARIO G. DAVIDE, JR.                                                             

         Chief Justice

[1]           Rollo, pp. 8-23.[2]           Id., pp. 25-39.  Fifth Division. 

Penned by Justice Josefina Guevara-Salonga, with the concurrence of Justices Godardo A. Jacinto (Division chair) and Eloy R. Bello Jr. (member, now retired).

[3]           CA Decision, p. 15; rollo, p. 38.[4]           Outer brackets copied verbatim.[5]           Ibid.[6]           Ibid.

[7]           CTA Decision, pp. 1-15; rollo, pp. 40-54.  Penned by then Presiding Judge (now Presiding Justice) Ernesto D. Acosta, with the concurrence of then Judges Ramon O. de Veyra and Amancio Q. Saga (both retired).

[8]           CA Decision pp. 2-7; rollo, pp. 26-31.  Boldface characters, underscoring and italics copied verbatim.

[9]           This case was deemed submitted for decision on July 23, 2003, upon this Court’s receipt of petitioner’s Memorandum, signed by Solicitor General Alfredo L. Benipayo, Assistant Solicitor General Fernanda Lampas Peralta and Associate Solicitor Romeo D. Galzote.  Respondent’s Memorandum -- signed by Attys. Rolando V. Medalla Jr., Ramon G. Songco, and Ma. Elizabeth E. Peralta-Loriega -- was received by this Court on May 16, 2003.

[10]          Petitioner’s Memorandum, p. 9; temporary rollo, p. 9.  Original in upper case.

[11]          In the case at bar, the applicable Tax Code refers to the National Internal Revenue Code (NIRC) of 1986 as amended by Executive Order (EO) No.

273 and Republic Act (RA) Nos. 7716 and 8241 dated July 25, 1987, May 5, 1994, and December 20, 1996, respectively.

                        Today, the Tax Code refers to RA 8424 as amended, otherwise known as the “Tax Reform Act of 1997,” which took effect on January 1, 1998 (Commissioner of Internal Revenue v. CA, 385 Phil. 875, 883, March 30, 2000).

[12]          In fact, per VAT Ruling No. 080-89 addressed to Spencer F. Lenhart, vice-president and general manager of American Express International, Inc. (AEII Philippines), BIR Deputy Commissioner Eufracio D. Santos wrote that “there is no need to file an application” for zero rating.

[13]          Garner (ed. in chief), Black’s Law Dictionary (8th ed., 1999), p. 1399.

[14]          Smith, West’s Law Dictionary (1993), p. 737.

[15]          §99 [now §105] and §102(b)(2) [now §108(B)(2)] of the Tax Code.  See footnote 11; and Deoferio Jr. and Mamalateo, The Value Added Tax in the Philippines (2000), p. 33.

[16]          These are unlike some widely used credit cards, such as Visa and MasterCard, that are issued by banks.  See Meigs and Meigs, Accounting: The Basis for Business Decisions (5th ed., 1982), pp. 355-356.

[17]          This is also known as the “Access Devices Regulation Act of 1998” approved on February 11, 1998.

[18]          For example, “Visa and MasterCard are complex entities in that they are owned by their member banks, provide network services to their member banks, and provide currency conversion as part of the network services, but have no contracts with cardholders.”  Schwartz v. Visa International Corp., 2003 WL 1870370 (Cal. Superior), p. 50, April 7, 2003, per Sabraw, J.

[19]          §3(f) of RA 8484.[20]          Garner (ed. in chief), supra, p. 396.[21]          Ibid.[22]          Editorial staff of Prentice-Hall, Inc.,

Encyclopedic Dictionary of Business Finance (1960), p. 181.

[23]          Credit card drafts are multi-part business forms signed by customers who make purchases using credit

cards.  These forms are similar to checks that are drawn upon the funds of credit card companies rather than upon the personal bank accounts of customers.  Meigs and Meigs, supra, p. 355.

[24]          Id., p. 356.[25]          Id., p. 355.[26]          Consumer credit refers to the credit

granted “to an individual to facilitate the purchase of consumer goods and services.”  Garner (ed. in chief), supra, p. 396.

                        Also known as personal credit, it “may be extended by means of a charge account, an installment sale, or by a personal loan.”  Editorial staff of Prentice-Hall, Inc., supra, p. 164.

[27]          In general, this term refers to amounts paid on a percentage basis “for the privilege of making purchases on a deferred payment basis.”  Smith, supra, p. 314.

                        Under §3(h) of RA 8484, more specifically, these are amounts “to be paid by the debtor incident to the extension of credit such as interest or discounts, collection fees, credit

investigation fees, and other service charges.”

[28]          Garner (ed. in chief), supra, p. 199.[29]          In general, a home office refers to

“the use of a residence for business purposes.”  Smith, supra, p. 389.

                        More specifically, it is the “principal place of business” where the main office is located as appearing in the corporation’s articles of incorporation.  5th paragraph, §4.107-1 of RR 7-95, dated December 9, 1995.

[30]          4th paragraph, §4.107-1 of RR 7-95, dated December 9, 1995.

[31]          Meigs, Mosich, and Larsen, Modern Advanced Accounting (2nd ed., 1979), p. 145.

                        “Indeed, accounting operations x x x are inevitable, and have to be effected in the ordinary course of business, wherever the home office x x x extends its trade to another land through a branch office x x x.”  Koppel (Philippines), Inc. v. Yatco, 77 Phil. 496, 512, October 10, 1946, per Hilado, J.

[32]          Meigs, Mosich, and Larsen, supra, p. 148.

[33]          “Reciprocal accounts” are account titles found in the books of accounts of a home office and its branches that may be likened to two sides of the same coin.  When one account -- the Investment in Branch account -- is debited by the home office in its own books for a particular transaction with a branch, the other account -- the Home Office account -- is credited by the latter, also in its own books to show how that transaction affected it.  Thus, if reciprocal accounts are offset against each other at the end of the financial reporting period of the entire business enterprise, an intra-company transfer of assets will show neither an increase nor a decrease in total assets, precisely because the transferred assets merely changed location from one unit of the same entity to another; that is, from the home office to any of its branches or vice versa.  In this scenario, there is obviously no change in ownership.  See Meigs, Mosich, and Larsen, supra, pp. 144-146, 149-150, 165.

[34]          Petitioner’s Memorandum, p. 27; temporary rollo, p. 27.

[35]          For financial accounting purposes, the parent company in Delaware is a single entity composed of its home office, the various ROCs and respondent.

Though viewed as one, the parent company and respondent are, in law, separate and distinct juridical entities.  Applying Art. 44 of the Civil Code, each is a corporation for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder.  While the former is duly organized and existing under and by virtue of the laws of Delaware, the latter is registered and operates under Philippine laws.

“The act of one corporation crediting or debiting the other for certain items x x x is perfectly compatible with the idea of the domestic entity being or acting as a mere branch x x x of the parent organization. Such operations were called for [anyway] by the exigencies or convenience of the entire business.”  Koppel (Philippines), Inc. v. Yatco, supra, pp. 511-512.

[36]          A “transfer price” is “[t]he price charged by one segment of an organization for a product or service supplied to another segment of the same organization x x x.”  Garner (ed. in chief), supra, p. 1227.

                        There are three general methods for determining transfer prices; namely, market-based, cost-based, and negotiated.  The method chosen must lead each sub-unit manager to make optimal decisions for the organization as a whole, in order to meet the three criteria of goal congruence, managerial effort, and sub-unit autonomy.  Horngren & Foster, Cost Accounting: A Managerial Emphasis (7th ed., 1991), pp. 855-856 & 860.

[37]          Under a responsibility accounting system in which the plans and actions of each responsibility center is measured, a manager may be held accountable for sales only (of a revenue center); or for expenses only (of a cost center); or for both revenues and costs (of a profit center); or for revenues, costs and

investments (of an investment center).  Horngren & Foster, id., p. 186.

[38]          Meigs, Mosich, and Larsen, supra, p. 146.

[39]          Under §100 of the Tax Code, “export sales” as applied to goods “means the sale and shipment or exportation of goods from the Philippines to a foreign country x x x or foreign currency denominated sales.”  “Foreign currency denominated sales” refers to “sales to non-residents of goods assembled or manufactured in the Philippines, for delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines.”

[40]          Commissioner of Internal Revenue v. Cebu Toyo Corp., GR No. 149073, February 16, 2005.

[41]          Deoferio Jr. and Mamalateo, supra, pp. 33 & 67.

[42]          Smith, supra, p. 892.[43]          See Kapatiran ng mga Naglilingkod

sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371, 378-379, June 30, 1988.

[44]          An indirect tax “is imposed upon goods [before] reaching the consumer

who ultimately pays for it, not as a tax, but as a part of the purchase price.”  Maceda v. Macaraig Jr., 223 SCRA 217, 235, June 8, 1993, per Nocon, J.; referring to Paras, Taxation Fundamentals (1966), pp. 24-25.  See Guzman, Crisis Under Arroyo Rages: People Bear the Brunt, IBON Birdtalk: Economic and Political Briefing, PSSC Auditorium, PSSC Bldg., Commonwealth Ave., Quezon City, January 13, 2005, p. 14.

[45]          See Tolentino v. Secretary of Finance, 235 SCRA 630, 657, August 25, 1994, and Tolentino v. Secretary of Finance, 319 Phil. 755, 792 & 797, October 30, 1995.

[46]          Deoferio Jr. and Mamalateo, supra, pp. 49 & 89.

[47]          Commissioner of Internal Revenue v. CA, supra, pp. 883-884.

[48]          2nd paragraph of §102(a) [now 2nd

paragraph of §108(A)] of the Tax Code.  See Deoferio Jr. and Mamalateo, supra, pp. 89-90.

[49]          Commissioner of Internal Revenue v. CA, supra, p. 884, per Pardo, J.

[50]          Deoferio Jr. and Mamalateo, supra, pp. 81, 82, 91, 92 & 204.

[51]          Deoferio Jr. and Mamalateo, id., pp. 43 & 93.

[52]          Per VAT Ruling No. 040-98, relied upon by petitioner.  See Petition, p. 9; rollo, p. 16.

[53]          Garner (ed. in chief), supra, p. 336.[54]          Id., p. 1173.[55]          Id., p. 479.[56]          Id., p. 1421.[57]          §102(b)(2) of the Tax Code.[58]          See 5th paragraph of item 1 in the

reply portion of VAT Ruling No. 040-98, dated November 23, 1998.

[59]          See Alexander Howden & Co., Ltd. v. The Collector (Now Commissioner) of Internal Revenue, 121 Phil. 579, 583-584, April 14, 1965.

[60]          “[N]o state may tax anything not within its jurisdiction without violating the due process clause of the [C]onstitution.”  Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900, January 17, 1936, per Malcolm, J.

[61]          Deoferio Jr. and Mamalateo, supra, p. 93.

[62]          Alejandro, The Law on Taxation (1966 rev. ed.), p. 33.

[63]          Garner (ed. in chief), supra, p. 1503.[64]          De Leon, The Fundamentals of

Taxation (12th ed., 1998), p. 3.[65]          Deoferio Jr. and Mamalateo, supra,

pp. 93.[66]          Agpalo, Statutory Construction (2nd

ed., 1990), p. 45.[67]          Cebu Portland Cement Co. v.

Municipality of Naga, Cebu, 133 Phil. 695, 699, August 22, 1968, per Fernando, J. (later CJ.).

[68]          Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111, 116, October 31, 1969, per Fernando, J. (later CJ.).

[69]          Contex Corp. v. Commissioner of Internal Revenue, 433 SCRA 376, 387, July 2, 2004.

[70]          Gove (ed. in chief) and the Merriam-Webster editorial staff, Webster’s Third New International Dictionary of the English Language Unabridged (1976), p. 136.

[71]          2nd paragraph of §102(a) [now 2nd

paragraph of §108(A)] of the Tax Code.[72]          See Agpalo, supra, pp. 153-160.[73]          Ibid.

[74]          See Regalado v. Yulo, 61 Phil. 173, 179, February 15, 1935.

[75]          De Leon, supra, p. 83.[76]          See 5th paragraph of item 1 in the

reply portion of VAT Ruling No. 040-98, dated November 23, 1998.

[77]          CA Decision, p. 11; rollo, p. 34.[78]          See Hilado v. Collector of Internal

Revenue, 100 Phil. 288, 295, October 31, 1956.

[79]          Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916, 929, January 28, 1999, per Quisumbing, J.

[80]          Ibid, (citing People v. Hernandez, 59 Phil. 272, 276, December 22, 1933, and Molina v. Rafferty, 37 Phil. 545, 555, February 1, 1918.)

[81]          Commissioner of Internal Revenue v. Central Luzon Drug Corp., GR No. 159647, April 15, 2005, p. 26, per Panganiban, J.

[82]          See Commissioner of Internal Revenue v. CA, 240 SCRA 368, 372, January 20, 1995.

[83]          See Commissioner of Internal Revenue v. CA, 335 Phil. 219, 226-227, February 6, 1997 (citing Commissioner

of Internal Revenue v. Telefunken Semiconductor Philippines, Inc., 319  Phil. 523, 530, October 23, 1995; Bank of America NT & SA v. CA, 234 SCRA 302, 306-307, July 21, 1994; Commissioner of Internal Revenue v. CTA, 195 SCRA 444, 460-461, March 20, 1991; Commissioner of Internal Revenue v. Mega General Merchandising Corp., 166 SCRA 166, 172, September 30, 1988; Commissioner of Internal Revenue v. Burroughs Ltd., 226 Phil. 236, 240-241, June 19, 1986; and ABS-CBN Broadcasting Corp. v. CTA, 195 Phil. 33, 41 & 44, October 12, 1981).

[84]          This section has been retained in RA 8424 as amended, with a slight modification: “preceding section” was changed to “preceding Sections.”

[85]          The Municipality Government of Pagsanjan, Laguna v. Reyes, 98 Phil. 654, 658, March 23, 1956.

[86]          Dueñas v. Santos Subdivision Homeowners Association, 431 SCRA 76, 89, June 4, 2004, per Quisumbing, J. (quoting Republic v. Sandiganbayan, 355 Phil. 181, 198, July 31, 1998, per

Panganiban, J.).  See Home Development Mutual Fund v. COA, GR No. 157001, October 19, 2004, per Carpio, J.

[87]          §246 of the Tax Code provides:                            “Non-retroactivity of

rulings. -- Any revocation, modification, or reversal of  x x x the rulings x x x promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the [BIR]; (b) where the facts subsequently gathered by the [BIR] are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith.”

[88]          1st paragraph of §4 of RA 8424, the Tax Code now in effect.

[89]          Hilado v. Collector of Internal Revenue, supra, p. 294.

[90]          Interpellations during the second reading of Committee Report No. 349 on Senate Bill No. 1630 - VAT Refinements,  Record of the Senate, 2nd

Regular Session (February 21, 1994 to April 20, 1994), Vol. IV, No. 65, Monday, March 21, 1994, pp. 536-537.  Italics

and boldface copied verbatim, but underscoring ours.  See Journal of the Senate, 2nd Regular Session (1993-1994), Vol. III, Monday, March 21, 1994, p. 70.

[91]          ABS-CBN Broadcasting Corp. v. CTA, supra, p. 43, per Melencio-Herrera, J. (citing Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579, 587, April 14, 1965, and Biddle v. Commissioner of Internal Revenue, 302 U.S., 573, 582, 58 S.Ct. 379, 383, January 10, 1938).  See In re R. Mcculloch Dick, 38 Phil. 41, 77-78, April 16, 1918, per Carson, J. (quoting Sutherland, Statutory Construction, Vol. II, [2nd ed.], sections 403 and 404).

[92]          Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA 436, 455, November 25, 2003, per Panganiban, J. (footnoting Alexander Howden & Co., Ltd. v. The Collector [Now Commissioner] of Internal Revenue, supra, p. 587, per Bengzon, J.P., J.); the latter case citing Laxamana v. Baltazar, 92 Phil. 32, 34-35, September 19, 1952, and Mead Corporation v. Commissioner

of Internal Revenue, 116 F.2d. 187, 194, November 29, 1940, per Jones, Circuit J.

[93]          Commissioner of Internal Revenue v. CA, supra, pp. 885-886, (citing Commissioner of Internal Revenue v. CA, 204 SCRA 182, 189-190, November 21, 1991).

[94]          Commissioner of Internal Revenue v. Cebu Toyo Corp., supra.  §110(B) of the Tax Code.

[95]          Bank of America NT & SA v. CA, supra, p. 307, per Vitug, J.

[96]          “x x x within two (2) years after the close of the taxable quarter x x x,” per §106 (now §112) of the Tax Code.