G.R. No. 153866             February 11, 2005

CIR vs. SEAGATE TECHNOLOGY (PHILIPPINES).

D E C I S I O N

FACTS:

Respondent is registered with the Philippine Export Zone Authority (PEZA) to engage in the manufacture of recording components primarily used in computers for export.

It is also a VAT registered entity.

VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent]

An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT refund prompting the [respondent] to elevate the case to [the CTA] in order to toll the running of the two-year prescriptive period.

ISSUE:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount ofP12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999."

HELD:

Respondent is entitled to the refund or issuance of Tax Credit Certificate.

It is a PEZA-registered enterprise within a special economic zone, thus entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall also enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.

If it avails itself of PD 66, respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activities. Even so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.

If it chooses EO 226,respondent shall further be entitled to an income tax holiday; additional deduction for labor expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials; and exemption from contractors’ taxes, wharfage dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees, local taxes and licenses, and real property taxes.

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends20 to that zone the provision stating that no local or national taxes shall be imposed therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and maintained.22Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business29 as they pass along the production and distribution chain, the tax being limited only to the value added30 to such goods, properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method.35 Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada.36Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.47 The tax rate is set at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax,49 but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or credit for input taxes paid.58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person, theburden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64 depending again on the application of the destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,68 because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory.69 This means that in such zone is created the legal fiction of foreign territory.70 Under the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT,73 then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an export processing zone77within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is deemed included.Exceptio firmat regulam in casibus non exceptis. An exception

confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property taxes that presently are imposed on land owned by developers.82 This similar and repeated prohibition is an unambiguous ratification of the law’s intent in not imposing local or national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later amended by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately redounds to the benefit of the national economy by enticing more business investments and creating more employment opportunities.85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if brought to the ecozone’s restricted area87 for manufacturing by registered export enterprises,88 of which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.89

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their products;91 on required supplies and spare part for consigned equipment;92 and on foreign and domestic merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.93 In addition, they are given credits for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively used for the manufacture of their products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production of export goods,99 and for locally produced raw materials, capital equipment and spare parts used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the ecozone.101Indeed, the latter exporters are likewise entitled to such tax exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and liberally in favor of the taxing authority.104

Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that the legislature intended to exempt them.107 In the present case, all the cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered supplier’s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration -- is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the development of the country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic zones, "the government shall actively encourage, promote, induce and accelerate a sound and balanced industrial, economic and social development of the country x x x through the establishment, among others, of special economic zones x x x that shall effectively attract legitimate and productive foreign investments."113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x meet the tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and result in increased volume and value of exports for the economy."114 Fiscal incentives that are cost-efficient and simple to administer shall be devised and extended to significant projects "to compensate for market imperfections, to reward performance contributing to economic development,"115 and "to stimulate the establishment and assist initial operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out earlier in RA 7227 -- of converting into alternative productive uses118 the former military reservations and their extensions,119as well as of providing them incentives120 to enhance the benefits that would be derived from them121 in promoting economic and social development.122

Finally, under RA 7844, the State declares the need "to evolve export development into a national effort"123 in order to win international markets. By providing many export and tax incentives,124 the State is able to drive home the point that exporting is indeed "the key to national survival and the means through which the economic goals of increased employment and enhanced incomes can most expeditiously be achieved."125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic activity; and x x x create a robust environment for business to enable firms to compete better in the regional as well as the global market."126 After all, international competitiveness requires economic and tax incentives to lower the cost of goods produced for export. State actions that affect global competition need to be specific and selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentives to needed investments,128 as well as of promoting the preferential use of domestic materials and locally produced goods and adopting measures to help make these competitive.129 Tax credits for domestic inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and efficient public institutions are essential prerequisites for sustainable economic development."130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives it gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is due.134 This is a non sequitur. By the VAT’s very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions against the income tax holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments not adequately and seriously brought below cannot be raised for the first time on appeal."136 This is a "matter of procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero rating140 cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such regulations is not "within the statutory authority x x x granted by the legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter.142 The courts will not countenance one that overrides the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer’s transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty.145 Respondent’s registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed146 by both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer’s negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO 226149also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it

enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-sourced inputs x x x."

x x x x x x x x x

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied

with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

G.R. No. 140230 December 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.

D E C I S I O N

GARCIA, J.:

In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner) seeks the review and reversal of the September 17, 1999 Decision1 of the Court of Appeals (CA) in CA-G.R. No. SP 47895, affirming, in effect, the February 18, 1998 decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted by respondent Philippine Long Distance Company (PLDT) against petitioner for taxes it paid to the Bureau of Internal Revenue (BIR) in connection with its importation in 1992 to 1994 of equipment, machineries and spare parts.

The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a telecommunications system throughout the Philippines.

For equipment, machineries and spare parts it imported for its business on different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).

On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption privilege under Section 12 of R.A. 7082, which reads:

Sec. 12. The grantee … shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, … shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee … shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,3 pertinently reading, as follows:

PLDT shall be subject only to the following taxes, to wit:

xxx xxx xxx

7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof.

xxx xxx xxx

The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its importations of equipment, machineries and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly made liable.

xxx xxx xxx

In view thereof, this Office … hereby holds that PLDT, is exempt from VAT on its importation of equipment, machineries and spare parts … needed in its franchise operations.

Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim4 for tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying "in connection with its importation of various equipment, machineries and spare parts needed for its operations". With its claim not having been acted upon by the BIR, and obviously to forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for review,5 therein seeking a refund of, or the issuance of a tax credit certificate in, the amount ofP280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The petition was docketed in said court as CTA Case No. 5178.

On February 18, 1998, the CTA rendered a decision6 granting PLDT’s petition, pertinently saying:

This Court has noted that petitioner has included in its claim receipts covering the period prior to December 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find that the petitioner is entitled to the reduced amount of P223,265,276.00 after excluding from the final computation those taxes that were paid prior to December 16, 1992 as they fall outside the two-year prescriptive period for claiming for a refund as provided by law. The computation of the refundable amount is summarized as follows:

COMPENSATING TAX

Total amount claimed P126,713.037.00

Less:

a) Amount already prescribed: xxx

Total P   38,015,132.00

b) Waived by petitioner

(Exh. B-216) P   1,440,874.00  P 39,456,006.00

Amount refundable P 87,257,031.00

ADVANCE SALES TAX

Total amount claimed P12,460.219.00

Less amount already prescribed: P 5,043,828.00

Amount refundable P 7,416,391.00

OTHER BIR TAXES

Total amount claimed P 25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P 14,149,957.00

VALUE ADDED TAX

Total amount claimed P 116.041,333.00

Less amount waived by petitioner

(unaccounted receipts) 1,599,436.00

Amount refundable P 114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,

============

(Breakdown omitted)

and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and in accordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE in favor of petitioner a Tax Credit Certificate in the reduced amount of P223,265,276.00 representing erroneously paid value-added taxes, compensating taxes, advance sales taxes and other BIR taxes on its importation of equipments (sic), machineries and spare parts for the period covering the taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then CTA Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion7 of Associate Judge Amancio Q. Saga who maintained that the phrase "in lieu of all taxes" found in Section 12 of R.A. No. 7082, supra, refers to exemption from "direct taxes only" and does not cover "indirect taxes", such as VAT, compensating tax and advance sales tax.

In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution8 of May 7, 1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.9

Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895.

As stated at the outset hereof, the appellate court, in the herein challenged Decision10 dated September 17, 1999, dismissed the BIR’s petition, thereby effectively affirming the CTA’s judgment.

Relying on its ruling in an earlier case between the same parties and involving the same issue – CA-G.R. SP No. 40811, decided 16 February 1998 – the appellate court partly wrote in its assailed decision:

This Court has already spoken on the issue of what taxes are referred to in the phrase "in lieu of all taxes" found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and the same must be followed pursuant to the doctrine of stare decisis. xxx. "Stare decisis et non quieta movere. Stand by the decision and disturb not what is settled."

Hence, this recourse by the BIR Commissioner on the lone assigned error that:

THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.

There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently raises had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal Revenue vs. Philippine Long Distance Company. There, the Sixteenth Division of the appellate court declared that under the express provision of Section 12 of R.A. 7082, supra, "the payment [by PLDT] of the 3% franchise tax of [its] gross receipts shall be in lieu of all taxes" exempts PLDT from payment of compensating tax, advance sales tax, VAT and other internal revenue taxes on its importation of various equipment, machinery and spare parts for the use of its telecommunications system.

Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court a motion for time to file a petition for review, docketed in this Court as G.R. No. 134386. However, on the last day for the filing of the intended petition, the then BIR Commissioner had a change of heart and instead manifested11 that he will no longer pursue G.R. No. 134386, there being no compelling grounds to disagree with the Court of Appeals’ decision in CA-G.R. 40811. Consequently, on September 28, 1998, the Court issued a Resolution12 in G.R. No. 134386 notifying the parties that "no petition" was filed in said case and that the CA judgment sought to be reviewed therein "has now become final and executory". Pursuant to said Resolution, an Entry of Judgment13 was issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, the CA’s dismissal of CA-G.R. No. 47895 on the additional ground of stare decisis.

Under the doctrine of stare decisis et non quieta movere, a point of law already established will, generally, be followed by the same determining court and by all courts of lower rank in subsequent cases where the same legal issue is raised.14 For reasons needing no belaboring, however, the Court is not at all concluded by the ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895.

The Court has time and again stated that the rule on stare decisis promotes stability in the law and should, therefore, be accorded respect. However, blind adherence to precedents, simply as precedent, no longer rules. More important than anything else is that the court is right,15 thus its duty to abandon any doctrine found to be in violation of the law in force.16

As it were, the former BIR Commissioner’s decision not to pursue his petition in G.R. No. 134386 denied the BIR, at least as early as in that case, the opportunity to obtain from the Court an authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the government is not estopped by acts or errors of its agents, particularly on matters involving taxes. Corollarily, the erroneous application of tax laws by public officers does not preclude the subsequent correct application thereof.17 Withal, the errors of certain administrative officers, if that be the case, should never be allowed to jeopardize the government’s financial position.18

Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the "in lieu of all taxes" clause found in Section 12 of PLDT’s franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in no uncertain terms, that PLDT’s payment of the 3% franchise tax on all its gross receipts from businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earnings thereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word "all" encompasses any and all taxes collectible under the National Internal Revenue Code (NIRC), save those specifically mentioned in PLDT’s franchise, such as income and real property taxes.

The BIR Commissioner excepts. He submits that the exempting "in lieu of all taxes" clause covers direct taxes only, adding that for indirect taxes to be included in the exemption, the intention to include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT exempt from payment of VAT and other indirect taxes on its importations. To the Commissioner, PLDT’s claimed entitlement to tax refund/credit is without basis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for or in lieu of indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations.

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax.

In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them;19 they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in.20

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.21 Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.

To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.22 Stated differently, a

seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or end-user of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.23

There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes on its importations in question, is effectively claiming exemption from taxes not falling under the category of direct taxes. The claim covers VAT, advance sales tax and compensating tax.

The NIRC classifies VAT as "an indirect tax … the amount of [which] may be shifted or passed on to the buyer, transferee or lessee of the goods".24 As aptly pointed out by Judge Amancio Q. Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of a business enterprise or on its earnings. It is imposed on all taxpayers who import goods (unless such importation falls under the category of an exempt transaction under Sec. 109 of the Revenue Code) whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale.25

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,26 lay the "economic burden of the tax", on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not.27 The rationale for compensating tax is to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries.28

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke one’s exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased.29 Hence, it is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.30

Time and again, the Court has stated that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.31 To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.32

As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDT’s franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT’s franchise or earnings, are outside the purview of the "in lieu" provision.

If we were to adhere to the appellate court’s interpretation of the law that the "in lieu of all taxes" clauseencompasses the totality of all taxes collectible under the Revenue Code, then, the immediately following limiting clause "on this franchise and its earnings" would be nothing more than

a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of interpretation cannot be accorded a governing sway following the familiar legal maxim redendo singula singulis meaning, take the words distributively and apply the reference. Under this principle, each word or phrase must be given its proper connection in order to give it proper force and effect, rendering none of them useless or superfluous. 33

Significantly, in Manila Electric Company [Meralco] vs. Vera,34 the Court declared the relatively broader exempting clause "shall be in lieu of all taxes and assessments of whatsoever nature … upon the privileges earnings, income franchise ... of the grantee" written in par. # 9 of Meralco’s franchise as not so all encompassing as to embrace indirect tax, like compensating tax. There, the Court said:

It is a well-settled rule or principle in taxation that a compensating tax … is an excise tax … one that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied upon property because of its use is an excise duty. ….

The compensating tax being imposed upon … MERALCO, is an impost on its use of imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax falling within the exemption. Thus, inInternational Business Machine Corporation vs. Collector of Internal Revenue, … which involved the collection of a compensating tax from the plaintiff-petitioner on business machines imported by it, this Court stated in unequivocal terms that "it is not the act of importation that is taxed under section 190 but the uses of imported goods not subjected to a sales tax" because the "compensating tax was expressly designated as a substitute to make up or compensate for the revenue lost to the government through the avoidance of sales taxes by means of direct purchases abroad.

xxx xxx xxx

xxx If it had been the legislative intent to exempt MERALCO from paying a tax on the use of imported equipments, the legislative body could have easily done so by expanding the provision of paragraph 9 and adding to the exemption such words as "compensating tax" or "purchases from abroad for use in its business," and the like.

It may be so that in Maceda vs. Macaraig, Jr.35 the Court held that an exemption from "all taxes" granted to the National Power Corporation (NPC) under its charter36 includes both direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson of Macedabeing that an exemption from "all taxes" excludes indirect taxes, unless the exempting statute, like NPC’s charter, is so couched as to include indirect tax from the exemption. Wrote the Court:

xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPC’s amended charter) amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties fees …."

The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. ….

xxx xxx xxx

It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original; words in bracket added)

Of similar import is what we said in Borja vs. Collector of Internal Revenue.37 There, the Court upheld the decision of the CTA denying a claim for refund of the compensating taxes paid on the importation of materials and equipment by a grantee of a heat and power legislative franchise containing an "in lieu" provision, rationalizing as follows:

xxx Moreover, the petitioner’s alleged exemption from the payment of compensating tax in the present case is not clear or expressed; unlike the exemption from the payment of income tax which was clear and expressed in the Carcar case. Unless it appears clearly and manifestly that an exemption is intended, the provision is to be construed strictly against the party claiming exemption. xxx.

Jurisprudence thus teaches that imparting the "in lieu of all taxes" clause a literal meaning, as did the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it is the duty of courts to seek the real intent of the legislature, even if, by so doing, they may limit the literal meaning of the broad language.38

It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist, it must not be enlarged by construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the very terms of the statute the favor would be extended beyond dispute in ordinary cases.39

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption. None should be granted.

As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT’s allegation that the Bureau of Customs assessed the company for advance sales tax and compensating tax for importations entered between October 1, 1992 and May 31, 1994 when the value-added tax system already replaced, if not totally eliminated, advance sales and compensating taxes.40 Indeed, pursuant to Executive Order No. 27341 which took effect on January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on original and subsequent sales tax.42 It stands to reason then, as urged by PLDT, that compensating tax and advance sales tax were no longer collectible internal revenue taxes under the NILRC when the Bureau of Customs made the assessments in question and collected the corresponding tax. Stated a bit differently, PLDT was no longer under legal obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDT’s allegations concerning the abolition of the provisions of the Tax Code imposing the payment of compensating and advance sales tax on importations and the non-existence of these taxes during the period under review. On the contrary, petitioner admits that the VAT on importation of goods has "replace[d] the compensating tax and advance sales tax under the old Tax Code".43

Given the above perspective, the amount PLDT paid in the concept of advance sales tax and compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments and would theoretically be refundable. It should be emphasized, however, that, such importations were, when made, already subject to VAT.

Factoring in the fact that a portion of the claim was barred by prescription, the CTA had determined that PLDT is entitled to a total refundable amount of P94,673,422.00 (P87,257,031.00 of compensating tax + P7,416,391.00 =P94,673,422.00). Accordingly, it behooves the BIR to grant a refund of the advance sales tax and compensating tax in the total amount of P94,673,422.00, subject to the condition that PLDT present proof of payment of the corresponding VAT on said transactions.

WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00 advance sales tax and compensating tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31, 1994, less the VAT which may have been due on the importations in question, but have otherwise remained uncollected.

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO, Petitioners, vs.THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.

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

G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners, vs.EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

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

G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS’ OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the name and style of "SHELL GATE – N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P.

POSADAS doing business under the name and style of "STARCARGA ENTERPRISES"; ADORACION MAÑEBO doing business under the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name and style of "LEONA’S GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION"; MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS’ HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HERITAGE CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business under the name and style of "TRUE SERVICE STATION", Petitioners, vs.CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

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

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIÑO, Petitioners, vs.CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive Secretary, Respondent.

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

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, vs. HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the Bureau of Customs, Respondent.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and wider coverage for full value-added tax benefits … these are the reasons why Republic Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary restraining order, effective immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 o’clock in the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the prices that they’ll have to pay would have to go up by 10%. While all that was being aired, per your presentation and per our own understanding of the law, that’s not true. It’s not true that the e-vat law necessarily increased prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different industries, different products, different services are hit differently. So it’s not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : You’re right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a

mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased arbitrarily by 10%. And that’s one reason among many others this Court had to issue TRO because of the confusion in the implementation. That’s why we added as an issue in this case, even if it’s tangentially taken up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these mitigating measures and the location and situation of each product, of each service, of each company, isn’t it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all these and we wish the government will take time to clarify all these by means of a more detailed implementing rules, in case the law is upheld by this Court. . . .6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a uniform provisoauthorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc.,et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.

Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or property without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law. Petitioners further contend that like any other property or property right, the input tax credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several

transactions with the government, is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition forcertiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable

input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue should be solely allocated for public

purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the

Constitution.

RESPONDENTS’ COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners

failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have already been settled. With regard to the issue of undue delegation of legislative power to the President, respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any of the two conditions provided therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceedingP1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the "cost deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under the "tax credit method," 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.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable to transact the business of the nation, either at all, or at least with decency, deliberation, and order."19Thus, Article VI, Section 16 (3) of the Constitution provides that "each House may determine the rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on the amendment to any bill or joint resolution, the differences may be settled by the conference committees of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panel shall report such fact to the House for the latter’s appropriate action.

Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the subject measure.

. . .

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten (10) days after their composition. The President shall designate the members of the Senate Panel in the conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with the explanatory statement of the conference committee shall be attached to the report.

. . .

The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional provision, where the two houses of Congress find themselves in disagreement over changes or amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the legislative branch is to formulate and implement its own rules of proceedings and to discipline its members, may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of both houses creating

the bicameral conference committee are unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both houses, thereby remaining within the jurisdiction conferred upon it by Congress.

In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners’ plea for the Court to go behind the enrolled copy of the bill. Assailed in said case was Congress’s creation of two sets of bicameral conference committees, the lack of records of said committees’ proceedings, the alleged violation of said committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A review of cases reveals the Court’s consistent adherence to the rule. The Court finds no reason to deviate from the salutary rule in this case where the irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in the absence of showing that there was a violation of a constitutional provision or the rights of private individuals. In Osmeña v. Pendatun, it was held: "At any rate, courts have declared that ‘the rules adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting them.’ And it has been said that "Parliamentary rules are merely procedural, and with their observance, the courts have no concern. They may be waived or disregarded by the legislative body." Consequently, "mere failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when the requisite number of members have agreed to a particular measure."21(Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed by the conference committee in introducing changes or deleting provisions in the House and Senate bills. Akin to the Fariñas case,22 the present petitions also raise an issue regarding the actions taken by the conference committee on matters regarding Congress’ compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23the Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral Conference Committee] it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555   House Bill No.3705   Senate Bill No. 1950With regard to "Stand-By Authority" in favor of President

Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of goods (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use or lease of properties (amending Sec. 108 of NIRC)

  Provides for 12% VAT in general on sales of goods or properties and reduced rates for sale of certain locally manufactured goods and petroleum products and raw materials to be used in the manufacture thereof (amending Sec. 106 of NIRC); 12% VAT on importation of goods and reduced rates for certain imported products including petroleum products (amending Sec. 107 of NIRC); and 12% VAT on sale of services and use or lease of properties and a reduced rate for certain services including power generation (amending Sec. 108 of NIRC)

  Provides for a single rate of 10% VAT on sale of goods or properties (amending Sec. 106 of NIRC), 10% VAT on sale of services including sale of electricity by generation companies, transmission and distribution companies, and use or lease of properties (amending Sec. 108 of NIRC)

With regard to the "no pass-on" provisionNo similar provision   Provides that the VAT imposed

on power generation and on the sale of petroleum products shall be absorbed by generation companies or sellers, respectively, and shall not be passed on to consumers

  Provides that the VAT imposed on sales of electricity by generation companies and services of transmission companies and distribution companies, as well as those of franchise grantees of electric utilities shall not apply to residential

end-users. VAT shall be absorbed by generation, transmission, and distribution companies.

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and services other than capital goods shall not exceed 5% of the total amount of such goods and services; and for persons engaged in retail trading of goods, the allowable input tax credit shall not exceed 11% of the total amount of goods purchased.

  No similar provision   Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods and services other than capital goods shall not exceed 90% of the output VAT.

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision   No similar provision   Provided for amendments to several NIRC provisions regarding corporate income, percentage, franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1½%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on to consumers or whether both the

VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference Committee decided to adopt the position of the House by putting a limitation on the amount of input tax that may be credited against the output tax, although it crafted its own language as to the amount of the limitation on input tax credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. – . . .

. . .

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such shorter period: . . .

(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: PROVIDED that the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage and excise taxes, the conference committee decided to include such amendments and basically adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference Committee is mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a pass on-tax. And let’s keep it plain and simple. Let’s not confuse the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, let’s keep the VAT simple.26 (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the support of either House."27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said provisions were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative

department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus without any basis.31 (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committee’s Report in these cases must have undergone three readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference committee report.32 (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27 Rates of Income Tax on Domestic Corporation28(A)(1) Tax on Resident Foreign Corporation28(B)(1) Inter-corporate Dividends34(B)(1) Inter-corporate Dividends116 Tax on Persons Exempt from VAT117 Percentage Tax on domestic carriers and keepers of Garage

119 Tax on franchises121 Tax on banks and Non-Bank Financial Intermediaries148 Excise Tax on manufactured oils and other fuels151 Excise Tax on mineral products236 Registration requirements237 Issuance of receipts or sales or commercial invoices288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the House bills are not intended to be amended by the House of Representatives. Hence, they argue that since the proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

…

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the House.

. . .

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the country’s serious financial problems. To do this, government expenditures must be strictly monitored and controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant expenditure savings have been identified by the administration. It is supported with a credible package of revenue measures that include measures to improve tax administration and control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in the long run prove effective and beneficial to the overall status of our economy. One such opportunity is a review of existing tax rates, evaluating the relevance given our present conditions.34(Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the government

to supplement our country’s serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the consumer,i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional revenues annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve goods and services. The rest of the tab – P10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel, this government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the burden.35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.

. . .

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of VAT.36

The other sections amended by the Senate pertained to matters of tax administration which are necessary for the implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.

SUBSTANTIVE ISSUES

I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

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

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor:provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. – There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

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

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services, which cannot be included within the purview of tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon

merchandise to the government and usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also argue that the law also effectively nullified the President’s power of control, which includes the authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no guiding standards are provided in the law on what basis and as to how he will make his recommendation. They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature – that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate;41 and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions.42 A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected.43 Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that nothing was left to the judgment of any other appointee or delegate of the legislature.

. . .

‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be made.’

. . .

It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may delegate a power not legislative which it may itself rightfully exercise.The power to ascertain facts is such a power which may be delegated. There is nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the taking into effect of a law. That is a mental process common to all branches of the government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority on account of the complexity arising from social and economic forces at work in this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United States in the following language — speaking of declaration of legislative power to administrative agencies: The principle which permits the legislature to provide that the administrative agent may determine when the circumstances are such as require the application of a law is defended upon the ground that at the time this

authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by the legislature. In other words, the legislature, as it is its duty to do, determines that, under given circumstances, certain executive or administrative action is to be taken, and that, under other circumstances, different or no action at all is to be taken. What is thus left to the administrative official is not the legislative determination of what public policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms of the law by which he is governed. The efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment of the contingency upon which the Act shall take effect may be left to such agencies as it may designate. The legislature, then, may provide that a law shall take effect upon the happening of future specified contingencies leaving to some other person or body the power to determine when the specified contingency has arisen.(Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its functions when it describes what job must be done, who is to do it, and what is the scope of his authority. For a complex economy, that may be the only way in which the legislative process can go forward. A distinction has rightfully been made between delegation of power to make the laws which necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its execution to be exercised under and in pursuance of the law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility and practicability. (Emphasis supplied).48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.49 While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends.50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the absence of accurate information on the part of the legislators, and any reasonable method of securing such information is proper.51 The Constitution as a continuously operative charter of government does not require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible for Congress itself properly to investigate.52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the wordshall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative functions of the Chief Executive are performed by and through the executive departments, and the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of the President."55

In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect.56The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret the law.59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP of

the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1½%.

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.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners’ argument is, at best, purely speculative. There is no basis for petitioners’ fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.

2. Nat’l Gov’t Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their variations.64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the country’s gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service. That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation. That’s the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as what it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at least based on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a position where we can then convince them to improve our ability to borrow at lower rates. But conditions have changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the market was not as favorable and up to now we have not accessed and we might pull back because the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our deficit reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The more debt you have, the more deficit you have because interest and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the law is indeed sufficient to answer the state’s economic dilemma is not for the Court to judge. In theFariñas case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the political branches of the government. It is not for this Court to look into the wisdom

or propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory, whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: …"

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a business’s books of accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners’ argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR);69 and

Third, if 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, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer’s option.70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the seller.71 What only needs to be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature also dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not deterred.78 Again, for

whatever is the purpose of the 60-month amortization, this involves executive economic policy and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on payment for the lease or use of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. …

(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. … Taxes withheld on income payments covered by the expanded withholding tax

(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or attributable to the taxable transaction.79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable transactions with the government.80 This is supported by the fact that under the old provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Creditable Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall becreditable against the value-added tax liability of the seller or contractor: Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to treat transactions with the government differently. Since it has not been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not take an astute businessman to know that it is a matter of exception that a business will sell goods or services without profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances."83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital equipment, or has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different consequences. While the implementation of the law may yield varying end results depending on one’s profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeña III and Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

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

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00.88Also, basic marine and agricultural food products in their original state are still not subject to the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

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

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%.96 The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97 Even the sale by an artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected.98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional provision has been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC)99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply

because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political or social ills; We should not forget that the Constitution has judiciously allocated the powers of government to three distinct and separate compartments; and that judicial interpretation has tended to the preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

G.R. No. 81311 June 30, 1988

KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners, vs.HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.

G.R. No. 81820 June 30, 1988

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

G.R. No. 81921 June 30, 1988

INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners, vs.The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.

G.R. No. 82152 June 30, 1988

RICARDO C. VALMONTE, petitioner, vs.

THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET, respondent.

Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.

Jaime C. Opinion for individual petitioners in G.R. No. 81311.

Banzuela, Flores, Miralles, Rañeses, Sy, Taquio and Associates for petitioners in G.R. No 81820.

Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820.

Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

 

PADILLA, J.:

These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses and other provisions of the 1987 Constitution.

The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the Solicitor General, only the third requisite — that the constitutional question should be raised at the earliest opportunity — has been complied with. He also questions the legal standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution.

Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions.

But, before resolving the issues raised, a brief look into the tax law in question is in order.

The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross receipts realized from the sale of services.

The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery.

The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt.

Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority to issue EO 273 on 25 July 1987.

The contention is without merit.

It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states:

Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to exercise legislative powers.

On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides:

Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress is convened.

It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to legislate.

Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987). He contends that the word "convene" is synonymous with "the date when the elected members of Congress assumed office."

The contention is without merit. The word "convene" which has been interpreted to mean "to call together, cause to assemble, or convoke," 1 is clearly different from assumption of office by the individual members of Congress or their taking the oath of office. As an example, we call to mind the interim National Assembly created under the 1973 Constitution, which had not been "convened" but some members of the body, more particularly the delegates to the 1971 Constitutional

Convention who had opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of office.

To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would already be deemed to be in session after the individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special election to elect a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict between the President and the Cabinet as to whether or not the President and the Cabinet as to whether or not the President can re-assume the powers and duties of his office, would also be redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the declaration of martial law or the suspension of the privilage of the writ of habeas corpus.

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

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

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

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

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

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

The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify the nullification of a law. there must be a clear and unequivocal breach of the Constitution, not a doubtful and argumentative implication. 4

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

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

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

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

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

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

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

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

xxx xxx xxx

(r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships;

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

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

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

At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now.

The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are made to believe.

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

WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.

G.R. No. 158885               April 2, 2009

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

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

G.R. No. 170680               April 2, 2009

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

D E C I S I O N

TINGA, J.:

The value-added tax (VAT) system was first introduced in the Philippines on 1 January 1988, with the tax imposable on "any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods."1 The first VAT law is found in Executive Order No. 273 (E.O. 273), which amended several provisions of the then National Internal Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise accommodated the potential burdens of the shift to the VAT system by allowing newly liable VAT-registered persons to avail of a transitional input tax credit, as provided for in Section 105 of the old NIRC, as amended by E.O. No. 273. Said Section 105 is quoted, thus:

SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.2

There are other measures contained in E.O. No. 273 which were similarly intended to ease the shift to the VAT system. These measures also took the form of "transitional input taxes which can be credited against output tax,"3and are found in Section 25 of E.O. No. 273, the section entitled "Transitory Provisions." Said transitory provisions, which were never incorporated in the Old NIRC, read:

Sec. 25. Transitory provisions. (a) All VAT-registered persons shall be allowed transitional input taxes which can be credited against output tax in the same manner as provided in Sections 104 of the National Internal Revenue Code as follows:

1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in accordance with regulations prescribed therefor;

2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit; and

3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 as goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.

Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered person who files an inventory of the goods referred to in said paragraphs as provided in regulations.

(b) Any unused tax credit certificate issued prior to January 1, 1988 for excess tax credits which are applicable against advance sales tax shall be surrendered to, and replaced by the Commissioner with new tax credit certificates which can be used in payment for value-added tax liabilities.

(c) Any person already engaged in business whose gross sales or receipts for a 12-month period from September 1, 1986 to August 1, 1987, exceed the amount of P200,000.00, or any person who has been in business for less than 12 months as of August 1, 1987 but expects his gross sales or receipts to exceed P200,000 on or before December 31, 1987, shall apply for registration on or before October 29, 1987.4

On 1 January 1996, Republic Act (Rep. Act) No. 7716 took effect.5 It amended provisions of the Old NIRC principally by restructuring the VAT system. It was under Rep. Act No. 7716 that VAT was imposed for the first time on the sale of real properties. This was accomplished by amending Section 100 of the NIRC to include "real properties" among the "goods or properties," the sale, barter or exchange of which is made subject to VAT. The relevant portions of Section 100, as amended by Rep. Act No. 7716, thus read:

Sec. 100. Value-added-tax on sale of goods or properties. —

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

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

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx6

The provisions of Section 105 of the NIRC, on the transitional input tax credit, had remained intact despite the enactment of Rep. Act No. 7716. Said provisions would however be amended following the passage of the new National Internal Revenue Code of 1997 (New NIRC), also officially known as Rep Act No. 8424. The section on the transitional input tax credit was renumbered from Section 105 of the Old NIRC to Section 111(A) of the New NIRC. The new amendments on the transitional input tax credit are relatively minor, hardly material to the case at bar. They are highlighted below for easy reference:

Section 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies

equivalent for eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.7 (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the first time, the concept of "presumptive input tax credits," with Section 111(b) of the New NIRC providing as follows:

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom.8

What we have explained above are the statutory antecedents that underlie the present petitions for review. We now turn to the factual antecedents.

I.

Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real property. On 8 February 1995, FBDC acquired by way of sale from the national government, a vast tract of land that formerly formed part of the Fort Bonifacio military reservation, located in what is now the Fort Bonifacio Global City (Global City) in Taguig City.9 Since the sale was consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to develop the tract of land, and from October, 1966 onwards it has been selling lots located in the Global City to interested buyers.10

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those regularly engaged in by FBDC have since been made subject to VAT. As the vendor, FBDC from thereon has become obliged to remit to the Bureau of Internal Revenue (BIR) output VAT payments it received from the sale of its properties to the Bureau of Internal Revenue (BIR). FBDC likewise invoked its right to avail of the transitional input tax credit and accordingly submitted an inventory list of real properties it owned, with a total book value ofP71,227,503,200.00.11

On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation two (2) contracts to sell, separately conveying two (2) parcels of land within the Global City in consideration of the purchase prices atP1,526,298,949.00 and P785,009,018.00, both payable in installments.12 For the fourth quarter of 1996, FBDC earned a total of P3,498,888,713.60 from the sale of its lots, on which the output VAT payable to the BIR wasP318,080,792.14. In the context of remitting its output VAT payments to the BIR, FBDC paid a total ofP269,340,469.45 and utilized (a) P28,413,783.00 representing a portion of its then total transitional/presumptive input tax credit of P5,698,200,256.00,

which petitioner allocated for the two (2) lots sold to Metro Pacific; and (b) its regular input tax credit of P20,326,539.69 on the purchase of goods and services.13

Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate action on whether its use of its presumptive input VAT on its land inventory, to the extent of P28,413,783.00 in partial payment of its output VAT for the fourth quarter of 1996, was in order. After investigating the matter, the BIR recommended that the claimed presumptive input tax credit be disallowed.14 Consequently, the BIR issued to FBDC a Pre-Assessment Notice (PAN) dated 23 December 1997 for deficiency VAT for the 4th quarter of 1996. This was followed by a letter of respondent Commissioner of Internal Revenue (CIR),15 addressed to and received by FBDC on 5 March 1998, disallowing the presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95 provided the basis in main for the CIR’s opinion, the section reading, thus:

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

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

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

The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:

(a) Presumptive Input Tax Credits -

x x x

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or properties and improvements showing the quantity, description and amount filed with the RDO not later than Janaury 31, 1996.

x x x

Consequently, FBDC received an Assessment Notice in the amount of P45,188,708.08, representing deficiency VAT for the 4th quarter of 1996, including surcharge, interest and penalty. After respondent Regional Director denied FBDC’s motion for reconsideration/protest, FBDC filed a petition for review with the Court of Tax Appeals (CTA), docketed as C.T.A. Case No. 5665.16 On 11

August 2000, the CTA rendered a decision affirming the assessment made by the respondents.17 FBDC assailed the CTA decision through a petition for review filed with the Court of Appeals, docketed as CA-G.R. SP No. 60477. On 15 November 2002, the Court of Appeals rendered a decision affirming the CTA decision, but removing the surcharge, interests and penalties, thus reducing the amount due to P28,413,783.00.18 From said decision, FBDC filed a petition for review with this Court, the first of the two petitions now before us, seeking the reversal of the CTA decision dated 11 August 2000 and a pronouncement that FBDC is entitled to the transitional/presumptive input tax credit of P28,413,783.00. This petition has been docketed as G.R. No. 158885.

The second petition, which is docketed as G.R. No. 170680, involves the same parties and legal issues, but concerns the claim of FBDC that it is entitled to claim a similar transitional/presumptive input tax credit, this time for the third quarter of 1997. A brief recital of the anteceding facts underlying this second claim is in order.

For the third quarter of 1997, FBDC derived the total amount of P3,591,726,328.11 from its sales and lease of lots, on which the output VAT payable to the BIR was P359,172,632.81.19 Accordingly, FBDC made cash payments totaling P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on purchases of goods and services.20 On 11 May 1999, FBDC filed with the BIR a claim for refund of the amount ofP347,741,695.74 which it had paid as VAT for the third quarter of 1997.21 No action was taken on the refund claim, leading FBDC to file a petition for review with the CTA, docketed as CTA Case No. 5926. Utilizing the same valuation22 of 8% of the total book value of its beginning inventory of real properties (or P71,227,503,200.00) FBDC argued that its input tax credit was more than enough to offset the VAT paid by it for the third quarter of 1997.23

On 17 October 2000, the CTA promulgated its decision24 in CTA Case No. 5926, denying the claim for refund. FBDC then filed a petition for review with the Court of Appeals, docketed as CA-G.R. SP No. 61517. On 3 October 2003, the Court of Appeals rendered a decision25 affirming the judgment of the CTA. As a result, FBDC filed its second petition, docketed as G.R. No. 170680.

II.

The two petitions were duly consolidated26 and called for oral argument on 18 April 2006. During the oral arguments, the parties were directed to discuss the following issues:

1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real properties by real estate dealers, is the 8% transitional input tax credit in Section 105 applied only to the improvements on the real property or is it applied on the value of the entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No. 7-95 valid in limiting the 8% transitional input tax to the improvements on the real property?

While the two issues are linked, the main issue is evidently whether Section 105 of the Old NIRC may be interpreted in such a way as to restrict its application in the case of real estate dealers only to the improvements on the real property belonging to their beginning inventory, and not the entire real property itself. There would be no controversy before us if the Old NIRC had itself supplied that limitation, yet the law is tellingly silent in that regard. RR 7-95, which imposes such restrictions on real estate dealers, is discordant with the Old NIRC, so it is alleged.

III.

On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input tax credit is computed. It can be conceded that when it was drafted Section 105 could not have possibly contemplated concerns specific to real properties, as real estate transactions were not originally subject to VAT. At the same time, when transactions on real properties were finally made subject to VAT beginning with Rep. Act No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in the application of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions subject to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT "on every sale, barter or exchange of goods," without however specifying the kind of properties that fall within or under the generic class "goods" subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of which we will enumerate. First, it made every sale, barter or exchange of "goods or properties" subject to VAT.27 Second, it generally defined "goods or properties" as "all tangible and intangible objects which are capable of pecuniary estimation."28 Third, it included a non-exclusive enumeration of various objects that fall under the class "goods or properties" subject to VAT, including "[r]eal properties held primarily for sale to customers or held for lease in the ordinary course of trade or business."29

From these amendments to Section 100, is there any differentiated VAT treatment on real properties or real estate dealers that would justify the suggested limitations on the application of the transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in the ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is clear that those regularly engaged in the real estate business are accorded the same treatment as the merchants of other goods or properties available in the market. In the same way that a milliner considers hats as his goods and a rancher considers cattle as his goods, a real estate dealer holds real property, whether or not it contains improvements, as his goods.

Had Section 100 itself supplied any differentiation between the treatment of real properties or real estate dealers and the treatment of the transactions involving other commercial goods, then such differing treatment would have constituted the statutory basis for the CIR to engage in such differentiation which said respondent did seek to accomplish in this case through Section 4.105-1 of RR 7-95. Yet the amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact that the said law left Section 105 intact, reveal the lack of any legislative intention to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the sale of other goods or properties or in any other commercial trade or business.

If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on their properties, how then were the CIR and the courts a quo able to justify such a view?

IV.

The fact alone that the denial of FBDC’s claims is in accord with Section 4.105-1 of RR 7-95 does not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the incongruence cannot by itself justify the denial of the claims. We need to inquire into the rationale behind Section 4.105-1, as well as the question whether the interpretation of the law embodied therein is validated by the law itself.

The CTA, in its rulings, proceeded from a thesis which is not readily apparent from the texts of the laws we have cited. The transitional input tax credit is conditioned on the prior payment of sales taxes or the VAT, so the CTA observed. The introduction of the VAT through E.O. No. 273 and its subsequent expansion through Rep. Act No. 7716 subjected various persons to the tax for the very first time, leaving them unable to claim the input tax credit based on their purchases before they became subject to the VAT. Hence, the transitional input tax credit was designed to alleviate that relatively iniquitous loss. Given that rationale, according to the CTA, it would be improper to allow FBDC, which had acquired its properties through a tax-free purchase, to claim the transitional input tax credit. The CTA added that Section 105.4.1 of RR 7-95 is consonant with its perceived rationale behind the transitional input tax credit since the materials used for the construction of improvements would have most likely involved the payment of VAT on their purchase.

Concededly, this theory of the CTA has some sense, extravagantly extrapolated as it is though from the seeming silence on the part of the provisions of the law. Yet ultimately, the theory is woefully limited in perspective.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT registered people would have been prejudiced by the inability to credit against the output VAT their payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-registered persons to invoke a "presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit", and a similar presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.30

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section 25 alone would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the transitional input tax credit under Section 105, thereby assuring that the tax credit would endure long after the last goods made subject to sales tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal link between those two would have been nonetheless extinguished long ago. Yet Congress has reenacted the transitional input tax credit several times; that fact simply belies the absence of any relationship between such tax credit and the long-abolished sales taxes. Obviously then, the purpose behind the transitional input tax credit is not confined to the transition from sales tax to VAT.

There is hardly any constricted definition of "transitional" that will limit its possible meaning to the shift from the sales tax regime to the VAT regime. Indeed, it could also allude to the transition one undergoes from not being a VAT-registered person to becoming a VAT-registered person. Such transition does not take place merely by operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It could also occur when one decides to start a business. Section 105 states that the transitional input tax credits become available either to (1) a person who becomes liable to VAT; or

(2) any person who elects to be VAT-registered. The clear language of the law entitles new trades or businesses to avail of the tax credit once they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences operations. If we view the matter from the perspective of a starting entrepreneur, greater clarity emerges on the continued utility of the transitional input tax credit.

Following the theory of the CTA, the new enterprise should be able to claim the transitional input tax credit because it has presumably paid taxes, VAT in particular, in the purchase of the goods, materials and supplies in its beginning inventory. Consequently, as the CTA held below, if the new enterprise has not paid VAT in its purchases of such goods, materials and supplies, then it should not be able to claim the tax credit. However, it is not always true that the acquisition of such goods, materials and supplies entail the payment of taxes on the part of the new business. In fact, this could occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only on account of a specially legislated exemption.

Let us cite a few examples drawn from the New NIRC. If the goods or properties are not acquired from a person in the course of trade or business, the transaction would not be subject to VAT under Section 105.31 The sale would be subject to capital gains taxes under Section 24(D),32 but since capital gains is a tax on passive income it is the seller, not the buyer, who generally would shoulder the tax.

If the goods or properties are acquired through donation, the acquisition would not be subject to VAT but to donor’s tax under Section 98 instead.33 It is the donor who would be liable to pay the donor’s tax,34 and the donation would be exempt if the donor’s total net gifts during the calendar year does not exceed P100,000.00.35

If the goods or properties are acquired through testate or intestate succession, the transfer would not be subject to VAT but liable instead for estate tax under Title III of the New NIRC.36 If the net estate does not exceedP200,000.00, no estate tax would be assessed.37

The interpretation proffered by the CTA would exclude goods and properties which are acquired through sale not in the ordinary course of trade or business, donation or through succession, from the beginning inventory on which the transitional input tax credit is based. This prospect all but highlights the ultimate absurdity of the respondents' position. Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-requisite for inclusion in the beginning inventory.

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

There is another point that weighs against the CTA’s interpretation. Under Section 105 of the Old NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher."38 If indeed the transitional input tax credit is premised on the previous payment of VAT, then it does not make

sense to afford the taxpayer the benefit of such credit based on "8% of the value of such inventory" should the same prove higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented with ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its properties from the national government, even claiming that to allow the transitional input tax credit is "tantamount to giving an undeserved bonus to real estate dealers similarly situated as [FBDC] which the Government cannot afford to provide." Yet the tax laws in question, and all tax laws in general, are designed to enforce uniform tax treatment to persons or classes of persons who share minimum legislated standards. The common standard for the application of the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and accommodating in ascertaining who should be entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.

IV.

Given the fatal flaws in the theory offered by the CTA as supposedly underlying the transitional input tax credit, is there any other basis to justify the limitations imposed by the CIR through RR 7-95? We discern nothing more. As seen in our discussion, there is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and their ability to claim the transitional input tax credit based on the value of their real properties. In addition, the very idea of excluding the real properties itself from the beginning inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of goods, whether or not such "goods" take the form of real properties or more mundane commodities.

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

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

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods, materials and supplies upon which the transitional input VAT would be based "shall be left to regulation by the appropriate administrative authority". This is based on the phrase "filing of an inventory as prescribed by regulations" found in Section 105. Nonetheless, Section 105 does include the particular properties to be included in the inventory, namely goods, materials and supplies. It is questionable whether the CIR has the power to actually redefine the concept of "goods," as she did when she excluded real properties from the class of goods which real estate companies in the business of selling real properties may include in their inventory. The authority to prescribe regulations can pertain to more technical matters, such as how to appraise the value of the inventory or what papers need to be filed to properly itemize the contents of such inventory. But such authority

cannot go as far as to amend Section 105 itself, which the Commissioner had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the enabling statute if such rule or regulation is to be valid.39 In case of conflict between a statute and an administrative order, the former must prevail.40 Indeed, the CIR has no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such limitation. A contrary conclusion would mean the CIR could very well moot the law or arrogate legislative authority unto himself by retaining sole discretion to provide the definition and scope of the term "goods."

V.

At this juncture, we turn to some of the points raised in the dissent of the esteemed Justice Antonio T. Carpio.

The dissent adopts the CTA’s thesis that the transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory. Had the dissenting view won, it would have introduced a new requisite to the application of the transitional input tax credit and required the taxpayer to supply proof that it had previously paid taxes on the acquisition of goods, materials and supplies comprising its beginning inventory. We have sufficiently rebutted this thesis, but the dissent adds a twist to the argument by using the term "presumptive input tax credit" to imply that the transitional input tax credit involves a presumption that there was a previous payment of taxes.

Let us clarify the distinction between the presumptive input tax credit and the transitional input tax credit. As with the transitional input tax credit, the presumptive input tax credit is creditable against the output VAT. It necessarily has come into existence in our tax structure only after the introduction of the VAT. As quoted earlier,41 E.O. No. 273 provided for a "presumptive input tax credit" as one of the transitory measures in the shift from sales taxes to VAT, but such presumptive input tax credit was never integrated in the NIRC itself. It was only in 1997, or eleven years after the VAT was first introduced, that the presumptive input tax credit was first incorporated in the NIRC, more particularly in Section 111(B) of the New NIRC. As borne out by the text of the provision,42 it is plain that the presumptive input tax credit is highly limited in application as it may be claimed only by "persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil;"43 and "public works contractors."44

Clearly, for more than a decade now, the term "presumptive input tax credit" has contemplated a particularly idiosyncratic tax credit far divorced from its original usage in the transitory provisions of E.O. No. 273. There is utterly no sense then in latching on to the term as having any significant meaning for the purpose of the cases at bar.

The dissent, in arguing for the effectivity of Section 4.105-1 of RR 7-95, ratiocinates in this manner: (1) Section 4.105-1 finds basis in Section 105 of the Old NIRC, which provides that the input tax is allowed on the "beginning inventory of goods, materials and supplies;" (2) input taxes must have been paid on such goods, materials and supplies; (3) unlike real property itself, the improvements thereon were already subject to VAT even prior to the passage of Rep. Act No. 7716; (4) since no VAT was paid on the real property prior to the passage of Rep. Act No. 7716, it could not form part of the "beginning inventory of goods, materials and supplies."

This chain of premises have already been debunked. It is apparent that the dissent believes that only those "goods, materials and supplies" on which input VAT was paid could form the basis of

valuation of the input tax credit. Thus, if the VAT-registered person acquired all the goods, materials and supplies of the beginning inventory through a sale not in the ordinary course of trade or business, or through succession or donation, said person would be unable to receive a transitional input tax credit. Yet even RR 7-95, which imposes the restriction only on real estate dealers permits such other persons who obtained their beginning inventory through tax-free means to claim the transitional input tax credit. The dissent thus betrays a view that is even more radical and more misaligned with the language of the law than that expressed by the CIR.

VI.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from including the value of their real properties in the beginning inventory of goods, materials and supplies, has in fact already been repealed. The offending provisions were deleted with the enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 7-95.45 The repeal of the basis for the present assessments by RR 6-97 only highlights the continuing absurdity of the position of the BIR towards FBDC.

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

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

G.R. No. 166408             October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners, vs.ABS-CBN BROADCASTING CORPORATION, respondent.

D E C I S I O N

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made out of inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of Appeals (CA) and that2 of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition and collection of local franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized and existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible for the imposition and collection of taxes within the territorial jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a franchise tax was imposed on businesses operating within its jurisdiction. The provision states:

Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption to the contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise whether issued by the national government or local government and, doing business in Quezon City, shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding years thereafter, of gross receipts and sales derived from the operation of the business in Quezon City during the preceding calendar year.

On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines under R.A. No. 7966.4 Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads:

Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the corporation developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by Quezon City on the dates, in the amounts and under the official receipts as follows:

O.R. No. Date Amount Paid

2464274 7/18/1995 P 1,489,977.28

2484651 10/20/1995 1,489,977.28

2536134 1/22/1996 2,880,975.65

8354906 1/23/1997 8,621,470.83

48756 1/23/1997 2,731,135.81

67352 4/3/1997     2,731,135.81

Total P19,944,672.665

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as follows:

O.R. No. Date Amount Paid

2536134 1-22-96 P 2,880,975.65

8354906 1-23-97 8,621,470.83

0048756 1-23-97     2,731,135.81

Total P14,233,582.296

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local franchise tax by the City Government of Quezon City for being unconstitutional. It likewise prayed for the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:

O.R. No. Date Amount Paid

2464274 7-18-95 P 1,489,977.28

2484651 10-20-95 1,489,977.28

2536134 1-22-96 2,880,975.65

8354906 1-23-97 8,621,470.83

0048756 1-23-97 2,731,135.81

0067352 4-03-97     2,731,135.81

Total P19,944,672.667

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of local government units. Further, that taxes collectible by and payable to the local government were distinct from taxes collectible by and payable to the national government, considering that the Constitution specifically declared that the taxes imposed by local government units "shall accrue exclusively to the local governments." Lastly, the City contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code (LGC) was passed.8 Section 193 of the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81) and of other

amounts of local franchise tax as may have been and will be paid by ABS-CBN until the resolution of the case.

Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the refund of all payments made. The dispositive portion of the RTC decision reads:

WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby orders the defendants to refund all its payments made after the effectivity of its legislative franchise on May 3, 1995.

SO ORDERED.9

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from payment of local franchise tax could be discerned from the usage of the "in lieu of all taxes" provision and from the absence of any qualification except income taxes. Had Congress intended to exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion similar to the proviso on income taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent electric company CEPALCO from payment of provincial franchise tax was upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax Code, on which the provincial ordinance imposing the local franchise tax was based, was a general law. Further, it was held that whenever there is a conflict between two laws, one special and particular and the other general, the special law must be taken as intended to constitute an exception to the general act.

The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the legislature ought to be presumed to have enacted it with the knowledge and awareness of the existence and prior enactment of Section 13711 of the LGC.

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax was an impairment of ABS-CBN's contract with the government. The imposition of another franchise on the corporation by the local authority would constitute an impairment of the former's charter, which is in the nature of a private contract between it and the government.

As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five

Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the only amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in relation to the succeeding payments.

The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of Quezon City and its Treasurer. According to the appellate court, the issues raised were purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:

For another, the issues which appellants submit for this Court's consideration are more of legal query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.

x x x x

The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric and Power Co., Inc. to be a legal one. There is no more argument to this.

The next issue although it may need the reexamination of the pertinent provisions of the local franchise and the legislative franchise given to appellee, also needs no evaluation of facts. It suffices that there may be a conflict which may need to be reconciled, without regard to the factual backdrop of the case.

The last issue deals with a legal question, because whether or not there is a prior written claim for refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be dispensed with, which obviously is not a factual issue.13

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the CA in its Resolution dated December 16, 2004. Hence, the present recourse.

Issues

Petitioner submits the following issues for resolution:

I.

Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the petitioners-appellants.

II.

Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of Appeals.14

Our Ruling

The second issue, being procedural in nature, shall be dealt with immediately. But there are other resultant issues linked to the first.

I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal issues, namely:

1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be in lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the franchise tax imposed by appellants;

2) Whether appellants' imposition of local franchise tax is a violation of appellee's legislative franchise; and

3) Whether one can do away with the requirement on prior written claim for refund.15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts. There is a question of law when the doubt or difference arises as to what the law is pertaining to a certain state of facts.16

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising only questions of law is erroneous and shall be dismissed, issues of pure law not being within its jurisdiction.17Consequently, the dismissal by the CA of petitioners' appeal was in order.

In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of petitioner was valid, considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode of appeal. The appellate court held that since the issue being raised is whether the RTC has jurisdiction over the subject matter of the case, which is a question of law, the appeal should have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final orders of the RTC to the Court of Appeals, provides:

SEC. 2. Modes of appeal. -

(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing a notice of appeal with the court which rendered the judgment or final order appealed from and serving a copy thereof upon the adverse party. No record on appeal shall be required except in special proceedings and other cases of multiple or separate appeals where the law or these Rules so require. In such cases, the record on appeal shall be filed and served in like manner.

(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for review in accordance with Rule 42.

(c) Appeal by certiorari. - In all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule on appeals as follows:

(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made to the Court of Appeals by mere notice of appeal where the appellant raises questions of fact or mixed questions of fact and law;

(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant raises only questions of law, the appeal must be taken to the Supreme Court on a petition for review on certiorari under Rule 45;

(3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction, regardless of whether the appellant raises questions of fact, questions of law, or mixed questions of fact and law, shall be brought to the Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves the jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case are pure questions of law. As petitioners' appeal solely involves a question of law, they should have directly taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed outright, x x x.19 (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation,20 this Court stated:

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:

"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities, however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of

appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local franchise tax.

A. The present controversy essentially boils down to a dispute between the inherent taxing power of Congress and the delegated authority to tax of local governments under the 1987 Constitution and effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on Section 151 in relation to Section 137 of the LGC, to wit:

Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x x x

x x x x

Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may levy the taxes, fees and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact legislation granting exemptions. This principle was upheld in City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.22 Said this Court:

This thus raises the question of whether or not the City's Revenue Code pursuant to which the city treasurer of Quezon City levied real property taxes against Bayantel's real properties located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.

Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its franchise."

Bayantel's posture is well-taken. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. As we explained in Mactan Cebu International Airport Authority:

"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. x x x"

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units' delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress."

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:

"What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be "consistent with the basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass."

In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government's delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties within the city's territory and removed exemptions theretofore "previously granted to, or presently enjoyed by all persons, whether natural or juridical [x x x]" there can really be no dispute that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that "a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted." Under this law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing power of local government units. An interpretation denying Congress such power to exempt would reduce the phrase "not hereinafter specifically exempted" as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes. There, the Court wrote:

"Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations."23 (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however, that payment of the percentage franchise tax shall be "in lieu of all taxes" on the said franchise.24

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed, this Court in City Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the power of Congress to grant tax exemptions over and above the power of the local government's delegated power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local franchise tax.

Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly exempt it from payment of local franchise tax. They contend that a tax exemption cannot be created by mere implication and that one who claims tax exemptions must be able to justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception.26 The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed.27

The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers.28 He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that "exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms.29

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all gross receipts of the radio/television business transacted under the franchise and the franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof.

The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in lieu of all taxes provision" would include exemption from local tax is not unequivocal.

As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila Railroad v. Rafferty,31 Philippine Railway Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v. David33 to support its claim that that the "in lieu of all taxes" clause includes exemption from all taxes.

However, a review of the foregoing case law reveals that the grantees' respective franchises expressly exempt them from municipal and provincial taxes. Said the Court in Manila Railroad v. Rafferty:34

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that:

"In consideration of the premises and of the granting of this concession or franchise, there shall be paid by the grantee to the Philippine Government, annually, for the period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of one per cent of the gross earnings of the grantee in respect of the lines covered hereby for the preceding year; after said period of thirty (30) years, and for the fifty (50) years thereafter, the amount so to be paid annually shall be an amount equal to one and one-half (1 1/2) per cent of such gross earnings for the preceding year; and after such period of eighty (80) years, the percentage and amount so to be paid annually by the grantee shall be fixed by the Philippine Government.

Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature - municipal, provincial or central - upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise."35 (Underscoring supplied)

In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing authority from whose jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax, by a grant expressed in terms "too plain to be mistaken" its claim for exemption for local franchise tax must fail.

C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos.

In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax.

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:

SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross receipts from the business covered by the law granting the franchise, a tax in accordance with the schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent

(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three (3%) percent

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law,36 took effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further amended to read as follows:

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, as value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines, for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; x x x services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; x x x (Emphasis supplied)

Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and other franchise grantees" were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject to 10% VAT but not to franchise tax. Only the franchise tax on "electric, gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

SEC. 117. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise. (Emphasis added)

Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:

SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:

"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"Sec. 117. Tax on franchise. - Any provision of general or special law to the contrary, notwithstanding,there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent (3%)and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this section, shall have an option to be registered as a value-added tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT liability of radio and/or television companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006.

In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.

The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause has now become functus officio, rendered inoperative.

In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes" clause in its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the clause has become functus officio because as the law now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in the trial court for refund of local franchise tax is DISMISSED.

G.R. No. 152532. August 16, 2005

PEOPLE OF THE PHILIPPINES, Petitioners, vs.SANDIGANBAYAN (Fourth Division) and BIENVENIDO A. TAN JR., Respondent.

D E C I S I O N

PANGANIBAN, J.:

A judgment of acquittal made by a competent court on a valid information after the accused has entered a plea bars an appeal by the prosecution. Only a clear showing of grave abuse of discretion or denial of due process to the State can justify a review (through a petition for certiorari) of such decision by this Court. In acquitting private respondent in the present case, the Sandiganbayan has not been shown to have acted arbitrarily or whimsically. Equally important, the herein accused, Commissioner Bienvenido A. Tan Jr., has not been proven to have exceeded his discretion in the exercise of his functions. Taking into account the relevant facts and applicable laws in this very perplexing subject of taxation, this Court cannot fault him for abating an excessive and erroneous tax assessment. Quite the contrary, he has acted fairly and sensibly under the circumstances.

The Case

Before us is a Petition for Certiorari1 under Rule 65 of the Rules of Court, seeking to nullify and set aside the January 23, 2002 Resolution2 of the Sandiganbayan (SB) in Criminal Case No. 20685. The dispositive part of the Resolution reads as follows:

"WHEREFORE, premises considered, the Decision dated 02 March 2001 is hereby RECONSIDERED and SET ASIDE, and the accused is hereby ACQUITTED of the charge in the instant case.

"The bailbond of the accused is hereby cancelled and the Hold Departure order previously issued by the court is hereby lifted and set aside."3

The Facts

The facts are narrated by the SB in its original Decision dated March 2, 2001, as follows:

"Pursuant to Letter of Authority No. ATD-035-STO dated January 2, 1986 and Memorandum of Authority dated March 3, 1986, an investigation was conducted by [Bureau of Internal Revenue (BIR)] examiners on the ad valorem and specific tax liabilities of [San Miguel Corp. (SMC)] covering the period from January 1, 1985 to March 31, 1986. The result of the investigation showed that [SMC] has a deficiency on specific and ad valorem taxes totaling P342,616,217.88 broken down as follows:

‘Specific Tax P 33,817,613.21

Ad Valorem Tax P308,798,604.67’

"On the basis of these findings, the BIR sent a letter dated July 13, 1987 to SMC demanding the payment of its deficiency tax in the amount of P342,616,217.88. Apparently, the letter was received by the SMC, as it protested the assessment in its letter dated August 10, 1987 with the information: 1) that the alleged specific tax deficiency was already paid when the BIR approved SMC’s request that its excess ad valorem payments be applied to its specific tax balance; 2) that the computation of the ad valorem tax deficiency was erroneous since the BIR examiners disallowed the deduction of the price differential (cost of freight from brewery to warehouse) and ad valorem tax.

"The protest was denied by the BIR thru a letter dated October [8], 1987 signed by accused Commissioner Bienvenido Tan, Jr., but the original assessment of P342,616,217.88 was reduced to P302,[0]51,048.93 due to the crediting of the taxpayer’s excess ad valorem tax deposit of P21,805,409.10 with a reiteration of the payment of the x x x assessed specific and ad valorem tax as reduced.

"On October 27, 1987, herein accused referred the matter to Jaime M. Maza, Assistant BIR Commissioner, Legal Service Division and thereafter different BIR officials also reviewed the case of SMC and rendered varying legal opinions on the issue x x x

"On the part of Alicia P. Clemeno, Chief, Legislative Ruling and Research Division, she recommended the reduction of SMC’s tax liability, first to P21,856,985.29, and later to P22,000,000.00. Balbino E. Gatdula, Jr., Assistant Revenue Service Chief, Legal Service, supported the demand for ad valorem tax deficiency from SMC. In a letter dated August 31, 1988, SMC, thru a certain Avendano offered the amount of P10,000,000.00 for the settlement of the assessment. This was concurred in by Juanito Urbi, Chief, Prosecutor Division, BIR in a Memorandum dated December 20, 1988. Jaime Maza, Assistant Commissioner, Legal Service, BIR, also gave his concurrence to the recommendation that the offer of SMC for P10,000,000.00 in compromise settlement be accepted. The recommendation was approved by accused Bienvenido Tan; and accordingly, in a letter dated December 20, 1988, SMC was informed that its offer to compromise was accepted."4

Subsequently, the SB reversed its original March 2, 2001 Decision with its now assailed January 23, 2002 Resolution. The antecedents leading to the Petition before this Court are narrated by the SB in this manner:

"In our Decision of March 2, 2001, herein accused Bienvenido A. Tan, former Commissioner of the [BIR], was convicted for violation of Section 3(e) of Republic Act [(RA)] No. 3019 as amended, otherwise known as the Anti-Graft and Corrupt Practices Act, the dispositive portion of which states as follows:

‘WHEREFORE, premises considered, judgment is hereby rendered convicting the accused for Violation of Section 3(e) of [(RA)] 3019 as amended, and appreciating in his favor the presence of the mitigating circumstance of age, accused being over seventy (70) years old, and in the absence of aggravating circumstances to offset the same, applying the Indeterminate Sentence Law, he is hereby sentenced to suffer imprisonment of six (6) years and one (1) month as minimum to fifteen (15) years as maximum. He is further disqualified perpetually from holding public office.

‘As the Court finds the compromise agreement to have been entered into illegally, the [BIR] is hereby ordered to collect from [SMC] the amount of P292,951,048.93 representing its tax liabilities covering the period from January 1, 1985 to March 31, 1986.

‘SO ORDERED.’

"In his Motion for Reconsideration filed on March 12, 2001, accused seeks to reconsider aforesaid Decision and posits the following grounds: (1) the Court erred in holding that the assessment contained in the letter of accused dated 08 October 1987 was final and executory; (2) corollarily, the Court erred in holding that the referral of the 08 October 1987 assessment to the Assistant Commissioner for further study was uncalled for, given that there was no request for a reconsideration of the 08 October 1987 assessment; (3) the Court erred in not holding that the specific tax assessment of [P]33,817,613.21 had been paid through the application of SMC’s excess ad valorem tax deposits to its unpaid specific tax; (4) the Court erred in not holding that the abatement of SMC’s ad valorem tax was proper on the ground that there exists a reasonable doubt as to the correctness of said assessment; [(5)] the Court erred in holding that accused exercise of his authority under Section 204 of the [National Internal Revenue Code (NIRC)] to abate the assessment of ad valorem tax was improper; and [(6)] the Court erred in holding that there was a compromise of the SMC tax case which resulted in undue injury to the government.

"In its Comment, the prosecution asserts that (1) the assessment contained in the letter of SMC dated October 8, 1987 was final and executory; (2) the referral of the 08 October 1987 assessment to the Assistant Commissioner for further study was uncalled for given that there was no request for a reconsideration from SMC; (3) SMC’s total tax due and collectible as Specific Tax of [P]33,817,613.21 has not been settled; (4) the Court correctly held that the abatement of SMC’s ad valorem taxes is improper; and (5) the Court is correct in ruling that there was a compromise of SMC’s tax which resulted in undue injury to the government.

"Thereafter, the accused and the prosecution made a further exchange of pleadings elaborating on their respective positions on the matter.

"The Motion is impressed with merit. After a careful and exhaustive review of the pleadings, the records and the evidence, we reconsider our Decision dated March 2, 2001 and hereby acquit the accused of the charge in the instant case."5

Ruling of the Sandiganbayan

In acquitting herein private respondent, the SB adduced several reasons.

First, the SB failed to give weight to the October 27, 1987 meeting between Commissioner Tan and SMC’s representatives -- a meeting which resulted in the referral of the assessment to Tan’s subordinates for further review and study. The referral showed that the disputed assessment had not yet become final and executory.

Second, notwithstanding the prosecution’s observation that the BIR rejected SMC’s protest against the inclusion of the water component of beer, private respondent unequivocally approved SMC’s application of its excess ad valorem deposit to complete the payment of its specific tax deficiency.

Third, the abatement of SMC’s ad valorem taxes is proper. The tax base for computing them should not include the ad valorem tax itself and the price differential. Reliance upon Executive Order (EO) No. 273 is not misplaced, because that law simply affirms general principles of taxation as well as BIR’s long-standing practice and policy not to impose a tax on a tax. Moreover, nothing precludes private respondent from applying EO 273 on an assessment made prior to its effectivity, because that law was merely intended to formalize such long-standing practice and policy.

Fourth, after inquiring into the discretionary prerogative of private respondent to compromise, the SB found no reason to conclude that he had acted contrary to law or been impelled by any motive other than honest good faith. The compromise he had entered into regarding SMC’s tax did not result in any injury to the government. No genuine compromise is impeccable, since the parties to it must perforce give up something in exchange for something else. No basis existed to hold him liable for violation of Section 3(e) of RA 3019.

Hence, this Petition.6

The Issues

Petitioner raises the following issues for our consideration:

"A.

"The respondent court acted with grave abuse of discretion amounting to lack or excess of jurisdiction when, in upholding private respondent’s act in ruling upon SMC’s Motion for Reconsideration, it disregarded Section 228 (previously Section 246) of the NIRC.

"B.

"The respondent court acted with grave abuse of discretion amounting to lack or excess of jurisdiction when, in upholding private respondent’s act in accepting SMC’s offer of compromise of P10,000,000.00 for its tax liability ofP302,051,048.93, it disregarded Sections 124 and 228 of the NIRC.

"C.

"The respondent court acted with grave abuse of discretion amounting to lack or excess of jurisdiction when it declared the validity of private respondent’s act of approving SMC’s application of the excess ad valorem to its specific tax deficiency despite its being contrary to law.

"D.

"The respondent court acted with grave abuse of discretion amounting to lack or excess of jurisdiction when it acquitted private respondent for violation of Sec. 3(e) of RA 3019 despite the overwhelming evidence proving his guilt beyond reasonable doubt."7

We shall tackle the foregoing issues seriatim, with the exception of the third issue that will be discussed ahead of the second.

The Court’s Ruling

The Petition has no merit.

First Issue:

Viability of SMC’s Motion for Reconsideration

Section 229 of the NIRC8 provides thus:

"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 regulation within thirty (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 the said decision; otherwise, the decision shall become final, executory and demandable."9

Petitioner argues that "on October 8, 1987, a final decision was rendered by private respondent as to SMC’s tax liability totaling P302,051,048.93 x x x." Since SMC did not appeal to the CTA, this decision became final and could no longer be compromised by private respondent. We disagree.

A careful reading of the quoted tax provision readily shows that the "Motion for Reconsideration" filed by SMC was aptly ruled upon by private respondent. Despite the use of the phrase "finally decided," his October 8, 1987 letter to SMC did not constitute a final assessment.

First, the phrase "finally decided" referred not to the total amount of deficiency specific and ad valorem taxes, but to the reduction of such assessment. The reduction was the result of SMC’s protest, by way of two requests for reconsideration dated June 9, 1987 and August 10, 1987. Contrary to petitioner’s assertion, the rules on statutory construction did not apply; the October 8, 1987 letter was not even a law. Grantia argumenti that the letter partook of the nature of a final assessment, its finality was suspended by private respondent’s handwritten note on the bottom left of the second page, extending the tender of payment for another 15 days from October 27, 1987, because of a referral of the assessment to the BIR’s Legal Service.10

Second, SMC filed on November 2, 1987 a timely request for reinvestigation -- technically not a motion for reconsideration. Under Section 229 of the NIRC, this request was a proper administrative protest11 done within 30 days from receipt of the assessment and substantiated by facts and law.12 The assessment was received by SMC only on October 26, 1987. Its request for reinvestigation was in turn received by the BIR on November 10, 1987, well within the 30-day period allowed by Section 229; thus, the assessment had not yet become final.

Moreover, a day after SMC’s receipt of the assessment, the SB found that a meeting had indeed been held between private respondent and the representatives of SMC, resulting in the suspension of the alleged finality of the assessment. The meeting partook of the nature of an oral, in advance of the written, request for reinvestigation. In both instances, the taxpayer’s request was not merely pro forma; it had the effect of suspending -- not interrupting -- the 30-day period for appeal.13

We do not agree with petitioner’s contention that, contrary to the finding of the SB in its March 2, 2001 Decision, no conference had been held on that date. A careful perusal of the Decision would, however, reveal that the date of the supposed conference was not indicated with certainty.14 And even if it were, the conference was supposed to have been held between SMC’s representatives and BIR officials, other than private respondent, on the computation (not the assessment) that was followed by SMC and that bore the alleged approval by the BIR.

Third, after SMC’s request for reinvestigation, no other issuance emanated from the BIR that could be considered a decision. Therefore, no appeal to the Tax Court15 could have been made under Section 229 of the NIRC, since the protest filed with the BIR had not been acted upon. Appealable to the Tax Court is a decision that refers not to the assessment itself, but to one made on the protest against such assessment.16 The commissioner of internal revenue’s action in response to a taxpayer’s request for reconsideration or reinvestigation of the assessment constitutes the decision, the receipt of which will start the 30-day period for appeal.17

Section 229 does not prevent a taxpayer from exhausting administrative remedies by filing a request for reconsideration, then a request for reinvestigation.18 Furthermore, under Section 7(1) of RA 112519 as amended,20 the Tax Court exercised exclusive appellate jurisdiction to review not the assessments themselves, but the decisions involving disputed ones arising under the NIRC.21

Fourth, quite obviously, no decision could as yet be made by the BIR, because the protest filed by SMC had been referred by private respondent to several top BIR officials for further review. In fact, various intra-office Memoranda were issued in 1988 involving the chiefs of the (1) Legislative Ruling and Research and (2) Prosecution Divisions of the BIR, as well as its assistant commissioners for legal service and excise tax. Had the assessment already become final in 1987, there would then be no more reason to reinvestigate and study the merits of SMC’s protest in 1988.

Fifth, totally misplaced is petitioner’s reference to the 180-day period from the submission of documents, within which time the BIR should act upon the protest, followed by a 30-day period of appeal to the Tax Court. This provision did not exist in either 1987 or 1988. It appeared only in a much later law, RA 8424, as Section 228 -- again erroneously referred to by petitioner as the basis for the present controversy.

Consequently, there was no legal impediment either to the referral of the protest by private respondent to his subordinates or to the action taken by them -- a process that lasted for more than 180 days. Neither was there a need to make a 30-day appeal to the Tax Court due to the BIR’s inaction on the protest within the 180-day period.

The assessment was clearly not yet final, executory or demandable. While it is pending with the commissioner of internal revenue, it cannot yet serve as the basis of collection by distraint or levy or by judicial action.22 No grave abuse of discretion can be attributed to the SB for upholding private respondent’s act of reinvestigation upon SMC’s request.

Second Issue:

Application of the Ad Valorem Tax

to the Specific Tax Deficiency

In like manner, no grave abuse of discretion was committed when the SB upheld private respondent’s approval of SMC’s application of its excess ad valorem tax deposits to its specific tax deficiency.

First, the approval given by private respondent was correct. Ad valorem taxes23 and specific taxes24 are both excise taxes25 on alcohol products.26 The payment by installment of a portion of the total specific tax deficiency of SMC, in addition to the application of its excess and unused ad valorem tax deposits to the remaining portion, fully covered the total net specific tax shortfall. BIR committed an oversight in failing to credit the amount of deposits to the specific tax deficiency, as well as an error in crediting the same amount to a subsequent ad valorem taxliability. A confusion was thus created when it issued a later assessment for the same specific tax deficiency, this time inclusive of increments.27 Proper was the BIR officials’ abatement or cancellation of the specific taxes of SMC, after the amount of its ad valorem tax deposits had already been credited to it.

To state that the balances of accounts pertaining to different tax deposits could only be applied to cover certain tax liabilities upon the approval of a request for tax credit is to validate the proposition that the acceptance of payment by installment of a portion of the specific tax deficiency was indeed tantamount to the approval of the request. No law or regulation prevented such approval.

Private respondent’s letter states a condition: should the final computation of specific and ad valorem taxes yield a different result, the difference plus penalties would be paid in addition to them. Obviously, this condition referred solely to the discrepancy, not to the application, and had nothing to do with the approval that was given.

Second, such approval had the concurrence of top tax officials within the Bureau. Not only was there a presumption of regularity in the performance of official functions;28 also, their collective conclusion was controlling. Besides, the disclosure of the change in beer formulation was timely and voluntary; no attribution of bad faith or fraud could be made. A change in technology that would result in a change in the manner of computing taxes was well within the realm of tax administration,29 on which private respondent had reasonable discretion to rule.

Third, the law and revenue regulations30 allowed pre-payment schemes,31 whereby excise taxes on alcohol products could be paid in advance of the dates they were due. Since the equivalent value of specific taxes by way of advance ad valorem tax deposits had already been paid, the government lost nothing. It was a simple request properly granted for applying the advance deposits made on one type of excise tax to another type. Granting such request was well within private respondent’s authority to administer tax laws and regulations.32 Again, the assessment was not final, demandable or executory at the time.

Fourth, in a letter to the Blue Ribbon Committee of the Senate, no less than the succeeding commissioner of internal revenue declared that the abatement of the specific tax deficiency through the proposed application was proper. Even if the new commissioner had admittedly been advised by private respondent, there remained the unrebutted presumptions of good faith and regularity in the performance of official functions.

Third Issue:

Acceptance of the   P 10 Million Alleged Compromise

The SB did not gravely abuse its discretion when it upheld private respondent’s acceptance of SMC’s compromise offer of P10 million.

In computing its ad valorem tax liabilities for the taxable period involved in the present case, SMC deducted from its brewer’s gross selling price the specific tax, price differential, and ad valorem tax. The BIR allowed the deduction of the specific tax, but not the deduction of the price differential and ad valorem tax, thus increasing the tax base and consequently the ad valorem tax liabilities of SMC for the said period.

Prior to and during the taxable period involved in the present case, several changes were made in the NIRC of 1977, particularly its provisions pertaining to fermented liquor. We must therefore trace the NIRC’s pertinent history to be able to rule properly on the validity of SMC’s deduction of both the price differential and the ad valorem tax from the brewer’s gross selling price.

Section 147(A) of the NIRC, as amended by PD 195933 in 1984, provides for the collection of a specific tax on each liter of the volume capacity of fermented liquor. In addition to the provision on the specific tax, the first paragraph of its Section 147(B) provides for the levying, assessment and collection of an ad valorem tax. The latter tax is equivalent to a certain percentage of the brewer’s gross selling price, net of the specific tax, of the product to be removed from the brewery or other place of manufacture. The ad valorem tax shall be paid by the brewer at the same time as the specific tax.

Added in 1984 were provisions of Section 186-A34 governing the determination of the gross selling price of cigarettes, as well as the administrative requirements and penalties imposable. Such provisions shall apply to the determination of the gross selling price of fermented liquor.35 Basically, this means that the amount of tax due on the fermented liquor shall be determined by the price at which it is sold either wholesale in the factory of SMC or directly to the public through its sales agents. If the fermented liquor is sold or allowed to be sold wholesale by SMC in another establishment which it owns, the wholesale price in that establishment shall determine the tax applicable to the fermented liquor sold there. When the price is less than the cost of manufacture plus all expenses incurred, until the fermented liquor is finally sold by SMC, such cost plus expenses shall be the basis for determining the amount of tax to be collected.

In 1986, PD 1994 amended the NIRC of 1977 by renumbering, among others, Section 147 as Section 124.36 In the new Section 124, the provisions on the specific and ad valorem taxes imposed on fermented liquors remained substantially the same, except for the tax rates.

On July 1, 1986, Section 4 of EO 22 amended said Section 124 by essentially providing that an ad valorem taxequivalent to a certain percentage of the brewer’s wholesale selling price -- this time excluding the ad valorem tax -- shall be levied, assessed and collected on fermented liquors. It was only in 1988 that EO 273 renumbered Section 124 as Section 140, and thereby amended it further to exclude also from such wholesale price the value-added tax already imposed at the time upon the same articles.37

Price Differential Deduction

Section 110 of the NIRC of 1977, as amended in 1986 by PD 1994, explicitly provides that the excise taxes on domestic products shall be paid by the manufacturer or producer before the removal of those products from the place of production.38 "It does not matter to what use the article[s] subject to tax is put";39 the excise taxes are still due, even though the articles are removed merely for storage in some other place and are not actually sold or consumed.40 The intent of the law is reiterated in several implementing regulations.41 This means, therefore, that the price that should be used as the

tax base for computing the ad valorem tax on fermented liquor is the price at the brewery. After all, excise taxes are taxes on property,42 not on the sale of the property.

Verily, the price differential cannot be ascertained at the time the fermented liquor is removed from the brewery, because such ascertainment will involve amounts that cannot be determined with certainty in advance, and that vary from one commercial outlet to another. The price differential, according to SMC, represents the cost of discounts, promotions, rebates, and transportation. To require the inclusion of the price differential in, not its deduction from, the tax base for purposes of computing the ad valorem tax would certainly lead to the impossible situation of computing for such tax, because the price differential itself cannot be determined unless the fermented liquor is actually sold.

Hence, no ad valorem tax can ever be paid before the removal of the fermented liquor from the place of production. This outcome cannot be countenanced, for it would be contrary to what the law mandates -- payment before removal. It follows that the tax base to be used should be net of the price differential. In other words, the gross selling price should be that which is charged at the brewery prior to the removal of the fermented liquor.

Ad Valorem Tax Deduction

The taxable period covered in this case is January 1, 1985 to March 31, 1986. Prior to the amendment of the NIRC of 1977 by EO 22 on July 1, 1986, the ad valorem tax was not excluded from the brewer’s wholesale price. Does this mean that such tax cannot be deducted? The answer is no.

A tax should not be imposed upon another tax. This is tax pyramiding, which has no basis either in fact or in law.

Private respondent has shown by mathematical analysis that the inclusion of the ad valorem tax in the tax base would only yield a circuitous manner of computation that will never end in just one ad valorem tax figure properly chargeable against a taxpayer. Quoted verbatim, his presentation is as follows:

"If [SMC] wants to make P42.7269 on a case of beer and because of price differential and specific taxes has to fix a price of P51.2722 ex brewery, what would the ad valorem tax be?

"The prosecution’s method is to charge the 20% ad valorem on the selling price ex brewery of P51.2722 and to tack that on the SMC price as follows:

‘P51.2722 - price ex brewery

x .20

P10.2544 - ad valorem tax

and 42.7269 - SMC price

P52.9813 - this should be the new selling price ex

brewery but SMC only charged P51.2722’

"Following the prosecution’s theory, since there is a new selling price ex brewery, i.e., P52.9813, the ad valorem tax should be adjusted to the new selling price or tax base or 20% of P52.9813, resulting in:

‘P42.7269 - SMC price

10.5962 - new ad valorem tax P53.3231

P53.3231 - another new selling price ex brewery’

"Then following the prosecution’s theory, the 20% ad valorem tax is again charged on the new selling price ex brewery.

‘20% of P53.3231 the new tax base or

P10.6646 - the new ad valorem tax

Resulting in P42.7269 - SMC price

10.6646 - new ad valorem tax

P53.3915 - new selling price ex warehouse

"Therefore, the ad valorem tax is not P10.2544 or P10.5962 but P10.6646 ad infinitum.

"The obvious untenability of the above situation is a clear enough argument to prove that ad valorem tax should be excluded from the tax base.

"The correct method is that used by the BIR and that is:

‘P 51.2722   - original price to public

[1.20]

= P42.726[8] - SMC warehouse price.’"43

Expectedly, though, petitioner is unable to negate the mathematics proffered by private respondent.

Equally important, tax pyramiding has since 1922 been rejected by this Court, the legislature, and our tax authorities. The intent behind the law is clearly to obviate a tax imposed upon another tax. Ratio legis est anima legis. The reason for the law is its spirit.

For instance, Regulations No. 27,44 promulgated March 1, 1923, already excludes the specific tax on cigars and cigarettes from the tax base upon which such tax is computed.45 This is reiterated in the more recent amendments to our tax law, among which are EOs 22 and 273,46 and their implementing rules. In fact, Commissioner of Internal Revenue v. American Rubber Co. held that a taxpayer cannot be "compelled to pay a x x x tax on the tax itself."47

Having shown the appropriateness of deducting the ad valorem tax from the tax base upon which it is computed, private respondent has shown prudence in exercising his power under Section

204(2)48 of the NIRC of 1977 to abate an unjust, excessively assessed, and unreasonable tax; and to accept the offer of P10 million,49 if only to avoid protracted and costly litigation.

Abatement,

Not Compromise

Although referred to in the pleadings as a compromise, the matter at hand is actually an abatement or a cancellation. Abatement is the "diminution or decrease in the amount of tax imposed;"50 it refers to "the act of eliminating or nullifying; x x x of lessening or moderating x x x."51 To abate is "to nullify or reduce in value or amount";52 while to cancel is "to obliterate, cross out, or invalidate";53 and "to strike out; x x x delete; x x x erase; x x x make void or invalid; x x x annul; x x x destroy; x x x revoke or recall."54

The BIR may therefore abate or cancel the whole or any unpaid portion of a tax liability, inclusive of increments, if its assessment is excessive or erroneous;55 or if the administration costs involved do not justify the collection of the amount due.56 No mutual concessions need be made,57 because an excessive or erroneous tax is not compromised; it is abated or canceled. Only correct taxes should be paid.58 Besides, as we have discussed earlier, there was no finality in the assessment that could be settled.

Moreover, petitioner did not prove the alleged bad faith attributed to private respondent, who simply relied upon his subordinates. Mere assertion will not suffice. Even reference to the approval by the Evaluation Board was misleading, for such approval was inexistent at the time and was merely a product of RA 8424 as amended.59Actual, not presumed, fraud should be the bench mark of liability.

Fourth Issue:

Violation of Section 3(e) of RA 3019

Clearly, the court a quo did not commit grave abuse of discretion in upholding private respondent in his act of ruling upon the request of SMC for reinvestigation, leading, first, to his approval of its application of the excess tax deposit to its tax deficiency; and, second, to his acceptance of its offer to pay for its tax liability, which was a little over the assessed amount, inclusive of increments. It necessarily follows that his acquittal is proper and inevitable.

Basic is the rule that no person shall be twice put in jeopardy of punishment for the same offense.60 It is a constitutional guarantee repeated in Section 7 of Rule 117 of the Rules of Court. A judgment of acquittal cannot be reopened, absent a grave abuse of discretion or a denial of due process to the State.61 In this light, pertinent is the following excerpt, showing how a similar attempt was made by the prosecution to overturn an acquittal through a Petition for Certiorari in this Court:

"The rule against double jeopardy proscribes an appeal from a judgment of acquittal. If said judgment is assailed in a petition for certiorari under Rule 65 of the Rules of Court, x x x the petitioner must prove that the lower court, in acquitting the accused, committed not merely reversible errors, but grave abuse of discretion amounting to lack or excess of jurisdiction. A judgment rendered with grave abuse of discretion or without due process is void, does not exist in legal contemplation and, thus, cannot be the source of an acquittal. However, where the petition demonstrate[s] mere errors in judgment not amounting to grave abuse of discretion or deprivation of due process, the writ of certiorari cannot issue. A review of the alleged errors of judgment cannot be made without trampling upon the right of the accused against double jeopardy."62

As aptly put by private respondent, error in the exercise of jurisdiction is not the same as error in judgment. The latter is not reviewable by certiorari,63 since evidence has been duly considered and passed upon by the SB.

Epilogue

Former BIR Commissioner Bienvenido A. Tan Jr. was charged with "having willfully, unlawfully and criminally cause[d] undue injury to the government by effecting a compromise of the tax liabilities" of SMC amounting toP302,051,048.93 for only P10,000,000, a "compromise [that] is grossly disadvantageous to the government." In no uncertain terms, the assailed Resolution of the Sandiganbayan acquitted him of violating Section 3(e) of Republic Act No. 3019 (the Anti-Graft Law).

Under the Constitution, no person shall be twice put in jeopardy of punishment for the same offense. To implement this constitutional mandate, the Rules of Court64 bars an appeal by the State from a judgment of acquittal, provided the following requisites are present: (1) a valid complaint or information was filed; (2) before a competent court; (3) the defendant pleaded to the charge; and (4) the accused was acquitted.

Petitioner alleges, however, that in acquitting the accused, the Sandiganbayan acted in a "capricious, whimsical, arbitrary or despotic manner" equivalent to lack or excess of jurisdiction.

Indeed, the double jeopardy principle will not protect the accused, if the prosecution can show that the court gravely abused its discretion in rendering the judgment of acquittal. The prosecution’s burden is heavy: to show grave -- not just ordinary -- abuse of discretion equivalent to lack or excess of jurisdiction.

This Court notes the tenacity of the Ombudsman and the Office the Special Prosecutor in doggedly pursuing what they believe is the public weal. But after a careful review of the assailed judgment and the relevant facts and laws, this Court cannot ascribe capricious or whimsical conduct on the part of the Sandiganbayan. The SB Resolution assessed the facts and applied the governing laws and jurisprudence. It analyzed the arguments of both the prosecution and the defense. It then concluded that the elements of the crime charged had not been sufficiently proven. Hence, it acquitted the accused.

Because of the importance of this case and the need to assist the government in collecting the correct amount of taxes, this Court even went further by inquiring whether private respondent (not just the Sandiganbayan) acted within the confines of his duties and prerogatives.

As can be seen from the foregoing discussions, Commissioner Bienvenido A. Tan Jr. acted fairly, honestly and in good faith in discharging his functions. To compromise a tax liability of more than P300 million for only P10 million may appear to be an arbitrary action grossly disadvantageous to the government. The fact remains, however, that the initial tax assessment of P300 million was correctly found by the SB to be overly excessive and erroneous. Under the circumstances, the abatement of the excessive and erroneous taxes was not only within the discretion of respondent; it was just and fair to all concerned. After all, the purpose of tax assessment is to collect only what is legally and justly due the government; not to overburden, much less harass, the taxpayers.

WHEREFORE, the Petition is DENIED, and the assailed Resolution AFFIRMED. No pronouncement as to costs.

G.R. No. L-19667      November 29, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.

G.R. No. L-19801-03      November 29, 1966

AMERICAN RUBBER COMPANY, petitioner, vs.THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Nos. L-19667:Office of the Solicitor General for petitioner.Ozaeta, Gibbs and Ozaeta for respondents.

Nos. L-19801-03:Ozaeta, Gibbs and Ozaeta for petitioner.Office of the Solicitor General for respondents.

REYES, J.B.L., J.:

These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as well as by the American Rubber Company (G.R. Nos. L-19801, 19802, 19803).

The factual background is the same in all four cases, and is not in controversy, having been stipulated between the parties.

Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December 1, 1958, was engaged in producing rubber from its approximately 900 hectare rubber tree plantation, which it owned and operated in Latuan, Isabela, City of Basilan. Its products, known in the market as Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe, are turned out in the following manner:

The initial step common to the production of all the foregoing rubber products is tapping, i.e., the collection of latex (rubber juice) from rubber trees. This is done by the daily cutting, early in the morning, of a spiral incision in the bark of rubber trees and placing a cup below the lower end of the incision to receive the flow of latex. The collecting cup is filled after two hours. The tapper then collects the latex into buckets and carries them to the collecting shed. The tapper subsequently pours the latex collected into big milk cans. The filled milk cans are then taken in motor vehicles to a coagulating shed, also within the premises of petitioner's plantation, where the latex is strained into coagulating tanks to remove foreign matter such as leaves and dirt. After these initial steps, the processes vary in the production of the various rubber products mentioned above. Said processes are described hereunder.

Preserved Rubber Latex

Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly stirred and then poured into metal drums. The addition of ammonia preserves the latex in liquid form and prevents its deterioration or its acquisition of a repulsive smell, and at the same time preserves its uniform color. Latex which has been thus artificially preserved in its liquid form generally lasts for about a month without spoiling. On the other hand, fresh latex in its original state lasts for only about two hours, after which it becomes spoiled.

Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum containers.

Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2

To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to the latex in the coagulating tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The mixture is stirred thoroughly. Thereafter aluminum partitions are placed crosswise inside the tank so that the latex will coagulate into uniform slabs. Acetic acid is added to the latex to hasten coagulation which otherwise takes place naturally, and to preserve its fresh state and color. The similarity in the production of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ends at the point of removing the coagulum (coagulated rubber sheets) from the coagulating tanks.

To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired thickness is attained, whereupon it is removed to the air-drying house situated inside petitioner's plantation and hung for a period of about twelve or thirteen days to dry. There are no mechanical driers used; the air-drying is done naturally. As soon as the Pale Crepe is dried, the sheets are sorted; those which are of uniform pale color are classified as Pale Crepe No. 2, whereupon they are baled and stored, ready for market.

Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except that the coagulum is passed only once through a roller provided with ribs after which the flattened and ribbed coagulum is removed to petitioner's smoke-house where it is hung and cured by exposure to heat and smoke from wood fires for about six or seven days. The resulting smoked sheets are sorted and classified dependent upon color and opaqueness into ribbed smoked sheets (RSS) No. 1 and No. 2, baled, and stored ready for the market. No mechanical equipment is used in generating the smoke in the smoke-house.

The petitioner's rollers are powered by engines although they could be turned by hand as it is done in small rubber plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried and smoked they deteriorate, get spoiled, and the color varies.

Flat Bark Rubber

Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex dripping from the ground around the tree, called "ground rubber", as well as the dried latex from the incisions made the previous day, called "bark rubber". Ground and bark rubber are not intentionally produced. No chemicals are added to the latex transformed into ground and bark rubber. This kind of dried latex is spoiled and has a bad odor.

Ground and bark rubber when gathered in sufficient quantities are passed numerous times through the rollers or mills until they form a uniform mass or sheet which, finally is called Flat Bark Rubber. No chemical is used to coagulate the dried ground and bark rubber because they are already coagulated. They are formed into sheets by means only of pressure of the mills or rollers through which they are passed. Flat Bark Rubber commands the lowest prices in the rubber market.

3X Brown Crepe

Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not only ground and bark rubber but removes and collects the latex in the cups, known as "cup rubber". The cup rubber coagulates and dries through natural processes and, when gathered in sufficient

quantities, is milled and rolled through a series of rollers until by force of pressure it is formed into a mass of the desired thickness called "3X Brown Crepe." Like ground and bark rubber, no chemicals are added to cup rubber to produce 3X Brown Crepe. Cup rubber in its original form, like ground and bark rubber, is spoiled and has a bad odor.

2X Brown Crepe

2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which had been cut or trimmed from the from the ribbed smoked sheets No. 2 into a uniform mass. 2X Brown Crepe is produced in the same manner as the other sheets of crepe rubber, i.e., without the addition of any chemicals.

Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the respondent's regulations declared same for tax purposes which respondent accordingly assessed. Petitioner paid, under protest, the corresponding sales taxes thereon claiming exemption therefrom under Section 188 (b) of the National Internal Revenue Code.

The following sales taxes on the aforementioned rubber products were paid under protest —

From Jan. 1, 1955 to Dec. 31, 1956

P83,193.48

From Jan. 1, 1957 to June 30, 1957

P20,504.99

From July 1, 1957 to Dec. 31, 1958

P52,378.90

It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local sales of its rubber products, following Internal Revenue General Circulars Nos. 431 and 440, had been separately itemized and billed by petitioner Company in the invoices issued to the customers, that paid both the value of the rubber articles and the separately itemized sales tax, from January 1, 1955 to August 2, 1957.

After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground that under section 188, paragraph b, of the Internal Revenue Code, as amended,1 its rubber products were agricultural products exempt from sales tax, and upon refusal of the Commissioner of Internal Revenue, brought the case on appeal to the Court of Tax Appeals (C.T.A. Nos. 356, 440,, 632). The respondent Commissioner interposed defenses, denying that petitioner's products were agricultural ones within the exemption; claiming that there had been no exhaustion of administrative remedies; and argued that the sales tax having been passed to the buyers during the period that elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have personality to demand, sue for and recover the aforesaid sales taxes, plus interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural products, "because the labor employed in the processing thereof is agricultural labor", and hence, the sales of such products were exempt from sales tax, but declared Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained from rolling excess pieces of Smoked Sheets) to be manufactured products, sales of which were subject to the tax. It overruled the defense of non-exhaustion of administrative remedies and upheld the Revenue Commissioner's stand that petitioner Company was not entitled to recover the

sales tax that had been separately billed to its customers, and paid by the latter. Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440 and ordered respondent Commissioner to refund only P3,916.49 without interest, or costs.

Both parties then duly appealed to this.

The issues posed on these appeals are:

(1) Whether the plaintiff's rubber products above described should be considered agricultural or manufactured for purposes of their subjection to the sales tax;

(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and paid by the buyers of its products; and

(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case recovery thereof is allowed.

The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from sales tax established in section 188 (b) of the Internal Revenue Tax Code in favor of sales of agricultural products, whether in their original form or not, made by the producer or owner of the land where produced is not taken away merely because the produce undergoes processing at the hand of said producer or owner for the purpose of working his product into a more convenient and valuable form suited to meet the demand of an expanded market; that the exemption was not designed in favor of the small agricultural producer, already exempted by the subsequent paragraphs of the same section 188, but that said exemption is not incompatible with large scale agricultural production that incidentally required resort to preservative processes designed to increase or prolong marketability of the product.

In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber tree, which is clearly an agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited marketability. The addition of ammonia prevents its deterioration for about a month, and we see no reason why this preservative process should wrest away from the preserved latex the protective mantle of the tax exemption.

Taking also into account the great distance that separates the plaintiff's plantation from the main rubber processing centers in Japan, the United States and Europe, and the difficulty in handling products in liquid form, it can be discerned without difficulty that preserved, latex, with its 30-day spoilage limit, is still severely handicapped for export and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to separate and solidify the rubber granules diffused in the latex, and hence, according to the stipulation of facts and the evidence, acetic acid is added to hasten coagulation. There is nothing on record to show that the acetic acid in way produces anything that was not originally in the source, the liquid latex. The coagulum is then rolled and compacted and afterwards air dried to make Pale Crepe(1 and 2), or else cured and smoked to produce rubber sheets. Once again we see nothing in this processing to alter the agricultural nature of the result; what takes place is merely an accelerated coagulation and dessication that would naturally occur anyway, only within a longer period of time, coupled with greater spoilage of the product.

Thus the operations carried out by plaintiff appear to be purely preservative in nature, made necessary, by its production of fresh rubber latex in a large scale. they are purely incidental to the latter, just as the canning of skinned and cored pineapples in syrup was held to be incidental to the large-scale cultivation of the fruit in the Philippine Packing Corporation case (ante). Being necessary to suit the product to the demands of the market, the operations in both cases should lead to the same result, non-taxability of the sales of the respective agricultural products. In not so holding, the Tax Court was in error.

Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the finding of the Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products. According to the record, these sheets result from the drippings and waste rubber that have dried naturally, that are rolled and compacted into the desired thickness, without any other processing.

As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of ribbed smoked sheets, no reason is seen why it should be treated differently from the ribbed smoked sheets themselves.

In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed manufactured articles, on the strength of section 194 (n) of the Revenue Code defining a "manufacturer" as

every person who by physical or chemical process alters the exterior texture or form or inner substances of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put to in its original condition, or who . . . alters the quality of any such raw material . . . as to reduce it to marketable shape . . . .

But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the exemption of agricultural products, "whether in their original form or not". The use of this last phrase in the statute clearly indicates that the agricultural product may be altered in texture or form without being divested of the exemption (cas cit. 100 Phil., p. 548). The exception would be sales of agricultural products while Republic Act No. 1612 was in effect because under this Act the freedom from sales tax became restricted to agricultural products "in their original form" only. So that plaintiff's sales from August 24, 1956 (approval of Republic Act 1612) to June 22, 1957 (when Republic Act 1856 became effective and restored the exemption to agricultural products "whether in their original form or not") became properly taxable. Under paragraphs (A)2 and B(4) of the additional stipulation of facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax properly collected during this period of plaintiff's transactions amounted to P18,187.19 from August 24 to December 31, 1956; and P18,888.28 from January 1 to June 21, 1957, or a total of P37,075.47. This last amount is, therefore non-recoverable.2

The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff Company is not entitled to recover the sales tax paid by it from January, 1955 to August 2, 1957, because during that period the plaintiff had separately invoiced and billed the corresponding sales tax to the buyers of its products. In so holding, the Tax Court relied on our decisions in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27, 1958.

The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the court of First Instance to the effect that —

"The amount collected from the theatergoers as additional price of admission tickets is not the property of plaintiffs or any of them. It is paid by the public. If anybody has the right to claim it, it is those who paid it. Only owners of property has the right to claim said property. The cine owner acted as mere agents of the city in collecting additional price charged in the sale of admission tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case, since the municipal taxes therein imposed were taxes on the admission tickets sold, so that, in effect, they were levies upon the theatergoers who bought them; so much so that (as the decision expressly ruled) the tax was collected by the theater owners as agents of the respective municipal treasurers. This does not obtain in the case at bar. The Medina ruling was merely followed in Rojas & Bros. vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the manufacturer, producer or importer (Op. of the Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely payment. There is no proof that the tax paid by plaintiff is the very money paid by its customers. Where the tax money paid by the plaintiff came from is really no concern of the Government, but solely a matter between the plaintiff and its customers. Anyway, once recovered, the plaintiff must hold the refund taxes in trust for the individual purchasers who advanced payment thereof, and whose names must appear in plaintiff's records.

Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the respondent Commissioner's General Circular No. 440, providing that —

if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him, has included an amount intended to cover the sales tax in the gross selling price of the article, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item in the invoice. . . . (Emphasis supplied)

In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the taxpayer being compelled to pay a sales tax on the tax itself. It does not seem either just or proper that a step suggested by the Internal Revenue authorities themselves to protect the taxpayer from paying a double tax should now be used to block his action to recover taxes collected without legal sanction.

Finally, a more important reason that militates against extensive and indiscriminate application of the Medina vs. City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the individual customers to whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of the small amount paid by each and the high cost of litigation for the reclaiming of an illegal tax. In so far, therefore, as it favors the imposition, collection and retention of illegal taxes, and encourages a multiplicity of suits, the Tax Court's ruling under appeal violates morals and public policy.

The plaintiff Company also urges that the refund of the taxes should include interest thereon. While this Court has allowed recovery of interest in some cases, it has done so only in cases of patent arbitrariness on the part of the Revenue authorities; and in this instance we agree with the Tax Court that no such patent arbitrariness has been shown.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No. L-19667 and modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales

taxes therein involved to have been improperly denied levied and collected and ordering respondent Commissioner of Internal Revenue to refund the same, except the taxes corresponding to the period from August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in force. The amount of P37,075.47 paid by the taxpayer for this period is hereby declared properly collected and not refundable. Without special pronouncement as to costs.

G.R. No. 153205             January 22, 2007

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

D E C I S I O N

CARPIO, J.:

The Case

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

The Antecedents

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

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

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

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

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

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein

that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

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

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

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

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

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

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

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

Totals P147,317,189.62 P3,361,174.14

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

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows:

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

x x x x x x x x x x.

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

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P   3,361,174.14

VAT Output Tax Payable P   6,994,659.67

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

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

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

The Ruling of the Court of Tax Appeals

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

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

x x x x

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

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

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

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

Hence, this petition.

The Court of Appeals’ Ruling

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

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98, respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of theBangko Sentral ng Pilipinas (BSP).9

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

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

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

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

The Issue

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

The Ruling of the Court

We deny the petition.

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

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

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

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

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

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

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

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

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

Respondent is mistaken.

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

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

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

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

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

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

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not

engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

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

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

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

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),24 the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.

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

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

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable

foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied)

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

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

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

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

WHEREFORE, the Court DENIES the petition.

G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs.TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No. 59106,1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,2 which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the first and second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the Securities and Exchange Commission on 07 July 1995,3 with the primary purpose of engaging in the business of manufacturing and exporting of electrical and mechanical machinery, equipment, systems, accessories, parts, components, materials and goods of all kinds, including, without

limitation, to those relating to office automation and information technology, and all types of computer hardware and software, such as HDD, CD-ROM and personal computer printed circuit boards.4

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark, Biñan, Laguna.5 Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a withholding agent.6

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT.9Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in the amount of P14,176,601.28,10 and for 01 April to 30 June 1996 in the amount of P5,161,820.79,11 for a total of P19,338,422.07. To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA during the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several Special and Affirmative Defenses, to wit –

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to investigation by the Bureau of Internal Revenue.

6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes sought to be refunded were erroneously or illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of the tax.

9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an exemption from taxation.12

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba in the amount of P16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for lack of merit.15

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIR’s Petition for Review and affirmed the CTA Decision dated 10 March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of Appeals based on the following grounds –

1. The Court of Appeals erred in holding that petitioner’s failure to raise in the Tax Court the arguments relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.

3. The Court of Appeals erred in not holding that since respondent’s business is not subject to VAT, the capital goods and services it purchased are considered not used in VAT taxable business, and, therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said Regulations.

4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input taxes it paid on zero-rated transactions.16

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this Court answers in the affirmative.

I

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977, as amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax. –

…

(b) Capital goods. – A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.17

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as follows –

Sec. 4.106-1. Refunds or tax credits of input tax. –

. . .

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

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations.

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

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended –

SEC. 103. Exempt transactions. – The following shall be exempt from value-added tax.

…

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory.18

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known as The Special Economic Zone Act of 1995, as amended. According to the said section, "[e]xcept for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid…" The five percent (5%) preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law, Rep. Act No. 7916, as amended.

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),19 this Court already made such distinction –

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status – VAT-exempt or not – of the party to the transaction…

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT…

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT,

the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,20 under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone has been described as –

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.21

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.22

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory;23 thus, creating the fiction that the ECOZONE is a foreign territory.24 As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT.25

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,26 the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads –

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a PEZA Registered Enterprise. –

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine"of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter’s PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under Executive Order No. 226, as amended, were deemed subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning thus –

In the first place, respondent could not have paid input taxes on its purchases of goods and services from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, 1997 Tax Code).

…

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

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

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own purchases of goods and services related to its zero-rated sale of goods and services to respondent. On the other hand, respondent, as the buyer in such zero-rated sale of goods and services, could not have paid input taxes for which it can claim as tax credit or refund.27

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-2,28 in relation to Section 4.106-1(a),29 of RR No. 7-95, as amended, which allows the tax credit/refund of input VAT on zero-rated sales of goods, properties or services. Instead, respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which allows a VAT-registered person to apply for tax credit/refund of the input VAT on its capital goods. While in the former, the seller of the goods, properties or services is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshiba’s application for tax credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually passed on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-registered supplier from the Customs Territory did not charge any output VAT to respondent

Toshiba believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goods and it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of Appeals, and even this Court,30 cannot be lightly disregarded considering the great number of PEZA-registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.31

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer and non-pioneer enterprises for six-year and four-year periods, respectively.32 Those availing of this incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present Petition took place during the first and second quarters of 1996, way before the issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR itself. Since respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted by respondent Toshiba consisting of receipts, invoices, and

vouchers, from its suppliers from the Customs Territory. Accordingly, this Court gives due respect to and adopts herein the CTA’s findings that the suppliers of capital goods from the Customs Territory did pass on output VAT to respondent Toshiba and the amount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July 2003, the BIR answered the following question –

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated without seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT invoices/receipts?

…

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:

a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the purchaser prior to the implementation of RMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared the sales to the PEZA-registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-registered companies, regardless of the type or class of PEZA registration, should be denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof depending on whether the given conditions are met. Respondent Toshiba’s claim for tax credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent Toshiba’s application for tax credit/refund of its input VAT, when such claim had already been determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even approve applications filed by other similarly-situated PEZA-registered enterprises at the administrative level.

III

Findings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshiba’s claim for tax credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate

under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised and threshed out in the lower courts. Giving it credence would belie petitioner CIR’s assertion that it is raising only issues of law in its Petition that may be resolved without need for reception of additional evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount of P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

G.R. No. 166732             April 27, 2007

INTEL TECHNOLOGY PHILIPPINES, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CALLEJO, SR., J.:

Before the Court is a Petition for Review on Certiorari filed by Intel Technology Philippines, Inc. (petitioner) seeking to reverse and set aside the Decision1 dated August 12, 2004 of the Court of Appeals (CA) in CA-G.R. SP No. 79327. The assailed decision affirmed that of the Court of Tax Appeals denying petitioner’s claim for a refund or issuance of a tax credit certificate in the amount of P11,770,181.70, allegedly representing the value-added input taxes it had paid on domestic purchases of goods and services for the period of April 1, 1998 to June 30, 1998. Likewise sought to be reversed and set aside is the appellate court’s Resolution2 dated January 14, 2005 denying petitioner’s Motion for Reconsideration.

The Antecedents

Petitioner is a domestic corporation engaged primarily in the business of designing, developing, manufacturing and exporting advanced and large- scale integrated circuit components (ICs).3 It is registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) entity in 1996 under Certificate of Registration RDO Control No. 96-540-000713.4 It is likewise registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone export enterprise.5

As a VAT-registered entity, petitioner filed with the Commission of Internal Revenue its Monthly VAT Declarations and Quarterly VAT Return for the second quarter of 1998 declaring zero-rated export sales of P2,538,906,840.16 and VAT input taxes from domestic purchases of goods and services in the total amount of P11,770,181.70. Petitioner alleged that its zero-rated export sales were paid for in acceptable foreign currency and were inwardly remitted in accordance with the regulations of the Bangko Sentral ng Pilipinas (BSP).

On May 18, 1999, petitioner filed with the Commission of Internal Revenue, through its One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, a claim for tax credit/refund of VAT input taxes on its domestic purchases of goods and services directly used in

its commercial operations. Petitioner’s claim for refund amounted to P11,770,181.70 covering the period April 1, 1998 to June 30, 1998.6

On June 30, 2000, when the two-year prescriptive period to file a refund was about to lapse without any action by the Commission of Internal Revenue on its claim, petitioner filed with the Court of Tax Appeals (CTA) a petition for review with the Commissioner of Internal Revenue (Commissioner) as respondent.7 Petitioner alleged therein that:

3. Petitioner is engaged primarily in the business of designing, developing, manufacturing and exporting advanced and large-scale integrated circuit components, commonly referred to in the industry as Integrated Circuits or "ICs." As such, [it] has registered itself as a value-added tax entity pursuant to Section 107 of the Tax Code effective January 30, 1996, pursuant to which it was issued Certificate of Registration No. 96-540-000713. Being engaged in said business, Petitioner registered itself with the Philippine Economic Zone Authority (PEZA) as an export enterprise and was issued Certificate of Registration No. 95-133 by the Philippine Economic Zone Authority. Photocopies of Petitioner’s Certificate of Registration (BIR Form 1556) and PEZA Certificate of Registration are hereto attached as Annexes "A" and "B," and made as integral parts hereof;

4. For the period covering April 01 to June 30, 1998, petitioner generated and recorded zero-rated export sales in the amount of PhP2,538,906,840.16, Philippine Currency;

5. The above amount of P2,538,906,840.16 was paid to petitioner in acceptable foreign currency and was inwardly remitted in accordance with existing regulations of the Central Bank of the Philippines pursuant to Sec. 106(A)(2)(a)(1) of the Tax Code;

6. For the period covering April 01, 1998 to June 30, 1998, petitioner paid VAT input taxes amounting to PhP11,770,181.70 for domestic purchases of goods and services which were attributable to petitioner’s zero-rated sales of PhP2,538,906,840.16. Photocopies of petitioner’s quarterly VAT returns and monthly declarations for the second taxable quarter of 1998 which was duly filed with the Respondent, and received by Respondent’s collection agents, RCBC – Gateway Branch are hereto attached as Annex "C," "D," "E" and "F" forming as integral parts hereof;

7. The above VAT input taxes were paid in connection with the Petitioner’s trade or business and were duly supported by invoices and/or receipts showing the information required under Sections 113 and 237 of the Tax Code, and had not been applied against any VAT output tax liability of the Petitioner during the same period from April 1, 1998 to June 30, 1998, or any succeeding period or periods;

x x x x

8. Being a VAT-registered entity, Petitioner is subject to the Value-Added Tax imposed under Title IV of the Tax Code.

x x x x

9. The export sales of the petitioner are not subject to 10% value-added tax but are zero-rated. Hence, such zero-rated sales will not result to any VAT output tax pursuant to Sec. 106(A)(2)(a)(1) and Sec. 108(B)(1) of the Tax Code;

10. Petitioner, for the period covering April 01, 1998 to June 30, 1998, having generated zero-rated sales and paid VAT input taxes in the course of its trade or business, which VAT input taxes are attributable to the zero-rated sales and have not been applied to any VAT output tax liability of the Petitioner for said period or any succeeding quarter or quarters nor has been issued any tax credit certificate, it follows that petitioner is entitled to the issuance of a tax credit certificate for VAT input taxes in the amount of PhP11,770,181.70 x x x.

x x x x

11. On May 18, 1999, petitioner in compliance with the requisites provided for by law for the issuance of a tax credit certificate filed a claim for tax credit in the total amount of PhP11,770,181.70, with respondent through the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center per BIR Form No. 2552 entitled ‘APPLICATION FOR TAX CREDIT/REFUND OR VALUE-ADDED TAX PAID’ and Claimant Information Sheet No. 35418. x x x

12. Respondent, however, despite such application for the issuance of a tax credit certificate above-mentioned and notwithstanding presentation of documentary evidences in support of such application, failed to grant the tax credit applied for. x x x8

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, as follows:

WHEREFORE, it is respectfully prayed that this Honorable Court after trial render judgment:

1. Declaring Petitioner entitled to the issuance of tax credit certificate in the amount of PhP11,770,181.70 representing VAT input taxes paid by it during the period from April 01, 1998 to June 30, 1998, for which no tax credit certificate was issued;

2. Ordering respondent to issue the tax credit certificate in favor of petitioner in the amount of PhP11,770,181.70 referred to above; and

3. Granting petitioner such other reliefs as may be just and equitable under the premises.9

The Commissioner, as respondent, opposed the petition and prayed for its dismissal. The following special and affirmative defenses were raised:

4. Petitioner, being allegedly registered with the Philippine Economic Zone Authority, is exempt from all taxes, including value-added tax, pursuant to Section 24 of Republic Act No. 7916, in relation to Section 103 of the Tax Code, as amended by RA 7716. Since its sales are not zero-rated but are exempt from VAT, petitioner is not entitled to refund of input tax pursuant to Section 4.106-1 and 4.103-1 of Revenue Regulations No. 7-95;

5. Petitioner’s alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau;

6. The amount of P47,582,813.72 being claimed by petitioner as alleged VAT input taxes for the period of 01 July 1997 to 31 December 1997 was not properly documented;

7. In an action for refund the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund/credit;

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit;

9. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation.10

The CTA commissioned the services of an independent auditor, Eliseo Aurellado, to conduct an audit and evaluate petitioner’s claim. On March 22, 2001, he submitted a Report to the CTA with the following conclusion:

In performing the above procedures, except for the net effect of the Input VAT paid on its purchases as compared to the results of my review of supporting documents, as shown in Annex "B" no other matters came to my attention that cause me to believe that the attached Schedule of Input VAT Paid should be adjusted. We believe that only the amounts of P9,688,809.39 is a valid claim for tax credit. This report relates only to the application of Intel Technology Philippines, Inc. for tax credit/refund specified on page 1 of this report and does not extend to the Financial Statements, taken as a whole, for any period where the aforementioned tax refund is present.11

Appended thereto were the summary of purchases, statements of input VAT exception, and statements of zero-rated export sales.12

Petitioner adduced testimonial evidence and offered the following documents in evidence:

EXHIBIT DESCRIPTION PURPOSE

"A" A copy of Petitioner’s Certificate of Registration No. 95-133 issued by Philippine Economic Zone Authority (PEZA). This was already subject of stipulation of facts.

To prove that Intel Technology Philippines, Inc. is registered with PEZA as Ecozone Export Enterprise.

"B" A copy of Petitioner’s BIR Certificate of Registration with RDO Control No. 96-540-000713 issued on January 30, 1996 by Revenue District Office No. 54.

This was already subject of stipulation of facts.

To prove that Petitioner is duly registered with the Bureau of Internal Revenue.

To prove that Petitioner is a duly registered VAT entity.

"C" & "D""C-1" & "D-1"

Copies of the Monthly VAT Returns for the month of April and May of 1998. These were already subjects of stipulation of facts.

Signature of Pablo V. Pablo.

To prove that Petitioner filed its Monthly VAT Declaration for the month of April and May of 1998.

To prove that the monthly VAT Returns was duly signed by Petitioner’s authorized agent.

"E""E-1"

Copies of Petitioner’s Quarterly VAT Return for the second quarter of 1998.

To prove that Petitioner filed its Quarterly VAT return for the second quarter of 1998.

To prove that Petitioner’s authorized

Signature of Pablo V. Pablo

This was already subject to

stipulation of facts

agent properly signed the Quarterly VAT Return for the second quarter of 1998.

"F" & "F-2""F-1"

Copies of Petitioner’s Amended Quarterly VAT Return for the second quarter of 1998.

Signature of Pablo V. Pablo

This was already subject to stipulation of facts.

To prove that Petitioner filed its Amended Quarterly VAT return for the second quarter of 1998.

To prove that Petitioner’s authorized agent properly signed the Amended Quarterly VAT Return for the second quarter of 1998.

"F-3" Box No. 16A of the Amended Quarterly VAT return for the second quarter of 1998.

To prove that Petitioner properly reported its sales subject to zero-rated for the second quarter of 1998.

"F-4" Box No. 16B of the Amended Quarterly VAT return for the second quarter of 1998.

To prove that petitioner paid and remitted the output VAT for the second quarter of 1998.

"F-5" Box No. 17 of the Amended Quarter VAT return for the second quarter of 1998

To prove that petitioner property reported its export sales subject to zero-rated for the second quarter of 1998 in the amount ofP2,538,906,840.160.

"F-6" Box No. 22B of the Amended Quarterly VAT return for the second quarter of 1998.

To prove that petitioner incurred an input taxes on its domestic purchases of goods and services for the second quarter of 1998 in the amount of P11,770,181.70.

"G" to "L" and "H-2" and "K-2""G-1" to "L-1"

Copies of Petitioner’s Quarterly VAT Returns for the third and fourth quarters of 1998 and first and second quarters of 1999 including the amended returns for the third quarter and first quarter of 1998 and 1999, respectively.

Signature of Pablo V. Pablo.

These were already subject of stipulation of facts.

To prove that Petitioner filed its Quarterly VAT Returns for the third and fourth quarters of 1998 and first and second quarters of 1999 including the amended returns for the third and first quarters of 1998 and 1999, respectively.

To prove that the Quarterly VAT returns were properly signed by Petitioner’s duly authorized representative.

"H-3," "I-2," "K3" & "L-2"

Box No. 34 or 35 of the Quarterly VAT returns for the third and fourth quarters of 1998 and first and second quarters of

To prove that the Petitioner always has excess input VAT and the same was not utilized in the succeeding quarter

1999. or quarters.

"M" & "N""M-1" & "N-1"

Copies of Petitioner’s Claimant Information Sheet No. 35418 including BIR Form No. 2552 for the period April 1, 1998 to June 30, 1998 filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance duly stamped received last 05-18-99.

Signature of Pablo V. Pablo

These were already subject of stipulation of facts.

To prove that Petitioner filed a claim for refund of input taxes in the total amount of P11,770,181.70 with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance last 05-18-99.

To prove that the claimant information sheet and BIR form 2552 were signed by Petitioner’s duly authorized representative.

"O""O-1""O-2"

Certification of inward remittance dated March 08, 2000 issued by CITIBANK

Signature of Pepper M. Lopez, CitiService Officer

Amount of inward remittance in the amount of US$98,000,000.00

To prove that the proceeds of export sales of petitioner were properly remitted in US dollars in accordance with the regulations of the Bangko Sentral ng Pilipinas.

To prove that the Certification was properly signed by Citibank’s authorized representative.

To prove the amount of inward remittance in the amount of US$98,000,000.00.

"P""P-1""P-2"

Certification of inward remittance dated March 09, 2000 issued by RCBC

Signture of Ms. Araceli V.

Dyoco, Head Export Dept.

Amount of inward remittance in the amount of US$102,499,965.00

To prove that the proceeds of export sales of petitioner were properly remitted in US dollars in accordance with the regulations of the Bangko Sentral ng Pilipinas.

To prove that the Certification was properly signed by RCBC’s authorized representative.

To prove the amount of inward remittance in the amount of US$102,499,965.00.

"Q""Q-1" and "Q-2"

Copy of the Certification issued by Mr. Eliseo A. Aurellado, independent CPA commissioned by the Honorable Court of Tax Appeals.

Signature and PTR No. of Mr. Eliseo A. Aurellado.

To prove that Mr. Eliseo A. Aurellado has issued a certification with regards to the correctness of Petitioner’s summary input VAT paid and summary of zero-rated sales.

To prove that Mr. Eliseo A. Aurellado is the one who issued the above-

mentioned Certification and that he has the authority to act as such.

"S" Copy of the summary of purchases attached as Annex "A" to the Certification marked as "Annex "Q."

To prove the correctness of the input VAT paid on domestic purchases of goods and services for the second quarter of 1998.

"T""T-1"

Copy of schedule of input VAT paid with exception attached as Annex "B" to the Certification marked as "Annex "Q."

The total amount of exception isP2,081,372.31.

To prove the amount of input VAT paid on domestic purchases of goods and services with exception.

To prove the total input VAT with exception in the amount ofP2,081,372.31.

"U-1" to "U-375," "V-1" to V-665" and "W-1" to "W-424"

Copies of Petitioner’s supplier invoices and official receipts for the second quarter of 1998.

To prove that the input VAT paid by Petitioner for the second quarter of 1998 except those with exception are property supported with sales invoices and official receipts.

"X" to "X-669"

Copies of Petitioner’s summary of export sales, sales invoices, official receipts, airway bills, export declarations and certification of inward remittances for the second quarter of 1998.

To prove that Petitioner for the second quarter of 1998 generated export sales in the total amount ofP2,538,906,840.16 and the same were duly supported with documents.

"Y" Copy of the summary export sales consisting of 13 pages attached as Annex "C" to the Certification marked as Exhibit "Q."

To prove [that] from April 1, 1998 to June 30, 1998, Petitioner generated and recorded an export sales in the amount of P2,538,906,840.16.13

On April 21, 2003, the CTA rendered judgment denying petitioner’s claim for refund or issuance of a tax credit certificate. The tax court acknowledged that petitioner is legally entitled to a refund or issuance of a tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods and service attributable to its zero-rated sales. However, the export invoices adduced in evidence by petitioner could not be considered as competent evidence to prove its zero-rated sales of goods for VAT purposes and for refund or issuance of a tax credit certificate because no BIR authority to print said invoices was indicated thereon. The CTA also observed that some of the invoices do not contain the Taxpayer’s Identification Number-VAT (TIN-V) of petitioner as required in Section 113, in conjunction with Section 237, of the Tax Code. The dispositive portion of the CTA decision reads:

WHEREFORE, in view of the foregoing, petitioner’s claim for issuance of a tax credit certificate in the amount ofP11,770,181.70 allegedly representing its VAT input taxes on domestic purchases of goods and services for the period April 1, 1998 to June 30, 1998 is hereby DENIED.

SO ORDERED.14

Petitioner filed a Motion for Reconsideration15 alleging that it was able to prove its export sales by the following documentary evidence:

(1) Certifications of inward remittances marked as Exhibits "O" and "P" for the Petitioner.

(2) Airway bills.

(3) Export declarations.

(4) Certifications of Mr. Eliseo Aurellado (Exhibit "Q" for the Petitioner), the independent CPA duly commissioned by this Honorable Court, to the effect that the petitioner made export sales for the period covered in the amount of Php2,538, 906,840.16.16

Petitioner also alleged the following in its Supplemental Motion for Reconsideration:

The petitioner truly believes that although the invoicing requirements prescribed under Section 113 (A)(1), in relation to Section 237 of the 1997 Tax Code, should be applied strictly in the use of invoices or receipts for purposes of substantiating input VAT incurred, the same stringent application is not called for when the invoices or receipts are used for purposes of substantiating actual export sales.

While the invoices or receipts being used to substantiate claim for input VAT pertain to domestic sales, the invoices or receipts presented by the petitioner, and which were invalidated by this Honorable Court pertain to export sales. There should be a marked difference because in domestic sales, there results a corresponding input VAT which may be possibly claimed by the purchaser, whereas in export sales, such as those done by the petitioner, the purchaser incurs no input VAT which it may eventually claim. Thus, for purposes of substantiation in the claim for input VAT resulting from domestic sales the stern application of the mentioned invoicing requirements is naturally demanded. But for simple purposes of substantiating export sales, as in the case of petitioner, it should not be as exacting especially considering that the petitioner still has to substantiate its input VAT, which, this time, needs to hurdle the aforesaid invoicing requirements under the 1997 Tax Code.

Moreover, unlike in the substantiation of input VAT, which can only be done through the submission of domestic sales invoices, there are other documents to show the fact of export sales such as export declarations, inward remittances and airway bills. This gives more plausible reason why invoices or receipts being used to prove input VAT need to comply with the invoice requirements set forth under Section 113(A)(1), in relation to Section 237, of the 1997 Tax Code.17

Petitioner appended thereto a letter-authority dated April 17, 1997 signed by BIR Regional Director Sol Hubahib of Region No. 9 approving its request to use computerized sales invoices.

On September 1, 2003, the CTA denied petitioner’s Motion for Reconsideration and Supplemental Motion for Reconsideration.

Aggrieved, petitioner filed before the CA a petition for review of the tax court’s decision. Petitioner averred that, under Sections 113(A)(1) and 237 of the 1997 Tax Code, the following information is required to be indicated in the invoice or receipt: (1) a statement that the seller is VAT-registered; (2) the seller’s TIN; and (3) the name, business style, if any, and address of the purchaser, customer or client. However, petitioner averred, such requirements apply only to domestic or local sales, considering that the output tax (the input tax on the part of the local purchaser), may be claimed by the latter as a credit against its output VAT. Thus, according to petitioner, the invoices or receipts being issued by the local seller are required to indicate the information listed under the aforementioned provisions of the Tax Code so that the local purchaser would have a valid basis in

its claim for the crediting of the input VAT. On the other hand, such requirements do not apply to its export sales, since no input VAT may be claimed thereon. Petitioner further pointed out that the transaction is subject to 0% rate; there is no input VAT to be claimed by its foreign purchaser; and the latter is not a VAT-registered entity in the Philippines. Considering that no refundable or creditable input VAT results from its export sales transactions, it should not be subjected to strict compliance with the invoicing requirements.

Petitioner also claimed that the absence of BIR authority to print its TIN-V in some of the invoices is not fatal to its claim for refund or issuance of a tax credit certificate as to invalidate the documents used to prove its export sales. It declared that it used computerized accounting forms as sales invoices in its export sales based on the letter-authority dated April 17, 1997 of the BIR. It was only through plain mistake and inadvertence that the sales invoices it used had no authority to print. Such omission should not allegedly render the said sales invoices altogether invalid or inadmissible for purposes of substantiating petitioner’s actual export sales covering the period April 1, 1998 to June 30, 1998. Petitioner opined that its failure to adduce in evidence the said letter-authority of the BIR was due to its honest belief that it had already adduced sufficient evidence to prove its actual export sales.

Petitioner submitted that while the CTA ruled that the invoices which did not indicate TIN-V were not sufficient proof of its export sales, this constituted only a small part of the hundreds of invoices it had submitted. These defective invoices, therefore, relate to a small chunk of the export sales it made for the covered period. If at all, the invalid invoices could only mean that only a small part of its claim was being disallowed, not the entire claim.

On August 12, 2004, the CA rendered its Decision18 affirming the CTA ruling. The CA ruled that while under Section 106(A)(2)(a)(1) of the Tax Code, VAT-registered entities are entitled to claim VAT refund on their input taxes if their export sales are zero-rated, the claim is nevertheless subject to the invoicing and accounting requirements of VAT-registered persons under Section 113 in relation to Section 237 of the Tax Code. It is therefore clear, the appellate court concluded, that what should be proven are not only the export sales but also compliance with the requirements under the aforesaid sections of the Tax Code.19

The CA further ruled that Revenue Regulations (RR) No. 7-95 requires VAT-registered persons to issue duly registered receipts, and enumerates the entries that should be contained in the said duly registered receipts. Section 237 of the Tax Code further mandates that persons required to issue receipts or invoices should register these documents with the BIR. In fact, RR No. 2-90 restored the requirement to register and stamp receipts and invoices prior to their use.20 Thus, VAT-registered persons are directed to issue duly registered invoices for every sale or lease of goods, properties or services, containing the required information under the law.21

According to the CA, since petitioner issued invoices with the BIR’s authority to print, it must be concluded that these invoices were not registered as they did not comply with the invoicing requirements under Section 113, and the requirements for issuance of receipts or sales or commercial invoices under Section 237. The CA declared that an unregistered receipt could not be used as supporting document for input tax.22 It further explained that Revenue Memorandum Circular (RMC) No. 42-2003 already clarified that failure to comply with invoicing requirements would result in the disallowance of the claim for input tax by the purchaser-claimant. Hence, the CA ruled, if the claim for refund or issuance of a tax credit certificate is based on the taxpayer’s zero-rated sales, but the invoicing requirements in the issuance of sales invoices are not complied with, the claim for tax credit/refund of VAT on its purchases shall be denied. This is because the invoices issued to its customers failed to depict that the taxpayer is VAT-registered and that its sales are classified as zero-rated. According to the appellate court, however, this treatment is without prejudice to the right

of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable.23

The CA further declared that petitioner failed to establish that its computer-generated sales invoices were duly stamped with the approval of the BIR as shown by the letter-authority dated April 17, 1997, considering that the said letter-authority was not presented during the trial of the case, much less attached to the petition filed before it.24 The fallo of the CA decision reads:

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The Decision of the Court of Tax Appeals in CTA Case No. 6128 is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.25

Undaunted by the adverse ruling of the appellate court, petitioner now seeks recourse to this Court on the following grounds:

I.

THE DECISION OF THE COURT OF APPEALS AFFIRMING THE DENIAL OF PETITIONER’S CLAIM FOR TAX CREDIT/REFUND IS CONTRARY TO PROVISIONS OF THE TAX CODE AND APPLICABLE REGULATIONS AND DECISIONS OF THE HONORABLE SUPREME COURT.

II.

SECTIONS 113 AND 237 OF THE TAX CODE DO NOT REQUIRE PETITIONER TO REFLECT ITS AUTHORITY TO PRINT IN ITS INVOICES. PETITIONER IS NOT REQUIRED BY ANY LAW OR REGULATION TO REFLECT ITS AUTHORITY TO PRINT UPON ITS INVOICES. NEITHER IS THE FAILURE PENALIZED BY ANY LAW OR STATUTE SUCH THAT THE INVOICES ARE RENDERED INADMISSIBLE.

III.

THE FAILURE TO STATE THE TIN-V IN PETITIONER’S EXPORT SALES INVOICES SHOULD NOT INVALIDATE PETITIONER’S CLAIM. PETITIONER’S EXPORT SALES INVOICES, WHICH ARE ADMISSIBLE, COMPETENT AND MATERIAL EVIDENCE, SUFFICIENTLY PROVE PETITIONER’S EXPORT SALES.26

The Issues

The issues to be resolved in the instant case are (1) whether the absence of the BIR authority to print or the absence of the TIN-V in petitioner’s export sales invoices operates to forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable to its zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its sales invoices automatically invalidates its claim for a tax credit certification.

Petitioner’s Arguments

Petitioner contends that Sections 113 and 237 of the Tax Code, and even RR 7-95, do not require the taxpayer to reflect its authority to print in its invoices.27 Failure to print such authority is not even penalized by any law or statute such that the invoices which do not contain the BIR authority for petitioner to print its sales are rendered inadmissible in evidence.28 Further, the authority to print

under Section 238 of the Tax Code is a requirement that is separate from and independent of the information that ought to be reflected in the invoice or official receipt as mandated by Section 113, in relation to Section 237 of the Tax Code.29 The BIR has even ruled, in BIR Ruling DA-375-03, that receipts which do not reflect that the taxpayer is VAT-registered do not automatically invalidate the claim for an input tax credit.30 Moreover, RR 2-90 (which the appellate court cited in the assailed decision) does not state that failure to reflect the authority to print on the face of a sales invoice or receipt results in the outright invalidation of such sales invoice or of the claim for tax credit/refund.31 It insists that RMC No. 42-03, which the CA likewise relied on in the assailed decision, does not apply, for it relates to non-compliance with invoicing requirements; the authority to print is not among the information required by law or any regulation to be reflected in petitioner’s invoices.32

Petitioner asserts that even if it were assumed for the sake of argument that the BIR has issued a regulation to the effect that failure to indicate the authority to print on the face of a sales invoice would render it invalid, such regulation cannot prevail over the law that it seeks to implement. It insists that any additional requirement imposed by the BIR for a valid claim other than those mandated by law is invalid,33 and that the provisions of a taxing act are not to be extended by implication.34

Further, petitioner contends that it was authorized by the BIR to use a computerized accounting system35 through the letter-authority dated April 17, 1997.36 It avers that even if the letter-authority was not offered in evidence, the Court ought to take judicial notice thereof as an official act of the Executive Branch.37 Petitioner asserts that since its export sales invoices were computer-generated under an approved computerized accounting system, it is no longer mandated to comply with the requirements under Section 19 of RR No. 2-90 on the authentication and registration of books, registers or records, authority to print receipts, sales or commercial invoices; and registration and stamping of receipts and invoices. Such requirements apply only to manually generated receipts and invoices. Even granting arguendo that it was still required by RR No. 7-95 to indicate its authority to print in its invoices, it was not mandated to obtain an authority to print as the burden of securing the same falls upon the printer of the receipts.38

Petitioner further contends that the invoicing requirement of stating the TIN-V applies only to domestic or local sales, given that the output tax (the input tax on the part of the local purchaser), may be claimed by the latter as a credit against its output VAT. In such a case, the invoicing requirements should be complied with in order for the local purchaser to have a valid basis in its claim for crediting of input VAT. This, however, does not apply in the instant case for the following reasons: petitioner’s export sales with its foreign purchaser is subject to zero-rated VAT; its foreign purchaser cannot claim input VAT as it is governed by a foreign taxing jurisdiction; and the latter is not a VAT-registered entity in the Philippines.39 To buttress its claim, petitioner cites the decision of the CA in Intel Technology Philippines, Inc. v. CIR.40

In any case, petitioner argues, it sufficiently proved its export sales since, other than the subject invoices, it also submitted in evidence the following: certifications of inward remittances; airway bills; export declarations; certification by Eliseo Aurellado, the independent CPA duly commissioned by the tax court, attesting that petitioner made export sales of P2,538,906,840.16 during the second quarter of 1998.

Petitioner pleads that its application for tax credit/refund should be granted to serve the higher interest of justice, equity and fairness, and claims that technicalities should give way to its substantive rights.41 While it may be true that taxes are the lifeblood of the government, technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens.

The Respondent’s Counter-Arguments

For his part, respondent Commissioner, through the Office of the Solicitor General, maintains that the absence of the BIR authority to print and the TIN-V in its export sales invoices is fatal to petitioner’s claim for refund.42 Section 113 of the Tax Code enumerates the invoicing requirements for VAT-registered persons, which include, among others, a statement that the seller is VAT-registered and the seller’s TIN.43 Section 237 of the same Code, and Section 4.108.1 of RR No. 7-95, further require the issuance of duly registered receipts or invoices for every sale or transaction, indicating thereon the purchaser’s TIN.44

A VAT-registered person is, therefore, required to issue a receipt or invoice with a TIN for every consummated sale, and which, following Section 19 of RR No. 2-90,45 must be duly registered with the BIR as evidenced by a stamp of the taxpayer’s authority to print.46 Respondent stresses that Section 238 of the Tax Code mandates all persons engaged in business to secure an authority to print receipts or invoices from the BIR.47 There is an additional requirement that such authority to print must be stamped on every receipt or invoice of a VAT-registered person. While it is not explicitly enumerated in Sections 113 and 237 of the Tax Code as one of the invoicing requirements, it can be implied from said provisions that such information must be reflected on the receipt or invoice, as the stamping of the said BIR authority to print is a proof of the invoice being BIR-registered.48 Absent the said authority to print, therefore, petitioner’s invoices are considered unregistered, and thus cannot be used as supporting documents to prove its input tax and eventually, its claim for tax refund.49

Respondent Commissioner further emphasizes that tax refunds/ credits are in the nature of tax exemptions; hence, laws relating to them call for a strict application against the claimant.50 The burden to prove the entitlement to the refund also rests on the taxpayer, which, in this case, was not proven by petitioner.51 Moreover, petitioner’s argument, that it was authorized by the BIR to use a computerized accounting system and as such is no longer required to secure an authority to print, has no leg to stand on because the April 17, 1997 letter-authority52 from the BIR was not formally offered in evidence.53 It insists that since the letter-authority is a mere correspondence containing matters that are not of public knowledge and incapable of unquestionable demonstration, the Court cannot take judicial notice thereof.54 And even if petitioner was authorized to use computerized invoices, it was not excused from complying with the stamping and invoicing requirements.55

Lastly, respondent contends that it is incorrect for petitioner to state that the invoicing requirement under the Tax Code finds relevance only in domestic or local sales. The provisions of the law and the BIR regulations on invoicing do not distinguish whether the transaction is an export or local sale.56

The Court’s Ruling

The petition is partially granted.

Since the issues are interrelated, the Court shall delve into and resolve them simultaneously.

The pertinent provision of the Tax Code on VAT on the sale of goods or properties, particularly with respect to export sales, is Section 106(A)(2)(a)(1).57 The provision reads:

Section 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax.-- xxx

x x x x

(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales.--The term ‘export sales’ means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

Based on the above provision, export sales, or sales outside the Philippines, are subject to VAT at 0% rate if made by a VAT-registered person.58 When applied to the tax base, the 0% rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund or tax credit certificate for the VAT previously charged by suppliers.59

In the instant case, petitioner, as a VAT-registered as well as PEZA-registered entity engaged in the export of advanced and large-scale ICs, is claiming a refund or issuance of a tax credit certificate in the amount ofP11,770,181.70 for VAT input taxes it paid on its domestic purchases of goods and services covering the period April 1, 1998 to June 30, 1998. For petitioner (or other VAT-registered persons or entities whose sales are zero-rated or effectively zero-rated) to validly claim a refund or tax credit, Section 112(A) of the Tax Code provides:

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

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.60

Under Sections 106 (A)(2)(a)(1) in relation to 112(A) of the Tax Code, a taxpayer engaged in zero-rated or effectively zero-rated transactions may apply for a refund or issuance of a tax credit certificate for input taxes paid attributable to such sales upon complying with the following requisites: (1) the taxpayer is engaged in sales which are zero-rated (like export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax; and (5) in case of zero-rated sales under Section 106(A)(2)(a)(1) and (2), Section 106(B), and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with BSP rules and regulations. It is added that, "where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of

creditable input tax due or paid cannot be directly or entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of the sales."

In this connection, petitioner, in order to prove that it was engaged in export sales during the second quarter of 1998, offered in evidence copies of summary of export sales, sales invoices, official receipts, airway bills, export declarations and certification of inward remittances during the said period.61 In addition, petitioner’s Certificate of Registration with RDO Control No. 96-540-00071362 issued by the BIR and Certificate of Registration No. 95-13363 issued by the PEZA were likewise offered in evidence to prove that it is a VAT-registered entity as well as an Ecozone export enterprise.

To the mind of the Court, these documentary evidence submitted by petitioner, e.g., summary of export sales, sales invoices, official receipts, airway bills and export declarations, prove that it is engaged in the "sale and actual shipment of goods from the Philippines to a foreign country." In short, petitioner is considered engaged in export sales (a zero-rated transaction) if made by a VAT-registered entity. Moreover, the certification of inward remittances attests to the fact of payment "in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the BSP." Thus, petitioner’s evidence, juxtaposed with the requirements of Sections 106 (A)(2)(a)(1) and 112(A) of the Tax Code, as enumerated earlier, sufficiently establish that it is entitled to a claim for refund or issuance of a tax credit certificate for creditable input taxes.

Significantly, the CTA and the CA have similarly found petitioner to be legally entitled to a claim for refund or issuance of tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods and services attributable to its zero-rated sales. They denied petitioner’s claim, however, on the ground that it purportedly failed to comply with the invoicing requirements under Sections 113 and 237 of the Tax Code since its sales invoices do not bear the BIR authority to print, and several of the invoices do not indicate the TIN-V.

On the latter point, the Court disagrees with the CTA and CA. As correctly argued by petitioner, there is no law or BIR rule or regulation requiring petitioner’s authority from the BIR to print its sales invoices (BIR authority to print) to be reflected or indicated therein. Sections 113, 237 and 238 of the Tax Code provide:

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

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

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

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

(B) Accounting Requirements. – Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance.64 (emphasis supplied)

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

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

The Commissioner may, in meritorious cases, exempt any person subject to an internal revenue tax from compliance with the provisions of this Section.65 (emphasis supplied)

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

No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, Taxpayer Identification Number (TIN) and business address of the person or entity to use the same, and such other information that may be required by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

All persons who print receipt or sales or commercial invoices shall maintain a logbook/register of taxpayer who availed of their printing services. The logbook/register shall contain the following information:

(1) Names, Taxpayer Identification Numbers of the persons or entities for whom the receipts or sales or commercial invoices are printed; and

(2) Number of booklets, number of sets per booklet, number of copies per set and the serial numbers of the receipts or invoices in each booklet. (emphasis supplied)

RR 2-90, as cited by respondent Commissioner, also states in its Section 19(d) that:

Section 19. Authentication and registration of books, register, or records; authority to print receipts, sales or commercial invoices; and registration and stamping of receipts and invoices.

x x x x

(d) Registration and stamping of receipts and invoices

Before being used, the printed receipts, sales or commercial invoices shall be registered with the revenue district officer where the principal place of business of the taxpayer is located within thirty (30) days from the date of printing the same. The registration of the printed receipts or invoices shall be evidenced by an appropriate stamp on the face of the taxpayer’s copy of the authority to print as well as on the front cover, on the back of the middle invoice or receipt and on the back of the last invoice or receipt of the registered booklet or pad, authenticated by the signature of the officer authorized to place the stamp thereon. (emphasis supplied)

RR 7-95, the Consolidated VAT Regulations, also states in Section 4.108-1 that:

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

1. the name, TIN and address of seller;

2. date of transaction;

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

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

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

6. the invoice value or consideration.

In the case of sale of real property subject to VAT and where the zonal or market value is higher than the actual consideration, the VAT shall be separately indicated in the invoice or receipt.

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

If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A "VAT-invoice" shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code.

The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records.

It is clear from the foregoing that while entities engaged in business are required to secure from the BIR an authority to print receipts or invoices and to issue duly registered receipts or invoices, it is not required that the BIR authority to print be reflected or indicated therein. Only the following items are required to be indicated in the receipts or invoices: (1) a statement that the seller is a VAT-registered entity followed by its TIN-V; (2) the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax; (3) date of the transaction; (4) quantity of merchandise; (5) unit cost; (6) description of merchandise or nature of service; (7) the name, business style, if any, and address of the purchaser, customer or client in the case of sales, receipt or transfers in the amount of P100.00 or more, or regardless of the amount, where the sale or transfer is made by a person liable to VAT to another person also liable to VAT, or

where the receipt is issued to cover payment made as rentals, commissions, compensations or fees; and (8) the TIN of the purchaser where the purchaser is a VAT-registered person.

It should be noted that petitioner is engaged in export sales, such that the purchasers of its goods are foreign entities, which are, logically, not VAT-registered in our country or liable to pay VAT in our jurisdiction. Items (7) and (8) in the above enumeration do not, thus, apply to petitioner; that is, they need not be reflected or indicated in the invoices or receipts, given that it is an entity engaged in export sales, and the purchasers of its goods which are foreign entities are not VAT-registered in our country nor liable to pay VAT in our jurisdiction.

In any case, the above cited provisions of law and revenue regulations do not provide that failure to reflect or indicate in the invoices or receipts the BIR authority to print, as well as the TIN-V, would result in the outright invalidation of these invoices or receipts. Neither is it provided therein that such omission or failure would result in the outright denial of a claim for tax credit/refund. Instead, Section 264 of the Tax Code imposes the penalty of fine and imprisonment for, among others, invoices or receipts that do not truly reflect or contain all the required information, to wit:

Section 264. Failure or Refusal to Issue Receipts or Sales or Commercial Invoices, Violations Related to the Printing of such Receipts or Invoices or Other Violations. –

(a) Any person who, being required under Section 237 to issue receipts or sales or commercial invoices, fails or refuses to issue such receipts or invoices, issues receipts or invoices that do not truly reflect and/or contain all the informations required to be shown therein or uses multiple or double receipts or invoices, shall, upon conviction for each act or omission, be punished by a fine of not less than One thousand pesos (P1,000) but not more than Fifty thousand pesos (P50,000) and suffer imprisonment of not less than two (2) years but not more than four (4) years.

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

(1) Printing of receipts or sales or commercial invoices without authority from the Bureau of Internal Revenue; or

(2) Printing of double or multiple sets of invoices or receipts;

(3) Printing of unnumbered receipts or sales or commercial invoices, not bearing the name, business style, Taxpayer Identification Number, and business address of the person or entity.

The appellate court’s reliance on RMC No. 42-2003 is misplaced. The said Circular clarified, inter alia, that failure to comply with the invoicing requirements on the documents supporting the sale of goods and services would result in the disallowance of the claim for refund or issuance of a tax credit certificate of creditable input taxes. The said Circular mentioned as an example the failure to state the TIN of the taxpayer in the invoice or receipt. However, in petitioner’s case, the principal ground for the denial of its claim for refund or issuance of a tax credit certificate is its failure to reflect or indicate in its invoices the BIR authority to print. As earlier discussed, the BIR authority to print is not one of the items required by law to be reflected or indicated in the invoices or receipts. In any case, the said Circular was issued on July 15, 2003 by then Commissioner Guillermo L. Parayno, Jr., while petitioner’s claim was filed on May 18, 1999. Hence, RMC No. 42-2003 cannot be applied retroactively because to do so would be prejudicial to petitioner. In a long line of cases,66 the Court has affirmed that the rulings, circulars, rules and regulations promulgated by the Commissioner on

Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers.

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

To stress, petitioner, as a VAT-registered entity, is engaged in export sales of advanced and large-scale ICs and, as such, under Section 106 (A)(2)(a)(1) of the Tax Code, its sales or transactions are subject to VAT at 0% rate. Further, subject to the requirements stated in Section 112(A), it is entitled to claim refund or issuance of a tax credit certificate for input VAT taxes attributable to its export sales. As the Court had the occasion to explain since no output VAT was imposed on the zero-rated export sales, what the government reimburses or refunds to the claimant is the input VAT paid – thus, the necessity for the input VAT paid to be substantiated by purchase invoices or official receipts.67 These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quality of goods sold and their selling price, and, taken collectively, are the best means to prove the input VAT payments of the claimant.68

In a claim for refund or issuance of a tax credit certificate attributable to zero-rated sales, what is to be closely scrutinized is the documentary substantiation of the input VAT paid, as may be proven by other export documents, rather than the supporting documents for the zero-rated export sales. And since petitioner has established by sufficient evidence that it is entitled to a refund or issuance of a tax credit certificate, in accordance with the requirements of Sections 106 (A)(2)(a)(1) and 112(A) of the Tax Code, then its claim should not be denied, notwithstanding its failure to state on the invoices the BIR authority to print and the TIN-V. Worthy of mentioning again is the fact that even the CTA and the CA have found petitioner to be legally entitled to a claim for refund or issuance of a tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods and services attributable to its zero-rated sales.

What applies to petitioner, as a PEZA-registered export enterprise, is the Court’s pronouncement that leniency in the implementation of the VAT is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in our laws.69 The incentives offered to PEZA enterprises, among which are tax exemptions and tax credits, ultimately redound to the benefit of the national economy, enticing as they do more enterprises to invest and do business within the zones, thus creating more employment opportunities and infusing more dynamism to the vibrant interplay of market forces.70

Even as the Court now holds that petitioner is legally entitled to a refund or issuance of a tax credit certificate of its unutilized VAT input taxes on domestic purchases of goods and services attributable to its zero-rated sales, the case shall nevertheless be remanded to the CTA for proper determination and computation of petitioner’s tax credit/refund, considering that in the Report71 of the independent auditor, Eliseo Aurellado, only the amount ofP9,688,809.00 was deemed as petitioner’s valid claim for tax credit.72 According to Aurellado, the difference ofP2,081,372.32 from petitioner’s input VAT claim of P11,770,181.70 was not supported by sufficient documentary proof.73 The Court, not being a trier of facts, cannot certainly decide this factual circumstance.

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Decision dated August 12, 2004 of the CA in CA-G.R. SP No. 79327 is REVERSED and SET ASIDE. The instant

case is REMANDED to the Court of Tax Appeals for the determination and computation of petitioner’s tax credit/refund.

G.R. No. 147295             February 16, 2007

THE COMMISIONER OF INTERNAL REVENUE, Petitioner, vs.ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.

D E C I S I O N

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the November 17, 2000 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite (Philippines) Hotel Corporation v. The Commissioner of Internal Revenue for Refund of VAT Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in Manila. It leases 6,768.53 square meters of the hotel’s premises to the Philippine Amusement and Gaming Corporation [hereafter, PAGCOR] for casino operations. It also caters food and beverages to PAGCOR’s casino patrons through the hotel’s restaurant outlets. For the period January (sic) 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on account of its tax exempt status. 1awphi1.net

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT to the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences of non-payment of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998, Acesite filed an administrative claim for refund with the CIR but the latter failed to resolve the same. Thus on 29 May 1998, Acesite filed a petition with the Court of Tax Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross rentals, respectively from PAGCOR shall, as a matter of course, be refunded to the petitioner for having been inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40, and considering further the principle of ‘solutio indebiti’ which requires the return of what has been

delivered through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64 computed as follows:

Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20)

January 1996 P 2,199.94

February 1996 26,205.04

March 1996 70,338.42 98,743.40

P30,054,148.64vvvvvvvvvvvvvv

WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The Respondent is hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64) immediately.

SO ORDERED.4

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was not only exempt from direct taxes but was also exempt from indirect taxes like the VAT and consequently, the transactions between respondent Acesite and PAGCOR were "effectively zero-rated" because they involved the rendition of services to an entity exempt from indirect taxes. Thus, the CA affirmed the CTA’s determination by ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate, we answer in the affirmative. We will however discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions. –

x x x x

(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority.

x x x x

(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by VAT-registered persons shall be subject to 0%.

x x x x

(b) Transactions subject to zero percent (0%) rated.—

x x x x

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case ofCommissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor’s tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact, that is, when it was not aware that the transactions it had with PAGCOR were zero-rated at the time it made the payments. In UST Cooperative Store v. City of Manila,6 we explained that "there is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made."7 Such payment is held to be not voluntary and, therefore, can be recovered or refunded.8

Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance with pertinent Revenue Regulations on exemptions during the proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as it paid the VAT under a mistake of fact. Hence, petitioner’s argument on this point is utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken supposition of the existence of a specific fact, where it would not have been known that the fact was otherwise, it may be recovered. The ground upon which the right of recovery rests is that money paid through misapprehension of facts belongs in equity and in good conscience to the person who paid it.9

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal Revenue v. Fireman’s Fund Insurance Company, where we held that: "Enshrined in the basic legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of this doctrine."10

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly.11 In the instant case, respondent Acesite had discharged this burden as found by the CTA and the CA. Indeed, the records show that Acesite proved its actual VAT payments subject to refund, as attested to by an independent Certified Public Accountant who was duly commissioned by the CTA. On the other hand, petitioner never disputed nor contested respondent’s testimonial and documentary evidence. In fact, petitioner never presented any evidence on its behalf.

One final word. The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR and this duty demands that the BIR should refund without any unreasonable delay what it has erroneously collected.12

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA is hereby AFFIRMED. No costs.

G.R. No. 163835               July 7, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Respondent.

D E C I S I O N

BRION, J.:

Through a petition for review on certiorari,1 petitioner Commissioner of Internal Revenue (CIR) seeks to set aside the decision dated October 1, 20032 and the resolution dated May 26, 20043 of the Court of Appeals (CA) in CA G.R. SP No. 61157. The assailed CA rulings affirmed the decision dated July 17, 20004 of the Court of Tax Appeals (CTA) in CTA Case No. 5551, partially granting respondent Eastern Telecommunications Philippines, Inc.’s (Eastern’s) claim for refund of unapplied input tax from its purchase and importation of capital goods.

THE FACTUAL ANTECEDENTS

Eastern is a domestic corporation granted by Congress with a telecommunications franchise under Republic Act (RA) No. 7617 on June 25, 1992. Under its franchise, Eastern is allowed to install, operate, and maintain telecommunications system throughout the Philippines.

From July 1, 1995 to December 31, 1996, Eastern purchased various imported equipment, machineries, and spare parts necessary in carrying out its business activities. The importations were subjected to a 10% value-added tax (VAT) by the Bureau of Customs, which was duly paid by Eastern.

On September 19, 1997, Eastern filed with the CIR a written application for refund or credit of unapplied input taxes it paid on the imported equipment during the taxable years 1995 and 1996 amounting to P22,013,134.00. In claiming for the tax refund, Eastern principally relied on Sec. 10 of RA No. 7617, which allows Eastern to pay 3% of its gross receipts in lieu of all taxes on this franchise or earnings thereof.5 In the alternative, Eastern cited Section 106(B) of the National Internal Revenue Code of 19776 (Tax Code) which authorizes a VAT-registered taxpayer to claim for the issuance of a tax credit certificate or a tax refund of input taxes paid on capital goods imported or purchased locally to the extent that such input taxes7 have not been applied against its output taxes.8

To toll the running of the two-year prescriptive period under the same provision, Eastern filed an appeal with the CTA on September 25, 1997 without waiting for the CIR’s decision on its application for refund. The CIR filed an Answer to Eastern’s appeal in which it raised the following special and affirmative defenses:

6. [Eastern’s] claim for refund/tax credit is pending administrative investigation;

x x x x

8. [Eastern’s] exempting clause under its legislative franchise x x x should be understood or interpreted as written, meaning, the 3% franchise tax shall be collected as substitute for any internal revenue taxes x x x imposed on its franchise or gross receipts/earnings thereof x x x;

9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither a tax on franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of importing goods whether or not the taxpayer is engaged in business, and regardless of whether the imported goods are intended for sale, barter or exchange;

10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance sales tax and compensating tax x x x. Accordingly, the 3% franchise tax did not substitute the 10% [VAT]

on [Eastern’s] importation of equipment, machineries and spare parts for the use of its telecommunication system;

11. Tax refunds are in the nature of tax exemptions. As such, they are regarded in derogation of sovereign authority and to be construed in strictissimi juris against the person or entity claiming the exemption. The burden is upon him who claims the exemption in his favour and he must be able to justify his claim by the clearest grant of organic or statute law and cannot be permitted to exist upon vague implication x x x;

12. Taxes paid and collected are presumed to have been made in accordance with the laws and regulations; and

13. It is incumbent upon the taxpayer to establish its right to the refund and failure to sustain the burden is fatal to the claim for refund.9

Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the refund/credit of the unapplied input taxes, not on the basis of the "in lieu of all taxes" provision of its legislative franchise,10 but rather, on Section 106(B) of the Tax Code, which states:

SECTION 106. Refunds or tax credits of input tax.

x x x x

(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.11 [Emphases supplied.]

The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed refund/credit as all the elements of the above provision were present: (1) Eastern was a VAT-registered entity which paid 10% input taxes on its importations of capital equipment; (2) this input VAT remained unapplied as of the first quarter of 1997; and (3) Eastern seasonably filed its application for refund/credit within the two-year period stated in the law. However, the CTA noted that Eastern was able to substantiate only P21,487,702.00 of its claimed amount ofP22,013,134.00. The difference represented input taxes that were allegedly paid but were not supported by the corresponding receipts, as found by an independent auditor. Moreover, it excluded P5,360,634.00 in input taxes on imported equipment for the year 1995, even when these were properly documented as they were already booked by Eastern as part of the cost. Once input tax becomes part of the cost of capital equipment, it necessarily forms part of depreciation. Thus, to grant the refund of the 1995 creditable input tax amounts to twice giving Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA granted in part Eastern’s appeal by declaring it entitled to a tax refund of P16,229,100.00, representing unapplied input taxes on imported capital goods for the taxable year 1996.12

The CIR filed, on August 3, 2000, a motion for reconsideration13 of the CTA’s decision. About a month and a half later, it filed a supplemental motion for reconsideration dated September 15, 2000.14 The CTA denied the CIR’s motion for reconsideration in its resolution dated September 20, 2000.15 The CIR then elevated the case to the CA through a petition for review under Rule 43 of the Rules of Court. The CA affirmed the CTA ruling through its decision dated October 1, 200316 and its resolution dated May 26, 2004,17 denying the motion for reconsideration. Hence, the present petition.

THE PETITIONER’S ARGUMENTS

The CIR takes exception to the CA’s ruling that Eastern is entitled to the full amount of unapplied input taxes paid for its purchase of imported capital goods that were substantiated by the corresponding receipts and invoices. The CIR posits that, applying Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a tax refund of only P8,814,790.15, instead of the P16,229,100.00 adjudged by the CTA and the CA. Section 104(A) of the Tax Code states:

SEC. 104. Tax Credits. –

(a) Creditable Input tax. -

x x x x

A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed input tax credit as follows:

(A) Total input tax which can be directly attributed to transactions subject to value-added tax; and

(B) A ratable portion of any input tax which cannot be directly attributed to either activity.18 [Emphases supplied.]

To be entitled to a tax refund of the full amount of P16,229,100.00, the CIR asserts that Eastern must prove that (a) it was engaged in purely VAT taxable transactions and (b) the unapplied input taxes it claims as refund were directly attributable to transactions subject to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters of 1996, however, showed that it earned income from both transactions subject to VAT and transactions exempt from VAT;19 the returns reported income earned from taxable sales, zero-rated sales, and exempt sales in the following amounts:

1996 Taxable SalesZero-Rated

SalesExempt Sales

1st Quarter 820,673.70 --- ---

2nd Quarter 3,361,618.59 225,088,899.07 140,111,655.85

3rd Quarter 2,607,168.96 169,821,537.80 187,712,657.16

4th Quarter 1,134,942.71 162,530,947.40 147,717,028.53

TOTAL 7,924,403.96 557,441,384.27 475,541,341.54

Total Amount of Sales1,040,907,129.77

The taxable sales and zero-rated sales are considered transactions subject to VAT,20 while exempt sales refer to transactions not subject to VAT.

Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that this constitutes as an admission on Eastern’s part that it engaged in transactions not subject to VAT. Hence, the proportionate allocation of the tax credit to VAT and non-VAT transactions provided in

Section 104(A) of the Tax Code should apply. Eastern is then entitled to only P8,814,790.15 as the ratable portion of the tax credit, computed in the following manner:

Taxable Sales + Zero-rated Sales

Total Salesx Input Tax as found by the CTA = Refundable input tax

7,924,403.96 + 557,445,384.97

1,040,907,129.77x 16,229,100.00 = P8,814,790.15

THE RESPONDENT’S ARGUMENTS

Eastern objects to the arguments raised in the petition, alleging that these have not been raised in the Answer filed by the CIR before the CTA. In fact, the CIR only raised the applicability of Section 104(A) of the Tax Code in his supplemental motion for reconsideration of the CTA’s ruling which, notably, was filed a month and a half after the original motion was filed, and thus beyond the 15-day reglementary period.21 Accordingly, the applicability of Section 104(A) was never validly presented as an issue before the CTA; this, Eastern presumes, is the reason why it was not discussed in the CTA’s resolution denying the motion for reconsideration. Eastern claims that for the CIR to raise such an issue now would constitute a violation of its right to due process; following settled rules of procedure and fair play, the CIR should not be allowed at the appeal level to change his theory of the case.

Moreover, in raising the question of whether Eastern was in fact engaged in transactions not subject to VAT and whether the unapplied input taxes can be directly attributable to transactions subject to VAT, Eastern posits that the CIR is effectively raising factual questions that cannot be the subject of an appeal by certiorari before the Court.

Even if the CIR’s arguments were considered, Eastern insists that the petition should nevertheless be denied since the CA found that there was no evidence in the claim that it was engaged in non-VAT transactions. The CA has ruled that:

The following requirements must be present before [Section 104(A)] of the [1977 Tax Code] can be applied, to wit:

1. The person claiming the creditable input tax must be VAT-registered;

2. Such person is engaged in a transaction subject to VAT;

3. The person is also engaged in other transactions not subject to VAT; and

4. The ratable portion of any input tax cannot be directly attributed to either activity.

In the case at bar, the third and fourth requisites are not extant. It is undisputed that [Eastern] is VAT-registered and the importation of [Eastern’s] telecommunications equipment, machinery, spare parts, fiber optic cables, and the like, as found by the CTA, is a transaction subject to VAT. However, there is no evidence on record that would evidently show that respondent is also engaged in other transactions that are not subject to VAT. [Emphasis supplied.]22

Given the parties’ arguments, the issue for resolution is whether the rule in Section 104(A) of the Tax Code on the apportionment of tax credits can be applied in appreciating Eastern’s claim for tax refund, considering that the matter was raised by the CIR only when he sought reconsideration of the CTA ruling?

THE COURT’S RULING

We find the CIR’s petition meritorious.

The Rules of Court prohibits raising new issues on appeal; the question of the applicability of Section 104(A) of the Tax Code was already raised but the tax court did not rule on it

Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues on appeal:

SEC. 15. Questions that may be raised on appeal. – Whether or not the appellant has filed a motion for new trial in the court below, he may include in his assignment of errors any question of law or fact that has been raised in the court below and which is within the issues framed by the parties.

The general rule is that appeals can only raise questions of law or fact that (a) were raised in the court below, and (b) are within the issues framed by the parties therein.23 An issue which was neither averred in the pleadings nor raised during trial in the court below cannot be raised for the first time on appeal.24 The rule was made for the benefit of the adverse party and the trial court as well. Raising new issues at the appeal level is offensive to the basic rules of fair play and justice and is violative of a party’s constitutional right to due process of law. Moreover, the trial court should be given a meaningful opportunity to consider and pass upon all the issues, and to avoid or correct any alleged errors before those issues or errors become the basis for an appeal.25

Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax Code only in his supplemental motion for reconsideration of the CTA decision (which was even belatedly filed), the issue was not properly and timely raised and, hence, could not be considered by the CTA. By raising the issue in his appeal before the CA, the CIR has violated the above-cited procedural rule.

Contrary to Eastern’s claim, we find that the CIR has previously questioned the nature of Eastern’s transactions insofar as they affected the claim for tax refund in his motion for reconsideration of the CTA decision, although it did not specifically refer to Section 104(A) of the Tax Code. We quote relevant portions of the motion:

[W]e maintain that [Eastern’s] claims are not creditable input taxes under [Section 104(A) of the Tax Code]. What the law contemplates as creditable input taxes are only those paid on purchases of goods and services specifically enumerated under [Section 104 (A)] and that such input tax must have been paid by a VAT[-]registered person/entity in the course of trade or business. It must be noted that [Eastern] failed to prove that such purchases were used in their VAT[-]taxable business. [Eastern’s pieces of] evidence are not purchases of capital goods and do not fall under the enumeration x x x.

It is significant to point out here that refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT[-]taxable business. x x x a perusal of the evidence submitted before [the CTA] does not show that the alleged capital goods were used in VAT[-]taxable business of [Eastern] x x x. [Emphases supplied.]26

In raising these matters in his motion for reconsideration, the CIR put forward the applicability of Section 104(A) because, essentially, the applicability of the provision boils down to the question of whether the purchased capital goods which a taxpayer paid input taxes were also used in a VAT-taxable business, i.e., transactions that were subject to VAT, in order for them to be refundable/creditable. Once proved that the taxpayer used the purchased capital goods in a both VAT taxable and non-VAT taxable business, the proportional allocation of tax credits stated in the law necessarily applies. This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95, entitled Consolidated Value-Added Tax Regulations, which states:

SEC. 4.106-1. Refunds or tax credits of input tax. – x x x x

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

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations. [Emphasis supplied.]

That the CTA failed to rule on this question when it resolved the CIR’s motion for reconsideration should not be taken against the CIR. It was the CTA which committed an error when it failed to avail of that "meaningful opportunity to avoid or correct any alleged errors before those errors become the basis for an appeal."27

1avvphi1

Exceptions to the general rule; Eastern’s VAT returns reporting income from exempt sales are matters of record that the tax court should have considered

The rule against raising new issues on appeal is not without exceptions; it is a procedural rule that the Court may relax when compelling reasons so warrant or when justice requires it. What constitutes good and sufficient cause that would merit suspension of the rules is discretionary upon the courts.28 Former Senator Vicente Francisco, a noted authority in procedural law, cites an instance when the appellate court may take up an issue for the first time:

The appellate court may, in the interest of justice, properly take into consideration in deciding the case matters of record having some bearing on the issue submitted which the parties failed to raise or the lower court ignored, although they have not been specifically raised as issues by the pleadings. This is in consonance with the liberal spirit that pervades the Rules of Court, and the modern trend of procedure which accord the courts broad discretionary power, consistent with the orderly administration of justice, in the decision of cases brought before them.29 [Emphasis supplied.]

As applied in the present case, even without the CIR raising the applicability of Section 104(A), the CTA should have considered it since all four of Eastern’s VAT returns corresponding to each taxable quarter of 1996 clearly stated that it earned income from exempt sales, i.e., non-VAT taxable sales. Eastern’s quarterly VAT returns are matters of record. In fact, Eastern included them in its formal offer of evidence before the CTA "to prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-rated sales." By declaring income from exempt sales, Eastern effectively admitted that it engaged in transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill any output tax on his sales to his customers and, corollarily, is not allowed any credit or refund of the input taxes he paid on his purchases.30 This non-crediting of input taxes in exempt transactions is the underlying reason why the Tax Code adopted the rule on apportionment of tax credits under Section

104(A) whenever a VAT-registered taxpayer engages in both VAT taxable and non-VAT taxable sales. In the face of these disclosures by Eastern, we thus find the CA’s the conclusion that "there is no evidence on record that would evidently show that [Eastern] is also engaged in other transactions that are not subject to VAT" to be questionable.31

Also, we disagree with the CA’s declaration that:

The mere fact that [Eastern’s] Quarterly VAT Returns confirm that [Eastern’s] transactions involved zero-rated sales and exempt sales do not sufficiently establish that the same were derived from [Eastern’s] transactions that are not subject to VAT. On the contrary, the transactions from which [Eastern’s] sales were derived are subject to VAT but are either zero[-]rated (0%) or otherwise exempted for falling within the transactions enumerated in [Section 102(B) or Section 103] of the Tax Code.32 [Emphasis supplied.]

Section 103 of the Tax Code33 is an enumeration of transactions exempt from VAT. Explaining the relation between exempt transactions in Section 103 and claims for tax refunds, the Court declared in CIR v. Toshiba Equipment (Phils.), Inc. that:

Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.34

The mere declaration of exempt sales in the VAT returns, whether based on Section 103 of the Tax Code or some other special law, should have prompted the CA to apply Section 104(A) of the Tax Code to Eastern’s claim. It was thus erroneous for the appellate court to rule that the declaration of exempt sales in Eastern’s VAT return, which may correspond to exempt transactions under Section 103, does not indicate that Eastern was also involved in non-VAT transactions.

Exception to general rule; taxpayer claiming refund has the duty to prove entitlement thereto

Another exemption from the rule against raising new issues on appeal is when the question involves matters of public importance.35

The power of taxation is an inherent attribute of sovereignty; the government chiefly relies on taxation to obtain the means to carry on its operations. Taxes are essential to its very existence;36 hence, the dictum that "taxes are the lifeblood of the government." For this reason, the right of taxation cannot easily be surrendered; statutes granting tax exemptions are considered as a derogation of the sovereign authority and are strictly construed against the person or entity claiming the exemption. Claims for tax refunds, when based on statutes granting tax exemption or tax refund, partake of the nature of an exemption; thus, the rule of strict interpretation against the taxpayer-claimant similarly applies.37

The taxpayer is charged with the heavy burden of proving that he has complied with and satisfied all the statutory and administrative requirements to be entitled to the tax refund. This burden cannot be offset by the non-observance of procedural technicalities by the government’s tax agents when the non-observance of the remedial measure addressing it does not in any manner prejudice the taxpayer’s due process rights, as in the present case.

Eastern cannot validly claim to have been taken by surprise by the CIR’s arguments on the relevance of Section 104(A) of the Tax Code, considering that the arguments were based on the reported exempt sales in the VAT returns that Eastern itself prepared and formally offered as evidence. Even if we were to consider the CIR’s act as a lapse in the observance of procedural rules, such lapse does not work to entitle Eastern to a tax refund when the established and uncontested facts have shown otherwise. Lapses in the literal observance of a rule of procedure may be overlooked when they have not prejudiced the adverse party and especially when they are more consistent with upholding settled principles in taxation.

WHEREFORE, we GRANT the petitioner’s petition for review on certiorari, and REVERSE the decision of the Court of Appeals in CA G.R. SP No. 61157, promulgated on October 1, 2003, as well as its resolution of May 26, 2004. We order the REMAND of the case to the Court of Tax Appeals to determine the proportionate amount of tax credit that respondent is entitled to, consistent with our ruling above. Costs against the respondent.