G.R. No.

115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,

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

RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The
motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception of
the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in
G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine Airlines,
Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544, and Juan
T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a
rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino, Kilosbayan, Inc.,
Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate previous
claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of Representatives as required
by Art. VI, §24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
where it passed three readings and that afterward it was sent to the Senate where after first reading it was referred
to the Senate Ways and Means Committee, they complain that the Senate did not pass it on second and third
readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it approved on May 24,
1994. Petitioner Tolentino adds that what the Senate committee should have done was to amend H. No. 11197 by
striking out the text of the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a
House bill and the Senate version just becomes the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House
revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, the
Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM
FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON
CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation
of H. No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by
the Senate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY
FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22,
1992. This Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August
2, 1989, and S. No. 807, which was approved by the Senate on October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of
House and Senate bills. These are the following, with indications of the dates on which the laws were approved by
the President and dates the separate bills of the two chambers of Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE
THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE
PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL
GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE

PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,

INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT
THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF
GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY
CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO

DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT,
AND FOR OTHER PURPOSES (November 9, 1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE

DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK

LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL
PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to
propose amendments to bills required to originate in the House, passed its own version of a House revenue
measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of
the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere matter
of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did in this
case, a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into Consideration . .
. H.B. 11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the subject matter
of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with another which covers a subject
distinct from that proposed in the original bill or resolution. (emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses less
power than the U.S. Senate because of textual differences between constitutional provisions giving them the power
to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may
propose or concur with amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

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.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on other
Bills" in the American version, according to petitioners, shows the intention of the framers of our Constitution to
restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as to
show that these bills were not to be like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional intent are
nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the 1935
Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to change to a
bicameral legislature, it became necessary to provide for the procedure for lawmaking by the Senate and the House
of Representatives. The work of proposing amendments to the Constitution was done by the National Assembly,
acting as a constituent assembly, some of whose members, jealous of preserving the Assembly's lawmaking
powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills
shall originate exclusively in the Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be deemed
enacted and may be submitted to the President for corresponding action. In the event that the
Senate should fail to finally act on any such bills, the Assembly may, after thirty days from the
opening of the next regular session of the same legislative term, reapprove the same with a vote of
 two-thirds of all the members of the Assembly. And upon such reapproval, the bill shall be deemed
enacted and may be submitted to the President for corresponding action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted
everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and embodied
in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and ratified by them in the elections held on June
18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present Constitution was
derived. It explains why the word "exclusively" was added to the American text from which the framers of the
Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the defeat of
the proposal, the power of the Senate to propose amendments must be understood to be full, plenary and complete
"as on other Bills." Thus, because revenue bills are required to originate exclusively in the House of
Representatives, the Senate cannot enact revenue measures of its own without such bills. After a revenue bill is
passed and sent over to it by the House, however, the Senate certainly can pass its own version on the same
subject matter. This follows from the coequality of the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the
following commentaries:

The power of the Senate to propose or concur with amendments is apparently without restriction. It
would seem that by virtue of this power, the Senate can practically re-write a bill required to come
from the House and leave only a trace of the original bill. For example, a general revenue bill passed
by the lower house of the United States Congress contained provisions for the imposition of an
inheritance tax . This was changed by the Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it to
make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))

The above-mentioned bills are supposed to be initiated by the House of Representatives because it
is more numerous in membership and therefore also more representative of the people. Moreover,
its members are presumed to be more familiar with the needs of the country in regard to the
enactment of the legislation involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with
amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills must "originate exclusively in the House of Representatives," it also
adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school text, a
committee to which a bill is referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections or
altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it
will be known as a committee bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House by prescribing
that the number of the House bill and its other parts up to the enacting clause must be preserved although the text
of the Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere
technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as
much an amendment of H. No. 11197 as any which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is
an independent and distinct bill. Hence their repeated references to its certification that it was passed by the Senate
"in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that
there is something substantially different between the reference to S. No. 1129 and the reference to H. No. 11197.
From this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is
the product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the
corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S.
No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences between
the two bills, at the same time indicates that the provisions of the Senate bill were precisely intended to be
amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and three
readings. It was enough that after it was passed on first reading it was referred to the Senate Committee on Ways
and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before the two bills
could be referred to the Conference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House bill
and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a
conference committee, the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice versa. As Congressman Duran
put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by
the House but not passed by the Senate, and a Senate bill of a similar nature is passed in the
Senate but never passed in the House, can the two bills be the subject of a conference, and can a
law be enacted from these two bills? I understand that the Senate bill in this particular instance does
not refer to investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of deposits in banks
but also investigation of investments in government securities. Now, since the two bills differ in their
subject matter, I believe that no law can be enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this
where a conference should be had. If the House bill had been approved by the Senate, there would
have been no need of a conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we are now considering the
report of that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and unrelated
measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the President
separately certified to the need for the immediate enactment of these measures, his certification was ineffectual and
void. The certification had to be made of the version of the same revenue bill which at the moment was being
considered. Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many bills
as are presented in a house of Congress even though the bills are merely versions of the bill he has already
certified. It is enough that he certifies the bill which, at the time he makes the certification, is under consideration.
Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that
matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it was the
one which at that time was being considered by the House. This bill was later substituted, together with other bills,
by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision that the phrase
"except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, §26 (2) qualifies not
only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must have passed "three
readings on separate days." There is not only textual support for such construction but historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in its
final form furnished its Members at least three calendar days prior to its passage, except when the
President shall have certified to the necessity of its immediate enactment. Upon the last reading of a
bill, no amendment thereof shall be allowed and the question upon its passage shall be taken
immediately thereafter, and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):
 (2) No bill 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 the Members three days before its passage,
except when the Prime Minister 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.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the present
Constitution, thus:

(2) 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.

The exception is based on the prudential consideration that if in all cases three readings on separate days are
required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity which it is meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the
Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit does
not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was an
urgent need for consideration of S. No. 1630, because they responded to the call of the President by voting on the
bill on second and third readings on the same day. While the judicial department is not bound by the Senate's
acceptance of the President's certification, the respect due coequal departments of the government in matters
committed to them by the Constitution and the absence of a clear showing of grave abuse of discretion caution a
stay of the judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was discussed
for six days. Only its distribution in advance in its final printed form was actually dispensed with by holding the voting
on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time between the submission
of the bill on February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it was finally
voted on by the Senate on third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the members
of Congress of what they must vote on and (2) to give them notice that a measure is progressing through the
enacting process, thus enabling them and others interested in the measure to prepare their positions with reference
to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These
purposes were substantially achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of Attorneys
for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of full public
disclosure and the people's right to know (Art. II, §28 and Art. III, §7) the Conference Committee met for two days in
executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold such sessions with only the
conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring open
sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open
hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff members
were present. These were staff members of the Senators and Congressmen, however, who may be presumed to be
their confidential men, not stenographers as in this case who on the last two days of the conference were excluded.
There is no showing that the conferees themselves did not take notes of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, conferees keep
notes of their meetings. Above all, the public's right to know was fully served because the Conference Committee in
this case submitted a report showing the changes made on the differing versions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must contain "a detailed,
sufficiently explicit statement of the changes in or other amendments." These changes are shown in the bill attached
to the Conference Committee Report. The members of both houses could thus ascertain what changes had been
made in the original bills without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of
1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of the conference
committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the
Rules of this House which provides specifically that the conference report must be accompanied by
a detailed statement of the effects of the amendment on the bill of the House. This conference
committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of
order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of
order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from Pangasinan,
but this provision applies to those cases where only portions of the bill have been amended. In this
case before us an entire bill is presented; therefore, it can be easily seen from the reading of the bill
what the provisions are. Besides, this procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions
of the Rules, and the reason for the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases inserted in or deleted from the
provisions of the bill included in the conference report, and we cannot understand what those words
and phrases mean and their relation to the bill. In that case, it is necessary to make a detailed
statement on how those words and phrases will affect the bill as a whole; but when the entire bill
itself is copied verbatim in the conference report, that is not necessary. So when the reason for the
Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was
upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are
germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA
703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It may propose an entirely new provision. What is
important is that its report is subsequently approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been added by the conference committee, there
was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no amendment thereto
shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that an amendment
was made upon the last reading of the bill that eventually became R.A. No. 7354 and
that copies thereof in its final form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in accordance
with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official assurances from a
coordinate department of the government, to which we owe, at the very least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a 1979 study:

Conference committees may be of two types: free or instructed. These committees may be given
instructions by their parent bodies or they may be left without instructions. Normally the conference
committees are without instructions, and this is why they are often critically referred to as "the little
legislatures." Once bills have been sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new measures that were not in the
original legislation. No minutes are kept, and members' activities on conference committees are
difficult to determine. One congressman known for his idealism put it this way: "I killed a bill on
export incentives for my interest group [copra] in the conference committee but I could not have
done so anywhere else." The conference committee submits a report to both houses, and usually it
is accepted. If the report is not accepted, then the committee is discharged and new members are
appointed.
 (R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A
COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that
conference committees here are no different from their counterparts in the United States whose vast powers we
noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, §16(3) each house has the
power "to determine the rules of its proceedings," including those of its committees. Any meaningful change in the
method and procedures of Congress or its committees must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the
Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed, levied,
established, assessed or collected by any municipal, city, provincial or national authority or government agency,
now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National Internal Revenue
Code, which provides as follows:

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

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending §103, as follows:

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

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY]
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any
provision of the NIRC which stands in the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to P.D.
No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is already stated
in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is §103(q), in order to
widen the base of the VAT. Actually, it is the bill which becomes a law that is required to express in its title the
subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as
among the provisions sought to be amended. We are satisfied that sufficient notice had been given of the pendency
of these bills in Congress before they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A.
No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER
PURPOSES CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was contended
that the withdrawal of franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court held:
 To require every end and means necessary for the accomplishment of the general objectives of the
statute to be expressed in its title would not only be unreasonable but would actually render
legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:

The details of a legislative act need not be specifically stated in its title, but matter
germane to the subject as expressed in the title, and adopted to the accomplishment
of the object in view, may properly be included in the act. Thus, it is proper to create
in the same act the machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its execution. If
such matters are properly connected with the subject as expressed in the title, it is
unnecessary that they should also have special mention in the title. (Southern Pac.
Co. v. Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not
exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws
which single out the press or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining those
granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory taxation
of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law
could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other
businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI.
The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers whose weekly circulation
was over 20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large
papers were critical of Senator Huey Long who controlled the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d
295 (1983), the tax was found to be discriminatory because although it could have been made liable for the sales
tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press was
not. Instead, the press was exempted from both taxes. It was, however, later made to pay a special use tax on the
cost of paper and ink which made these items "the only items subject to the use tax that were component of goods
to be sold at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that the goal
of regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would
therefore appear that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and
unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL,
petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and many more are
likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden the base of
the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are
profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these transactions will
suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor
General says, such exemptions are granted, in some cases, to encourage agricultural production and, in other
cases, for the personal benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of
feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) or for professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
 (c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the press because "even
nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in support of this
assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the First
Amendment is not so restricted. A license tax certainly does not acquire constitutional validity
because it classifies the privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such equality in treatment does not
save the ordinance. Freedom of press, freedom of speech, freedom of religion are in preferred
position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence,
although its application to others, such those selling goods, is valid, its application to the press or to religious
groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is
unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a
preacher. It is quite another thing to exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise. It
was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining
the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue purposes. To subject the press to its payment is
not to burden the exercise of its right any more than to make the press pay income tax or subject it to general
regulation is not to violate its freedom under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the
sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that
to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any
other economic imposition that might make the right to disseminate religious doctrines costly. Otherwise, to follow
the petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible burden on
the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by §7 of R.A. No.
7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions
such as those relating to accounting in §108 of the NIRC. That the PBS distributes free bibles and therefore is not
liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies. At any rate
whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax by the
Commissioner of Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA
asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt
without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress
shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real
property by installment or on deferred payment basis would result in substantial increases in the monthly
amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the
buyer did not anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources are
cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old one,
interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may
impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless
prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing
laws but also "the reservation of the essential attributes of sovereignty, is . . . read into contracts as a postulate of
the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful authority of the government
and no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L.
Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products,
food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property
which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax,
but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless,
should likewise be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services
was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in
error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of petitioner to
the payment of the VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less poor"
in the example given by petitioner, because the second group or middle class can afford to rent houses in the
meantime that they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is
inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held
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 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912
(1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1) which provides
that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at
the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms
and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716
merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in
these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI,
§28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .

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
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.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines,
Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide for a
progressive system of taxation because the law imposes a flat rate of 10% and thus places the tax burden on all
taxpayers without regard to their ability to pay.

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).

Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of
feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and implements,
by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and services which
are used or availed of mainly by higher income groups. These include real properties held primarily for sale to
customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and
other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion
picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants
and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common
carriers, services of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues
not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to adjudication
the impact of actuality. There is no factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been
assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering
that petitioner here would condemn such a provision as void on its face, he has not made out a
case. This is merely to adhere to the authoritative doctrine 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.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of
adjudication would result in a multiplicity of suits. This need not be the case, however. Enforcement of the law may
give rise to such a case. A test case, provided it is an actual case and not an abstract or hypothetical one, may thus
be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not really settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, §5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a court to hear and
decide cases pending between parties who have the right to sue and be sued in the courts of law and equity" (Lamb
v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII,
§5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of
1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others." (United States v.
Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court cannot inquire into any
allegation of grave abuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the Philippines
(CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy of granting tax
exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To subject
cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No.
175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes but in 1984,
because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in
1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December 31, 1991,
but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution
"repudiated the previous actions of the government adverse to the interests of the cooperatives, that is, the repeated
revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by
way of the grant of tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of opportunities, income,
and wealth; a sustained increase in the amount of goods and services produced by the nation for the
benefit of the people; and an expanding productivity as the key to raising the quality of life for all,
especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and foreign markets. However, the
State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and
similar collective organizations, shall be encouraged to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth of cooperatives as
instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives by
withdrawing their exemption from income and sales taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did was
to withdraw the exemptions and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, §2 had
restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but then
again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the Constitution does not really require
that cooperatives be granted tax exemptions in order to promote their growth and viability. Hence, there is no basis
for petitioner's assertion that the government's policy toward cooperatives had been one of vacillation, as far as the
grant of tax privileges was concerned, and that it was to put an end to this indecision that the constitutional
provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax exemptions, but
that is left to the discretion of Congress. If Congress does not grant exemption and there is no discrimination to
cooperatives, no violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from taxation.
Such theory is contrary to the Constitution under which only the following are exempt from taxation: charitable
institutions, churches and parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal protection
of the law because electric cooperatives are exempted from the VAT. The classification between electric and other
cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently rests on a
congressional determination that there is greater need to provide cheaper electric power to as many people as
possible, especially those living in the rural areas, than there is to provide them with other necessities in life. We
cannot say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have in
fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now come
to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that its enactment
by the other branches of the government does not constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to Congress as the body which is electorally responsible,
remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of
the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267,
270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should
enforce the public accountability of legislators, that those who took part in passing the law in question by voting for it
in Congress should later thrust to the courts the burden of reviewing measures in the flush of enactment. This Court
does not sit as a third branch of the legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order
previously issued is hereby lifted.

SO ORDERED.
G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

PARDO, J.:

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

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

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

P1,679,155.00
Taxable sale/receipt ===========
=
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3

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

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

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

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting the
Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates,
relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were
on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing
services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it
was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in
taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

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

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

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

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of
Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax
Appeals, the dispositive portion of which reads:

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

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

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

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

We give due course to the petition.

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

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

We agree with the Commissioner.

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

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

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

We disagree.

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

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

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

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

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business.
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization
or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at
every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance
of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires
the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is
profit-oriented.

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

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

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

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining
liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT. 1awp++i1

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

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered
by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the
performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of
services subject to VAT. As the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great
weight. 14 Also, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to
the study and consideration of tax cases and has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the
COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds
petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's
liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods and services, in the
course of trade or business, as defined by law, is subject to VAT.

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

No costs.

SO ORDERED. 1âw phi 1.nêt

G.R. No. 193301 March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the
Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513.
The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009 Amended Decision5 of
the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The
CTA First Division denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for the
first and second quarters of taxable year 2003 for being filed out of time (CTA Case Nos. 7227 and 7287). The CTA
First Division, however, ordered the

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax (VAT)
for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).

G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the
Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its
Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s petition for review
in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnership’s (Mindanao I) claims for
refund or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters (CTA
Case No. 7318) of 2003.

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added
taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production Facilities accredited by
the Department of Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA),
effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that
sales of power by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I
and II filed with the CIR claims for refund or tax credit of accumulated unutilized and/or excess input taxes due to
VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of Mindanao
II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227, Mindanao II claims
a tax refund or credit of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax
refund or credit of ₱1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax
refund or credit of ₱3,521,129.50 for the third and fourth quarters of 2003.

The CTA First Division’s narration of the pertinent facts is as follows:

xxxx

On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with the
Philippine National Oil Corporation – Energy Development Company (PNOC-EDC) for finance, engineering, supply,
installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant,
provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert
the steam into electric capacity and energy for PNOC-EDC and shall deliver the same to the National Power
Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated power and
delivery of electric capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
 xxxx

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates
therefrom creditable input taxes. Pursuant to the provisions of the National Internal Revenue Code (NIRC),
Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax liability. Considering,
however that its only revenue-generating activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax
credits remain unutilized.

Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the EPIRA
in computing for its VAT payable when it filed its Quarterly VAT Returns on the following dates:

CTA Case No. Period Covered Date of Filing

(2003)
Original Return Amended Return
7227 1st Quarter April 23, 2003 July 3, 2002 (sic),
April 1, 2004 &
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity,
Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue District
Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR. Hence,
these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of
2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao II, these petitions
were consolidated on March 15, 2006 as they involve the same parties and the same subject matter. The only
difference lies with the taxable periods involved in each petition.11

The Court of Tax Appeals’ Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin requirements
for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales from power generation.
The CTA First Division also stated that Mindanao II complied with five requirements to be entitled to a refund:

1. There must be zero-rated or effectively zero-rated sales;

2. That input taxes were incurred or paid;

3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales;

4. That the input VAT payments were not applied against any output VAT liability; and

5. That the claim for refund was filed within the two-year prescriptive period.13

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s return as
well as its administrative and judicial claims, and concluded that Mindanao II’s administrative and judicial claims
were timely filed in compliance with this Court’s ruling in Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive period
for filing a VAT refund claim should not be counted from the close of the quarter but from the date of the filing of the
VAT return. As ruled in Atlas, VAT liability or entitlement to a refund can only be determined upon the filing of the
quarterly VAT return.

CTA Period Date Filing

Case Covered
Original Amended Administrative Judicial
No. (2003)
Return Return Return Claim
7227 1st Quarter 23 April 1 April 13 April 2005 22 April 2005
2003 2004
7287 2nd 22 July 1 April 13 April 2005 7 July 2005
Quarter 2003 2004
 7317 3rd Quarter 25 Oct. 1 April 13 April 2005 9 Sept. 2005
2003 2004
7317 4th Quarter 26 Jan. 1 April 13 April 2005 9 Sept.
2004 2004 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II filed its
VAT returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July 2005,
and 9 September 2005 were timely filed in accordance with Atlas.

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of ₱7,703,957.79, after
disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully depreciated
₱200,000.00 Nissan Patrol. The input taxes amounting to ₱522,059.91 were disallowed for failure to meet invoicing
requirements, while the input VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82 because the output
VAT for the sale was not included in the VAT declarations.

The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN MILLION
SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS (₱7,703,957.79)
representing its unutilized input VAT for the four (4) quarters of the taxable year 2003.

SO ORDERED.17

Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated Nissan Patrol is
a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover, the disallowed input taxes
substantially complied with the requirements for refund or tax credit.

The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and second
quarters of 2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the 1997 Tax Code.
The CIR further stated that Section 229 is a general provision, and governs cases not covered by Section 112(A).
The CIR countered the CTA First Division’s 22 September 2008 decision by citing this Court’s ruling in Commisioner
of Internal Revenue v. Mirant Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT payments must
be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made
regardless of whether said tax was paid.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s motion for partial
reconsideration partly meritorious, and rendered an Amended Decision20 on 26 June 2009. The CTA First Division
stated that the claim for refund or credit with the BIR and the subsequent appeal to the CTA must be filed within the
two-year period prescribed under Section 229. The two-year prescriptive period in Section 229 was denominated as
a mandatory statute of limitations. Therefore, Mindanao II’s claims for refund for the first and second quarters of
2003 had already prescribed.

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the
Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted
documents failed to substantiate the requisites for the refund or credit claims.

The CTA First Division modified its 22 September 2008 Decision to read as follows:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the
modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY SEVEN
AND 77/100 PESOS (₱2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the
taxable year 2003.

SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s petition.
The CTA En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-year prescriptive
period for filing the application for refund or credit of input VAT attributable to zero-rated sales or effectively zero-
rated sales shall be counted from the close of the taxable quarter when the sales were made; (2) the Atlas and
Mirant cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax Code;
(3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-rated transactions pursuant
to Section 105; (4) Mindanao II failed to comply with the substantiation requirements provided under Section 113(A)
in relation to Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of
Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be relaxed in the
present case.

The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for lack
of merit. Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated June 26, 2009
issued by the First Division are AFFIRMED.

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s Motion for
Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:

1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed within
two (2) years after the close of the taxable quarter when such sales were made.

2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.

3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal meaning
and applied without any interpretation.27

G.R. No. 194637

Mindanao I v. CIR

The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA EB
cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case
Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized and/or excess input
taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit of
₱3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit of
₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax refund or credit of
₱7,940,727.83 for the third and fourth quarters of 2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent facts is as
follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine National
Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance, design, construction, testing,
commissioning, operation, maintenance and repair of a 47-megawatt geothermal power plant. Under the said BOT
contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the
steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and deliver the same to the
National Power Corporation (NPC), for and in behalf of PNOC-EDC.

Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of Energy (DOE)
as a Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215, wherein Certificate of
Accreditation No. 95-037 was issued.

On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National Internal
Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric Power Industry
Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric power industry, highlighting,
among others, the importance of ensuring the reliability, security and affordability of the supply of electric power to
end users. Under the provisions of this Republic Act and its implementing rules and regulations, the delivery and
supply of electric energy by generation companies became VAT zero-rated, which previously were subject to ten
percent (10%) VAT.

xxxx

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation
companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the
EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that its sales qualify for VAT
zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first, second,
third, and fourth quarters of taxable year 2003, which were subsequently amended and filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit
certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount of
₱14,185, 294.80.

Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July 7, 2005,
and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively. However, on October 10,
2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR denying its application for
tax credit/refund.28

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and 7318.
The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27% of the
amount of substantiated excess input VAT because a portion was not reported in its quarterly VAT returns; (2) out of
the ₱14,185,294.80 excess input VAT applied for refund, only ₱11,657,447.14 can be considered substantiated
excess input VAT due to disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second Division’s further verification, and additional disallowances per the CTA Second
Division’s further verification;

(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over to the third
quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same procedure was done for
the second, third, and fourth quarters of 2003; and (4) Mindanao I’s administrative claims were filed within the two-
year prescriptive period reckoned from the respective dates of filing of the quarterly VAT returns.

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:

WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the
reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED SEVENTY
SEVEN PESOS AND 53/100 (₱10,523,177.53) representing Mindanao I’s unutilized input VAT for the four quarters
of the taxable year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It claimed
that the CTA Second Division should not have allocated proportionately Mindanao I’s unutilized creditable input
taxes for the taxable year 2003, because the proportionate allocation of the amount of creditable taxes in Section
112(A) applies only when the creditable input taxes due cannot be directly and entirely attributed to any of the zero-
rated or effectively zero-rated sales. Mindanao I claims that its unreported collection is directly attributable to its VAT
zero-rated sales. The CTA Second Division denied Mindanao I’s motion and maintained the proportionate allocation
because there was a portion of the gross receipts that was undeclared in Mindanao I’s gross receipts.

The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I failed to
exhaust administrative remedies before it filed its petition for review. The CTA Second Division denied the CIR’s
motion, and cited Atlas33 as the basis for ruling that it is more practical and reasonable to count the two-year
prescriptive period for filing a claim for refund or credit of input VAT on zero-rated sales from the date of filing of the
return and payment of the tax due.

The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:

WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s Motion for
Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied the
petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which have not yet been
considered and passed upon by the CTA Second Division in its assailed decision and resolution.

The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit. Accordingly,
the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second Division in CTA Case
Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner of Internal Revenue"
are hereby AFFIRMED in toto.

SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010 Decision. In an
Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIR’s claim that Section
229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA En Banc also ruled that the
procedure prescribed under Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed first before the
CTA En Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010 Decision in light of
this Court’s ruling in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi).38

The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter of
2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from March
31, 2003 or until March 31, 2005 within which to file its administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT for the
first quarter of taxable year 2003 with the BIR, which is beyond the two-year prescriptive period mentioned
above.

C.T.A. Case No. 7286:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second quarter of
2003. Pursuant to

Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within
which to file its administrative claim for refund for the second quarter of 2003, or until June 30, 2005;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the
second quarter of taxable year 2003 with the BIR, which is within the two-year prescriptive period, provided
under Section 112 (A) of the NIRC of 1997, as amended;

(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting
documents together with the application for refund) or until August 2, 2005, to decide the administrative
claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005,
Mindanao I should have elevated its claim for refund to the CTA in Division;

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA Case
No. 7286, even before the 120-day period for the CIR to decide the claim for refund had lapsed on August 2,
2005. The Petition for Review was, therefore, prematurely filed and there was failure to exhaust
administrative remedies;

xxxx

C.T.A. Case No. 7318:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and fourth
quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I therefore, has
two years from September 30, 2003 and December 31, 2003, or until September 30, 2005 and December
31, 2005, respectively, within which to file its administrative claim for the third and fourth quarters of 2003;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the
third and fourth quarters of taxable year 2003 with the BIR, which is well within the two-year prescriptive
period, provided under Section 112(A) of the NIRC of 1997, as amended;

(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents,
together with the aforesaid application for refund, the CIR has 120 days or until August 2, 2005, to decide
the claim;

(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September 1,
2005 Mindanao I should have elevated its claim for refund to the CTA;
 (5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9, 2005,
which is 8 days beyond the 30-day period to appeal to the CTA.

Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for Review
should have been dismissed for being filed late.

In recapitulation:

(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year
prescriptive period;

(2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply with a condition
precedent when it failed to exhaust administrative remedies by filing its Petition for Review even before the
lapse of the 120-day period for the CIR to decide the administrative claim;

(3) C.T.A. Case No. 7318

Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is hereby
GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby
GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second, third and fourth quarters
of 2003 is hereby DENIED.

SO ORDERED.39

The Issues

G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and 2nd
quarters of year 2003 has already prescribed pursuant to the Mirant case.

A. The Atlas case and Mirant case have conflicting interpretations of the law as to the reckoning date
of the two year prescriptive period for filing claims for VAT refund.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3),
Article VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were
made as the reckoning date in counting the two-year prescriptive period cannot be applied
retroactively in the case of Mindanao II.

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as amended
in that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not incidental to the
VAT zero-rated operation of Mindanao II.

III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent
Certified Public Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax Code,
as amended, for refund/tax credit.

A. The amount of ₱2,090.16 was brought about by the timing difference in the recording of the
foreign currency deposit transaction.
 B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV & Company
which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim for
refund or tax credit for the year 2004 subject matter of CTA Case No. 7507.

IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40

G.R. No. 194637

Mindanao I v. CIR

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the case of
Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, which was
then the controlling ruling at the time of filing.

A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation, which
uses the end of the taxable quarter when the sales were made as the reckoning date in counting the
two-year prescriptive period, cannot be applied retroactively in the case of Mindanao I.

B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007 was
not and cannot be superseded by the Mirant Pagbilao case promulgated by the Second Division of
this Honorable Court on September 12, 2008 in light of the explicit provision of Section 4(3), Article
VIII of the 1987 Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi Forging
Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the present case.41

In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and 194637 to
avoid conflicting rulings in related cases.

The Court’s Ruling

Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or the
interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of
₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s unutilized
input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts of ₱3,893,566.14,
₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by G.R. No. 194637.

Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and Mindanao I’s
administrative and judicial claims, provide:

SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of
the volume of sales.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner
shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support of the application filed in accordance with
Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner
to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.

x x x x 43 (Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
No. VAT Sales in when application application for with CTA45 with CTA
2003 and sales of tax tax refund/ (judicial
amount were refund/tax credit with the claim)
made credit CIR
certificate (administrative
with the claim)44
CIR
7227 1st Quarter, 31 March 31 March 13 April 2005 12 22 April
₱3,160,984.69 2003 2005 September 2005
2005
7287 2nd Quarter, 30 June 30 June 13 April 2005 12 7 July 2005
₱1,562,085.33 2003 2005 September
2005
7317 3rd and 4th 30 30 13 April 2005 12 9 September
Quarters, September September September 2005
₱3,521,129.50 2003 2005 2005
31 2 January
December 2006
2003 (31
December
2005 being
a
Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
No. VAT Sales in when sales application application for with CTA47 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
certificate (administrative
with the claim)46
CIR
7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
₱3,893,566.14 2003 2005 2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
₱2,351,000.83 2003 2005 2005
7317 3rd 30 30 4 April 2005 1 September 9 September
and 4th September September 2005 2005
Quarters, 2003 2005
₱7,940,727.83
31 2 January
December 2006
2003 (31
December
2005 being
a Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither Atlas nor
Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant was promulgated on 12
September 2008. It is therefore misleading to state that Atlas was the controlling doctrine at the time of filing of the
claims. The 1997 Tax Code, which took effect on 1 January 1998, was the applicable law at the time of filing of the
claims in issue. As this Court explained in the recent consolidated cases of Commissioner of Internal Revenue v.
San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex
Mining Corporation v. Commissioner of Internal Revenue (San Roque):48

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the
Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit. It is indisputable
that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting period, originally fixed
at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, which took effect on 1
January 1988. The waiting period was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax
Reform Act of 1997. Thus, the waiting period has been in our statute books for more than fifteen (15) years before
San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of
exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with
the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete
with cases upholding and reiterating these doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner
of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When a taxpayer prematurely files a
judicial claim for tax refund or credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction over
the appeal. The charter of the CTA also expressly provides that if the Commissioner fails to decide within "a specific
period" required by law, such "inaction shall be deemed a denial" of the application for tax refund or credit. It is the
Commissioner’s decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for
review.

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA void.
Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." San Roque’s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be legitimized "except
when the law itself authorizes its validity." There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or
acquire any right from his void act. A right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired right can arise from acts
or omissions which are against the law or which infringe upon the rights of others." For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any right arising from such void petition.
Thus, San Roque’s petition with the CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just
because the Commissioner merely asserts that the case was prematurely filed with the CTA and does not question
the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess input VAT, or that
the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him as a matter of
right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional conditions prescribed by law to
claim such tax refund or credit is essential and necessary for such claim to prosper. Well-settled is the rule that tax
refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.

The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund
or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the
Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the taxpayer.
Non-compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence to exhaustion
of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not establish the precedent that
non-compliance with mandatory and jurisdictional conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance with mandatory
and jurisdictional requirements, for then every tax refund case will have to be decided on the numerical correctness
of the amounts claimed, regardless of non-compliance with mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed
its petition for review with the CTA more than four years before Atlas was promulgated. The Atlas doctrine did not
exist at the time San Roque failed to comply with the 120-day period. Thus, San Roque cannot invoke the Atlas
doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely
stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from
the close of the taxable quarter when the sales involving the input VAT were made. The Atlas doctrine does not
interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed, we see
no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "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 x x x."

We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of 2003 as
follows:

(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003 was
on 31 March 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims have prescribed,
pursuant to Section 112(A) of the 1997 Tax Code.

(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of 2003
was on 30 June 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.

(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of 2003 was
on 30 September 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of 2003
was on 2 January 2006. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.

Prescriptive Period for

the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 have been properly appealed,
we still see no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax Code. The second
paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the
Court of Tax Appeals."

The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in
the law. Section 112(C) expressly grants the Commissioner 120 days within which to decide the taxpayer’s claim.
The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied exactly as worded since it is clear, plain,
and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there will
be no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s case, it
filed its petition with the CTA a mere 13 days after it filed its administrative claim with the Commissioner.
Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of
the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied
exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he wishes, appeal
the decision of the Commissioner to the CTA within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA
within 30 days from the expiration of the 120-day period.
 xxxx

There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive
period, as long as the administrative claim is filed within the two-year prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "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 the creditable input tax due or paid to such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the last day of the two-year
prescriptive period and it will still strictly comply with the law. The two-year prescriptive period is a grace period in
favor of the taxpayer and he can avail of the full period before his right to apply for a tax refund or credit is barred by
prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one
hundred twenty (120) days from the date of submission of complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section 112(A) is the administrative
claim that the Commissioner must decide within the 120-day period. In short, the two-year prescriptive period in
Section 112(A) refers to the period within which the taxpayer can file an administrative claim for tax refund or credit.
Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA but to
the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase ‘within two years x x x
apply for the issuance of a tax credit or refund’ refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to
730 days), then the taxpayer must file his administrative claim for refund or credit within the first 610 days of the two-
year prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610 days will result in the
appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his administrative
claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st day to decide the claim.
If the Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer file his
judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-
day period granted by law to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the
taxpayer complied with the law by filing his administrative claim within the two-year prescriptive period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found
in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his
administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a
remedy that the law expressly grants in clear, plain, and unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer
can file his administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files his
claim on the last day of the two-year prescriptive

period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days
to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation of
Section 112(A) and (C).50 (Emphases in the original; citations omitted)

In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s recognition of BIR
Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao I and II filed their
claims within this period.

We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as follows:

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30 days after the CIR’s
denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and fourth quarters of
2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier than 11 August 2005, which is
the expiration of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before
the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao II’s
judicial claim for the second quarter of 2003 was prematurely filed.
 However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that
Mindanao II’s judicial claim for the second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.

(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao II’s judicial claim for the third quarter of 2003 was thus filed on time, pursuant to Section 112(C) of
the 1997 Tax Code.

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005.
Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to Section 112(C)
of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005. Counting
120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s denial by
inaction,52 the last day for filing a judicial claim with the CTA for the second, third, and fourth quarters of 2003 was
on 1 September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration
of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before
the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao I’s judicial
claim for the second quarter of 2003 was prematurely filed. However, pursuant to San Roque’s recognition
of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim for the second quarter of
2003 qualifies under the exception to the strict application of the 120+30 day periods.

(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after the prescriptive period, pursuant
to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the fourth quarter of 2003 was thus filed after the prescriptive period, pursuant
to Section 112(C) of the 1997 Tax Code.

San Roque: Recognition of BIR Ruling No. DA-489-03

In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims for tax
refund or credit of three different companies. In San Roque, we reiterated that "following the verba legis doctrine,
Section 112(C) must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day mandatory and
jurisdictional period. The CTA will have no jurisdiction because there will be no ‘decision’ or ‘deemed a denial
decision’ of the Commissioner for the CTA to review."

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized
that BIR Ruling No. DA-489-03 constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03
expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek
judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its
effect on taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlas
doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit
they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers
or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a
particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One
Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government agency is
also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the
agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No.
DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.

xxxx

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No.
DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim prematurely without
waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the
benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
(Emphasis in the original)

Summary of Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR

Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized
input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter
when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The
120-day period may extend beyond the two-year period from the filing of the administrative claim if the claim
is filed in the later part of the two-year period. If the 120-day period expires without any decision from the
CIR, then the administrative claim may be considered to be denied by inaction.
 (3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying
the administrative claim or from the expiration of the 120-day period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of
its business; hence, it is an isolated transaction that should not have been subject to 10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

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

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

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

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

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay)55 and Imperial v.
Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the NIRC of 1986,
involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled that
the sale of vessels was not in the course of NDC’s trade or business as it was involuntary and made pursuant to the
Government’s policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed upon Imperial the
definition of "carrying on business." Imperial, however, is an unreported case that merely stated that "‘to engage’ is
to embark in a business or to employ oneself therein."57

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an
1âwphi1

isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section
105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions
incidental thereto."

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the
electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the
sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan
Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT.

Substantiation Requirements

Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it has substantially
complied with the substantiation requirements of Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code,
as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60

We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a finding of fact.
The CTA En Banc evaluated the records of the case and found that the transactions in question are purchases for
services and that Mindanao II failed to comply with the substantiation requirements. We affirm the CTA En Banc’s
finding of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to overturn their
findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A
EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the
Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well
as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED while
its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of
Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003 are DENIED while its claim for the
second quarter of 2003 is GRANTED.

SO ORDERED.

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

DECISION

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its
vessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of
1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals
commonly ruled that the sale is not subject to VAT. We affirm, though on a more unequivocal rationale than that
utilized by the rulings under review. The fact that the sale was not in the course of the trade or business of NDC is
sufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its
wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1 The vessels were
constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its
wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the
public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels."3 On 3
June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed
composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively,
private respondents).4 The bid was approved by the Committee on Privatization, and a Notice of Award dated 1 July
1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
that "[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of
VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the vessels was subject to VAT
had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez &
Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no favorable ruling be
received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed
for the payment of the VAT on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988
from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC
was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing
out personal property including sale of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT]."7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88
(dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to an inquiry from
the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT Ruling
Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the Letter of
Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a
Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-88
and 007-89, as well as the refund of the VAT payment made amounting to P15,120,000.00.8 The Commissioner of
Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not the real parties in
interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code.
The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing
Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or
transactions ‘deemed sale’ of taxable goods (including capital goods, irrespective of the date of acquisition)." The
CIR argued that the sale of the vessels were among those transactions "deemed sale," as enumerated in Section 4
of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified
"change of ownership of business" as a circumstance that gave rise to a transaction "deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the petition.9 The CTA ruled
that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC’s business, and was
thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade
or business. The CTA further held that the sale of the vessels could not be "deemed sale," and thus subject to
VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section
100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be
resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is not an
exemption provision, but a classification provision which warranted the resolution of doubts in favor of the taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a Decision
reversing the CTA.11 While the appellate court agreed that the sale was an isolated transaction, not made in the
course of NDC’s regular trade or business, it nonetheless found that the transaction fell within the classification of
those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought about
a change of ownership in NMC. The Court of Appeals also applied the principle governing tax exemptions that such
should be strictly construed against the taxpayer, and liberally in favor of the government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February
2001.13 This time, the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No.
5-87 must be a consequence of the "retirement from or cessation of business" by the owner of the goods, as
provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the classification
of transactions "deemed sale" was a classification statute, and not an exemption statute, thus warranting the
resolution of any doubt in favor of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and
refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99
of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions by
the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately
irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage.15 It is the end user of
consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end
users by the providers of these goods or services16 who in turn may credit their own VAT liability (or input VAT) from
the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by the end consumer
represents the final link in a production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of
consumption,18 yet assuages the manufacturers or providers of goods and services by enabling them to pass on
their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax
liability.

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

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the
CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered.20 We
cite with approval the CTA’s explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term "carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally incident
thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the
time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v.
Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing
business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale
which was involuntary and made pursuant to the declared policy of Government for privatization could no
 longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was created
for the primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this
Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the
course of trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR,
is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied, assessed and
collected on every sale, barter or exchange of goods, a value added tax x x x." Section 100 should be read in light of
Section 99, which lays down the general rule on which persons are liable for VAT in the first place and on what
transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the
Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be
applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or
business" as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a
means of ascertaining whether the sale of the vessels was "in the course of trade or business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the
meaning of "in the course of trade or business," but instead the identification of the transactions which may be
deemed as sale. It would become necessary to ascertain whether under those two provisions the transaction may
be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the first
place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the purpose of
determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the
course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the
Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds
the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentially
correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those involving
"change of ownership of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code,
clarifies that such "change of ownership" is only an attending circumstance to "retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation."25 Indeed, Section
4(E) of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a "circumstance" that
attends those transactions "deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.
G.R. No. 178090 February 8, 2010

PANASONIC COMMUNICATIONS IMAGING CORPORATION OF THE PHILIPPINES (formerly MATSUSHITA

BUSINESS MACHINE CORPORATION OF THE PHILIPPINES), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

ABAD, J.:

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

The Facts and the Case

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

From April 1 to September 30, 1998 and from October 1, 1998 to March 31, 1999, petitioner Panasonic generated
export sales amounting to US$12,819,475.15 and US$11,859,489.78, respectively, for a total of US$24,678,964.93.
Believing that these export sales were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997 National
Internal Revenue Code as amended by Republic Act (R.A.) 8424 (1997 NIRC),2 Panasonic paid input VAT of
₱4,980,254.26 and ₱4,388,228.14 for the two periods or a total of ₱9,368,482.40 attributable to its zero-rated sales.

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

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

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

The Issue Presented

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

The Court’s Ruling

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

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes7 equal to the input taxes8 that
his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that
he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall
be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer.9
Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at
zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax
chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output
tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating,
which allows him to recover the input taxes he paid relating to the export sales, making him internationally
competitive.10

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

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

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

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

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

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

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

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

Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the word "zero-rated" for
zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only after the enactment
of R.A. 9337 on November 1, 2005, a law that did not yet exist at the time it issued its invoices.

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

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

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

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

2. Date of transaction;

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

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

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

6. The invoice value or consideration.

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

This Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is
dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority.17 Besides, statutes that grant tax exemptions
are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax refunds in
relation to the VAT are in the nature of such exemptions. The general rule is that claimants of tax refunds bear the
burden of proving the factual basis of their claims. Taxes are the lifeblood of the nation. Therefore, statutes that
allow exemptions are construed strictly against the grantee and liberally in favor of the government.18

WHEREFORE, the petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.
G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution of
the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the
CTA-First Division2 which, in turn, partially granted the petition for review of respondent Sony Philippines,
Inc. (Sony). The CTA-First Division decision cancelled the deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount of ₱1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain revenue
officers to examine Sony’s books of accounts and other accounting records regarding revenue taxes for "the period
1997 and unverified prior years." On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and
penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final
assessment notices, the formal letter of demand and the details of discrepancies.4 Said details of the deficiency
taxes and penalties for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
 Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony
submitted relevant documents in support of its protest on the 16th of that same month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting documents
to the CIR, Sony filed a petition for review before the CTA.7

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising
expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the
EWT, the CTA-First Division maintained the deficiency EWT assessment on Sony’s motor vehicles and on
professional fees paid to general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First
Division, however, disallowed the EWT assessment on rental expense since it found that the total rental deposit of
₱10,523,821.99 was incurred from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late payment of VAT
on royalties, for late remittance of final withholding tax on royalty as of December 1997 and for the late remittance of
EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s petition by cancelling the
deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the penalties. Thus, the
dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and
WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However, the deficiency
assessments for expanded withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the amount
of ₱1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum of
₱1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997 Tax
Code.

SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:
 A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency
VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with
respect to the 5% withholding tax on rental deposit in the amount of ₱10,523,821.99 should be cancelled;
and

D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on
royalties covering the period January to March 1998 was filed on time.10

On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR filed a petition for
1av vphi1

review with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the
amount of ₱10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period January to March
1998 was filed outside of time.11

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIR’s petition on
May 17, 2007. CIR’s motion for reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the
CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE
AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF

PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5%
INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE
5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT
PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING
THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a
manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved
to give due course to the petition and to decide the case on the basis of the pleadings filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue
officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the
books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of
tax.15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant
authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of
any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall
not prevent the Commissioner from authorizing the examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment.
Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting
through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment they
arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31,
1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period should be
covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should
have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified prior
years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent
portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing
L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than
one taxable period, the other periods or years shall be specifically indicated in the L/A.16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIR’s
argument, that Sony’s advertising expense could not be considered as an input VAT credit because the same was
eventually reimbursed by Sony International Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising
expense should be for the account of SIS, and not Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s
deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been
realized from the advertising expense of the latter.18 It is evident under Section 11019 of the 1997 Tax Code that an
advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no less
than CIR’s own witness, Revenue Officer Antonio Aluquin.20 There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is
another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. In
support of this, the CIR cited a portion of Sony’s protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to
the latter’s advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most,
this is an additional income of our client subject to income tax. We submit further that our client is not subject to VAT
on the subsidy income as this was not derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic conditions, and
was only "equivalent to the latter’s (Sony’s) advertising expenses."

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

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, 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.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and
not in payment for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services rendered for a fee
even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however,
is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the
affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred
although without profit. This is not true in the present case. Sony did not render any service to SIS at all. The
services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS.
SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising expense but never received any
goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR insists that said
deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue
Regulation No. 2-98 dated April 17, 1998.24 The said revenue regulation provides that the 10% rate is applied when
the recipient of the commission income is a natural person. According to the CIR, Sony’s schedule of Selling,
General and Administrative expenses shows the commission expense as "commission/dealer salesman incentive,"
emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g) of
Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real estate and
commercial brokers and agents of professional entertainers – five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in the
schedule of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as
"commission/dealer salesman incentive" the same does not justify the automatic imposition of flat 10% rate. As
itemized by petitioner, such expense is composed of "Commission Expense" in the amount of P10,200.00 and
‘Broker Dealer’ of P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is
Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule
during the subject period of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the present case. Besides, the
withholding tax on brokers and agents was only increased to 10% much later or by the end of July 2001 under
Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the amount
of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate LOA
specifying the coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not valid and must
be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of
December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First
Division when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from January to
March 1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29 of
Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March of
1998. At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony
and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax on
royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when the
royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10 days after
the end of each month. The question now is when does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were agreed
upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE shall
furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the MODELS
sold, leased or otherwise disposed of by the LICENSEE during such respective semi-annual period and amount of
royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the
LICENSOR concurrently with the furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in
June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the end of
December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted by
Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the
CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period ending June 30, which meant that the
royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before
July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on July 8,
1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.
 G.R. No. 228539

ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC), HEREIN REPRESENTED BY ITS AUTHORIZED

REPRESENTATIVE, MS. FELICIDAD M. DEL ROSARIO, Petitioner vs. BUREAU OF INTERNAL REVENUE
(BIR), HEREIN REPRESENTED BY HON. COMMISSIONER KIM S. JACINTO-HENARES, Respondent

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated July 1, 2016 and the Order3 dated November
7, 2016 of the Regional Trial Court of Makati City, Branch 134 (RTC), in Special Civil Case No. 14- 985, which
denied petitioner Association of Non-Profit Clubs, Inc. (ANPC)'s petition4 for declaratory relief, thereby upholding in
full the validity of Revenue Memorandum Circular (RMC) No. 35-2012.5

The Facts

On August 3, 2012, respondent the Bureau of Internal Revenue (BIR) issued RMC No. 35-2012, entitled "Clarifying
the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit
Purposes,"6 which was addressed to all revenue officials, employees, and others concerned for their guidance
regarding the income tax and Valued Added Tax (VAT) liability of the said recreational clubs.7

On the income tax component, RMC No. 35-2012 states that "[c]lubs which are organized and operated
exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the
National Internal Revenue Code [(NIRC)] of 1997,8 as amended [(1997 NIRC)]."9 The BIR justified the foregoing
interpretation based on the following reasons:

According to the doctrine of casus omissus pro omisso habendus est, a person, object, or thing omitted from an
enumeration must be held to have been omitted intentionally. The provision in the (1977 Tax Code] which granted
income tax exemption to such recreational clubs was omitted in the current list of tax exempt corporations under [the
1997 NIRC], as amended. Hence, the income of recreational clubs from whatever source, including but not
limited to membership fees, assessment dues, rental income, and service fees are subject to income
tax.10 (Emphasis and underscoring supplied)

Likewise, on the VAT component, RMC No. 35-2012 provides that "the gross receipts of recreational clubs
including but not limited to membership fees, assessment dues, rental income, and service fees are subject
to VAT."11 As basis, the BIR relied on Section 105,12 Chapter I, Title IV of the 1997 NIRC, which states that even a
nonstock, nonprofit private organization or government entity is liable to pay VAT on the sale of goods or services.13

On October 25, 2012, ANPC, along with the representatives of its member clubs, invited Atty. Elenita Quimosing
(Atty. Quimosing), Chief of Staff, Operations Group of the BIR, to discuss "specifically the effects of the said
[C]ircular and to seek clarification and advice from the BIR on how it will affect the operational requirements of each
club and their members/stakeholders."14 During their meeting, Atty. Quimosing discussed the basis and effects of
RMC No. 35-2012, and further suggested that the attendees submit a position paper to the BIR expressing their
concerns.15

Consequently, ANPC submitted its position paper,16 requesting "the non-application of RMC [No.] 35-2012 for
income tax and VAT liability on membership fees, association dues, and fees of similar nature collected by [the]
exclusive membership clubs from [their] members which are used to defray the expenses of the said
clubs."17 However, despite the lapse of two (2) years, the BIR has not acted upon the request, and all the member
clubs of ANPC were subjected to income tax and VAT on all membership fees, assessment dues, and service
fees.18

Aggrieved, ANPC, on behalf of its club members, filed a petition19 for declaratory relief before the RTC on
September 17, 2014, seeking to declare RMC No. 35-2012 invalid, unjust, oppressive, confiscatory, and in violation
of the due process clause of the Constitution.20 ANPC argued that in issuing RMC No. 35-2012, the BIR acted
beyond its rule-making authority in interpreting that payments of membership fees, assessment dues, and service v
fees are considered as income subject to income tax, as well as a sale of service that is subject to VAT.21

For its part, the Office of the Solicitor General (OSG), on behalf of the BIR, sought the dismissal of the petition for
ANPC's failure to exhaust all the available administrative remedies. It also argued that RMC No. 35- 2012 is a mere
amplification of the existing law and the rules and regulations of the BIR on the matter, positing that the said Circular
merely explained that by removing recreational clubs from the list of tax exempt entities or corporations, Congress
intended to subject them to income tax and VAT under the 1997 NIRC.22

The RTC Ruling

In a Decision23 dated July 1, 2016, the RTC denied the petition for declaratory relief24 and upheld the validity and
constitutionality of RMC No. 35-2012.25 On the procedural issue, the RTC found that there was no violation of the
doctrine of exhaustion of administrative remedies, since judicial intervention was urgent in light of the impending
imposition of taxes on the membership fees and assessment dues paid by the members of the exclusive clubs.26 As
to the substantive issue, the RTC found that given the apparent intent of Congress to subject recreational clubs to
taxes, the BIR, being the administrative agency concerned with the implementation of the law, has the power to
make such an interpretation through the issuance of RMC No. 35-2012. As an interpretative rule issued well within
the powers of the BIR, the same need not be published and neither is a hearing required for its validity.27

Undaunted, ANPC sought reconsideration,28 which the RTC denied in an Order29 dated November 7, 2016. Raising
pure questions of law, ANPC, herein represented by its authorized representative, Ms. Felicidad M. Del Rosario,
filed the instant petition for review on certiorari directly before the Court.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not the RTC erred in upholding in full the validity of RMC
No. 35-2012.

The Court's Ruling

The petition is partly meritorious.

I.

The Court first resolves the procedural issues.

In its Comment,30 the BIR, through the OSG, seeks the dismissal of the present petition on the ground that ANPC
violated the doctrine of hierarchy of courts due to its direct resort before the Court.31 Moreover, it asserts that ANPC
violated the doctrine of exhaustion of available administrative remedies, pointing out that ANPC should have first
elevated the matter to the Secretary of Finance for review pursuant to Section 4,32 Title I of the 1997 NIRC.33

The contentions are untenable.

First, the Court holds that there was no violation of the doctrine of hierarchy of courts because the present petition
for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in relation to Rule 45 of the Rules of Court, is
the sole remedy to appeal a decision of the RTC in cases involving pure questions of law. The doctrine of hierarchy
of courts is violated only when relief may be had through multiple fora having concurrent jurisdiction over the case,
such as in petitions for certiorari, mandamus, and prohibition which are concurrently cognizable either by the
Regional Trial Courts, the Court of Appeals, or the Supreme Court. In Uy v. Contreras:34

[W]hile it is true that this Court, the Court of Appeals, and the Regional Trial Courts have concurrent original
jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas corpus, such concurrence
does not accord litigants unrestrained freedom of choice of the court to which application therefor may be
directed. There is a hierarchy of courts determinative of the venue of appeals which should also serve as a
general determinant of the proper forum for the application for the extraordinary writs. A becoming regard for
this judicial hierarchy by the petitioner and her lawyers ought to have led them to file the petition with the proper
Regional Trial Court.35 (Emphasis and underscoring supplied)

Clearly, the correctness of the BIR's interpretation of the 1997 NIRC under the assailed RMC is a pure question of
law,36 because the same does not involve an examination of the probative value of the evidence presented by the
litigants or any of them.37 Thus, being the only remedy to appeal the RTC's ruling upholding the Circular's validity on
a purely legal question, direct resort to this Court, through a Rule 45 petition, was correctly availed by ANPC.

Anent the issue of exhaustion of administrative remedies, the Court likewise holds that the said doctrine was not
transgressed.

At the onset, it is apt to point out that RMC No. 35-2012 only clarified the taxability (particularly, income tax and VAT
liability) of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes based
on the BIR's own interpretation of the NIRC provisions on income tax and VAT. Evidently, it was not designed "to
implement a primary legislation by providing the details thereof' as in a legislative rule; but rather, was intended only
to "provide guidelines to the law which the administrative agency is in charge of enforcing,"38 as the said Circular
was, in fact, addressed to "[a]ll [r]evenue [o]fficials, [e]mployees[,] and [o]thers [c]oncerned"39 to guide them in the
enforcement of income tax and VAT laws against fees collected by the said clubs.

Given its nature, RMC No. 35-2012 is therefore subject to the administrative review of the Secretary of Finance
pursuant to Section 4, Title I of the 1997 NIRC, which provides:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the
provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.
x x x x (Emphases supplied)

Thus, as dictated by the rule on exhaustion of administrative remedies,40 the validity of RMC No. 35-2012 should
have been first subjected to the review of the Secretary of Finance before ANPC sought judicial recourse with the
RTC.

However, as exceptions to this rule, when the issue involved is purely a legal question (as above-explained), or
when there are circumstances indicating the urgency of judicial intervention41 - as in this case where membership
fees, assessment dues, and the like of all recreational clubs would be imminently subjected to income tax and VAT -
then the doctrine of exhaustion of administrative remedies may be relaxed.

Accordingly, ANPC's recourse to the RTC and now, before this Court are permissible and hence, are not grounds to
dismiss this case. That being said, the Court now proceeds to resolve the substantive issue on whether or not RMC
No. 35-2012 is valid.

II.

To recount, RMC No. 35-2012 is an interpretative rule issued by the BIR to guide all revenue officials, employees,
and others concerned in the enforcement of income tax and VAT laws against clubs organized and operated
exclusively for pleasure, recreation, and other non-profit purposes ("recreational clubs" for brevity).

As to its income tax component, RMC No. 35-2012 provides the interpretation that since the old tax exemption
previously accorded under Section 21 (h),42 Chapter III, Title II of Presidential Decree No. 1158, otherwise known as
the "National Internal Revenue Code of 1977"43 (1977 Tax Code), to recreational clubs was deleted in the 1997
NIRC, then the income of recreational clubs from whatever source, including but not limited to membership
fees, assessment dues, rental income, and service fees, is subject to income tax.

The interpretation is partly correct.

Indeed, applying the doctrine of casus omissus pro omisso habendus est (meaning, a person, object or thing
omitted from an enumeration must be held to have been omitted intentionally44) , the fact that the 1997 NIRC omitted
recreational clubs from the list of exempt organizations under the 1977 Tax Code evinces the deliberate intent of
Congress to remove the tax income exemption previously accorded to these clubs. As such, the income that
recreational clubs derive "from whatever source"45 is now subject to income tax under the provisions of the 1997
NIRC.

However, notwithstanding the correctness of the above-interpretation, RMC No. 35-2012 erroneously foisted a
sweeping interpretation that membership fees and assessment dues are sources of income of recreational
clubs from which income tax liability may accrue, viz.:

The provision in the [1977 Tax Code] which granted income tax exemption to such recreational clubs was omitted in
the current list of tax exempt corporations under the [1997 NIRC], as amended. Hence, the income of recreational
clubs from whatever source, including but not limited to membership fees, assessment dues, rental income,
and service fees [is] subject to income tax.46 (Emphases and underscoring supplied)

The distinction between "capital" and "income" is well-settled in our jurisprudence. As held in the early case
of Madrigal v. Rafferty,47 "capital" has been delineated as a "fund" or "wealth," as opposed to "income" being "the
flow of services rendered by capital" or the "service of wealth":

Income as contrasted with capital or property is to be the test. The essential difference between capital and
income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital.
A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund
of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the
service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgi;expresses the
thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (London County
Council vs. Attorney General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4
Tax Cas., 265. See further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United
States Supreme Court, January 7, 1918.)48 (Emphases and underscoring supplied)

In Conwi v. Court of Tax Appeals,49 the Court elucidated that "income may be defined as an amount of money
coming to a person or corporation within a specified time, whether as payment for services, interest or profit
from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a
flow of the fruits of one's labor."50

As correctly argued by ANPC, membership fees, assessment dues, and other fees of similar nature only constitute
contributions to and/or replenishment of the funds for the maintenance and operations of the facilities
offered by recreational clubs to their exclusive members.51 They represent funds "held in trust" by these
clubs to defray their operating and general costs and hence, only constitute infusion of capital. 52

Case law provides that in order to constitute "income," there must be realized "gain."53 Clearly, because of the nature
of membership fees and assessment dues as funds inherently dedicated for the maintenance, preservation, and
upkeep of the clubs' general operations and facilities, nothing is to be gained from their collection. This stands in
contrast to the fees received by recreational clubs coming from their income-generating facilities, such as bars,
restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment,
services, and other accommodations: In these latter examples, regardless of the purpose of the fees' eventual use,
gain is already realized from the moment they are collected because capital maintenance, preservation, or upkeep
is not their pre-determined purpose. As such, recreational clubs are generally free to use these fees for whatever
purpose they desire and thus, considered as unencumbered "fruits" coming from a business transaction.

Further, given these recreational clubs' non-profit nature, membership fees and assessment dues cannot be
considered as funds that would represent these clubs' interest or profit from any investment. In fact, these fees are
paid by the clubs' members without any expectation of any yield or gain (unlike in stock subscriptions), but only for
the above-stated purposes and in order to retain their membership therein.

In fine, for as long as these membership fees, assessment dues, and the like are treated as collections by
recreational clubs from their members as an inherent consequence of their membership, and are, by nature,
intended for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, then
these fees cannot be classified as "the income of recreational clubs from whatever source" that are
"subject to income tax."54 Instead, they only form part of capital from which no income tax may be collected
or imposed.

It is a well-enshrined principle in our jurisdiction that the State cannot impose a tax on capital as it constitutes an
unconstitutional confiscation of property. As the Court held in Chamber of Real Estate and Builders' Associations,
Inc. v. Romulo:55

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits,
so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes
the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At
the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or
property without due process of law." In Sison, Jr. v. Ancheta [215 Phil. 582 (1984)], we held that the due process
clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a
confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure
as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the
authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a
broad standard, there is a need for proof of such persuasive character.

xxxx

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In 1âш phi 1

other words, it is income, not capital, which is subject to income tax. x x x.56 (Emphases supplied)

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,57 the Court held that "[a]s
a matter of power[,] a court, when confronted with an interpretative rule, [such as RMC No. 35-2012,] is free to (i)
give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some
intermediate degree of authoritative weight to the interpretative rule."58 Thus, by sweepingly including in RMC No.
35-2012 all membership fees and assessment dues in its classification of "income of recreational clubs from
whatever source'' that are "subject to income tax,"59 the BIR exceeded its rule-making authority. Case law holds that:

[T]he rule-making power of administrative agencies cannot be extended to amend or expand statutory requirements
or to embrace matters not originally encompassed by the law. Administrative regulations should always be in accord
with the provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in
favor of the basic law.60

Accordingly, the Court hereby declares the said interpretation to be invalid, and in consequence, sets aside the
ruling of the RTC.

In the same way, the Court declares as invalid the BIR's interpretation in RMC No. 35-2012 that membership fees,
assessment dues, and the like are part of "the gross receipts of recreational clubs" that are "subject to VAT."61

It is a basic principle that before a transaction is imposed VAT, a sale, barter or exchange of goods or
properties, or sale of a service is required.62 This is true even if such sale is on a cost-reimbursement
basis.63 Section 105, Chapter I, Title IV of the 1997 NIRC reads:
Section 105. Persons Liable.- Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

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

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

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

As ANPC aptly pointed out, membership fees, assessment dues, and the like are not subject to VAT because in
collecting such fees, the club is not selling its service to the members. Conversely, the members are not buying
services from the club when dues are paid; hence, there is no economic or commercial activity to speak of as these
dues are devoted for the operations/maintenance of the facilities of the organization.64 As such, there could be no
"sale, barter or exchange of goods or properties, or sale of a service" to speak of, which would then be
subject to VAT under the 1997 NIRC.

WHEREFORE, the petition is GRANTED. The Decision dated July 1, 2016 and the Order dated November 7, 2016
of the Regional Trial Court of Makati City, Branch 134, in Special Civil Case No. 14-985, are hereby SET ASIDE.
The Court DECLARES that membership fees, assessment dues, and fees of similar nature collected by clubs which
are organized and operated exclusively for pleasure, recreation, and other nonprofit purposes do not constitute
as: (a) "the income of recreational clubs from whatever source" that are "subject to income tax"; and (b) part of the
"gross receipts of recreational clubs" that are "subject to [Value Added Tax]." Accordingly, Revenue Memorandum
Circular No. 35-2012 should be interpreted in accordance with this Decision.

SO ORDERED.
G.R. No. 183505 February 26, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION, Respondents.

DECISION

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law would lead to absurdity or
injustice, legislative history is all important. In such cases, courts may take judicial notice of the origin and history of
the law,1 the deliberations during the enactment,2 as well as prior laws on the same subject matter3 to ascertain the
true intent or spirit of the law.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to Republic Act (RA) No.
9282,4 seeks to set aside the April 30, 2008 Decision5 and the June 24, 2008 Resolution6 of the Court of Tax
Appeals (CTA).

Factual Antecedents

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia) are
domestic corporations duly organized and existing under the laws of the Republic of the Philippines. Both are
engaged in the business of operating cinema houses, among others.7

CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a Preliminary Assessment Notice
(PAN) for value added tax (VAT) deficiency on cinema ticket sales in the amount of ₱119,276,047.40 for taxable
year 2000.8 In response, SM Prime filed a letter-protest dated December 15, 2003.9

On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged VAT deficiency, which
the latter protested in a letter dated January 14, 2004.10

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency for
taxable year 2000 in the amount of ₱124,035,874.12.11

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA Case No. 7079.12

CTA Case No. 7085

On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on

cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93.13 First Asia protested the PAN in a
letter dated July 9, 2002.14

Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency which was protested by
First Asia in a letter dated December 12, 2002.15

On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First Asia to pay the amount
of ₱35,823,680.93 for VAT deficiency for taxable year 1999.16

Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No.
7085.17

CTA Case No. 7111

On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket sales for taxable year 2000
in the amount of ₱35,840,895.78. First Asia protested the PAN through a letter dated April 22, 2004.18

Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.19 First Asia protested the same in
a letter dated July 9, 2004.20

On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT deficiency in the amount of
₱35,840,895.78 for taxable year 2000.21
This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004. The case was
docketed as CTA Case No. 7111.22

CTA Case No. 7272

Re: Assessment Notice No. 008-02

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total amount of ₱32,802,912.21
was issued against First Asia by the BIR. In response, First Asia filed a protest-letter dated November 11, 2004. The
BIR then sent a Formal Letter of Demand, which was protested by First Asia on December 14, 2004.23

Re: Assessment Notice No. 003-03

A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for the taxable year 2003
was issued by the BIR against First Asia. In a letter dated September 23, 2004, First Asia protested the PAN. A
Formal Letter of Demand was thereafter issued by the BIR to First Asia, which the latter protested through a letter
dated November 11, 2004. 24

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia to pay the amounts of
₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable years 2002 and 2003, respectively.25

Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as CTA Case No. 7272.26

Consolidated Petitions

The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM Prime and First Asia. 27

On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and 7272 with CTA Case No.
7079 on the grounds that the issues raised therein are identical and that SM Prime is a majority shareholder of First
Asia. The motion was granted.28

Upon submission of the parties’ respective memoranda, the consolidated cases were submitted for decision on the
sole issue of whether gross receipts derived from admission tickets by cinema/theater operators or proprietors are
subject to VAT.29

Ruling of the CTA First Division

On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review.
Resorting to the language used and the legislative history of the law, it ruled that the activity of showing
cinematographic films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of 1997,
as amended, but an activity subject to amusement tax under RA 7160, otherwise known as the Local Government
Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled "Joint Resolution Expressing the True Intent of
Congress with Respect to the Prevailing Tax Regime in the Theater and Local Film Industry Consistent with the
State’s Policy to Have a Viable, Sustainable and Competitive Theater and Film Industry as One of its Partners in
National Development,"30 the CTA First Division held that the House of Representatives resolved that there should
only be one business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by
cities and provinces under the LGC of 1991. Further, it held that consistent with the State’s policy to have a viable,
sustainable and competitive theater and film industry, the national government should be precluded from imposing
its own business tax in addition to that already imposed and collected by local government units. The CTA First
Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross
receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the
procedural due process for tax issuances under RMC No. 20-86.31 Thus, it disposed of the case as follows:

IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review. Respondent’s Decisions
denying petitioners’ protests against deficiency value-added taxes are hereby REVERSED. Accordingly,
Assessment Notices Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-03 and 008-02
are ORDERED cancelled and set aside.

SO ORDERED.32

Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its Resolution dated
December 14, 2006.33

Ruling of the CTA En Banc

Thus, the CIR appealed to the CTA En Banc.34 The case was docketed as CTA EB No. 244.35 The CTA En
Banc however denied36 the Petition for Review and dismissed37 as well petitioner’s Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services
are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema
operators or proprietors is not among the enumerated activities contemplated in the phrase "sale or exchange of
services," then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures,
films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-
2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to
comply with RMC No. 20-86.

Issue

Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously erred:

(1) In not finding/holding that the gross receipts derived by operators/proprietors of cinema houses from admission
tickets [are] subject to the 10% VAT because:

(a) THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE PAYING PUBLIC

IS A SALE OF SERVICE;

(b) UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;

(c) SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE APPLICATION OF
RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS UNWARRANTED;

(d) GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE APPLICABLE HEREIN,
STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME AND PROMULGATED
DANGEROUS PRECEDENTS;

(e) THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS’ SERVICES

FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;

(f) QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE TRIED BY THE
HONORABLE COURT; and

(g) RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF THE NIRC.

(2) In ruling that the enumeration in Section 108 of the NIRC of 1997 is exhaustive in coverage;

(3) In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures is merely subject to the
amusement tax imposed by the Local Government Code; and

(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.38

Simply put, the issue in this case is whether the gross receipts derived by operators or proprietors of cinema/theater
houses from admission tickets are subject to VAT.

Petitioner’s Arguments

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive
because it covers all sales of services unless exempted by law. He claims that the CTA erred in applying the rules
on statutory construction and in using extrinsic aids in interpreting Section 108 because the provision is clear and
unambiguous. Thus, he maintains that the exhibition of movies by cinema operators or proprietors to the paying
public, being a sale of service, is subject to VAT.

Respondents’ Arguments

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the gross
receipts of proprietors or operators of cinemas/theaters derived from public admission are not among the services
subject to VAT. Respondents insist that gross receipts from cinema/theater admission tickets were never intended
to be subject to any tax imposed by the national government. According to them, the absence of gross receipts from
cinema/theater admission tickets from the list of services which are subject to the national amusement tax under
Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that RMC No.
28-2001 on which the deficiency assessments were based is an unpublished administrative ruling.

Our Ruling

The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

Section 108 of the NIRC of the 1997 reads:

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

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

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

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other like property or right;

xxxx

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.

x x x x (Emphasis supplied)

A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of
services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise include,"
indicate that the enumeration is by way of example only.39

Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This,
however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En
Banc:

"Exhibition" in Black’s Law Dictionary is defined as "To show or display. x x x To produce anything in public so that it
may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract by which one
owning such property grants to another the right to possess, use and enjoy it on specified period of time in
exchange for periodic payment of a stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x
x40

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not
included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the
phrase "similar services." The intent of the legislature must therefore be ascertained.

The legislature never intended operators

or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,41 the national government imposed amusement tax on proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses, boxing exhibitions, and other places of amusement, including
cockpits, race tracks, and cabaret.42 In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or cinematographs before the gross
receipts were divided between the proprietors, lessees, or operators of the theaters or cinematographs and the
distributors of the cinematographic films. Section 1143 of the Local Tax Code,44 however, amended this provision by
transferring the power to impose amusement tax45 on admission from theaters, cinematographs, concert halls,
circuses and other places of amusements exclusively to the local government. Thus, when the NIRC of 197746 was
enacted, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets,
day and night clubs, Jai-Alai and race tracks.47
On January 1, 1988, the VAT Law48 was promulgated. It amended certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on original and subsequent sales tax and percentage tax on certain
services. It imposed VAT on sales of services under Section 102 thereof, which provides:

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

(1) Processing manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, x x x

xxxx

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

(b) Determination of the tax. — (1) Tax billed as a separate item in the invoice. — If the tax is billed
as a separate item in the invoice, the tax shall be based on the gross receipts, excluding the tax.

(2) Tax not billed separately or is billed erroneously in the invoice. — If the tax is not billed separately or is
billed erroneously in the invoice, the tax shall be determined by multiplying the gross receipts (including the
amount intended to cover the tax or the tax billed erroneously) by 1/11. (Emphasis supplied)

Persons subject to amusement tax under the NIRC of 1977, as amended, however, were exempted from the
coverage of VAT.49

On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which clarified that the power
to impose amusement tax on gross receipts derived from admission tickets was exclusive with the local government
units and that only the gross receipts of amusement places derived from sources other than from admission tickets
were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions of RMC 8-88 read:

Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax on gross receipts arising
from admission to places of amusement has been transferred to the local governments to the exclusion of the
national government.

xxxx

Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of the amendatory laws
which amended the National Internal Revenue Code, including the value added tax law under Executive Order No.
273, has amended the provisions of Section 11 of the Local Tax Code. Accordingly, the sole jurisdiction for
collection of amusement tax on admission receipts in places of amusement rests exclusively on the local
government, to the exclusion of the national government. Since the Bureau of Internal Revenue is an agency of the
national government, then it follows that it has no legal mandate to levy amusement tax on admission receipts in the
said places of amusement.

Considering the foregoing legal background, the provisions under Section 123 of the National Internal Revenue
Code as renumbered by Executive Order No. 273 (Sec. 228, old NIRC) pertaining to amusement taxes on places of
amusement shall be implemented in accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO.
231-86 dated November 5, 1986 to wit:

"x x x Accordingly, only the gross receipts of the amusement places derived from sources other than from
admission tickets shall be subject to x x x amusement tax prescribed under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by E.O. 273). The tax on gross receipts derived from
admission tickets shall be levied and collected by the city government pursuant to Section 23 of
Presidential Decree No. 231, as amended x x x" or by the provincial government, pursuant to Section 11 of
P.D. 231, otherwise known as the Local Tax Code. (Emphasis supplied)

On October 10, 1991, the LGC of 1991 was passed into law. The local government retained the power to impose
amusement tax on proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission
fees under Section 140 thereof.50 In the case of theaters or cinemas, the tax shall first be deducted and withheld by
their proprietors, lessees, or operators and paid to the local government before the gross receipts are divided
between said proprietors, lessees, or operators and the distributors of the cinematographic films. However, the
provision in the Local Tax Code expressly excluding the national government from collecting tax from the
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of
amusements was no longer included.

In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its administration. Three
years later, RA 7716 was amended by RA 8241. Shortly thereafter, the NIRC of 199751 was signed into law. Several
amendments52 were made to expand the coverage of VAT. However, none pertain to cinema/theater operators or
proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. While persons
subject to amusement tax53 under the NIRC of 1997 are exempt from the coverage of VAT.54

Based on the foregoing, the following facts can be established:

(1) Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or
proprietors has always been considered as a form of entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to the local
government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees
or operators of cabarets, day and night clubs, Jai-Alai and race tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on
certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC
from the coverage of VAT. 1auuphil

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose
amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other
places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to amusement tax
under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds
true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to
tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government,
did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between
the places of amusement taxed by the national government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who
would be paying an additional 10%55 VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of
1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997
would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application
of a law must be rejected if it will operate unjustly or lead to absurd results.56 Thus, we are convinced that the
legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT.

On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,57 to wit:

The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution
to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the
tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and
confidence in the Government this power must be used justly and not treacherously.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to amusement tax under Section
260 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code of 1939, computed on
the amount paid for admission. With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231,
dated June 28, 1973, the power of imposing taxes on gross receipts from admission of persons to cinema/theater
and other places of amusement had, thereafter, been transferred to the provincial government, to the exclusion of
the national or municipal government (Sections 11 & 13, Local Tax Code). However, the said provision containing
the exclusive power of the provincial government to impose amusement tax, had also been repealed and/or deleted
by Republic Act (RA) No. 7160, otherwise known as the Local Government Code of 1991, enacted into law on
October 10, 1991. Accordingly, the enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of persons to places of amusement,
led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108) of the old Tax Code, as
amended by the Expanded VAT Law (RA No. 7716) and which was implemented beginning January 1,
1996.58 (Emphasis supplied)

We disagree.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition
under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax
on cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax
is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously.59 As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or
proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from
admission to cinema houses must be struck down. We cannot overemphasize that RMCs must not override,
supplant, or modify the law, but must remain consistent and in harmony with, the law they seek to apply and
implement.60

In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied with the procedural due
process for tax issuances as prescribed under RMC No. 20-86.

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the
coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against him.61 The reason is obvious: it is both illogical and
impractical to determine who are exempted without first determining who are covered by the provision.62 Thus,
unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule
that the imposition of a tax cannot be presumed.63 In fact, in case of doubt, tax laws must be construed strictly
against the government and in favor of the taxpayer.64

WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the Court of Tax Appeals En
Banc holding that gross receipts derived by respondents from admission tickets in showing motion pictures, films or
movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997, as
amended, and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.

SO ORDERED.
G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2, 2015 and
Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated September 15, 2014.in CTA Case No.
7948 of the CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
Commissioner of Internal Revenue (CIR) the deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per
annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code
(NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance
coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are
entitled to various preventive, diagnostic and curative medical services provided by duly licensed physicians,
specialists and other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.7

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System
(EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on
January 25, 2007.8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR
informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the
issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received
CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of Pl
96,614,476.69,10 inclusive of penalties. 11

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under
Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine
Health Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide medical and/or
hospital services, but merely arranges for the same, its services are not VAT exempt.13

MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical
and/or hospital services by hospitals and/or clinics but include actual and direct rendition of medical and laboratory
services; in fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory facilities which it used in
providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million
was received from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of
Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts because
P5.6 Million of which represent advances for professional fees due from clients which were paid by MEDICARD
while the remainder was already previously subjected to VAT; (4) the professional fees in the amount of Pl 1 Million
should also be excluded because it represents the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT
rate should not be applied on the entire amount but only for the period when the 12% VAT rate was already in
effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and deficiency interest because it did
not pass on the VAT to its members.14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to
verify the supporting documents of MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009,
denying MEDICARD's protest, to wit:

IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in total
sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes immediately. Should payment be made
later, adjustment has to be made to impose interest until date of payment. This is olir final decision. If you disagree,
you may take an appeal to the [CTA] within the period provided by law, otherwise, said assessment shall become
final, executory and demandable. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position before
the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's deficiency VAT
assessment covering taxable year 2006, viz.:

WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD]
covering taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to
pay [CIR] the amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -
Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱l78,538,566.68

Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl
78,538,566.68 computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the
NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of
₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l
.67 and on the 20% deficiency interest which have accrued as afore-stated in (a), computed from June 19,
2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of
Authority (LOA) alone as the CIR is granted vast powers to perform examination and assessment functions; (2) in
lieu of an LOA, an LN was issued to MEDICARD informing it· of the discrepancies between its ITRs and VAT
Returns and this procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3)
MEDICARD is estopped from questioning the validity of the assessment on the ground of lack of LOA since the
assessment issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD on
notice of the deficiencies and it in fact availed of the remedies provided by law without questioning the nullity of the
assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics
cannot be excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the
act of earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD
which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory
facilities cannot be excluded from its gross receipts because the operation of these clinics and laboratory is merely
an incident to MEDICARD's main line of business as HMO and there is no evidence that MEDICARD segregated
the amounts pertaining to this at the time it received the premium from its members; and (6) MEDICARD was not
able to substantiate the amount pertaining to its January 2006 income and therefore has no basis to impose a 10%
VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the
matter to the CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10% VAT
rate for January 2006 is concerned but sustained the findings of the CTA Division in all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
Decision date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD]
is ordered to pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section
248(A)(3) of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱76,187,687.58

 Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48

In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58
computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997,
as amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 (representing
basic deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the deficiency
interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof
pursuant to Section 249(C) of the NIRC of 1997, as amended."

SO ORDERED.22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was
denied.23 Hence, MEDICARD now seeks recourse to this Court via a petition for review on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE
MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT
PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It
empowers or enables said revenue officer to examine the books of account and other accounting records of a
taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA is premised on the fact that the
examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR
himself or his duly authorized representatives. Section 6 of the NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. –

(A) Examination of Return and Determination of Tax Due.- After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the
examinationof any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to
file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer.

x x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances
contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-
taking, or surveillance among others has nothing to do with the LOA. These are simply methods of examining the
taxpayer in order to arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without
prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue (BIR)
promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient centralized Data
Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of Listing for Enforcement System
(RELIEF System).26 This system can detect tax leaks by matching the data available under the BIR's Integrated Tax
System (ITS) with data gathered from third-party sources. Through the consolidation and cross-referencing of third-
party information, discrepancy reports on sales and purchases can be generated to uncover under declared income
and over claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System,
particularly with regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems Group
(ISG) is responsible for: (1) coming up with the List of Taxpayers with discrepancies within the threshold amount set
by management for the issuance of LN and for the system-generated LNs; and (2) sending the same to the taxpayer
and to the Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID
under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the LNs
to the investigating offices [Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers
Audit and Investigation Division (LTAID)]. At the level of these investigating offices, the appropriate action on the LN
s issued to taxpayers with RELIEF data discrepancy would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in
the CIR's exercise of its ·power to authorize any examination of taxpayer arid the assessment of the correct amount
of tax. The no-contact-audit approach includes the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases and Schedule of Importation submitted by VAT
taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002.
This may also include the matching of data from other information or returns filed by the taxpayers with the BIR such
as Alphalist of Payees subject to Final or Creditable Withholding Taxes.

Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the
computerized/manual matching of sales and purchases/expenses appears to reveal discrepancies, the same shall
be communicated to the concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy
notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the RELIEF
System, a revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in
the absence of an LOA with the aid of a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance with law and are
presumed correct since these are filed under the penalty of perjury27 are easily rebutted and the taxpayer becomes
instantly burdened to explain a purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before
any investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is
merely similar to a Notice for Informal Conference. However, for a Notice of Informal Conference, which generally
precedes the issuance of an assessment notice to be valid, the same presupposes that the revenue officer who
issued the same is properly authorized in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-
2003, was amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against
taxpayers'· issued LNs by reconciling various revenue issuances which conflict with the NIRC. Among the objectives
in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of
LNs to LOAs and assessment and collection of deficiency taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the
concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR within

One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer shall
no longer be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day period from the
LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-
day period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to
replace the LN. The head of the concerned investigating office shall submit a summary list of LNs for conversion to
LAs (using the herein prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the
corresponding LAs with the notation "This LA cancels LN_________ No. "

xxxx

V. PROCEDURES

xxxx

B. At the Regional Office/Large Taxpayers Service

xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for
conversion to LAs, to the concerned investigating offices for the encoding of the required information x x x and for
service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance thereof,
prepare a summary list of said LN s for conversion to LAs x x x.

xxxx

16. Effect the service of the above LAs to the concerned taxpayers.28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED
ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted
into an LOA contrary to the above quoted provision. Surprisingly, the CIR did not even dispute the applicability of the
above provision of RMO 32-2005 in the present case which is clear and unequivocal on the necessity of an LOA for
the· assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant
the reversal of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment.
Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence
of such an authority, the assessment or examination is a nullity.30 (Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR
himself. Under RR No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data
generated under the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of
administrative and criminal .remedies, particularly closure, criminal action, or audit and investigation. Since the law
specifically requires an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA,
the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact Revenue Memorandum
Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of disqualifying the
taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is
specifically required under the NIRC before an examination of a taxpayer may be had while an LN is not found in the
NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is found based on the BIR's RELIEF
System. Second, an LOA is valid only for 30 days from date of issue while an LN has no such limitation. Third, an
LOA gives the revenue officer only a period of 10days from receipt of LOA to conduct his examination of the
taxpayer whereas an LN does not contain such a limitation.31 Simply put, LN is entirely different and serves a
different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN has
serve its purpose, the revenue officer should have properly secured an LOA before proceeding with the further
examination and assessment of the petitioner. Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial
books or records being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires
an authority from the CIR or from his duly authorized representatives before an examination "of a taxpayer" may be
made. The requirement of authorization is therefore not dependent on whether the taxpayer may be required to
physically open his books and financial records but only on whether a taxpayer is being subject to examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster.
The ease by which the BIR's revenue generating objectives is achieved is no excuse however for its non-
compliance with the statutory requirement under Section 6 and with its own administrative issuance. In fact, apart
from being a statutory requirement, an LOA is equally needed even under the BIR's RELIEF System because the
rationale of requirement is the same whether or not the CIR conducts a physical examination of the taxpayer's
records: to prevent undue harassment of a taxpayer and level the playing field between the government' s vast
resources for tax assessment, collection and enforcement, on one hand, and the solitary taxpayer's dual need to
prosecute its business while at the same time responding to the BIR exercise of its statutory powers. The balance
between these is achieved by ensuring that any examination of the taxpayer by the BIR' s revenue officers is
properly authorized in the first place by those to whom the discretion to exercise the power of examination is given
by the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of
their lack of authority was only brought up during the trial of the case. What is crucial is whether the proceedings
that led to the issuance of VAT deficiency assessment against MEDICARD had the prior approval and authorization
from the CIR or her duly authorized representatives. Not having authority to examine MEDICARD in the first place,
the assessment issued by the CIR is inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in
MEDICARD's substantive arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that the gross
receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from
members undiminished by any amount paid or payable to the owners/operators of hospitals, clinics and medical and
dental practitioners. MEDICARD explains that its business as an HMO involves two different although interrelated
contracts. One is between a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the health care institutions/healthcare professionals
and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals
for the coverage of MEDICARD members under specific health related services for a specified period of time in
exchange for payment of a more or less fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per individual, regardless of the amount involved,
already includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would earmark this
latter portion for medical utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in its gross
receipts of its earnings from medical services which it actually and directly rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care
services that are needed by plan holders/members for fixed prepaid membership fees and for a specified period of
time, then MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is,
thus, determined under Section 108(A)32 of the Tax Code, as amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities
whose gross receipts is the amount actually received as contract price without allowing any deduction from the
gross receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and
gross receipts in general were defined, thus:

Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or
constructively received during the taxable period for the services performed or to be performed for another person,
excluding the value-added tax. The compensation for their services representing their service fee, is
presumed to be the total amount received as enrollment fee from their members plus other charges
received.

Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with
the services and deposits applied as payments for services rendered, and advance payments actually or
constructively received during the taxable period for the services performed or to be performed for another
person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross
receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross
receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What
applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 16-2005 and not the modified
definition of gross receipts in general under the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that the
amount received by an HMO as membership fee is the HMO's compensation for their services. As a mere
presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee does
NOT actually compensate it but some other person, which in this case are the medical service providers
themselves. It is a well-settled principle of legal hermeneutics that words of a statute will be interpreted in their
natural, plain and ordinary acceptation and signification, unless it is evident that the legislature intended a technical
or special legal meaning to those words. The Court cannot read the word "presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC does
not contain any specific definition.36 Therefore, absent a statutory definition, this Court has construed the term gross
receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts
without any deduction.37 Congress, under Section 108, could have simply left the term gross receipts similarly
undefined and its interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope
of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the services it
performed or to the amount it received as advance payment for the services it will render in the future for another
person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not
seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare
services (its members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the pre-arranged medical services from its
accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior to being
attended to or admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services, which depends upon its member's
choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical services from
MEDICARD's accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members
obviously knew that beyond the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would
not actually be providing the actual healthcare service. Thus, based on industry practice, MEDICARD informs its
would-be member beforehand that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is exempt from VAT
under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend
the definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another
person, other than the taxpayer, but even to amounts that were indisputably utilized not by MED ICARD itself but by
the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which
renders every word operative is preferred over that which makes some words idle and nugatory. This principle is
expressed in the maxim Ut magisvaleat quam pereat, that is, we choose the interpretation which gives effect to the
whole of the statute – it’s every word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court adopted the principal
object and purpose object in determining whether the MEDICARD therein is engaged in the business of insurance
and therefore liable for documentary stamp tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification for cost after .the services is rendered. Except the
last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way for the rendering of service, even on the contingency that it be
needed, and contracting merely to stand its cost when or after it is rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. In the present case, the VAT is a tax on the value added by the performance of the service by the taxpayer. It
is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT.40 But the Court's
task however is not to weigh these policy considerations but to determine if these considerations in favor of taxation
can even be implied from the statute where the CIR purports to derive her authority. This Court rules that they
cannot because the language of the NIRC is pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to
the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic
that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain
meaning of the tax laws. 41 (Citation omitted and emphasis and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should
have been reasonably founded from the language of the statute. That language is wanting in this case. In the
scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide.
The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by
the courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd, erroneous or
improper.42 The CIR's interpretation of gross receipts in the present case is patently erroneous for lack of both
textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and management
over the funds, the Court does not agree. On the contrary, it is MEDICARD's act of earmarking or allocating 80% of
1âwphi1

the amount it received as membership fee at the time of payment that weakens the ownership imputed to it. By
earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that its possession of the funds
is not in the concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's right
in relation to these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to pay from
the amounts it had allocated as an administrator once its members avail of the medical services of MEDICARD's
healthcare providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked,
corresponding to 80% of its enrollment fees, and paid to the medical service providers should form part of its gross
receipt for VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in
this regard that MEDICARD established that upon receipt of payment of membership fee it actually issued two
official receipts, one pertaining to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical utilization.: Therefore, the
absence of an actual and physical segregation of the amounts pertaining to two different kinds · of fees cannot
arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from proving that indeed services
were rendered by its healthcare providers for which it paid the amount it sought to be excluded from its gross
receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the NIRC,
on one hand, and the utter lack of legal basis of the CIR's position on the computation of MEDICARD's gross
receipts, the Court finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and counter-
arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en
banc grounded as it is on due process violation. The Court likewise rules that for purposes of determining the VAT
liability of an HMO, the amounts earmarked and actually spent for medical utilization of its members should not be
included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision dated
September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB
No. 1224 are REVERSED and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-
2005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act
No. 9337, for purposes of determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty
percent (80%) of the amount of the contract price earmarked as fiduciary funds for the medical utilization of its
members. Further, the Value-Added Tax deficiency assessment issued against Medicard Philippines, Inc. is hereby
declared unauthorized for having been issued without a Letter of Authority by the Commissioner of Internal Revenue
or his duly authorized representatives.

SO ORDERED.
G.R. No. 210588

SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM S.

JACINTO-HENARES, Petitioners
vs.
REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE PLASTIC ENTERPRISES CORPORATION,
Respondents

DECISION

BRION, J.:

This is a direct recourse to this Court from the Regional Trial Court (RTC), Branch 58, Angeles City, through a
petition for review on certiorari1 under Rule 45 of the Rules of Court on a pure question of law. The petition seeks
the reversal of the November 8, 2013 decision2 of the RTC in SCA Case No. 12-410. In the assailed decision, the
RTC declared Revenue Regulation (RR) No. 2-2012 unconstitutional and without force and effect.

The Facts

In response to reports of smuggling of petroleum and petroleum products and to ensure the correct taxes are paid
and collected, petitioner Secretary of Finance Cesar V. Purisima - pursuant to his authority to interpret tax laws3 and
upon the recommendation of petitioner Commissioner of Internal Revenue (CIR) Kim S. Jacinto-Henares signed RR
2-2012 on February 17, 2012.

The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum and
petroleum products coming directly from abroad and brought into the Philippines, including Freeport and economic
zones (FEZs).4 It then allows the credit or refund of any VAT or excise tax paid if the taxpayer proves that the
petroleum previously brought in has been sold to a duly registered FEZ locator and used pursuant to the registered
activity of such locator.5

In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum product, and
must thereafter prove the use of the petroleum product for the locator's registered activity in order to secure a credit
for the taxes paid.

On March 7, 2012, Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a petition for
prohibition and injunction6 against the petitioners to annul and set aside RR 2-2012.

Lazatin posits that Republic Act No. (RA) 94007 treats the Clark Special Economic Zone and Clark Freeport Zone
(together hereinafter referred to as Clark FEZ) as a separate customs territory and allows tax and duty-free
importations of raw materials, capital and equipment into the zone. Thus, the imposition of VAT and excise tax, even
on the importation of petroleum products into FEZs (like Clark FEZ), directly contravenes the law.

The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the proceedings as a co-
petitioner and accordingly entered its appearance and moved for leave of court to file its petition-in- intervention.8

EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented. EPEC insists that RR
2-2012's mechanism of requiring even locators to pay the tax first and to subsequently claim a credit or to refund the
taxes paid effectively removes the locators' tax-exempt status.

The RTC initially issued a temporary restraining order to stay the implementation of RR 2-2012. It eventually issued
a writ of preliminary injunction in its order dated April 4, 2012.

The petitioners questioned the issuance of the writ. On May 17, 2012, they filed a petition for certiorari9 before the
Court of Appeals (CA) assailing the RTC's order. The CA granted the petition10 and denied the respondents'
subsequent motion for reconsideration.11

The respondents stood their ground by filing a petition for review on certiorari before this Court (G.R. No. 208387) to
reinstate the RTC's injunction against the implementation of RR 2-2012, and by moving for the issuance of a
temporary restraining order and/or writ of preliminary injunction. We denied the motion but nevertheless required the
petitioners to comment on the petition.

The proceedings before the RTC in the meanwhile continued. On April 18, 2012, petitioner Lazatin amended his
original petition, converting it to a petition for declaratory relief.12 The RTC admitted the amended petition and
allowed EPEC to intervene.

In its decision dated November 8, 2013, the RTC ruled in favor of Lazatin and EPEC.
First, on the procedural aspect, the RTC held that the original petition's amendment is allowed by the rules and that
amendments are largely preferred; it allowed the amendment in the exercise of its sound judicial discretion to avoid
multiplicity of suits and to give the parties an opportunity to thresh out the issues and finally reach a conclusion.13

Second, the R TC held that Lazatin and EPEC had legal standing to question the validity of RR 2-2012. Lazatin's
allegation that RR 2-2012 effectively amends and modifies RA 9400 gave him standing as a legislator: the
amendment of a tax law is a power that belongs exclusively to Congress. Lazatin's allegation, according to the RTC,
sufficiently shows how his rights, privileges, and prerogatives as a member of Congress were impaired by the
issuance of RR 2-2012.

The RTC also ruled that the case warrants a relaxation on the rules on legal standing because the issues touched
upon are of transcendental importance. The trial court considered the encompassing effect that RR 2- 2012 may
have in the numerous freeport and economic zones in the Philippines, as well as its potential impact on hundreds of
investors operating within the zones.

The RTC then held that even if Lazatin does not have legal standing, EPEC' s intervention cured this defect: EPEC,
as a locator within the Clark FEZ, would be adversely affected by the implementation of RR 2-2012.

Finally, the RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes that,
by law, are not due in the first place.14 Since RA 9400 clearly grants tax and duty-free incentives to Clark FEZ
locators, a revocation of these incentives by an RR directly contravenes the express intent of the Legislature.15 In
effect, the petitioners encroached upon the prerogative to enact, amend, or repeal laws, which the Constitution
exclusively granted to Congress.

The Petition

The petitioners anchor their present petition on two arguments: 1) respondents have no legal standing, and 2) RR 2-
2012 is valid and constitutional.

The petitioners submit that the Lazatin and EPEC do not have legal standing to assail the validity of RR 2-2012.

First, the petitioners claim that Lazatin does not have the requisite legal standing as he failed to exactly show how
the implementation of RR 2-2012 would impair the exercise his official functions. Respondent Lazatin merely
generally alleged that his constitutional prerogatives to pass or amend laws were gravely impaired or were about to
be impaired by the issuance of RR 2-2012. He did not specify the power that he, as a legislator, would be
encroached upon.

While the Clark FEZ is within the district that respondent Lazatin represents, the petitioners emphasize that Lazatin
failed to show that he is authorized to file a case on behalf of the locators in the FEZ, the local government unit, or
his constituents in general.16 To the petitioners, if RR 2- 2012 ever caused injury to the locators or to any of Lazatin's
constituents, only these injured parties possess the personality to question the petitioners' actions; respondent
Lazatin cannot claim this right on their behalf.17

The petitioners claim, too, that the RTC should not have brushed aside the rules on standing on account of
transcendental importance. To them, this case does not involve public funds, only a speculative loss of profits upon
the implementation of RR 2-2012; nor is Lazatin a party with more direct and specific interest to raise the issues in
his petition.18 Citing Senate v. Ermita,19 the petitioners argue that the rules on standing cannot be relaxed.

Second, petitioners also argue that EPEC does not have legal standing to intervene. That EPEC will ultimately bear
the VAT and excise tax as an end-user, is misguided.20 The burden of payment of VAT and excise tax may be
shifted to the buyer21 and this burden, from the point of view of the transferee, is no longer a tax but merely a
component of the cost of goods purchased. The statutory liability for the tax remains with the seller. Thus, EPEC
cannot say that when the burden is passed on to it, RR 2-2012 effectively imposes tax on it as a Clark FEZ locator.

The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers of petroleum products. If
EPEC is indeed a locator, then it enjoys tax and duty exemptions granted by RA 9400 so long as it does not bring
the petroleum or petroleum products to the Philippine customs territory.22

The petitioners legally argue that RR 2-2012 is valid and constitutional.

First, petitioners submit that RR 2-2012's issuance and implementation are within their powers to undertake.23 RR 2-
2012 is an administrative issuance that enjoys the presumption of validity in the manner that statutes enjoy this
presumption; thus, it cannot be nullified without clear and convincing evidence to the contrary.24

Second, petitioners contend that while RA 9400 does grant tax and customs duty incentives to Clark FEZ locators,
there are conditions before these benefits may be availed of. The locators cannot invoke outright exemption from
VAT and excise tax on its importations without first satisfying the conditions set by RA 9400, that is, the importation
must not be removed from the FEZ and introduced into the Philippine customs territory.25
These locators enjoy what petitioners call a qualified tax exemption. They must first pay the corresponding taxes on
its imported petroleum. Then, they must submit the documents required under RR 2-2012. If they have sufficiently
shown that the imported products have not been removed from the FEZ, their earlier payment shall be subject to a
refund.

The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax exemption privilege. The regulation
1âwphi1

simply requires proof that a locator has complied with the conditions for tax exemption. If the locator cannot show
that the goods were retained and/or consumed within the FEZ, such failure creates the presumption that the goods
have been introduced into the customs territory without the appropriate permits.26 On the other hand, if they have
duly proven the disposition of the goods within the FEZ, their "advance payment" is subject to a refund. Thus, to the
petitioners, to the extent that a refund is allowable, there is in reality a tax exemption.27

Counter-arguments

Respondents Lazatin and EPEC, maintaining that they have standing to question its validity, insist that RR 2-2012 is
unconstitutional.

Respondents have standing as

lawmaker and FEZ locator.

The respondents argue that a member of Congress has standing to protect the prerogatives, powers, and privileges
vested by the Constitution in his office.28 As a member of Congress, his standing to question executive issuances
that infringe on the right of Congress to enact, amend, or repeal laws has already been recognized.29 He suffers
substantial injury whenever the executive oversteps and intrudes into his power as a lawmaker.30

On the other hand, the respondents point out that RR 2-2012 explicitly covers FEZs. Thus, being a Clark FEZ
locator, EPEC is among the many businesses that would have been directly affected by its implementation.31

RR 2-2012 illegally imposes taxes

on Clark FEZs.

The respondents underscore that RA 9400 provides FEZ locators certain incentives, such as tax- and duty-free
importations of raw materials and capital equipment. These provisions of the law must be interpreted in a way that
will give full effect to law's policy and objective, which is to maximize the benefits derived from the FEZs in
promoting economic and social development.32

They admit that the law subjects to taxes and duties the goods that were brought into the FEZ and subsequently
introduced to the Philippine customs territory. However, contrary to petitioners' position that locators' tax and duty
exemptions are qualified, their incentives apply automatically.

According to the respondents, petitioners' interpretation of the law contravenes the policy laid down by RA 9400,
because it makes the incentives subject to a suspensive condition. They claim that the condition - the removal of the
goods from the FEZ and their subsequent introduction to the customs territory - is resolutory; locators enjoy the
granted incentives upon bringing the goods into the FEZ. It is only when the goods are shown to have been brought
into the customs territory will the proper taxes and duties have to be paid.33 RR 2-2012 reverses this process by
requiring the locators to pay "advance" taxes and duties first and to subsequently prove that they are entitled to a
refund, thereafter.34 RR 2-2012 indeed allows a refund, but a refund of taxes that were not due in the first place.35

The respondents add that even the refund mechanism under RR 2-2012 is problematic. They claim that RR 2-2012
only allows a refund when the petroleum products brought into the FEZ are subsequently sold to FEZ locators or to
entities that similarly enjoy exemption from direct and indirect taxes. The issuance does not envision a situation
where the petroleum products are directly brought into the FEZ and are consumed by the same
entity/locator.36 Further, the refund process takes a considerable length of time to secure, thus requiring cash outlay
on the part of locators;37 even when the claim for refund is granted, the refund will not be in cash, but in the form of a
Tax Credit Certificate (TCC).38

As the challenged regulation directly contravenes incentives legitimately granted by a legislative act, the
respondents argue that in issuing RR 2-2012, the petitioners not only encroached upon congressional prerogatives
and arrogated powers unto themselves; they also effectively violated, brushed aside, and rendered nugatory the
rigorous process required in enacting or amending laws.39

Issues

We shall decide the following issues:

I. Whether respondents Lazatin and EPEC have legal standing to bring the action of declaratory relief; and

II. Whether RR 2-2012 is valid and constitutional.

The Court's Ruling

We do not find the petition meritorious.

I. Respondents have legal

standing to file petition for
declaratory relief.

The party seeking declaratory relief must have a legal interest in the controversy for the action to prosper.40 This
interest must be material not merely incidental. It must be an interest that which will be affected by the challenged
decree, law or regulation. It must be a present substantial interest, as opposed to a mere expectancy or a future,
contingent, subordinate, or consequential interest.41

Moreover, in case the petition for declaratory relief specifically involves a question of constitutionality, the courts will
not assume jurisdiction over the case unless the person challenging the validity of the act possesses the
requisite legal standing to pose the challenge.42

Locus standi is a personal and substantial interest in a case such that the party has sustained or will sustain direct
injury as a result of the challenged governmental act. The question is whether the challenging party alleges such
personal stake in the outcome of the controversy so as to assure the existence of concrete adverseness that would
sharpen the presentation of issues and illuminate the court in ruling on the constitutional question posed.43

We rule that the respondents satisfy these standards.

Lazatin has legal standing as

a legislator.

Lazatin filed the petition for declaratory relief before the RTC in his capacity as a member of Congress.44 He alleged
that RR 2-2012 was issued directly contravening RA 9400, a legislative enactment. Thus, the regulation encroached
upon the Congress' exclusive power to enact, amend, or repeal laws.45 According to Lazatin, a member of Congress
has standing to challenge the validity of an executive issuance if it tends to impair his prerogatives as a legislator.46

We agree with Lazatin.

In Biraogo v. The Philippine Truth Commission,47 we ruled that legislators have the legal standing to ensure that the
prerogatives, powers, and privileges vested by the Constitution in their office remain inviolate. To this end, members
of Congress are allowed to question the validity of any official action that infringes on their prerogatives as
legislators.48

Thus, members of Congress possess the legal standing to question acts that amount to a usurpation of the
legislative power of Congress.49 Legislative power is exclusively vested in the Legislature. When the implementing
rules and regulations issued by the Executive contradict or add to what Congress has provided by legislation, the
issuance of these rules amounts to an undue exercise of legislative power and an encroachment of Congress'
prerogatives.

To the same extent that the Legislature cannot surrender or abdicate its legislative power without violating the
Constitution,50 so also is a constitutional violation committed when rules and regulations implementing legislative
enactments are contrary to existing statutes. No law can be amended by a mere administrative rule issued for its
implementation; administrative or executive acts are invalid if they contravene the laws or to the Constitution.51

Thus, the allegation that RR 2-2012 - an executive issuance purporting to implement the provisions of the Tax Code
- directly contravenes RA 9400 clothes a member of Congress with legal standing to question the issuance to
prevent undue encroachment of legislative power by the executive.

EPEC has legal standing as a

Clark FEZ locator.

EPEC intervened in the proceedings before the RTC based on the allegation that, as a Clark FEZ locator, it will be
directly affected by the implementation of RR 2-2012.52

We agree with EPEC.

It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and applies to all petroleum and
petroleum products that are imported directly from abroad to the Philippines, including FEZs.53

As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum products will be directly
affected by RR 2-2012. Thus, its interest in the subject matter - a personal and substantial one - gives it legal
standing to question the issuance's validity.
In sum, the respondents' respective interests in this case are sufficiently substantial to be directly affected by the
implementation of RR 2-2012. The RTC therefore did not err when it gave due course to Lazatin's petition for
declaratory relief as well as EPEC's petition-in-intervention.

In light of this ruling, we see no need to rule on the claimed transcendental importance of the issues raised.

II. RR 2-2012 is invalid and

unconstitutional.

On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional because: a) it illegally imposes
taxes upon FEZ enterprises, which, by law, enjoy tax-exempt status, and b) it effectively amends the law (i.e., RA
7227, as amended by RA 9400) and thereby encroaches upon the legislative authority reserved exclusively by the
Constitution for Congress.

FEZ enterprises enjoy tax- and

duty-free incentives on its
importations.

In 1992, Congress enacted RA 7227 otherwise known as the "Bases Conversion and Development Act of 1992" to
enhance the benefits to be derived from the Subic and Clark military reservations.54 RA 7227 established the Subic
Special economic zone and granted such special territory various tax and duty incentives.

To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the legislature enacted RA 9400 to
amend RA 7227.55 Subsequently, the Department of Finance issued Department Order No. 3-200856 to implement
RA 9400 (Implementing Rules).

Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs territory separate and distinct from
the Philippines customs territory. Thus, as opposed to importations into and establishments in the Philippines
customs territory,57 which are fully subject to Philippine customs and tax laws, importations into
and establishments located within the Clark FEZ (FEZ Enterprises )58 enjoy special incentives, including tax and
duty-free importation.59 More specifically, Clark FEZ enterprises shall be entitled to the freeport status of the zone
and a 5% preferential income tax rate on its gross income, in lieu of national and local taxes.60

RA 9400 and its Implementing Rules grant the following:

First, the law provides that importations of raw materials and capital equipment into the FEZs shall be tax- and duty-
free. It is the specific transaction (i.e., importation) that is exempt from taxes and duties.

Second, the law also grants FEZ enterprises tax- and duty-free importation and a preferential rate in the payment of
income tax, in lieu of all national and local taxes. These incentives exempt the establishment itself from taxation.

Thus, the Legislature intended FEZs to enjoy tax incentives in general - whether with respect to the transactions that
take place within its special jurisdiction, or the persons/establishments within the jurisdiction. From this perspective,
the tax incentives enjoyed by FEZ enterprises must be understood to necessarily include the tax exemption
of importations of selected articles into the FEZ.

We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted within the context and in a
manner that promotes the legislative intent of RA 722761 and, by extension, RA 9400. Thus, we recognized that FEZ
enterprises are exempt from both direct and indirect internal revenue taxes.62 In particular, they are considered VAT-
exempt entities.63

In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ enterprises covers
internal revenue taxes imposed on goods brought into the FEZ, including the Clark FEZ, such as VAT and excise
tax.

RR 2-2012 illegally imposes VAT and excise

tax on goods brought into the FEZs.

Section 3 of RR 2-2012 provides the following:

First, whenever petroleum and petroleum products are imported and/or brought directly to the Philippines,
the importer of these goods is required to pay the corresponding VAT and excise tax due on the importation.

Second, the importer, as the payor of the taxes, may subsequently seek a refund of the amount previously paid by
filing a corresponding claim with the Bureau of Customs (BOC).

Third, the claim shall only be granted upon showing that the necessary condition has been fulfilled.
At first glance, this imposition - a mere tax administration measure according to the petitioners - appears to be
consistent with the taxation of similar imported articles under the Tax Code, specifically under its Sections 10764 and
14865 (in relation with Sections 12966 and 13167).

However, RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or brought into the
various FEZs in the Philippines. Hence, when an FEZ enterprise brings petroleum and petroleum products into the
FEZ, under RR 2-2012, it shall be considered an importer liable for the taxes due on these products.

The crux of the controversy can be found in this feature of the challenged regulation.

The petitioners assert that RR 2-2012 simply implements the provisions of the Tax Code on collection of internal
revenue taxes, more specifically VAT and excise tax, on the importation of petroleum and petroleum products. To
them, FEZ enterprises enjoy a qualified tax exemption such that they have to pay the tax due on the importation
first, and thereafter claim a refund, which shall be allowed only upon showing that the goods were not introduced to
the Philippine customs territory.

On the other hand, the respondents contend that RR 2-2012 imposes taxes on FEZ enterprises, which in the first
place are not liable for taxes. They emphasize that the tax incentives under RA 9400 apply automatically upon the
importation of the goods. The proper taxes on the importation shall only be due if the enterprises can later show that
the goods were subsequently introduced to the Philippine customs territory.

Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT and excise tax, as we
discussed above, it follows and we accordingly rule that the taxes imposed by Section 3 of RR 2-2012 directly
contravene these exemptions. First, the regulation erroneously considers petroleum and petroleum products
brought into a FEZ as taxable importations. Second, it unreasonably burdens FEZ enterprises by making them pay
the corresponding taxes - an obligation from which the law specifically exempts them - even if there is a subsequent
opportunity to refund the payments made.

Petroleum and petroleum products brought

into the FEZ and which remain therein are
not taxable importations.

RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and petroleum products into
FEZs. Strictly speaking, however, articles brought into these FEZs are not taxable importations under the law based
on the following considerations:

First, importation refers to bringing goods from abroad into the Philippine customs jurisdiction. It begins from the
time the goods enter the Philippine jurisdiction and is deemed terminated when the applicable taxes and duties have
been paid or the goods have left the jurisdiction of the BOC.68

Second, under the Tax Code, imported goods are subject to VAT and excise tax. These taxes shall be paid prior to
the release of the goods from customs custody.69 Also, for VAT purposes,70 an importer refers to any person who
brings goods into the Philippines.

Third, the Philippine VAT system adheres to the cross border doctrine.71 Under this rule, no VAT shall be imposed to
form part of the cost of the goods destined for consumption outside the Philippine customs territory.72 Thus, we have
already ruled before that an FEZ enterprise cannot be directly charged for the VAT on its sales, nor can VAT be
passed on to them indirectly as added cost to their purchases.73

Fourth, laws such as RA 7227, RA 7916, and RA 9400 have established certain special areas as separate customs
territories .74 In this regard, we have already held that such jurisdictions, such as the Clark FEZ, are, by legal fiction,
foreign territories.75

Fifth, the Implementing Rules provides that goods initially introduced into the FEZs and subsequently brought
out therefrom and introduced into the Philippine customs territory shall be considered as importations and thereby
subject to the VAT.76 One such instance is the sale by any FEZ enterprise to a customer located in the customs
territory, which the VAT regulations refer to as a technical importation.77

We find it clear from all these that when goods (e.g., petroleum and petroleum products) are brought into an
FEZ, the goods remain to be in foreign territory and are not therefore goods introduced into Philippine customs
territory subject to Philippine customs and tax laws.78

Stated differently, goods brought into and traded within an FEZ are generally beyond the reach of national internal
revenue taxes and customs duties enforced in the Philippine customs territory. This is consistent with the incentive
granted to FEZs exempting the importation itself from taxes and duties.

Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As long as the goods remain (e.g.,
sale and/or consumption of the article within the FEZ) in the FEZ or re-exported to another foreign jurisdiction, they
shall continue to be tax-free.79 However, once the goods are introduced into the Philippine customs territory, it
ceases to enjoy the tax privileges accorded to FEZs. It shall then be considered as an importation subject to all
applicable national internal revenue taxes and customs duties.

The tax exemption granted to FEZ

enterprises is an immunity from tax liability
and from the payment of the tax.

The respondents claim that when RR 2-2012 was issued, petroleum and petroleum products brought into the FEZ
by FEZ enterprises suddenly became subject to VAT and excise tax, in direct contravention of RA 9400 (with
respect to Clark FEZ enterprises). Such imposition is not authorized under any law, including the Tax Code.80

On the other hand, the petitioners argue that RR 2-2012 does not withdraw the tax exemption privileges of FEZ
enterprises. As their tax exemption is merely qualified, they cannot invoke outright exemption. Thus, FEZ
1âwphi1

enterprises are required to pay internal revenue taxes first on their imported petroleum under RR 2-2012. They may
then refund their previous payment upon showing that the condition under RA 9400 has been satisfied - that is, the
goods have not been introduced to the Philippines customs territory.81 To the petitioners, to the extent that a refund
is allowable, there is still in reality a tax exemption.82

We disagree with this contention.

First, FEZ enterprises bringing goods into the FEZ should not be considered as importers subject to tax in the same
manner that the very act of bringing goods into these special territories does not make them taxable
importations. We emphasize that the exemption from taxes and duties under RA 9400 are granted not only
to importations into the FEZ, but also specifically to each FEZ enterprise. As discussed, the tax exemption enjoyed
by FEZ enterprises necessarily includes the tax exemption of the importations of selected articles into the FEZ.

Second, the essence of a tax exemption is the immunity or freedom from a charge or burden to which others are
subjected.83 It is a waiver of the government's right to collect84 the amounts that would have been collectible under
our tax laws. Thus, when the law speaks of a tax exemption, it should be understood as freedom from the imposition
and payment of a particular tax.

Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does not amount to a tax
exemption. Even if the possibility of a subsequent refund exists, the fact remains that FEZ enterprises must still
spend money and other resources to pay for something they should be immune to in the first place. This completely
contradicts the essence of their tax exemption.

In the same vein, we cannot agree with the view that FEZ enterprises have the duty to prove their entitlement to tax
exemption first before fully enjoying the same; we find it illogical to determine whether a person is exempted from
tax without first determining if he is subject to the tax being imposed. We have reminded the tax authorities to
determine first if a person is liable for a particular tax, applying the rule of strict interpretation of tax laws, before
asking him to prove his exemption therefrom.85 Indeed, as entities exempted on taxes on importations, FEZ
enterprises are clearly beyond the coverage of any law imposing those very charges. There is no justifiable reason
to require them to prove that they are exempted from it.

More importantly, we have also recognized that the exemption from local and national taxes granted under RA
7227, as amended by RA 9400, are ipso facto accorded to FEZs. In case of doubt, conflicts with respect to such tax
exemption privilege shall be resolved in favor of these special territories.86

RR 2-2012 is unconstitutional.

According to the respondents, the power to enact, amend, or repeal laws belong exclusively to Congress.87 In
passing RR 2-2012, petitioners illegally amended the law - a power solely vested on the Legislature.

We agree with the respondents.

The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not enlarge, alter,
restrict, or otherwise go beyond the provisions of the law they administer; administrators and implementors cannot
engraft additional requirements not contemplated by the legislature.88

It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to
implement. While it purportedly establishes mere administration measures for the collection of VAT and excise tax
on the importation of petroleum and petroleum products, not once did it mention the pertinent chapters of the Tax
Code on VAT and excise tax.

While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures proposed by the issuance
cannot be implemented at the expense of entities that have been clearly granted statutory tax immunity.

REVISED PAGE
Tax exemptions are granted for specific public interests that the Legislature considers sufficient to offset the
monetary loss in the grant of exemptions.89 To limit the tax-free importation privilege of FEZ enterprises by requiring
them to pay subject to a refund clearly runs counter to the Legislature's intent to create a free port where the "free
flow of goods or capital within, into, and out of the zones" is ensured.90

Finally, the State's inherent power to tax is vested exclusively in the Legislature.91 We have since ruled that the
power to tax includes the power to grant tax exemptions.92 Thus, the imposition of taxes, as well as the
grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment.

As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the legislative to
FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved exclusively to Congress, in
violation of the doctrine of separation of powers.

In these lights, we hereby rule and declare that RR 2-2012 is null and void.

WHEREFORE, we hereby DISMISS the petition for lack of merit, and accordingly AFFIRM decision of the Regional
Trial Court dated November 8, 2013 2001 in SCA Case No. 12-410.

SO ORDERED.