Tax Liabilities of Pawnshops

Tax liabilities of Pawnshop

Tambunting Pawnshop Inc., v Commissioner of Internal Revenue. GR 179085.

Facts: Tambunting Pawnshop protested the assessment of the CIR arguing the followingCTA ruled that Tambunting is liable for VAT and documentary stamp tax but not for withholding tax on compensation and expanded withholding tax. Tambunting asked for reconsideration which was denied thus the case reached the Supreme Court.

Issue: Whether pawnshops are liable for taxes

Contention of Tambunting: Pawnshops are not subject to Value Added Tax pursuant to Section 108 of the National Internal Revenue Code. Tambunting properly withheld and remitted to the respondent the correct amount of expanded withholding tax for taxable year 1999. Tambunting has already paid the assessed amount of P14,398.38 ,representing deficiency withholding tax on compensation, thus, assessment on withholding on compensation must be cancelled. Tambunting’s pawn tickets are not subject to documentary stamp tax pursuant to existing laws and jurisprudence.

Contention of CIR: Pawnshops are liable for the said taxes.

Ruling: In favor of TambuntingThe Decision of the CTA is modified that the assessment deficiency value-added taxes and for surcharges and delinquency interest on deficient Value-Added Tax and Documentary Income Tax are set aside.A pawnshop is not enumerated as one of those engaged in “sale or exchange of services” in Section 108 of the National Internal Revenue Code. The nature of the business of pawnshops does not fall under “service”. R.A. No. 9238 (2004) finally classified pawnshops as Other Non-bank Financial Intermediaries. The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law. The services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were specifically exempted from VAT, 28 and the 0% to 5% percentage tax on gross receipts on other non-bank financial intermediaries was reimposed under Section 122 of the Tax Code of 1997. Pawnshops should pay documentary stamp tax for it is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. But regarding surcharges and interest Tambunting is not liable. It is settled that good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the imposition of surcharges and interest.

Off-line carrier doing business in the Philippines subject to 32% tax

South African Airways v CIR, GR 180356

Facts: South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa. Its principal office is located at South Africa. In the Philippines, it is an internal air carrier having no landing rights in the country. South African Airways has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioner’s off-line flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. South African Airways is not registered with the Securities and Exchange Commission as a corporation, branch office, or partnership. It is not licensed to do business in the Philippines. For the taxable year 2000, South African Airways filed separate quarterly and annual income tax returns for its off-line flights, where the total is P1,727,766.38.Later, South African Airways filed with the BIR, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings(GPB) for the taxable year 2000. The claim was unheeded. Thus, South African Airways filed a Petition for Review with the CTA for the refund of the abovementioned amount. CTA First Division denied the petition for lack of merit. The CTA ruled that South African Airways is a resident foreign corporation engaged in trade or business in the Philippines. It further ruled that petitioner was not liable to pay tax on its GPB under NIRC. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its income derived from the sales of passage documents in the Philippines. Thus, the refund is denied. South African Airways’ appeal to the CTA en banc was denied . Issue: Whether South African Airways , as an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax Contention of South African Airways. The new definition of GPB, it is no longer liable under the NIRC Further, South African Airways argues that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax. South African Airways’ interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.

Contention CIR . South African Airways is liable for 32% income for it is engaged in trade and business in the Philippines.

Ruling: In favor of CIR. South African Airways is liable for 32% income tax. The place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is included in GPB. The Court ruled that off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and that their income from sales of passage documents here is income from within the Philippines. Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Had legislature’s intentions been to completely exclude all international air carriers from the application of the general rule under Sec. 28, it would have used the appropriate language to do so; but the legislature did not. The general rule is that resident foreign corporations shall be liable for a 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income “from carriage of persons, excess baggage,

cargo and mail originating from the Philippines” which shall be taxed at 2 1/2% of their Gross Philippine Billings. South African Airways, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule.

Minimum Corporate TaxChamber of Real Estate v Exec Sec Romulo, GR 160756

Facts: Chamber of Real Estate is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.Chamber of Real Estate assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Chamber of Real Estate argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. Chamber of Real Estate also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets.

Issue: Whether the imposition of the MCIT on domestic corporations is unconstitutional

Contention of Chamber of Real Estate: The enumerated provisions of the subject revenue regulations violate the due process clause because, the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector. Contention of Exec Sec Romulo: Chamber of Real Estate is liable for MCIT.

Ruling: MCIT does not violate Due ProcessThe MCIT was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution. The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered. 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.” An income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, and other direct expenses from gross sales. Clearly, the capital is not being taxedFurthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT

merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Invalid waivers of prescriptive period to assessCommissioner of Internal Revenue v Kudos Metal Corporation. GR 178087

Facts: Kudos Metal Corporation filed its ITR for the taxable year 1998. BIR served upon respondent three Notices of Presentation of Records. Kudos Metal Corporation failed to comply with these notices, hence, the BIR issued a Subpeona Duces Tecum, receipt of which was acknowledged by respondent’s President, Mr. Chan Ching Bio.Kudos Metal Corporation accountant, executed a Waiver of the Defense of Prescription. This was followed by a second Waiver of Defense of Prescription.BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the Kudos Metal Corporation . This was followed by a Formal Letter of Demand with Assessment Notices.Kudos Metal Corporation challenged the assessments by filing its “Protest on Various Tax Assessments” and its “Legal Arguments and Documents in Support of Protests against Various Assessments” .BIR rendered a decision on the matter, requesting the immediate payment of the tax liabilities.Believing that the government’s right to assess taxes had prescribed, Kudos Metal Corporation filed a Petition for Review with the CTA. The CTA Second Division issued a Resolution canceling the assessment notices issued against Kudos Metal Corporation for having been issued beyond the prescriptive period. It found the first Waiver of the Statute of Limitations incomplete and defective for failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90.

Issue: Whether the government’s right to assess taxes is not barred by prescription

Contention of CIR. Assistant Commissioner is not the revenue official authorized to sign the waiver, as the tax case involves more than P1,000,000.00. In this regard, only the Commissioner is authorized to enter into agreement with the petitioner in extending the period of assessment. The waiver also failed to indicate the date of acceptance. Such date of acceptance is necessary to determine whether the acceptance was made within the prescriptive period. The fact of receipt by the taxpayer of his file copy was not indicated on the original copy. The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but also of the acceptance by the BIR and the perfection of the agreement. Contention of Kudos Metal Corporation: Kudos Metal Corporation argues that the government’s right to assess taxes is not barred by prescription as the two waivers executed by respondent, through its accountant, effectively tolled or extended the period within which the assessment can be made. In disputing the conclusion of the CTA that the waivers are invalid, Kudos Metal Corporationclaims that respondent is estopped from adopting a position contrary to what it has previously taken. Kudos Metal Corporation insists that by acquiescing to the audit during the period specified in the waivers, respondent led the government to believe that the “delay” in the process would not be utilized against it. Thus, respondent may no longer repudiate the validity of the waivers and raise the issue of prescription. Ruling: In favor of CIR Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. A perusal of the waivers executed by Kudos Metal Corporation’s accountant reveals the following infirmities: (1)The waivers were executed without the notarized written authority of Pasco (accountant) to sign the waiver in behalf of respondent, (2)The waivers failed to indicate the date of acceptance. (3)The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers. Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments were issued by the BIR beyond the three-year period and are void.

Deposits for future subscription not subject to DSTCommissioner of Internal Revenue v First Express Pawnshop Co, Inc. GR 172045

Facts: CIR, issued the following assessment notices against First Express Pawnshop Company, Inc. An assessment for deficiency income tax of P20,712.58 with compromise penalty of P3,000, an assessment for deficiency VAT of P601,220.18 with compromise penalty of P16,000, an assessment for deficiency documentary stamp tax (DST) of P12,328.45 on deposit on subscription with compromise penalty of P2,000 and an assessment for deficiency DST of P62,128.87 on pawn tickets with compromise penalty of P8,500.CIR did not act on the protest during the 180-day period. Express Pawnshop contended that CIR did not consider the supporting documents on the interest expenses and donations which resulted in the deficiency income tax.Express Pawnshop maintained that pawnshops are not lending investors whose services are subject to VAT, hence it was not liable for deficiency VAT. Express Pawnshop also alleged that no deficiency DST was due because Section 180 of the NIRC does not cover any document or transaction which relates to Express Pawnshop. Express Pawnshop also argued that the issuance of a pawn ticket did not constitute a pledge. CIR alleged that the assessment was valid and correct and the taxpayer had the burden of proof to impugn its validity or correctness. CIR maintained that Express Pawnshop is subject to 10% VAT based on its gross receipts). CIR also cited BIR Ruling No. 221-91 which provides that pawnshop tickets are subject to DST. Express Pawnshop paid P27,744.88 as deficiency income tax inclusive of interest. CTA later on ruled to cancel stamp tax but held that Express Pawnshop still liable for VAT. CTA En Banc promulgated a Decision affirming Express Pawnshop’s liability to pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that Express Pawnshop’s deposit on subscription was not subject to DST. Issue: Whether Express Pawnshop is liable for DST on deposit on subscription of capital stock. Contention of Express PawnshopExpress Pawnshop argues that deposit on future subscription is not subject to DST under Section 175 of the Tax Code. It must be noted that deposits on subscription represent advances made by the stockholders and are in the nature of liabilities for which stocks may be issued in the future. Absent any express agreement between the stockholders and petitioner to convert said advances/deposits to capital stock, either through a subscription agreement or any other document, these deposits remain as liabilities owed by Express Pawnshop to its stockholders. For these deposits to be subject to DST, it is necessary that a conversion/subscription agreement be made by First Express and its stockholders. Absent such conversion, no DST can be imposed on said deposits under Section 175 of the Tax Code.Contention of CIRCTA erred in disregarding the rule on the finality of assessments prescribed under Section 228 of the Tax Code. CIR asserts that even if Express Pawnshop filed a protest, it did not offer evidence to prove its claim that the deposit on subscription was an “advance” made by Express Pawnshop’s stockholders. CIR alleges that Express Pawnshop’s failure to submit supporting documents within 60 days from the filing of its protest as required under Section 228 of the Tax Code caused the assessment for deposit on subscription to become final and unassailable. Ruling: In favor of Express Pawnshop DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually an excise tax because it is imposed on the transaction rather than on the document. In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. The Court explained that the DST attaches upon acceptance of the stockholder’s subscription in the corporation’s capital stock regardless of actual or constructive delivery of the certificates of stock. In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in

blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer of certificates of stock As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same. The deposit on stock subscription as reflected in Express Pawnshop Balance Sheet as of 1998 is not a subscription agreement subject to the payment of DST. The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, Express Pawnshop is not liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

Local Government in case of collection of local taxes where there is no express provision in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxSan Roque Power Co. v CIR, GR no. 180345

Facts: San Roque Power is a domestic corporation organized under the corporate laws. It was incorporated for the sole purpose of building and operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an indivisible project consisting of the power station, the dam, spillway, and other related facilities San Roque Power entered into a Power Purchase Agreement (PPA) with

the National Power Corporation (NPC) to develop the hydro potential

of the Lower Agno River, and to be able to generate additional power

and energy for the Luzon Power Grid. The PPA provides that San

Roque Power shall be responsible for the design, construction,

installation, completion and testing and commissioning of the Power

Station and it shall operate and maintain the same, subject to the

instructions of the NPC. During the cooperation period of 25 years

commencing from the completion date of the Power Station, the NPC

shall purchase all the electricity generated by the Power Plant.

Because of the exclusive nature of the PPA between San Roque Power

and the NPC, San Roque Power applied for and was granted five

Certificates of Zero Rate by the BIR, through the Chief Regulatory

Operations Monitoring Division, now the Audit Information, Tax

Exemption & Incentive Division. Based on these certificates, the

zero-rated status of San Roque Power commenced and continued

throughout the year.

San Roque Power filed with the CIR its Monthly VAT Declarations and

Quarterly VAT Returns.

San Roque Power filed with the BIR four separate administrative claims

for refund of Unutilized Input VAT paid. In these letters addressed to

the BIR, explained that San Roque Power’s sale of power to NPC are

subject to VAT at zero percent rate, in accordance with Section

108(B)(3) of the NIRC. San Roque Power sought to recover the total

amount of P250,258,094.25, representing its unutilized excess VAT

on its importation of capital and other taxable goods and services.

CIR failed to act on the request for tax refund or credit of San Roque

Power, which prompted the latter to file, with the CTA in Division, a

Petition for Review, before it could be barred by the two-year

prescriptive period within which to file its claim. Petitioner sought the

refund representing its unutilized excess VAT on its importation and

local purchases of various goods and services for the year 2002.

Issue: Whether the sales are subject to value-added taxes at

effectively zero percent (0%) rate;

2. Whether or not petitioner incurred input taxes

which are attributable to its effectively zero-rated transactions;

3. Whether or not petitioner’s importation and

purchases of capital goods and related services are within the scope and meaning of “capital goods” under Revenue Regulations No. 7-95;

4. Whether or not petitioner’s input taxes are

sufficiently substantiated with VAT invoices or official receipts;

5. Whether or not the VAT input taxes being claimed

for refund/tax credit by petitioner (had) been credited or utilized against any output taxes or (had) been carried forward to the succeeding quarter or quarters; and

6. Whether or not petitioner is entitled to a refund of

VAT input taxes it paid from January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos (P249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to

refund or tax credit in the amount of P249,397,620.18 representing its

unutilized input VAT paid on importation and purchases of capital and

other taxable goods and services from January 1 to December 31,

2002.

After a hearing on the merits, the CTA Second Division

rendered a

Decisio

nhttp://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345

http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm#_ftn16

.htm - _ftn16 dated 23 March 2006 denying petitioner’s claim for tax

refund or credit. The CTA noted that petitioner based its claim on

creditable input VAT paid, which is attributable to (1) zero-rated or

effectively zero-rated sale, as provided under Section 112(A) of the

NIRC, and (2) purchases of capital goods, in accordance with Section

112(B) of the NIRC. The court ruled that in order for petitioner to be

entitled to the refund or issuance of a tax credit certificate on the

basis of Section 112(A) of the NIRC, it must establish that it had

incurred zero-rated sales or effectively zero-rated sales for the

taxable year 2002. Since records show that petitioner did not make

any zero-rated or effectively-zero rated sales for the taxable year

2002, the CTA reasoned that petitioner’s claim must be denied.

Parenthetically, the court declared that the claim for tax refund or

credit based on Section 112(B) of the NIRC requires petitioner to

prove that it paid input VAT on capital goods purchased, based on

the definition of capital goods provided under Section 4.112-1(b) of

Revenue Regulations No. 7-95—i.e., goods or properties which have

an estimated useful life of greater than one year, are treated as

depreciable assets under Section 34(F) of the NIRC, and are used

directly or indirectly in the production or sale of taxable goods and

services. The CTA found that the evidence offered by petitioner—the

suppliers’ invoices and official receipts and Import Entries and

Internal Revenue Declarations and the audit report of the Court-

commissioned Independent Certified Public Accountant (CPA) are

insufficient to prove that the importations and domestic purchases

were classified as capital goods and properties entered as part of the

“Property, Plant and Equipment” account of the petitioner. The

dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn17

Not satisfied with the foregoing Decision dated 23 March 2006,

petitioner filed a Motion for Reconsideration which was denied by the




CTA Second Division in a Resolution dated 4 January

2007

.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.

htm - _ftn18

Petitioner filed an appeal with the CTA En Banc, docketed as

CTA EB No. 248. The CTA En Banc promulgated its

Decisio


.htm - _ftn19 on 20 September 2007 denying petitioner’s appeal. The

CTA En Banc reiterated the ruling of the Division that petitioner’s

claim based on Section 112(A) of the NIRC should be denied since it

did not present any records of any zero-rated or effectively zero-rated

transactions. It clarified that since petitioner failed to prove that any

sale of its electricity had transpired, petitioner may base its claim only

on Section 112(B) of the NIRC, the provision governing the purchase

of capital goods. The court noted that the report of the Court-

commissioned auditing firm, Punongbayan & Araullo, dealt

specifically with the unutilized input taxes paid or incurred by

petitioner on its local and foreign purchases of goods and services

attributable to its zero-rated sales, and not to purchases of capital

goods. It decided that petitioner failed to prove that the purchases

evidenced by the invoices and receipts, which petitioner presented,

were classified as capital goods which formed part of its “Property,

Plant and Equipment,” especially since petitioner failed to present its

books of account. The dispositive part of the said Decision reads:

WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby AFFIRMED.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn20

The CTA En Banc denied petitioner’s Motion for

Reconsideration in a Resolution dated 22 October

2007








htm - _ftn21

Hence, the present Petition for Review where the petitioner

raises the following errors allegedly committed by the CTA En banc:

I

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

II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF LAW.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn22

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may

claim a tax refund or credit in the amount of P249,397,620.18 for

creditable input tax attributable to zero-rated or effectively zero-rated

sales pursuant to Section 112(A) of the NIRC or for input taxes paid

on capital goods as provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and

the evidence offered by the parties. It is an accepted doctrine that this

Court is not a trier of facts. It is not its function to review, examine





and evaluate or weigh the probative value of the evidence

presented. However, this rule does not apply where the judgment is

premised on a misapprehension of facts, or when the appellate court

failed to notice certain relevant facts which if considered would justify

a different

conclusion


htm - _ftn23

After reviewing the records, this Court finds that petitioner’s

claim for refund or credit is justified under Section 112(A) of the NIRC

which states that:

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

(A) Zero-rated or Effectively Zero-rated Sales—Any

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

To claim refund or tax credit under Section 112(A), petitioner

must comply with the following criteria: (1) the taxpayer is VAT

registered; (2) the taxpayer is engaged in zero-rated or effectively

zero-rated sales; (3) the input taxes are due or paid; (4) the input

taxes are not transitional input taxes; (5) the input taxes have not



been applied against output taxes during and in the succeeding

quarters; (6) the input taxes claimed are attributable to zero-rated or

effectively zero-rated sales; (7) for zero-rated sales under Section

106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable

foreign currency exchange proceeds have been duly accounted for in

accordance with BSP rules and regulations; (8) where there are both

zero-rated or effectively zero-rated sales and taxable or exempt

sales, and the input taxes cannot be directly and entirely attributable

to any of these sales, the input taxes shall be proportionately

allocated on the basis of sales volume; and (9) the claim is filed

within two years after the close of the taxable quarter when such

sales were

made


htm - _ftn24

Based on the evidence presented, petitioner complied with the

abovementioned requirements. Firstly, petitioner had adequately

proved that it is a VAT registered taxpayer when it presented

Certificate of Registration No. OCN-98-006-007394, which it attached

to its Petition for Review dated 29 March 2004 filed before the CTA in

Division. Secondly, it is unquestioned that petitioner is engaged in

providing electricity for NPC, an activity which is subject to zero rate,

under Section 108(B)(3) of the NIRC. Thirdly, petitioner offered as

evidence suppliers’ VAT invoices or official receipts, as well as Import

Entries and Internal Revenue Declarations (Exhibits “J-4-A1” to “J-4-

L265”), which were examined in the audit conducted by Aguilar, the

Court-commissioned Independent CPA. Significantly, Aguilar noted

in his audit report (Exhibit “J-2”) that of the P249,397,620.18 claimed

by petitioner, he identified items with incomplete documentation and

errors in computation with a total amount of P3,266,009.78. Based

on these findings, the remaining input VAT of P246,131,610.40 was

properly documented and recorded in the books. The said report

reads:



In performing the procedures referred under the Procedures Performed section of this report, no matters came to our attention that cause us to believe that the amount of input VAT applied for as tax credit certificate/refund of P249,397,620.18 for the period January 1, 2002 to December 31, 2002 should be adjusted except for input VAT claimed with incomplete documentation, those with various and other exceptions on the supporting documents and those with errors in computation totaling P3,266,009.78, as discussed in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report. We have also ascertained that the input VAT claimed are properly recorded in the books and, except as specifically identified in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly supported by original and appropriate suppliers’ VAT invoices and/or official receipts.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn25

Fourthly, the input taxes claimed, which consisted of local purchases

and importations made in 2002, are not transitional input taxes, which

Section 111 of the NIRC defines as input taxes allowed on the

beginning inventory of goods, materials and

supplies


htm - _ftn26 Fifthly, the audit report of Aguilar affirms that the input

VAT being claimed for tax refund or credit is net of the input VAT that

was already offset against output VAT amounting to P26,247.27 for

the first quarter of 2002 and P34,996.36 for the fourth quarter of

2002

,http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.

htm - _ftn27 as reflected in the Quarterly VAT

Returns


htm - _ftn28

The main dispute in this case is whether or not petitioner’s

claim complied with the sixth requirement—the existence of zero-

rated or effectively zero-rated sales, to which creditable input taxes









may be attributed. The CTA in Division and en banc denied

petitioner’s claim solely on this ground. The tax courts based this

conclusion on the audited report, marked as Exhibit “J-2,” stating that

petitioner made no sale of electricity to NPC in

2002


htm - _ftn29 Moreover, the affidavit of Echevarria (Exhibit “L”),

petitioner’s Vice President and Director for Finance, contained an

admission that no commercial sale of electricity had been made in

favor of NPC in 2002 since the project was still under construction at

that

time


htm - _ftn30

However, upon closer examination of the records, it appears

that on 2002, petitioner carried out a “sale” of electricity to NPC. The

fourth quarter return for the year 2002, which petitioner filed, reported

a zero-rated sale in the amount of

P

42,500,000.00.http://sc.judiciary.gov.ph/jurisprudence/2009/novembe

r2009/180345.htm - _ftn31 In the Affidavit of Echevarria dated 9

February 2005 (Exhibit “L”), which was uncontroverted by

respondent, the affiant stated that although no commercial sale was

made in 2002, petitioner produced and transferred electricity to NPC

during the testing period in exchange for the amount of

P42,500,000.00, to

wit

:http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.

htm - _ftn32

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









The Court is not unmindful of the fact that the transaction

described hereinabove was not a commercial sale. In granting the

tax benefit to VAT-registered zero-rated or effectively zero-rated

taxpayers, Section 112(A) of the NIRC does not limit the definition of

“sale” to commercial transactions in the normal course of business.

Conspicuously, Section 106(B) of the NIRC, which deals with the

imposition of the VAT, does not limit the term “sale” to commercial

sales, rather it extends the term to transactions that are “deemed”

sale, which are thus enumerated:

SEC 106. Value-Added Tax on Sale of Goods or Properties. x x x x (B) Transactions Deemed Sale.—The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to:

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

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable

construction of the law that when the term “sale” is made to include

certain transactions for the purpose of imposing a tax, these same

transactions should be included in the term “sale” when considering

the availability of an exemption or tax benefit from the same revenue

measures. It is undisputed that during the fourth quarter of 2002,

petitioner transferred to NPC all the electricity that was produced

during the trial period. The fact that it was not transferred through a

commercial sale or in the normal course of business does not deflect

from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange

proceeds is inapplicable where petitioner’s zero-rated sale of

electricity to NPC did not involve foreign exchange and consisted

only of a single transaction wherein NPC paid petitioner

P42,500,000.00 in exchange for the electricity transferred to it by

petitioner. Similarly, the eighth requirement is inapplicable to this

case, where the only sale transaction consisted of an effectively zero-

rated sale and there are no exempt or taxable sales that transpired,

which will require the proportionate allocation of the creditable input

tax paid.

The last requirement determines that the claim should be filed


sales were made. The sale of electricity to NPC was reported at the

fourth quarter of 2002, which closed on 31 December 2002.

Petitioner had until 30 December 2004 to file its claim for refund or

credit. For the period January to March 2002, petitioner filed an

amended request for refund or tax credit on 30 May 2003; for the

period July 2002 to September 2002, on 27 February 2003; and for

the period October 2002 to December 2002, on 31 July

2003


htm - _ftn33 In these three quarters, petitioners seasonably filed its

requests for refund and tax credit. However, for the period April 2002

to May 2002, the claim was filed prematurely on 25 October 2002,

before the last quarter had closed on 31 December

2002


htm - _ftn34





Despite this lapse in procedure, this Court notes that petitioner

was able to positively show that it was able to accumulate excess

input taxes on various importations and local purchases in the

amount of P246,131,610.40, which were attributable to a transfer of

electricity in favor of NPC. The fact that it had filed its claim for

refund or credit during the quarter when the transfer of electricity had

taken place, instead of at the close of the said quarter does not make

petitioner any less entitled to its claim. Given the special

circumstances of this case, wherein petitioner was incorporated for

the sole purpose of constructing or operating a power plant that will

transfer all the electricity it generates to NPC, there is no danger that

petitioner would try to fraudulently claim input tax paid on purchases

that will be attributed to sale transactions that are not zero-rated.

Substantial justice, equity and fair play are on the side of the

petitioner. Technicalities and legalisms, however, exalted, should not

be misused by the government to keep money not belonging to it,

thereby enriching itself at the expense of its law abiding citizens.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received something “when there [was] no right to demand it,” and thus, it has the obligation to return it. Heavily militating against respondent Commissioner is the ancient principle that no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn35 It bears emphasis that effective zero-rating is not intended as a

benefit to the person legally liable to pay the tax, such as petitioner,

but to relieve certain exempt entities, such as the NPC, from the

burden of indirect tax so as to encourage the development of

particular industries. Before, as well as after, the adoption of the



VAT, certain special laws were enacted for the benefit of various

entities and international agreements were entered into by the

Philippines with foreign governments and institutions exempting sale

of goods or supply of services from indirect taxes at the level of their

suppliers. Effective zero-rating was intended to relieve the exempt

entity from being burdened with the indirect tax which is or which will

be shifted to it had there been no exemption. In this case, petitioner

is being exempted from paying VAT on its purchases to relieve NPC

of the burden of additional costs that petitioner may shift to NPC by

adding to the cost of the electricity sold to the

latter


htm - _ftn36

Section 13 of Republic Act No. 6395, otherwise known as the

NPC Charter, further clarifies that it is the lawmakers’ intention that

NPC be made completely exempt from all taxes, both direct and

indirect:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities. - The corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities, and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities;



(c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of foreign goods, required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the corporation in the generation, transmission, utilization, and sale of electric power. To limit the exemption granted to the NPC to direct taxes,

notwithstanding the general and broad language of the statute will be

to thwart the legislative intention in giving exemption from all forms of

taxes and impositions, without distinguishing between those that are

direct and those that are

not


htm - _ftn37

Congress granted NPC a comprehensive tax exemption

because of the significant public interest involved. This is enunciated

in Section 1 of Republic Act No. 6395:

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

The ability of the NPC to provide sufficient and affordable electricity

throughout the country greatly affects our industrial and rural

development. Erroneously and unjustly depriving industries that

generate electrical power of tax benefits that the law clearly grants



will have an immediate effect on consumers of electricity and long

term effects on our economy.

In the same breath, we cannot lose sight of the fact that it is the

declared policy of the State, expressed in Section 2 of Republic Act

No. 9136, otherwise known as the EPIRA Law, “to ensure and

accelerate the total electrification of the country;” “to enhance the

inflow of private capital and broaden the ownership base of the power

generation, transmission and distribution sectors;” and “to promote

the utilization of indigenous and new and renewable energy

resources in power generation in order to reduce dependence on

imported energy.” Further, Section 6 provides that “pursuant to the

objective of lowering electricity rates to end-users, sales of generated

power by generation companies shall be value-added tax zero-rated.

Section 75 of said law succinctly declares that “this Act shall,

unless the context indicates otherwise, be construed in favor of the

establishment, promotion, preservation of competition and power

empowerment so that the widest participation of the people, whether

directly or indirectly is ensured.”

The objectives as set forth in the EPIRA Law can only be

achieved if government were to allow petitioner and others similarly

situated to obtain the input tax credits available under the law.

Denying petitioner such credits would go against the declared

policies of the EPIRA Law.

The legislative grant of tax relief (whether in the EPIRA Law or

the Tax Code) constitutes a sovereign commitment of Government to

taxpayers that the latter can avail themselves of certain tax reliefs

and incentives in the course of their business activities here. Such a

commitment is particularly vital to foreign investors who have been

enticed to invest heavily in our country’s infrastructure, and who have

done so on the firm assurance that certain tax reliefs and incentives

can be availed of in order to enable them to achieve their projected

returns on these very long-term and heavily funded investments.

While the government’s ability to keep its commitment is put in doubt,

credit rating turns to worse; the costs of borrowing becomes higher

and the harder it will be to attract foreign investors. The country’s

earnest efforts to move forward will all be put to naught.

Having decided that petitioner is entitled to claim refund or tax

credit under Section 112(A) of the NIRC or on the basis of effectively

zero-rated sales in the amount of P246,131,610.40, there is no more

need to establish its right to make the same claim under Section

112(B) of the NIRC or on the basis of purchase of capital goods.

Finally, respondent contends that according to well-established

doctrine, a tax refund, which is in the nature of a tax exemption,

should be construed strictissimi juris against the

taxpayer


htm - _ftn38 However, when the claim for refund has clear legal

basis and is sufficiently supported by evidence, as in the present

case, then the Court shall not hesitate to grant the

same


htm - _ftn39

WHEREFORE, the instant Petition for Review is GRANTED.

The Decision of the Court of Tax Appeals En Banc dated 20

September 2007 in CTA EB Case No. 248, affirming the Decision

dated 23 March 2006 of the CTA Second Division in CTA Case No.

6916, is REVERSED. Respondent Commissioner of Internal

Revenue is ordered to refund, or in the alternative, to issue a tax

credit certificate to petitioner San Roque Power Corporation in the

amount of Two Hundred Forty-Six Million One Hundred Thirty-One

Thousand Six Hundred Ten Pesos and 40/100 (P246,131,610.40),

representing unutilized input VAT for the period 1 January 2002 to 31

December 2002. No costs.

SO ORDERED.





SAN ROQUE POWER CORPORATION, Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE, Respondent.

G.R. No. 180345

Present:

CORONA, J., Chairperson,CHICO-NAZARIO,VELASCO, JR.,NACHURA, andPERALTA, JJ.

Promulgated:

November 25, 2009x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

x

D E C I S I O N CHICO-NAZARIO, J.: In this Petition for Review on Certiorari, under Rule 45 of the

Revised Rules of Court, petitioner San Roque Power Corporation

assails the

Decisio


.htm - _ftn1 of the Court of Tax Appeals (CTA) En Banc dated 20

September 2007 in CTA EB No. 248, affirming the

Decisio


.htm - _ftn2 dated 23 March 2006 of the CTA Second Division in CTA

Case No. 6916, which dismissed the claim of petitioner for the refund

and/or issuance of a tax credit certificate in the amount of Two

Hundred Forty-Nine Million Three Hundred Ninety-Seven Thousand

Six Hundred Twenty Pesos and 18/100 (P249,397,620.18) allegedly

representing unutilized input Value Added Tax (VAT) for the period

covering January to December 2002.





Respondent, as the Commissioner of the Bureau of Internal

Revenue (BIR), is responsible for the assessment and collection of all

national internal revenue taxes, fees, and charges, including the

Value Added Tax (VAT), imposed by Section

10

8http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345

.htm - _ftn3 of the National Internal Revenue Code (NIRC) of 1997.

Moreover, it is empowered to grant refunds or issue tax credit

certificates in accordance with Section 112 of the NIRC of 1997 for

unutilized input VAT paid on zero-rated or effectively zero-rated sales

and purchases of capital goods, to wit:

SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-rated or Effectively Zero-rated Sales—Any

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

(B) Capital Goods—A VAT-registered person may

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



On the other hand, petitioner is a domestic corporation

organized under the corporate laws of the Republic of the

Philippines. On 14 October 1997, it was incorporated for the sole

purpose of building and operating the San Roque Multipurpose

Project in San Manuel, Pangasinan, which is an indivisible project

consisting of the power station, the dam, spillway, and other related

facilities


htm - _ftn4 It is registered with the Board of Investments (BOI) on a

preferred pioneer status to engage in the design, construction,

erection, assembly, as well as own, commission, and operate electric

power-generating plants and related activities, for which it was issued

the Certificate of Registration No. 97-356 dated 11 February

1998


htm - _ftn5 As a seller of services, petitioner is registered with the

BIR as a VAT taxpayer under Certificate of Registration No. OCN-98-

006-007394.http://sc.judiciary.gov.ph/jurisprudence/2009/november2

009/180345.htm - _ftn6

On 11 October 1997, petitioner entered into a Power Purchase

Agreement (PPA) with the National Power Corporation (NPC) to

develop the hydro potential of the Lower Agno River, and to be able

to generate additional power and energy for the Luzon Power Grid,

by developing and operating the San Roque Multipurpose Project.

The PPA provides that petitioner shall be responsible for the design,

construction, installation, completion and testing and commissioning

of the Power Station and it shall operate and maintain the same,

subject to the instructions of the NPC. During the cooperation period

of 25 years commencing from the completion date of the Power

Station, the NPC shall purchase all the electricity generated by the

Power

Plant


htm - _ftn7









Because of the exclusive nature of the PPA between petitioner

and the NPC, petitioner applied for and was granted five Certificates

of Zero Rate by the BIR, through the Chief Regulatory Operations

Monitoring Division, now the Audit Information, Tax Exemption &

Incentive Division. Based on these certificates, the zero-rated status

of petitioner commenced on 27 September 1998 and continued

throughout the year

2002


htm - _ftn8

For the period January to December 2002, petitioner filed with

the respondent its Monthly VAT Declarations and Quarterly VAT

Returns. Its Quarterly VAT Returns showed excess input VAT

payments on account of its importation and domestic purchases of

goods and services, as

follow

shttp://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345

.htm - _ftn9:

Period Covered

Date Filed

Particulars Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 20, 2002

Tax Due for the Quarter (Box 13C)

P 26,247.27

Input Tax carried over from previous qtr (22B)

296,124,429.21

Input VAT on Domestic Purchases for the Qtr(22D) 95,003,348.91Input VAT on Importation of Goods for the Qtr(22F) 20,758,668.00Total Available Input tax (23)

411,886,446.12

VAT Refund/TCC Claimed (24A)

173,909,435.66

Net Creditable Input Tax (25)

237,977,010.46

VAT payable (Excess Input Tax) (26)

(237,950,763.19)

Tax Payable (overpayment) (28)

(237,950,763.19)





2nd Quarter

(April 1, 2002 to

June 30, 2002)

July 24, 2002


P blank


237,950,763.19


321,643,021.02


237,950,763.19


83,692,257.83


(83,692,257.83)


(83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002


P blank


199,428,027.47


229,817,923.26


Blank


229,817,923.26


(229,817,923.26)


(229,817,923.26)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003


P 34,996.36


114,082,153.62

Input VAT on Domestic Purchases for the Qtr(22D) 18,166,330.54Input VAT on Importation of

Goods for the Qtr(22F) 2,308,837.00Total Available Input tax (23)

134,557,321.16


83,692,257.83


50,865,063.33


(50,830,066.97)


(50,830,066.97)

On 19 June 2002, 25 October 2002, 27 February 2003, and 29

May 2003, petitioner filed with the BIR four separate administrative

claims for refund of Unutilized Input VAT paid for the period January

to March 2002, April to June 2002, July to September 2002, and

October to December 2002, respectively. In these letters addressed

to the BIR, Carlos Echevarria (Echevarria), the Vice President and

Director of Finance of petitioner, explained that petitioner’s sale of

power to NPC are subject to VAT at zero percent rate, in accordance

with Section 108(B)(3) of the

NIRC


htm - _ftn10 Petitioner sought to recover the total amount of

P250,258,094.25, representing its unutilized excess VAT on its

importation of capital and other taxable goods and services for the

year 2002, broken down as

follow


.htm - _ftn11:

QtrInvolve

dOutput Tax

Input Tax

Domestic Purchases

Importations Excess Input Tax

(A) (B) (C) (D) = (B) + (C) –(A)

1st P 26,247.2

7

P95,003,348.91

P20,758,668.0

0

P115,735,769.8

4





2nd - 65,206,499.83 18,485,758.00

83,692,257.83

3rd - 28,924,020.79 1,465,875.00 30,389,895.794th 34,996.3

618,166,330.54 2,308,837.00 20,440,171.18

P61,243.6

3

P207,300,200.0

7

P43,019,138.0

0

P250,258,094.4

4

Petitioner amended its Quarterly VAT Returns, particularly the

items on (1) Input VAT on Domestic Purchases during the first

quarter of 2002; (2) Input VAT on Domestic Purchases for the fourth

quarter of 2002; and (3) Input VAT on Importation of Goods for the

fourth quarter of 2002. The amendments read as

follow


.htm - _ftn12:

Period Covered

Date Filed

Particulars Amount

1st Quarter

(January 1, 2002 to

March 31, 2002)

April 24, 2003


P 26,247.27


297,719,296.25

Input VAT on Domestic Purchases for the Qtr(22D) 95,126,981.69

(22F) 20,758,668.00Total Available Input tax (23)

413,604,945.94


175,544,002.27


175,544,002.27


(238,060,943.67)


(238,034,696.40)

2nd Quarter

(April 1, 2002 to

April 24, 2003


P blank


238,034,696.40

Input VAT on Domestic



June 30, 2002)

Purchases for the Qtr(22D) 65,206,499.83Input VAT on Importation of Goods for the Qtr(22F) 18,485,758.00Total Available Input tax (23)

321,643,021.02


237,950,763.19


83,692,257.83


(83,692,257.83)


(83,692,257.83)

3rd Quarter

(July 1, 2002 to

September 30, 2002)

October 25, 2002


P blank


83,692,257.83


114,082,153.62


Blank


114,082,153.62


(114,082,153.62)


(114,082,153.62)

4th Quarter

(October 1, 2002 to

December 31, 2002)

January 23, 2003


P 34,996.36


114,082,153.62


133,573,214.12


83,692,257.83


49,880,956.29


(49,845,959.93)


(49,845,959.93)

On 30 May 2003 and 31 July 2003, petitioner filed two letters

with the BIR to amend its claims for tax refund or credit for the first

and fourth quarter of 2002, respectively. Petitioner sought to recover

a total amount of P249,397,620.18 representing its unutilized excess

VAT on its importation and domestic purchases of goods and

services for the year 2002, broken down as

follow


.htm - _ftn13:

QtrInvolve

dDate Filed

Output Tax

Input Tax

Domestic Purchases

Importations Excess Input Tax

(A) (B) (C) (D) = (B) + (C) –(A)

1st 30-May-

03

P 26,247.2

7

P95,126,981.69

P20,758,668.0

0

P115,859,402.4

22nd 25-

Oct-02

- 65,206,499.83 18,185,758.00

83,692,257.83

3rd 27-Feb-

03

- 28,924,920.79 1,465,875,00 30,389,895.79

4th 31-Jul-03

34,996.36

17,918,056.50 1,573,004.00 19,456,064.14

P61,243.6

3

P207,175,558.8

1

P42,283,305.0

0

P249,397,620.1

8 Respondent failed to act on the request for tax refund or credit

of petitioner, which prompted the latter to file on 5 April 2004, with the

CTA in Division, a Petition for Review, docketed as CTA Case No.

6916 before it could be barred by the two-year prescriptive period



within which to file its claim. Petitioner sought the refund of the

amount of P249,397,620.18 representing its unutilized excess VAT

on its importation and local purchases of various goods and services

for the year

2002


htm - _ftn14

During the proceedings before the CTA Second Division,

petitioner presented the following documents, among other pieces of

evidence: (1) Petitioner’s Amended Quarterly VAT return for the 4th

Quarter of 2002 marked as Exhibit “A,” showing the amount of

P42,500,000.00 paid by NTC to petitioner for all the electricity

produced during test runs; (2) the special audit report, prepared by

the CPA firm of Punongbayan and Araullo through a partner, Angel

A. Aguilar (Aguilar), and the attached schedules, marked as Exhibits

“J-2” to “J-21”; (3) Sales Invoices and Official Receipts and related

documents issued to petitioner for the year 2002, marked as Exhibits

“J-4-A1” to “J-4-L265”; (4) Audited Financial Statements of Petitioner

for the year 2002, with comparative figures for 2001, marked as

Exhibit “K”; and (5) the Affidavit of Echevarria dated 9 February 2005,

marked as Exhibit

“L”


htm - _ftn15

During the hearings, the parties jointly stipulated on the issues

involved:

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

2. Whether or not petitioner incurred input taxes

which are attributable to its effectively zero-rated transactions;

3. Whether or not petitioner’s importation and

purchases of capital goods and related services are





within the scope and meaning of “capital goods” under Revenue Regulations No. 7-95;

4. Whether or not petitioner’s input taxes are

sufficiently substantiated with VAT invoices or official receipts;

5. Whether or not the VAT input taxes being claimed

for refund/tax credit by petitioner (had) been credited or utilized against any output taxes or (had) been carried forward to the succeeding quarter or quarters; and

6. Whether or not petitioner is entitled to a refund of

VAT input taxes it paid from January 1, 2002 to December 31, 2002 in the total amount of Two Hundred Forty Nine Million Three Hundred Ninety Seven Thousand Six Hundred Twenty and 18/100 Pesos (P249,397,620.18).

Simply put, the issue is: whether or not petitioner is entitled to

refund or tax credit in the amount of P249,397,620.18 representing its

unutilized input VAT paid on importation and purchases of capital and

other taxable goods and services from January 1 to December 31,

2002.

After a hearing on the merits, the CTA Second Division

rendered a

Decisio


.htm - _ftn16 dated 23 March 2006 denying petitioner’s claim for tax

refund or credit. The CTA noted that petitioner based its claim on

creditable input VAT paid, which is attributable to (1) zero-rated or

effectively zero-rated sale, as provided under Section 112(A) of the

NIRC, and (2) purchases of capital goods, in accordance with Section

112(B) of the NIRC. The court ruled that in order for petitioner to be

entitled to the refund or issuance of a tax credit certificate on the

basis of Section 112(A) of the NIRC, it must establish that it had

incurred zero-rated sales or effectively zero-rated sales for the

taxable year 2002. Since records show that petitioner did not make

any zero-rated or effectively-zero rated sales for the taxable year

2002, the CTA reasoned that petitioner’s claim must be denied.



Parenthetically, the court declared that the claim for tax refund or

credit based on Section 112(B) of the NIRC requires petitioner to

prove that it paid input VAT on capital goods purchased, based on

the definition of capital goods provided under Section 4.112-1(b) of

Revenue Regulations No. 7-95—i.e., goods or properties which have

an estimated useful life of greater than one year, are treated as

depreciable assets under Section 34(F) of the NIRC, and are used

directly or indirectly in the production or sale of taxable goods and

services. The CTA found that the evidence offered by petitioner—the

suppliers’ invoices and official receipts and Import Entries and

Internal Revenue Declarations and the audit report of the Court-

commissioned Independent Certified Public Accountant (CPA) are

insufficient to prove that the importations and domestic purchases

were classified as capital goods and properties entered as part of the

“Property, Plant and Equipment” account of the petitioner. The

dispositive part of the said Decision reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn17

Not satisfied with the foregoing Decision dated 23 March 2006,

petitioner filed a Motion for Reconsideration which was denied by the

CTA Second Division in a Resolution dated 4 January

2007


htm - _ftn18

Petitioner filed an appeal with the CTA En Banc, docketed as

CTA EB No. 248. The CTA En Banc promulgated its

Decisio


.htm - _ftn19 on 20 September 2007 denying petitioner’s appeal. The

CTA En Banc reiterated the ruling of the Division that petitioner’s

claim based on Section 112(A) of the NIRC should be denied since it







did not present any records of any zero-rated or effectively zero-rated

transactions. It clarified that since petitioner failed to prove that any

sale of its electricity had transpired, petitioner may base its claim only

on Section 112(B) of the NIRC, the provision governing the purchase

of capital goods. The court noted that the report of the Court-

commissioned auditing firm, Punongbayan & Araullo, dealt

specifically with the unutilized input taxes paid or incurred by

petitioner on its local and foreign purchases of goods and services

attributable to its zero-rated sales, and not to purchases of capital

goods. It decided that petitioner failed to prove that the purchases

evidenced by the invoices and receipts, which petitioner presented,

were classified as capital goods which formed part of its “Property,

Plant and Equipment,” especially since petitioner failed to present its

books of account. The dispositive part of the said Decision reads:

WHEREFORE, premises considered, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby AFFIRMED.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn20

The CTA En Banc denied petitioner’s Motion for

Reconsideration in a Resolution dated 22 October

2007


htm - _ftn21

Hence, the present Petition for Review where the petitioner

raises the following errors allegedly committed by the CTA En banc:

I

THE COURT OF TAX APPEALS EN BANC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION IN FAILING OR REFUSING TO APPRECIATE THE OVERWHELMING AND UNCONTROVERTED EVIDENCE SUBMITTED BY THE





PETITIONER, THUS DEPRIVING PETITIONER OF ITS PROPERTY WITHOUT DUE PROCESS; AND

II

THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN RULING THAT THE ABSENCE OF ZERO-RATED SALES BY PETITIONER DURING THE YEAR COVERED BY THE CLAIM FOR REFUND DOES NOT ENTITLE PETITIONER TO A REFUND OF ITS EXCESS VAT INPUT TAXES ATTRIBUTABLE TO ZERO-RATED SALES, CONTRARY TO PROVISIONS OF LAW.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn22

The present Petition is meritorious.

The main issue in this case is whether or not petitioner may

claim a tax refund or credit in the amount of P249,397,620.18 for

creditable input tax attributable to zero-rated or effectively zero-rated

sales pursuant to Section 112(A) of the NIRC or for input taxes paid

on capital goods as provided under Section 112(B) of the NIRC.

To resolve the issue, this Court must re-examine the facts and

the evidence offered by the parties. It is an accepted doctrine that this

Court is not a trier of facts. It is not its function to review, examine

and evaluate or weigh the probative value of the evidence

presented. However, this rule does not apply where the judgment is

premised on a misapprehension of facts, or when the appellate court

failed to notice certain relevant facts which if considered would justify

a different

conclusion


htm - _ftn23





After reviewing the records, this Court finds that petitioner’s

claim for refund or credit is justified under Section 112(A) of the NIRC

which states that:

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

(A) Zero-rated or Effectively Zero-rated Sales—Any

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

To claim refund or tax credit under Section 112(A), petitioner

must comply with the following criteria: (1) the taxpayer is VAT

registered; (2) the taxpayer is engaged in zero-rated or effectively

zero-rated sales; (3) the input taxes are due or paid; (4) the input

taxes are not transitional input taxes; (5) the input taxes have not

been applied against output taxes during and in the succeeding

quarters; (6) the input taxes claimed are attributable to zero-rated or

effectively zero-rated sales; (7) for zero-rated sales under Section

106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable

foreign currency exchange proceeds have been duly accounted for in

accordance with BSP rules and regulations; (8) where there are both

zero-rated or effectively zero-rated sales and taxable or exempt

sales, and the input taxes cannot be directly and entirely attributable

to any of these sales, the input taxes shall be proportionately

allocated on the basis of sales volume; and (9) the claim is filed


sales were

made


htm - _ftn24

Based on the evidence presented, petitioner complied with the

abovementioned requirements. Firstly, petitioner had adequately

proved that it is a VAT registered taxpayer when it presented

Certificate of Registration No. OCN-98-006-007394, which it attached

to its Petition for Review dated 29 March 2004 filed before the CTA in

Division. Secondly, it is unquestioned that petitioner is engaged in

providing electricity for NPC, an activity which is subject to zero rate,

under Section 108(B)(3) of the NIRC. Thirdly, petitioner offered as

evidence suppliers’ VAT invoices or official receipts, as well as Import

Entries and Internal Revenue Declarations (Exhibits “J-4-A1” to “J-4-

L265”), which were examined in the audit conducted by Aguilar, the

Court-commissioned Independent CPA. Significantly, Aguilar noted

in his audit report (Exhibit “J-2”) that of the P249,397,620.18 claimed

by petitioner, he identified items with incomplete documentation and

errors in computation with a total amount of P3,266,009.78. Based

on these findings, the remaining input VAT of P246,131,610.40 was

properly documented and recorded in the books. The said report

reads:

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



identified in the Findings and Results of the Agreed-Upon Audit Procedures Performed sections of this report, are properly supported by original and appropriate suppliers’ VAT invoices and/or official receipts.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn25

Fourthly, the input taxes claimed, which consisted of local purchases

and importations made in 2002, are not transitional input taxes, which

Section 111 of the NIRC defines as input taxes allowed on the

beginning inventory of goods, materials and

supplies


htm - _ftn26 Fifthly, the audit report of Aguilar affirms that the input

VAT being claimed for tax refund or credit is net of the input VAT that

was already offset against output VAT amounting to P26,247.27 for

the first quarter of 2002 and P34,996.36 for the fourth quarter of

2002

,http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.

htm - _ftn27 as reflected in the Quarterly VAT

Returns


htm - _ftn28

The main dispute in this case is whether or not petitioner’s

claim complied with the sixth requirement—the existence of zero-

rated or effectively zero-rated sales, to which creditable input taxes

may be attributed. The CTA in Division and en banc denied

petitioner’s claim solely on this ground. The tax courts based this

conclusion on the audited report, marked as Exhibit “J-2,” stating that

petitioner made no sale of electricity to NPC in

2002


htm - _ftn29 Moreover, the affidavit of Echevarria (Exhibit “L”),

petitioner’s Vice President and Director for Finance, contained an

admission that no commercial sale of electricity had been made in

favor of NPC in 2002 since the project was still under construction at











that

time


htm - _ftn30

However, upon closer examination of the records, it appears

that on 2002, petitioner carried out a “sale” of electricity to NPC. The

fourth quarter return for the year 2002, which petitioner filed, reported

a zero-rated sale in the amount of

P

42,500,000.00.http://sc.judiciary.gov.ph/jurisprudence/2009/novembe

r2009/180345.htm - _ftn31 In the Affidavit of Echevarria dated 9

February 2005 (Exhibit “L”), which was uncontroverted by

respondent, the affiant stated that although no commercial sale was

made in 2002, petitioner produced and transferred electricity to NPC

during the testing period in exchange for the amount of

P42,500,000.00, to

wit

:http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.

htm - _ftn32

A: San Roque Power Corporation has had no sale yet during 2002. The P42,500,000.00 which was paid to us by Napocor was something similar to a more cost recovery scheme. The pre-agreed amount would be about equal to our costs for producing the electricity during the testing period and we just reflected this in our 4th quarter return as a zero-rated sale. x x x. The Court is not unmindful of the fact that the transaction

described hereinabove was not a commercial sale. In granting the

tax benefit to VAT-registered zero-rated or effectively zero-rated

taxpayers, Section 112(A) of the NIRC does not limit the definition of

“sale” to commercial transactions in the normal course of business.

Conspicuously, Section 106(B) of the NIRC, which deals with the

imposition of the VAT, does not limit the term “sale” to commercial

sales, rather it extends the term to transactions that are “deemed”

sale, which are thus enumerated:







SEC 106. Value-Added Tax on Sale of Goods or Properties. x x x x (B) Transactions Deemed Sale.—The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to:

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

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this Court finds it an equitable

construction of the law that when the term “sale” is made to include

certain transactions for the purpose of imposing a tax, these same

transactions should be included in the term “sale” when considering

the availability of an exemption or tax benefit from the same revenue

measures. It is undisputed that during the fourth quarter of 2002,

petitioner transferred to NPC all the electricity that was produced

during the trial period. The fact that it was not transferred through a

commercial sale or in the normal course of business does not deflect

from the fact that such transaction is deemed as a sale under the law.

The seventh requirement regarding foreign currency exchange

proceeds is inapplicable where petitioner’s zero-rated sale of

electricity to NPC did not involve foreign exchange and consisted

only of a single transaction wherein NPC paid petitioner

P42,500,000.00 in exchange for the electricity transferred to it by

petitioner. Similarly, the eighth requirement is inapplicable to this

case, where the only sale transaction consisted of an effectively zero-

rated sale and there are no exempt or taxable sales that transpired,

which will require the proportionate allocation of the creditable input

tax paid.

The last requirement determines that the claim should be filed


sales were made. The sale of electricity to NPC was reported at the

fourth quarter of 2002, which closed on 31 December 2002.

Petitioner had until 30 December 2004 to file its claim for refund or

credit. For the period January to March 2002, petitioner filed an

amended request for refund or tax credit on 30 May 2003; for the

period July 2002 to September 2002, on 27 February 2003; and for

the period October 2002 to December 2002, on 31 July

2003


htm - _ftn33 In these three quarters, petitioners seasonably filed its

requests for refund and tax credit. However, for the period April 2002

to May 2002, the claim was filed prematurely on 25 October 2002,

before the last quarter had closed on 31 December

2002


htm - _ftn34

Despite this lapse in procedure, this Court notes that petitioner

was able to positively show that it was able to accumulate excess

input taxes on various importations and local purchases in the

amount of P246,131,610.40, which were attributable to a transfer of

electricity in favor of NPC. The fact that it had filed its claim for

refund or credit during the quarter when the transfer of electricity had

taken place, instead of at the close of the said quarter does not make

petitioner any less entitled to its claim. Given the special

circumstances of this case, wherein petitioner was incorporated for





the sole purpose of constructing or operating a power plant that will

transfer all the electricity it generates to NPC, there is no danger that

petitioner would try to fraudulently claim input tax paid on purchases

that will be attributed to sale transactions that are not zero-rated.

Substantial justice, equity and fair play are on the side of the

petitioner. Technicalities and legalisms, however, exalted, should not

be misused by the government to keep money not belonging to it,

thereby enriching itself at the expense of its law abiding citizens.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received something “when there [was] no right to demand it,” and thus, it has the obligation to return it. Heavily militating against respondent Commissioner is the ancient principle that no one, not even the State, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes.http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/180345.htm - _ftn35 It bears emphasis that effective zero-rating is not intended as a

benefit to the person legally liable to pay the tax, such as petitioner,

but to relieve certain exempt entities, such as the NPC, from the

burden of indirect tax so as to encourage the development of

particular industries. Before, as well as after, the adoption of the

VAT, certain special laws were enacted for the benefit of various

entities and international agreements were entered into by the

Philippines with foreign governments and institutions exempting sale

of goods or supply of services from indirect taxes at the level of their

suppliers. Effective zero-rating was intended to relieve the exempt

entity from being burdened with the indirect tax which is or which will

be shifted to it had there been no exemption. In this case, petitioner

is being exempted from paying VAT on its purchases to relieve NPC

of the burden of additional costs that petitioner may shift to NPC by

adding to the cost of the electricity sold to the



latter


htm - _ftn36

Section 13 of Republic Act No. 6395, otherwise known as the

NPC Charter, further clarifies that it is the lawmakers’ intention that

NPC be made completely exempt from all taxes, both direct and

indirect:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities. - The corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section 1 of this Act, the corporation is hereby declared exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities, and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes, and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax and wharfage fees on import of foreign goods, required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the corporation in the generation, transmission, utilization, and sale of electric power.



To limit the exemption granted to the NPC to direct taxes,

notwithstanding the general and broad language of the statute will be

to thwart the legislative intention in giving exemption from all forms of

taxes and impositions, without distinguishing between those that are

direct and those that are

not


htm - _ftn37

Congress granted NPC a comprehensive tax exemption

because of the significant public interest involved. This is enunciated

in Section 1 of Republic Act No. 6395:

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

The ability of the NPC to provide sufficient and affordable electricity

throughout the country greatly affects our industrial and rural

development. Erroneously and unjustly depriving industries that

generate electrical power of tax benefits that the law clearly grants

will have an immediate effect on consumers of electricity and long

term effects on our economy.

In the same breath, we cannot lose sight of the fact that it is the

declared policy of the State, expressed in Section 2 of Republic Act

No. 9136, otherwise known as the EPIRA Law, “to ensure and

accelerate the total electrification of the country;” “to enhance the

inflow of private capital and broaden the ownership base of the power

generation, transmission and distribution sectors;” and “to promote

the utilization of indigenous and new and renewable energy



resources in power generation in order to reduce dependence on

imported energy.” Further, Section 6 provides that “pursuant to the

objective of lowering electricity rates to end-users, sales of generated

power by generation companies shall be value-added tax zero-rated.

Section 75 of said law succinctly declares that “this Act shall,

unless the context indicates otherwise, be construed in favor of the

establishment, promotion, preservation of competition and power

empowerment so that the widest participation of the people, whether

directly or indirectly is ensured.”

The objectives as set forth in the EPIRA Law can only be

achieved if government were to allow petitioner and others similarly

situated to obtain the input tax credits available under the law.

Denying petitioner such credits would go against the declared

policies of the EPIRA Law.

The legislative grant of tax relief (whether in the EPIRA Law or

the Tax Code) constitutes a sovereign commitment of Government to

taxpayers that the latter can avail themselves of certain tax reliefs

and incentives in the course of their business activities here. Such a

commitment is particularly vital to foreign investors who have been

enticed to invest heavily in our country’s infrastructure, and who have

done so on the firm assurance that certain tax reliefs and incentives

can be availed of in order to enable them to achieve their projected

returns on these very long-term and heavily funded investments.

While the government’s ability to keep its commitment is put in doubt,

credit rating turns to worse; the costs of borrowing becomes higher

and the harder it will be to attract foreign investors. The country’s

earnest efforts to move forward will all be put to naught.

Having decided that petitioner is entitled to claim refund or tax

credit under Section 112(A) of the NIRC or on the basis of effectively

zero-rated sales in the amount of P246,131,610.40, there is no more

need to establish its right to make the same claim under Section

112(B) of the NIRC or on the basis of purchase of capital goods.

Finally, respondent contends that according to well-established

doctrine, a tax refund, which is in the nature of a tax exemption,

should be construed strictissimi juris against the

taxpayer


htm - _ftn38 However, when the claim for refund has clear legal

basis and is sufficiently supported by evidence, as in the present

case, then the Court shall not hesitate to grant the

same


htm - _ftn39

WHEREFORE, the instant Petition for Review is GRANTED.

The Decision of the Court of Tax Appeals En Banc dated 20

September 2007 in CTA EB Case No. 248, affirming the Decision

dated 23 March 2006 of the CTA Second Division in CTA Case No.

6916, is REVERSED. Respondent Commissioner of Internal

Revenue is ordered to refund, or in the alternative, to issue a tax

credit certificate to petitioner San Roque Power Corporation in the

amount of Two Hundred Forty-Six Million One Hundred Thirty-One

Thousand Six Hundred Ten Pesos and 40/100 (P246,131,610.40),

representing unutilized input VAT for the period 1 January 2002 to 31

December 2002. No costs.

SO ORDERED.

G.R. No. 173594 February 6, 2008SILKAIR (SINGAPORE) PTE, LTD., petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O NCARPIO MORALES, J.:Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of Singapore which has a Philippine representative office, is an online international air carrier operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes.On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written application for the refund of P4,567,450.79





excise taxes it claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June 2000.1 As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition for Review2 before the CTA following Commissioner of Internal Revenue v. Victorias Milling Co., Inc., et al.3

Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his Answer that, among other things,

Petitioner failed to prove that the sale of the petroleum products was directly made from a domestic oil company to the international carrier. The excise tax on petroleum products is the direct liability of the manufacturer/producer, and when added to the cost of the goods sold to the buyer, it is no longer a tax but part of the price which the buyer has to pay to obtain the article.4 (Emphasis and underscoring supplied)

By Decision of May 27, 2005, the Second Division of the CTA denied Silkair’s petition on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum products, any claim for refund should be filed by the latter; and where the burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the goods purchased. Thus the CTA discoursed:

The liability for excise tax on petroleum products that are being removed from its refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x xx x x xWhile it is true that in the case of excise tax imposed on petroleum products, the seller thereof may shift the tax burden to the buyer, the latter is the proper party to claim for the refund in the case of exemption from excise tax. Since the excise tax was imposed upon Petron Corporation as the manufacturer of petroleum products, pursuant to Section 130(A)(2), and that the corresponding excise taxes were indeed, paid by it, . . . any claim for refund of the subject excise taxes should be filed by Petron Corporation as the taxpayer contemplated under the law. Petitioner cannot be considered as the taxpayer because it merely shouldered the burden of the excise tax and not the excise tax itself. Therefore, the right to claim for the refund of excise taxes paid on petroleum products lies with Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to the former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller who has the option whether or not to shift the burden of the tax to the purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed on to it is no longer a tax but becomes an added cost on the goods purchased which constitutes a part of the purchase price. The incidence of taxation or the person statutorily liable to pay the tax falls on Petron Corporation though the impact of taxation or the burden of taxation falls on another person, which in this case is

petitioner Silkair.5 (Italics in the original; emphasis and underscoring supplied)

Silkair filed a Motion for Reconsideration6 during the pendency of which or on September 12, 2005 the Bengzon Law Firm entered its appearance as counsel,7 without Silkair’s then-counsel of record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw") having withdrawn as such.By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair’s motion for reconsideration. A copy of the Resolution was furnished Silkair’s counsel JGLaw which received it on October 3, 2005.9

On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of Appearance.10 On even date, Silkair, through the Bengzon Law Firm, filed a Manifestation/Motion11 stating:

Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO VALDEZ CALUYA & FERNANDEZ (JGLaw).

1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all legal representation handled by the latter on behalf of the petitioner. Petitioner also requested JGLaw to make arrangements for the transfer of all files relating to its legal representation on behalf of petitioner to the undersigned counsel. x x x2. The undersigned counsel was engaged to act as counsel for the petitioner in the above-entitled case; and thus, filed its entry of appearance on 12 September 2005. x x x3. The undersigned counsel, through petitioner, has received information that the Honorable Court promulgated a Resolution on petitioner’s Motion for Reconsideration. To date, the undersigned counsel has yet to receive an official copy of the above-mentioned Resolution. In light of the foregoing, undersigned counsel hereby respectfully requests for an official copy of the Honorable Court’s Resolution on petitioner’s Motion for Reconsideration x x x.12 (Underscoring supplied)

On October 14, 2005, the Bengzon Law Firm received its requested copy of the September 22, 200513 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005, Silkair, through said counsel, filed a Motion for Extension of Time to File Petition for Review14 before the CTA En Banc which gave it until November 14, 2005 to file a petition for review. On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On even date, the Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for Silkair with the information, that Silkair would continue to be represented by Atty. Teodoro A. Pastrana, who used to be with the firm but who had become a partner of the Pastrana and Fallar Law Offices.16

The CTA En Banc granted Silkair’s second Motion for Extension of Time, giving Silkair until November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its Petition for Review17 before the CTA En Banc.

By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkair’s petition for review for having been filed out of time in this wise:

A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or resolution, or denial of motion for new trial or reconsideration to appeal to the proper forum, in this case, the CTA En Banc. This is clear from both Section 11 and Section 9 of Republic Act No. 9282 x x x.x x x xThe petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices, received the Resolution dated September 22, 2005 on October 3, 2005. At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm which filed its Entry of Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane B. Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices was still the counsel of record considering that the Notice of Withdrawal of Appearance signed by Atty. Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or ten (10) days after receipt of the September 22, 2005 Resolution of the Court’s Second Division. This notwithstanding, Section 2 of Rule 13 of the Rules of Court provides that if any party has appeared by counsel, service upon him shall be made upon his counsel or one of them, unless service upon the party himself is ordered by the Court. Where a party is represented by more than one counsel of record, "notice to any one of the several counsel on record is equivalent to notice to all the counsel (Damasco vs. Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of record, had received the September 22, 2005 Resolution as early as October 3, 2005, it had only until October 18, 2005 within which to file its Petition for Review. Petitioner only managed to file the Petition for Review with the Court En Banc on November 17, 2005 or [after] thirty (30) days had lapsed from the final date of October 18, 2005 to appeal.The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10) days from the appeal period and the second Motion for Extension of Time to file its Petition for Review on November 11, 2005 and its allowance by the CTA En Banc notwithstanding, the questioned Decision is no longer appealable for failure to timely file the necessary Petition for Review.19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda, Jr. posited that Silkair is not the proper party to claim the tax refund.Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22 Hence, the present Petition for Review23 which raises the following issues:

I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY FILED.

II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS OF TECHNICALITY.III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE FILING OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24 (Underscoring supplied)

Silkair posits that "the instant case does not involve a situation where the petitioner was represented by two (2) counsels on record, such that notice to the former counsel would be held binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied upon by the respondent";26 and that "the case of Dolores De Mesa Abad v. Court of Appeals27 has more appropriate application to the present case."28 In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting the therein private respondents’ Motion for Annulment of documents and titles. The order was received by the therein petitioner’s counsel of record, Atty. Escolastico R. Viola, on November 22, 1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation." Atty. Millora received a copy of the trial court’s order on December 9, 1974. On January 4, 1975, the therein petitioners, through Atty. Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of the period to file a Record on Appeal. They filed the Record on Appeal on January 24, 1975. The trial court dismissed the appeal for having been filed out of time, which was upheld by the Court of Appeals on the ground that the period within which to appeal should be counted from November 22, 1974, the date Atty. Viola received a copy of the November 19, 1974 order. The appellate court held that Atty. Viola was still the counsel of record, he not having yet withdrawn his appearance as counsel for the therein petitioners. On petition for certiorari,29 this Court held

x x x [R]espondent Court reckoned the period of appeal from the time petitioners’ original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of documents and titles on November 22, 1974. But as petitioners stress, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation" on July 16, 1974. Where there may have been no specific withdrawal by Atty. Escolastico R. Viola, for which he should be admonished, by the appearance of a new counsel, it can be said that Atty. Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were already sent by the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty. Viola.Under the circumstances, December 9, 1974 is the controlling date of receipt by petitioners’ counsel and from which the period of appeal from the Order of November 19, 1974 should

be reckoned. That being the case, petitioner’s x x x appeal filed on January 4, 1975 was timely filed.30 (Underscoring supplied)

The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In any event, more recent jurisprudence holds that in case of failure to comply with the procedure established by Section 26, Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a counsel in a case, the attorney of record is regarded as the counsel who should be served with copies of the judgments, orders and pleadings.32 Thus, where no notice of withdrawal or substitution of counsel has been shown, notice to counsel of record is, for all purposes, notice to the client.33 The court cannot be expected to itself ascertain whether the counsel of record has been changed.34 In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13, 200535 after the Bengzon Law Firm had entered its appearance. While Silkair claims it dismissed JGLaw as its counsel as early as August 24, 2005, the same was communicated to the CTA only on October 13, 2005.36 Thus, JGLaw was still Silkair’s counsel of record as of October 3, 2005 when a copy of the September 22, 2005 resolution of the CTA Second Division was served on it. The service upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA Second Division was, therefore, for all legal intents and purposes, service to Silkair, and the CTA correctly reckoned the period of appeal from such date.TECHNICALITY ASIDE, on the merits, the petition just the same fails. Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which reads

Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. – Petroleum products sold to the following are exempt from excise tax:x x x x(b) Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; x x xx x x x,

and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads

Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials

referred to above may be required to be kept under customs supervision and control.

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.38

Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party."39 It invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes.Silkairs’s argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,41 this Court clarified the ruling in Maceda v. Macaraig, Jr., viz:

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

x x x However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPC’s amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties[,] fees…"The use of the phrase "all forms" of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before…x x x xIt is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original; emphasis supplied)42

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 43 and if an exemption is found to exist, it must not be enlarged by construction.44

WHEREFORE, the petition is DENIED.Costs against petitioner.SO ORDERED.COMMISSIONER OF G.R. No. 153205INTERNAL REVENUE, Petitioner, Present: QUISUMBING, J. - versus - Chairperson, CARPIO, CARPIO MORALES, TINGA, andBURMEISTER AND WAIN VELASCO, JR., JJ.SCANDINAVIAN CONTRACTORMINDANAO, INC., Promulgated: Respondent. January 22, 2007 x----------------------------------------------------------------------------------------x

D E C I S I O N

CARPIO, J.:

The Case This petition for

revie

whttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn1 seeks to set aside the 16 April 2002

Decisio

nhttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the

8 August 2001

Decisio

nhttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn3 of the Court of Tax Appeals (CTA). The CTA ordered the

http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm#_ftn3






Commissioner of Internal Revenue (petitioner) to issue a tax credit

certificate for P6,994,659.67 in favor of Burmeister and Wain

Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents The CTA summarized the facts, which the Court of Appeals

adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination manager. BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCOR’s two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system. In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng

Pilipinas, the aforesaid services shall be subject to VAT at zero-rate. [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City. For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows: Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax ---------------------------------------------------------------------------------- 1st E 04-18-96 P 33,019,651.07 P608,953.48 2nd F 07-16-96 37,108,863.33 756,802.66 3rd G 10-14-96 34,196,372.35 930,279.14 4th H 01-20-97 42,992,302.87 1,065,138.86 Totals P 147 ,317,189.62 P 3,361,174.14 On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows: Section 4.102-2(b)(2) – “Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.”

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows: Amount subject to 10% VAT P103,558,338.11 Multiply by 10% VAT Output Tax P 10,355,833.81 Less: 1996 Input VAT P 3,361,174.14 VAT Output Tax Payable P 6,994,659.67 On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 “insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%).”

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm - _ftn4

On 27 December 1999, respondent filed a petition for review

with the CTA in order to toll the running of the two-year prescriptive

period under the Tax Code.



The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to

issue a tax credit certificate for P6,994,659.67 in favor of respondent.

The CTA’s ruling stated:

[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondent’s] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code. x x x x The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x. Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x xhttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm - _ftn5

Petitioner filed a petition for review with the Court of Appeals,

which dismissed the petition for lack of merit and affirmed the CTA



decision

.http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s

view that since respondent’s services are not destined for

consumption abroad, they are not of the same nature as project

studies, information services, engineering and architectural designs,

and other similar services mentioned in Section 4.102-2(b)(2) of

Revenue Regulations No. 5-

96http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn7 as subject to 0% VAT. Thus, according to petitioner,

respondent’s services cannot legally qualify for 0% VAT but are

subject to the regular 10%

VAT


_ftn8

The Court of Appeals found untenable petitioner’s contention

that under VAT Ruling No. 040-98, respondent’s services should be

destined for consumption abroad to enjoy zero-rating. Contrary to

petitioner’s interpretation, there are two kinds of transactions or

services subject to zero percent VAT under VAT Ruling No. 040-98.

These are (a) services other than repacking goods for other persons

doing business outside the Philippines which goods are subsequently

exported; and (b) services by a resident to a non-resident foreign

client, such as project studies, information services, engineering and

architectural designs and other similar services, the consideration for

which is paid for in acceptable foreign currency and accounted for in

accordance with the rules and regulations of the Bangko Sentral ng

Pilipinas







(BSP)


_ftn9

The Court of Appeals stated that “only the first classification is

required by the provision to be consumed abroad in order to be taxed

at zero rate. In x x x the absence of such express or implied

stipulation in the statute, the second classification need not be

consumed

abroad.

”http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn10

The Court of Appeals further held that assuming petitioner’s

interpretation of Section 4.102-2(b)(2) of Revenue Regulations No. 5-

96 is correct, such administrative provision is void being an

amendment to the Tax Code. Petitioner went beyond merely

providing the implementing details by adding another requirement to

zero-rating. “This is indicated by the additional phrase ‘as well as

services by a resident to a non-resident foreign client, such as

project studies, information services and engineering and

architectural designs and other similar services.’ In effect, this

phrase adds not just one but two requisites: (a) services must be

rendered by a resident to a non-resident; and (b) these must be in the

nature of project studies, information services,

etc.


_ftn11

The Court of Appeals explained that under Section 108(b)(2) of

the Tax

Code

,http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn12 for services which were performed in the Philippines to enjoy

zero-rating, these must comply only with two requisites, to wit: (1)

payment in acceptable foreign currency and (2) accounted for in









accordance with the rules of the BSP. Section 108(b)(2) of the Tax

Code does not provide that services must be “destined for

consumption abroad” in order to be VAT zero-

rated.http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.ht

m - _ftn13

The Court of Appeals disagreed with petitioner’s argument that

our VAT law generally follows the destination principle (i.e., exports

exempt, imports

taxable)


_ftn14 The Court of Appeals stated that “if indeed the ‘destination

principle’ underlies and is the basis of the VAT laws, then petitioner’s

proper remedy would be to recommend an amendment of Section

108(b)(2) to Congress. Without such amendment, however,

petitioner should apply the terms of the basic law. Petitioner could not

resort to administrative legislation, as what [he] had done in this

case.


_ftn15

The Issue

The lone issue for resolution is whether respondent is entitled to

the refund of P6,994,659.67 as erroneously paid output VAT for the

year

1996


_ftn16

The Ruling of the Court

We deny the petition.









At the outset, the Court declares that the denial of the instant

petition is not on the ground that respondent’s services are subject to

0% VAT. Rather, it is based on the non-retroactivity of the prejudicial

revocation of BIR Ruling No. 023-


_ftn17 and VAT Ruling No. 003-

99,http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm

- _ftn18 which held that respondent’s services are subject to 0% VAT

and which respondent invoked in applying for refund of the output

VAT.

Section 102(b) of the Tax

Code


_ftn19 the applicable provision in 1996 when respondent rendered

the services and paid the VAT in question, enumerates which

services are zero-rated, thus:

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

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate; (4) Services rendered to vessels engaged exclusively in international shipping; and







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

In insisting that its services should be zero-rated, respondent

claims that it complied with the requirements of the Tax Code for zero

rating under the second paragraph of Section 102(b). Respondent

asserts that (1) the payment of its service fees was in acceptable

foreign currency, (2) there was inward remittance of the foreign

currency into the Philippines, and (3) accounting of such

remittance was in accordance with BSP rules. Moreover, respondent

contends that its services which “constitute the actual operation and

management of two (2) power barges in Mindanao” are not “even

remotely similar to project studies, information services and

engineering and architectural designs under Section 4.102-2(b)(2) of

Revenue Regulations No. 5-96.” As such, respondent’s services

need not be “destined to be consumed abroad in order to be VAT

zero-rated.”

Respondent is mistaken.

The Tax Code not only requires that the services be other than

“processing, manufacturing or repacking of goods” and that payment

for such services be in acceptable foreign currency accounted for in

accordance with BSP rules. Another essential condition for

qualification to zero-rating under Section 102(b)(2) is that the

recipient of such services is doing business outside the

Philippines. While this requirement is not expressly stated in the

second paragraph of Section 102(b), this is clearly provided in the

first paragraph of Section 102(b) where the listed services must be

“for other persons doing business outside the Philippines.” The

phrase “for other persons doing business outside the Philippines” not

only refers to the services enumerated in the first paragraph of

Section 102(b), but also pertains to the general term “services”

appearing in the second paragraph of Section 102(b). In short,

services other than processing, manufacturing, or repacking of goods

must likewise be performed for persons doing business outside the

Philippines.

This can only be the logical interpretation of Section 102(b)(2).

If the provider and recipient of the “other services” are both doing

business in the Philippines, the payment of foreign currency is

irrelevant. Otherwise, those subject to the regular VAT under Section

102(a) can avoid paying the VAT by simply stipulating payment in

foreign currency inwardly remitted by the recipient of services. To

interpret Section 102(b)(2) to apply to a payer-recipient of services

doing business in the Philippines is to make the payment of the

regular VAT under Section 102(a) dependent on the generosity of the

taxpayer. The provider of services can choose to pay the regular

VAT or avoid it by stipulating payment in foreign currency inwardly

remitted by the payer-recipient. Such interpretation removes Section

102(a) as a tax measure in the Tax Code, an interpretation this Court

cannot sanction. A tax is a mandatory exaction, not a voluntary

contribution.

When Section 102(b)(2) stipulates payment in “acceptable

foreign currency” under BSP rules, the law clearly envisions the

payer-recipient of services to be doing business outside the

Philippines. Only those not doing business in the Philippines can be

required under BSP

rule

shttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn20 to pay in acceptable foreign currency for their purchase of

goods or services from the Philippines. In a domestic transaction,

where the provider and recipient of services are both doing business

in the Philippines, the BSP cannot require any party to make payment

in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the

nature of export sales since the payer-recipient of services is doing



business outside the Philippines. Under BSP

rules


_ftn21 the proceeds of export sales must be reported to the Bangko

Sentral ng Pilipinas. Thus, there is reason to require the provider of

services under Section 102(b) (1) and (2) to account for the foreign

currency proceeds to the BSP. The same rationale does not apply if

the provider and recipient of the services are both doing business in

the Philippines since their transaction is not in the nature of an export

sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both

doing business in the Philippines, their transaction falls squarely

under Section 102(a) governing domestic sale or exchange of

services. Indeed, this is a purely local sale or exchange of services

subject to the regular VAT, unless of course the transaction falls

under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of “[s]ervices other than

those mentioned in the preceding subparagraph,” the legislative

intent is that only the services are different between subparagraphs 1

and 2. The requirements for zero-rating, including the essential

condition that the recipient of services is doing business outside the

Philippines, remain the same under both subparagraphs.

Significantly, the amended Section

108(b

)http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn22 [previously Section 102(b)] of the present Tax Code clarifies

this legislative intent. Expressly included among the transactions

subject to 0% VAT are “[s]ervices other than those mentioned in the

[first] paragraph [of Section 108(b)] rendered to a person engaged

in business conducted outside the Philippines or to a

nonresident person not engaged in business who is outside the

Philippines when the services are performed, the consideration for





which is paid for in acceptable foreign currency and accounted for in

accordance with the rules and regulations of the BSP.”

In this case, the payer-recipient of respondent’s services is the

Consortium which is a joint-venture doing business in the

Philippines. While the Consortium’s principal members are non-

resident foreign corporations, the Consortium itself is doing

business in the Philippines. This is shown clearly in BIR Ruling

No. 023-95 which states that the contract between the Consortium

and NAPOCOR is for a 15-year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S (“BWSC”), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (“MITSUI”), all referred to hereinafter as the “Consortium”, and the National Power Corporation (“NAPOCOR”) for the operation and maintenance of two 100-Megawatt power barges (“Power Barges”) acquired by NAPOCOR for a 15-year term.http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm - _ftn23 (Emphasis supplied)

Considering this length of time, the Consortium’s operation and

maintenance of NAPOCOR’s power barges cannot be classified as a

single or isolated transaction. The Consortium does not fall under

Section 102(b)(2) which requires that the recipient of the services

must be a person doing business outside the Philippines. Therefore,

respondent’s services to the Consortium, not being supplied to a

person doing business outside the Philippines, cannot legally qualify

for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and

maintains NAPOCOR’s power barges in the Philippines. NAPOCOR

pays the Consortium, through its non-resident partners, partly in

foreign currency outwardly remitted. In turn, the Consortium pays

respondent also in foreign currency inwardly remitted and accounted



for in accordance with BSP rules. This payment scheme does not

entitle respondent to 0% VAT. As the Court held in Commissioner of

Internal Revenue v. American Express International, Inc. (Philippine

Branch

),http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn24 the place of payment is immaterial, much less is the place

where the output of the service is ultimately used. An essential

condition for entitlement to 0% VAT under Section 102(b)(1) and (2)

is that the recipient of the services is a person doing business outside

the Philippines. In this case, the recipient of the services is the

Consortium, which is doing business not outside, but within the

Philippines because it has a 15-year contract to operate and

maintain NAPOCOR’s two 100-megawatt power barges in

Mindanao.

The Court recognizes the rule that the VAT system generally

follows the “destination principle” (exports are zero-rated whereas

imports are taxed). However, as the Court stated in American

Express, there is an exception to this

rule


_ftn25 This exception refers to the 0% VAT on services enumerated

in Section 102 and performed in the Philippines. For services covered

by Section 102(b)(1) and (2), the recipient of the services must be a

person doing business outside the Philippines. Thus, to be exempt

from the destination principle under Section 102(b)(1) and (2), the

services must be (a) performed in the Philippines; (b) for a person

doing business outside the Philippines; and (c) paid in acceptable

foreign currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American

Expres

shttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm -

_ftn26 is misplaced. That case involved a recipient of services,

specifically American Express International, Inc. (Hongkong Branch),

doing business outside the Philippines. There, the Court stated:







Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x xhttp://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm - _ftn27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the

Consortium – which is doing business in the Philippines. Hence,

American Express’ services were subject to 0% VAT, while

respondent’s services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax,

respondent relied on VAT Ruling No. 003-

99,http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm

- _ftn28 which reconfirmed BIR Ruling No. 023-


_ftn29 “insofar as it held that the services being rendered by

BWSCMI is subject to VAT at zero percent (0%).” Respondent’s

reliance on these BIR rulings binds petitioner.

Petitioner’s filing of his Answer before the CTA challenging

respondent’s claim for refund effectively serves as a revocation of

VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such

revocation cannot be given retroactive effect since it will prejudice

respondent. Changing respondent’s status will deprive respondent of

a refund of a substantial amount representing excess output

tax.http://sc.judiciary.gov.ph/jurisprudence/2007/jan2007/153205.htm

- _ftn30 Section 246 of the Tax Code provides that any revocation of

a ruling by the Commissioner of Internal Revenue shall not be given

retroactive application if the revocation will prejudice the taxpayer.

Further, there is no showing of the existence of any of the exceptions









enumerated in Section 246 of the Tax Code for the retroactive

application of such revocation.

However, upon the filing of petitioner’s Answer dated 2

March 2000 before the CTA contesting respondent’s claim for

refund, respondent’s services shall be subject to the regular

10%

VAT


_ftn31 Such filing is deemed a revocation of VAT Ruling No. 003-99

and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

