VATTAXATION 2 ATTY. BERNIE MENDOZA

THIRD DIVISION

G.R. No. 146984 July 28, 2006

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

D E C I S I O N

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

FIRST DIVISIONG.R. No. 149073 February 16, 2005COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.CEBU TOYO CORPORATION,respondent.D E C I S I O NQUISUMBING,J.:In itsDecision1dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed theResolutionsdated May 31, 20002and August 2, 2000,3of the Court of Tax Appeals (CTA) ordering the Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue a tax credit certificate in favor of Cebu Toyo Corporation in the sum ofP2,158,714.46, representing the unutilized input value-added tax (VAT) payments.The facts, as culled from the records, are as follows:Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various optical components used in television sets, cameras, compact discs and other similar devices. Its principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws of Japan. Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to the provisions of Presidential Decree No. 66.4It is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.5As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)6of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT ofP4,462,412.63.On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 amounting toP4,439,827.21 representing excess VAT input payments.Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the two-year prescriptive period pursuant to Section 2307of the Tax Code.Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and services related to such zero-rated activities are available as tax credits or refunds.The petitioners position is that respondent was not entitled to a refund or tax credit since: (1) it failed to show that the tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been made in accordance with law; and (3) claims for refund are strictly construed against the claimant as these partake of the nature of tax exemption.Initially, the CTA denied the petition for insufficiency of evidence.8The tax court sustained respondents argument that it was a VAT-registered entity. It also found that the petition was timely, as it was filed within the prescription period. The CTA also ruled that the respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan Export Processing Zone were export sales subject to VAT at 0% rate. It found that the input VAT covered by respondents claim was not applied against any output VAT. However, the tax court decreed that the petition should nonetheless be denied because of the respondents failure to present documentary evidence to show that there were foreign currency exchange proceeds from its export sales. The CTA also observed that respondent failed to submit the approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation and the certification of constructive inward remittance.Undaunted, respondent filed on February 21, 2000, aMotion for Reconsiderationarguing that: (1) proof of its inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP approval on its Agreement of Offsetting nor do they require certification on the amount constructively remitted; (3) it was not legally required to prove foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had complied with the substantiation requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input tax.On May 31, 2000, the tax court partly granted the motion for reconsideration in aResolution, to wit:WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted. Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion of which shall now read as follows:WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the amount ofP2,158,714.46 representing unutilized input tax payments.SO ORDERED.9In granting partial reconsideration, the tax court found that there was no need for BSP approval of the Agreement of Offsetting since the same may be categorized as an inter-company open account offset arrangement. Hence, the respondent need not present proof of foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10of the Tax Code. However, the CTA stressed that respondent must still prove that there was an actual offsetting of accounts to prove that constructive foreign currency exchange proceeds were inwardly remitted as required under Section 106(A)(2)(a).The CTA found that only the amount ofY274,043,858.00 covering respondents sales to Toyo Lens Corporation and purchases from said mother company for the period August 7, 1996 to August 26, 1997 were actually offset against respondents related accounts receivable and accounts payable as shown by the Agreement for Offsetting dated August 30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable subsidiary ledgers corroborated the amount. The tax court also found that out of the total export sales for the period April 1, 1996 to December 31, 1997 amounting toY700,654,606.15, respondents sales to MEPZ enterprises amounted only toY136,473,908.05 of said total. Thus, allocating the input taxes supported by receipts to the export sales, the CTA determined that the refund/credit amounted to onlyP2,158,714.46,11computed as follows:Total Input Taxes Claimed by respondentP4,439,827.21

Less: Exceptions made by SGV

a.) 1996P651,256.17

b.) 1997104,129.13755,385.30

Validly Supported Input TaxesP3,684,441.91

Allocation:

Verified Zero-Rated Sales

a.) Toyo Lens CorporationY274,043,858.00

b.) MEPZ Enterprises136,473,908.05Y410,517,766.05

Divided by Total Zero-Rated SalesY700,654,606.15

Quotient0.5859

Multiply by Allowable Input TaxP3,684,441.91

Amount RefundableP2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed aMotion for Reconsiderationarguing that respondent was not entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section 2413of Republic Act No. 7916,14as amended by Rep. Act No. 8748.15Thus, since respondent was not subject to VAT, the Commissioner contended that the capital goods it purchased must be deemed not used in VAT taxable business and therefore it was not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95.16Petitioner filed aMotion for Reconsiderationon June 21, 2000 based on the following theories: (1) that respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondents business is not subject to VAT, the capital goods it purchased are considered not used in a VAT taxable business and therefore is not entitled to a refund of input taxes.17The respondent opposed the CommissionersMotion for Reconsiderationand prayed that the CTA resolution be modified so as to grant it the entire amount of tax refund or credit it was seeking.On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It held that the grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not applicable since respondent has availed of the income tax holiday incentive under Executive Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section 2318of Rep. Act No. 7916. The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an exemption from payment of income taxes for 4 or 6 years depending on whether the registration was as a pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.The petitioner then filed aPetition for Reviewwith the Court of Appeals (CA), docketed as CA-G.R. SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and reiterating its claim that respondent is not entitled to a refund of input taxes since it is VAT-exempt.On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor, thus:WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.SO ORDERED.19The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The appellate court held as untenable herein petitioners argument that respondent is not entitled to a refund because it is VAT-exempt since the evidence showed that it is a VAT-registered enterprise subject to VAT at the rate of 0%. It agreed with the ruling of the tax court that respondent had two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226, then the 0% VAT rate would be applicable to it and any unutilized input VAT should be refunded to respondent upon proper application with and substantiation by the BIR.1awphi1.ntHence, the instant petition for review now before us, with herein petitioner alleging that:I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716.II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95.20In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the Court of Tax Appeals resolution granting a refund in the amount ofP2,158,714.46 representing unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997.Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 10921of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it previously paid as provided under Section 4.103-122of Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was erroneous and did not confer upon the respondent any right to claim recognition of the input tax credit.The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to respondent, its export sales are not exempt from VAT, contrary to petitioners claim, but its export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report certified by an independent Certified Public Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any output tax against which said input taxes may be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.Petitioners contention that respondent is not entitled to refund for being exempt from VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or services.23An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt.24Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person.25Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund.261awphi1.ntIn principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure that goods are provided free of VAT. While the zero rating and the exemption are computationally the same, they actually differ in several aspects, to wit:(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the output tax;(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional for VAT-exempt persons.In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT taxpayer per Certificate of Registration of the BIR.27Further, the records show that the respondent is subject to VAT as it availed of the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which the Court of Tax Appeals computed atP2,158,714.46, but which we findafter recomputationshould beP2,158,714.52.The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.28In this case, we find no cogent reason to deviate from this well-entrenched principle. Thus, we are persuaded that indeed the Court of Appeals committed no reversible error in affirming the assailed ruling of the Court of Tax Appeals.WHEREFORE, the petition is DENIED for lack of merit.l^vvphi1.netThe assailed Decision dated July 6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of respondent in the amount ofP2,158,714.52 representing unutilized input tax payments. No pronouncement as to costs.SO ORDERED.

FIRST DIVISIONG.R. No. 125355 March 30, 2000COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION,respondents.PARDO,J.:What is before the Court is a petition for review oncertiorariof the decision of the Court of Appeals,1reversing that of the Court of Tax Appeals,2which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that Commonwealth Management and Services Corporation, is liable for value added tax for services to clients during taxable year 1988.Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.1wphi1.ntOn January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:Taxable sale/receiptP1,679,155.00============

10% tax due thereon167,915.50

25% surcharge41,978.88

20% interestper annum125,936.63

Compromise penalty for late payment16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLEP351,831.01============3

COMASERCO's annual corporate income tax return ending December 31, 1988 indicateda net loss in its operationsin the amount of P6,077.00.On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4a petition for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the dispositive portion of which reads:WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency.5On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals.After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the dispositive portion of which reads:WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis.6The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties,7where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services.On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review oncertiorariassailing the decision of the Court of Appeals.On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996, COMASERCO complied with the resolution.8We give due course to the petition.At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service.We agree with the Commissioner.Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides that:Sec. 99.Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code.9COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT.We disagree.On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended law provides that:Sec. 105.Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.Contrary to COMASERCO's contention the above provision clarifies that even anon-stock,non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented.The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.Sec. 108 of the National Internal Revenue Code of 199710defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project."11On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-9812emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax.Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.13In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions.Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight.14Also, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority.15There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.No costs.SO ORDERED.1wphi1.nt

SECOND DIVISIONG.R. No. 178697 November 17, 2010COMMISSIONER OF INTERNAL REVENUE,Petitioner,vs.SONY PHILIPPINES, INC.,Respondent.D E C I S I O NMENDOZA,J.:This petition for review oncertiorariseeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution of the Court of Tax Appeals En Banc1(CTA-EB),in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First Division2which, in turn, partially granted the petition for review of respondent Sony Philippines, Inc.(Sony). The CTA-First Division decision cancelled the deficiency assessment issued by petitioner Commissioner of Internal Revenue(CIR)against Sony for Value Added Tax(VAT)but upheld the deficiency assessment for expanded withholding tax(EWT)in the amount ofP1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount ofP1,269, 593.90.3THE FACTS:On November 24, 1998, the CIR issued Letter of Authority No. 000019734(LOA 19734)authorizing certain revenue officers to examine Sonys books of accounts and other accounting records regarding revenue taxes for"the period 1997 and unverified prior years."On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter of demand and the details of discrepancies.4Said details of the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax DueP7,958,700.00

Add: Penalties

Interest up to 3-31-2000P3,157,314.41

Compromise25,000.003,182,314.41

Deficiency VAT DueP11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax DueP1,416,976.90

Add: Penalties

Interest up to 3-31-2000P550,485.82

Compromise25,000.00575,485.82

Deficiency EWT DueP1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax DueP

Add: Penalties

SurchargeP359,177.80

Interest up to 3-31-200087,580.34

Compromise16,000.00462,758.14

Penalties DueP462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax DueP

Add: Penalties

SurchargeP1,729,690.71

Interest up to 3-31-2000508,783.07

Compromise50,000.002,288,473.78

Penalties DueP2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax DueP

Add: Penalties

25 % SurchargeP8,865.34

Interest up to 3-31-200058.29

Compromise2,000.0010,923.60

Penalties DueP10,923.60

GRAND TOTALP15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony submitted relevant documents in support of its protest on the 16th of that same month.6On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting documents to the CIR, Sony filed a petition for review before the CTA.7After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sonys motor vehicles and on professional fees paid to general professional partnerships. It also assessed the amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental expense since it found that the total rental deposit ofP10,523,821.99 was incurred from January to March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December 1997 and for the late remittance of EWT by some of Sonys branches.8In sum, the CTA-First Division partly granted Sonys petition by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the penalties. Thus, the dispositive portion reads:WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However, the deficiency assessments for expanded withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the amount ofP1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum ofP1,269,593.90:1. VAT on RoyaltyP 429,242.07

2. Withholding Tax on Royalty831,428.20

3. EWT of Petitioner's Branches8,923.63

TotalP 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997 Tax Code.SO ORDERED.9The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency VAT in the amount ofP11,141,014.41;B. The Honorable court committed reversible error in holding that the commission expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with respect to the 5% withholding tax on rental deposit in the amount ofP10,523,821.99 should be cancelled; andD. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on royalties covering the period January to March 1998 was filed on time.10On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1Unfazed, the CIR filed a petition for review with the CTA-EB raising identical issues:1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;2. Whether or not the commission expense in the amount ofP2,894,797.00 should be subjected to 10% withholding tax instead of the 5% tax rate;3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the amount ofP10,523,821.99 is proper; and4. Whether or not the remittance of final withholding tax on royalties covering the period January to March 1998 was filed outside of time.11Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:GROUNDS FOR THE ALLOWANCE OF THE PETITIONITHE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.IIAS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.IIITHE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved to give due course to the petition and to decide the case on the basis of the pleadings filed.13The Court finds no merit in the petition.The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be understood to mean the fiscal year ending in March 31, 1998.14The Court cannot agree.Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax.15The very provision of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. (A)Examination of Returns and Determination of tax Due. After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representativemay authorize the examination of any taxpayer and the assessment of the correct amount of tax:Provided, however, That failure to file a return shall not prevent the Commissioner fromauthorizing the examination of any taxpayer.x x x [Emphases supplied]Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity.As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR acting through its revenue officers went beyond the scope of their authority because the deficiency VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it should have done so by including it in the LOA or issuing another LOA.Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of which reads:3. A Letter of Authority should covera taxable period not exceeding one taxable year. The practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically indicated in the L/A.16[Emphasis supplied]On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense could not be considered as an input VAT credit because the same was eventually reimbursed by Sony International Singapore(SIS),is also erroneous.The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising expense should be for the account of SIS, and not Sony.17The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should have been realized from the advertising expense of the latter.18It is evident under Section 11019of the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no less than CIRs own witness, Revenue Officer Antonio Aluquin.20There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter paid for the same.21Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is another matter all together but will definitely not change said fact.The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to the latters advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit further that our client is not subject to VAT on the subsidy income as this was not derived from the sale of goods or services.22Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sonys advertising expense for it was but an assistance or aid in view of Sonys dire or adverse economic conditions, and was only "equivalent to the latters (Sonys) advertising expenses."Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:SEC. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.In the case ofCIR v. Court of Appeals (CA),23the Court had the occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however, is not applicable to the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. This is not true in the present case. Sony did not render any service to SIS at all. The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latters advertising expense but never received any goods, properties or service from Sony.Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24The said revenue regulation provides that the 10% rate is applied when the recipient of the commission income is a natural person. According to the CIR, Sonys schedule of Selling, General and Administrative expenses shows the commission expense as "commission/dealer salesman incentive," emphasizing the word salesman.On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g) of Revenue Regulations No. 6-85 which provides:(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real estate and commercial brokers and agents of professional entertainers five per centum (5%).25In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in the schedule of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is composed of "Commission Expense" in the amount of P10,200.00 and Broker Dealer of P2,894,797.00.26The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule during the subject period of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and agents was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.27Until then, the rate was only 5%.The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the amount ofP10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate LOA specifying the coverage, the CIRs deficiency EWT assessment from January to March 1998, is not valid and must be disallowed.Finally, the Court now proceeds to the third ground relied upon by the CIR.The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from January to March 1998.The CIR insists that under Section 328of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)29of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of royalties.The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when the royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10 days after the end of each month. The question now is when does the royalty become payable?Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were agreed upon:(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the furnishing of the above statement.30Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably filed. Although the royalty from January to March 1998 was well within the semi-annual period ending June 30, which meant that the royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet late.In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.WHEREFORE, the petition is DENIED.

SECOND DIVISIONG.R. No. 145559 July 14, 2006COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.BENGUET CORPORATION,respondent.D E C I S I O NGARCIA,J.:In this petition for review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue seeks the reversal and setting aside of the following Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 38413, to wit:1.Resolution dated May 10, 20001insofar as it ordered petitioner to issue a tax credit to respondent Benguet Corporation in the amount ofP49,749,223.31 representing input VAT/tax attributable to its sales of gold to the Central Bank (now Bangko Sentral ng Pilipinas or BSP) covering the period from January 1, 1988 to July 31, 1989; and2.Resolution dated October 16, 20002denying petitioner's motion for reconsideration.The facts, as narrated by the CA in its basic Resolution of May 10, 2000, are:[Respondent] is a domestic corporation engaged in mining business, specifically the exploration, development and operation of mining properties for purposes of commercial production and the marketing of mine products. It is a VAT-registered enterprise, with VAT Registration No. 31-0-000027 issued on January 1, 1988. Sometime in January 1988, [respondent] filed an application for zero-rating of its sales of mine products, which application was duly approved by the [petitioner] Commissioner of Internal Revenue.On August 28, 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 378-88 which declared that the sale of gold to the Central Bank is considered an export sale and therefore subject to VAT at 0% rate. On December 14, 1988, then Deputy Commissioner Santos also issued Revenue Memorandum Circular (RMC) No. 59-88, again declaring that the sale of gold by a VAT-registered taxpayer to the Central Bank is subject to the zero-rate VAT. No less than five Rulings were subsequently issued by [petitioner] from 1988 to 1990 reiterating and confirming its position that the sale of gold by a VAT-registered taxpayer to the Central Bank is subject to the zero-rate VAT.As a corollary, and in reliance, of the foregoing issuances, [respondent], during the six (6) taxable quarters in question covering the period January 1, 1988 to July 31, 1989, sold gold to the Central Bank and treated these sales as zero-rated that is, subject to the 0% VAT. During the same period, [respondent] thus incurred input taxes attributable to said sales to the Central Bank. Consequently, [respondent] filed with the Commissioner of Internal Revenue applications for the issuance of Tax Credit Certificates for input VAT Credits attributable to its export sales - that is, inclusive of direct export sales and sale of gold to the Central Bank corresponding to the same taxable periods, to wit:AMOUNT OF TAX CREDIT APPLIED FORTAXABLE PERIOD

P34,449,817.7101Jan88 to 30 Apr88

P30,382,666.8601May88 to 31Jul88

P13,467,663.41 01Nov88 to 31Jan89

P7,030,261.29 01Feb89 to 30Apr89

P18,263,960.2801May89 to 31Jul89

(CTA Decision dated March 23, 1995; Pages 83-86, rollo)Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued VAT Ruling No. 008-92 declaring and holding that the sales of gold to the Central Bank are considered domestic sales subject to 10% VAT instead of 0% VAT as previously held in BIR Issuances from 1998 to 1990. Subsequently, VAT Ruling No. 59-92, dated April 28, 1992, x x x were issued by [petitioner] reiterating the treatment of sales of gold to the Central Bank as domestic sales, and expressly countenancing the Retroactive application of VAT Ruling No. 008-92 to all such sales made starting January 1, 1988, ratiocinating,inter alia, that the mining companies will not be unduly prejudiced by a retroactive application of VAT Ruling 008-92 because their claim for refund of input taxes are not lost because the same are allowable on its output taxes on the sales of gold to Central Bank; on its output taxes on other sales; and as deduction to income tax under Section 29 of the Tax Code.On the basis of the aforequoted BIR Issuances, [petitioner] thus treated [respondent's] sales of gold to the Central Bank as domestic sales subject to 10% VAT but allowed [respondent] a total tax credit of onlyP81,991,810.91 which corresponded to VAT input taxes attributable to its direct export sales (CTA Decision dated March 23, 1995; Page 87). Notwithstanding this finding of the [petitioner], [respondent] was not refunded the said amounts of tax credit claimed. Thus, to suspend the running of the two-year prescriptive period (Sec. 106, NIRC) for claiming refunds or tax credits, [respondent] instituted x x x consolidated Petitions for Review with the Court of Tax Appeals, praying for the issuance of"Tax Credit Certificates"for the following input VAT credits attributable to export sales transacted during the taxable quarters or periods in question, to wit:CTA CaseNumberAmount of Tax Credit Applied forTaxable Period

4429P64,832,374.6701JAN 88 to 31JUL88

4495P43,614,437.8801AUG 88to 31JAN89

4575P23,294,221.7701FEB 89 to 31JUL89

P131,741,034.22 = TOTAL

Significantly, the total amount ofP131,741,034.22, as hereinabove computed, corresponds to the total input VAT credits attributable to export sales made by [respondent] during the taxable periods set forth and therefore, represents a combination of input tax attributable to both (1) direct export sales and (2) sales of gold to the Central Bank. (Words in brackets added).3In a decision dated March 23, 1995,4the Court of Tax Appeals (CTA) dismissed respondent's aforementioned consolidated Petitions for Review and denied the whole amount of its claim for tax credit ofP131,741,034.22. The tax court held that the alleged prejudice to respondent as a result of the retroactive application of VAT Ruling No. 008-92 issued on January 23, 1992 to the latter's gold sales to the Central Bank (CB) from January 1, 1988 to July 31, 1989 is merely speculative and not actual and imminent so as to proscribe said Ruling's retroactivity. The CTA further held that respondent would not be unduly prejudiced considering that VAT Ruling No. 59-92 which mandates the retroactivity of VAT Ruling No. 008-92 likewise provides for alternative remedies for the recovery of the input VAT.Its motion for reconsideration having been denied by the tax court, respondent appealed to the CA whereat its recourse was docketed asCA-G.R. SP No. 38413.At first, the CA, in a decision dated May 30, 1996,5affirmed in toto that of the tax court.However, upon respondent's motion for reconsideration, the CA, in the herein assailed basicResolution dated May 10, 2000, reversed itself by setting aside its earlier decision of May 30, 1996 and ordering herein petitioner to issue in respondent's favor a tax credit in the amount ofP131,741,034.22, to wit:IN THE LIGHT OF ALL THE FOREGOING, [respondent's]Motion for Reconsideration, x x x as supplemented, is GRANTED. The Decision of this Court, dated May 30, 1996, affirming the Decision of the Court of Tax Appeals x x x isSET ASIDE. The [petitioner Commissioner of Internal Revenue] is hereby ordered to issue [respondent] aTAX CREDITin the amount ofP131,741,034.22.SO ORDERED.In its reversal action, the CA ruled that the tax credit in the total amount ofP131,741,034.22 consists of (1)P81,991,810.91, representing input VAT credits attributable to direct export sales subject to 0% VAT, and (2)P49,749,223.31, representing input VAT attributable to sales of gold to the CB which were subject to 0% when said sales were made in 1988 and 1989. In effect, the CA rejected the retroactive application of VAT Ruling No. 008-92 to the subject gold sales of respondent because of the resulting prejudice to the latter despite the existence of alternative modes for the recovery of the input VAT.This time, it was petitioner who moved for a reconsideration but his motion was denied by the CA in its subsequentResolution of October 16, 2000.Hence, petitioner's present recourse assailing only that portion of the CA Resolution of May 10, 2000 allowing respondent the amount ofP49,749,223.31 as tax credit corresponding to the input VAT attributable to its sales of gold to the CB for the period January 1, 1988 to July 31, 1989. It is petitioner's sole contention that the CA erred in rejecting the retroactive application of VAT Ruling No. 008-92, dated January 23, 1992, subjecting sales of gold to the CB to 10% VAT to respondent's sales of gold during the period from January 1, 1988 to July 31, 1989. Petitioner posits that, contrary to the ruling of the appellate court, the retroactive application of VAT Ruling No. 008-92 to respondent would not prejudice the latter.Initially, the Court, in its Resolution of January 24, 2001,6denied the Petition for lack of verification and certification against forum shopping. However, upon petitioner's manifestation and motion for reconsideration, the Court reinstated the Petition in its subsequent Resolution of March 5, 2001.7The petition must have to fall.We start with the well-entrenched rule that rulings and circulars, rules and regulations, promulgated by the Commissioner of Internal Revenue, would have no retroactive application if to so apply them would be prejudicial to the taxpayers.8And this is as it should be, for the Tax Code, specifically Section 246 thereof, is explicit that:x x x Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith.There is no question, therefore, as to the prohibition against the retroactive application of the revocation, modification or reversal, as the case maybe, of previously established Bureau on Internal Revenue (BIR) Rulings when the taxpayer's interest would be prejudiced thereby. But even if prejudicial to a taxpayer, retroactive application is still allowed where: (a) a taxpayer deliberately misstates or omits material facts from his return or any document required by the BIR; (b) where subsequent facts gathered by the BIR are materially different from which the ruling is based; and (c) where the taxpayer acted in bad faith.As admittedly, respondent's case does not fall under any of the above exceptions, what is crucial to determine then is whether the retroactive application of VAT Ruling No. 008-92 would be prejudicial to respondent Benguet Corporation.The Court resolves the question in the affirmative.Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered taxpayer in connection with his purchase of goods and services. Thus, "input tax" means the value-added tax paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local purchases of goods or services from a VAT-registered person.9On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% of the selling price as output VAT or output tax.10Hence, "output tax" is the value-added tax on the sale of taxable goods or services by any person registered or required to register under Section 107 of the (old) Tax Code.11The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on the 10% output VAT on the gross selling price or gross receipts, as the case may be, to its buyers, or (2) if the input tax is attributable to the purchase of capital goods or to zero-rated sales, by filing a claim for a refund or tax credit with the BIR.12Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only recover its input VAT costs by filing a refund or tax credit with the BIR.Here, the claimed tax credit of input tax amounting toP49,749,223.31 represents the costs or expenses incurred by respondent in connection with its gold production. Relying on BIR Rulings, specifically VAT Ruling No. 378-88, dated August 28, 1988, and VAT Ruling No. 59-88, dated December 14, 1988, both of which declared that sales of gold to the CB are considered export sales subject to 0%, respondent sold gold to the CB from January 1, 1988 to July 31, 1989 without passing on to the latter its input VAT costs, obviously intending to obtain a refund or credit thereof from the BIR at the end of the taxable period. However, by the time respondent applied for refund/credit of its input VAT costs, VAT Ruling No. 008-92 dated January 23, 1992, treating sales of gold to the CB as domestic sales subject to 10% VAT, and VAT Ruling No. 059-92 dated April 28, 1992, retroactively applying said VAT Ruling No. 008-92 to such sales made from January 1, 1988 onwards, were issued. As a result, respondent's application for refund/credit was denied and, as likewise found by the CA, it was even subsequently assessed deficiency output VAT on October 19, 1992 in the total amounts ofP252,283,241.95 for the year 1988, andP244,318,148.56 for the year 1989.13Clearly, from the foregoing, the prejudice to respondent by the retroactive application of VAT Ruling No. 008-92 to its sales of gold to the CB from January 1, 1988 to July 31, 1989 is patently evident.Verily, by reason of the denial of its claim for refund/credit, respondent has been precluded from recovering its input VAT costs attributable to its sales of gold to the CB during the period mentioned, for the following reasons:First, because respondent could not pass on to the CB the 10% output VAT which would be retroactively imposed on said transactions, not having passed the same at the time the sales were made on the assumption that said sales are subject to 0%, and, hence, maybe refunded or credited later. And second, because respondent could not claim the input VAT costs as a refund/credit as it has been prevented such option, the sales in question having been retroactively subjected to 10% VAT, ergo limiting recovery of said costs to the application of the same against the output tax which will result therefrom.Indeed, respondent stands to suffer substantial economic prejudice by the retroactive application of the VAT Ruling in question.But petitioner maintains otherwise, arguing that respondent will not be unduly prejudiced since there are still other available remedies for it to recover its input VAT costs. Said remedies, so petitioner points out, are for respondent to either (1) use said input taxes in paying its output taxes in connection with its other sales transactions which are subject to the 10% VAT or (2) if there are no other sales transactions subject to 10% VAT, treat the input VAT as cost and deduct the same from income for income tax purposes.We are not persuaded.The first remedy cannot be applied in this case. As correctly found by the CA, respondent has clearly shown that it has no "other transactions" subject to 10% VAT, and petitioner has failed to prove the existence of such "other transactions" against which to set off respondent's input VAT.14Anent the second remedy, prejudice will still, indubitably, result because treating the input VAT as an income tax deductible expense will yield only a partial and not full financial benefit of having the input VAT refunded or used as a tax credit. We quote with approval the CA's observations in this respect, thus:x x x even assuming that input VAT is still available for deduction, [respondent] still suffers prejudice. As a zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances), [respondent] could have claimed a cash refund or tax credit of the input VAT in the amount ofP49,749,223.31. If it had been allowed a cash refund or tax credit, it could have used the full amount thereof to pay its other tax obligations (or, in the case of a cash refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash refund or tax credit and is limited to the so-called remedy of deducting the input VAT from gross income. But a cash refund or tax credit is not the same as a tax deduction. A tax deduction has less benefits than a tax credit. Consider the following differences;2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section 104(b) of the Tax Code states;"(b) Excess output or input tax. xxx Any input tax attributable to xxx zero-rated sales by a VAT-registered person may at his option be refundedor credited against other internal revenue taxes, subject to the provisions of Section 106."On the other hand, a tax deduction may be used only against gross income for purposes of income tax. A tax deduction is not allowed against other internal revenue taxes such as excise taxes, documentary stamp taxes, and output VAT.2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income tax liabilities (Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final income tax due (Section 106[b], Tax Code). This is illustrated in the example below:Assume that in 1988, respondent had a gross income ofP1,000,000,000 and deductible expenses in general (such as salaries, utilities, transportation, fuel and costs of sale) ofP500,000,000. Assume also that [respondent] had input VAT ofP131,741,034.22, the amount being claimed in the instant case. [Respondent's] income tax liability, depending on whether it utilized the input tax as tax credit or tax deduction, would be as follows:a. Tax credit

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

Deductions (Section 29, Tax Code)( 500,000,000.00)

Taxable Income (Section 27, Tax Code)P500,000.000.00

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

Tax PayableP175,000,000.00

Tax Credit(131,741,034.22)

Tax dueP43,258,965.78

b. Tax deduction

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

Deductions

General (Section 29, Tax Code)P500,000,000.00

Input VAT (VAT Ruling No. 059-92)P131,741,034.22P631,741,034.22)

Taxable income (Section 27, Tax Code)P368,258,966.78

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

Tax payableP128,890,638.02

Tax Credit-

Tax due______________

P128,890,638.02

Thus, if the input VAT ofP131,741,034.22 were to be credited against the income tax due, the income tax payable is onlyP43,258,965.78. On the other hand, if the input VAT were to be deducted from gross income before arriving at the net income, the income tax payable isP128,890,638.02. This is almost three (3) times the income tax payable if the input VAT were to be deducted from the income tax payable.As can be seen from above, there is a substantial difference between a tax credit and a tax deduction. A tax credit reduces tax liability while a tax deduction only reduces taxable income (emphasis supplied).A tax credit of input VAT fully utilizes the entire amount ofP131,741,034.22, since tax liability is reduced by the said amount. A tax deduction is not fully utilized because the savings is only 35% orP46,109,361.98. In the above case, therefore, the use of input VAT as a tax deduction results in a loss of 65% of the input VAT, orP85,631,672.24, which [respondent] could have otherwise fully utilized as a tax credit.x x x x x x x x xx x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a recovery of the expense. The deduction of a bad debt, for instance, does not result in the recovery of the debt. On the other hand, a tax credit, because it can be fully utilized to reduce tax liability, is as good as cash and is thus effectively a full recovery of the input VAT cost.15(Emphasis in the original; Words in brackets supplied).We may add that the prejudice which befell respondent is all the more highlighted by the fact that it has been issued assessments for deficiency output VAT on the basis of the same sales of gold to the CB.On a final note, the Court is fully cognizant of the well-entrenched principle that the Government is not estopped from collecting taxes because of mistakes or errors on the part of its agents.16But, like other principles of law, this also admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer.17As this Court has said inABS-CBN Broadcasting Corporation v. Court of Tax Appeals and the Commissioner of Internal Revenue:18The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is indicative of legislative intention to support the principle of good faith. In fact, in the United States x x x it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. [Word in brackets supplied].Here, when respondent sold gold to the CB, it relied on the formal assurances of the BIR,i.e., VAT Ruling No. 378-88 dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated December 14, 1988, that such sales are zero-rated. To retroact a later ruling VAT Ruling No. 008-92 - revoking the grant of zero-rating status to the sales of gold to the CB and applying a new and contrary position that such sales are now subject to 10%, is clearly inconsistent with justice and the elementary requirements of fair play.Accordingly, we find that the CA did not commit a reversible error in holding that VAT Ruling No. 008-92 cannot be retroactively applied to respondent's sales of gold to the CB during the period January 1, 1988 to July 31, 1989, hence, it is entitled to tax credit in the amount ofP49,749,223.31 attributable to such sales.IN VIEW WHEREOF, the instant petition isDENIEDand the assailed CA Resolutions areAFFIRMED.No costs.SO ORDERED.

THIRD DIVISION