GENERAL PRINCIPLES

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.THE INSULAR LIFE ASSURANCE CO. LTD., Respondent.

D E C I S I O N

REYES, J.:

"Time and again, the Court has held that it is a very desirable and necessary judicial practice that when a court has laid down a principle of law as applicable to a certain state of facts, it will adhere to that principle and apply it to all future cases in which the facts are substantially the same. Stare decisis et non quieta movere. Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of certainty, a conclusion reached in one case should be applied to those that follow if the facts are substantially the same, even though the parties may be different. It proceeds from the first principle of justice that, absent any powerful countervailing considerations, like cases ought to be decided alike. Thus, where the same questions relating to the same event have been put forward by the parties similarly situated as in a previous case litigated and decided by a competent court, the rule of stare decisisis a bar to any attempt to relitigate the same issue."1

The Case

This is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court filed by the Commissioner of Internal Revenue (petitioner) against The Insular Life Assurance Co., Ltd. (respondent),challenging the Decision3dated March 14, 2011 and Resolution4 dated June 13, 2011 of the Court of Tax Appeals (CTA) en banc in CTA EB Case No. 585 (CTA Case No. 7292).

Antecedent Facts

Petitioner Commissioner of Internal Revenue is the official duly authorized under Section 4 of the National Internal Revenue Code (NIRC) of 1997, as amended, to assess and collect internal revenue taxes, as well as the power to decide disputed assessments, subject to the exclusive appellate jurisdiction of this Court.

Respondent The Insular Life Assurance, Co., Ltd. is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office located at IL Corporate Center, Insular Life Drive, FilinvestCorporate City, Alabang, Muntinlupa City. It is registered as a non-stock mutual life insurer with the Securities and Exchange Commission.

On October 7, 2004, respondent received an Assessment Notice with Formal Letter of Demand both dated July 29, 2004, assessing respondent for deficiency DST on its premiums on direct business/sums assured for calendar year 2002, computed as follows:

Documentary Stamp Tax  

Deficiency Documentary StampTax-Basic

P70,732,389.83

Add: Increments (Interest andCompromise Penalty)

23,201,969.38

Total Amount Due P93,934,359.21

Thereafter, respondent filed its Protest Letter on November 4, 2004, which was subsequently denied by petitioner in a Final Decision, on Disputed Assessment dated April 15, 2005 for lack of factual and legal bases. Apparently, respondent received the aforesaid Final Decision on Disputed Assessment only on June 23, 2005.

On July 15, 2005, respondent filed a Petition for Review before [the CTA].

On April 21, 2009, the former Second Division of the [CTA] rendered a Decision in favor of respondent, thus, granting the Petition for Review and held, among others, that respondent sufficiently established that it is a cooperative company and therefore, it is exempt from the DST on the insurance policies it grants to its members.

Consequently, on May 13, 2009, petitioner filed a Motion for Reconsideration.

On January 11, 2010, petitioner received a Resolution dated January 4, 2010 of the former Second Division of [the CTA] denying [its] Motion for Reconsideration for lack of merit. It held, among others, that the Supreme Court in Republic of the Philippines vs. Sunlife Assurance Company of Canada already laid down the rule that registration with the Cooperative Development Authority is not essential before respondent may avail of the exemptions granted under Section 199 of the 1997 NIRC, as amended.

Undaunted, petitioner filed a Petition for Review before the [CTA] en banc on January 26, 2010.5 (Citations omitted)

On March 14, 2011, the CTA en banc denied the petition and rendered the assailed decision, with the dispositive portion as follows:

WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. The assailed Decision dated April 21, 2009 and Resolution dated January 4, 2010 are AFFIRMED.

SO ORDERED.6

It is the petitioner’s contention that since the respondent is not registered with the Cooperative Development Authority (CDA), it should not be considered as a cooperative company that is entitled to the exemption provided under Section 199(a) of the National Internal Revenue Code (NIRC) of 1997.7 Thus, the instant petition.

Issue

WHETHER OR NOT THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS A COOPERATIVE AND [IS] THUS[,] EXEMPT FROM DOCUMENTARY STAMP TAX.8

Ruling

The Court has pronounced in Republic of the Philippines v. Sunlife Assurance Company of Canada9 that "[u]nder the Tax Code although respondent is a cooperative, registration with the CDA is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums, under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199."10

Section 199 of the NIRC of 1997 provides:

Sec. 199. Documents and Papers Not Subject to Stamp Tax. – The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax:

(a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company, operated on the lodge system or local cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit.

x x x x (Emphasis ours)

As regards the applicability of Sunlife to the case at bar, the CTA, through records, has established the following similarities between the two which call for the application of the doctrine of stare decisis:

1. Sunlife Assurance Company of Canada and the respondent are both engaged in mutual life insurance business in the Philippines;

2. The structures of both corporations were converted from stock life insurance corporation to non-stock mutual life insurance for the benefit of its policyholders pursuant to Section 266, Title 17 of the Insurance Code of 1978 and they were made prior to the effectivity of Republic Act (R.A.) No. 6938, otherwise known as the "Cooperative Code of the Philippines";

3. Both corporations claim to bea purely cooperative corporation duly licensed to engage in mutual life insurance business;

4. Both corporations claim exemption from payment of the documentary stamp taxes (DST) under Section 199(1) of the Tax Code (now Section 199[a] of the NIRC of 1997, as amended); and

5. Petitioner CIR requires registration with the CDA before it grants tax exemptions under the Tax Code.11

The CTA observed that the factual circumstances obtaining in Sunlife and the present case are substantially the same. Hence, the CTA based its assailed decision on the doctrine enunciated by the Court in the said case. On the other hand, the petitioner submitted that the doctrine in Sunlife should be reconsidered and not be applied because the same failed to consider Section 3(e) of R.A No. 6939,12 which provides that CDA has the power to register all cooperatives,13 to wit:

Section 3. Powers, Functions and Responsibilities. – The Authority shall have the following powers, functions and responsibilities:

x x x x

(e) Register all cooperatives and their federations and unions, including their division, merger, consolidation, dissolution or liquidation. It shall also register the transfer of all or substantially all of their assets and liabilities and such other matters as may be required by the Authority;

x x x x

The petitioner proposed that considering the foregoing provision, registration with the CDA is necessary for an association to be deemed as a cooperative and to enjoy the tax privileges appurtenant thereto.14

A perusal of Section 3(e) of R.A. No. 6939 evidently shows that it is merely a statement of one of the powers exercised by CDA. Neither Section 3(e) of R.A. No. 6939 nor any other provision in the aforementioned statute imposes registration with the CDA as a condition precedent to claiming DST exemption. Even then, R.A. No. 6939 is inapplicable to the case at bar, as will be discussed shortly.

The NIRC of 1997 defined a cooperative company or association as "conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit."15 Consequently, as long as these requisites are satisfied, a company or association is deemed a cooperative insofar as taxation is concerned. In this case, the respondent has sufficiently established that it conforms with the elements of a cooperative as defined in the NIRC of 1997 in that it is managed by members, operated with money collected from the members and has for its main purpose the mutual protection of members for profit.16

The Court presented three justifications in Sunlife why registration with the CDA is not necessary for cooperatives to claim exemption from DST.

First, the NIRC of 1997 does not require registration with the CDA. No tax provision requires a mutual life insurance company to register with that agency in order to enjoy exemption from both percentage and DST. Although a provision of Section 8 of the Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the Certificate of Registration with the CDA before the issuance of a tax exemption certificate, that provision cannot prevail over the clear absence of an equivalent requirement under the Tax Code.17

The respondent correctly pointed out that in other provisions of the NIRC, registration with the CDA is expressly required in order to avail of certain tax exemptions or preferential tax treatment18 −a requirement which is noticeably absent in Section 199 of the NIRC. Quoted below are examples of cooperatives which are expressly mandated by law to be registered with the CDA before their transactions could be considered as exempted from value added tax:

Sec. 109. Exempt Transactions. – The following shall be exempt from the value-added tax:

x x x x

(r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

(s) Sales by electric cooperatives duly registered with the Cooperative Development Authority or National Electrification Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity;

(t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members;

(u) Sales by non-agricultural, non-electric and noncredit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

x x x x (Emphasis ours)

This absence of the registration requirement under Section 199 clearly manifests the intention of the Legislative branch of the government to do away with registration before the CDA for a cooperative to benefit from the DST exemption under this particular section.

Second, the provisions of the Cooperative Code of the Philippines do not apply.19 The history of the Cooperative Code was amply discussed in Sunlife where it was noted that cooperatives under the old law, Presidential Decree (P.D.) No. 17520 "referred only to an organization composed primarily of small producers and consumers who voluntarily joined to form a business enterprise that they themselves owned, controlled, and patronized. The Bureau of Cooperatives Development — under the Department of Local Government and Community Development (later Ministry of Agriculture) — had the authority to register, regulate and supervise only the following cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2) local or primary cooperatives composed of natural persons and/or barrio associations; (3) federations composed of cooperatives that may or may not perform business activities; and (4) unions of cooperatives that did not perform any business activities. Respondent does not fall under any of the abovementioned types of cooperatives required to be registered under [P.D. No.] 175."21

Thus, when the subsequent law, R.A. No. 6939, concerning cooperatives was enacted, the respondent was not covered by said law and was not required to be registered, viz:

When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and previous laws were also deemed registered with the CDA. Since respondent was not required to be registered under the old law on cooperatives, it followed that it was not required to be registered even under the new law.

x x x Only cooperatives to be formed or organized under the Cooperative Code needed registration with the CDA. x x x.22 (Emphasis ours)

"The distinguishing feature of a cooperative enterprise is the mutuality of cooperation among its member-policyholders united for that purpose. So long as respondent meets this essential feature, it does not even have to use and carry the name of a cooperative to operate its mutual life insurance business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege merely because it failed to register. The nature of its operations is clear; its purpose well-defined. Exemption when granted cannot prevail over administrative convenience."23

Third, the Insurance Code does not require registration with the CDA.1âwphi1 "The provisions of this Code primarily govern insurance contracts; only if a particular matter in question is not specifically provided for shall the provisions of the Civil Code on contracts and special laws govern."24

There being no cogent reason for the Court to deviate from its ruling in Sunlife, the Court holds that the respondent, being a cooperative company not mandated by law to be registered with the CDA, cannot be required under RMC No. 48-91, a mere circular, to be registered prior to availing of DST exemption.

"While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails. "25

WHEREFORE, premises considered, the petition is DENIED. Accordingly, the Decision dated March 14, 2011 and Resolution dated June 13, 2011 of the Court of Tax Appeals en bane in CTA EB Case No. 585 (CTA Case No. 7292) are hereby AFFIRMED.

NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE WORKSHOP, INC., Petitioners, vs.ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE CITY OF MANILA,Respondents.

D E C I S I O N

BERSAMIN, J.:

The issue here concerns double taxation. There is double taxation when the same taxpayer is taxed twice when he should be taxed only once for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period, and the taxes are of the same kind or character. Double taxation is obnoxious.

The Case

Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18, 2007,1 whereby the Court of Appeals (CA) denied petitioners' appeal for lack of jurisdiction; and the resolution promulgated on November 14, 2007,2 whereby the CA denied their motion for reconsideration for its lack of merit.

Antecedents

The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.3 At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code of Manila,4 as amended, as a condition for the renewal of their respective business licenses for the year 1999. Section 21 of the Revenue Code of Manila stated:

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC - On any of the following businesses and articles of commerce subject to the excise, value-added or percentage taxes under the National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed:

A) On person who sells goods and services in the course of trade or businesses; x x x PROVIDED, that all registered businesses in the City of Manila already paying the aforementioned tax shall be exempted from payment thereof.

To comply with the City of Manila’s assessmentof taxes under Section 21, supra, the petitioners paid under protest the following amounts corresponding to the first quarter of 1999,5 to wit:

(a) Nursery Care Corporation P595,190.25

(b) Shoemart Incorporated P3,283,520.14

(c) Star Appliance Center P236,084.03

(d) H & B, Inc. P1,271,118.74

(e) Supplies Station, Inc. P239,501.25

(f) Hardware Work Shop, Inc. P609,953.24

By letter dated March 1, 1999, the petitioners formally requested the Office of the City Treasurer for the tax credit or refund of the local business taxes paid under protest.6 However, then City Treasurer Anthony Acevedo (Acevedo) denied the request through his letter of March 10, 1999.7

On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought the reconsideration of the denial of their request.8 Still, the City Treasurer did not reconsider.9 In the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of Manila.10

On April 29, 1999, the petitioners filed their respective petitions for certiorariin the Regional Trial Court (RTC) in Manila. The petitions, docketed as Civil Cases Nos. 99-93668 to 99-93673,11 were initially raffled to different branches, but were soon consolidated in Branch 34.12 After the presiding judge of Branch 34 voluntarily inhibited himself, the consolidated cases were transferred to Branch 23,13 but were again re-raffled to Branch 19 upon the designation of Branch 23 as a special drugs court.14

The parties agreed on and jointly submitted the following issues for the consideration and resolution of the RTC, namely:

(a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as amended, constitutes double taxation.

(b) Whether or not the failure of the petitioners to avail of the statutorily provided remedy for their tax protest on the ground of unconstitutionality, illegality and oppressiveness under Section 187 of the Local Government Code renders the present action dismissible for non-exhaustion of administrative remedy.15

Decision of the RTC

On April 26, 2002, the RTC rendered its decision, holding thusly:

The Court perceives of no instance of the constitutionally proscribed double taxation, in the strict, narrow or obnoxious sense, imposed upon the petitioners under Section 15 and 17, on the one hand, and under Section 21, on the other, of the questioned Ordinance. The tax imposed under Section 15 and 17, as against that imposed under Section 21, are levied against different tax objects or subject matter. The tax under Section 15 is imposed upon wholesalers, distributors or dealers, while that under Section 17 is imposedupon retailers. In short, taxes imposed under Section 15 and 17 is a tax on the business of wholesalers, distributors, dealers and retailers. On the other hand, the tax imposed upon herein petitioners under Section 21 is not a tax against the business of the petitioners (as wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or end-users of the articles sold by petitioners. This is plain from a reading of the modifying paragraph of Section 21 which says:

"The tax shall be payable by the person paying for the services rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days after the end of each quarter." (Underscoring supplied)

In effect, the petitioners only act as the collection or withholding agent of the City while the ones actually paying the tax are the consumers or end-users of the articles being sold by petitioners. The taxes imposed under Sec. 21 represent additional amounts added by the business establishment to the basic prices of its goods and services which are paid by the end-users to the businesses. It is actually not taxes on the business of petitioners but on the consumers. Hence, there is no double taxation in the narrow, strict or obnoxious sense,involved in the imposition of taxes by the City of Manila under Sections 15, 17 and 21 of the questioned Ordinance. This in effect resolves infavor of the constitutionality of the assailed sections of Ordinance No. 7807 of the City of Manila.

Petitioners, likewise, pray the Court to direct respondents to cease and desist from implementing Section 21 of the questioned Ordinance. That the Court cannot do, without doing away with the mandatory provisions of Section 187 of the Local Government Code which distinctly commands that an appeal questioning the constitutionality or legality of a tax ordinance shall not have the effectof suspending the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein. This is so because an ordinance carries with it the presumption of validity.

x x x

With the foregoing findings, petitioners’ prayer for the refund of the amounts paid by them under protest must, likewise, fail.

Wherefore, the petitions are dismissed. Without pronouncement as to costs.

SO ORDERED.16

The petitioners appealed to the CA.17

Ruling of the CA

On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as follows:

The six (6) cases were consolidated on a common question of fact and law, that is, whether the act ofthe City Treasurer of Manila of assessing and collecting business taxes under Section 21of Ordinance 7807, on top of other business taxes alsoassessed and collected under the previous sections of the same ordinance is a violation of the provisions of Section 143 of the Local Government Code.

Clearly, the disposition of the present appeal in these consolidated cases does not necessitate the calibration of the whole evidence as there is no question or doubt as to the truth or the falsehood of the facts obtaining herein, as both parties agree thereon. The present case involves a question of law that would not lend itself to an examination or evaluation by this Court of the probative value of the evidence presented.

Thus the Court is constrained todismiss the instant petition for lack of jurisdiction under Section 2,Rule 50 of the 1997 Rules on Civil Procedure which states:

"Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41 taken from the Regional Trial Court to the Court of Appeals raising only questions of law shall be dismissed, issues purely of law not being reviewable by said court. similarly, an appeal by notice of appeal instead of by petition for review from the appellate judgment of a Regional Trial Court shall be dismissed.

An appeal erroneously taken tothe Court of Appeals shall not be transferred to the appropriate court but shall be dismissed outright.

WHEREFORE, the foregoing considered, the appeal is DISMISSED.

SO ORDERED.18

The petitioners moved for reconsideration, but the CA denied their motion through the resolution promulgated on November 14, 2007.19

Issues

The petitioners now appeal, raising the following grounds, to wit:

A.

THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND DENYING THEIR MOTION FOR RECONSIDERATION, ERRED INRULING THAT THE ISSUE INVOLVED IS A PURELY LEGAL QUESTION.

B.

THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19 OF THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING PETITIONERS’ PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER PROTEST AND DISMISSING THE PETITION FOR CERTIORARI FILED BY THE PETITIONERS.

C.

THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY TREASURER OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE ADDITIONAL BUSINESS TAX UNDER SECTION 21 OFORDINANCE NO. 7794, AS AMENDED BY ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS CONSTITUTIVE OF DOUBLE TAXATION AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.20

The main issues for resolution are, therefore, (1) whether or not the CA properly denied due course to the appeal for raising pure questions of law; and (2) whether or not the petitioners were entitled to the tax credit or tax refund for the taxes paid under Section 21, supra.

Ruling

The appeal is meritorious.

1.

The CA did not err in dismissing the appeal;but the rules should be liberally appliedfor the sake of justice and equity

The Rules of Courtprovides three modes of appeal from the decisions and final orders of the RTC, namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the decisionsand final orders were rendered in civil or criminal actions by the RTC in the exercise of original jurisdiction; (2) petition for review under Rule 42, where the decisions and final orders were rendered by the RTC in the exerciseof appellate jurisdiction; and (3) petition for review on certiorarito the Supreme Court under Rule 45.21 The first mode of appeal is taken to the CA on questions of fact, or mixed questions of fact and law. The second mode of appeal is brought to the CA on questions of fact, of law, or mixed questions of fact and law.22 The third mode of appeal is elevated to the Supreme Court only on questions of law.23

The distinction between a question oflaw and a question of fact is well established. On the one hand, a question of law ariseswhen there is doubt as to what the law is on a certain state of facts; on the other, there is a question of fact when the doubt arises asto the truth or falsity of the alleged facts.24 According to Leoncio v. De Vera:25

x x x For a question to beone of law, the same must not involve an examination of the probative value ofthe evidence presented by the litigants or any of them. The resolution of the issue must restsolely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether a question isone of law or offact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question oflaw; otherwise it is a question of fact.26

The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice of appeal filed in the trial court, and from the appellant’s brief submitted to the appellate court.27 In this case, the petitioners filed a notice of appeal in which they contended that the April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their consolidated motion for reconsideration were contrary to the facts and law obtaining in the consolidated cases.28 In their consolidated memorandum filed in the CA, they essentially assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners under Section 21 of the Revenue Code of Manila constituted double taxation in the strict, narrow or obnoxious sense. Considered together, therefore, the notice of appeal and consolidated memorandum evidently did notraise issues that required the reevaluation of evidence or the relevance of surrounding circumstances.

The CA rightly concluded that the petitioners thereby raised only a question of law. The dismissal of their appeal was proper, strictly speaking, because Section 2, Rule 50 of the Rules of Court provides that an appeal from the RTC to the CA raising only questions of law shall be dismissed;

and that an appeal erroneously taken to the CA shall be outrightly dismissed.29

2.

Collection of taxes pursuant to Section 21 of theRevenue Code of Manila constituted double taxation

The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in light of jurisprudence promulgated subsequent to the filing of the petition, deems it fitting and proper to adopt a liberal approach in order to render a justand speedy disposition of the substantive issue at hand. Hence, we resolve, bearing inmind the following pronouncement in Go v. Chaves:30

Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the prompt disposition of unmeritorious cases which clog the court dockets and do little more than waste the courts’ time. These technical and procedural rules, however, are intended to ensure, rather than suppress, substantial justice. A deviation from their rigid enforcement may thus be allowed, as petitioners should be given the fullest opportunity to establish the merits of their case, rather than lose their property on mere technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance Corporation that:

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

The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself unconstitutional or invalid, its enforcement against the petitioners constituted double taxation because the local business taxes under Section 15 and Section 17 of the Revenue Code of Manila were already being paid by them.31 They contend that the proviso in Section 21 exempted all registered businesses in the City of Manila from paying the tax imposed under Section 21;32 and that the exemption was more in accord with Section 143 of the Local Government Code,33 the law that vested in the municipal and city governments the power to impose business taxes.

The respondents counter, however, that double taxation did not occur from the imposition and collection of the tax pursuant to Section 21 of the Revenue Code of Manila;34 that the taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the consumers of the goods and services sold by a business establishment;35and that the petitioners did not exhaust their administrative remedies by first appealing to the Secretary of Justice to challenge the constitutionalityor legality of the tax ordinance.36

In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila, the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines, Inc.,37 which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila.38 In the latter, the Court has held:

x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment.1âwphi1 Said exempting proviso was precisely included in said section so as to avoid double taxation.

Double taxation means taxingthe same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdictionfor the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute tocity revenues; (3) by the same taxing authority – petitioner Cityof Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the ManilaRevenue Code for the fourth quarter of 2001, considering thatit had already been paying local business tax under Section 14 of the same ordinance.

x x x x

Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made under Section 21 must be refunded in favor of petitioner.

It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of 2001 in the total amount of P470,932.21. Therefore, it is entitled to a refund of P164,552.04 corresponding to the payment under Section 21 of the Manila Revenue Code.

On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc., the Court now holds that all the elements of double taxation concurred upon the Cityof Manila’s assessment on and collection from the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and services in the course of trade or business based on a certain percentage ofhis gross sales or receipts in the preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who sold goods and services in the course of trade or business but only identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the privilege of doing business in the City of Manila in order to make the taxpayers contributeto the city’s revenues – were imposed on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same jurisdiction in the same taxing period (i.e., per calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers, Assemblers and Other Processors)39 of the Revenue Code of Manila, the legal principlesenunciated therein should similarly apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the same nature of tax as that imposed under Section 14, i.e., local business tax, albeit on a different subject matter or group of taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double taxation, and the taxes collected pursuant thereto must be refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191; and DIRECTS the City of Manila to refund the payments made by the petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

No pronouncement on costs of suit.

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

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

G.R. No. 180035

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

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

G.R. No. 181092

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

D E C I S I O N

LEONARDO-DE CASTRO, J.:

The Court has consolidated these three petitions as they involve the same parties, similar facts and common questions of law. This is not the first time that Fort Bonifacio Development Corporation (FBDC) has come to this Court about these issues against the very same respondents, and the Court En Banc has resolved them in two separate, recent cases1 that are applicable here for reasons to be discussed below.

G.R. No. 175707 is an appeal by certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure from (a) the Decision2 dated April 22, 2003 of the Court of Appeals in CA-G.R. SP No. 61516 dismissing FBDC's Petition for Review with regard to the Decision of the Court of Ta:x Appeals (CTA) dated October 13, 2000 in CTA Case No. 5885, and from (b) the Court of Appeals Resolution3 dated November 30, 2006 denying its Motion for Reconsideration.

G.R. No. 180035 is likewise an appeal by certiorari pursuant to Rule 45 from (a) the Court of Appeals Decision4dated April 30, 2007 in CAG.R. SP No. 76540 denying FBDC’s Petition for Review with respect to the CTA Resolution5 dated March 28, 2003 in CTA Case No. 6021, and from (b) the Court of Appeals Resolution6 dated October 8, 2007 denying its Motion for Reconsideration.

The CTA Resolution reconsidered and reversed its earlier Decision7 dated January 30, 2002 ordering respondents in CTA Case No. 6021 to refund or issue a tax credit certificate infavor of petitioner in the amount ofP77,151,020.46, representing "VAT erroneously paid by or illegally collected from petitioner for the first quarter of 1998, and instead denied petitioner’s Claim for Refund therefor."8

G.R. No. 181092 is also an appeal by certiorari pursuant to Rule 45 from the Court of Appeals Decision9 dated December 28, 2007 in CA-G.R. SP No. 61158 dismissing FBDC’s petition for review with respect to the CTA Decision10 dated September 29, 2000 in CTA Case No. 5694. The aforesaid CTA Decision, which the Court of Appeals affirmed, denied petitioner’s Claim for Refund in the amount of P269,340,469.45, representing "VAT erroneously paid by or illegally collected from petitioner for the fourth quarter of 1996."11

The facts are not in dispute.

Petitioner FBDC (petitioner) is a domestic corporation duly registered and existing under Philippine laws. Its issued and outstanding capital stock is owned in part by the Bases Conversion Development Authority, a wholly owned government corporation created by Republic Act No. 7227 for the purpose of "accelerating the conversion of military reservations into alternative productive uses and raising funds through the sale of portions of said military reservationsin order to promote the economic and social development of the country in general."12 The remaining fifty-five per cent (55%) is owned by Bonifacio Land Corporation, a consortium of private domestic corporations.13

Respondent Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue (BIR). Respondent Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, is the chief of the aforesaid District Office.

The parties entered into a Stipulation of Facts, Documents, and Issue14 before the CTA for each case. It was established before the CTA that petitioner is engaged in the development and sale of real property. It is the owner of, and is developing and

selling, parcels of land within a "newtown" development area known as the Fort Bonifacio Global City (the Global City), located within the former military camp known as Fort Bonifacio, Taguig, Metro Manila.15 The National Government, by virtue of Republic Act No. 722716 and Executive Order No. 40,17was the one that conveyed to petitioner these parcels of land on February 8, 1995.

In May 1996, petitioner commenced developing the Global City, and since October 1996, had been selling lots to interested buyers.18 At the time of acquisition, value-added tax (VAT) was not yet imposed on the sale of real properties. Republic Act No. 7716(the Expanded Value-Added Tax [E-VAT] Law),19 which took effect on January 1, 1996, restructured the VAT system by further amending pertinent provisions of the National Internal Revenue Code (NIRC). Section 100 of the old NIRC was so amended by including "real properties" in the definition of the term "goods or properties," thereby subjecting the sale of "real properties" to VAT. The provision, as amended, reads:

SEC. 100. Value-Added Tax on Sale of Goods or Properties. — (a) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

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

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

While prior to Republic Act No. 7716, real estate transactions were not subject to VAT, they became subject to VAT upon the effectivity of said law. Thus, the sale of the parcels of land by petitioner became subject to a 10% VAT, and this was later increased to 12%, pursuant to Republic Act No. 9337.20 Petitioner afterwards becamea VAT-registered taxpayer.

On September 19, 1996, in accordance with Revenue Regulations No. 7-95 (Consolidated VAT Regulations), petitioner submitted to respondent BIR, Revenue District No. 44, Taguig and Pateros, an inventory list of its properties as of February 29, 1996. The total book value of petitioner’s land inventory amounted toP71,227,503,200.00.21

On the basis of Section 105 of the NIRC,22 petitioner claims a transitional or presumptive input tax creditof 8% ofP71,227,503,200.00, the total value of the real properties listed in its inventory, or a total input tax credit ofP5,698,200,256.00.23 After the value of the real properties was reduced dueto a reconveyance by petitioner to BCDA of a parcel of land, petitioner claims that it is entitled to input tax credit in the reduced amountofP4,250,475,000.48.24

What petitioner seeks to be refunded are the actual VAT payments made by it in cash, which it claims were either erroneously paid by or illegally collected from it.25 Each Claim for Refund is based on petitioner’s position that it is entitled to a transitional input tax credit under Section 105 of the old NIRC, which more than offsets the aforesaid VAT payments.

G.R. No. 175707

Petitioner’s VAT returns filed with the BIR show that for the second quarter of 1997, petitioner received the total amount of P5,014,755,287.40 from its sales and lease of lots, on which the output VAT payable wasP501,475,528.74.26 The VAT returns likewise show that petitioner made cash payments totaling P486,355,846.78 and utilized its input tax credit of P15,119,681.96 on purchases of goods and services.27

On February 11, 1999, petitioner filed with the BIR a claim for refundof the amount of P486,355,846.78 which it paid in cash as VAT for the second quarter of 1997.28

On May 21, 1999, petitioner filed with the CTA a petition for review29 by way of appeal, docketed as CTA Case No. 5885, from the alleged inaction by respondents of petitioner’s claim for refund with the BIR. On October 1, 1999, the parties submitted tothe CTA a Stipulation of Facts, Documents and Issue.30 On October 13, 2000, the CTA issued its Decision31 in CTA Case No. 5885 denying petitioner’s claim for refund for lack of merit.

On November 23, 2000, petitioner filed with the Court of Appeals a Petition for Review of the aforesaid CTA Decision, which was docketed as CA-G.R SP No. 61516. On April 22, 2003, the CA issued its Decision32dismissing the Petition for Review. On November 30, 2006, the Court of Appeals issued its Resolution33 denying petitioner’s Motion for Reconsideration.

On December 21, 2006, this Petition for Review was filed.

Petitioner submitted its Memorandum34 on November 7, 2008 while respondents filed their "Comment"35 on May 4, 2009.36

On December 2, 2009, petitioner submitted a Supplement37 to its Memorandum dated November 6, 2008,stating that the said case is intimately related to the cases of Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. No. 158885, and Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue," G.R. No. 170680, which were already decided by this Court, and which involve the same parties and similar facts and issues.38

Except for the amounts of tax refund being claimed and the periods covered for each claim, the facts in this case and in the other two consolidated cases below are thesame. The parties entered into similar Stipulations in the other two cases consolidated here.39

G.R. No. 180035

We quote relevant portions of the parties’ Stipulation of Facts, Documents and Issue in CTA Case No. 602140below:

1.11. Per VAT returns filed by petitioner with the BIR, for the second quarter of 1998, petitioner derived the total amount of P903,427,264.20 from its sales and lease of lots, on which the output VAT payable to the Bureau of Internal Revenue was P90,342,726.42.

1.12. The VAT returns filed by petitioner likewise show that to pay said amount of P90,342,726.42 due to the BIR, petitioner made cash payments totalling P77,151,020.46 and utilized its regular input tax credit ofP39,878,959.37 on purchases of goods and services.

1.13. On November 22, 1999, petitioner filed with the BIR a claim for refund of the amount ofP77,151,020.46 which it paid as valueadded tax for the first quarter of 1998.

1.14. Earlier, on October 8, 1998 and November 17, 1998, February 11, 1999, May 11, 1999, and September 10, 1999, based on similar grounds, petitioner filed with the BIR claims for refund of the amounts of P269,340,469.45, P359,652,009.47, P486,355,846.78, P347,741,695.74, and P15,036,891.26, representing value-added taxes paid by it on proceeds derived from its sales and lease of lots for the quarters ended December 31, 1996, March 31, 1997, June 30, 1997, September 30, 1997, and December 31, 1997, respectively. After deducting these amounts of P269,340,469.45, P359,652,009.47,P486,355,846.78, P347,741,695.74, and P15,036,891.26 from the total amount of P5,698,200,256.00 claimed by petitioner as input tax credit, the remaining input tax credit more than sufficiently covers the amount of P77,151,020.46 subject of petitioner’s claim for refund of November 22, 1999.

1.15. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for refund of November 22, 1999.41 (Emphases ours.)

The petition in G.R. No. 180035 "seeks to correct the unauthorized limitation of the term ‘real properties’ to ‘improvements thereon’ by Revenue Regulations 7-95 and the error of the Court of Tax Appeals and Court of Appeals in sustaining the aforesaid Regulations."42 This theory of petitioner is the same for all three cases now before us.

On March 14, 2013, petitioner filed a Motion for Consolidation43 of G.R. No. 180035 with G.R. No. 175707.

Petitioner submitted its Memorandum44 on September 15, 2009 while respondents filed theirson September 22, 2009.45

G.R. No. 181092

The facts summarized below are found in the parties’ Stipulation of Facts, Documents and Issue in CTA Case No. 569446:

1.09. Per VAT returns filed by petitioner with the BIR, for the fourth quarter of 1996, petitioner derived the total amount of P3,498,888,713.60 from its sales and lease of lots, on which the output VAT payableto the Bureau of Internal Revenue wasP318,080,792.14.

1.10. The VAT returns filed by petitioner likewise show that to pay said amount of P318,080,792.14 due to the BIR, petitioner made cash payments totalling P269,340,469.45 and utilized (a) part of the total transitional/presumptive

input tax credit of P5,698,200,256.00 being claimed by it to the extent ofP28,413,783.00; and (b) its regular input tax credit of P20,326,539.69 on purchases of goods and services.

1.11. On October 8, 1998 petitioner filed with the BIR a claim for refund of the amounts ofP269,340,469.45, which it paid as valueadded tax.

1.12. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for refund.47 (Emphases ours.)

Petitioner submitted its Memorandum48 on January 18, 2010 while respondents filed theirs on October 14, 2010.49

On March 14, 2013, petitioner filed a Motion for Consolidation50 of G.R. No. 181092 with G.R. No. 175707.

On January 23, 2014, petitioner filed a Motion to Resolve51 these consolidated cases, alleging that the parties had already filed their respective memoranda; and, more importantly, that the principal issue in these cases, whether petitioner is entitled to the 8% transitional input tax granted in Section 105 (now Section 111[A]) of the NIRC based on the value of its inventory of land, and as a consequence, to a refund of the amounts it paid as VAT for the periods in question, had already been resolved by the Supreme Court En Bancin its Decision dated April 2, 2009 in G.R. Nos. 158885 and 170680, as well as its Decision dated September 4, 2012 in G.R. No. 173425. Petitioner further alleges that said decided cases involve the same parties, facts, and issues as the cases now before this Court.52

THEORY OF PETITIONER

Petitioner claims that "the 10% value-added tax is based on the gross selling price or gross value in money of the ‘goods’ sold, bartered or exchanged."53 Petitioner likewise claims thatby definition, the term "goods" was limited to "movable, tangible objects which is appropriable or transferable" and that said term did not originally include "real property."54 It was previously defined as follows under Revenue Regulations No. 5-87:

(p) "Goods" means any movable, tangible objects which is appropriable or transferrable. Republic Act No. 7716 (E-VAT Law, January 1, 1996) expanded the coverage of the original VAT Law (Executive Order No. 273), specifically Section 100 of the old NIRC. According to petitioner, while under Executive Order No. 273, the term "goods" did not include real properties, Republic Act No. 7716, in amending Section 100, explicitly included in the term "goods" "real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business." Consequently, the sale, barter, or exchange of real properties was made subject to a VAT equivalent to 10% (later increased to 12%, pursuant to Republic Act No. 9337) of the gross selling price of real properties.

Among the new provisions included by Executive Order No. 273 in the NIRC was the following: SEC. 105. Transitional Input Tax Credits. — A person who becomes liable to value-added tax orany person who elects to be a VAT registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8%of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

According to petitioner, the E-VAT Law, Republic Act No. 7716, did not amend Section 105. Thus, Section 105, as quoted above, remained effective even after the enactment of Republic Act No. 7716.

Previously, or on December 9, 1995, the Secretary of Finance and the Commissioner of Internal Revenue issued Revenue Regulations No. 7-95, which included the following provisions: SECTION 4.100-1. Value-added tax on sale of goods or properties. — VAT is imposed and collected on every sale, barter or exchange or transactions "deemed sale" of taxable goods or properties at the rate of 10% of the gross selling price.

"Gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the zonal value whichever is higher. Provided however, in the absence of zonal value, gross selling price refers to the market value shown in the latest declaration or the consideration whichever is higher.

"Taxable sale" refers to the sale, barter, exchange and/or lease of goods or properties, including transactions "deemed sale" and the performance of service for a consideration, all of which are subject to tax under Sections 100 and 102 of the Code.

Any person otherwise required to register for VAT purposes who fails to register shall also be liable to VAT on his sale of taxable goods or properties as defined in the preceding paragraph. The sale of goods subject to excise tax is also subject to VAT, except manufactured petroleum products (other than lubricating oil, processed gas, grease, wax and petrolatum).

"Goods or properties" refer to all tangible and intangible objects which are capable of pecuniary estimation and shall include:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.

x x x x

SECTION 4.104-1. Credits for input tax. —

"Input tax"means the value-added tax due from or paid by a VAT registered person on importation of goodsor local purchases of goods or services, including lease or use of property, from another VAT-registered person in the course ofhis trade or business. It shall also include the transitional or presumptive input tax determined in accordance with Section 105 of the Code.

x x x x

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

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

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

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8% excluding goods that are exempt from VAT under SECTION 103. Only VAT-registered persons shall be entitled to presumptive input tax credits.

x x x x

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits—

(i) For goods, materials or supplies not for sale but purchased for use in business in their present condition, which are not intended for further processing and are on hand as of December 31, 1995, a presumptive input tax equivalent to 8% of the value of the goods or properties shall be allowed.

(ii) For goods or properties purchased with the object of resale in their present condition, the same presumptive input tax equivalent to 8% of the value of the goods unused as of December 31, 1995 shall be allowed, which amount may also be credited against the output tax of a VAT-registered person.

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

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

Petitioner argues that Section 4.100-1 of Revenue Regulations No. 7-95 explicitly limited the term "goods" as regards real properties to "improvements, such as buildings, roads, drainage systems, and other similar structures," thereby excluding the real property itself from the coverage of the term "goods" as it is used in Section 105 of the NIRC. This has brought about, as a consequence, the issues involved in the instant case.

Petitioner claims that the "Court of Appeals erred in not holding that Revenue Regulations No. 6-97 has effectively repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit which may be claimed under Section 105 of the NIRC to the ‘improvements’ on real properties."55Petitioner argues that the provision in Section 4.105-1 of Revenue Regulations No. 7-95 stating that in the case of real estate dealers, the basis of the input tax credit shall be the improvements, has been deleted by Revenue Regulations No. 6-97, dated January 2, 1997,which amended Revenue Regulations No. 7-95. Revenue Regulations No. 6-97 was issued to implement Republic Act No. 8241 (the law amending Republic Act No. 7716, the E-VAT Law), which took effect on January 1, 1997. Petitioner notes that Section 4.105-1 of Revenue Regulations No. 6-97 is but a reenactment of Section 4.105-1 of Revenue Regulations No. 7-95, with the only difference being that the following paragraph in Revenue Regulations No. 7-95 was deleted:

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

Petitioner calls this an express repeal, and with the deletion of the above paragraph, what stands and should be applied "is the statutory definition in Section 100 of the NIRC of the term ‘goods’ in Section 105 thereof."56

Petitioner contends that the relevant provision now states that "[t]he transitional input tax credit shall be eight percent (8%) of the value of the beginning inventory x x x on such goods, materials and supplies." It no longer limits the allowable transitional input tax credit to "improvements" on the real properties. The amendment recognizes that the basis of the 8% input tax credit should not be confinedto the value of the improvements. Petitioner further contends that the Commissioner of Internal Revenue has in fact corrected the mistake in Revenue Regulations No. 7-95.57

Petitioner argues that Revenue Regulations No. 6-97, being beneficial to the taxpayer, should be given a retroactive application.58 Petitioner states that the transactions involved inthese consolidated cases took place after Revenue Regulations No. 6-97 took effect, under the provisions of which the transitional input tax credit with regardto real properties would be based on the value of the land inventory and not limited to the value of the improvements.

Petitioner assigns another error: the Court of Appeals erred in holding that Revenue Regulations No. 7-95 isa valid implementation of the NIRC and in according it great respect, and should have held that the same is invalid for being contrary to the provisions of Section 105 of the NIRC.59 Petitioner contends that Revenue Regulations No. 7-95 is not valid for being contrary to the express provisions of Section 105 of the NIRC, and in fact amends the same, for it limited the scope of Section 105 "to less than what the law provides."60 Petitioner elaborates:

[Revenue Regulations No. 7-95] illegally constricted the provisions of the aforesaid section. It delimited the coverage of Section 105 and practically amended it in violation of the fundamental principle that administrative regulations are subordinate to the law. Based on the numerous authorities cited above, Section 4.105-1 and the Transitory Provisions of Revenue Regulations No. 7-95 are invalid and ineffective insofar as they limit the input tax credit to 8% of the value of the "improvements" on land, for being contrary to the express provisions of Section 105, in relation to Section 100, of the NIRC, and the Court of Appeals should have so held.61 Petitioner likewise raises the following arguments:

● The rule that the construction given by the administrative agency charged with the enforcement of the law should be accorded great weight by the courts, does not apply here.62 ● x x x Section 4.105-1 of Revenue Regulations No. 7-95 neither exclude[s] nor prohibit[s] that the 8% input tax credit may also [be] based on the taxpayer’s inventory of land.63

● The issuance of Revenue Regulations No. 7-95 by the [BIR], which changed the statutory definition of "goods" with regard to the application of Section 105 of the NIRC, and the declaration of validity of said regulations by the Court of Appeals and Court of Tax Appeals, was in violation of the fundamental principle of separation of powers.64

x x x x

Insofar, therefore, as Revenue Regulation[s] No. 7-95 limited the scope of the term "goods" under Section 105, to "improvements" on real properties, contrary to the definition of "goods" in Section 100, [RR] No. 7-95 decreed "what the law shall be", now "how the law may be enforced", and is, consequently, of no effect because it constitutes undue delegation of legislative power.

x x x x

[T]he transgression by the BIR and the CTA and CA of the basic principle of separation of powers, including the fundamental rule of nondelegation of legislative power, is clear.65 Furthermore, petitioner claims that:

SINCE THE PROVISIONS OF SECTION 105 OF THE [NIRC] IN RELATION TO SECTION 100 THEREOF, ARE CLEAR, THERE WAS NO BASIS AND NECESSITY FOR THE BUREAU OF INTERNAL REVENUE AND THE COURT OF APPEALS AND THE COURT OF TAX APPEALS TO INTERPRET AND CONSTRUE THE SAME.66

PETITIONER IS CLEARLY ENTITLED TO THE TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDIT GRANTED IN SECTION 105 OF THE NIRCAND HENCE TO A REFUND OF THE VALUE-ADDED TAX PAID BY IT FOR THE SECOND QUARTER OF 1997.67

Petitioner insists that there was no basis and necessity for the BIR, the CTA, and the Court of Appeals to interpret and construe Sections 100 and 105 of the NIRC because "where the law speaks in clear and categorical language, or the terms of the statute are clear and unambiguous and free from doubt, there is no room for interpretation or construction and no interpretation or construction is called for; there is only room for application."68 Petitioner asserts that legislative intent is determined primarily from the language of the statute; legislative intent has to be discovered from the four corners of the law; and thus, where no ambiguity appears, it may be presumed conclusivelythat the clear and explicit terms of a statute express the legislative intention.69

So looking at the cases now before us, petitioner avers that the Court of Appeals, the CTA, and the BIR did not merely interpret and construe Section 105, and that they virtually amended the said section, for it is allegedly clear from Section 105 of the old NIRC, in relation to Section 100, that "legislative intent is to the effect that the taxpayer is entitled to the input tax credit based on the value of the beginning inventory of land, not merely on the improvements thereon, and irrespective of any prior payment of sales tax or VAT."70

THEORY OF RESPONDENTS

Petitioner’s claims for refund were consistently denied in the three cases now before us. Even if inone case, G.R. No. 180035, petitioner succeeded in getting a favorable decision from the CTA, the grant of refund or tax credit was subsequently reversed on respondents’ Motion for Reconsideration, and such denial ofpetitioner’s claim was affirmed by the Court of Appeals. Respondents’ reasons for denying petitioner’s claims are summarized in their Comment in G.R. No. 175707, and we quote:

REASONS WHY PETITION SHOULD BE DENIED OR DISMISSED

1. The 8% input tax credit provided for in Section 105 of the NIRC, in relation to Section 100 thereof, is based on the value of the improvements on the land.

2. The taxpayer is entitled to the input tax credit provided for in Section 105 of the NIRC only if it has previously paid VAT or sales taxes on its inventory of land.

3. Section 4.105-1 of Revenue Regulations No. 7-95 of the BIR is valid, effective and has the force and effect of law, which implemented Section 105 of the NIRC.71

In respondents’ Comment72 dated November 3, 2008 in G.R. No. 180035, they averred that petitioner’s claim for the 8% transitional/presumptive input tax is "inconsistent with the purpose and intent of the law in granting such tax refund or tax credit."73 Respondents raise the following arguments:

1. The transitional input tax provided under Section 105 in relation to Section 100 of the Tax Code, as amended by EO No. 273 effective January 1, 1988, is subject to certain conditions which petitioner failed to meet.74

2. The claim for petitioner for transitional input tax is in the nature of a tax exemption which should be strictly construed against it.75

3. Revenue Regulations No. 7-95 is valid and consistent with provisions of the NIRC.76 Moreover, respondents contend that:

"[P]etitioner is not legally entitled to any transitional input tax credit, whether it be the 8% presumptive inputtax credit or any actual input tax credit in respect of its inventory of land brought into the VAT regime beginning January 1, 1996, in view of the following:

1. VAT free acquisition of the raw land.– petitioner purchased and acquired, from the Government, the aforesaid raw land under a VAT free sale transaction. The Government, as a vendor, was tax-exempt and accordingly did not pass on any VAT or sales tax as part of the price paid therefor by the petitioner.

2. No transitory input tax on inventory of land is allowed. Section 105 of the Code, as amended by Republic Act No. 7716, and as implemented by Section 4.105-1 of Revenue Regulations No. 7-95, expressly provides that no transitional input tax credit shall be allowed to real estate dealers in respect of their beginning inventory of land brought into the VAT regime beginning January 1, 1996 (supra). Likewise, the Transitory Provisions [(a) (iii)] of Revenue Regulations No. 7-95 categorically states that "for real estate dealers, the presumptive input tax of 8% of the book value of improvements constructed on or after January 1, 1998 (effectivity of E.O. 273) shall be allowed." For purposes of subparagraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 ofsuch goods or properties and improvements showing the quantity, description, and amount should be filed with the RDO not later than January 31, 1996. It is admitted that petitioner filed its inventory listing of real properties on September 19, 1996 or almost nine (9) months late in contravention [of] the requirements in Revenue Regulations No. 7-95."77

Respondents, quoting the Civil Code,78 argue that Section 4.105-1 of Revenue Regulations No. 7-95 has the force and effect of a law since it is not contrary to any law or the Constitution. Respondents add that "[w]hen the administrative agency promulgates rules and regulations, it makes a new law with the force and effect of a valid law x x x."79

ISSUES

The main issue before us now is whether or not petitioner is entitled to a refund of the amounts of: 1)P486,355,846.78 in G.R. No. 175707, 2) P77,151,020.46 for G.R. No. 180035, and 3) P269,340,469.45 in G.R. No. 181092, which it paid as value-added tax, or to a tax credit for said amounts.

To resolve the issue stated above, it is also necessary to determine:

● Whether the transitional/presumptive input tax credit under Section 105 of the NIRC may be claimed only on the "improvements" on real properties;

● Whether there must have been previous payment of sales tax or value added tax by petitioner on its land before it may claim the input tax credit granted by Section 105 of the NIRC;

● Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the NIRC; and

● Whether the issuance of Revenue Regulations No. 7-95 by the BIR, and declaration of validity of saidRegulations by the Court of Tax Appeals and the Court of Appeals, was in violation of the fundamental principle of separation of powers.

THE RULINGS BELOW

A. G.R. No. 175707

1. CTA Case No. 5885 Decision (October 13, 2000)

The CTA traced the history of "transitional input tax credit" from the original VAT Law of 1988 (Executive Order No. 273) up to the Tax Reform Act of 1997 and looked into Section 105 of the Tax Code. According to the CTA, the BIR issued Revenue Regulations No. 5-87, specifically Section 26(b),80 to implement the provisions of Section 105. The CTA concluded from these provisions that "the purpose of granting transitional input tax credit to be utilized as payment for output VAT is primarily to give recognition to the sales tax component of inventories which would qualify as input tax credit had such goods been acquired during the effectivity of the VAT Law of 1988."81The CTA stated that the purpose of transitional input tax credit remained the same even after the amendments introduced by the E-VAT Law.82 The CTA held that "the rationale in granting the transitional input tax credit also serves as its condition for its availment as a benefit"83 and that "[i]nherent in the law is the condition of prior payment of VAT or sales taxes."84 The CTA excluded petitioner from availing of the transitional input tax credit provided by law, reasoning that "to base the 8% transitional input tax on the book value of the land isto negate the

purpose of the law in granting such benefit. It would be tantamount to giving an undeserved bonus to real estate dealers similarly situated as petitioner which the Government cannot afford to provide."85 Furthermore, the CTA held that respondent was correct in basing the 8% transitional input tax credit on the value of the improvements on the land, citing Section 4.105-1 of Revenue Regulations No. 7-95, which the CTA claims is consistent and in harmony with the law it seeks to implement. Thus, the CTA denied petitioner’s claim for refund.86

2. CA-G.R. No. 61516 Decision (April 22, 2003)

The Court of Appeals affirmed the CTA and ruled that petitioner is not entitled to refund or tax credit in the amount of P486,355,846.78 and stated that "Revenue Regulations No. 7-95 is a valid implementation of the NIRC."87 According to the Court of Appeals:

"[P]etitioner acquired the contested property from the National Government under a VAT-free transaction. The Government, as a vendor was outside the operation of the VATand ergo, could not possibly have passed on any VAT or sales tax as part of the purchase price to the petitioner as vendee."88

x x x [T]he grant of transitional input tax credit indeed presupposes that the manufacturers, producers and importers should have previously paid sales taxes on their inventories. They were given the benefit of transitional input tax credits, precisely, to make up for the previously paid sales taxes which were now abolished by the VAT Law. It bears stressing that the VAT Law took the place of privilege taxes, percentage taxes and sales taxes on original or subsequent sale of articles. These taxes were substituted by the VAT at the constant rate of 0% or 10%.89

3. CA-G.R. No. 61516 Resolution (November 30, 2006)

Upon petitioner’s Motion for Reconsideration, the Court of Appeals affirmed its decision, but we find the following statement by the appellate court worthy of note:

We concede that the inventory restrictions under Revenue Regulation No. 7-95 limiting the coverage of the inventory only to acquisition cost of the materials used in building "improvements" has already been deleted by Revenue Regulation 6-97. This notwithstanding, we are poised to sustain our earlier ruling as regards the refund presently claimed.90

B. G.R. No. 180035

1. CTA Case No. 6021 Decision (January 30, 2002)

The CTA sustained petitioner’s position and held that respondent erred in basing the transitional input tax credit of real estate dealers on the value of the improvements.91 The CTA ratiocinated as follows:

This Court, in upholding the position taken by the petitioner, is convinced that Section 105 of the Tax Code is clear in itself. Explicit therefrom is the fact that a taxpayer shall be allowed a transitional/presumptive input tax credit based on the value of its beginning inventory of goods which is defined in Section 100 as to encompass even real property. x x x.92

The CTA went on to point out inconsistencies it had found between the transitory provisions of Revenue Regulations No. 7-95 and the law it sought to implement, in the following manner:

Notice that letter (a)(ii) of the x x x transitory provisions93 states that goods or properties purchased with the object of resalein their present condition comes with the corresponding 8% presumptive input tax of the value of the goods, which amount may alsobe credited against the output tax of a VAT-registered person. It must be remembered that Section 100 as amended by Republic Act No. 7716 extends the term "goods or properties" to real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. This provision alone entitles Petitioner to the 8%presumptive input tax of the value of the land (goods or properties) sold. However in letter (a)(iii) of the same Transitory Provisions, Respondent apparently changed his (sic) course when it declared that real estate dealers are only entitled to the 8% of the value of the improvements. This glaring inconsistency between the two provisions prove that Revenue Regulations No. 7-95 was not a result of an intensive study and analysis and may have been haphazardly formulated.94

The CTA held that the implementing regulation, which provides that the 8% transitional input tax shall bebased on the improvements only of the real properties, is neither valid nor effective.95 The CTA also sustained petitioner’s argument that

Revenue Regulations No. 7-95 provides no specific date as to when the inventory list should be submitted. The relevant portion of the CTA decision reads:

The only requirement is that the presumptive input tax shall be supported by an inventory of goods asshown in a detailed list to be submitted to the BIR. Moreover, the requirement of filing an inventory of goods not later than January 31, 1996 inthe transitory provision of the same regulation refers to the recognition of presumptive input tax on goods or properties on hand as of December 31, 1995 of taxpayers already liable to VAT as of that date.

Clearly, Petitioner is entitled to the presumptive input tax in the amount of P5,698,200,256.00, computed as follows:

Book Value of Inventory x x x P71,227,503,200.00

Multiply by Presumptive

Input Tax rate _____ 8%

Available Presumptive Input Tax P5,698,200,256.00

The failure of the Petitioner to consider the presumptive input tax in the computation of its output tax liability for the 1st quarter of 1998 results to overpayment of the VAT for the same period.

To prove the fact of overpayment, Petitioner presented the original Monthly VAT Declaration for the month of January 1998 showing the amount of P77,151,020.46 as the cash component of the value-added taxes paid (Exhibits E-14 & E-14-A) which is the subject matter of the instant claim for refund.

In Petitioner’s amended quarterly VAT return for the 1st quarter of 1998 (Exhibit D-1), Petitioner deducted the amount of P77,151,020.46 from the total available input tax toshow that the amount being claimed would no longer be available as input tax credit.

In conclusion, the Petitioner has satisfactorily proven its entitlement to the refund of value-added taxes paid for the first quarter of taxable year 1998.

WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondents are hereby ORDERED to REFUND or issue a TAX CREDIT CERTIFICATE in favor of the Petitioner the total amount of P77,151,020.46 representing the erroneously paid value-added tax for the first quarter of 1998.96

2. CTA Case No. 6021 Resolution (March 28, 2003)

The CTA reversedits earlier ruling upon respondents’ motion for reconsideration and thus denied petitioner’s claim for refund. The CTA reasoned and concluded as follows:

The vortex of the controversy in the instant case actually involves the question of whether or not Section 4.105-1 of Revenue Regulations No. 7-95, issued by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue, is valid and consistent with and not violative of Section 105 of the Tax Code, in relation to Section 100 (a)(1)(A).

x x x x

We agree with the position taken by the respondents that Revenue Regulations No. 7-95 is not contrary to the basic law which it seeks to implement. As clearly worded, Section 105 of the Tax Code provides that a person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall be allowed 8% transitional input tax subject to the filing of an inventory as prescribed by regulations.

Section 105, which requires the filing of an inventory for the grant of the transitional input tax, is couched in a manner where there is a need for an implementing rule or regulation tocarry its intendment. True to its wordings, the BIR issued Revenue Regulations No. 7-95 (specifically Section 4.105-1) which succinctly mentioned that the basis of the presumptive input tax shall be the improvements in case of real estate dealers.97

x x x x

WHEREFORE, in view of the foregoing, the instant Motion for Reconsideration filed by respondents is hereby GRANTED. Accordingly, petitioner’s claim for refund of the alleged overpaid Value-Added Tax in the amount ofP77,151,020.46 covering the first quarter of 1998 is hereby DENIEDfor lack of merit.98

3. CA-G.R. SP No. 76540 Decision (April 30, 2007)

The Court of Appeals affirmed the CTA’s Resolution denying petitioner’s claim for refund, and we quote portions of the discussion from the Court of Appeals decision below:

To Our mind, the key to resolving the jugular issue of this controversy involves a deeper analysis on how the much-contested transitional input tax credit has been encrypted in the country’s valueadded tax (VAT) system.

x x x x

x x x [T]he Commissioner of Internal Revenue promulgated Revenue Regulations No. 7-95which laid down, among others, the basis of the transitional input tax credit for real estate dealers:99 x x x x

The Regulation unmistakably allows credit for transitional input tax of any person who becomes liable to VAT or who elects to be a VAT registered person. More particularly, real estate dealers who were beforehand not subject to VAT are allowed a tax credit to cushion the staggering effect of the newly imposed 10% output VAT liability under RA No. 7716.

Bearing in mind the purpose of the transitional input tax credit under the VAT system, We find it incongruous to grant petitioner’s claim for tax refund. We take note of the fact that petitioner acquired the Global City lots from the National Government. The transaction was not subject to any sales or business tax. Since the seller did not pass on any tax liability to petitioner, the latter may not claim tax credit. Clearly then, petitioner cannot simply demand that it is entitled to the transitional input tax credit.

x x x x

Another point.Section 105 of the National Internal Revenue Code, as amended by EO No. 273, explicitly provides that the transitional input tax credit shall be based on "the beginning inventory of goods, materials and supplies orthe actual value-added tax paid on such goods, materials and supplies, whichever is higher." Note that the law did not simply say – the transitional input tax credit shall be 8% of the beginning inventory of goods, materials and supplies.

Instead, lawmakers went on to say that the creditable input tax shall be whichever is higher between the value of the inventory and the actual VAT paid. Necessarily then, a comparison of these two figures would have to be made. This strengthens Our view that previous payment of the VAT is indispensable to determine the actual value of the input tax creditable against the output tax. So too, this is in consonance with the present tax credit method adopted in this jurisdiction whereby an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.

We proceed to traverse another argument raised in this controversy. Petitioner insists that the term "goods" which was one of the bases in computing the transitional inputtax credit must be construed so as to include real properties held primarily for sale to customers. Petitioner posits that respondent Commissioner practically rewrote the law when it issued Revenue Regulations No. 7-95 which limited the basis of the 8% transitional input tax credit to the value of improvements alone.

Petitioner is clearly mistaken.

The term "goods" has been defined to mean any movable or tangible objects which are appreciable or tangible. More specifically, the word "goods" is always used to designate wares, commodities, and personal chattels; and does not include chattels real."Real property" on the other hand, refers to land, and generally whatever is erected or growing upon or affixed to land. It is therefore quite absurd to equate "goods" as being synonymous to "properties". The vast difference between the terms "goods" and "real properties" is so obvious that petitioner’s assertion must be struckdown for being utterly baseless and specious.

Along this line, We uphold the validity of Revenue Regulations No. 7-95. The authority of the Secretary of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as

well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law. Revenue Regulations No. 7-95 is clearly not inconsistent with the prevailing statute insofar as the provision on transitional inputtax credit is concerned.100

4. CA-G.R. SP No. 76540 Resolution (October 8, 2007)

In this Resolution, the Court of Appeals denied petitioner’s Motion for Reconsideration of its Decision dated April 30, 2007.

C. G.R. No. 181092

1. CTA Case No. 5694 Decision (September 29, 2000)

The CTA ruled that petitioner is not automatically entitled to the 8% transitional input tax allowed under Section 105 of the Tax Code based solely on its inventory of real properties, and cited the rule on uniformity in taxation duly enshrined in the Constitution.101 According to the CTA:

As defined under the above Section 104 of the Tax Code, an "input tax" means the VAT paid by a VAT-registered person in the course of his trade or business on importation ofgoods or services from a VAT registered person; and that such tax shall include the transitional input tax determined in accordance with Section 105 of the Tax Code,supra.102

Applying the rule on statutory construction that particular words, clauses and phrases should not be studied as detached and isolated expressions, but the whole and every part of the statute must be considered in fixing the meaning of any of its parts in order to produce a harmonious whole, the phrase "transitional input tax" found in Section 105 should be understood to encompass goods, materials and supplies which are subject to VAT, in line with the context of "input tax" as defined in Section 104, most especially that the latter includes, and immediately precedes, the former under its statutory meaning. Petitioner’s contention that the 8% transitional input tax is statutorily presumed to the extent that its real properties which have not been subjected to VAT are entitled thereto, would directly contradict "input tax" as defined in Section 104 and would invariably cause disharmony.103

The CTA held that the 8% transitional input tax should not be viewed as an outright grant or presumption without need of prior taxes having been paid. Expounding on this, the CTA said: The simple instance in the aforesaid paragraphs of requiring the tax on the materials, supplies or goods comprising the inventory to be currently unutilized as deferred sales tax credit before the 8% presumptive input tax can be enjoyed readily leads to the inevitable conclusion that such 8% tax cannot be just granted toany VAT liable person if he has no priorly paid creditable sales taxes. Legislative intent thus clearly points to priorly paid taxes on goods, materials and supplies before a VAT registered person can avail of the 8% presumptive input tax.104

Anent the applicability to petitioner’s case of the requirement under Article VI, Section 28, par. 1 of the Constitution that the rule of taxation shall be uniform and equitable, the CTA held thus: Granting arguendo that Petitioner is statutorily presumed to be entitled to the 8% transitional input tax as provided in Section 105, even without having previously paid any tax on its inventory of goods, Petitioner would be placed at a more advantageous position than a similar VAT-registered person who also becomes liable to VAT but who has actually paid VAT on his purchases of goods, materials and supplies. This is evident from the alternative modes of acquiring the proper amount of transitional input tax under Section 105, supra. One is by getting the equivalent amount of 8% tax based on the beginning inventory of goods, materials and supplies and the other is by the actual VAT paid on such goods, materials and supplies, whichever is higher.

As it is supposed to work, the transitional input tax should answer for the 10% output VAT liability thata VAT-registered person will incur once he starts business operations. While a VAT-registered person who is allowed a transitional input tax based on his actual payment of 10% VAT on his purchases can utilize the same to pay for his output VAT liability, a similar VAT-registered person like herein Petitioner, when allowed the alternative 8% transitional input tax, can offset his output VAT liability equally through such 8% tax even without having paid any previous tax. This obvious inequity that may arise could not have been the intention and purpose of the lawmakers in granting the transitional input tax credit. x x x105

Evidently, Petitioner is not similarly situated both as to privileges and liabilities to that of a VAT-registered person who has paid actual 10% input VAT on his purchases of goods, materials and supplies. The latter person will not earn anything from his transitional input tax which, to emphasize, has been paid by him because the same will just offset his 10% output VAT liability. On the other hand, herein Petitioner will earn gratis the amount equivalent to 10% output VAT it has passed on to buyers for the simple reason that it has never previously paid any input tax on its goods. Its gain will be facilitated by herein claim for

refund if ever granted. This is the reason why we do not see any incongruity in Section 4.105-1 of Revenue Regulations No. 7-95 as it relates to Section 105 of the 1996 Tax Code, contrary to the contention of Petitioner. Section 4.105-1 (supra), which bases the transitional input tax credit on the value of the improvements, is consistent with the purpose of the law x x x.106

2. CA-G.R. SP No. 61158 Decision (December 28, 2007) The Court of Appeals affirmed the CTA’s denial of petitioner’s claim for refund and upheld the validity of the questioned Revenue Regulation issued by respondent Commissioner ofInternal Revenue, reasoning as follows:

Sec. 105 of the NIRC, as amended, provides that the allowance for the 8% input tax on the beginning inventory of a VAT-covered entity is "subject to the filing of an inventory as prescribed by regulations." This means that the legislature left to the BIR the determination of what will constitute the beginning inventory ofgoods, materials and supplies which will, in turn, serve as the basis for computing the 8% input tax.

While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends x x x. Hence, there is no gainsaying that the CIR and the Secretary of Finance, in limiting the application of the input tax of real estate dealers to improvements constructed on or after January 1, 1988, merely exercised their delegated authority under Sec. 105, id., to promulgate rules and regulations defining what should be included in the beginning inventory of a VAT-registered entity.

x x x x

In the instant case, We find that, contrary to petitioner’s attacks against its validity, the limitation on the beginning inventory of real estate dealers contained in Sec. 4.105-1 of RR No. 7-95 is reasonable and consistent with the natureof the input VAT. x x x.

Based on the foregoing antecedents, it is clear why the second paragraph of Sec. 4.105-1 of RR No. 7-95 limits the transitional input taxes of real estate dealers to the value of improvements constructed on or after January 1, 1988. Since the sale of the land was not subject to VAT or other sales taxes prior to the effectivity of Rep. Act No. 7716, real estate dealers at that time had no input taxes to speak of. With this in mind, the CIR correctly limited the application of the 8% transitional input tax to improvements on real estate dealers constructed on or after January 1, 1988 when the VAT was initially implemented. This is, as it should be, for to grant petitioner a refund or credit for input taxes it never paid would be tantamount to unjust enrichment.

As petitioner itself observes, the input tax credit provided for by Sec. 105 of the NIRC is a mechanism used to grant some relief from burden some taxes. It follows, therefore, that not having been burdened by VAT or any other sales tax on its inventory of land prior to the effectivity of Rep. Act No. 7716, petitioner is not entitled to the relief afforded by Sec. 105, id.107

The Court of Appeals ruled that petitioner is not similarly situated as those business entities which previously paid taxes on their inputs, and stressed that "a tax refund or credit x x x is in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer x x x."108

THIS COURT’S RULING

As previously stated, the issues here have already been passed upon and resolved by this Court En Banc twice, in decisions that have reached finality, and we are bound by the doctrine of stare decisis to apply those decisions to these consolidated cases, for they involve the same facts, issues, and even parties.

Thus, we find for the petitioner.

DISCUSSION

The errors assigned by petitioner to the Court of Appeals and the arguments offered by respondents to support the denial of petitioner’s claim for tax refund have already been dealt with thoroughly by the Court En Banc in Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. Nos. 158885 and 170680 (Decision - April 2, 2009; Resolution - October 2, 2009); and Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. No. 173425 (Decision - September 4, 2012; Resolution - January 22, 2013).

The Court En Bancdecided on the following issues in G.R. Nos. 158885 and 170680:

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

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

Subsequently, in G.R. No. 173425, the Court resolved issues that are identical to the ones raised here by petitioner,109 thus:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input tax credit which may be claimed under Section 105 of the National Internal Revenue Code to the "improvements" on real properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the National Internal Revenue Code.

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue, and declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals, [were] in violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105 of the National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax [sales tax or value-added tax]110by petitioner on its land before it may claim the input tax credit granted by Section 105 of the National Internal Revenue Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose of the transitional/presumptive input tax provided for in Section 105 of the National Internal Revenue Code.

3.05.g. Whether the economic and socialobjectives in the acquisition of the subject property by petitioner from the Government should be taken into consideration.111

The Court’s pronouncements in the decided cases regarding these issues are discussed below. The doctrine of stare decisis et non quieta movere, which means "to abide by, or adhere to, decided cases,"112 compels us to apply the rulings by the Court tothese consolidated cases before us. Under the doctrine of stare decisis, "when this Court has once laid down a principle of law as applicable to a certainstate of facts, it will adhere to that principle, and apply it to all future cases, where facts are substantially the same; regardless of whether the parties and property are the same."113 This is to provide stability in judicial decisions, as held by the Court in a previous case:

Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of certainty, a conclusion reached in one case should be applied to those that follow if the facts are substantially the same, even though the parties may be different. It proceeds from the first principle of justice that, absent any powerful countervailing considerations, like cases ought to be decided alike.114

More importantly, we cannot depart from the legal precedents as laid down by the Court En Banc. It is provided in the Constitution that "no doctrine or principle of law laid down by the court in a decision rendered en bancor in division may be modified or reversed except by the court sitting en banc."115

What is left for this Court to do is to reiterate the rulings in the aforesaid legal precedents and apply them to these consolidated cases.

As regards the main issue, the Court conclusively held that petitioner is entitled to the 8% transitional input tax on its beginning inventory of land, which is granted in Section 105 (nowSection 111[A]) of the NIRC, and granted the refund of the amounts petitioner had paid as output VAT for the different tax periods in question.116

Whether the transitional/presumptiveinput tax credit under Section 105 of theNIRC may be claimed only on the"improvements" on real properties.

The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows: On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input tax credit is computed. It can be conceded that when it was drafted Section 105 could not have possibly contemplated concerns specific to real properties, as real estate transactions were not originally subject to VAT. At the same time, when transactions on real properties were finally made subject to VAT beginning withRep. Act No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in the application of the transitional input tax credit with respect to real properties or real estate dealers.

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

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

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

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in the ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is clear that those regularly engaged in the real estate business are accorded the same treatment as the merchants of other goods or properties available in the market. In the same way that a milliner considers hats as his goods and a rancher considers cattle as his goods, a real estate dealer holds real property, whether ornot it contains improvements, as his goods.117 (Citations omitted, emphasis added.)

x x x x

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

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to "improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old NIRC, but also the definition which the same revenue regulation itself has provided.118 (Emphasis added.)

The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that Section 105 of the old NIRC, on the transitional input tax credit, remained intact despite the enactment of Republic Act No. 7716. Section 105 was amended by Republic Act No. 8424, and the provisions on the transitional input tax credit are now embodied in Section 111(A) of the new NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits.—

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

and supplies equivalent for 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.119

In G.R. Nos. 158885 and 170680, the Court asked, "If the plain text of Republic Act No. 7716 fails to supply any apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on their properties, how then were the Commissioner of Internal Revenue and the courts a quoable to justify such a view?"120 The Court then answered this question in this manner:

IV.

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

x x x x

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT registered people would have been prejudiced by the inability to credit against the output VAT their payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision authorized VAT-registered persons to invoke a "presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit," and a similar presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.121 (Emphasis ours.)

Whether there must have been previouspayment of sales tax or value-added taxby petitioner on its land before petitionermay claim the input tax credit granted bySection 105 (now Section 111[A]) of the NIRC.

The Court discussed this matter lengthily in its Decision in G.R. Nos. 158885 and 170680, and we quote:

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

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

x x x Section 105 states that the transitional input tax credits become available either to (1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear language of the law entitles new trades or businesses to avail of the tax credit once they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences operations.

x x x [I]t is not always true that the acquisition of such goods, materials and supplies entail the payment of taxes on the part of the new business. In fact, this could occur as a matter of course by virtue of the operation of various provisions of the NIRC, and not only on account of a specially legislated exemption.

x x x x

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

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

There is another point that weighs against the CTA's interpretation. Under Section 105 of the Old NIRC, the rate of the transitional input tax credit is "8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher." If indeed the transitional input tax credit is premised on the previous payment of VAT, then it does not make sense to afford the taxpayer the benefit of such credit based on "8% of the value of such inventory" should the same prove higher than the actual VAT paid. This intent that the CTA alluded to could have been implemented with ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its properties from the national government, even claiming that to allow the transitional input tax credit is "tantamount to giving an undeserved bonusto real estate dealers similarly situated as [FBDC] which the Government cannot afford to provide." Yet the tax laws in question, and all tax laws in general, are designed to enforce uniform tax treatment to persons or classes of persons who share minimum legislated standards. The common standard for the application of the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and accommodating in ascertaining who should be entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.122 (Citations omitted, emphases ours.)

The Court En Bancin its Resolution in G.R. No. 173425 likewise discussed the question of prior payment of taxes as a prerequisite before a taxpayer could avail of the transitional input tax credit. The Court found that petitioner is entitled to the 8% transitional input tax credit, and clearly said that the fact that petitioner acquired the Global City property under a tax-free transaction makes no difference as prior payment of taxes is not a prerequisite.123 We quote pertinent portions of the resolution below:

This argument has long been settled. To reiterate, prior payment of taxes is not necessary before a taxpayer could avail of the 8% transitional input tax credit. This position is solidly supported by law and jurisprudence, viz.:

First.Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a taxpayer to avail of the 8% transitional input tax credit, all that is required from the taxpayer is to file a beginning inventory with the Bureau of Internal Revenue (BIR). It was never mentioned in Section 105 that prior payment of taxes is a requirement. x x x.

x x x x

Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it now would be tantamount to judicial legislation which, to state the obvious, is not allowed.

Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior payment of taxes is not required before a taxpayer could avail of transitional input tax credit. As we have declared in our September 4, 2012 Decision, "[t]ax credit is not synonymous to tax refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from one's total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage investment."

Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax credit is no longer novel. It has long been settled by jurisprudence. x x x.

Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., this Court had already declared that prior payment of taxes is not required in order toavail of a tax credit. x x x124 (Citations omitted, emphases ours.)

The Court has thus categorically ruled that prior payment of taxes is not required for a taxpayer toavail of the 8% transitional input tax credit provided in Section 105 of the old NIRC and that petitioner is entitled to it, despite the fact that petitioner acquired the Global City property under a tax-free transaction.125 The Court En Banc held:

Contrary to the view of the CTA and the CA, there is nothing in the abovequoted provision to indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax credit. Obviously, all that is required is for the taxpayerto file a beginning inventory with the BIR.

To require prior payment of taxes x x x is not only tantamount to judicial legislation but would also render nugatory the provision in Section 105 of the old NIRC that the transitional input tax credit shall be "8% of the value of [the beginning] inventory or the actual [VAT] paid on such goods, materials and supplies, whichever is higher" because the actual VAT (now 12%) paid on the goods, materials, and supplies would always be higher than the 8% (now 2%) of the beginning inventory which, following the view of Justice Carpio, would have to exclude all goods, materials, and supplies where no taxes were paid. Clearly, limiting the value of the beginning inventory only to goods, materials, and supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it would have specifically stated that the beginning inventory excludes goods, materials, and supplies where no taxes were paid.126

Whether Revenue Regulations No. 7-95 isa valid implementation of Section 105 ofthe NIRC.

In the April 2, 2009 Decision inG.R. Nos. 158885 and 170680, the Court struck down Section 4.105-1 ofRevenue Regulations No. 7-95 for being in conflict with the law.127 The decision reads in part as follows:

[There] is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction imposed on realestate brokers and their ability to claim the transitional input tax credit based on the value of their real properties. In addition, the very idea of excluding the real properties itself from the beginning inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of goods, whether or not such "goods" take the form of real properties or more mundane commodities.

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

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

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods, materials and supplies upon which the transitional input VAT would be based "shall be left to regulation by the appropriate administrative authority". This is based on the phrase "filing of an inventory as prescribed by regulations" found in Section 105. Nonetheless, Section 105 does include the particular properties to be included in the inventory, namely goods, materials and supplies. It is questionable whether the CIR has the power to actually redefine the concept of "goods", as she did when she excluded real properties from the class of goods which real estate companies in the business of selling real properties may include in their inventory. The authority to prescribe regulations can pertain to more technical matters, such as how to appraise the value of the inventory or what papers need to be filed to properly itemize the contents of such inventory. But such authority cannot go as far as to amend Section 105 itself, which the Commissioner had unfortunately accomplished in this case.

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

well moot the law or arrogate legislative authority unto himself by retaining sole discretion to provide the definition and scope of the term "goods."128 (Emphasis added.)

Furthermore, in G.R. No. 173425, the Court held:

Section 4.105-1 of RR 7-95 isinconsistent with Section 105 of theold NIRC

As regards Section 4.105-1 ofRR 7-95 which limited the 8% transitional input tax credit to the value of the improvements on the land, the same contravenes the provision of Section 105 of the old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716, which defines "goods or properties," to wit:

x x x x

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax credit to the value of the improvement of the real properties, is a nullity. Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are the product of a delegated legislative power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond itsterms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under Section 105 is a nullity.

As we see it then, the 8% transitional input tax creditshould not be limited to the value of the improvements on the real properties but should include the value of the real properties as well.129 (Citations omitted, emphasis ours.)

Whether the issuance of RevenueRegulations No. 7-95 by the BIR, anddeclaration of validity of said Regulationsby the CTA and the Court of Appeals,was in violation of the fundamentalprinciple of separation of powers.

In the Resolution dated October 2, 2009 in G.R. Nos. 158885 and 170680 the Court denied the respondents’ Motion for Reconsideration with finality and held:

[The April 2, 2009 Decision] held that the CIR had no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such limitation. This it did when it restrictedthe application of Section 105 in the case of real estate dealers only to improvements on the real property belonging to their beginning inventory.

x x x x

The statutory definition of the term "goods or properties" leaves no room for doubt. It states: "Sec. 100. Value-added tax on sale of goods or properties.— (a) Rate and base of tax. — x x x (1) The term ‘goods or properties’ shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:

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

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

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

The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for sale to c[u]st[o]mers or held for lease in the ordinary course of business." Having been defined in Section 100 of the NIRC, the term "goods" as used in Section 105 of the same code could not have a different meaning. This has been explained in the Decision dated April 2, 2009, thus:

x x x x

Section 4.105-1 of RR 7-95 restricted the definition of "goods," viz.:

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

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on which it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term"goods" is concerned. This is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that administrative agencies promulgate, which are the product of a delegated legislative power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted bythe legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with, the standards prescribed by law.

To be valid, an administrative ruleor regulation must conform, not contradict, the provisions of the enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the law itis intended to implement. Any rule that is not consistent with the statute itself is null and void. While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond itsterms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that mattercannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional inputtax credit under Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue.1âwphi1 RR 6-97 was basically a reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following paragraph:

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

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97 which is now in consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods is concerned. The failure to add a specific repealing clause would not necessarily indicate that there was no intent to repeal RR 7-95. The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy between the provisions of RR 6-97 and RR 7-95.

x x x x

As pointed out in Our Decision ofApril 2, 2009, to give Section 105 a restrictive construction that transitional input tax credit applies only when taxes were previously paid on the properties in the beginning inventory and there is a law imposing the tax which is presumed to have been paid, is to impose conditions or requisites to the application of the transitional tax input credit which are not found in the law. The courts must not read into the law what is not there. To do so will violate the principle of separation of powers which prohibits this Court from engaging in judicial legislation.130 (Emphases added.)

As the Court En Banc held in G.R. No. 173425, the issues in this case are not novel. These same issues have been squarely ruled upon by this Court in the earlier decided casesthat have attained finality.131

It is now this Court’s duty to apply the previous rulings to the present case. Once a case has been decided one way, any other case involving exactly the same point at issue, as in the present case, should be decided in the same manner.132

Thus, we find that petitioner is entitled to a refund of the amounts of: 1) P486,355,846.78 in G.R. No. 175707, 2)P77,151,020.46 in G.R. No. 180035, and 3) P269,340,469.45 in G.R. No. 181092, which petitioner paid as value-added tax, or toa tax credit for said amounts. WHEREFORE, in view of the foregoing, the consolidated petitions are hereby GRANTED. The following are REVERSED and SET ASIDE:

1) Under G.R. No. 175707, the Decisiondated April 22, 2003 of the Court of Appeals in CA-G.R. SP No. 61516 and its subsequent Resolution dated November 30, 2006;

2) Under G.R. No. 180035, the Decisiondated April 30, 2007 of the Court of Appeals in CA-G.R. SP No. 76540 and its subsequent Resolution dated October 8, 2007; and

3) Under G.R. No. 181092, the Decisiondated December 28, 2007 of the Court of Appeals in CA-G.R. SP No. 61158.

Respondent Commissioner of Internal Revenue is ordered to REFUND, OR, IN THE ALTERNATIVE, TO ISSUE A TAX CREDIT CERTIFICATE to petitioner Fort Bonifacio Development Corporation, the following amounts:

1) P486,355,846. 78 paid as output value-added tax for the second quarter of 1997 (G.R. No. 175707);

2) P77,151,020.46 paid as output value-added tax for the first quarter of 1998 (G.R. No. 180035); and

3) P269,340,469.45 paid as output value-added tax for the fourth quarter of 1996 (G.R. No. 181092).

LG ELECTRONICS PHILIPPINES, INC., Petitioner, vs.COMMISSION OF INTERNAL REVENUE, Respondent.

D E C I S I O N

LEONEN, J.:

This case involves the determination of whether petitioner LG Electronics Philippines, Inc. is entitled to the immunities and privileges granted under Tax Amnesty Act of 1997.

This is a Petition for Review on Certiorari1 assailing the Court of Tax Appeals' Decision2 dated May 11, 2004 and Resolution3 dated September 22, 2004.

LG Electronics Philippines, Inc. (LG) is a corporation duly organized and existing under the laws of the Philippines.4

On March 21, 1998, LG received a formal assessment notice and demand letter from the Bureau of Internal Revenue. LG was assessed deficiency income tax of 267,365,067.41 for the taxable year of 1994.5

The deficiency was computed on the basis of (a) disallowed interest expenses for being unsupported; (b) disallowed salary expenses for not being subjected to withholding tax on compensation; (c) imputation of alleged undeclared sales; and (d)

disallowed brokerage fees for not being subjected to expanded withholding tax.6 The Commissioner of Internal Revenue computed the deficiency as follows:7

Net Business Income P105,639,471.00

Add: Discrepancies

Interest Expense-lack of proofs 24,515,117.00

Salaries Expense-unreconciled 9,586,097.35

Undeclared Sales

Sales per investigation P844,238,605.12

Sales per return 836,509,217.00 7,729,388.12

Brokerage, other charges-not subjected to EWT 346,091,296.47

Taxable Income P493,561,369.94==============

Tax Due P172,746,479.48

Less: Tax Paid 36,235,307.00

Deficiency Tax P136,511,172.48

Add: 25% Surcharge 34,127,793.12

Interest 4-16-95 to 2-16-98 96,701,101.81

Compromise 25,000.00

TOTAL AMOUNT DUE & COLLECTIBLE P267,365,067.41==============

LG, through its external auditor, Sycip Gorres Velayo & Company (SGV), filed on April 17, 1998 an administrative protest with the Bureau of Internal Revenue against the tax assessment.8 On June 16, 1998, LG filed a supplemental protest. It requested for a reconsideration and reinvestigation of the tax assessment. It claimed that the assessment did not have factual and legal bases. LG also subsequently submitted supporting documents.9

Without waiting for the Commissioner of Internal Revenue’s resolution of the protest, LG filed a Petition for Review before the Court of Tax Appeals on January 11, 1999.10

The Commissioner of Internal Revenue argued before the Court of Tax Appeals that the assessment issued was in accordance with law since the interest expenses claimed by LG were unsupported by sufficient proof. LG had undeclared income. Brokerage fees and other charges were not subjected to expanded withholding tax. Moreover, the details in the assessment notice substantially complied with the provisions of Section 228 of the Tax Code, the taxpayer having been informed in writing of the law and the facts on which the assessment was based.11 Meanwhile, the Commissioner of Internal Revenue issued the Report dated March 3, 1999, which recommended the reduction of LG’s liability for deficiency income tax to P10,557,736.28.12

In its Decision dated May 11, 2004, the Court of Tax Appeals ruled that LG was liable for the payment ofP27,181,887.82, representing deficiency income tax for taxable year 1994, including 20% delinquency interest computed from March 18, 1998.13

According to the Court of Tax Appeals, "[w]hile petitioner submitted documents to substantiate its interest expense by bank statements, bank debit memoranda and letters of authority to debit its account, computations of interest and bank reconciliation, it failed to submit in evidence a vital document, which is the loan agreement. Except for a photocopy of a pre-marked document . . . [,]the court is unable to find any document purporting to be a loan agreement."14

The Court of Tax Appeals summarized LG’s deficiency income tax:15

Net Business Income P 105,639,471.00

Add: Discrepancies Interest Expense-lack of Proofs 24,515,117.00

Salaries Expense-unreconciled 8,746,877.00

Brokerage, other charges not subjected to EWT 4,292,200.43

Taxable Income P 143,193,665.43===============

Tax Due P 50,117,782.90

Less: Tax Paid 36,235,307.00

Deficiency Tax P 13,882,475.90

Add: 25% Surcharge 3,470,618.98

Interest 4-16-95 to 2-16-98 9,828,792.94

TOTAL AMOUNT DUE & COLLECTIBLE P 27,181,887.82===============

The dispositive portion of the Court of Tax Appeals’ decision reads:

Accordingly, petitioner is ORDERED to PAY the respondent Commissioner of Internal Revenue the amount ofP27,181,887.82 representing petitioner’s deficiency income tax for the taxable year 1994, plus 20% delinquency interest from March 18, 1998 until the amount is fully paid pursuant to Section 249(c)(3) of the 1994 Tax Code.

SO ORDERED.16

LG filed a Motion for Partial Reconsideration17 on June 4, 2004. On September 22, 2004, the Court of Tax Appeals partially granted the Motion.18 It reduced LG’s liability to P27,054,879.11.19 The liability was reduced as follows:20

Net Business Income P 105,639,471.00

Add: Discrepancies

Interest Expense-lack of proofs 24,515,117.00

Salaries Expense-unreconciled 8,746,877.00

Brokerage, Other Charges not subjected to EWT P 4,292,200.43

Less: Charges that should not be subjected to EWT 185,333.01 4,106,867.42

Taxable Income P 143,008,332.42================

Tax Due P 50,052,916.35

Less: Tax Paid 36,235,307.00

Deficiency Tax 13,817,609.35

Add: 25% Surcharge 3,454,402.34

Interest 4-16-95 to 2-16-96 [sic] 9,782,867.42

TOTAL AMOUNT DUE & COLLECTIBLE

P 27,054,879.11================

On November 18, 2004, LG filed the present Petition for Review on Certiorari.21 On January 19, 2005, the Commissioner of Internal Revenue was required to file its Comment.22 This Comment23 was noted on March 1, 2006.24 Petitioner was then required to submit its Reply.25 After receipt of its Reply,26 this court resolved to require the parties to submit their Memoranda.27

Petitioner filed a Manifestation dated January 29, 2008 stating that it availed itself of the tax amnesty provided under Republic Act No. 948028 by paying the total amount of P8,647,565.50.29 In addition, the Bureau of Internal Revenue, through Assistant Commissioner James Roldan, issued a ruling30 on January 25, 2008, which held that petitioner complied with the provisions of Republic Act No. 9480.31 Petitioner is, thus, entitled to the immunities and privileges provided for under the law including "civil, criminal or administrative penalties under the National Internal Revenue Code of 1997 . . . arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years."32

The following documents were attached to petitioner’s manifestation: (1) Notice of Availment of Tax Amnesty;33(2) Tax Amnesty Return (BIR Form No. 2116);34 (3) Tax Amnesty Payment Form (BIR Form No. 0617);35 (4) Statement of Assets, Liabilities and Net Worth (SALN);36 and (5) BTRBIR deposit slip.37

Respondent was required to comment on the Manifestation within 10 days from notice.38 According to respondent, petitioner cannot claim the tax amnesty provided under Republic Act No. 9480 for the following reasons: (1) accounts receivable by the Bureau of Internal Revenue as of the date of amnesty are not covered since these constitute government property; (2) cases that have already been favorably ruled upon by the trial court or appellate courts prior to the availment of tax amnesty are not covered; and (3) petitioner’s case involves withholding taxes that are not covered by the Tax Amnesty Act.39

The parties raised the following original issues in their pleadings:

(1) Whether questions of fact may be touched upon in a Petition for Review on Certiorari under Rule 45 of the Rules of Court;

i. Whether . . . the Honorable Court of Tax Appeals, while holding the amount of P120,985.99 as a valid deduction representing a portion of employees benefits, erred in disallowing the amount ofP1,754,860.36 as deduction from the gross income for alleged failure of the petitioner to properly and substantially support the same by evidence[;] [and]

ii. Whether . . . the Honorable Court of Tax Appeals, while holding the amount of P185,333.01 as a valid deduction representing brokerage fees not subject to 5% withholding tax, erred in disallowing expenses for allege[d] failure of the petitioner to duly support the claim with official receipts40

(2) Whether the Court of Tax Appeals erred in ruling that interest expense is deductible from gross income only if supported by a written agreement of the indebtedness, which includes a stipulation for the payment of interest; and

(3) Whether the Court of Tax Appeals erred in ruling that LG Electronics cannot claim the amount ofP6,989,338.00 as deduction from its gross income for alleged failure to withhold income tax on accrued bonuses.

However, in view of petitioner’s Manifestation stating that it availed of the tax amnesty provided under Republic Act No. 9480, the only issue for disposition is whether petitioner is entitled to the immunities and privileges under the Tax Amnesty Law or Republic Act No. 9480.

We deny the Petition for being moot and academic.

I

Petitioner claimed that it perfected the availment of tax amnesty under Republic Act No. 9480 when it paid the correct amount and submitted the required documents. It also relied on the Bureau of Internal Revenue’s ruling dated January 25, 2008, which categorically ruled on petitioner’s tax amnesty. Pertinent provisions of the ruling state:

On the basis of the foregoing, LGE should pay a tax amnesty rate equivalent to five percent (5%) of its total declared networth as of Balance Sheet dated December 31, 2005. Per attached certified true copy of Balance Sheet of LGE dated December 31, 2005, LGE has a total declared networth of One Hundred Seventy Two Million Nine Hundred Fifty One Thousand Three Hundred Ten Pesos (172,951,310.00). As such, LGE is liable for the amount of Eight Million Six Hundred Forty Seven Thousand Five Hundred Sixty Five Pesos and Fifty Centavos (P8,647,565.50).

It appears that LGE initially paid the amount of Five Hundred Thousand Pesos (P500,000.00) on October 26, 2007 when it first availed of the tax amnesty and it subsequently paid the amount of Eight Million One Hundred Forty Seven Thousand Five Hundred Sixty Five Pesos and Fifty Centavos (P8,147,565.50)on January 11, 2008 when it amended its tax amnesty returns. As such, LGE has fully paid its liabilities under the Act.

. . . .

Considering that LGE has paid the amnesty tax due for corporation and has submitted its tax amnesty forms to Revenue District Office No. 47 of the BIR of Pasig City, there is deemed full compliance with the provisions of the Act. As such, LGE is entitled to the immunities and privileges provided for under Section 6 of the Act and Section 10 of RMC No. 55-2007 which provides, among others, immunity from payment of tax liabilities, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from its failure to pay any and all internal revenue taxes for taxable year2005 and prior years. This includes immunity from payment of any internal revenue tax liability except those provided for under Section 5 of the Act.41

On the other hand, respondent’s counsel from BIR Revenue Region No. 7 Legal Division argued that petitioner cannot avail itself of the tax amnesty program under Republic Act No. 9480. In its Comment on the Manifestation dated January 29, 2008, it said that:

Under Question No. 47 of Revenue Memorandum Circular 69-2007, delinquent accounts/ accounts receivable, including unpaid self assessed taxes, in the records of the BIR which are already accounts receivable of the BIR/assets of the government as of date of amnesty are NOT COVERED by the tax amnesty because the same are already properties of the government prior to/upon taxpayer’s date of amnesty availment. Further, Question No. 49 of the same revenue issuance likewise states that tax assessments that are disputed administratively or judicially are, as a general rule, covered by the tax amnesty, except those cases excluded from the coverage of the Tax Amnesty Program as discussed in this Circular and those cases involving issues that have already been ruled by the trial court/appellate court in favor of the BIR/Government prior to the taxpayer’s availment of the amnesty law. It is to be emphasized that the case of the herein Petitioner had already been resolved by the Court of Tax Appeals under CTA Case No. 5715 as early as 11 May 2004[.]

Further, Section 8 of Republic Act No. 9480 specifically provides for the exception to the coverage of the Tax Amnesty Program, one of which is the withholding agents with respect to their withholding tax liabilities. . . .

It is crystal clear from the foregoing provisions of Republic Act No. 9480 that withholding taxes are not covered by the amnesty program. Since the case of the Petitioner also involves withholding taxes, the Respondent could not claim immunity under Republic Act No. 9480.The Bureau of Internal Revenue does not have the power to grant immunity for those types of taxes which are not covered by the tax amnesty law.42 (Emphasis in the original, underscoring supplied)

This court finds that petitioner has properly availed itself of the tax amnesty granted under Republic Act No. 9480.

The pertinent provisions on the grant and availment of tax amnesty state:

SECTION 1. Coverage. – There is hereby authorized and granted a tax amnesty which shall cover all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005: Provided, however, That the amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8 hereof.

SEC. 2. Availment of the Amnesty. – Any person, natural or juridical, who wishes to avail himself of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.

. . . .

SEC. 5. Grant of Tax Amnesty. – Except for the persons or cases covered in Section 8 hereof, any person, whether natural or juridical, may avail himself of the benefits of tax amnesty under this Act, and pay the amnesty tax due thereon, based on his networth as of December 31, 2005 as declared in the SALN as of said period, in accordance with the following schedule of amnesty tax rates and minimum amnesty tax payments required:

. . . .

(b) Corporations

(1) With subscribedcapital of aboveP50 Million

5% or P500,000whichever is higher

. . . .

(d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act shall amend such previously filed statements by including still undeclared assets and/or liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting increase in networth: Provided, That such taxpayers shall likewise be categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section. (Emphasis supplied)

Taxpayers who availed themselves of the tax amnesty program are entitled to the immunities and privileges under Section 6 of the law:

SEC. 6. Immunities and Privileges. – Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges:

(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.

(b) The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him.

(c) The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws.

All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof.

In addition to the above provisions of law, BIR Revenue Memorandum Circular (RMC) No. 55-2007,43 which reproduces the Department of Finance Department Order 29-07,44 provides:

SEC. 3. Taxes Covered. – The tax amnesty shall cover all national internal revenue taxes imposed by the National Government for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.

SEC. 4. Who May Avail of Tax Amnesty. – The following may avail of the tax amnesty under RA 9480:

1. Individuals, whether resident or nonresident citizens, or resident or nonresident aliens;

2. Estates and trusts;

3. Corporations;

4. Cooperatives and tax exempt entities that have become taxable as of December 31, 2005; and

5. Other juridical entities including partnerships.

For this purpose, an individual taxpayer in his/her own capacity shall be treated as a different taxpayer when he acts as administrator/executor of the estate of a deceased taxpayer. The pertinent provisions of Sec. 236 of the Tax Code on the registration of the estate of the decedent by the administrator or executor and the issuance of new TIN shall be complied with. Therefore, an individual taxpayer, seeking to avail of the tax amnesty and who at the same time is an executor or administrator of the estate of a deceased taxpayer who would also like to avail of the tax amnesty, shall file two (2) separate amnesty tax returns, one for himself as a taxpayer and the other in his capacity as executor or administrator of the estate of the decedent with respect to the revenue and other income earned or received by the estate.

. . . .

RULE IIIAVAILMENT AND PAYMENT OF AMNESTY

SEC. 6. Method of Availment of Tax Amnesty. –

1. Forms/Documents to be filed. – To avail of the general tax amnesty, concerned taxpayers shall file the following documents/requirements:

a. Notice of Availment in such form as may be prescribed by the BIR.

b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such form, as may be prescribed by the BIR.

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. – The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows:

a. Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be.

b. Non-residents shall file with the office of the Commissioner of the BIR, or with any RDO.

c. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, Statement of Assets, Liabilities and Networth, or such other documents submitted by the taxpayer.

3. Payment of Amnesty Tax and Full Compliance. – Upon filing of the Tax Amnesty Return in accordance with Sec. 6(2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business. The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of – or to be accomplished by – the bank, the collection agent or the Treasurer, showing the acceptance of the amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch manager shall sign the acceptance of payment form. The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be

submitted to the RDO, which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the provisions of RA 9480.

. . . .

RULE VIMMUNITIES AND PRIVILEGES

SEC. 10. Immunities and Privileges. – Taxpayers who have fully complied with the conditions under RA 9480 and these rules shall be entitled to the following immunities and privileges:

1. The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.

2. The taxpayer’s Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent and, except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him.

3. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined by the BIR. However, the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws.

The above-stated immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 4 of RA 9480 and Section 9, Rule IV hereof. (Emphasis supplied)

In several cases, this court explained the nature of a tax amnesty. In Metropolitan Bank and Trust Co. v. Commissioner of Internal Revenue:45

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.46

This court in Commissioner of Internal Revenue v. Gonzalez47 further described the role of tax amnesties in the government’s collection of taxes:

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case.48

Under Republic Act No. 9480 and BIR Revenue Memorandum Circular No. 55-2007, the qualified taxpayer may immediately avail of the immunities and privileges upon submission of the required documents. This is clear from Section 2 of Republic Act No. 9480:

SEC. 2. Availment of the Amnesty. – Any person, natural or juridical, who wishes to avail himself of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR. (Emphasis supplied)

Meanwhile, Section 6 of BIR Revenue Memorandum Circular No. 55-2007 and Department of Finance Department Order 20-07 provide:

SEC. 6. Method of Availment of Tax Amnesty. –

1. Forms/Documents to be filed. – To avail of the general tax amnesty, concerned taxpayers shall file the following documents/requirements:

a. Notice of Availment in such form as may be prescribed by the BIR.

b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such form, as may be prescribed by the BIR.

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. – The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows:

a. Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be.

b. Non-residents shall file with the office of the Commissioner of the BIR, or with any RDO.

c. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, Statement of Assets, Liabilities and Networth, or such other documents submitted by the taxpayer.

3. Payment of Amnesty Tax and Full Compliance. – Upon filing of the Tax Amnesty Return in accordance with Sec. 6(2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business. The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of – or to be accomplished by – the bank, the collection agent or the Treasurer, showing the acceptance of the amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch manager shall sign the acceptance of payment form. The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be submitted to the RDO, which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the provisions of RA 9480.(Emphasis supplied)

In Philippine Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue,49 this court ruled that the completion of the requirements and compliance with the procedure laid down in the law and the implementing rules entitle the taxpayer to the privileges and immunities under the tax amnesty program.50

In this case, petitioner showed that it complied with the requirements laid down in Republic Act No. 9480. Pertinent documents were submitted to the Bureau of Internal Revenue and attached to the records of this case. Petitioner’s compliance was also affirmed by the Bureau of Internal Revenue in its ruling dated January 25, 2008. Petitioner is, therefore, entitled to the immunities and privileges granted under Section 6 of Republic Act No. 9480.

We now proceed to the arguments against petitioner’s availment of tax amnesty raised by respondent.

II

Respondent erred when it relied on the answers to questions numbered 47 and 49 of BIR Revenue Memorandum Circular No. 69-200751 reproduced below:

Q-47 Are Delinquent Accounts/Accounts Receivable, including unpaid self-assessed taxes, in the records of the BIR which are already Accounts Rec[ei]vable of the BIR/assets of the Government as of date of amnesty availment by the taxpayer still covered by such amnesty availment?

A-47 No. This is so because these are already properties/assets of the Government prior to/upon taxpayer’s date of amnesty availment.

. . . .

Q-49 Are tax assessments that are disputed administratively or judicially still covered by the tax amnesty law?

A-49 As a rule yes, except those cases excluded from the coverage of the Tax Amnesty Program as discussed in this CIRCULAR and those cases involving issues that have already been ruled by the trial court/appellate court in favor of the BIR/Government prior to taxpayer’s availment of the amnesty law. (Emphasis supplied)

The law is clear. Only final and executory judgments are excluded from the coverage of the tax amnesty program, hence:

SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act:

. . . .

(f) Tax cases subject of final and executory judgment by the courts.52 (Emphasis supplied) This exception was reproduced in the Implementing Rules and Regulations of the law:

SEC. 5. Exceptions.– The tax amnesty shall not extend to the following persons or cases existing as of the effectivity of RA 9480:

. . . .

7. Tax cases subject of final and executory judgment by the courts.53

We hold that only cases that involve final and executory judgments are excluded from the tax amnesty program.

This court has already ruled on the Bureau of Internal Revenue’s unjustified expansion of cases not covered under the tax amnesty program.

In Philippine Banking Corporation (Now: Global Business Bank, Inc.), this court categorically found that "BIR’s inclusion of ‘issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer’ as one of the exceptions . . . is misplaced."54 This court said that:

RA 9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final and executory judgment by the courts." The present case has not become final and executory when Metrobank availed of the tax amnesty program.55

In the recent case of CS Garment Inc., v. Commissioner of Internal Revenue56 we declared that:

While tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority, it is also a well-settled doctrine that the rule-making power of administrative agencies cannot be extended to amend or expand statutory requirements or to embrace matters not originally encompassed by the law. Administrative regulations should always be in accord with the provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in favor of the basic law. We thus definitively declare that the exception "[i]ssues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" under BIR RMC 19-2008 is invalid, as the exception goes beyond the scope of the provisions of the 2007 Tax Amnesty Law.57 (Emphasis supplied, citations omitted)

BIR Revenue Memorandum Circular No. 19-2008, declared by this court as erroneous, is substantially the same as the answers to the questions numbered 47 and 49 in BIR Revenue Memorandum Circular No. 69-2007, which respondent relied upon in the present case. Pertinent provisions of BIR Revenue Memorandum Circular No. 19-2008 are the following:

A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007

The following is a basic guide for taxpayers who wish to avail of tax amnesty pursuant of Republic Act No. 9480 (Tax Amnesty Act of 2007).

Who may avail of the amnesty?

. . . .

EXCEPT:

Issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers who have failed to observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday Incentives and other incentives)

. . . .

Delinquent Accounts/Accounts Receivable considered as assets of the BIR/Government, including self-assessed tax

Accordingly, answers to the questions numbered 47 and 49 of BIR Revenue Memorandum Circular No. 69-2007 are declared invalid for going beyond the text of the law.

III

Furthermore, contrary to respondent’s argument, the case does not involve withholding taxes. This is readily seen in Republic Act No. 9480 and BIR Revenue Memorandum Circular No. 55-2007. Section 8 of Republic Act No. 9480 provides:

SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act:

(a) Withholding agents with respect to their withholding tax liabilities[.] (Emphasis supplied) Similarly, BIR Revenue Memorandum Circular No. 55-2007 states:

SEC. 5. Exceptions.– The tax amnesty shall not extend to the following persons or cases existing as of the effectivity of RA 9480:

1. Withholding agents with respect to their withholding tax liabilities[.]

Income tax is different from withholding tax, with both operating in distinct systems.

In the seminal case of Fisher v. Trinidad,58 this court defined income tax as "a tax on the yearly profits arising from property, professions, trades, and offices."59 Otherwise stated, income tax is the "tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like."60

On the other hand, withholding tax is a method of collecting income tax in advance.61 "In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base."62 There are three reasons for the utilization of the withholding tax system: "first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and third, to improve the government’s cash flow."63

In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,64 this court ruled that "the liability of the withholding agent is independent from that of the taxpayer."65 Further:

The [withholding agent] cannot be made liable for the tax due because it is the [taxpayer] who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the

same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him.66

The cause of action for failure to withhold taxes is different from the cause of action arising from non-payment of income taxes.67 "Indeed, the revenue officers generally disallow the expenses claimed as deductions from gross income, if no withholding of tax as required by law or he regulations was withheld and remitted to the BIR within the prescribed dates."68

In Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue,69 respondent therein argued that petitioner was not entitled to the grant of tax amnesty under Republic Act No. 9480 as petitioner was deemed a withholding agent of the assessed deficiency value added tax and deficiency excise tax.70 Petitioner was, thus, disqualified under Section 8 of the law.71 This court rejected such contention:

The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious.

Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.72 (Citations omitted)

In this case, petitioner was assessed for its deficiency income taxes due to the disallowance of several items for deduction. Petitioner was not assessed for its liability as withholding agent. The two liabilities are distinct from and must not be confused with each other.

1âwphi1

The main reason for the disallowance of the deductions was that petitioner was not able to fully substantiate its claim of remittance through receipts or relevant documents.

IV

Furthermore, we find it appropriate to pronounce that the Bureau of Internal Revenue Legal Division is not the proper representative of respondent.

We observe that respondent is represented by a lawyer from the Legal Division of Revenue Region No. 7 of the Bureau of Internal Revenue and not by the Office of the Solicitor General. We are mindful of Section 220 of Republic Act No. 8424 or the Tax Reform Act of 1997, which provides that legal officers of the Bureau of Internal Revenue are the ones tasked to institute the necessary civil or criminal proceedings on behalf of the government:

Section 220. Form and Mode of Proceeding in Actions Arising under this Code. – Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner. (Emphasis supplied)

Nonetheless, this court has previously ruled on the issue of the Bureau of Internal Revenue’s representation in appellate proceedings, particularly before this court:

The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in

appellate proceedings. This pronouncement finds justification in the various laws defining the Office of the Solicitor General, beginning with Act No. 135, which took effect on 16 June 1901, up to the present Administrative Code of 1987. Section 35, Chapter 12, Title III, Book IV, of the said Code outlines the powers and functions of the Office of the Solicitor General which includes, but not limited to, its duty to —

(1) Represent the Government in the Supreme Court and the Court of Appeals in all criminal proceedings; represent the Government and its officers in the Supreme Court, the Court of Appeals, and all other courts or tribunals in all civil actions and special proceedings in which the Government or any officer thereof in his official capacity is a party.

. . . .

(3) Appear in any court in any action involving the validity of any treaty, law, executive order or proclamation, rule or regulation when in his judgment his intervention is necessary or when requested by the Court.

In Gonzales vs. Chavez, the Supreme Court has said that, from the historical and statutory perspectives, the Solicitor General is the "principal law officer and legal defender of the government."73 (Emphasis in the original, citations omitted)

From the foregoing, we find that the Office of the Solicitor General is the proper party to represent the interests of the government through the Bureau of Internal Revenue. The Legal Division of the Bureau of Internal Revenue should be mindful of this procedural lapse in the future.

However, records show that the Office of the Solicitor General has been apprised of developments in the case since the beginning of the proceedings. We, thus, rule that the interests of the government have been duly protected.

As petitioner is found entitled to the immunities and privileges granted under the tax amnesty program, the issue on the assessed deficiency income taxes is, thus, moot and academic. WHEREFORE, in view of petitioner LG Electronics Philippines, Inc.'s availment of the tax amnesty program under Republic Act No. 9480, the petition is DENIED for being MOOT and ACADEMIC. Petitioner's deficiency .taxes for taxable year 2005 and prior years are deemed fully settled.

HONDA CARS PHILIPPINES, INC., Petitioner, vs.HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.

D E C I S I O N

BRION, J.:

We resolve the present petition for review on certiorari1 seeking to nullify the March 30, 2012 decision2 and October 25, 2012 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 109297. These rulings were penned by Associate Justice Noel G. Tijam and concurred in by Associate Justices Romeo F. Barza and Edwin D. Sorongon.

The Factual Antecedents

On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and respondent Honda Cars Technical Specialists and Supervisory Union (union), the exclusive collective bargaining representative of the company’s supervisors and technical specialists, entered into a collective bargaining agreement (CBA) effective April 1, 2006 to March 31, 2011.4

Prior to April 1, 2005, the union members were receiving a transportation allowance of 3,300.00 a month. On September 3, 2005, the company and the union entered into a Memorandum of Agreement5 (MOA) converting the transportation allowance into a monthly gasoline allowance starting at 125 liters effective April 1,2005. The allowance answers for the gasoline consumed by the union members for official business purposes and for home to office travel and vice-versa. The company claimed that the grant of the gasoline allowance is tied up to a similar company policy for managers and assistant vice-presidents (AVPs), which provides that in the event the amount of gasoline is not fully consumed, the gasoline not used may be converted into cash, subject to whatever tax may be applicable. Since the cash conversion is paid in the monthly payroll as an excess gas allowance, the company considers the amount as part of the managers’ and AVPs’ compensation that is subject to income tax on compensation.

Accordingly, the company deducted from the union members’ salaries the withholding tax corresponding to the conversion to cash of their unused gasoline allowance.

The union, on the other hand, argued that the gasoline allowance for its members is a "negotiated item" under Article XV, Section 15 of the new CBA on fringe benefits. It thus opposed the company’s practice of treating the gasoline allowance that, when converted into cash, is considered as compensation income that is subject to withholding tax.

The disagreement between the company and the union on the matter resulted in a grievance which they referred to the CBA grievance procedure for resolution. As it remained unsettled there, they submitted the issue to a panel of voluntary arbitrators as required by the CBA.

The Voluntary Arbitration Decision

On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a decision/award7 declaring that the cash conversion of the unused gasoline allowance enjoyed by the members of the union is a fringe benefit subject to the fringe benefit tax, not to income tax. The panel held that the deductions made by the company shall be considered as advances subject to refund in future remittances of withholding taxes.

The company moved for partial reconsideration of the decision, but the panel denied the motion in its June 3, 2009 order,8 prompting the company to appeal to the CA through a Rule 43 petition for review. The core issue in this appeal was whether the cash conversion of the unused gasoline allowance is a fringe benefit subject to the fringe benefit tax, and not to a compensation income subject to withholding tax.

The CA Ruling

The CA Eight Division denied the petition and upheld with modification the voluntary arbitration decision. It agreed with the panel’s ruling that the cash conversion of the unused gasoline allowance is a fringe benefit granted under Section 15, Article XV of the CBA on "Fringe Benefits." Accordingly, the CA held that the benefit is not compensation income subject to withholding tax.

This conclusion notwithstanding, the CA clarified that while the gasoline allowance or the cash conversion of its unused portion is a fringe benefit, it is "not necessarily subject to fringe benefit tax."9 It explained that Section 33 (A) of the National Internal Revenue Code (NIRC) of 1997 imposed a fringe benefit tax, effective January 1, 2000 and thereafter, on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank-and-file employees) by the employer (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer).

According to the CA, "it is undisputed that the reason behind the grant of the gasoline allowance to the union members is primarily for the convenience and advantage of Honda, their employer."10 It thus declared that the gasoline allowance or the cash conversion of the unused portion thereof is not subject to fringe benefit tax.11

The Petition

Its motion for reconsideration denied, the company appeals to this Court to set aside the CA’s dispositions, raising the very same issue it brought to the appellate court — whether the cash conversion of the gasoline allowance of the union members is a fringe benefit or compensation income, for taxation purposes.

The company reiterates its position that the cash conversion of the union members’ gasoline allowance is compensation income subject to income tax, and not to a fringe benefit tax. It argues that the tax treatment of a benefit extended by the employer to the employees is governed by law and the applicable tax regulations, and notby the nomenclature or definition provided by the parties. The fact that the CBA erroneously classified the gasoline allowance as a fringe benefit is immaterial as it is the law – Section 33 of the NIRC – that provides for the legal classification of the benefit.

It adds that there is no basis for the CA conclusion that the cash conversion of the unused gasoline allowance redounds to the benefit of management. Common sense dictates that it is the individual union members who solely benefit from the cash conversion of the gasoline allowance as it goes into their compensation income.

In any event, the company submits that even assuming that the cash conversion of the unused gasoline allowance is a tax-exempt fringe benefit and that it erred in withholding the income taxes due, still the union members would have no cause of action against it for the refund of the amounts withheld from them and remitted to the Bureau of Internal Revenue (BIR).

Citing Section 204 of the NIRC, the company contends that an action for the refund of an erroneous withholding and payment of taxes should be in the nature of a tax refund claim with the BIR. It further contends that when it withheld the income tax due from the cash conversion of the unused gasoline allowance of the union members, it was simply acting as an agent of the government for the collection and payment of taxes due from the members.

The Union’s Position

In its Comment12 dated April 19, 2013, the union argues for the denial of the petition for lack of merit. Itposits that its members’ gasoline allowance and its unused gas equivalent are fringe benefits under the CBA and the law [Section 33 (A) of NIRC] and is therefore not subject to withholding tax on compensation income. Moreover, under that law and BIR Revenue Regulations 2-98, the same benefit is not subject to the fringe benefit tax because it is required by the nature of, or necessary to the trade or business of the company.

The union further submits that in 2007, the BIR ruled that fixed and/or pre-computed transportation allowance given to supervisory employees in pursuit of the business of the company, shall not be taxable as compensation or fringe benefits of the employees.13 It maintains that the gasoline allowance is already pre-computed by the company as sufficient to cover the gasoline consumption of the supervisors whenever they perform work for the company. The fact that the company allowed its members to convert it to cash when not fully consumed is no longer their problem because the benefit was already given.

Our Ruling

We partly grant the petition.

The Voluntary Arbitrator has no

jurisdiction to settle tax matters

The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction to hear and decide all unresolved grievances arising from the interpretation or implementation of the Collective Bargaining Agreement and those arising from the interpretation or enforcement of company personnel policies.14 Upon agreement of the parties, the Voluntary Arbitrator shall also hear and decide allother labor disputes, including unfair labor practices and bargaining deadlocks.15

In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes. Labor dispute means "any controversy or matter concerning terms and conditions of employment or the association or representation of persons in negotiating, fixing, maintaining, changing, or arranging the terms and conditions of employment, regardless of whether the disputants stand in the proximate relation of employer and employee."16

The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the cash conversion of the gasoline allowance shall be subject to fringe benefit tax or the graduated income tax rate on compensation; and (2) whether the company wrongfully withheld income tax on the converted gas allowance.

The Voluntary Arbitrator has no competence to rule on the taxability of the gas allowance and on the propriety of the withholding of tax. These issues are clearly tax matters, and do not involve labor disputes. To be exact, they involve tax issues within a labor relations setting as they pertain to questions of law on the application of Section 33 (A) of the NIRC. They do not require the application of the Labor Code or the interpretation of the MOA and/or company personnel policies. Furthermore, the company and the union cannot agree or compromise on the taxability of the gas allowance. Taxation is the State’s inherent power; its imposition cannot be subject to the will of the parties.

Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and original jurisdiction to interpret the provisions of the NIRC and other tax laws, subject to review by the Secretary of Finance. Consequently, if the company and/or the union desire/s to seek clarification of these issues, it/they should have requested for a tax ruling17 from the Bureau of Internal Revenue (BIR). Any revocation, modification or reversal of the CIR’s ruling 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 any document required of him by the BIR;

(b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.18

On the other hand, if the union disputes the withholding of tax and desires a refund of the withheld tax, it should have filed an administrative claim for refund with the CIR. Paragraph 2, Section 4 of the NIRC expressly vests the CIR original jurisdiction over refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other tax matters. The union has no cause of action against the company

Under the withholding tax system, the employer as the withholding agent acts as both the government and the taxpayer’s agent. Except in the case of a minimum wage earner, every employer has the duty to deduct and withhold upon the employee’s wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon the CIR’s recommendation.19 As the Government’s agent, the employer collects tax and serves as the payee by fiction of law.20 As the employee’s agent, the employer files the necessary income tax return and remits the tax to the Government.21

Based on these considerations, we hold that the union has no cause of action against the company.1âwphi1 The company merely performed its statutory duty to withhold tax based on its interpretation of the NIRC, albeit that interpretation may later be found to be erroneous. The employer did not violate the employee's right by the mere act of withholding the tax that may be due the government.22

Moreover, the NIRC only holds the withholding agent personally liable for the tax arising from the breach of his legal duty to withhold, as distinguished from his duty to pay tax.23 Under Section 79 (B) of the NIRC, if the tax required to be deducted and withheld is not collected from the employer, the employer shall not be relieved from liability for any penalty or addition to the unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer, and in proper cases, the withholding agent, is against the BIR, and not against the withholding agent.24 The union's cause of action for the refund or non-withholding of tax is against the taxing authority, and not against the employer. Section 229 of the NIRC provides:

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

WHEREFORE, premises considered, we PARTLY GRANT the petition for review on certiorari filed by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE the March 30, 2012 decision and the October 25, 2012 resolution of the Court of Appeals in CA-G.R. SP No. 109297. We declare NULL AND VOID the February 6, 2009 decision and June 3, 2009 resolution of the Panel of Voluntary Arbitrators. No costs.

SMART COMMUNICATIONS, INC., Petitioner, vs.MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

This petition for review1 challenges the 26 June 2012 Decision2 and 13 November 2012 Resolution3 of the Court of Tax. Appeals (CTA) En Banc.

Th e CTA En Banc affirmed the 17 December 2010 Decision4 and 7 April 2011 Resolution5 of the CTA First Division, which in turn affirmed the 2 December 2008 Decision6 and 21 May 2009 Order7 of the Regional Trial Court of Tanauan City, Batangas, Branch 6. The trial court declared void the assessment imposed by respondent Municipality of Malvar, Batangas against petitioner Smart Communications, Inc. for its telecommunications tower for 2001 to July 2003 and directed respondent to assess petitioner only for the period starting 1 October 2003.

The Facts

Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the business of providing telecommunications services to the general public while respondent Municipality of Malvar, Batangas (Municipality) is a local government unit created by law.

In the course of its business, Smart constructed a telecommunications tower within the territorial jurisdiction of the Municipality. The construction of the tower was for the purpose of receiving and transmitting cellular communications within the covered area.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An Ordinance Regulating the Establishment of Special Projects."

On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the Mayor of the Municipality an assessment letter with a schedule of payment for the total amount of P389,950.00 for Smart’s telecommunications tower. The letter reads as follows:

This is to formally submit to your good office your schedule of payments in the Municipal Treasury of the Local Government Unit of Malvar, province of Batangas which corresponds to the tower of your company built in the premises of the municipality, to wit:

TOTAL PROJECT COST: PHP 11,000,000.00

For the Year 2001-2003

50% of 1% of the total project cost Php55,000.00

Add: 45% surcharge 24,750.00

Php79,750.00

Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00

For the year 2004

1% of the total project cost Php110,000.00

37% surcharge 40,700.00==========

Php150,700.00

TOTAL Php389,950.00

Hoping that you will give this matter your preferential attention.8

Due to the alleged arrears in the payment of the assessment, the Municipality also caused the posting of a closure notice on the telecommunications tower.

On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of the assessment and closure notice. In the same protest, Smart challenged the validity of Ordinance No. 18 on which the assessment was based.

In a letter dated 28 September 2004, the Municipality denied Smart’s protest.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas, Branch 6, an "Appeal/Petition" assailing the validity of Ordinance No. 18. The case was docketed as SP Civil Case No. 04-11-1920.

On 2 December 2008, the trial court rendered a Decision partly granting Smart’s Appeal/Petition. The trial court confined its resolution of the case to the validity of the assessment, and did not rule on the legality of Ordinance No. 18. The trial court held that the assessment covering the period from 2001 to July 2003 was void since Ordinance No. 18 was approved only on 30 July 2003. However, the trial court declared valid the assessment starting 1 October 2003, citing Article 4 of the Civil Code of the Philippines,9 in relation to the provisions of Ordinance No. 18 and Section 166 of Republic Act No. 7160 or the Local Government Code of 1991 (LGC).10 The dispositive portion of the trial court’s Decision reads:

WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment dated August 24, 2004 against petitioner is hereby declared null and void insofar as the assessment made from year 2001 to July 2003 and respondent is hereby prohibited from assessing and collecting, from petitioner, fees during the said period and the Municipal Government of Malvar, Batangas is directed to assess Smart Communications, Inc. only for the period starting October 1, 2003.

No costs.

SO ORDERED.11

The trial court denied the motion for reconsideration in its Order of 21 May 2009.

On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA AC No. 58.

On 17 December 2010, the CTA First Division denied the petition for review. The dispositive portion of the decision reads:

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the assailed Decision dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of the Regional Trial Court of Tanauan City, Batangas in SP. Civil Case No. 04-11-1920 entitled "Smart Communications, Inc. vs. Municipality of Malvar, Batangas" are AFFIRMED.

SO ORDERED.12

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for reconsideration.

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Division’s decision and resolution. The dispositive portion of the CTA En Banc’s 26 June 2012 decision reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED for lack of merit.1âwphi1

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7, 2011 are hereby AFFIRMED.

SO ORDERED.13

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Ruling of the CTA En Banc

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En Banc declared that it is a court of special jurisdiction and as such, it can take cognizance only of such matters as are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of Republic Act No. 9282, the CTA En Banc held that the CTA has exclusive appellate jurisdiction to review on appeal, decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally resolved by them in the exercise of their original or appellate jurisdiction. However, the same provision does not confer on the CTA jurisdiction to resolve cases where the constitutionality of a law or rule is challenged.

The Issues

The petition raises the following arguments:

1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the CTA En Banc should have exercised its jurisdiction and declared the Ordinance as illegal.

2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the doctrine of exhaustion of administrative remedies does not apply in [this case].

3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the respondent has no authority to impose the so-called "fees" on the basis of the void ordinance.14

The Ruling of the Court

The Court denies the petition.

On whether the CTA has jurisdiction over the present case

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart maintains that the CTA has jurisdiction over the present case considering the "unique" factual circumstances involved.

The CTA refuses to take cognizance of this case since it challenges the constitutionality of Ordinance No. 18, which is outside the province of the CTA.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No. 9282, created the Court of Tax Appeals. Section 7, paragraph (a), sub-paragraph (3)15 of the law vests the CTA with the exclusive appellate jurisdiction over "decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction."

The question now is whether the trial court resolved a local tax case in order to fall within the ambit of the CTA’s appellate jurisdiction This question, in turn, depends ultimately on whether the fees imposed under Ordinance No. 18 are in fact taxes.

Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not regulatory, but revenue-raising. Citing Philippine Airlines, Inc. v. Edu,16 Smart contends that the designation of "fees" in Ordinance No. 18 is not controlling.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government."

Consistent with this constitutional mandate, the LGC grants the taxing powers to each local government unit. Specifically, Section 142 of the LGC grants municipalities the power to levy taxes, fees, and charges not otherwise levied by provinces. Section 143 of the LGC provides for the scale of taxes on business that may be imposed by municipalities17 while Section 14718 of the same law provides for the fees and charges that may be imposed by municipalities on business and occupation.

The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against persons or property, while the term "fee" means "a charge fixed by law or ordinance for the regulation or inspection of a business or activity."19

In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance Regulating the Establishment of Special Projects," to regulate the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus, and provide for the correction, condemnation or removal of the same when found to be dangerous, defective or otherwise hazardous to the welfare of the inhabitant[s]."20 It was also envisioned to address the foreseen "environmental depredation" to be brought about by these "special projects" to the

Municipality.21 Pursuant to these objectives, the Municipality imposed fees on various structures, which included telecommunications towers.

As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus" listed therein, which included Smart’s telecommunications tower. Clearly, the purpose of the assailed Ordinance is to regulate the enumerated activities particularly related to the construction and maintenance of various structures. The fees in Ordinance No. 18 are not impositions on the building or structure itself; rather, they are impositions on the activity subject of government regulation, such as the installation and construction of the structures.22

Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the identified special projects, which included "cell sites" or telecommunications towers, the fees imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-raising. While the fees may contribute to the revenues of the Municipality, this effect is merely incidental. Thus, the fees imposed in Ordinance No. 18 are not taxes.

In Progressive Development Corporation v. Quezon City,23 the Court declared that "if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias,24 the Court reiterated that the purpose and effect of the imposition determine whether it is a tax or a fee, and that the lack of any standards for such imposition gives the presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition is properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the provisions of the ordinance. Thus, "[w]hen no police inspection, supervision, or regulation is provided, nor any standard set for the applicant to establish, or that he agrees to attain or maintain, but any and all persons engaged in the business designated, without qualification or hindrance, may come, and a license on payment of the stipulated sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is strong that the power of taxation, and not the police power, is being exercised."

Contrary to Smart’s contention, Ordinance No. 18 expressly provides for the standards which Smart must satisfy prior to the issuance of the specified permits, clearly indicating that the fees are regulatory in nature.

These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.

The following documents shall be submitted to the SB Secretary in triplicate:

a) zoning clearance

b) Vicinity Map

c) Site Plan

d) Evidence of ownership

e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or telegraph line, ERB in case of gasoline station, power plant, and other concerned national agencies

f) Conversion order from DAR is located within agricultural zone.

g) Radiation Protection Evaluation.

h) Written consent from subdivision association or the residence of the area concerned if the special projects is located within the residential zone.

i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit – Upon the expiration of 180 days and the proponents of special projects shall apply for final [development permit] and they are require[d] to submit the following:

a) evaluation from the committee where the Vice Mayor refers the special project

b) Certification that all local fees have been paid.

Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition for lack of jurisdiction. Likewise, Section 187 of the LGC,25 which outlines the procedure for questioning the constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the resolution of the issue on non-exhaustion of administrative remedies.

On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart argues that the Municipality exceeded its power to impose taxes and fees as provided in Book II, Title One, Chapter 2, Article II of the LGC. Smart maintains that the mayor’s permit fees in Ordinance No. 18 (equivalent to 1% of the project cost) are not among those expressly enumerated in the LGC.

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not appear in the enumeration of taxes under Section 143 of the LGC.

Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is empowered to impose taxes, fees and charges, not specifically enumerated in the LGC or taxed under the Tax Code or other applicable law. Section 186 of the LGC, granting local government units wide latitude in imposing fees, expressly provides:

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose.

Smart further argues that the Municipality is encroaching on the regulatory powers of the National Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act No. 7925 which provides that the National Telecommunications Commission (NTC), in the exercise of its regulatory powers, shall impose such fees and charges as may be necessary to cover reasonable costs and expenses for the regulation and supervision of the operations of telecommunications entities. Thus, Smart alleges that the regulation of telecommunications entities and all aspects of its operations is specifically lodged by law on the NTC.

To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus" within the Municipality. The fees are not imposed to regulate the administrative, technical, financial, or marketing operations of telecommunications entities, such as Smart’s; rather, to regulate the installation and maintenance of physical structures – Smart’s cell sites or telecommunications tower. The regulation of the installation and maintenance of such physical structures is an exercise of the police power of the Municipality. Clearly, the Municipality does not encroach on NTC’s regulatory powers.

The Court likewise rejects Smart’s contention that the power to fix the fees for the issuance of development permits and locational clearances is exercised by the Housing and Land Use Regulatory Board (HLURB). Suffice it to state that the HLURB itself recognizes the local government units’ power to collect fees related to land use and development. Significantly, the HLURB issued locational guidelines governing telecommunications infrastructure.1âwphi1 Guideline No. VI relates to the collection of locational clearance fees either by the HLURB or the concerned local government unit, to wit:

VI. Fees

The Housing and Land Use Regulatory Board in the performance of its functions shall collect the locational clearance fee based on the revised schedule of fees under the special use project as per Resolution No. 622, series of 1998 or by the concerned LGUs subject to EO 72.26

On whether Ordinance No. 18 is valid and constitutional

Smart contends that Ordinance No. 18 violates Sections 130(b)(3)27 and 186 of the LGC since the fees are unjust, excessive, oppressive and confiscatory. Aside from this bare allegation, Smart did not present any evidence substantiating its claims. In Victorias Milling Co., Inc. v. Municipality of Victorias,28 the Court rejected the argument that the fees imposed by respondent therein are excessive for lack of evidence supporting such claim, to wit:

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of the business made subject to imposition.

Plaintiff, has however not sufficiently proven that, taking these factors together, the license taxes are unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to insisting that the amounts levied exceed the cost of regulation and the municipality has adequate funds for the alleged purposes as evidenced by the municipality’s cash surplus for the fiscal year ending 1956.

On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality of Ordinance No. 18 in the Prayer of the Petition, without any argument or evidence to support its plea. Nowhere in the body of the Petition was this issue specifically raised and discussed. Significantly, Smart failed to cite any constitutional provision allegedly violated by respondent when it issued Ordinance No. 18.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down a law as unconstitutional, Smart has the burden to prove a clear and unequivocal breach of the Constitution, which Smart miserably failed to do. In Lawyers Against Monopoly and Poverty (LAMP) v. Secretary of Budget and Management,29 the Court held, thus:

To justify the nullification of the law or its implementation, there must be a clear and unequivocal, not a doubtful, breach of the Constitution. In case of doubt in the sufficiency of proof establishing unconstitutionality, the Court must sustain legislation because "to invalidate [a law] based on xx x baseless supposition is an affront to the wisdom not only of the legislature that passed it but also of the executive which approved it." This presumption of constitutionality can be overcome only by the clearest showing that there was indeed an infraction of the Constitution, and only when such a conclusion is reached by the required majority may the Court pronounce, in the discharge of the duty it cannot escape, that the challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

COCA-COLA BOTTLERS PHILIPPINES, INC., Petitioner, vs.CITY OF MANILA; LIBERTY M. TOLEDO, in her capacity as Officer-in-Charge (OIC), Treasurer of the City of Manila; JOSEPH SANTIAGO, in his capacity as OIC, Chief License Division of the City of Manila; REYNALDO MONTALBO, in his capacity as City Auditor of the City of Manila, Respondents.

D E C I S I O N

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to reverse and set aside the Orders1 dated December 22, 2010 and June 21, 2011, respectively, of the Regional Trial Court of Manila (RTC-Manila) in Civil Case No. 00-97081.

The factual and procedural antecedents follow:

This case springs from the Decision2 rendered by the RTC-Manila, dated September 28, 2001, in the case entitled Coca-Cola Bottlers Philippines, Inc. v. City of Manila, et al., docketed as Civil Case No. 00-97081, granting petitioner’s request for tax refund or credit assessed under Section 213 of the Revenue Code of Manila upon finding that there was double taxation in the imposition of local business taxes. The dispositive portion of said Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants to either refund or credit the tax assessed under Section 21 of the Revenue Code of Manila and paid for by plaintiff on the first quarter of year 2000 in the amount of P3,036,887.33.

The defendants City of Manila, etc. are enjoined from collecting the tax from plaintiff Coca-Cola Bottlers Phils., Inc. under Section 21 of the Revenue Code of Manila. The counterclaims [sic] of respondents is hereby DENIED for lack of merit.

Accordingly, the Injunction bond posted by petitioner is hereby CANCELLED.

SO ORDERED.4

Aggrieved by the foregoing, respondents herein appealed to the Court of Appeals via an ordinary appeal.5 On April 9, 2003, the Court of Appeals issued a Resolution dismissing respondents’ appeal on the ground that the same was improperly brought to the said Court pursuant to Section 2, Rule 50 of the Revised Rules of Court. Despite respondents’ motion for reconsideration, the Court of Appeals affirmed its decision in its Resolution dated February 28, 2005.6

On February 10, 2010, this Court promulgated a Resolution denying the Petition for Review filed by the respondents, the dispositive portion of which reads:

WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 09 April 2003 and 28 February 2005 Resolutions of the Court of Appeals in CA-G.R. CV No. 74517.

SO ORDERED.7

On May 12, 2010, the Clerk of Court of this Court issued an Entry of Judgment8 relative to the aforesaid Resolution and declared the same final and executory on March 10, 2010.

On June 3, 2010, petitioner filed with the RTC-Manila a Motion for Execution for the enforcement of the Decision dated September 28, 2001 and the issuance of the corresponding writ of execution.9 Finding merit therein, on June 11, 2010, the RTC-Manila issued an Order10 granting petitioner’s Motion for Execution and directed the Branch Clerk of Court to issue the corresponding writ of execution to satisfy the judgment.

On June 15, 2010, the Branch Clerk of Court, Branch 21 of the RTC Manila issued a Writ of Execution directing the Sheriff to cause the execution of the Decision dated September 28, 2001, disposing as follows:

NOW THEREFORE, you are hereby commanded to cause the execution of the aforesaid judgment, including payment in full of your lawful fees for the service of this writ.11

Aggrieved, respondents filed a Motion to Quash Writ of Execution. In response, petitioner filed its Opposition thereto on December 12, 2010.12

On December 22, 2010, the RTC-Manila issued an Order13 granting the Motion to Quash Writ of Execution, ruling:

Finding the motion to be prejudicial to the defendants, if implemented, and considering that the projects of the City will be hampered, the same is hereby GRANTED.

WHEREFORE, premises considered, the Motion to Quash the Writ of Execution is hereby GRANTED.

SO ORDERED.14

Herein petitioner filed a Motion for Reconsideration, but the same was denied by the RTC-Manila in its Order dated June 21, 2011, reasoning that both tax refund and tax credit involve public funds. Thus, pursuant to SC Administrative Circular No. 10-2000,15 the enforcement or satisfaction of the assailed decision may still be pursued in accordance with the rules and procedures laid down in Presidential Decree (P.D.) No. 1445, otherwise known as the Government Auditing Code of the Philippines.16

Hence, the present Petition for Review on Certiorari raising the following assignment of errors:

1. THE HONORABLE COURT A QUOSERIOUSLY ERRED WHEN IT FAILED TO CONSIDER THAT THE WRIT OF EXECUTION (FOR SPECIAL JUDGMENT) ISSUED BY THE BRANCH CLERK OF COURT DOES NOT INVOLVE THE LEVY OR GARNISHMENT OF FUNDS AND PROPERTY USED OR BEING USED FOR PUBLIC PURPOSE,ADMINISTRATIVE CIRCULAR NO. 10-2000 HAS THEREFORE NO RELEVANCE IN THIS CASE.

2. THE HONORABLE COURT A QUOSERIOUSLY ERRED WHEN IT FAILED TO CONSIDER THAT THE JUDGMENT IN THIS CASE REQUIRES EITHER TAX REFUND (PAYMENT OF SUM OF MONEY) OR TAX CREDIT (ISSUANCE OF TAX CREDIT CERTIFICATE).

3. THE HONORABLE COURT A QUOSERIOUSLY ERRED WHEN IT FAILED TO CONSIDER THAT THE DEFENDANTS HAVE BEEN ISSUING TAX CREDIT CERTIFICATES TO OTHER TAXPAYERS FOR ILLEGALLY COLLECTED TAXES EVEN WITHOUT ANY APPROPRIATE MEASURE.

4. THE HONORABLE COURT A QUOSERIOUSLY ERRED WHEN IT FAILED TO CONSIDER THAT THE REASON CITED IN THE ORDER IN QUASHING THE WRIT OF EXECUTION IS NOT ONE OF THE GROUNDS LAID DOWN BY LAW. (GUTIERREZ VS. VALIENTE, 557 SCRA 211)

5. THE HONORABLE COURT A QUOSERIOUSLY ERRED WHEN IT FAILED TO CONSIDER THAT ITS ASSAILED ORDER HAS IN EFFECT REVERSED THE JUDGMENT IN THIS CASE, THUS, DEPRIVING PETITIONER THE FRUITS OF ITS LABOR BEFORE THE COURTS.17

At the onset, it bears stressing that while petitioner lays down various grounds for the allowance of the petition, the controversy boils down to the propriety of the issuance of the writ of execution of the judgment ordering respondents either to refund or credit the tax assessed under Section 2118 of the Revenue Code of Manila in the amount of Php3,036,887.33.

After careful consideration of the facts and laws obtaining in this case, we find that the issuance of the Writ of Execution was superfluous, given the clear directive of the RTC-Manila in its Decision dated September 28, 2001. We do not, however, agree with respondents’ view that Administrative Circular No. 10-2000 is applicable to the instant case for reasons discussed hereinbelow.

In its first assigned error, petitioner argues that the writ of execution issued by the Branch Clerk of Court does not involve the levy or garnishment of funds and property used or being used for public purpose given that the writ was issued "For: Special Judgment." Thus, Administrative Circular No. 10-2000 has no relevance in the instant case.

In its Decision dated September 28,2001, the RTC-Manila directs respondents to either refund or credit the tax under Section 21 of the Revenue Code of Manila, which was improperly assessed but nevertheless paid for by petitioner on the first quarter of year 2000 in the amount of P3,036,887.33. The judgment does not actually involve a monetary award or a settlement of claim against the government.

Under the first option, any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund.19 On the other hand, the second option works by applying the refundable amount against the tax liabilities of the petitioner in the succeeding taxable years.20

Hence, instead of moving for the issuance of a writ of execution relative to the aforesaid Decision, petitioner should have merely requested for the approval of the City of Manila in implementing the tax refund or tax credit, whichever is appropriate. In other words, no writ was necessary to cause the execution thereof, since the implementation of the tax refund will effectively be a return of funds by the City of Manila in favor of petitioner while a tax credit will merely serve as a deduction of petitioner’s tax liabilities in the future.

In fact, Section 252 (c) of the Local Government Code of the Philippines is very clear that "[i]n the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability." It was not necessary for petitioner to move for the issuance of the writ of execution because the remedy has already been provided by law.

Thus, under Administrative Order No. 270 prescribing rules and regulations implementing the Local Government Code, particularly Article 286 thereof, the tax credit granted a taxpayer shall be applied to future tax obligations of the same taxpayer for the same business, to wit:

ARTICLE 286. Claim for Refund or Tax Credit. — All taxpayers entitled to a refund or tax credit provided in this Rule shall file with the local treasurer a claim in writing duly supported by evidence of payment (e.g., official receipts, tax clearance, and such other proof evidencing overpayment)within two (2) years from payment of the tax, fee, or charge. No case or proceeding shall be entertained in any court without this claim in writing, and after the expiration of two (2) years from the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or tax credit.

The tax credit granted a taxpayer shall not be refundable in cash but shall only be applied to future tax obligations of the same taxpayer for the same business. If a taxpayer has paid in full the tax due for the entire year and he shall have no other tax obligation payable to the LGU concerned during the year, his tax credits, if any, shall be applied in full during the first quarter of the next calendar year on the tax due from him for the same business of said calendar year.

Any unapplied balance of the tax credit shall be refunded in cash in the event that he terminates operation of the business involved within the locality.21

Accordingly, while we find merit in petitioner’s contention that there are two (2) ways by which respondents may satisfy the judgment of the RTC-Manila: (1) to pay the petitioner the amount of Php3,036,887.33 as tax refund; or (2) to issue a tax credit certificate in the same amount which may be credited by petitioner from its future tax liabilities due to the respondent City of Manila,22 the issuance of the Writ of Execution relative thereto was superfluous, because the judgment of the RTC-Manila can neither be considered a judgment for a specific sum of money susceptible of execution by levy or garnishment under Section 9,23 Rule 39 of the Rules of Court nor a special judgment under Section 11,24 Rule 39 thereof.

Moreover, given that Presidential Decree No. 1445 and Administrative Circular No. 10-2000 involve a settlement of a claim against a local government unit, the same finds no application in the instant case wherein no monetary award is actually awarded to petitioner but a mere return or restoration of petitioner’s money, arising from an excessive payment of tax erroneously or illegally imposed and received.

It could not have been the intention of the law to burden the taxpayer with going through the process of execution under the Rules of Civil Procedure before it may be allowed to avail its tax credit as affirmed by a court judgment. If at all, the City of Manila Local Treasury may be allowed to verify documents and information relative to the grant of the tax refund or tax credit (i.e., determine the correctness of the petitioner's returns, and the tax amount to be credited), in consonance with the ruling in San Carlos Milling Co., Inc. v. Commissioner of Internal Revenue,25which may be applied by analogy to the case at bar, to wit:

It is difficult to see by what process of ratiocination petitioner insists on the literal interpretation of the word "automatic." Such literal interpretation has been discussed and precluded by the respondent court in its decision of 23 December1991 where, as aforestated, it ruled that "once a taxpayer opts for either a refund or the automatic tax credit scheme, and signified his option in accordance with the regulation, this does not ipso facto confer on him the right to avail of the same immediately. An investigation, as a matter of procedure, is necessary to enable the Commissioner to determine the correctness of the petitioner's returns, and the tax amount to be credited.

Prior approval by the Commissioner of Internal Revenue of the tax credit under then section 86 (now section 69) of the Tax Code would appear to be the most reasonable interpretation to be given to said section. An opportunity must be given the internal revenue branch of the government to investigate and confirm the veracity of the claims of the taxpayer. The absolute freedom that petitioner seeks to automatically credit tax payments against tax liabilities for a succeeding taxable year, can easily give rise to confusion and abuse, depriving the government of authority and control over the manner by which the taxpayers credit and offset their tax liabilities, not to mention the resultant loss of revenue to the government under such a scheme.26

In its third assignment of error, petitioner postulates that the RTC Manila seriously erred when it failed to consider that the respondents have been issuing tax credit certificates to other taxpayers for illegally collected taxes even without any appropriate measure.1âwphi1

On the other hand, respondents argue that the same raises a question of fact which would entail an examination of probative value of documentary evidence which, in fact, were not introduced in the course of the trial but only as a mere attachment to the Motion for Reconsideration of petitioner.27

Petitioner’s sweeping statement cannot hold water as the factual and legal milieu of the tax refund cases submitted to the City of Manila, as well as the circumstances availing in each of those cases, vary, requiring a different action from the City of Manila. As such, the case of Asian Terminals Inc. as well as the case of Tupperware Brands Phils., Inc. and Smart Communications, Inc.,

as cited by petitioner,28 should not be compared to the instant case because it has not been proven that the factual and procedural circumstances availing therein are similar to the instant case.

For its fourth assigned error, petitioner argues that the reason cited in the Order quashing the Writ of Execution is not one of the grounds laid down by law.

Respondents aver, on the other hand, that in granting the Motion to Quash, the RTC-Manila plainly conceded that the Writ of Execution was improvidently issued as it was prejudicial to the respondents. Respondents also argue that the rule that government funds are generally exempt from execution is based on obvious considerations of public policy; thus, the primary functions and devolved public welfare services rendered by the respondent City of Manila cannot be interrupted or abandoned by the withdrawal of its meager resources from their lawful and particular purpose based on the appropriation ordinance.29

Finding that the issuance of the Writ of Execution was superfluous in the first place, this Court finds the foregoing issue inapt for discussion. Nevertheless, this Court disagrees with petitioner’s fifth contention that the assailed decision of the RTC-Manila granting the Motion to Quash the Writ of Execution has, in effect, reversed the judgment in the instant case.

What is at issue in the instant petition is merely the propriety of the enforcement of the writ of execution issued by the RTC-Manila. Clearly, this Court has already ruled upon the validity of the tax refund or the tax credit due to the petitioner and has rendered the same final and executory.

The lower court, therefore, has not effectively reversed the judgment in favor of petitioner. The court a quo’s reason for quashing the Writ of Execution was to allow the parties to enforce the judgment by complying first with the rules and procedures of P.D. No. 1445 and Administrative Circular No. 10-2000.30

WHEREFORE, premises considered, the petition is GRANTED. Accordingly, petitioner Coca-Cola Bottlers, Inc. is entitled to a tax refund or tax credit without need for a writ of execution, provided that petitioner complies with the requirements set by law for a tax refund or tax credit, whichever is applicable.

INCOME TAXATION

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner, vs.THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority of respondent, Respondents.

D E C I S I O N

PERALTA, J.:

The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and Gaming Corporation (PAGCOR) on September 13, 2013 in the case entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al.,1 which was promulgated on March 15, 2011. The Motion for Clarification essentially prays for the clarification of our Decision in the aforesaid case, as well the issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their employees, agents and any other persons or entities acting or claiming any right on BIR’s behalf, in the implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.

At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Clarification," in the session of the Court En Bancheld on November 25, 2014, the members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket number has been assigned thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant to the Resolution dated November 25,2014, the pertinent portion of which reads:

G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). – The Court Resolved to

(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary Injunction Application dated September 6, 2013 filed by PAGCOR;

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days from notice hereof. Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.

Considering that the parties havefiled their respective pleadings relative to the instant petition, and the appropriate docket fees have been duly paid by petitioner, this Court considers the instant petition submitted for resolution.

The facts are briefly summarized as follows:

On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition (With Prayer for the Issuance of a Temporary Restraining Order and/or Preliminary Injunction) seeking the declaration of nullity of Section 12 of Republic Act (R.A.)No. 93373 insofar as it amends Section 27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted from liability for corporate income tax.

On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its fallo reads:

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27(c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.

SO ORDERED.7

Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere denied by this Court in a Resolution8 dated May 31, 2011.

Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and the Resolution dated May 31, 2011, which clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR), its Contractees and Licensees." Relevant portions thereof state:

II. INCOME TAX

Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from the list of government-owned or controlled corporations (GOCCs) that are exempt from income tax. Accordingly, PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related operations, are subject to corporate income tax under the NIRC, as amended. This includes, among others:

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents’ commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations.

Income from "other related operations" includes, butis not limited to:

a) Income from licensed private casinos covered by authorities to operate issued to private operators;

b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g) Income from other necessary and related services, shows and entertainment.

PAGCOR’s other income that is not connected with the foregoing operations are likewise subject to corporate income tax under the NIRC, as amended.

PAGCOR’s contractees and licensees are entities duly authorized and licensed by PAGCOR to perform gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools. These contractees and licensees are subject to income tax under the NIRC, as amended.

III. FRANCHISE TAX

Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (5%) of the gross revenue or earnings it derives from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related operations as described above.

On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax treatment of its income from gaming operations and other related operations under RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in the Book of Entries of Judgment.10

Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and application of the aforesaid Decision, and seeking clarification with respect to the following:

1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits gaming income, pursuant to its Charter – P.D. 1869, as amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.

2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to both 5% franchise tax and income tax.

3. Whether PAGCOR’s income from operation of related services is subject to both income tax and 5% franchise tax.

4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of third parties with contractual relationship with PAGCOR in connection with the operation of casinos.11

In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability in view of the withdrawal of its tax privilege under R.A. No. 9337. However, we made no distinction as to which income is subject to corporate income tax, considering that the issue raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.

For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is classified into two: (1) income from its operations conducted under its Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of necessary and related services under Section 14(5) thereof (income from other related services). In RMC No. 33-2013, respondent further classified the aforesaid income as follows:

1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, includes, among others:

(a) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

(d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents’ commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations.

2. Income from "other related operations"includes, but is not limited to:

(a) Income from licensed private casinos covered by authorities to operate issued to private operators;

(b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;

(c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;

(d) Income from private poker operations;

(e) Income from junket operations;

(f) Income from SM demo units; and

(g) Income from other necessary and related services, shows and entertainment.12

After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain petitioner’s contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is demonstrable.

First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related services. Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitioner’sincome from operation of related services. Such income tax exemption could not have been applicable to petitioner’s income from gaming operations as it is already exempt therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions. –

x x x x

(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or

assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority.13

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most sound and logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first place. This is clear from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from its operation under the Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof whatever nature, which necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) than when it was not granted at all in the first place.

Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October 27, 1997, the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on Ways and Means to the request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax on its gaming operations when under its Charter, it is already exempted from paying the same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be reconciled in that manner.14

As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the Franchise, which shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial or national government authority;15 (2) income tax for income realized from other necessary and related services, shows and entertainment of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s tax liability on income from other related services was merely reinstated.

It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation. There is no inconsistency between the statutes; and in fact, they complement each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax treatment of petitioner’s income prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law — regardless of their dates of passage — and the special is to be considered as remaining an exception to the general.17 The rationale is:

Why a special law prevails over a general law has been put by the Court as follows: x x x x

x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature having specially considered all of the facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting a general law containing provisions repugnant to the provisions of the charter, and without making any mention of its intention to amend or modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.)18

Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law.19 However, if no provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for repeal of laws by implication is not favored.20

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioner’s tax exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the repealing clause of R.A. No. 9337.21 However, the repealing clause never mentioned petitioner’s Charter as one of the laws being repealed. On the other hand, the repeal of other special laws, namely,

Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or modified accordingly.22

When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing itstax exemption, it effectively reinstated and reiterated all of petitioner’s rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person. Thus, the extension of petitioner’s franchise under the sameterms and conditions means a continuation of its tax exempt status with respect to its income from gaming operations. Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions ofP.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial construction which will render the provision thereof operative and effective, as well as harmonious with each other.23

Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337, petitioner’s income derived from gaming operations is subject only to the five percent (5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioner’s income from operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with respect to petitioner’s income from other related services, inview of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:

Section 14. Other Conditions.

x x x x

(5) Operation of related services. — The Corporation is authorized to operate such necessary and related services, shows and entertainment. Any income that may be realized from these related services shall not be included as part of the income of the Corporation for the purpose of applying the franchise tax, but the same shall be considered as a separate income of the Corporation and shall be subject to income tax.24

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2) of P.D. 1869, which pertains to the income derived from issuing and/or granting the license to operate casinos to PAGCOR’s contractees and licensees, as well as earnings derived by PAGCOR from its own operations under the Franchise. On the other hand, the second classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR from its contractees and licensees in the latter’s operation of casinos, as well as PAGCOR’s own income from operating necessary and related services, shows and entertainment.

As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties with contractual relationship with petitioner in connection with the operation of casinos, we find no reason to rule upon the same. The resolution of the instant petition is limited to clarifying the tax treatment of petitioner’s income vis-à-visour Decision dated March 15, 2011. This Decision is not meant to expand our original Decision by delving into new issues involving petitioner’s contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore stand to benefit or bear the consequences of this resolution. For another, to answer the fourth issue raised by petitioner relative to its contractees and licensees would be downright premature and iniquitous as the same would effectively countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to corporate income tax and five percent (5%) franchise tax.1âwphi1 This unduly expands our Decision dated March 15, 2011 without due process since the imposition creates additional burden upon petitioner. Such act constitutes an overreach on the part of the respondent, which should be immediately struck down, lest grave injustice results. More, it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate income tax, is valid and constitutional. In addition, we hold that:

1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming operations, pursuant to P.D. 1869, as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;

2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and

3. Petitioner's income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from other related services.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from other related services.

DOCUMENTARY STAMP TAX/CAPITAL GAINS TAX

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent;

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

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other hand, denied the respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and individual, resident or non-resident of the Philippines, with respect to their passive investments in the Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other income derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through instructions given through electronic messages. The said instructions are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other investment in securities, the investor-clients would send electronic messages from abroad instructing HSBC to debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST) from September to December 1997 and also from January to December 1998 amounting toP19,572,992.10 and P32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total P19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total P32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA& ASSOCIATESG/F AFC Building, Alfaro St.Salcedo Village, MakatiMetro Manila

Attn: Atty. Tomas C. ToledoTax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions involving the following transactions of residents and non-residents of the Philippines with respect to their local or foreign currency accounts are subject to documentary stamp tax under Section 181 of the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual fund transfer since the funds are already in the Philippine accounts. The instructions are in the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment is against the delivery of investments purchased. The purchase of investments and the payment comprise one single transaction. DST has already been paid under Section 176 for the investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named recipient, who may be another bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested cable, and may not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that –

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part

thereof, of the face value of any such bill of exchange, or order, or Philippine equivalent of such value, if expressed in foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a foreign country but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill of exchange or order for the payment of money, which purports to draw money from a foreign country but payable in the Philippines. In the instant case, however, while the payor is residing outside the Philippines, he maintains a local and foreign currency account in the Philippines from where he will draw the money intended to pay a named recipient. The instruction or order to pay shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the meantime, such electronic instructions by the non-resident payor cannot be considered as a transaction per se considering that the same do not involve any transfer of funds from abroad or from the place where the instruction originates. Insofar as the local bank is concerned, such instruction could be considered only as a memorandum and shall be entered as such in its books of accounts. The actual debiting of the payor’s account, local or foreign currency account in the Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or foreign currency account, is not subject to DST, unless the account so maintained is a current or checking account, in which case, the issuance of the check or bank drafts is subject to the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and subject to the physical impossibility on the part of the payor to be present and prepare and sign an instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in cash. In this light, the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account and thereafter upon instruction of the non-resident depositor-payor, through an electronic message, the depository bank to debit his account and pay a named recipient shall not be subject to documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local depository bank for the account of its client residing abroad is part of its regular banking transaction which is not subject to documentary stamp tax. Neither does the receipt of funds makes the recipient subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the client once credited to his account, and which, thereafter can be disposed in the manner he wants. The payor-client’s further instruction to debit his account and pay a named recipient in the Philippines does not involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or foreign currency account in the Philippines is not subject to the documentary stamp tax under the aforementioned Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic message by non-resident payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic instruction purporting to draw funds from a local account intended to be paid to a named recipient in the Philippines is not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, this ruling shall be considered null and void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALOCommissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for the refund of the amount of P19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the amount ofP32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the two-year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered to refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of P30,360,570.75 in CTA Case No. 6009 andP16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients:

The instruction made through an electronic message by a nonresident investor-client, which is to debit his local or foreign currency account in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated in Section 181 of the Code. In this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank. The act of debiting the account is not subject to the documentary stamp tax under Section 181. Neither is the transaction subject to the documentary stamp tax under Section 180 of the same Code. These electronic message instructions cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account of the local bank, and the actual debiting of the payor’s local or foreign currency account in the Philippines is the actual transaction that should be properly entered as such.9

The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P30,360,570.75 representing erroneous payment of documentary stamp tax for the taxable year 1998.10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P16,436,395.83 representing erroneously paid documentary stamp tax for the months of September 1997 to December 1997.11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:

At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive investments in the Philippines mainly involving shares of stocks in domestic corporations. These investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should they desire to purchase shares of stock and other investments securities in the Philippines, the investor-clients send their instructions and advises via electronic messages from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency account and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed before the [CTA], were essentially orders to pay the purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering that the said tax was levied against the acceptances and payments by [HSBC] of the subject electronic messages/orders for payment. The issue of whether such electronic messages may be equated as a written document and thus be subject to tax is beside the point. As We have already stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for payment of money but on the acceptance or payment of the said bill or order. The acceptance of a bill or order is the signification by the drawee of its assent to the order of the drawer to pay a given sum of money while payment implies not only the assent to the said order of the drawer and a recognition of the drawer’s obligation to pay such aforesaid sum, but also a compliance with

such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under Section 181 is the existence of the requirement of acceptance or payment by the drawee (in this case, [HSBC]) of the order for payment of money from its investor-clients and that the said order was drawn from a foreign country and payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. In the same case, the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC] pursuant to the order made by its client-investors as embodied in the cited electronic messages, through which the herein parties’ privilege and opportunity to transact business respectively as drawee and drawers was exercised, separate and apart from the circumstances and conditions related to such acceptance and subsequent payment of the sum of money authorized by the concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-drawer relationship with its client-investor through the execution of a specific instrument which, in the case at bar, is the acceptance of the order for payment of money. The acceptance of a bill or order for payment may be done in writing by the drawee in the bill or order itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in writing in a separate instrument’ each time it debited the local or foreign currency accounts of its client-investors pursuant to the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST] therefore must be paid upon the execution of the specified instruments or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment of money sent by the client-investors through electronic messages. x x x.12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly specialized court which performs judicial functions, particularly for the review of tax cases. HSBC further argues that the Commissioner of Internal Revenue had already settled the issue on the taxability of electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for the payment of money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long standing administrative practice, respondent is not barred from questioning his own revenue ruling. Tax refunds like tax exemptions are strictly construed against the taxpayer.14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but payable in the Philippines" and that "a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer." A bill of exchange is one of two general forms of negotiable instruments under the Negotiable Instruments Law.15

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing instructions to debit their respective local or foreign currency accounts in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank." The Court favorably adopts the finding of the CTA that the electronic messages "cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred" and that the said electronic messages are "mere

memoranda" of the transaction consisting of the "actual debiting of the [investor-client-payor’s] local or foreign currency account in the Philippines" and "entered as such in the books of account of the local bank," HSBC.16

More fundamentally, the instructions given through electronic messages that are subjected to DST in these cases are not negotiable instruments as they do not comply with the requisites of negotiability under Section 1 of the Negotiable Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines, there could have been no acceptance or payment that will trigger the imposition of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998 subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST paid during the period September to December 1997 and subject of G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided: SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of any sum of money drawn or purporting to be drawn in any foreign country but payable in the Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax upon such document in the same manner as is required in this Act for the stamping of inland bills of exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp shall have been affixed thereto.18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident thereto documentary taxes for and in respect of the transaction so had or accomplished shall be paid as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the same, and at the time such act is done or transaction had:

x x x x

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippine Islands, on each two hundred pesos, or fractional part thereof, of

the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency, two centavos[.] (Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the payment of money, payable at sight or on demand, or after a specific period after sight or from a stated date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money drawn in a foreign country but payable in this country whether at sight or on demand or after a specified period after sight or from a stated date, is presented for acceptance or payment, there must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each P200 or fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939,21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for the past one hundred years.1âwphi1 The identical text and common history of Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily liable for the payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the taxable documents, instruments or papers.24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effected through the issuance of particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges and trusts, and conveyances of real property.25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was drawn abroad but payable in the Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of exchange or order for the payment of money, which has been drawn abroad but payable in the Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment for the bill of exchange or order for the payment of money which it has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money and the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him and it contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his acceptance.31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such presentment.32Presentment for acceptance is the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance.33

Presentment for acceptance is necessary only in the instances where the law requires it.34 In the instances where presentment for acceptance is not necessary, the holder of the bill of exchange can proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the purpose of demanding and obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable instrument has to be produced and shown to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or orders for the payment of money that have been drawn abroad but payable in the Philippines) that is subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for acceptance or presentment for payment, respectively. In other words, the acceptance or payment of the subject bill of exchange or order for the payment of money is done when there is presentment either for acceptance or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic messages received by HSBC from its investor-clients abroad instructing the former to debit the latter's local and foreign currency accounts and to pay the purchase price of shares of stock or investment in securities do not properly qualify as either presentment for acceptance or presentment for payment. There being neither presentment for acceptance nor presentment for payment, then there was no acceptance or payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on the part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines. Thus, there was no acceptance as the electronic messages did not constitute the written and signed manifestation of HSBC to a drawer's order to pay money. As HSBC could not have been an acceptor, then it could not have made any payment of a bill of exchange or order for the payment of money drawn abroad but payable here in the Philippines. In other words, HSBC could not have been held liable for DST under Section 230 of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing, issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus, HSBC erroneously paid DST on the said electronic messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

D E C I S I O N

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari filed by petitioner Commissioner of Internal Revenue, who seeks to nullify and set aside the September 10, 2009 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 77117. The CA had affirmed the Decision2 of the Court of Tax Appeals ordering petitioner to refund, or in the alternative, issue a tax credit certificate in favor of Pilipinas Shell Petroleum Corporation (respondent) in the amount of 1!22,101,407.64 representing the latter's erroneously paid documentary stamp tax for the taxable year 2000. Petitioner likewise assails the CA Resolution3 denying petitioner's motion for reconsideration. The antecedent facts:

Petitioner is the duly appointed Commissioner of Internal Revenue who holds office at the Bureau of Internal Revenue (BIR) National Office located at Agham Road, Diliman, Quezon City.

Respondent Pilipinas Shell Petroleum Corporation (PSPC) is a corporation organized and existing under the laws of the Philippines and was incorporated to construct, operate and maintain petroleum refineries, works, plant machinery, equipment dock and harbor facilities and auxiliary works and other facilities of all kinds and used in or in connection with the manufacture of products of all kinds which are wholly or partly derived from crude oil.

On April 27, 1999, respondent entered into a Plan of Merger with its affiliate, Shell Philippine Petroleum Corporation (SPPC), a corporation organized and existing under the laws ofthe Philippines. In the Plan of Merger, it was provided that the entire assets and liabilities of SPPC will be transferred to, and absorbed by, respondent as the surviving entity. The Securities and Exchange Commission approved the merger on July 1, 1999.

On August 10, 1999, respondent paidto the BIR documentary stamp taxes amounting to P524,316.00 on the original issuance of shares of stock of respondent issued in exchange for the surrendered SPPC shares pursuant to Section 175 of the National InternalRevenue Code of1997 (NIRC or Tax Code).

Confirming the tax-free nature of the merger between respondent and SPPC, the BIR, in a ruling4 dated October 4, 1999, ruled that pursuant to Section 40 (C)(2) and (6)(b) of the NIRC, no gain or loss shall be recognized, if, in pursuance to a planof merger or consolidation, a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock ofanother corporation which is also a party to the merger or consolidation. The BIR ruled, among others, that no gain or loss shall be recognized by the stockholders of SPPC on the exchange of their shares of stock of SPPC solely for shares of stock of respondent pursuant to the Plan of Merger.

The BIR, however, stated in said Ruling that

3. The issuance by PSPC of its own shares of stock to the shareholders of SPPC in exchange for the surrendered certificates of stock of SPPC shall be subject to the documentary stamp tax (DST) at the rate of Two Pesos (P2.00) on each Two HundredPesos (P200.00), or fractional part thereof, based on the total par value of the PSPC shares of stock issued pursuant to Section 175 of the Tax Code of 1997.

x x x x

6. The exchange of land and improvements by SPPC to PSPC for the latter’s shares of stock shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or its fair market value determined in accordance withSection 6(E) of the said Code, whichever is higher. x x x5

On May 10, 2000, respondent paid to the BIR the amount of P22,101,407.64 representing documentary stamp tax on the transfer of real property from SPPC to respondent.

Believing that it erroneously paid documentary stamp tax on its absorption of real property owned by SPPC, respondent filed with petitioner on September 18, 2000, a formal claim for refund or tax credit of the documentary stamp tax in the amount of P22,101,407.64.

There being no action by petitioner, respondent filed on May 8, 2002, a petition6 for review with the Court of Tax Appeals (CTA) in order to suspend the running of the two-year prescriptive period.

Petitioner filed an Answer7 on June 11, 2002 praying that the petition for review be dismissed for lack of merit. Petitioner asserted that in taxdeferred exchanges, documentary stamp tax is imposed. Petitioner cited BIR Ruling No. 2-20018 dated February 2, 2001 which states:

In view of all the foregoing, it is the opinion of this Office, as we hereby hold, that the tax-deferred exchange of properties of a corporation, which is a party to a merger or consolidation, solely for shares of stock in a corporation, which is also a party to the merger or consolidation, is subject to the documentary stamp tax under Section 176 if the properties to be transferred are shares of stock or even certificates of obligations, and also to the documentary stamp tax under Sec[tion] 196, if the properties to be transferred are real properties. Finally, it may be worth mentioning that the original issuance of shares of stock ofthe surviving corporation in favor of the stockholders of the absorbed corporation as a result of the merger, is subject to the documentary stamp tax under Sec[tion] 175 of the Tax Code of 1997. (BIR Ruling No. S-40-220-2000, December 21, 2000).9

In its Decision10 promulgated on April 30,2003, the CTA granted respondent’s prayer for tax refund or credit.

The CTA held that

Based on the foregoing, it is evident that the transfer of real property from the absorbed corporation to the surviving or consolidated corporation pursuant to a merger or consolidation occurs by operation of lawinasmuch as the real property is deemed transferred without further act or deed. In the case at bar, the petitioner’s theory is that DST on the transfer of real property does not apply to a "statutorymerger" where real property of the absorbed corporation is deemed automatically vested in the surviving corporation by operation of law, i.e., without any further act of deed.

x x x x

To reiterate, since the transfer of real property of SPPC to petitioner was not effected by or dependent on any voluntary act or deed of the parties to the merger, DST, therefore, should not attach to the same.

x x x x

A perusal of the above-cited provision would reveal that the DST is imposed only on all conveyances, deeds, instruments, or writings where realty sold shall be conveyed to purchaser or purchasers. Clearly, in case of merger, as in the case at bar, only by straining the imagination can the transferee be said to have "bought" or "purchased" real property from the transferor. The absorption by petitioner of real property of SPPC as an inherent legal consequence of the merger is not a sale or other conveyance of real property for a consideration in money or money’s worth.

As correctly pointed out by the petitioner, SPPC’s real property was not conveyed to or vested inpetitioner by means of any deed, instrument or writing, considering that real properties were automatically vested in petitioner without"further act or deed".There was a complete absence of any formal instrument or writing upon which DST may be imposed. Nor can the realty be said tohave been "sold" or vested in a "purchaser or purchasers" within the ordinary meanings of those terms.

x x x x

Moreover, under Revenue Memorandum Circular No. 44-86 dated December 4, 1986, which outlines the procedure in the determination and collection of stamp tax on instruments of sale or conveyance of real property, it is clear that the DST applies only if the instrument is a sale or other conveyance of real property for a consideration in money or money’s worth.

Finally, the absorption by petitioner of real property of SPPC by operation of law pursuant to the merger is part and parcel of a single and continuing transaction. Accordingly, the same should not be subject to DST as if it constituted a separate and distinct transaction.

As earlier stated, DST is in the nature of an excise tax because it is really imposed on the privilege to enter into a transaction. Its imposition, therefore, should be only once. And in a statutory merger, there is only one transaction, i.e., the issuance by the surviving corporation of its own shares of stock to the stockholdersof the absorbed corporation in exchange for the shares surrendered by the shareholders of the absorbed corporation. All other transactions which are an integral and inherent part of the merger, such as the absorption of real property, should no longer be subject to another round of DST. In other words,all the integral parts of the merger (e.g., surrender of shares inexchange for shares, transfer of assets, assumption of liabilities, etc.) should be treated as a single and continuing transaction subject only to one DST. The transfer of real property is not a transaction separate and distinct from the merger but an integral part or a mere continuation of the initial transaction which was previously consummated. Applying the same in petitioner’s case, the absorption by petitioner of real property of SPPC is not a transaction separate and distinct from the merger, wherein petitioner issued its own shares to SPPC shareholders in exchange for the latter’s shares in SPPC, the absorbed entity, but a mere continuation of the initial transaction which was previously consummated, and for which the required DST was already paid.11

On June 4, 2003, petitioner filed a petition for review with the CA. In the herein assailed Decision dated September 10, 2009, the CA dismissed the petition and affirmed the Decision of the CTA. The appellate court held that the transfer of the properties of SPPC to respondent was not in exchange for the latter’s shares of stock but is a legal consequence of the merger. The CA ruled that the actual transfer of SPPC’s real properties to respondent was not effected by or dependent upon any voluntary deed, conveyance or assignment but occurred by operation of law. The CA held that since the basis of the BIR in imposing the documentary stamp tax is not applicable to a transfer of realproperty by operation of law, PSPC erroneously paid the documentary stamp tax and is therefore, entitled to a tax refund or tax credit.

Petitioner filed a motion for reconsideration which was denied by the CA in its Resolution dated April 13, 2010.

Hence, petitioner filed the present petition on the sole ground that

THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRANSFER OF REAL PROPERTIES OF SPPC TO RESPONDENT IN EXCHANGE FOR THE LATTER’S SHARES OF STOCK IS NOT SUBJECT TO THE DST IMPOSED UNDER SECTION 196 OF THE TAX CODE.12

Petitioner points out that the mergerbetween SPPC and respondent resulted in the following: (1) the issuanceby respondent of its own shares of stock to the shareholders of SPPC in exchange for the surrendered certificates of stock of SPPC and was imposed a documentary stamp tax under Section 175 of the Tax Code in the amount ofP524,316.00; and (2) the transfer of SPPC’s real properties to respondent in exchange for the latter’s shares of stock which was imposed a documentary stamp tax under Section 196 of the Tax Code in the amount ofP22,101,407.64. Respondent claims that the documentary stamp tax imposed on the second transaction had been erroneously paid and seeks to claim a refund or tax credit in the amount of P22,101,407.64. Both the CTA and the CA held that respondent is entitled to refund or tax credit.

Petitioner insists that the transfer of SPPC’s real properties to respondent in exchange for the latter’s shares of stock is subject to documentary stamp tax. Petitioner contends that Section 196 of the Tax Code covers all transfers of real property for a valuable consideration and does not only refer to sale of realtysince it speaks of real property being "granted, assigned, transferred or otherwise conveyed."

Petitioner also claims that the subject transfer was not entirely by operation of law since the merger agreement between respondent and SPPC involves the voluntary act of the parties. Petitioner avers that it is wrong to say that no documentary stamp tax isimposable allegedly because the transfer to respondent of SPPC’s realproperties was not effected by means of any deed, instrument or writing. Petitioner contends that Section 196 of the Tax Code does not require that a particular document be executed for the transfer of real property in order to be subject to documentary stamp tax. Petitioner adds that it is enough that a conveyance of real property has been effected since documentary stamp tax is imposed not on the document alone but on the transaction. Petitioner avers that the merger between SPPC and respondent, while constituting a single transaction, gave riseto several tax incidents which, for tax purposes, should be treated individually and apart from the merger as a whole.

Lastly, petitioner argues that the enactment of Republic Act No. 924313 (RA 9243) which specifically exempts the transfers of real property in merger or consolidation from documentary stamp tax only supports further the conclusion that prior to RA9243, such transfers are subject to documentary stamp tax. Otherwise, there would have been no reason to specifically exempt such transfers from documentary stamp taxes.

Respondent in its Comment14 primarily submits that the decision sought to be reviewed is already final and executory and the petition is filed out of time.

Respondent asserts that it is a rule of statutory construction that a statute’s clauses and phrases should not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts. Respondent claims that petitioner’s interpretation that a mere grant, assignment, transferor conveyance of real property is subject to documentary stamp tax under Section 196 is erroneous since petitioner disregarded the qualifyingword "sold" which describes the kind of transfer that is contemplated as subject to documentary stamp tax. Respondent also points out that the fact that Section 196 refers to the words "sold", "purchaser" and "consideration"undoubtedly leads to the conclusion that only sales of real property are contemplated. That contrary to petitioner’s claim, documentary stamp tax is not levied on the privilege to convey real properties regardless of the manner of conveyance. Respondent emphasizes that the transaction between respondent and SPPC was not one whereby SPPC transferred its real properties to respondent in exchange for the latter’s shares of stock. SPPC and respondent did not enter into some Deed of Assignment or a Deed of Exchange whereby SPPC assigned or conveyed its real properties to respondent either for cash or in exchange for some property like shares of stock. Rather, the transaction that SPPC and respondent entered into was a merger and the transfer of the real properties of SPPC to respondent was merely a legal consequence of the merger of SPPC with respondent. Respondent, therefore,posits that since the absorption by respondent of SPPC’s real properties as a consequence of the merger is without consideration in money or money’s worth, the same is not subject to documentary stamp tax. Furthermore, respondent maintains that in a statutory merger or consolidation, real property ofthe absorbed corporation is transferred to and automatically vested in the surviving corporation purely and strictly by operation of law and not by voluntary act of the parties to the merger.

The issues presented for our resolution are as follows: (1) whether the transfer of SPPC’s real properties to respondent is subject to documentary stamp tax under Section 196 of the Tax Code; and (2) whether respondent is entitled to the refund/tax

credit inthe amount of P22,101,407.64 representing documentary stamp tax paid for the taxable year 2000 in connection with the transfer of real properties from SPPC to respondent.

Prefatorily, we first address respondent’s contention that the petition for review on certiorari was filed late.

Records show that on September 10, 2009, the CA issued the assailed decision. Petitioner filed a motion for reconsideration but the motion was denied by the CA in a Resolution dated April 13, 2010. Petitioner received notice of the Resolution on April 29, 2010 and thus had 15 days from that date or until May 14, 2010 to file its petition for review on certiorari. On June 3, 2010, the Office of the Solicitor General (OSG), representing petitioner, filed a manifestation and motion (ad cautelam) requesting for an extension of time within which to file a petition for review on certiorari. The OSG averred that petitioner forwarded the case to the OSG for representation; however, the records ofthe case, due to inadvertence and without fault of the handling lawyer, were forwarded to him only on May 26, 2010. Hence, it was impossible for him to file the petition or a motion for extension on May 14, 2010. Thereafter, the OSG filed a motion for extension dated June 10, 2010 requesting for a second extension of time to file its petition. Petitioner filed the present petition for review on certiorari on July 9, 2010.

In a Resolution15 dated July 26, 2010, this Court granted pro hac vice petitioner’s first and second motions for extension totalling 45 days from May 26, 2010. Hence, petitioner had until July 10, 2010 to file its petition for review on certiorari. Since the present petition was filed on July 9, 2010, it was filed within the 45-day extension period granted to petitioner.

We now proceed to the primordial issue of whether the transfer of SPPC’s real properties to respondent issubject to documentary stamp tax under Section 196 of the Tax Code. The pertinent provision states, to wit:

SEC. 196. Stamp Tax on Deeds of Sale and Conveyance of Real Property. – On all conveyances, deeds, instruments, or writings, other than grants, patents, or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred orotherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax,at the rates herein below prescribed based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration. (Emphasis and underscoring ours.)

As can be gleaned from the aforequoted provision, documentary stamp tax is imposed on all conveyances, deeds, instruments or writings whereby land or realty sold shall be conveyed to the purchaser or purchasers.

It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e.,that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment.16 The law must not be read in truncated parts, its provisions must beread in relation to the whole law.17 The particular words, clauses and phrases should not be studied as detached and isolated expression, but the whole and every part of the statute must be considered in fixing the meaning of any of its parts and in order to produce a harmonious whole.18

Here, we do not find merit in petitioner’s contention that Section 196 covers all transfers and conveyancesof real property for a valuable consideration. A perusal of the subject provision would clearly show it pertains only to sale transactions where real property is conveyed to a purchaser for a consideration. The phrase "granted, assigned, transferred or otherwise conveyed" is qualified by the word "sold" which means that documentary stamp tax under Section 196 is imposed on the transfer of realty by way of sale and does not apply to all conveyances of real property. Indeed, as correctly noted by the respondent, the fact that Section 196 refers to words "sold", "purchaser" and "consideration" undoubtedly leads to the conclusion that only sales of real property are contemplated therein.

Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred or otherwise conveyed" in claiming that all conveyances of real property regardless of the manner of transfer are subject to documentary stamp tax under Section 196. It is not proper to construe the meaning of a statute on the basis of one part. As we have previously explained,

A statute is passed as a whole and not in parts or sections, and is animated by one general purpose and intent. Consequently, each part or section should be construed in connection with every other part or section so as to produce a harmonious whole. It is not proper to confine its intention to the one section construed. It is always an unsafe way of construing a statute or contract to divide it by a process of etymological dissection, into separate words, and then apply to each, thus separated from the context, some particular meaning to be attached to any word or phrase usually to be ascertained from the context.19

We quote with approval the following statements of the appellate court in the assailed decision, Section 196 should be read as a whole and not phrase by phrase. The phrase granted, assigned, transferred or otherwise conveyedclearly refers to the phrase whereby any land, tenement or other realty is sold. This clearly shows that the legislature intended Section 196 to refer to a transfer of realty byvirtue of sale. This is further bolstered by the fact that the property is granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers. In addition, the basis of the stamp tax is the consideration agreed upon by the parties or the property’s fair market value. Taking all of these into consideration, it is beyond doubt that … Section 196 pertains to a transfer of realty by way of sale.20

It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent was pursuant to their approved plan of merger. In a merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation.21 Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights,privileges, and powers, as well as their liabilities.22 Here, SPPC ceasedto have any legal personality and respondent PSPC stepped into everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.

Pertinently, a merger of two corporations produces the following effects, among others:

Sec. 80. Effects of merger or consolidation. – x x x

x x x x

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporations, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or deed;…23 (Emphasis supplied.)

In a merger, the real properties are not deemed "sold" to the surviving corporation and the latter could not be considered as "purchaser" of realty since the real properties subject of the merger were merely absorbed by the surviving corporation by operation of law and these properties are deemed automatically transferred to and vestedin the surviving corporation without further act or deed. Therefore, the transfer of real properties to the surviving corporation in pursuance of a merger is not subject to documentary stamp tax. As stated at the outset, documentary stamp tax is imposed only on all conveyances, deeds, instruments or writing where realty sold shall be conveyed to a purchaser or purchasers. The transfer of SPPC’s real property to respondent was neither a sale nor was it a conveyance of real property for a consideration contracted to be paidas contemplated under Section 196 of the Tax Code. Hence, Section 196 ofthe Tax Code is inapplicable and respondent is not liable for documentary stamp tax.

In fact, as properly cited in the CTA Decision, Section 185 of Revenue Regulations No. 26, otherwise known as the documentary stamp tax regulations, provides:

Section 185. Conveyances withoutconsideration. – Conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable.

Furthermore, it should be noted that a documentary stamp tax is in the nature of an excise tax because it is imposed upon the privilege, opportunity or facility offered at exchanges for the transaction of the business.24Documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, or transfer of an obligation, right or property incident thereto.25 Documentary stamp tax is thus imposed on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto.26 Based on the foregoing, the transfer of real properties from SPPC to respondent is not subject to documentary stamp tax considering that the same was not conveyed to or vested in respondent by means of any specific deed, instrumentor writing. There was no deed of assignment and transfer separatelyexecuted by the parties for the conveyance of the real properties. The conveyance of real properties not being embodied in a separate instrumentbut is incorporated in the merger plan, thus, respondent is not liable to pay documentarystamp tax.

Notably, RA 9243, entitled "An Act Rationalizing the Provisions of the Documentary Stamp Tax of the National Internal Revenue Code of 1997" was enacted and took effect on April 27, 2004 which exempts the transfer of real property of a

corporation, which is a party to the merger or consolidation, to another corporation, which is also a party to the merger or consolidation, from the payment of documentary stamp tax.

Section 9 of the law which amends Section 199 of the NIRC states,

SECTION 9. Section 199 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:

Section 199. Documents and Papers Not Subject to Stamp Tax. – The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax:

x x x x

(m) Transfer of property pursuant to Section 40 (C)(2)27 of the National Internal Revenue Code of 1997, as amended. (Emphasis supplied.)

The enactment of the said law nowremoves any doubt and had made clear that the transfer of real properties as a consequence of merger or consolidation is not subject to documentary stamp tax.1âwphi1

Thus, we find no error on the part of the CA in affirming the Decision of the CTA which ruled that respondent is entitled to a refund or issuance of a tax credit certificate in the amount of P22,101,407.64 representing respondent’s erroneously paid documentary stamp tax on the transfer of real property from SPPC torespondent.

We reiterate the well-established doctrine that as a matter of practice and principle, this Court will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the CA. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part which is not present here.28 WHEREFORE, we DENY the petition for lack of merit. The Decision dated September 10, 2009 and Resolution dated April 13, 2010 of the Court of Appeals in CA-G.R. SP No. 77117 are hereby AFFIRMED.

No pronouncement as to costs.

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, Petitioners, v. ARLENE R. SORIANO, Respondent.

D E C I S I O N

PERALTA, J.:

Before the Court is a petition for review under Rule 45 of the Rules of Court assailing the Decision1dated November 15, 2013 and Order2 dated March 10, 2014 of the Regional Trial Court (RTC), Valenzuela City, Branch 270, in Civil Case No. 140-V-10.

The antecedent facts are as follows:

On October 20, 2010, petitioner Republic of the Philippines, represented by the Department of Public Works and Highways (DPWH), filed a Complaint3 for expropriation against respondent Arlene R. Soriano, the registered owner of a parcel of land consisting of an area of 200 square meters, situated at Gen. T. De Leon, Valenzuela City, and covered by Transfer Certificate of Title (TCT) No. V-13790.4In its Complaint, petitioner averred that pursuant to Republic Act (RA) No. 8974, otherwise known as “An Act to Facilitate the Acquisition of Right-Of-Way, Site or Location for National Government Infrastructure Projects and for other Purposes,” the property sought to be expropriated shall be used in implementing the construction of the North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur Highway, Valenzuela City.5cralawred

Petitioner duly deposited to the Acting Branch Clerk of Court the amount of P420,000.00 representing 100% of the zonal value of the subject property. Consequently, in an Order6 dated May 27, 2011, the RTC ordered the issuance of a Writ of Possession and a Writ of Expropriation for failure of respondent, or any of her representatives, to appear despite notice during the hearing called for the purpose.

In another Order7 dated June 21, 2011, the RTC appointed the following members of the Board of Commissioners for the determination of just compensation: (1) Ms. Eunice O. Josue, Officer-in-Charge, RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R. Andrade, Acting Valenzuela City Assessor, City Assessor’s Office, Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig, Valenzuela City. However, the trial court subsequently revoked the appointment of the Board for their failure to submit a report as to the fair market value of the property to assist the court in the determination of just compensation and directed the parties to submit their respective position papers.8  Thereafter, the case was set for hearing giving the parties the opportunity to present and identify all evidence in support of their arguments therein.

According to the RTC, the records of the case reveal that petitioner adduced evidence to show that the total amount deposited is just, fair, and equitable. Specifically, in its Position Paper, petitioner alleged that pursuant to a Certification issued by the Bureau of Internal Revenue (BIR), Revenue Region No. 5, the zonal value of the subject property in the amount of P2,100.00 per square meter is reasonable, fair, and just to compensate the defendant for the taking of her property in the total area of 200 square meters.9 In fact, Tax Declaration No. C-018-07994, dated November 13, 2009 submitted by petitioner, shows that the value of the subject property is at a lower rate of P400.00 per square meter. Moreover, as testified to by Associate Solicitor III Julie P. Mercurio, and as affirmed by the photographs submitted, the subject property is poorly maintained, covered by shrubs and weeds, and not concretely-paved.  It is located far from commercial or industrial developments in an area without a proper drainage system, can only be accessed through a narrow dirt road, and is surrounded by adjacent dwellings of sub-standard materials.

Accordingly, the RTC considered respondent to have waived her right to adduce evidence and to object to the evidence submitted by petitioner for her continued absence despite being given several notices to do so.

On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which reads:chanRoblesvirtualLawlibrary

WHEREFORE, with the foregoing determination of just compensation, judgment is hereby rendered:

1) Declaring plaintiff to have lawful right to acquire possession of and title to 200 square meters of defendant Arlene R. Soriano’s parcel of land covered by TCT V-13790 necessary for the construction of the NLEX – Harbor Link Project (Segment 9) from NLEX to MacArthur Highway Valenzuela City;

2) Condemning portion to the extent of 200 square meters of the above-described parcel of land including improvements thereon, if there be any, free from all liens and encumbrances;

3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square meter or the sum of Four Hundred Twenty Thousand Pesos (Php420,000.00) for the 200 square meters as fair, equitable, and just compensation with legal interest at 12% per annum from the taking of the possession of the property, subject to the payment of all unpaid real property taxes and other relevant taxes, if there be any;

4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the value of the transfer tax necessary for the transfer of the subject property from the name of the defendant to that of the plaintiff;

5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is directed to annotate this Decision in Transfer Certificate of Title No. V-13790 registered under the name of Arlene R. Soriano.

cralawlawlibrary

Let a certified true copy of this decision be recorded in the Registry of Deeds of Valenzuela City.

Records of this case show that the Land Bank Manager’s Check Nos. 0000016913 dated January 21, 2011 in the amount of Php400,000.00 and 0000017263 dated April 28, 2011 in the amount of Php20,000.00 issued by the Department of Public Works and Highways (DPWH) are already stale. Thus, the said Office is hereby directed to issue another Manager’s Check in the total amount Php420,000.00 under the name of the Office of the Clerk of Court, Regional Trial Court, Valenzuela City earmarked for the instant case.10cralawlawlibrary

Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013, the interest rate imposed by the RTC on just compensation should be lowered to 6% for the instant case falls under a loan or forbearance of money.11 In its Order12 dated March 10, 2014, the RTC reduced the interest rate to 6% per annum not on the basis of the aforementioned Circular, but on Article 2209 of the Civil Code, viz.:chanRoblesvirtualLawlibrary

However, the case of National Power Corporation v. Honorable Zain B. Angas is instructive.

In the aforementioned case law, which is similar to the instant case, the Supreme Court had the occasion to rule that it is well-settled that the aforequoted provision of Bangko Sentral ng Pilipinas Circular applies only to a loan or forbearance of money, goods or credits. However, the term “judgments” as used in Section 1 of the Usury Law and the previous Central Bank Circular

No. 416, should be interpreted to mean only judgments involving loan or forbearance of money, goods or credits, following the principle ofejusdem generis. And applying said rule on statutory construction, the general term “judgments” can refer only to judgments in cases involving loans or forbearance of any money, goods, or credits. Thus, the High Court held that, Art. 2209 of the Civil Code, and not the Central Bank Circular, is the law applicable.

Art. 2009 of the Civil Code reads:“If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.”cralawlawlibrary

Further in that case, the Supreme Court explained that the transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. It ultimately held that Art. 2209 of the Civil Code shall apply.13cralawlawlibrary

On May 12, 2014, petitioner filed the instant petition invoking the following arguments:chanRoblesvirtualLawlibrary

I.

RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER ANNUM ON THE AMOUNT OF JUST COMPENSATION OF THE SUBJECT PROPERTY AS THERE WAS NO DELAY ON THE PART OF PETITIONER.chanroblesvirtuallawlibrary

II.

BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND THE LOCAL GOVERNMENT CODE, IT IS RESPONDENT’S OBLIGATION TO PAY THE TRANSFER TAXES.cralawlawlibrary

Petitioner maintains that if property is taken for public use before compensation is deposited with the court having jurisdiction over the case, the final compensation must include interests on its just value computed from the time the property is taken up to the time when compensation is actually paid or deposited with the court.14 Thus, legal interest applies only when the property was taken prior to the deposit of payment with the court and only to the extent that there is delay in payment. In the instant case, petitioner posits that since it was able to deposit with the court the amount representing the zonal value of the property before its taking, it cannot be said to be in delay, and thus, there can be no interest due on the payment of just compensation.15  Moreover, petitioner alleges that since the entire subject property was expropriated and not merely a portion thereof, it did not suffer an impairment or decrease in value, rendering the award of consequential damages nugatory. Furthermore, petitioner claims that contrary to the RTC’s instruction, transfer taxes, in the nature of Capital Gains Tax and Documentary Stamp Tax, necessary for the transfer of the subject property from the name of the respondent to that of the petitioner are liabilities of respondent and not petitioner.

The petition is partly meritorious.

At the outset, it must be noted that the RTC’s reliance on National Power Corporation v. Angas is misplaced for the same has already been overturned by our more recent ruling in Republic v. Court of Appeals,16 wherein we held that the payment of just compensation for the expropriated property amounts to an effective forbearance on the part of the State, to wit:chanRoblesvirtualLawlibrary

Aside from this ruling, Republic notably overturned the Court’s previous ruling in National Power Corporation v. Angas which held that just compensation due for expropriated properties is not a loan or forbearance of money but indemnity for damages for the delay in payment; since the interest involved is in the nature of damages rather than earnings from loans, then Art. 2209 of the Civil Code, which fixes legal interest at 6%, shall apply.

In Republic, the Court recognized that the just compensation due to the landowners for their expropriated property amounted to an effective forbearance on the part of the State. Applying the Eastern Shipping Lines ruling, the Court fixed the applicable interest rate at 12% per annum, computed from the time the property was taken until the full amount of just compensation was paid, in order to eliminate the issue of the constant fluctuation and inflation of the value of the currency over time. In the Court’s own words:The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the zonal value of the property to be computed from the time petitioner instituted condemnation proceedings and "took" the property in September 1969. This allowance of interest on the amount found to be the value of the property as of the time of the taking computed, being an

effective forbearance, at 12% per annum should help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time.We subsequently upheld Republic’s 12% per annum interest rate on the unpaid expropriation compensation in the following cases: Reyes v. National Housing Authority, Land Bank of the Philippines v. Wycoco, Republic v. Court of Appeals, Land Bank of the Philippines v. Imperial, Philippine Ports Authority v. Rosales-Bondoc, and Curata v. Philippine Ports Authority.17cralawlawlibrary

Effectively, therefore, the debt incurred by the government on account of the taking of the property subject of an expropriation constitutes a forbearance18 which runs contrary to the trial court’s opinion that the same is in the nature of indemnity for damages calling for the application of Article 2209 of the Civil Code. Nevertheless, in line with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, Series of 2013, effective July 1, 2013, the prevailing rate of interest for loans or forbearance of money is six percent (6%) per annum, in the absence of an express contract as to such rate of interest.

Notwithstanding the foregoing, We find that the imposition of interest in this case is unwarranted in view of the fact that as evidenced by the acknowledgment receipt19 signed by the Branch Clerk of Court, petitioner was able to deposit with the trial court the amount representing the zonal value of the property before its taking. As often ruled by this Court, the award of interest is imposed in the nature of damages for delay in payment which, in effect, makes the obligation on the part of the government one of forbearance to ensure prompt payment of the value of the land and limit the opportunity loss of the owner.20  However, when there is no delay in the payment of just compensation, We have not hesitated in deleting the imposition of interest thereon for the same is justified only in cases where delay has been sufficiently established.21cralawred

The records of this case reveal that petitioner did not delay in its payment of just compensation as it had deposited the pertinent amount in full due to respondent on January 24, 2011, or four (4) months before the taking thereof, which was when the RTC ordered the issuance of a Writ of Possession and a Writ of Expropriation on May 27, 2011. The amount deposited was deemed by the trial court to be just, fair, and equitable, taking into account the well-established factors in assessing the value of land, such as its size, condition, location, tax declaration, and zonal valuation as determined by the BIR. Considering, therefore, the prompt payment by the petitioner of the full amount of just compensation as determined by the RTC, We find that the imposition of interest thereon is unjustified and should be deleted.

Similarly, the award of consequential damages should likewise be deleted in view of the fact that the entire area of the subject property is being expropriated, and not merely a portion thereof, wherein such remaining portion suffers an impairment or decrease in value, as enunciated in Republic of the Philippines v. Bank of the Philippine Islands,22 thus:chanRoblesvirtualLawlibrary

x x x  The general rule is that the just compensation to which the owner of the condemned property is entitled to is the market value. Market value is that sum of money which a person desirous but not compelled to buy, and an owner willing but not compelled to sell, would agree on as a price to be paid by the buyer and received by the seller. The general rule, however, is modified where only a part of a certain property is expropriated. In such a case, the owner is not restricted to compensation for the portion actually taken, he is also entitled to recover the consequential damage, if any, to the remaining part of the property.

x x x x

No actual taking of the building is necessary to grant consequential damages.Consequential damages are awarded if as a result of the expropriation, the remaining property of the owner suffers from an impairment or decrease in value. The rules on expropriation clearly provide a legal basis for the award of consequential damages. Section 6 of Rule 67 of the Rules of Court provides:x x x The commissioners shall assess the consequential damages to the property not taken and deduct from such consequential damages the consequential benefits to be derived by the owner from the public use or public purpose of the property taken, the operation of its franchise by the corporation or the carrying on of the business of the corporation or person taking the property. But in no case shall the consequential benefits assessed exceed the consequential damages assessed, or the owner be deprived of the actual value of his property so taken.In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:To determine just compensation, the trial court should first ascertain the market value of the property, to which should be added the consequential damages after deducting therefrom the consequential benefits which may arise from the expropriation. If the consequential benefits exceed the consequential damages, these items should be disregarded altogether as the basic value of the property should be paid in every case.23cralawredcralawlawlibrary

Considering that the subject property is being expropriated in its entirety, there is no remaining portion which may suffer an impairment or decrease in value as a result of the expropriation. Hence, the award of consequential damages is improper.

Anent petitioner’s contention that it cannot be made to pay the value of the transfer taxes in the nature of capital gains tax and documentary stamp tax, which are necessary for the transfer of the subject property from the name of the respondent to that of the petitioner, the same is partly meritorious.

With respect to the capital gains tax, We find merit in petitioner’s posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC), capital gains tax due on the sale of real property is a liability for the account of the seller, to wit:chanRoblesvirtualLawlibrary

Section 24. Income Tax Rates –

x x x x

(D) Capital Gains from Sale of Real Property. –(1) In General. – The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other disposition of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24(A)or under this Subsection, at the option of the taxpayer.chanrobleslaw

x x x xSection 56. Payment and Assessment of Income Tax for Individuals and Corporations. –(A) Payment of Tax –

x x x x

(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.cralawlawlibrary

Thus, it has been held that since capital gains is a tax on passive income, it is the seller, not the buyer, who generally would shoulder the tax.24  Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated December 18, 2013, constituted the DPWH as a withholding agent to withhold the six percent (6%) final withholding tax in the expropriation of real property for infrastructure projects.  As far as the government is concerned, therefore, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate.25cralawred

As to the documentary stamp tax, however, this Court finds inconsistent petitioner’s denial of liability to the same. Petitioner cites Section 196 of the 1997 NIRC as its basis in saying that the documentary stamp tax is the liability of the seller, viz.:chanRoblesvirtualLawlibrary

SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. - On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration:(a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed One thousand pesos (P1,000), Fifteen pesos (P15.00).

(b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00).

When it appears that the amount of the documentary stamp tax payable hereunder has been reduced by an incorrect statement of the consideration in any conveyance, deed, instrument or writing subject to such tax the Commissioner, provincial or city Treasurer, or other revenue officer shall, from the assessment rolls or other reliable source of information, assess the property of its true market value and collect the proper tax thereon.cralawlawlibrary

Yet, a perusal of the provision cited above does not explicitly impute the obligation to pay the documentary stamp tax on the seller. In fact, according to the BIR, all the parties to a transaction are primarily liable for the documentary stamp tax, as provided by Section 2 of BIR Revenue Regulations No. 9-2000, which reads:26cralawred

SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. –

(a) In General. - The documentary stamp taxes under Title VII of the Code is a tax on certain transactions. It is imposed against "the person making, signing, issuing, accepting, or transferring" the document or facility evidencing the aforesaid transactions. Thus, in general, it may be imposed on the transaction itself or upon the document underlying such act. Any of the parties thereto shall be liable for the full amount of the tax due: Provided, however, that as between themselves, the said parties may agree on who shall be liable or how they may share on the cost of the tax.

(b) Exception. - Whenever one of the parties to the taxable transaction is exempt from the tax imposed under Title VII of the Code, the other party thereto who is not exempt shall be the one directly liable for the tax.27cralawlawlibrary

As a general rule, therefore, any of the parties to a transaction shall be liable for the full amount of the documentary stamp tax due, unless they agree among themselves on who shall be liable for the same.

In this case, there is no agreement as to the party liable for the documentary stamp tax due on the sale of the land to be expropriated.  But while petitioner rejects any liability for the same, this Court must take note of petitioner’s Citizen’s Charter,28 which functions as a guide for the procedure to be taken by the DPWH in acquiring real property through expropriation under RA 8974.  The Citizen’s Charter,  issued by petitioner DPWH itself on December 4, 2013, explicitly provides that the documentary stamp tax, transfer tax, and registration fee due on the transfer of the title of land in the name of the Republic shall be shouldered by the implementing agency of the DPWH, while the capital gains tax shall be paid by the affected property owner.29 Thus, while there is no specific agreement between petitioner and respondent, petitioner’s issuance of the Citizen’s Charter serves as its notice to the public as to the procedure it shall generally take in cases of expropriation under RA 8974. Accordingly, it will be rather unjust for this Court to blindly accede to petitioner’s vague rejection of liability in the face of its issuance of the Citizen’s Charter, which contains a clear and unequivocal assumption of accountability for the documentary stamp tax. Had petitioner provided this Court with more convincing basis, apart from a mere citation of an indefinite provision of the 1997 NIRC, showing that it should be respondent-seller who shall be liable for the documentary stamp tax due on the sale of the subject property, its rejection of the payment of the same could have been sustained.

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED.  The Decision and Order, dated November 15, 2013 and March 10, 2014, respectively, of the Regional Trial Court, Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in that the imposition of interest on the payment of just compensation as well as the award of consequential damages are deleted. In addition, respondent Arlene R. Soriano is ORDERED to pay for the capital gains tax due on the transfer of the expropriated property, while the documentary stamp tax, transfer tax, and registration fee shall be for the account of petitioner.

FRANCHISE TAX

NATIONAL POWER CORPORATION, Petitioner, vs.PROVINCIAL GOVERNMENT OF BATAAN, SANGGUNIANG PANLALAWIGAN OF BATAAN, PASTOR B. VICHUACO (IN HIS OFFICIAL CAPACITY AS PROVINCIAL TREASURER OF BATAAN) and THE REGISTER OF DEEDS OF THE PROVINCE OF BATAAN, Respondents.

D E C I S I O N

ABAD, J.:

This case is about the distinction between an action contesting a local tax assessment and an action seeking to enjoin the local government from enforcing a tax assessment against a person who claims that the taxable business does not belong to him.

The Facts and the Case

On March 28, 2003 petitioner National Power Corporation (NPC) received a notice of franchise tax delinquency from the respondent Provincial Government of Bataan (the Province) for P45.9 million covering the years 2001, 2002, and 2003. The Province based its assessment on the NPC’s sale of electricity that it generated from two power plants in Bataan.

Rather than pay the tax or reject it, the NPC chose to reserve its right to contest the computation pending the decision of the Supreme Court in National Power Corporation v. City of Cabanatuan,1 a case where the issue of the NPC’s exemption from the payment of local franchise tax was then pending.

On May 12 and 14, 2003 the Province again sent notices of tax due to the NPC, calling its attention to the Court’s Decision in National Power Corporation v. City of Cabanatuan that held the NPC liable for the payment of local franchise tax. The NPC replied, however, that it had ceased to be liable for the payment of that tax after Congress enacted Republic Act (R.A.) 9136, also known as the Electric Power Industry Reform Act (EPIRA) that took effect on June 26, 2001. The new law relieved the NPC of the function of generating and supplying electricity beginning that year. Consequently, the Province has no right to further assess it for the 2001, 2002, and 2003 local franchise tax.

Ignoring the NPC’s view, the Province issued a "Warrant of Levy" on 14 real properties that it used to own in Limay, Bataan. In March 2004 the Province caused their sale at public auction with itself as the winning bidder. Shortly after, the NPC received a copy of the Certificate of Sale of Real Property covering the auctioned properties for P60,477,285.22, the amount of its franchise tax delinquency.

On July 7, 2004 the NPC filed with the Regional Trial Court (RTC) of Mariveles, Bataan, a petition for declaration of nullity of the foreclosure sale with prayer for preliminary mandatory injunction against the Province, the provincial treasurer, and the Sangguniang Panlalawigan.

The NPC alleged that the foreclosure had no legal basis since R.A. 7160 which authorized the collection of local franchise tax had been modified by the EPIRA. The latter law provided that power generation is not a public utility operation requiring a franchise, hence, not taxable. What remains subject to such tax is the business of transmission and distribution of electricity since these required a national franchise. As it happened, NPC had ceased by operation of the EPIRA in 2001 to engage in power transmission, given that all its facilities for this function, including its nationwide franchise, had been transferred to the National Transmission Corporation (TRANSCO).

Thus, the NPC asked the RTC to issue a preliminary injunction, enjoining the transfer of title and the sale of the foreclosed lands to Bataan and, after trial, to make the injunction permanent, declare NPC exempt from the local franchise tax and annul the foreclosure sale.

On November 3, 2005 the RTC dismissed the NPC’s petition, stating that the franchise tax was not based on ownership of property but on the NPC’s exercise of the privilege of doing business within Bataan. Further, the NPC presented no evidence that it had ceased to operate its power plants in that jurisdiction.

The NPC appealed the RTC Decision to the Court of Appeals (CA) but the Province moved to dismiss the same for lack of jurisdiction of that court over the subject matter of the case. The Province pointed out that, although the NPC denominated its suit before the RTC as one for declaration of nullity of foreclosure sale, it was essentially a local tax case questioning the validity of the Province’s imposition of the local franchise tax. Any appeal from the action should, therefore, be lodged with the Court of Tax Appeals (CTA). On November 27, 2007 the CA granted the Province’s motion and dismissed the petition on the ground cited.

Issue

The issue in this case is whether or not the CA erred in failing to rule that the NPC no longer owned or operated the business subject to local franchise tax and that the Province cannot execute on former NPC properties that had been taken from it and transferred to other government corporations.

Ruling of the Court

The RTC found that the NPC failed to present evidence that it no longer owned or operated the business subject to local franchise tax and that the properties the Province levied on did not belong to it. But proving these things did not require the

presentation of evidence in this case since these events took place by operation of law, particularly the EPIRA. Thus, Section 8 of the EPIRA provides:

SEC. 8. Creation of the National Transmission Company. There is hereby created a National Transmission Corporation, hereinafter referred to as TRANSCO, which shall assume the electrical transmission function of the National Power Corporation (NPC), and have the power and functions hereinafter granted. The TRANSCO shall assume the authority and responsibility of NPC for the planning, construction and centralized operation and maintenance of its high voltage transmission facilities, including grid interconnections and ancillary services.

Within six (6) months from the effectivity of this Act, the transmission and subtransmission facilities of NPC and all other assets related to transmission operations, including the nationwide franchise of NPC for the operation of the transmission system and the grid, shall be transferred to the TRANSCO. The TRANSCO shall be wholly owned by the Power Sector Assets and Liabilities Management Corporation (PSALM Corp.).

The subtransmission functions and assets shall be segregated from the transmission functions, assets and liabilities for transparency and disposal: Provided, That the subtransmission assets shall be operated and maintained by TRANSCO until their disposal to qualified distribution utilities which are in a position to take over the responsibility for operating, maintaining, upgrading, and expanding said assets. All transmission and subtransmission related liabilities of NPC shall be transferred to and assumed by the PSALM Corp.

TRANSCO shall negotiate with and thereafter transfer such functions, assets, and associated liabilities to the qualified distribution utility or utilities connected to such subtransmission facilities not later that two (2) years from the effectivity of this act or the start of open access, whichever comes earlier: x x x.

x x x x

The above created the TRANSCO and transferred to it the NPC’s electrical transmission function with effect on June 26, 2001. The NPC, therefore, ceased to operate that business in Bataan by operation of law. Since the local franchise tax is imposed on the privilege of operating a franchise, not a tax on the ownership of the transmission facilities, it is clear that such tax is not a liability of the NPC.

Nor could the Province levy on the transmission facilities to satisfy the tax assessment against the NPC since, as Section 8 above further provides, the latter ceased to own those facilities six months from the effectivity of the EPIRA. Those facilities have since belonged to TRANSCO.

The legislative emasculation of the NPC also covered its former power generation function, which was the target of the Province’s effort to collect the local franchise tax for 2001, 2002, and 2003. Section 49 of the EPIRA provides:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is hereby created a government-owned and -controlled corporation to be known as the "Power Sector Assets and Liabilities Management Corporation," hereinafter referred to as the "PSALM Corp.," which shall take ownership of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other disposable assets. All outstanding obligations of the NPC arising from loans, issuances of bonds, securities and other instruments of indebtedness shall be transferred to and assumed by the PSALM Corp. within one hundred eighty (180) days from the approval of this Act.1âwphi1

Section 49 above created the Power Sector Assets and Liabilities Management Corporation (PSALM Corp.) and transferred to it all of the NPC's "generation assets" which would include the Bataan Thermal Plant. Clearly, the NPC had ceased running its former power transmission and distribution business in Bataan by operation of law from June 26, 2001. It is, therefore, not the proper party subject to the local franchise tax for operating that business. Parenthetically, Section 49 also transferred "all existing xx x liabilities" of the NPC to PSALM Corp., presumably including its unpaid liability for local franchise tax from January 1 to June 25, 2001. Consequently, such tax is collectible solely from PSALM Corp.

An indispensable party is one who has an interest in the controversy or subject matter and in whose absence there cannot be a determination between the parties already before the court which is effective, complete or equitable.2 Here, since the subject properties belong to PSALM Corp. and TRANSCO, they are certainly indispensable parties to the case that must be necessarily included before it may properly go forward. For this reason, the proceedings below that held the NPC liable for the local franchise tax is a nullity. It did not matter where the RTC Decision was appealed, whether before the CA or the CTA.

WHEREFORE, the Court GRANTS the petition of the National Power Corporation and SETS ASIDE the Resolution of the Court of Appeals in CA-G.R. CV 87218 dated November 27, 2007. It further REMANDS the case to the Regional Trial Court so that the Power Sector Assets and Liabilities Management Corporation and the National Transmission Corporation may be impleaded as proper parties.

EXCISE TAX

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, Petitioners, vs.PHILIPPINE AIRLINES, INC., Respondent.

D E C I S I O N

VELASCO, JR., J.:

This is a Petition for Review on Certiorari under Rule 45 assailing and seeking to set aside the December 9, 2013 Decision1 and May 2, 2014 Resolution2 of the Court of Tax Appeals en bane in CTA EB No. 942 and 944, which granted the claim of respondent Philippine Airlines, Inc. (PAL) for refund of excise taxes it paid in connection with its importation in 2007 of certain items for its commissary and catering supplies.

The antecedent facts are simple and undisputed.

On June 11, 1978, PAL was granted under Presidential Decree No. 1590 (PD 1590) a franchise to operate air transport services domestically and internationally. Section 133 of the decree prescribes the tax component of PAL’s franchise. Under it, PAL, during the lifetime of its franchise, shall pay the government either basic corporate income tax or franchise tax based on revenues and/or the ratedefined in the provision, whichever is lower and the taxes thus paid under either scheme shall be inlieu of all other taxes, duties and other fees.

On January 1, 2005, Republic Act No. 9334 (RA 9334)4 took effect. Of pertinent relevance in this proceeding is its Sec. 6 which amended Sec. 131 of the 1997 National Internal Revenue Code (NIRC) to read:

SEC. 6.Section 131 of the National Internal Revenue Code of 1997, as amended, is hereby amended to read as follows:

"SEC. 131. Payment of Excise Taxes on Imported Articles.-

"(A) Persons Liable.- Excise taxes on imported articles shall be paid by the owner or importer to the Customs Officers, x x x before the release of such articles from the customs house, or by the person who is found in possession of articles which are exempt from excise taxes other than those legally entitled to exemption.

"In the case of tax-free articles brought or imported into the Philippines by persons, entities, or agencies exempt from tax which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers or recipients shall be considered the importers thereof x x x.

"The provision of any special or general law to the contrary notwithstanding, the importation of x x x cigarettes, distilled spirits, fermented liquorsand wines x x x, even if destined for tax and duty-free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due thereon.This shall apply to [said items] x x x brought directly into the duly chartered or legislated freeports x x x, and such other freeports as may hereafter be established or created by law x x x. (emphasis added.)

Pursuant to the above-quoted tax code provisions, PAL was assessed excise taxes on its February and March 2007 importation of cigarettes and alcoholic drinks for its commissary supplies used in its international flights. In due time, PAL paid the corresponding amounts, as indicated below, under protest:

BOC Official ReceiptNumber

Date of Payment Amount Paid

138110892 February 5, 2007 PhP 1,497,182

1138348761 February 26, 2007 PhP 1,525,480

138773503 March 23, 2007 PhP 1,528,196.85

PAL, thereafter, filed separate administrative claims for refund before the Bureau of Internal Revenue (BIR) for the alleged excise taxes it erroneously paid on said dates. Asthere was no appropriate action on the part of the then Commissioner of Internal Revenue (CIR) and obviously to forestall the running of the two-year prescriptive period for claiming tax refunds, PAL filed before the Court of Tax Appeals (CTA) a petition for review, docketed asCTA Case No. 7868. After the parties had submitted their respective memoranda following the joinder of issues and the formaloffer of evidence, the CTA Second Division rendered on June 22, 2012 in CTA Case No. 7868 a Decision5 finding for PAL, as petitioner, the CIR and the Commissioner of Customs (COC), as respondents, being ordered to pay PAL by way of refund the amount of PhP 4,550,858.85. The amount represented the excise taxes paid in February and March 2007, covering PAL’s importation of commissary supplies. Thefalloof the June 22, 2012 judgment reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly, respondents are hereby ORDERED TO REFUND to petitioner the amount of P4,550,858, representing petitioner’s erroneously paid excise taxes.

SO ORDERED.

Therefrom, the CIR and the COC interposed separate motions for reconsideration, both of which were, however, denied, in a consolidated Resolution6 of September 20, 2012. This prompted the CIR to elevate the matter to the CTA en bancon a petition for review, the recourse docketed as CTA EB No. 942. The COC later followed with his own petition, docketed as CTA EB No. 944. The cases werethereafter ordered consolidated.

By Decision dated December 9, 2013, the CTAen banc, with two justices dissenting, dismissed the CIR and COC’s petitions, thereby effectively affirming the judgment of the CTA Second Division. Just as its Second Division, the CTA en banc, citing an earlier case between the same parties and involving similar issues, heldin the main that the "in lieu of all taxes" clause in PAL’s franchise exempts it from excise tax, an exemption that, contrary to petitioners’ unyielding posture, has not been withdrawn by Congress when it enacted RA9334. Pushing the point, the tax court stated that Sec. 6 of RA 9334, as couched, cannot be construed as an express repeal of the "in lieu of all taxes" exemption granted under PAL’s franchise, because said Sec. 6, despite its "the provisions of any special law or general law to the contrary notwithstanding" proviso, has failed to specifically refer to Sec. 13 of PD 1590 as one of the key provisions intended to be repealed.

Anent PAL’s entitlement to the exemption claimed, and consequently the refund, the CTA took note of the following issuances:

1. Section 227 of RA 9337, which took effect on July 1, 2005, abolished the franchise tax under PAL’s and other domestic airlines’ charter and subjected them to corporate income tax and value-added tax. Nevertheless, the same section provides that PAL shall remain exempt from any taxes, duties, royalties, etc., as may be provided in PD 1590.

2. Philippine Air Lines, Inc. v. Commissioner of Internal Revenue,8 in which the Court has recognized the applicability of the exemption granted to PAL under its charter and necessarily its right to a refund, when appropriate.

Still dissatisfied, petitioners separately sought reconsideration, but the CTA en banc, in its May 2, 2014 Resolution, denied the motions, with the same adverted justices reiterating their dissent. Hence, this petition, on this core issue: whether or not PAL’s importations of alcohol and tobacco products for its commissary supplies are subject to excise tax.

Petitioners, as to be expected, would dispose of the query in the affirmative, on the contention that PAL’s tax exemption it heretofore enjoyed under Sec. 13 of its franchise had been revoked by Congress when, via RA 9334, it amended Sec. 131 of the NIRC, which, as earlier recited, subjects the importation of cigars, cigarettes, distilled spirits and wines to all applicable taxes inclusive of excise tax "the provision of any special or general law to the contrary notwithstanding."

On the other hand, PAL, citing at every turn the assailed CTA ruling, contends that its exemption from excise tax, as provided in its franchise under PD 1590, has not been withdrawn by the NIRC of 1997, as amended by RA 9334. And on the postulate thatRA 9334 partakes the nature of a general law which could not have plausibly repealed a special law, e.g., PD 1590, PAL would draw attention to Sec. 24 of PD 1590 providing how its franchise or any of its provisionsmay be modified or amended:

SECTION 24. This franchise, as amended, or any section or provision hereof may only be modified, amended or repealed expressly by a special law or decreethat shall specifically modify, amend or repeal this franchise or any section of provisions. (emphasis added)

The petition lacks merit.

It is a basic principle of statutory construction that a later law, general in terms and not expressly repealing or amending a prior special law, will not ordinarily affect the special provisions of such earlier statute.9 So it must be here.

Indeed, as things stand, PD 1590 has not been revoked by the NIRC of 1997, as amended. Or to be more precise, the tax privilege of PAL provided in Sec. 13 of PD 1590 has not been revoked by Sec. 131 of the NIRC of 1997, as amended by Sec. 6 of RA 9334. We said as much in Commissioner of Internal Revenue v. Philippine Air Lines, Inc:

That the Legislature chose not toamend or repeal [PD] 1590 even after PAL was privatized reveals the intent of the Legislature to let PAL continue to enjoy, as a private corporation, the very same rights and privileges under the terms and conditions stated in said charter.10 x x x To be sure, the manner to effectively repeal or at least modify any specific provision of PAL’s franchise under PD 1590, as decreed in the aforequoted Sec. 24, has not been demonstrated. And as aptly held by the CTA en banc, borrowing from the same Commissioner of Internal Revenue case:

While it is true that Sec. 6 of RA9334 as previously quoted states that "the provisions of any special orgeneral law to the contrary notwithstanding,"such phrase left alone cannot be considered as an express repeal of the exemptions granted under PAL’s franchise because it fails to specifically identify PD 1590 as one of the acts intended to be repealed. x x x

Noteworthy is the fact that PD 1590 is a special law, which governs the franchise of PAL. Between the provisions under PD 1590 as against the provisions under the NIRC of 1997, as amended by 9334, which is a general law, the former necessary prevails. This is in accordance with the rule that on a specific matter, the special law shall prevail over the general law, which shall be resorted only to supply deficiencies in the former. In addition, where there are two statutes, the earlier special and the later general – the terms of the general broad enough to include the matter provided for in the special – the fact that one is special and other general creates a presumption that the special is considered as remaining an exception tothe general, one as a general law of the land and the other as the law of a particular case.11

Any lingering doubt, however, as tothe continued entitlement of PAL under Sec. 13 of its franchise to excisetax exemption on otherwise taxable items contemplated therein, e.g., aviation gas, wine, liquor or cigarettes, should once and for all be put to restby the fairly recent pronouncement in Philippine Airlines, Inc. v. Commissioner of Internal Revenue.12 In that case, the Court, on the premise that the "propriety of a tax refund is hinged on the kind of exemption which forms its basis,"13 declared in no uncertain terms that PAL has "sufficiently prove[d]" its entitlement to a tax refund of the excise taxes and that PAL’s payment of either the franchise tax or basic corporate income tax in the amount fixed thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes on all importations of commissary and catering supplies, subject to the condition of their availability and eventual use. The Court wrote in thatparticular case involving PAL’s claim for refund of the excise taxes imposed on its purchase from Caltex (Phils.), Inc. of imported aviation fuel for domestic operations, thus:

In this case, PAL’s franchise grants it an exemption from both direct and indirect taxes on its purchase of petroleum products.1âwphi1 Section 13 thereof reads:

SEC. 13. In consideration of the franchise and rights hereby granted, the grantee [PAL] shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee’s annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or nontransport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shall bein lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected x x x, now or in the future, including but not limitedto the following:

1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or passed on the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other activities incidental thereto;

2. All taxes, including compensating taxes, duties, charges, royalties, or fees dueon all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and transport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price;

x x x x

Based on the above-cited provision, PAL’s payment of either the basic corporate income tax or franchise tax, whichever is lower, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax. The phrase "in lieu of all other taxes" includes but is not limited to taxes that are "directly due from or imposable upon the purchaser orthe seller, producer, manufacturer, or importer of said petroleum products butare billed or passed on the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement." In other words, in view of PAL’s payment of either the basic corporate income tax or franchise tax, whichever is lower, PAL is exempt from paying: (a) taxes directly due from or imposable upon it as the purchaser of the subjectpetroleum products; and (b) the cost of the taxes billed or passed on to it by the seller, producer, manufacturer, or importer of the said products either as part of the purchase price or by mutual agreement or other arrangement. Therefore, given the foregoing direct and indirect tax exemptionsunder its franchise, and applying the principles as above-discussed, PAL is endowed with the legal standing to file the subject tax refund claim, notwithstanding the fact that it is not the statutory taxpayer as contemplated by law.14 (emphasis ours)

Petitioners, in a bid to foil PAL’s instant claim for refund, has raised as a corollary sub-issue the question of PAL’s non-compliance with the conditions particularly set by Sec. 13 of PD 1509 for the imported supplies to be exempt from excisetax. These conditions are: (1) such supplies are imported for the use of the franchisee in its transport/non-transport operations and other incidental activities; and (2) they are not locally available in reasonable quantity, quality and price. Suffice it to state in this regard that the question thus raised is one of fact, the determination of which is best left to the CTA, it being a highly specialized body that reviews tax cases.15Without a showing that the CTA’s findings are unsupported by substantial evidence, the findingsthereof are binding on the Court.16

This being the case, We find no cogent reason to disturb for the nonce the finding of the CTA en banc, affirmatory of that of its Second Division.

In all then, PAL has presented in context a clear statutory basis for its refund claim of excise tax, a claim predicated on a statutory grant of exemption from that forced exaction. It thus behooves the government to refund what it erroneously collected. To borrow from CIR v. Fortune Tobacco Corporation,17 if the state expects taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against the same standard in refunding erroneous exactions and payment of such taxes.

WHEREFORE, the instant Petition for Review is DENIED. The assailed Decision of the Court of Tax Appeals en bane dated December 9, 2013 and its Resolution dated May 2, 2014 are hereby AFFIRMED.

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs.COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

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

G.R. Nos. 136328-29

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.FORTUNE TOBACCO CORPORATION, Respondent.

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

G.R. No. 144942

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.LA SUERTE CIGAR & CIGARETTE FACTORY, Respondent.

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

G.R. No. 148605

STERLING TOBACCO CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 158197

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 165499

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

LEONEN, J.:

These cases involve the taxability of stemmed leaf tobacco imported and locally purchased by cigarette manufacturers for use as raw material in the manufacture of their cigarettes. Under the National Internal Revenue Code of 1997 (1997 NIRC), before it was amended on December 19, 2012 through Republic Act No. 103511 (Sin Tax Law), stemmed leaf tobacco is subject to an excise tax of P0.75 for each kilogram thereof.2 The 1997 NIRC further provides that stemmed leaf tobacco - "leaf tobacco which has had the stem or midrib removed"3 - "may be sold in bulk as raw material by one manufacturer directly to another without payment of the tax, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance."4

This is a consolidation of six petitions for review of several decisions of the Court of Appeals, involving three cigarette manufacturers and the Commissioner of Internal Revenue. G.R. No. 125346 is anal5 from the Court of Appeals (Sixth Division) that rever LEONEN, LEONEN, sed6 the Court of Tax Appeals' decision7 and held petitioner La Suerte Cigar & Cigarette Factory (La Suerte) liable for deficiency specific tax on its purchase of imported and locally produced stemmed leaf tobacco and sale of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation (AATC) during the period from January 1, 1986 to June 30, 1989. GR. Nos. 136328-29 is an appeal8 by the Commissioner of Internal Revenue (Commissioner) from the decision9 of the Court of Appeals that affirmed the Court of Tax Appeals' rulings10 that Fortune Tobacco Corporation (Fortune) was not obliged to pay the excise tax on its importations of stemmed leaf tobacco for the periods from January 1, 1986 to June 30, 1989 and July 1, 1989 to November 30, 1990. In G.R. No. 148605, Sterling Tobacco Corporation (Sterling) appeals11 the decision12 of the Court of Appeals that reversed the Court of Tax Appeals’ decision13 and held it liable to pay deficiency excise

taxes on its importation and local purchases of stemmed leaf tobacco from November 1986 to June 24, 1989. G.R. No. 144942is an appeal14 from the Court of Appeals’ decision15 that affirmed the Court of Tax Appeals’ decision16 and ordered the refund of specific taxes paid by La Suerte on its importation of stemmed leaf tobacco in April 1995. In G.R. No. 158197, La Suerte sought to appeal17the decision18 of the Court of Appeals holding it liable for deficiency specific tax on its local and imported purchases of stemmed leaf tobacco and those it sold for the period from June 21, 1989 to November 20, 1990. Finally, in G.R. No. 165499, La Suerte again sought to appeal by certiorari19 the decision20 of the Court of Appeals reversing the Court of Tax Appeals and holding it liable for deficiency specific tax on its importation of stemmed leaf tobacco in March 1995.

Factual background

Overview of cigarette manufacturing

The primary component of cigarettes is tobacco, a processed product derived from the leaves of the plants in the genus Nicotiana.21 Most cigarettes contain a mixture or blend of several types of tobacco from a variety of sources.

The tobacco types grown in the Philippines are: Virginia (or ‘fluecured’),22 which accounts for 59.35% of tobacco production, Burley (or ‘bright air-cured’),23 which makes up 22.21%, and the Native (or ‘dark air-cured),24 which makes up the remaining 18.44%.25 "[T]he ‘native’ type is normally categorized into three: cigar filler type, wrapper type and chewing type, or . . . ‘Batek’ tobacco."26 Virginia and Burley, considered as the aromatic type, are intended for cigarette manufacturing.

Growing and harvesting

"Tobacco seeds undergo a process of germination, which takes about 7 to 10 days, depending on the tobacco varieties. . . . The tobacco seedlings are then sown in cold frames or hotbedsto prevent attacks from insects, and then transplanted into the fields"27 after 45 to 65 days.28 Harvesting begins 55 to 60 days after transplanting.29 A farmer carries out either priming(leaf by leaf) or stalk harvesting (by the whole plant).30

Curing

"After harvest, tobacco is stored for curing, which allows for the slow oxidation and degradation of carotenoids. This allows for the leaves to take on properties that are usually attributed to the ‘smoothness’ of the smoke."31

"Curing methods vary with the type of tobacco grown. The tobacco barn design varies accordingly."32 There are two main ways of curing tobacco in the Philippine setting:

1) Air-curing (for Burley and Native tobacco) "is carried out by hanging the tobacco in well-ventilated barns, where the tobacco is allowed to dry over a period of 4 to 8 weeks. Air-cured tobacco is generally low in sugar content, which gives the tobacco smoke a light, smooth, semi-sweet flavor. These tobacco leaves usually have a high nicotine content[;]"33 and

2) Flue-curing (for Virginia tobacco) process "starts by the sticking of tobacco leaves, which are then hung from tier-poles in curing barns. The procedure will generally take about a week. Fluecured tobacco generally produces cigarette tobacco, which usually has a high content of sugar, with medium to high levels of nicotine."34

Once cured, the leaves are sorted into grades based on size, color, and quality, and packed in standard bales.35The bales are then moved to accredited trading centers where they are purchased by leaf buyers such as wholesale tobacco dealers and exporters or cigarette manufacturing companies.36

Redrying and aging

After purchase, leaf tobacco is re-dried and then added with moisture to make the tobacco pliable enough to remove its large stems.37 The leaves are stripped or de-stemmed, eitherby hand or machine, cleaned and compressed into boxes or porous wooden vats called hogsheads, and aged.38 Thereafter, the leaves are either exported or used for the manufacture of cigarettes, cigars, and other tobacco products.

Primary processing39

In the cigarette factory, the tobacco leaves undergo a conditioning process where "high temperatures and humidity restore moisture to suitable levels for cutting and blending tobacco and completing the cigarette-making process."40

"[T]obaccos are precisely cut and blended according to . . . formulas, or recipes, to produce tobaccos for various brands of cigarettes. These brand recipes include ingredients and flavors that are added to the tobacco to give each brand its unique characteristics."41

Cigarette making and packing42

"The blended tobacco — often referred to as "filler" or "cut-filler" — . . . is delivered by a pneumatic feed system to cigarette making machines . . . within the factory."43 The machine disperses the shredded tobacco over a continuous roll of cigarette paper and cuts the paper to the desired length. The completed cigarettes are subsequently packed, sealed, and placed in cartons.

Cigarette manufacturers

La Suerte Cigar & Cigarette Factory (La Suerte),44 Fortune Tobacco Corporation (Fortune),45 and Sterling Tobacco Corporation (Sterling)46 are domestic corporations engaged in the production and manufacture of cigars and cigarettes. These companies import leaf tobacco from foreign sources and purchase locally produced leaf tobacco to be used in the manufacture of cigars and cigarettes.47

The transactions of these cigarette manufacturers pertinent to these consolidated cases are the following:

1. La Suerte’s local purchases, importations, and sale of stemmed leaf tobacco from January 1, 1986 to June 30, 1989 (G.R. No. 125346), and from June 1989 to November 1990 (G.R. No. 158197), and importations in March 1995 (G.R. No. 165499) and April 1995 (G.R. No. 144942); 2. Fortune’s importation of tobacco strips from January 1, 1986 to June 30, 1989, and from July 1, 1989 to November 30, 1990 (G.R. Nos. 136328–29); and

3. Sterling’s importations and local purchases of stemmed leaf tobacco from November 1986 to June 24, 1989 (G.R. No. 148605).

History of applicable tax provisions

The first tax code came into existence in 1939 with the enactment of Commonwealth Act No. 46648 (1939 Code). Section 136 of the 1939 Code imposed specific (excise) taxes on manufactured products of tobacco, but excluded cigars and cigarettes, which were subject to tax under a different section.49 Section 136 provided thus:

SECTION 136. Specific Tax on Products of Tobacco. – On manufactured products of tobacco, except cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for consumption in any other manner, but including all other tobacco twisted by hand or reduced into a condition to be consumed in any manner other than by the ordinary mode of drying and curing; and on all tobacco prepared or partially prepared for sale or consumption, even if prepared without the use of any machine or instrument and without being pressed or sweetened; and on all fine-cut shorts and refuse, scraps, clippings, cuttings, and sweepings of tobacco, there shall be collected on each kilogram, sixty centavos.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, forty-eight centavos. (Emphasis supplied)

Section 132 of the 1939 Code, however, by way of exception, provided that "stemmed leaf tobacco . . . may be sold in bulk as raw material by one manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax." Section 132 stated:

SECTION 132. Removal of Tobacco Products Without Prepayment of Tax. – Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditionsas may be prescribed in the regulations of the Department of Finance; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings and sweepings of tobacco may be sold in bulk as raw material byone manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax.

"Stemmed leaf tobacco," as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco. (Emphasis supplied)

On September 29, 1954, upon the recommendation of then Acting Collector of Internal Revenue J. Antonio Araneta, the Department of Finance promulgated Revenue Regulations No. V-39 (RR No. V-39), or "The Tobacco Products Regulations," relative to "the enforcement of the provisions of Title IV of the [1939 Tax Code] in so far as they affect the manufacture or importation of, and the collection and payment of the specific tax on, manufactured tobacco or products of tobacco."50 Section 20(a) of RR No. V-39, which lays the rules for tax exemption on tobacco products, states:

SECTION 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes. — (a) Sale of stemmed leaf tobacco, etc., by one factory to another. — Subject to the limitations herein established, products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use;and stemmed leaf tobacco, finecut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of specific tax.

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or partially manufactured tobacco or other refuse of tobacco may be transferred from one factory to another under an official L-7 in voice on which shall be entered the exact weight of the tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the page of removals.

Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under heading "Refuse, etc., received from other factory," showing the date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, and the weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another. (Emphasis supplied)

Sections 10 and 11 of RR No. V-39 enumerate and describe the record books to be kept and used by manufacturers of tobacco products, viz:

SECTION 10. (a) Register, auxiliary, and stamps requisition books for manufacturers. — The Collector of Internal Revenue shall from time to time supply provincial revenue agents or the Chief of the Tobacco Tax Section with the necessary number of manufacturers official register books and official auxiliary register booksas may be required in each locality by manufacturers of tobacco products. Whenever any manufacturer shall have qualified himself as such by executing a proper bond, registering his factory, and paying the privilege tax and shall have complied with all the requirements ofengaging in such business contained in the National Internal Revenue Code and in these regulations, the internal revenue agent within whose district the factory is located shall deliver to said manufacturer the necessary official register books and auxiliary register books. These books consist of the following:

B.I.R. No. 31.09—Official RegisterBook, A-3 for manufacturers of chewing and smoking tobacco. B.I.R. No. 31.10—Manufactured tobacco (Transcript sheet of above).

B.I.R. No. 31.18—Official Register Book, A-4, for manufacturers of cigar.

B.I.R. No. 31.19—(Transcriptsheet of the above).

B.I.R. No. 31.27—Official Register Book, A-5, for Manufacturers of cigarettes.

B.I.R. No. 31.28—(Transcript sheet of above).

B.I.R. No. 31.01—Official Register Book, L-7, record of raw materials for manufacturers of any class of tobacco products.

B.I.R. No. 31.02—(Transcript sheet of above)[.]

B.I.R. No. 31.46—Auxiliary Register Book, L-7-1/2, bale book, for manufacturers of any class of tobacco products.

B.I.R. No. 31.47—(Transcript sheet of above).

B.I.R. No. 31.12—Stamp requisition book, for manufacturers of manufactured tobacco.

B.I.R. No. 31.21—Stamp requisition book, for manufacturers of cigars.

B.I.R. No. 31.30—Stamp requisition book, for manufacturers of cigarettes.

B.I.R. No. 31.05—L-7 Official Invoice Book for, use in connection with L-7 register book.

B.I.R. No. 31.05—L-7-1/2 OfficialInvoice Book, for use in connection with L-7-1/2 bale book.

(b) General nature of official register and auxiliary register books.— The L-7 official register book isthe record of all raw materials used in the manufacture of tobacco products of all description in the factory.It is the primary record of the internal operations of the factory. It shows the raw materials used in the manufacture and the articles actually manufactured or produced. The Schedule A register books are the record of the articles actually manufactured or produced, and transferred from the credit side of the official register book, L-7. They show the amount of taxes paid and the name of the person to whom the finished products is consigned or sold when leaving the factory. The bale book[,] L-7-1/2, is an auxiliary to the L-7 official register book.

All official register books and other official records herein required of manufacturers shall be kept in the factory premises, or in the factory warehouse, in the case of bale books, and open to inspection by any internal revenue officer at all times of the day or night.

. . . .

SECTION 11. Entries to be made in the official register and auxiliary register books; monthly transcripts.— (a) Official bale book (L-7-1/2). All leaf tobacco received in any factory or factory warehouse shall be debited, and any removal of tobacco from the factory shall be credited in the official bale book; except cuttings, clippings, sweepings, and other partially manufactured tobacco, which shall be credited in the L-7 register book.

The Collector of Internal Revenue may in his discretion waive the requirements of keeping an official bale book by small factories.

(b) The Official Register Book (L-7).— One L-7 books shall suffice for each manufacturer of tobacco products, regardless of the classes of tobacco manufactured by him.All loose leaf tobacco received in the factory proper and all bales of leaf tobacco which are opened in the factory for use in the manufacture of tobacco products shall be entered in the L-7 official register book under the heading "Received from Dealers" at the net weights. In the column headed "Name["] and "Address" shall be shown the words "Transferred from tobacco factory warehouse". All leaf tobacco received into a factory must be entered in the official bale book pertaining to the factory and bales of leaf tobacco shall not be taken up in the L-7 register book until said bales are transferred for use and credited in the official bale book. While leaf tobacco must be taken in the official bale book, this is done for statistical purposes only. As soon asit enters the factory for use in manufacture it should be taken up in the L-7 register book and credited in the official bale book.

All removals of waste of tobacco, whether transferred to other factories, removed for agricultural orindustrial purposes, or destroyed on the premises or elsewhere, shall be entered in the official register book, L-7, under the heading "Raw Materials Removed", showing all information required therein. (Emphasis supplied)

Section 2 of RR No. V-39 broadly defined "manufactured products of tobacco" and "manufacturer of tobacco products" as follows:

Section 2. Definition of terms. — When used in there [sic] regulations, the following terms shall begiven the interpretations indicated in their respective definitions given below, except where the context indicates otherwise:

(a) "Manufactured products of tobacco" shall include cigars, cigarettes, smoking tobacco, chewing, snuff, and all other forms of manufactured and partially manufactured tobacco, as defined in section 194 (M)51 of the National Internal Revenue Code.

(b) "Manufacturer of tobacco products" shall include all persons engaged in the manufacture of any of the forms of tobacco mentioned in the next preceding paragraph.

In 1967, the Secretary of Finance promulgated Revenue Regulations No. 17-67 (RR No. 17-67), as amended,52or the "Tobacco Revenue Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and Other Tobacco Products; Grading, Classification, Inspection, Shipments, Exportation, Importation and the Manufacturers thereof under the provisions of Act No. 2613, as amended." Section 2(i) of RR No. 17-67 defined a "manufacturer of tobacco" and included in the definition one who prepares partially manufactured tobacco. Section 2(m) defined "partially manufactured tobacco" as including stemmed leaf tobacco. Thus, Sections 2(i) and (m) read:

(i) "Manufacturer of tobacco" — Includes every person whose business it is to manufacture tobacco o[r] snuff or who employs others to manufacture tobacco or snuff, whether such manufacture be by cutting, pressing (not baling), grinding, or rubbing (grating) any raw or leaf tobacco, or otherwise preparing raw or leaf tobacco, or manufactured or partially manufactured tobacco and snuff, or putting up for consumption scraps, refuse, or stems of tobacco resulting from any process of handling tobacco stems, scraps, clippings, or waste by sifting, twisting, screening or by any other process.

. . . .

(m) "Partially manufactured tobacco" — Includes:

(1) "Stemmed leaf" — handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust.

(2) "Long-filler" — handstripped tobacco of good, long pieces of broken leaf usableas filler for cigars without further preparation, and free from mold, dust stems and cigar cuttings.

(3) "Short-filler" — handstripped or machine-stripped tobacco, clean, good, short pieces of broken leaf, which will not pass through a screen of two inches (2") mesh.

(4) "Cigar-cuttings" — clean cuttings or clippings from cigars, unsized with any other form of tobacco.

(5) "Machine-scrap tobacco"— machine-threshed, clean, good tobacco, not included in any of the above terms, usable in the manufacture of tobacco products.

(6) "Stems" — midribs of leaftobacco removed from the whole leaf or broken leaf either by hand or machine.

(7) "Waste tobacco" — denatured tobacco; powder or dust, refuse, unfit for human consumption; discarded materials in the manufacture of tobacco products, which may include stems.

Section 3 of RR No. 17-67 classifiedentities that dealt with tobacco according to the type of permit that the Bureau of Internal Revenue issued to each entity. Under this classification, wholesale leaf tobacco dealers were considered L-3 permittees. Those (referring to wholesale leaf tobacco dealers) that reprocess partially manufactured tobacco for export, for themselves, and/or for other L-6 or L-7 permittees were considered L-6 permittees. Manufacturers of tobacco products such as cigarette manufacturers were considered L-7 permittees. Section 3 of RR No. 17-67 reads:

(a) L-3 — Wholesale leaf tobacco dealer.

(b) L-3F — Wholesale leaf tobacco dealer. Issued only in favor of Farmer's Cooperative Marketing Association (FaCoMas) duly organized in accordance with law. [This function relative to tobacco trading was transferred to the Philippine Virginia Tobacco Administration (PVTA) under Section 15 of Republic Act No. 2265].

(c) L-3R — Wholesale leaf tobacco dealers. Issued only in favor of persons or entities having fully equipped Redrying Plants.

(d) L-3-1/4 — Buyers for wholesale leaf tobacco dealers.

(e) L-4 — Wholesale leaf tobacco dealers. Issued only in favor of persons or entities having flue-curing barns, who may purchase or receive green Virginia leaf tobacco from bona fide tobacco planters only, or handle green leaf of their own production, which tobacco shall be sold or transferred only to holders of L-3 and L-3R permits after flue-curing the tobacco.

(f) L-5 — Tobacco planters selling to consumers part or the whole of their tobacco production. (g) L-6 — Wholesale leaf tobacco dealers who, exclusively for export, except as otherwise provided for in these regulations, perform the following functions:

(1) Handstripped and/or threshwhole leaf tobacco for themselves or for other L-6 or L-7 permittees;

(2) Re-process partially manufactured tobacco for themselves, or for other L-6 or L-7 permittees; (3) Sell their partially manufactured tobacco to other L-6 permittees.

(h) L-7 — Manufacturers of tobacco products. [L-7 1/2 designates an auxiliary registered book (bale books), for manufacturers of tobacco products.]

(i) B-14 — Wholesale leaf tobaccodealers (Privilege tax receipt)

(j) B-14 (a) — Retail leaf tobacco dealers (Privilege tax receipt)

La Suerte contends that on December 12, 1972, then Internal Revenue Commissioner Misael P. Vera issued a ruling which declared that:

. . . . The subsequent sale or transfer by the L-6/L-3R permittee for export or to an L-7-1/2 for use in the manufacture of cigars or cigarettes may also be allowed without the prepayment of the specific tax.53

Almost 40 years from the enactment of the 1939 Tax Code, Presidential Decree No. 1158-A, otherwise known as the "National Internal Revenue Code of 1977," was promulgated on June 3, 1977, to consolidate and integrate the various tax laws which have so far amended or repealed the provisions found in the 1939 Tax Code. Section 132 was renumbered as Section 144, and Section 136 as Section 148. Sections 144 and 148, read:

SEC. 144. Removal of tobacco products without prepayment of tax.—Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Department of Finance, and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cuts chewing tobacco, re-refuse, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax. "Stemmed leaf tobacco", as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco.

. . . .

SEC. 148. Specific tax on products of tobacco.—On manufactured products of tobacco, except cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for consumption in any other manner, but including all other tobacco twisted by hand or reduced into a condition to be consumed in any manner other than by the ordinary mode of drying and curing; and on all tobacco prepared orpartially prepared for sale or consumption, even if prepared without the use of any machine or instrument and without being pressed or sweetened; and on all fine-cut shorts and refuse, scraps, clippings,cuttings, stems, and sweepings of tobacco, there shall be collected on each kilogram, seventy-five centavos: Provided, however, That fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling, or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment ofthe specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner if the same are to be exported or to be used in the manufacture of other tobacco products on which the specific tax will eventually be paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos.

Sections 144 and 148 were subsequently renumbered as Sections 120 and 125 respectively under Presidential Decree No. 1994,54 which took effect on January 1, 1986 (1986 Tax Code); then as Sections 137 and 141 under Executive Order No. 273;55 and finally as Sections 140 and 144 under Republic Act No. 8424 or the "Tax Reform Act of 1997." However, the provisions remained basically unchanged.

The business transactions of La Suerte, Fortune, and Sterling that the Commissioner found to be taxable for specific tax took place during the effectivity of the 1986 Tax Code, as amended by Executive Order No. 273. The pertinent provisions are Sections 137 and 141, thus:

SEC. 137. Removal of tobacco products without prepayment of tax. – Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Ministry of Finance. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be soldin bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Ministry of Finance.

‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco.

. . . .

SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-five centavos on each kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any manner other than the ordinary mode of drying and curing;

(b) tobacco prepared or partially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of the specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Ministry of Finance upon recommendation of the Commissioner, if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventuallybe paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos.

Parenthetically, the present provisionsexplicitly state the following:

Stemmed leaf tobacco, tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened, fine-cut shorts and refuse, scraps, clippings, cuttings, stems, midribs, and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco shall be transferred, disposed of, or otherwise sold, without any prepayment of the excisetax . . . if the same are to be exported or to be used in the manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will eventually be paid on the finished product, under such conditions as may be prescribed in the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.56

BIR assessments

G.R. No. 125346

Sometime in June, 1989, a team of examiners from the Bureau of Internal Revenue, led by Crisanto G. Luna, Revenue Officer III of the Field Operation Division of the Excise Tax Service, conducted an examination of the books of La Suerte by virtue of a letter of authority issued by then Commissioner Jose U. Ong.

On January 3, 1990, La Suerte received a letter from then Commissioner Jose U. Ong demanding the payment of 34,934,827.67 as deficiency excise tax on La Suerte’s entire importation and local purchase of stemmed leaf tobacco for the period covering January 1, 1986 to June 30, 1989.

On January 12, 1990, La Suerte . . . protest[ed] the excise tax deficiency assessment . . . stressing that the BIR assessment was based solely on Section 141(b) of the Tax Code without, however, applying Section 137 thereof, the more specific provision,

which expressly allows the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without payment of the excise tax. However, in a letter, dated August 31, 1990, Commissioner Jose U. Ong denied La Suerte’s protest, insisting that stemmed leaf tobacco is subject to excise tax "unless there is an express grant of exemption from [the] payment of tax."

In a letter dated October 17, 1990, Commissioner Ong reiterated his demand for the payment of the alleged deficiency excise taxes due from La Suerte, to wit:

"Please be informed that in an investigation conducted by this Office, it was ascertainedthat you incurred a deficiency specific tax on your importation and local purchase of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989 in the total amount of 34,904,247.00 computed as follows:

STEMMED–LEAF TOBACCO

Imported 13,918,465 kls. x 0.75 P10,438,848.00

Local 32,620,532 kls. x 0.75 24,465,399.00

Total Amount Due (Basic Tax)- - - - - - - - - - - - P34,904,247.00

. . . ." (page 99, Rollo)

On December 6, 1990, La Suerte filed with the Court of Tax Appeals a Petition for Review seeking for the annulment of the assessments. . .

. . . On July 13, 1995, the Tax Court rendered [its] Decision, the dispositive portion of which reads[:]

"WHEREFORE, in all the foregoing, the assessment of alleged deficiency specific tax in the amount ofP34,904,247.00 issued by the Respondent is hereby CANCELLED for lack of merit.

SO ORDERED."57

The Commissioner appealed the Court of Tax Appeals’ decision before the Court of Appeals. On December 29, 1995, the Court of Appeals Sixth Division ruled against La Suerteand found that RR No. V-39 limits the tax exemption on transfers of stemmed leaf tobacco to transfers between two L-7 permittees.58 The Court of Appeals ruled as follows:

IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is hereby REVERSED and SET ASIDE. Respondent is ordered to pay the petitioner Commissioner of Internal Revenue the amount of P34,904,247.00 as deficiency specific tax on its importations and local purchases of stemmed leaf tobacco and its sale of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation covering the period from January 1, 1986 to June 30, 1989, plus 25% surcharge for late payment and 20% interest per annum from October 17, 1990 until fully paid pursuant to sections 248 and 249 of the Tax Code.

SO ORDERED.59

La Suerte filed a motion for reconsideration, which was denied by the Court of Appeals in its June 7, 1996 resolution.60

On August 2, 1996, La Suerte filed the instant petition for review,61 praying for the reversal of the Court of Appeals’ decision and cancellation of the assessment by the Commissioner. La Suerte raises the following grounds in support of its prayer:

A. THE COURT OF APPEALS ERRED WHEN IT CONSIDERED SECTION 20 (A) OF RR NO. V-39, SINCE THE COMMISSIONER RAISED IT FOR THE FIRST TIMEIN THE COURT OF APPEALS

B. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION 20(A) OF RR NO. V-39 RESTRICTS THE APPLICATION OF SECTION 137 OF THE TAX CODE, SINCE LANGUAGE IN SEC. 137 IS UNQUALIFIED, WHILE SEC. 20(A) CONTAINS NO RESTRICTIVE LANGUAGE

C. THE COURT OF APPEALS ERRED WHEN IT IGNORED SEC. 43 OF RR NO. 17-67 AS WELL AS OPINIONS OF BIR OFFICIALS WHICH CONFIRMED THE EXEMPTION OFSTEMMED LEAF TOBACCO FROM PREPAYMENT OF SPECIFIC TAX

D. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SEC. 43 OF RR NO. 17-67 DID NOT REPEAL SECTIONS 35 AND 20(A) OF RR NO. V-39, SINCE THEIR PROVISIONS ARE REPUGNANT TO EACH OTHER

E. THE COURT OF APPEALS ERRED WHEN IT HELD THAT RR NO. V-39 IMPOSES SPECIFIC TAXES ON STEMMED LEAF TOBACCO, SINCE IT MAKES NO MENTION AT ALL OF TAXES ON STEMMED LEAF TOBACCO

F. THE COURT OF APPEALS ERRED WHEN IT HELD RR NO. V-39 APPLIED TO L-6 PERMITTEES OR MANUFACTURERS OF STEMMED LEAF TOBACCO, SINCE L-6 CLASSIFICATION WAS NON-EXISTENT AT THE TIME

G. THE COURT OF APPEALS ERRED WHEN IT INTERPRETED SECTION 20(A) OF RR NO. V-39 IN SUCH A WAY AS TO RESULT IN ADMINISTRATIVE LEGISLATION, SINCE THE INTERPRETATION SANCTIONED THE RESTRICTION OF AN UNQUALIFIED PROVISION OF LAW BY A MERE REGULATION

H. THE COURT OF APPEALS ERRED WHEN IT GAVE NO WEIGHT TO THE DECEMBER 12, 1972 BIR RULING AND OPINIONS OF OTHER BIR OFFICIALS WHICH CONFIRMED THE EXEMPTION OF STEMMED LEAF TOBACCO FROM PREPAYMENT OF SPECIFIC TAX

I. THE COURT OF APPEALS ERRED WHEN IT HELD [THAT] NONAPPLICATION OF [THE] DECEMBER 12 RULING DID NOT IMPINGE ON PRINCIPLE OF NON-RETROACTIVITY OF RULINGS BECAUSE THE ASSESSMENT DID NOT CITE THE RULING, SINCE CITATION OF A RULING INAN ASSESSMENT [IS] NOT NECESSARY FOR PRINCIPLE TO APPLY

J. THE COURT OF APPEALS ERRED WHEN IT DISREGARDED THE ADMINISTRATIVE PRACTICE OF BIR FOR OVER HALF A CENTURY OF NOT SUBJECTINGSTEMMED LEAF TOBACCO TO SPECIFIC TAX

K. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SUBJECTING STEMMED LEAF TOBACCO TO SPECIFIC TAX IS NOT PROHIBITED FORM OF DOUBLE TAXATION, SINCE A TAX ON BOTH STEMMED LEAF TOBACCO AND CIGARETTES INTO WHICH IT IS MANUFACTURED IS DOUBLE TAXATION

L. THE COURT OF APPEALS ERRED WHEN IT HELD LA SUERTE LIABLE FOR SPECIFIC TAX EVENIF NO EFFORT WAS FIRST MADE TO COLLECT THE TAX FROM THE MANUFACTURER OF STEMMED LEAF TOBACCO, SINCE TAX CODE ALLOWS THIS ONLY IF SPECIAL ALLOWANCE IS GRANTED, WHICH IS NOT THE CASE

M. THE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE REENACTMENT OF THE 1939 CODE AS THE 1977 CODE AND 1986 TAX CODES ADOPTED THE INTERPRETATION IN THE DECEMBER 1972 BIR RULING

N. THE COURT OF APPEALS ERRED WHEN IT APPLIED THE RULES OF CONSTRUCTION ON EXEMPTION FROM TAXES, SINCE NO TAX EXEMPTION WAS INVOLVED BUT MERELY AN EXEMPTION FROM PREPAYMENT OF TAX.62

G.R. No. 136328–29

In the letter dated November 24,1989, the Commissioner demanded from Fortune the payment of deficiency excise tax in the amount of P28,938,446.25 for its importation of tobacco strips from January 1, 1986 to June 30, 1989. Fortune requested for reconsideration, which was denied by the Commissioner on August 31, 1990. Undaunted, Fortune appealed to the Court of Tax Appeals through a petition for review, which was docketed as CTA Case No. 4587.63

In the decision dated November 23, 1994, the Court of Tax Appeals ruled in favor of Fortune and set aside the Commissioner’s assessment of P28,938,446.25 as deficiency excise tax. Meanwhile, on March 20, 1991, Fortune received another letter from the Bureau of Internal Revenue, demanding payment of 1,989,821.86 as deficiency specific tax on its importation of stemmed leaf tobacco from July 1, 1989 to November 30, 1990.64 Fortune filed its protest and requested the Commissioner to cancel and withdraw the assessment.65 On April 18, 1991, the Commissioner denied with finality Fortune’s request.66 Fortune appealed to the Court of Tax Appeals, and the case was docketed as CTA Case No. 4616.67

In the decision dated October 6, 1994, the Court of Tax Appeals ruled in favor of Fortune and set aside the Commissioner’s assessment of P1,989,821.26 as deficiency excisetax on stemmed leaf tobacco.

The Commissioner filed separate petitions before the Court of Appeals, challenging the decisions rendered by the Court of Tax Appeals in CTA Case Nos. 4587 and 4616. These petitions were consolidated on November 28, 1996.68

In the decision dated January 30, 1998, the Court of Appeals Seventeenth Division dismissed the consolidated petitions filed by the Commissioner and affirmedthe assailed decisions of the Court of Tax Appeals. It also denied the Commissioner’s motion for reconsideration.

Hence, the Commissioner filed the present petition69 on January 8, 1999. The Commissioner claims that the Court of Appeals erred (1) "in holding that stemmed leaf tobacco is not subject to the specific tax imposed under Section 141 of the Tax Code[;]"70 (2) "in not holding that under Section 137 of the Tax Code, stemmed leaf tobacco is exempt from specific tax when sold in bulk as raw material by one manufacturer directly to another under such conditions as may be prescribed in the regulations of the Department of Finance[;]"71 and (3) "in holding that there is double taxation in the prohibited sense when specific tax is imposed on stemmed leaf tobacco and again on the finished product of which stemmed leaf tobacco is a raw material."72

G.R. No. 144942

In April 1995, "[La Suerte] imported stemmed leaf tobacco from various sellers abroad."73 The Commissioner "assessed specific taxes on the stemmed leaf tobacco in the amount of 175,909.50, which [La Suerte] paid under protest."74 "Consequently, [La Suerte] filed a claim for refund with [the Commissioner], [who] failed to act on the same."75 Undeterred, La Suerte appealed to the Court of Tax Appeals, which in its March 9, 1999 decision, ruled in its favor. The Commissioner appealed to the Court of Appeals Third Division, which on August 31, 2000, rendered its decision in CA-G.R. SP. No. 51902, affirming the decision of the Court of Tax Appeals.

The Commissioner then filed the instant petition for review76 asking this court to overturn the Court of Appeals’ decision. It avers that the Court of Appeals erred in holding that Section 137 of the Tax Code applied "without any conditions as to the domicile of the manufacturers and that [the Commissioner] cannot indirectly restrict its application to local manufacturers."77

The Third Division of this court initially denied78 the petition due to an insufficient or defective verification and because "the petition was filed by revenue lawyers and not by the Solicitor General."79

The Commissioner filed a motion for clarification80 seeking to clarify whether the Bureau of Internal Revenuelegal officers can file petitions for review pursuant to Section 220 of the Tax Code without the intervention of the Office of the Solicitor General.

The motion was referred to the En Banc81 on August 7, 2001, which issued the resolution on July 4, 2002, holding that "Section 220 of the Tax Reform Act must not be understood asoverturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings."82 In the same resolution, this court also declared the following:

The present controversy ruminate upon the singular issue of whether or not Revenue Regulation 1767 [sic] issued by petitioner, in relation to Section 137 of the InternalRevenue Code in the imposition of a tax on stemmed-leaf tobacco, deviated from the tax code. This question basically inquires then into whether or not the revenue regulation has exceeded, on constitutional grounds, the allowable limits of legislative delegation.

Aware that the dismissal of the petition could have lasting effect on government tax revenues, the lifeblood of the state, the Court heeds the plea of petitioner for a chance to prosecute its case.83 (Emphasis and underscoring supplied)

This court resolved to reinstate84 and give due course85 to the Commissioner’s petition. G.R. No. 148605

"On January 12, 1990, [Sterling] received a pre-assessment notice for alleged deficiency excise tax on itsimportation and local purchase of stemmed-leaf tobacco for P5,187,432.00 covering the period from November 1986 to January 1989."86 Sterling filed its protest letter87 dated January 19, 1990. The Commissioner, through its letters88 dated August 31, 1990 and October 17, 1990, denied the protest with finality.

Sterling filed before the Court of Tax Appeals a petition for review89 dated January 3, 1991, seeking the cancellation of the deficiency assessment and praying that the Commissioner be ordered to desist from collecting the assessed excise tax. On July 13, 1995,the Court of Tax Appeals rendered its decision ordering the cancellation of the assessment for deficiency excise tax.

The Commissioner then appealed90 to the Court of Appeals. On March 7, 2001, the latter, through its Ninth Division, rendered a decision reversing the Court of Tax Appeals’ ruling, thus:

WHEREFORE, premises considered, the Decision of the Court of Tax Appeals in C.T.A. Case No. 4532 is hereby REVERSED and SET ASIDE, and the respondent is ORDERED to pay to the public petitioner the amount ofP5,187,432.00 as deficiency specific tax on its imported and locally purchased stemmed leaf tobacco from November 1986 to June 24, 1989, plus 25% surcharge on P5,187,432.00, and 20% interest per annum on the total amount due from December 07, 1990 until full payment, pursuant to Sections 248-49 of the Tax Code.

SO ORDERED.91

Sterling filed a motion for reconsideration,92 which was denied by the Court of Appeals in its June 19, 2001 resolution.

Hence, on August 13, 2001, Sterling filed the instant petition for review.93

Sterling argues that the Court of Appeals erred in holding that (1) then Section 141 of the Tax Code subjects stemmed leaf tobacco to excise tax; (2) Section 137 of the Tax Code did notexempt stemmed leaf tobacco from prepayment of excise tax; (3) Section 20(A) of RR No. V-39 restricts the application of Section 137 of the Tax Code since its language was unqualified, while Section 20(A) contained no restrictive language; (4) RR No. V-39 imposed specific taxes on stemmed leaf tobacco since its language made no mention of taxes on stemmed leaf tobacco; (5) the reason behind limiting exemptions only to transfers fromone L-7 to another L-7 is because sale has previously been subjected tospecific tax; and (6) the exemption from specific tax did not apply to imported stemmed leaf tobacco.94

Sterling further argues that the Court of Appeals erred in not holding that (1) the Commissioner’s interpretation of Section 141 of the Tax Code and Section 20(A) of RR No. V-39 amounts to an amendment of Sections 141 and 137 of the Tax Code by a mere administrative regulation; (2) a December 12, 1972 Bureau of Internal Revenue ruling and opinions of other Bureau of Internal Revenue officials confirmed the exemption of stemmed leaf tobacco from prepayment of specific tax; (3) the administrative practice of the Bureau of Internal Revenue for over half a century of not subjecting stemmed leaf tobacco to excise tax proves that no excise taxes were ever intended to be imposed; (4) imposition of excise tax on stemmed leaf tobacco would result in the prohibited form of double taxation; and (5) the re-enactment of the relevant provisions in the 1977 and 1986 Tax Codes adopted the interpretation in the December 1972 Bureau of Internal Revenue ruling.95 Sterling also contends that the "Court of Appeals erred in applying the rules of construction on exemption from taxes, since no tax exemption was involved, but merely an exemption from prepayment of excise tax."96

G.R. No. 158197

On January 10, 1991, the Commissioner sent a pre-assessment notice to La Suerte demanding payment of 11,757,275.25 as deficiency specific tax on its local purchases and importations and on the sale of stemmed leaf tobacco during the period from September 14, 1989 to November 20, 1990.97 On February 8, 1991, La Suerte received the formal assessment letter of the Commissioner.98

La Suerte filed its protest on March 8, 1991.99 On May 14, 1991, La Suerte received the Commissioner’s decision "denying the protest with finality."100

"On June 13, 1991, the Court of Tax Appeals promulgated a Decision finding for . . . La Suerte and disposing [as follows:]"101

WHEREFORE, in view of the foregoing, We find the petition for review meritorious and the same is hereby GRANTED. Respondent’s decision dated April 29, 1991 is hereby set aside and the formal assessment for the deficiency specific tax in the sum of P11,575,275.25 subject of the respondent’s letter, dated January 30, 1991, is deemed cancelled.

No pronouncement as to costs of suit.

SO ORDERED.102

The Commissioner filed a motion for reconsideration that was denied by the Court of Tax Appeals in its April 5, 1995 resolution.103

The Commissioner appealed to the Court of Appeals.104 In its decision dated July 18, 2002, the Court of Appeals reversed the decision of the Court of Tax Appeals. It cited Commissioner of Internal Revenue v. La Campaña Fabrica de Tabacos, Inc.105 as basis for its ruling. La Suerte filed a motion for reconsideration, but it was denied by the Court of Appeals in the resolution106 dated May 9, 2003.

La Suerte prays for the reversal of the Court of Appeals’ decision and resolution in its petition for review,107wherein it raises the following arguments:

I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION 20(A) OF REV. REGS. NO. V-39 LIMITED THE CLASS OF MANUFACTURERS WHOSE SALES OF STEMMED LEAF TOBACCO WERE EXEMPT FROM PRE-PAYMENT OF SPECIFIC TAX.

II. EVEN IF SEC. 3 OF RR NO. 17-67 HAD BEEN WAS [sic] INTENDED TO LIMIT MANUFACTURERS EXEMPT FROM PREPAYMENT OF SPECIFIC TAX, THIS WOULD AMOUNT TO UNLAWFUL DELEGATION OF LEGISLATIVE POWER.

III. RR NO. 17-67 WAS NEITHER ISSUED TO AMEND RR NO. V-39 NOR TO AMEND THE TAX CODE, BUT SOLELY TO IMPLEMENT ACT NO. 2613, AS AMENDED, WHICH WAS ENACTED IN 1916 AND HAD ABSOLUTELY NOTHING TO DO WITH TAXES.

IV. SECTION 2(H) OF RR NO. 17-67 EXCEEDED THE CONSTITUTIONAL LIMITS ON THE DELEGATION OF LEGISLATIVE POWER.

V. SECTION 3(M) OF RR NO. 17-67 AS INTERPRETED BY COMMISSIONER EXCEEDED ALLOWABLE LIMITS ON DELEGATION OF LEGISLATIVE POWER.

VI. THE HONORABLE COURT OFAPPEALS ERRED IN APPLYING SECTION 20(A) OF RR NO. V-39 TO LA SUERTE’S IMPORTS OF STEMMED LEAF TOBACCO, FOR THE APPLICABLE PROVISION IS CHAPTER V OF RR NO. V-39.

VII. THE COMMISSIONER’S PRESENT INTERPRETATION OF SECTIONS 2(M)(1) AND 3(H)OF RR NO. 17-67, WAS NOT THE INTERPRETATION GIVEN TO THOSE SECTIONS BY ITS FRAMERS, AS SHOWN BY THE LONG ADMINISTRATIVE PRACTICE AFTER THE ISSUANCE OF RR NO. 17-67 AND THE BIR RULING DATED DECEMBER 12, 1972, WHICH CONFIRMED THE TAX-FREE TRANSFER OF STEMMED- LEAF TOBACCO.108

G.R. No. 165499

On various dates in March 1995, the Commissioner of Internal Revenue . . . collected from La Suerte the aggregate amount of THREE HUNDRED TWENTY-FIVE THOUSAND FOUR HUNDRED TEN PESOS (P325,410.00) for specific taxes on La Suerte’s bulk purchases of stemmed-leaf tobacco from foreign tobacco manufacturers. La Suerte paid the said amount under protest.

. . . .

On September 27, 1996 and October 2, 1996, La Suerte instituted with the Commissioner of Internal Revenue . . . and with Revenue District No. 52, a claim for refund of specific taxes said to have been erroneously paid on its importations of stemmed-leaf tobacco for the period of November 1994 up to May 1995, including the amount of Three Hundred Twenty Five Thousand Four Hundred Ten Pesos (P325,410.00). . . .

Inasmuch as its claim for refund was not acted upon by petitioner and in order to toll the running of the two-year reglementary period within which to file a judicial claim for such refund as provided under Section 229 of the 1997 National Internal Revenue Code, as amended, La Suerte filed on February 8, 1997 a petition for review with the CTA.109

On September 23, 1998, the Court of Tax Appeals rendered judgment granting the petition for review and ordering the Commissioner to refund the amount of P325,410.00 to La Suerte.110 The Commissioner filed a motion for reconsideration, but this was denied by the Court of Tax Appeals on December 15, 1998.111

On appeal, the Court of Appeals Fourth Division reversed112 the Court of Tax Appeals’ ruling. It also denied113 La Suerte’s motion for reconsideration. Hence, this petition was filed,114 reiterating the same arguments already presented in the other cases.

This court ordered the consolidation of G.R. Nos. 136328–29 and 125346.115 Thereafter, this court consolidated G.R. Nos. 165499, 144942, and 148605.116 Finally, this court approved the consolidation of G.R. Nos. 125346, 136328–29, 144942, 148605, 158197, and 165499.117

Issues

I. Whether stemmed leaf tobacco is subject to excise (specific) tax under Section 141 of the 1986 Tax Code;

II. Whether Section 137 of the 1986 Tax Code exempting from the payment of specific tax the sale of stemmed leaf tobacco by one manufacturer to another is not subject to any qualification and, therefore, exempts an L-7 manufacturer from paying said tax on its purchase of stemmed leaf tobacco from other manufacturers who are not classified as L-7 permittees;

III. Whether stemmed leaf tobacco imported by La Suerte, Fortune, and Sterling is exempt from specific tax under Section 137 of the 1986 Tax Code;

IV. Whether Section 20(a) of RR No. V-39, in relation to RR No. 17-67, which limits the exemption from payment of specific tax on stemmed leaf tobacco to sales transactions between manufacturers classified as L-7 permittees is a valid exercise by the Department of Finance ofits rule-making power under Section 338118 of the 1939 Tax Code;

V. Whether the possessor or owner of stemmed leaf tobacco may be held liable for the payment of specific tax if such tobacco product is removed from the place of production without payment of said tax;

VI. Whether the August 31, 1990 ruling of then Bureau of Internal Revenue Commissioner Jose U. Ong denying La Suerte’s request for exemption from specific tax on its local purchase and importation of stemmed leaf tobacco violates the principle on non-retroactivity of administrative ruling for allegedly contradicting the previous position taken by the Bureau of Internal Revenue that such a transaction is not subject to specific tax as expressed in the December 12, 1972 ruling of then Bureau of Internal Revenue Commissioner Misael P. Vera; and

VII. Whether the imposition of excise tax on stemmed leaf tobacco under Section 141 of the 1986 Tax Code constitutes double taxation.

Arguments of the cigarette manufacturers

The cigarette manufacturers claim that since Section 137 of the 1986 Tax Code and Section 20(a) of RR No. V-39 do not distinguish "as to the type of manufacturer that may sell stemmed-leaf tobacco without the prepayment of specific tax[,] [t]he logical conclusion is that any kind of tobacco manufacturer is entitled to this treatment."119 The authority of the Secretary of Finance to prescribe the "conditions" refers only to procedural matters and should not curtail or modifythe substantive right granted by the law.120 The cigarette manufacturers add thatthe reference to an L-7 invoice and L-7 register book in the second paragraph of Section 20(a) cannot limit the application of the tax exemption provision only to transfers between L-7 permittees because (1) it does not so provide;121 and (2) under the terms of RR No. V-39, L-7 referred to manufacturers of any class of tobacco products, including manufacturers of stemmed leaf tobacco.122

They further argue that, going by the theory of the Commissioner, RR No. 17-67 would have unduly restricted the meaning of "manufacturers" by limiting it to a few manufacturers suchas manufacturers of cigars and cigarettes.123 Allegedly, RR No. 17-67 cannotchange the original meaning of L-7 in Section 20(A) of RR No. V-39 without exceeding constitutional limits of delegated legislative power.124 La Suerte further points out that RR No. 17-67 was not even issued for the purpose of implementing the Tax Code but for the sole purpose of implementing Act No. 2613; and Section 3 of RR No. 17-67 restricts the new designations only for administrative purposes.125

Moreover, the cigarette manufacturers contend "that Section 132 does not operate as a tax exemption" because "prepayment means payment of obligation in advance or before it is due."126 Consequently, the rules of construction on tax exemption do not apply.127 According to them, "the absence of tax prepayment for the saleof stemmed leaf tobacco impliedly indicates the underlying policy of the law: that stemmed leaf tobacco shall not be taxed twice, first, as stemmed leaf tobacco and, second, as a component of the finished products of which it forms an integral part."128

Fortune, for its part, claims that stemmed leaf tobacco is not subject to excise tax. It argues that stemmed leaf tobacco cannot be considered prepared or partially prepared tobaccobecause it does not fall within the definition of a "processed tobacco"

under Section 1-b of Republic Act No. 698, as amended.129 Furthermore, it adds that Section 141 should be strictly construed against the taxing power.130 "There being no explicit reference to stemmed leaf tobacco in Section 141, it cannot be claimed or construed to be subject to specific tax."131

According to Fortune, "a plain reading of Section 141 readily reveals that the intention was to impose excise taxes on products oftobacco that are not to be used as raw materials in the manufacture of other tobacco products."132"Section 2(m)(1) unduly expanded the meaning of prepared or partially prepared tobacco to includea raw material like stemmed leaf tobacco; hence, ultra viresand invalid."133

As regards the taxability of their importations, Sterling argues that since locally manufactured stemmed leaf tobaccos are not subject to specific tax, it follows that imported stemmed leaf tobaccos are also not subject to specific tax.134 On the other hand, La Suerteclaims that Section 20(A) of RR No. V-39 does not apply to its imports because the applicable provision is Section 128(b) of the 1986 Tax Code, which states that "imported articles shall be subject to the same tax and the same rates and basis of excise taxes applicable to locally manufactured articles," and Chapter V of RR No. V-39 (Payment of specific taxes on imported cigars, cigarettes, smoking and chewing tobacco).135

Finally, La Suerte and Sterling136 argues that the Court of Appeals erred: (1) in ignoring Section 43 of RR No. 17-67, December 12, 1972 Bureau of Internal Revenue ruling and other Bureau of Internal Revenue opinions confirming the exemption of stemmed leaf tobacco from prepayment of specific tax;137 (2) in disregarding the Bureau of Internal Revenue’s practice for over half a century of not subjecting stemmed leaf tobacco to specific tax;138 (3) in failing to consider that the re-enactment of the 1939 Tax Code as the 1977 and 1986 Tax Codes impliedly adopted the interpretation in the December 12, 1972 ruling; and 4) in holding that nonapplication of the December 12, 1972 ruling did not impinge on the principle of non-retroactivity of rulings.139 Moreover, it argues that the Tax Code does not authorize collection of specific tax from buyers without a prior attempt to collect tax from manufacturers.140

Respondent’s arguments

Respondent counters that "under Section 141(b), partially prepared or manufactured tobacco is subject to specific tax."141 The definition of "partially manufactured tobacco" in Section 2(m) of RR No. 17-67 includes stemmed leaf tobacco; hence, stemmed leaf tobacco is subject to specific tax.142 "Imported stemmed leaf tobacco isalso subject to specific tax under Section 141(b) in relation to Section 128 of the 1977 Tax Code."143 Fortune’s reliance on the definition of "processed tobacco" in Section 1-b of Republic Act No. 698144 as amended by Republic Act No. 1194 is allegedly misplaced because the definition therein of processed tobacco merely clarified the type of tobacco product that may not be imported into the country.145 Respondent posits that "there is no double taxation in the prohibited sense even if specific tax is also imposed on the finished product of which stemmed leaf tobacco is a raw material."146 Congress clearly intended it "considering that stemmed leaf tobacco, as partially prepared or manufactured tobacco, is subjected to specific tax under Section 141(b), while cigars and cigarettes, of which stemmed leaf tobacco is a raw material, are also subjected to specific tax under Section 142."147 It adds that there is no constitutional prohibition against double taxation.148

"Foreign manufacturers of tobacco products not engaged in trade or business in the Philippines cannot be classified as L-7, L-6, or L-3R since they are beyond the pale of Philippine laws and regulations."149 "Since the transfer of stemmed leaf tobacco from one factory to another must be under an official L-7 invoice and entered in the L-7 registers of both transferor and transferee, it is obvious that the factories contemplated are those located or operating in the Philippines and operated only by L-7 permittees."150 The transaction contemplated under Section 137 is sale and not importation because the law uses the word "sold."151 The law uses "importation" or "imported" whenever the transaction involves bringing in articles from foreign countries.152

Respondent argues that "the issuance of RR Nos. V-39 and 17-67 is a valid exercise by the Department of Finance of its rule-making power" under Sections 132 and 338 of the 1939 Tax Code.153 It explains that "the reason for the exemption from specific tax of the sale of stemmed leaf tobacco as raw material by one L-7 directly to another L-7 is that the stemmed leaf tobacco is supposed to have been already subjected to specific tax when an L-7 purchased the same from an L-6."154 "Section 20(A) of RR No. V-39 adheres to the standards set forth in Section 245 because it provides the conditions for a tax-free removal of stemmed leaf tobacco under Section 137 without negating the imposition of specific tax under Section 141(b)."155 "To construe Section 137 in the restrictive manner suggested by La Suerte will practically defeat the revenue-generating provision of Section 141(b)."156

It further argues that the August 31, 1990 ruling of then Bureau of Internal Revenue Commissioner Jose U. Ong denying La Suerte’s request for exemption from specific tax on its local purchase and importation of stemmed leaf tobacco does not

violate the principle on non-retroactivity of administrative ruling. It alleges that an erroneous ruling, like the December 12, 1972 ruling, does not give rise to a vested right that can be invoked by La Suerte.157

Finally, respondent contends that under Section 127, if domestic products are removed from the place ofproduction without payment of the excise taxes due thereon, it is not required that the tax be collected first from the manufacturer or producer before the possessor thereof shall be liable.158

Court’s ruling

Nature of excise tax

Excise tax is a tax on the production, sale, or consumption of a specific commodity in a country. Section 110 of the 1986 Tax Code explicitly provides that the "excise taxes on domestic products shall be paid by the manufacturer or producer before[the] removal [of those products] from the place of production." "It does not matter to what use the article[s] subject to tax is put; the excise taxes are still due, even though the articles are removed merely for storage in someother place and are not actually sold or consumed."159 The excise tax based on weight, volume capacity or any other physical unit of measurement is referred to as "specific tax." If based on selling price or other specified value, itis referred to as "ad valorem" tax.

Section 141 subjects partiallyprepared tobacco, such asstemmed leaf tobacco, toexcise tax

Section 141 of the 1986 Tax Code provides:

SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-five centavos on each kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any manner other than the ordinary mode of drying and curing;

(b) tobacco prepared orpartially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of the specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Ministry of Finance upon recommendation of the Commissioner, if the same are tobe exported or to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos. (Emphasis supplied)

It is evident that when tobacco is harvested and processed either by hand or by machine, all itsproducts become subject to specific tax. Section 141 reveals the legislative policy to tax all forms of manufactured tobacco — in contrast to raw tobacco leaves — including tobacco refuse or all other tobacco which has been cut, split, twisted, or pressed and is capable of being smoked without further industrial processing.

Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a partially prepared tobacco. The removal of the stem or midrib from the leaf tobacco makes the resulting stemmed leaf tobacco a prepared or partially prepared tobacco. The following is La Suerte’s own illustration of how the stemmed leaf tobacco comes about: In the process of removing the stems, the whole leaf tobacco breaks into pieces; after the stems or midribs are removed, the tobacco is threshed (cut by machine into fine narrow strips) and then undergoes a process of redrying,160 undoubtedly showing that stemmed leaf tobacco is a partially prepared tobacco. Since the Tax Code contained no definition of "partially prepared tobacco," then the term should be construed in its general, ordinary, and comprehensive sense.161

RR No. 17-67, as amended, supplements the law by delineating what products of tobacco are "prepared or manufactured" and "partially prepared or partially manufactured." Section 2(m) states:

(m) "Partially manufactured tobacco" — Includes:

(1) "Stemmed leaf" — handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust.

(2) "Long-filler" — handstripped tobacco of good, long pieces of broken leaf usableas filler for cigars without further preparation, and free from mold, dust stems and cigar cuttings.

(3) "Short-filler" — handstripped or machine-stripped tobacco, clean, good, short pieces of broken leaf, which will not pass through a screen of two inches (2") mesh.

(4) "Cigar-cuttings" — clean cuttings or clippings from cigars, unsized with any other form of tobacco.

(5) "Machine-scrap tobacco"— machine-threshed, clean, good tobacco, not included in any of the above terms, usable in the manufacture of tobacco products.

(6) "Stems" — midribs of leaftobacco removed from the whole leaf or broken leaf either by hand or machine.

(7) "Waste tobacco" — denatured tobacco; powder or dust, refuse, unfit for human consumption;

discarded materials in the manufacture of tobacco products, which may include stems.

Insisting on the inapplicability of RR No. 17-67, La Suerte points to the different definitions given to stemmed leaf tobacco by Section 2(m)(1) of RR No. 17-67 and Section 137. It argues that while RR No. 17-67 defines stemmed leaf tobacco as handstripped tobacco of clean, good, partially broken leaf only, free from mold and dust,Section 137 defines it as leaf tobacco which has had the stemor midrib removed.The term does not include broken leaf tobacco. We are not convinced.

Different definitions of the term "stemmed leaf" are unavoidable, especially considering that Section 2(m)(1) is an implementing regulation of Act No. 2613, which was enacted in 1916 for purposes of improving the qualityof Philippine tobacco products, while Section 137 defines the tobacco product only for the purpose of exempting it from the specific tax. Whichever definition is adopted, there is no doubt that stemmed leaf tobacco is a partially prepared tobacco.

The onus of proving that stemmed leaf tobacco is not subject to the specific tax lies with the cigarette manufacturers. Taxation is the rule, exemption is the exception.162 Accordingly, statutes granting tax exemptions must be construed instrictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority. The cigarette manufacturers must justify their claim by a clear and categorical provision in the law. Otherwise, they are liable for the specific tax on stemmed leaf tobacco found in their possession pursuant to Section 127163 of the 1986 Tax Code, as amended.

Stemmed leaf tobaccotransferred in bulk betweencigarette manufacturers areexempt from excise tax underSection 137 of the 1986 TaxCode in conjunction with RRNo. V-39 and RR No. 17-67

In the instant case, an exemption on the taxability of stemmed leaf tobacco is found in Section 137, which provides the following:

SEC. 137. Removal of tobacco products without prepayment of tax. – Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Ministry of Finance. Stemmed leaf tobacco,fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Ministry of Finance.

‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco. (Emphasis and underscoring supplied) Section 137 authorizes a tax exemption subject to the following: (1) that the stemmed leaf tobacco is sold in bulk as raw material by one manufacturerdirectly to another; and (2) that the sale or transfer has complied with the conditions prescribed by the Department of Finance.

That the title of Section 137 uses the term "without prepayment" while the body itself uses "without payment" is of no moment. Both terms simply mean that stemmed leaf tobacco may be removed from the factory or place of production without prior payment of the specific tax.

This court has held in Commissioner of Internal Revenue v. La Campaña Fabrica de Tabacos, Inc.,164 reiterated in Compania General de Tabacos de Filipinas v. Court of Appeals165 and Commissioner of Internal Revenue v. La Suerte Cigar and Cigarette Factory, Inc.166 that the exemption from specific tax of the sale of stemmed leaf tobacco is qualified by and is subject to "such conditions as may be prescribed in the regulations of the Department of Finance." These conditions were provided for in RR Nos. V-39 and 17-67. Thus, Section 137 must be read and interpreted in accordance with these regulations.

Section 20(a) of RR No. V-39 provides the rules for tax exemption on tobacco products: SECTION 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes. — (a) Sale of stemmed leaf tobacco, etc., by one factory to another.— Subject to the limitations herein established, products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of the specific tax.

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or partially manufactured tobaccoor other refuse of tobacco may be transferred from one factory to another under an official L-7 invoiceon which shall be entered the exact weightof the tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the page of removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under heading "Refuse, etc., received from other factory," showing the date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, and the net weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another. (Emphasis supplied)

The conditions under which stemmed leaf tobacco may be transferred from one factory to another without prepayment of specific tax are as follows:

(a) The transfer shall be under an official L-7 invoice on which shall be entered the exact weight of the tobacco at the time of its removal;

(b) Entry shall be made in the L-7 register in the place provided on the page for removals; and

(c) Corresponding debit entry shall bemade in the L-7 register book of the factory receiving the tobacco under the heading, "Refuse, etc.,received from the other factory," showing the date of receipt, assessment and invoice numbers, name and address of the consignor, formin which received, and the weight of the tobacco.

Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau of Internal Revenue with an L-7 permit refer to "manufacturers of tobacco products." Hence, the transferor and transferee of the stemmed leaf tobacco must be an L-7 tobacco manufacturer.

La Campañaexplained that the reason behind the tax exemption of stemmed leaf tobacco transferred between two L-7 manufacturers is that the same had already been previouslytaxed when acquired by the L-7 manufacturer from dealers of tobacco, thus:

[T]he exemption from specific tax of the sale of stemmed leaf tobacco as raw material by one L-7 directly to another L-7 is because such stemmed leaf tobacco has been subjected to specific tax when an L-7 manufacturer purchased the same from wholesale leaf tobacco dealers designated under Section 3, Chapter I, Revenue Regulations No. 17-67 (supra) as L-3, L-3F, L-3R, L-4, or L-6, the latter being also a stripper of leaf tobacco. These are the sources of stemmed leaf tobacco to be used as raw materials by an L-7 manufacturer which does not produce stemmed leaf tobacco. When an L-7 manufacturer sells the stemmed leaf tobacco purchased from the foregoing suppliersto another L-7 manufacturer as raw material, such sale is not subject to specific tax under Section 137 (now Section 140), as implemented by Section 20(a) of Revenue Regulations No. V-39.167

There is no new product when stemmed leaf tobacco is transferred between two L-7 permit holders. Thus, there can be no excise tax that will attach. The regulation, therefore, is reasonable and does not create a new statutory right.

RR Nos. V-39 and 17-67 didnot exceed the allowablelimits of legislative delegation

The cigarette manufacturers contend that the authority of the Department of Finance to prescribe conditions is merely procedural. Its rule-making power is only for the effective enforcement of the law, which implicitly rules out substantive modifications. The Secretary of Finance cannot, by mere regulation, limit the classes of manufacturers that may be entitled to the tax exemption. Otherwise, Section 137 (Section 132 in the 1939 Tax Code) would be invalid as an undue delegation of legislative power without the required standards or parameters.

The power of taxation is inherently legislative and may be imposed or revoked only by the legislature.168Moreover, this plenary power of taxation cannot be delegated by Congress to any other branch of government or private persons, unless its delegation is authorized by the Constitution itself.169 Hence, the discretion to ascertain the following — (a) basis, amount, or rate of tax; (b) person or property that is subject to tax; (c) exemptions and exclusions from tax; and (d) manner of collecting the tax — may not be delegated away by Congress.

However, it is well-settled that the power to fill in the details and manner as to the enforcement and administration of a law may be delegated to various specialized administrative agencies like the Secretary of Finance in this case.170

This court in Maceda v. Macaraig, Jr.171 explained the rationale behind the permissible delegation of legislative powers to specialized agencies like the Secretary of Finance:

The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its non-delegation the exception. The reason is the increasing complexity of modern life and many technical fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing inability of the legislature to cope directly with the many problems demanding its attention. The growth of society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many of the problems attendant upon present day undertakings, the legislature may not have the competence, let alone the interest and the time, to provide the required directand efficacious, not to say specific solutions.172

Thus, rules and regulations implementing the law are designed to fill in the details or to make explicit whatis general, which otherwise cannot all be incorporated in the provision of the law.173 Such rules and regulations, when promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law,174"deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields."175 To be valid, a revenue regulation mustbe within the scope of statutory authority or standard granted by the legislature. Specifically, the regulation must (1) be germane to the object and purpose of the law;176 (2) not contradict, but conform to, the standards the law prescribes;177 and (3) be issued for the sole purpose of carrying into effect the general provisions of our tax laws.178

Section 338 authorizes the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the 1939 Tax Code.

The specific authority of the Department of Finance to issue regulations relating to the taxation of tobacco products is found in Section 4179 (Specific provisions to be contained in regulations); Section 125180 (Payment of specific tax on imported articles to customs officers prior to release from the customhouse); Section 132 (Removal of tobacco products without prepayment of tax); Section 149181 (Extent of supervision over establishments producing taxable output); Section 150182 (Records to be kept by manufacturers; Assessment based thereon); and Section 152183 (Labels and form of packages) of the 1939 Tax Code.

RR No. V-39 was promulgated to enforce the provisions of Title IV (Specific Taxes) of the 1939 Tax Code relating to the manufacture and importation of, and payment of specific tax on, manufactured tobacco or products of tobacco. By an explicit provision in Section 132, the lawmakers defer to the Department of Finance to provide the details upon which the removal of stemmed leaf tobacco may be exempt from the specific tax in view of its supposed expertise in the tobacco trade. Section 20(a) of RR No. V-39 adhered to the standards because it provided the conditions— the proper documentation and recording of raw materials transferred from one factory to another — for a tax-free removal of stemmed leaf tobacco, without negating the imposition of specific tax under Section 137. The "effective enforcement of the provisions of [the Tax Code]" in Section 338 provides a sufficient standard for the Secretary of Finance in determining the conditionsfor the tax-free removal of stemmed

leaf tobacco. Section 4 further provides a limitation on the contents of revenue regulations to be issued by the Secretary of Finance.

On the other hand, RR No. 17-67 was promulgated "[i]n accordance with the provisions of Section 79 (B) of the Administrative Code, as amended by Act No. 2803."184 Among the specific administrative powers conferred upon a department head under the Administrative Code is that of promulgating rules and regulations, not contrary to law, "necessary to regulate the proper working and harmonious and efficient administration of each and all of the offices and dependencies of his Department, and for the strict enforcement and proper execution ofthe laws relative to matters under the jurisdiction of said Department."185 Under the 1939 Tax Code, the Secretary of Finance is authorized to prescribe regulations affecting the business of persons dealing in articles subject to specific tax, including the mode in which the processes of production of tobacco and tobacco products should be conducted and the records to be kept by manufacturers. Clearly then, the provisions of RR No. 17-67 classifying and regulating the business of persons dealing in tobacco and tobacco products are within the rulemaking authority of the Secretary of Finance.

RR No. 17-67 did not create anew classification

The contention of the cigarette manufacturers that RR No. 17-67 unduly restricted the meaning of manufacturers of tobacco products by limiting it to a few manufacturers suchas manufacturers of cigars and cigarettes is misleading.

The definitions in RR No. 17-67 of"manufacturer of tobacco" and "manufacturer of cigars and/or cigarettes" are in conformity with, as in fact they are verbatim adoptions of, the definitions under Section 194(m) and (n) of the 1939 Tax Code.

The cigarette companies further argue that RR No. 17-67 unduly restricted the meaning of L-7 in Section 20(a) of RR No. V-39 because when RR No. V-39 was issued, there was no distinction at all between L-7, L-3, L-6 permittees, and L-7 referred to manufacturers of any class of tobacco products including stemmed leaf tobacco.

This argument is similarly misplaced.

A reading of the entire RR No. V-39 shows that the regulation pertains particularly to activities ofmanufacturers of smoking and chewing tobacco, cigars and cigarettes.186 This was rightly so because the regulation was issued to enforce the tax law provisions in relation to the manufacture and importation of tobacco products. Clearly apparent in Section 10(a) is that when a manufacturer of chewing and smoking tobacco, cigars, or cigarettes has been qualified to conduct his or her business as such, he or she is issued by the internal revenue agent the corresponding register books and auxiliary register books pertaining to his business as well as the official register book, L-7, to be used as record of the raw materials for his or her product. It is, therefore, logical toconclude that the L-7 invoice and L-7 register book under Section 20(a) refers to those invoice and books used by manufacturers of chewing and smoking tobacco, cigars or cigarettes.

RR No. 17-67 clarified RR No. V-39 by explicitly designating the manufacturers of tobacco products as L-7 permittees (Section 2), in contrast to wholesale leaf tobacco dealers and those that process partially manufactured tobacco such as stemmed leaf tobacco. RR No. 17-67 did not create a new and restrictive classification but only expressed in clear and categorical terms the distinctions between "manufacturers" and "dealers" of tobacco that were already implicit in RR No. V-39.

Indeed, there is no repugnancy between RR No. 17-67 and RR No. V-39, on the one hand, and the Tax Code, on the other. It is safer to presume that the term "manufacturer" used in Section 137 on tax exempt removals referred to an entity that is engaged in the business of, and was licensed by the Bureau of Internal Revenue as a, manufacturer of tobacco products. It does not include an entity engaged in business as a dealer in tobacco that, incidentally or in furtherance of its business as a dealer, strip or thresh whole leaf tobacco or reprocess partially manufactured tobacco.187

Such construction is consistent with the rule that tax exemptions, deemed to be in derogation of the state’s sovereign right of taxation, are strictly applied and may be granted only under clear and unmistakable terms of the law and not merely upon a vague implication or inference.188

RR No. V-39 must be appliedand read together with RRNo. 17-67

The cigarette manufacturers’ argument is misplaced, stating that RR No. 17-67 could not modify RR No. V-39 because it was promulgated to enforce Act No. 2613, as amended (entitled "An Act to Improve the Methods of Production and the Quality

ofTobacco in the Philippines and to Develop the Export Trade Therein"), which allegedly had nothing whatsoever to do with the Tax Code or with the imposition of taxes.

"The Tobacco Inspection Service,instituted under Act No. 2613, was made part of the Bureau of Internal Revenue and Bureau of Customs administration for . . . internal revenue purposes."189 The Collector of Internal Revenue was charged to enforce Act No. 2613, otherwise known as the Tobacco Inspection Law, with a view to promoting the Philippine tobacco trade and thereby increase the revenues of the government. This can be inferred from a reading of the following provisions of Act No. 2613:

SEC. 6. The Collector of InternalRevenue shall have the power and it shall be his duty:

(a) To establish general and local rules respecting the classification, marking, and packing of tobacco for domestic sale or factory use and for exportation so far as may be necessary to secure leaf tobacco of good quality and to secure its handling under sanitary conditions, and to the end that leaf tobacco be not mixed, packed, and marked and of the same quality when it is not of the same class and origin.

(b) To establish from time to time adequate rules defining the standard and the type of leaf and manufactured tobacco which shall be exported, as well also as the manner in which standard tobacco, shall be packed. Before establishing the rules above specified, the Collector of Internal Revenue shall give due notice of the proposed rules or amendments to those interested and shall give them an opportunity to present their objections to such rules or amendments.

(c) To require, whenever it shall be deemed expedient the inspection of and affixture of inspection labels to tobacco removed from the province of itsorigin to another province before such removal, or to tobacco for domestic sale or factory use.190

SEC. 7. No leaf tobacco or manufactured tobacco shall be exported until it shall have been inspected by the Collector of Internal Revenue or his duly authorized representative and found to be standard for export.Collector of customs shall not permit the exportation of tobacco from the Philippines unless the shipment be in conformity with the requirements set forth in this Act. The prohibition contained in this section shall not apply to waste and refuse tobacco accumulated in the manufacturing process when it is invoiced and marked as such waste and refuse.191 (Emphasis supplied)

. . . .

SEC. 9. The Collector of Internal Revenue may appoint inspectors of tobacco for the purpose of making the inspections herein required, and may also detail any officer or employee of the Bureau to perform such duty. Said inspectors or employees shall likewise be charged with the dutyof grading leaf tobacco and shall perform such other duties as may be required of them in the promotion of the Philippine tobacco industry. The Collector of Internal Revenue shall likewise appoint, with the approval of the Secretary of Finance, agents in the United States for the purpose of promoting the export trade in tobacco with the United States, whose duty it shall be to inspect shipments of tobacco upon or after their arrival in that country when so required, to assist manufacturers of, exporters of, and dealers in tobacco in disseminating information regarding Philippine tobacco and, at the request of the parties, to act as arbitrators between the exporter in the Philippine Islands and the importer in the United States whenever a dispute arises between them as to the quality, sizes, classes, or shapes shipped or received. When acting asarbitrator as aforesaid, the agent shall proceed in accordance with the law governing arbitration and award inthe locality where the dispute arises. All agents, inspectors, and employees acting under and by virtue of this Act shall be subject to all penal provisions applicable to internal-revenue officers generally.192(Emphasis supplied)

. . . .

SEC. 12. The inspection fees collectedby virtue of the provisions of this Act shall constitute a special fund to be known a the Tobacco Inspection Fund, which shall be expended by the Collector of Internal Revenue, with the approval of the Secretary of Finance, upon allotment by a Board consisting of the Commissioner of Internal Revenue, the Director of Plant Industry, the Director of the Bureau of Commerce and Industry, two manufacturers designated by the Manila Tobacco Association, and two persons representing the interests of the tobacco producers and growers, appointed by the President of the Philippine Islands[.]

These funds may be expended for any of the following purposes:

(a) The payment of the expenses incident to the enforcement of this Act including the salaries of the inspectors and agents.

(b) The payment of expenses incident to the reconditioning and returning to the Philippine Islands of damaged tobacco and the reimbursement of the value of the United States internal-revenue stamps lost thereby.

(c) The advertising of Philippine tobacco products in the United States and in foreign countries. (d) The establishment of tobaccowarehouses in the Philippine Islands and in the United States at such points as the trade conditions may demand.

(e) The payment of bounties to encourage the production of leaf tobacco of high quality.

(f) The promotion and defense of the Philippine tobacco interests in the United States and in foreign countries.

(g) The establishment, operation, and maintenance of tobacco experimental farms for the purpose of studying and testing the best methods for the improvement of the leaves:Provided, however, That thirty per centum of the total annual income of the tobacco inspection fund shall be expended for the establishment, operation, and maintenance of said tobacco experimental farms and for the investigation and discovery of efficacious ways and means for the extermination and control of the pests and diseases of tobacco: Provided, further, That in the establishment of experimental farms, preference shall be given to municipalities offering the necessary suitable land for the establishment of an experimental farm.

(h) The sending of special agentsand commissions to study the markets of the United States and foreign countries with regard to the Philippine cigars and their propaganda in said markets.

(i) The organization of exhibits of cigars and other Philippine tobacco products in the United States and in foreign countries.193

SEC. 13. The Collector Internal Revenue shall be the executive officer charged with the enforcement of the provisions of this Act and of the regulations issued in accordance therewith, but it shall be the duty of the Director of Agriculture, with the approval of the Secretary of Public Instruction, to execute and enforce the provisions hereof referring to the cultivation of tobacco. (Emphasis supplied)

The cigarette manufacturers, thus, erroneously concluded that Act No. 2613 does not involve taxation.

Parenthetically, Section 8 of Act No. 2613 pertained to the imposition of tobacco inspection fees, which are National Internal Revenue taxes, these being one of the miscellaneous taxes provided for under the Tax Code. Said Section 8 was in fact repealed by Section 369(b) of the 1939 Tax Code, and the provision regarding inspection feesare found in Section 302 of the 1939 Tax Code.

Since the two revenue regulations, RR Nos. V-34 and 17-67, are in pari materia, i.e., they both pertain specifically to the regulation of tobacco trade, they should be read and applied together. Statutes are in pari materia when they relate to the same person or thing or to the same class of persons or things, or object, or cover the same specific or particular subject matter.

It is axiomatic in statutory construction that a statute must be interpreted, not only to be consistent with itself, but also to harmonize with other laws on the same subject matter, as to form a complete, coherent and intelligible system. The rule is expressed in the maxim, "interpretare et concordare legibus est optimus interpretandi,"or every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence.194 (Citation omitted)

The foregoing rules on statutory construction can be applied by analogy to administrative issuances suchas RR No. V-39 and RR No. 17-67, especially since both are issued by the same administrative agency.

Importation of stemmed leaftobacco not included in theexemption under Section 137

The transaction contemplated in Section 137 does not include importation of stemmed leaf tobacco for the reason that the law uses the word "sold" to describe the transaction of transferring the raw materials from one manufacturer to another.

The Tax Code treats an importerand a manufacturer differently. Section 123 clearly distinguishes between goods manufactured or produced in the Philippines and things imported. The law uses the proper term "importation" or "imported" whenever the transaction involves bringing in articles from foreign countries as provided under Section 125 (cf. Section 124). Whenever the Tax Code refers to importers and manufacturers, they are separately mentioned as two distinct persons or entities (Sections 156 and 160). Under Chapter II, whenever the law uses the word manufacturer, it only means local manufacturer or producer of domestic products (Sections 150, 151, and 152 of the 1939 Tax Code).

Moreover, foreign manufacturers oftobacco products not engaged in trade or business in the Philippines cannot be designated as L-7 since these are beyond the pale of Philippine law and regulations. The factories contemplated are those located oroperating only in the Philippines. Contrary to La Suerte’s claim, Chapter V, Section 61 of RR No. V-39195 is not applicable to justify the tax exemption of its importation of stemmed leaf tobacco because from the title of Chapter V, the provision particularly refers to specific taxes on imported cigars, cigarettes, smoking and chewing tobacco.

No estoppel against government

The cigarette manufacturers contend that for a long time prior to the transactions herein involved, the Collector of Internal Revenue had never subjected their purchases and importations of stemmed leaf tobacco to excise taxes. This prolonged practice allegedly represents the official and authoritative interpretation of the law by the Bureau of Internal Revenue which must be respected.

We are not persuaded.

In Philippine Long Distance Telephone Co. v. Collector of Internal Revenue,196 this court has held that this principle is not absolute, and an erroneous implementation by an officerbased on a misapprehension of law may be corrected when the true construction is ascertained. Thus:

The appellant argues that the Collector of Internal Revenue, previous to the transactions hereininvolved, had never collected the franchise tax on items of the same nature as those herein in question and this is strong evidence that such transactions are not subject to tax on the principle that a prolonged practice on the part of an executive or administrative officer in charge of executing a certain statute is an authoritative construction of great weight. This contention may be granted, but the principle is not absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of law an officer has erroneously executed it for a long time, the error may be corrected when the true construction is ascertained. Such we deem to be the situation in the present case. Incidentally, the doctrine of estoppel does not apply here.197 (Emphasis supplied)

This court reiterated this rule in Abello v. Commissioner of Internal Revenue198 where it rejected petitioners’ claim that the prolonged practice (since 1939 up to 1988) of the Bureau of Internal Revenue in not subjecting political contributions to donor’s tax was an authoritative interpretation of the statute, entitled to great weight and the highest respect:

This Court holds that the BIR isnot precluded from making a new interpretation of the law, especially when the old interpretation was flawed. It is a well-entrenched rule that[:]

. . . erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute, and that the Government is never estopped by mistake or error on the part of its agents.199 (Emphasis supplied, citations omitted)

Prolonged practice of the Bureau of Internal Revenue in not collecting the specific tax on stemmed leaf tobacco cannot validate what is otherwise an erroneous application and enforcement of the law. The government is never estopped from collecting legitimate taxes because of the error committed by its agents.200

In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals,201 this court upheld the validity of a revenue memorandum circular issued by the Commissioner of Internal Revenue to correct an error in a previous circular that resulted in the non-collection of tobacco inspection fees for a long time and declared that estoppel cannot work against the government:

. . . the assailed Revenue Memorandum Circular was issued to rectify the error in General Circular No. V-27 and to interpret the phrase "tobacco for domestic sale or factory use" with the view of arresting huge losses of tobacco inspection fees which were not collected and imposed since the said Circular (No. V-27) took effect. Furthermore, the questioned Revenue Memorandum Circular was also issued to apprise those concerned of the construction and interpretation which should be accorded to Act No. 2613, as amended, and which respondent is duty bound to enforce. It is an opinion on how the law should be construed and there was no attempt whatsoever to enlarge or restrict the meaning of the law.

The basis for the issuance of said Memorandum Circular was so stated in Resolution No. 2-67 of the Tobacco Board, wherein petitioners as members of the Manila Tobacco Association, Inc. were duly represented, the pertinent portions of which read:

". . . .

WHEREAS, this original recommendation of Mr. Hernandez was perfectly in accordance with existing law, more particularly Sec. 1 of Republic Act No. 31 which took effect since September 25, 1946, but perhaps thru oversight by the former Commissioners and officers of the Tobacco Inspection Service the propriety and legality of effecting the inspection of tobacco products for local salesand imported leaf tobacco for factory use might have overlooked resulting in huge losses of tobacco inspection fees. . ." (Italics supplied)

. . . .

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of the miscellaneous taxes provided for under the Tax Code. Section 228 (formerly Section 302) of Chapter VII of the Code specificallyprovides for the collection and manner of payment of the said inspection fees. It is within the power and duty of the Commissioner to collect the same, even without inspection, should tobacco products be removed clandestinely or surreptitiously from the establishment of the wholesaler, manufacturer or redrying plant and from the customs custody in case of imported leaf tobacco. Errors, omissions or flaws committed by BIR inspectors and representatives while in the performance of their duties cannot beset up as estoppel nor estop the Government from collecting a tax legally due. Tobacco inspection fees are levied and collected for purposes of regulation and control and also as a source of revenue since fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection Fee Fund created by Sec. 12 of Act No. 2613, as amended and the other fifty percentum, to the Cultural Center of the Philippines. (Sec. 88, Chapter VII, NIRC)202 (Emphasis in this paragraph supplied, citation omitted)

Furthermore, the December 12, 1972 ruling of Commissioner Misael P. Vera runs counter to Section 20(a)of RR No. V-39 in relation to RR No. 17-67, which provides that only transfers of stemmed leaf tobacco between L-7 permittees are exempt. An implementing regulation cannot be superseded by a ruling which is a mere interpretation of the law. While opinions and rulings of officials of the government called upon to execute or implement administrative laws command much respect and weight, courts are not bound to accept the same if they override, instead of remain consistent and in harmony with, the law they seek to apply and implement.203

Double taxation

The contention that the cigarette manufacturers are doubly taxed because they are paying the specific tax on the raw material and on the finished product in which the raw material was a part is also devoid of merit.

For double taxation in the objectionable or prohibited sense to exist, "the same property must be taxed twice, when it should be taxed but once."204 "[B]oth taxes must be imposed on the same property or subject- matter, for the same purpose, by the same. . . taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax."205

At all events, there is no constitutional prohibition against double taxation in the Philippines.206 This court has explained in Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte:207

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double taxation.1âwphi1 It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality.208 (Emphasis supplied, citations omitted)

"It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform."209

Excise taxes are essentially taxes on property210 because they are levied on certain specified goods or articles manufactured or produced in the Philippines for domestic saleor consumption or for any other disposition, and on goods imported. In this case,

there is no double taxation in the prohibited sense because the specific tax is imposed by explicit provisions of the Tax Code on two different articles or products: (1) on the stemmed leaf tobacco; and (2) on cigar or cigarette.211

WHEREFORE, this court:

1. DENIESthe petition for review filed by La Suerte Cigar & Cigarette Factory in G.R. No. 125346 and AFFIRMSthe questioned decision and resolution of the Court of Appeals in CA-G.R. SP. No. 38107;

2. GRANTS the petition for review filed by the Commissioner of Internal Revenue in G.R. Nos. 136328–29 and REVERSES and SETS ASIDE the challenged decision and resolution of the Court of Appeals in CA-G.R. SP. Nos. 38219 and 40313. Fortune Tobacco Corporation is ORDERED to pay the following taxes:

a. P28,938,446.25 as deficiency excise tax for the period covering January 1, 1986to June 30, 1989, plus 20% interest per annum from November 24,1989 until fully paid; and

b. P1,989,821.26 as deficiency excise tax for the period covering July 1, 1989 to November 30, 1990, plus 20% interest per annum from March 1,1991 until fully paid.

3. GRANTS the petition for review filed by the Commissioner of Internal Revenue in G.R. No. 144942 and REVERSES and SETS ASIDE the challenged decision of the Court of Appeals in CA-G.R. SP. No. 51902. La Suerte Cigar & Cigarette Factory’s claim for refund of the amount of P175,909.50 is DENIED.

4. DENIES the petition for review filed by Sterling Tobacco Corporation in G.R. No. 148605 and AFFIRMS the questioned decision and resolution of the Court of Appeals in CA-G.R. SP. No. 38159;

5. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in G.R. No. 158197 and AFFIRMS the questioned decision and resolution of the Court of Appeals in CA-G.R. SP. No. 37124; and

6. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in G.R. No. 165499 and AFFIRMS the questioned decision and resolution of the Court of Appeals in

CA-G.R. SP. No. 50241.

FINAL WITHHOLDING TAX

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS

DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF

FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondents.

D E C I S I O N

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the P35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax.  Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon

their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of Court seeking to:chanroblesvirtuallawlibrary

a.  ANNUL Respondent BIR’s Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of similar tenor and import, for being unconstitutional and for having been issued without jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction. . .;

b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting the 20% FWT from the payment of the face value of the Government Bonds upon their maturity;

c.  COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds upon maturity. . .; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as other related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the] Petition.3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) “with the assistance of its financial advisors, Rizal Commercial Banking Corp. (“RCBC”), RCBC Capital Corp. (“RCBC Capital”), CAPEX Finance and Investment Corp. (“CAPEX”) and SEED Capital Ventures, Inc. (SEED),”5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury of 10-year zero-coupon Treasury Certificates (T-notes).6  The T-notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the PEACe Bonds.7  The net proceeds from the sale of the Bonds “will be used to endow a permanent fund (Hanapbuhay® Fund) to finance meritorious activities and projects of accredited non-government organizations (NGOs) throughout the country.”8chanRoblesvirtualLawlibrary

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were also presented by banks and financial institutions, such as First Metro Investment Corporation (proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security Bank Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25, 1999).12  “[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or discount earned on the proposed zero-coupon bonds would be subject to the prevailing withholding tax.”13chanRoblesvirtualLawlibrary

A zero-coupon bond is a bond bought at a price substantially lower than its face value (or at a deep discount), with the face value repaid at the time of maturity.14  It does not make periodic interest payments, or have so-called “coupons,” hence the term zero-coupon bond.15  However, the discount to face value constitutes the return to the bondholder.16chanRoblesvirtualLawlibrary

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO’s letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds.  BIR Ruling No. 020-2001, signed by then Commissioner of Internal Revenue René G. Bañez confirmed that the PEACe Bonds would not be classified as deposit substitutes and would not be subject to the corresponding withholding tax:chanroblesvirtuallawlibrary

Thus, to be classified as “deposit substitutes”, the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at any one time.  In the light of your representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as “deposit substitutes” falling within the purview of the above definition.  Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings).  In sum, these rulings pronounced that to be able to determine whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the “20 or more individual or corporate lenders” rule must apply.  Moreover, the determination of the phrase “at any one time” for purposes of determining the “20 or more lenders” is to be determined at the time of the original issuance.  Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza)

questioned the propriety of issuing the bonds directly to a special purpose vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED).22  Former Treasurer Edeza recommended that the issuance of the Bonds “be done through the ADAPS”23 and that CODE-NGO “should get a GSED to bid in [sic] its behalf.”24chanRoblesvirtualLawlibrary

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury announced that “P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]”26  The notice stated that the Bonds “shall be issued to not more than 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue.”27  It also required the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their bid submissions the names of the institutions bidding through them to ensure strict compliance with the 19 lender limit.28  Lastly, it stated that “the issue being limited to 19 lenders and while taxable shall not be subject to the 20% final withholding [tax].”29chanRoblesvirtualLawlibrary

On October 12, 2001, the Bureau of Treasury released a memo30 on the “Formula for the Zero-Coupon Bond.”  The memo stated in part that the formula (in determining the purchase price and settlement amount) “is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit.”31chanRoblesvirtualLawlibrary

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the “Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001” (Auction Guidelines).32  The Auction Guidelines reiterated that the Bonds to be auctioned are “[n]ot subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001).”33  The Auction Guidelines, for the first time, also stated that the Bonds are “[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]”34chanRoblesvirtualLawlibrary

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35  Also on the same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding tax and the opinion of the Monetary Board on reserve eligibility.37chanRoblesvirtualLawlibrary

During the auction, there were 45 bids from 15 GSEDs.38  The bidding range was very wide, from as low as 12.248% to as high as 18.000%.39  Nonetheless, the Bureau of Treasury accepted the auction results.40  The cut-off was at 12.75%.41chanRoblesvirtualLawlibrary

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids.42  Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion,43resulting in a discount of approximately P24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.45  RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of the P35 billion Bonds at the price of P11,995,513,716.51.47  In Section 7(r) of the underwriting agreement, CODE-NGO represented that “[a]ll income derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively.”48chanRoblesvirtualLawlibrary

RCBC Capital sold the Government Bonds in the secondary market for an issue price of P11,995,513,716.51.  Petitioners purchased the PEACe Bonds on different dates.49chanRoblesvirtualLawlibrary

BIR rulings

On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the BIR to withhold said final tax at the maturity thereof, [allegedly without] consultation with Petitioners as bondholders, and without conducting any hearing.”50chanRoblesvirtualLawlibrary

“It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the proper tax treatment of the discount or interest income derived from the Government Bonds.”51  The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:chanroblesvirtuallawlibrary

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest income from deposit substitutes.  It is now settled that all treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes.  In the case of zero-coupon bonds,

the discount (i.e. difference between face value and purchase price/discounted value of the bond) is treated as interest income of the purchaser/holder.  Thus, the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .

. . . .

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able to collect the final tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings.  Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax Code is clear that the “term public means borrowing from twenty (20) or more individual or corporate lenders at any one time.”  The word “any” plainly indicates that the period contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created when no such exemption is found in the law.55

On October 11, 2011, a “Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System Holdings Corporation and Subsidiaries (“PDS Group”).  The Memo provides that in view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no transfer of the same shall be allowed to be recorded in the Registry of Scripless Securities (“ROSS”) from 12 October 2011 until the redemption payment date on 18 October 2011.  Thus, the bondholders of record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the BTr as the beneficial owners of such securities for the relevant [tax] payments to be imposed thereon.”56chanRoblesvirtualLawlibrary

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or interest earned on the PEACe Bonds should “be imposed and withheld not only on RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’”58chanRoblesvirtualLawlibrary

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for a temporary restraining order and/or writ of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO)60 “enjoining the implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner banks and placed in escrow pending resolution of [the] petition.”61chanRoblesvirtualLawlibrary

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-intervention62 dated October 27, 2011, which was granted by this court on November 15, 2011.63chanRoblesvirtualLawlibrary

Meanwhile, on November 9, 2011, petitioners filed their “Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO.”64  They alleged that on the same day that the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts representing the face value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income, and that the Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding tax.65chanRoblesvirtualLawlibrary

On November 15, 2011, this court directed respondents to: “(1) SHOW CAUSE why they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners may place the corresponding funds in escrow pending resolution of the petition.”66chanRoblesvirtualLawlibrary

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with comment on the petition-in-intervention of RCBC and RCBC Capital).67  The motion was granted by this court on November 22, 2011.68chanRoblesvirtualLawlibrary

On December 1, 2011, public respondents filed their compliance.69  They explained that: 1) “the implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18, 2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is alreadyfait accompli . . . when the Resolution and TRO were served to and received by respondents BTr and National Treasurer [on October 19, 2011]”;70 and 2) the withheld amount has ipso facto become public funds and cannot be disbursed or released to petitioners without congressional appropriation.71  Respondents further aver that “[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that the 20% final withholding tax on interest income therefrom shall be withheld by the banks and placed in escrow . . .’ has also been rendered moot[.]”72chanRoblesvirtualLawlibrary

On December 6, 2011, this court noted respondents' compliance.73chanRoblesvirtualLawlibrary

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by RCBC and RCBC Capital and CODE-NGO.

On November 27, 2012, petitioners filed their “Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary Restraining Order).”75chanRoblesvirtualLawlibrary

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to direct respondents to comply with the temporary restraining order); and (b) required respondents to comment thereon.76chanRoblesvirtualLawlibrary

Respondents’ comment77 was filed on April 15, 2013, and petitioners filed their reply78 on June 5, 2013.cralawred

Issues

The main issues to be resolved are:ChanRoblesVirtualawlibrary

I. Whether the PEACe Bonds are “deposit substitutes” and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code.  Related to this question is the interpretation of the phrase “borrowing from twenty (20) or more individual or corporate lenders at any one time” under Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered “deposit substitutes,” whether the government or the Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax from the face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?

Arguments of petitioners, RCBC and RCBCCapital, and CODE-NGO 

Petitioners argue that “[a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . . . to pay the face value amount of PhP35 Billion upon maturity without any deduction whatsoever.”79  They add that “the Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after several, consistent categorical declarations that such bonds are exempt from the 20% FWT, without violating due process”80 and the constitutional principle on non-impairment of contracts.81  Petitioners aver that at the time they purchased the Bonds, they had the right to expect that they would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings.82  “[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith thereon.”83chanRoblesvirtualLawlibrary

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the 1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the Bureau of Treasury issued the Bonds.84  They allege that the 2004, 2005, and 2011 BIR Rulings “erroneously interpreted that the number of investors that participate in the ‘secondary market’ is the determining factor in reckoning the existence or non-existence of twenty (20) or more individual or corporate lenders.”85  Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that “the mere issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit substitutes[.]’”86  Thus, “[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative legislation[.]”87chanRoblesvirtualLawlibrary

Petitioners further argue that their income from the Bonds is a “trading gain,” which is exempt from income tax.88  They insist that “[t]hey are not lenders whose income is considered as ‘interest income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]”89 because they “acquired the Government Bonds in the secondary or tertiary market.”90chanRoblesvirtualLawlibrary

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the collection of the final tax was barred by prescription.91  They point out that under Section 7 of DOF Department Order No. 141-95,92 the final withholding tax “should have been withheld at the time of their issuance[.]”93  Also, under Section 203 of the 1997 National Internal Revenue Code, “internal revenue taxes, such as the final tax, [should] be assessed within three (3) years after the last day prescribed by law for the filing of the return.”94chanRoblesvirtualLawlibrary

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was in violation of their property rights,95 their constitutional right to due process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97  Allegedly, it would also have “an adverse effect of colossal magnitude on the investors, both local and foreign, the Philippine capital market, and most importantly, the country’s standing in the international commercial community.”98  Petitioners explained that “unless enjoined, the government’s threatened refusal to pay the full value of the Government Bonds will negatively impact on the image of the country in terms of protection for property rights (including financial assets), degree of legal protection for lender’s rights, and strength of investor protection.”99  They cited the country’s ranking in the World Economic Forum: 75th in the world in its 2011–2012 Global Competitiveness Index, 111thout of 142 countries worldwide and 2nd to the last among ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100  It would also allegedly “send a reverberating message to the whole world that there is no certainty, predictability, and stability of financial transactions in the capital markets[.]”101  “[T]he integrity of Government-issued bonds and notes will be greatly shattered and the credit of the Philippine Government will suffer”102 if the sudden turnaround of the government will be allowed,103 and it will reinforce “investors’ perception that the level of regulatory risk for contracts entered into by the Philippine Government is high,”104 thus resulting in higher interest rate for government-issued debt instruments and lowered credit rating.105chanRoblesvirtualLawlibrary

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue “gravely and seriously abused her discretion in the exercise of her rule-making power”106when she issued the assailed 2011 BIR Ruling which ruled that “all treasury bonds are ‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the requirement of twenty (20) or more lenders mandated under the NIRC.”107  They argue that “[b]y her blanket and arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax on privately-placed treasury bonds.”108  Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial impairment of their vested rights109 under the Bonds since the ruling imposes new conditions by “subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as previously represented by the Government, through respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon their maturity.”110  They added that “[t]he exemption from the twenty percent (20%) final withholding tax [was] the primary inducement and principal consideration for [their] participat[ion] in the auction and underwriting of the PEACe Bonds.”111chanRoblesvirtualLawlibrary

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them of the opportunity to challenge the same.112chanRoblesvirtualLawlibrary

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable “as [these] parties explicitly represented . . . that the said bonds are exempt from the final withholding tax.”113chanRoblesvirtualLawlibrary

Finally, petitioners-intervenors RCBC and RCBC Capital argue that “the implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing securities, which is contrary to the State policies of stabilizing the financial system and of developing capital markets.”114chanRoblesvirtualLawlibrary

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are “invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the applicability of the ‘20 or more lender’ rule to government debt instruments”[;]115 (b) “when [it] sold the PEACe Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC”[;]116 (c) “the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a contractual commitment granted by the Government in exchange for a valid and material consideration [i.e., the issue price paid and savings in borrowing cost derived by the Government,] thus protected by the non-impairment clause of the 1987 Constitution”[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings “did not validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR administrative guidance issued and published[.]”118  CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper because: (a) it involves determination of a factual question;119 and (b) it is premature and states no cause of action as it amounts to an anticipatory third-party claim.120chanRoblesvirtualLawlibrary

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies and hierarchy of courts, resulting in a lack of cause of action that justifies the dismissal of the petition.121  According to them, “the jurisdiction to review the rulings of the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax Appeals.”122  They point out that “a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’”123chanRoblesvirtualLawlibrary

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124  They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4.125chanRoblesvirtualLawlibrary

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but interest income subject to income tax.126  They explain that “[w]ith the payment of the PhP35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about PhP24.8 Billion as payment for interest.  Such interest is clearly an income of the Petitioners considering that the same is a flow of wealth and not merely a return of capital – the capital initially invested in the Bonds being approximately PhP10.2 Billion[.]”127chanRoblesvirtualLawlibrary

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an impairment of the obligations of contract, respondents aver that: “The BTr has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material term of the Bonds”[;]128 “[t]here has been no change in the laws governing the taxability of interest income from deposit substitutes and said laws are read into every contract”[;]129“[t]he assailed BIR Rulings merely interpret the term “deposit substitute” in accordance with the letter and spirit of the Tax Code”[;]130 “[t]he withholding of the 20% FWT does not result in a default by the Government as the latter performed its obligations to the bondholders in full”[;]131 and “[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds.”132chanRoblesvirtualLawlibrary

Similarly, respondents counter that the withholding of “[t]he 20% final withholding tax on the PEACe Bonds does not amount to a deprivation of property without due process of law.”133  Their imposition of the 20% final withholding tax is not arbitrary because they were only performing a duty imposed by law;134 “[t]he 2011 BIR Ruling is an interpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier construction given to the term by the 2004 and 2005 BIR Rulings.”135  Hence, respondents argue that “there was no need to observe the requirements of notice, hearing, and publication[.]”136chanRoblesvirtualLawlibrary

Nonetheless, respondents add that “there is every reason to believe that Petitioners — all major financial institutions equipped with both internal and external accounting and compliance departments as well as access to both internal and external legal counsel; actively involved in industry organizations such as the Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in the regular and special debt issuances of the BTr and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and 2005 BIR Rulings.”137  Allegedly, “the sudden and drastic drop — including virtually zero trading for extended periods of six months to almost a year — in the trading volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants, including the Petitioners herein, were aware of the ruling and its consequences for the PEACe Bonds.”138chanRoblesvirtualLawlibrary

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes by creating an unwarranted exception to the requirement of having 20 or more lenders/purchasers;140 and the word “any” in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is the entire term of the bond and not merely the point of origination or issuance.141chanRoblesvirtualLawlibrary

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice petitioners.142  “[W]ith or without the 2011 BIR Ruling, Petitioners would be liable to pay a 20% final withholding tax just the same because the PEACe Bonds in their possession are legally in the nature of deposit substitutes subject to a 20% final withholding tax under the NIRC.”143  Section 7 of DOF Department Order No. 141-95 also provides that income derived from Treasury bonds is subject to the 20% final withholding tax.144  “[W]hile revenue regulations as a general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer.”145chanRoblesvirtualLawlibrary

Finally, respondents submit that “there are a number of variables and factors affecting a capital market.”146  “[C]apital market itself is inherently unstable.”147  Thus, “[p]etitioners’ argument that the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition that is not a justiciable issue.”148chanRoblesvirtualLawlibrary

On the prayer for the temporary restraining order, respondents argue that this order “could no longer be implemented [because] the acts sought to be enjoined are already fait accompli.”149  They add that “to disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation made by law[.]’”150  “The remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their position be upheld by the Honorable Court.”151chanRoblesvirtualLawlibrary

Respondents also argue that “the implementation of the TRO would violate Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection of any national internal revenue tax imposed by the Tax Code.”152chanRoblesvirtualLawlibrary

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it declared that all government debt instruments are deposit substitutes regardless of the 20-lender rule; and

2. The 2011 BIR Ruling cannot  be applied retroactively because:

a) It will violate the contract clause;

o It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the government as an inducement and important consideration for the purchase of the Bonds;

b) It constitutes deprivation of property without due process because there was no prior notice to bondholders and hearing and publication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;

d) It violates the constitutional provision on supporting activities of non-government organizations and development of the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue Code and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when the latter’s rulings are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law:

a. Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they allege to have been wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.

Court’s ruling

Procedural Issues

Non-exhaustion of administrativeremedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of Finance.

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

Thus, it was held that “[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions are generally not entertained.”153  The remedy within the administrative machinery must be resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be sought.154chanRoblesvirtualLawlibrary

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:chanroblesvirtuallawlibrary

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal question,155 (3) when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of the President bears the implied and assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency of judicial intervention.156 (Emphasis supplied, citations omitted)

The exceptions under (2) and (11) are present in this case.  The question involved is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due process.  Judicial intervention is likewise urgent with the impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an exercise in futility.157chanRoblesvirtualLawlibrary

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue.  It appears that the Secretary of Finance adopted the Commissioner of Internal Revenue’s opinions as his own.158  This position was in fact confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to withhold the amount corresponding to the 20% final withholding tax on the interest or discounts allegedly due from the bondholders on the strength of the 2011 BIR Ruling.

Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals.  The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on the taxability of the interest income from zero-coupon bonds

issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282,160 such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:chanroblesvirtuallawlibrary

SEC. 7. Jurisdiction. - The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

. . . .

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.

. . . .

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:chanroblesvirtuallawlibrary

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops. . . .

. . . .

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:chanroblesvirtuallawlibrary

“SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes.” (Emphasis in the original)

. . . .

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:chanroblesvirtuallawlibrary

“Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere strictly to the interpretation given by the defendant to the statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of Internal Revenue (now Commissioner of

Internal Revenue) on the manner of enforcement of the said statute, the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue.’”163

In exceptional cases, however, this court entertained direct recourse to it when “dictated by public welfare and the advancement of public policy, or demanded by the broader interest of justice, or the orders complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate remedy.”164chanRoblesvirtualLawlibrary

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local Government,165 this court noted that the petition for prohibition was filed directly before it “in disregard of the rule on hierarchy of courts.  However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and decide the same on its merits in view of the significant constitutional issues raised by the parties dealing with the tax treatment of cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the matter.”166chanRoblesvirtualLawlibrary

Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a definitive declaration of whether government debt instruments are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or product that may be issued and traded in the market.  Due to the changing positions of the Bureau of Internal Revenue on this issue, there is a need for a final ruling from this court to stabilize the expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been rendered moot by this court’s issuance of the temporary restraining order enjoining the implementation of the 2011 BIR Ruling.  The temporary restraining order effectively recognized the urgency and necessity of direct resort to this court.

Substantive issues

Tax treatment of deposit substitutes

Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholding tax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.  These provisions read:chanroblesvirtuallawlibrary

SEC. 24. Income Tax Rates.

. . . .

(B) Rate of Tax on Certain Passive Income.(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:chanroblesvirtuallawlibrary

Four (4) years to less than five (5) years - 5%;Three (3) years to less than four (4) years - 12%; andLess than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

. . . .

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

. . . .

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977 National Internal Revenue Code through Presidential Decree No. 1739168issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit substitutes, viz:chanroblesvirtuallawlibrary

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These promissory notes, repurchase agreements, certificates of assignment or participation and similar instrument with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission of the Philippines for commercial, industrial, finance companies and either non-financial companies: Provided, however, that only debt instruments issued for inter-bank call loans to cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same definition and specifically identified the following borrowings as “deposit substitutes”:chanroblesvirtuallawlibrary

SECTION 2. Definitions of Terms. . . .

(h) “Deposit substitutes” shall mean –

. . . .

(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking functions evidenced by deposit substitutes instruments, except interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust companies, including the trust department of banks and investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of the qualifying phrase for public – borrowing from 20 or more individual or corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus:chanroblesvirtuallawlibrary

SEC. 22. Definitions - When used in this Title:

. . . .

(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to, bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined “public” to mean “twenty (20) or more individual or corporate lenders at any one time.”  Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to the 20% final withholding tax.

20-lender rule

Petitioners contend that “there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds.”169  On the other hand, respondents theorize that the word “any” “indicates that the period contemplated is the entire term of the bond and not merely the point of origination or issuance[,]”170 such that if the debt instruments “were subsequently sold in secondary markets and so on, in such a way that twenty (20) or more buyers eventually own the instruments, then it becomes indubitable that funds would be obtained from the “public” as defined in Section 22(Y) of the NIRC.”171  Indeed, in the context of the financial market, the words “at any one time” create an ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units (households and business firms that have savings or excess funds) flow to the deficit units (mainly business firms and government that need funds to finance their operations or growth).  They bring suppliers and users of funds together and provide the means by which the lenders transform their funds into financial assets, and the borrowers receive these funds now considered as their financial liabilities.  The transfer of funds is represented by a security, such as stocks and bonds.  Fund suppliers earn a return on their investment; the return is necessary to ensure that funds are supplied to the financial markets.172chanRoblesvirtualLawlibrary

“The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the securities[,]”173 namely:  (1) the money market, which facilitates the flow of short-term funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-term funds (with maturities of more than one year).174chanRoblesvirtualLawlibrary

Whether referring to money market securities or capital market securities, transactions occur either in the primary market or in the secondary market.175  “Primary markets facilitate the issuance of new securities.  Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership of the securities.”176  The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors.177chanRoblesvirtualLawlibrary

“Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial transactions.”178  Still, all systems perform one basic function: the quick mobilization of money from the lenders/investors to the borrowers.179chanRoblesvirtualLawlibrary

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance.180chanRoblesvirtualLawlibrary

With direct financing, the “borrower and lender meet each other and exchange funds in return for financial assets”181 (e.g., purchasing bonds directly from the company issuing them).  This method provides certain limitations such as: (a) “both borrower and lender must desire to exchange the same amount of funds at the same time”[;]182 and (b) “both lender and borrower must frequently incur substantial information costs simply to find each other.”183chanRoblesvirtualLawlibrary

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information

costs.184  A broker185 is “an individual or financial institution who provides information concerning possible purchases and sales of securities.  Either a buyer or a seller of securities may contact a broker, whose job is simply to bring buyers and sellers together.”186  Adealer187 “also serves as a middleman between buyers and sellers, but the dealer actually acquires the seller’s securities in the hope of selling them at a later time at a more favorable price.”188  Frequently, “a dealer will split up a large issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into investment.”189  In semidirect financing, “[t]he ultimate lender still winds up holding the borrower’s securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s [debt security].  There still must be a fundamental coincidence of wants and needs between [lenders and borrowers] for semidirect financial transactions to take place.”190chanRoblesvirtualLawlibrary

“The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions, carried out with the help of financial intermediaries”191 or financial institutions, like banks, investment banks, finance companies, insurance companies, and mutual funds.192  Financial intermediaries accept funds from surplus units and channel the funds to deficit units.193  “Depository institutions [such as banks] accept deposits from surplus units and provide credit to deficit units through loans and purchase of [debt] securities.”194  Nondepository institutions, like mutual funds, issue securities of their own (usually in smaller and affordable denominations) to surplus units and at the same time purchase debt securities of deficit units.195  “By pooling the resources of [small savers, a financial intermediary] can service the credit needs of large firms simultaneously.”196chanRoblesvirtualLawlibrary

The financial market, therefore, is an agglomeration of financial transactions in securities performed by market participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need them (deficit units or borrowers).

Meaning of “at any one time”

Thus, from the point of view of the financial market, the phrase “at any one time” for purposes of determining the “20 or more lenders” would mean every transaction executed in the primary or secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of “20 or more lenders/investors” is made at any transaction in connection with the purchase or sale of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes.  Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds.

For debt instruments that arenot deposit substitutes, regularincome tax applies  

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997 National Internal Revenue Code are subject to the regular income tax.

The phrase “all income derived from whatever source” in Chapter VI, Computation of Gross Income,Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all income not expressly exempted as within the class of taxable income under our laws.

“The definition of gross income is broad enough to include all passive incomes subject to specific tax rates or final taxes.”197  Hence, interest income from deposit substitutes are necessarily part of taxable income.  “However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income, which determines taxable income.”198  “Stated otherwise . . . if there were no withholding tax system in place in this

country, this 20 percent portion of the ‘passive’ income of [creditors/lenders] would actually be paid to the [creditors/lenders] and then remitted by them to the government in payment of their income tax.”199chanRoblesvirtualLawlibrary

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the rationale behind the withholding tax system:chanroblesvirtuallawlibrary

The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.201 (Citations omitted)

“The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source.”202chanRoblesvirtualLawlibrary

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller is required to withhold the 20% final income tax on the imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the “gains” contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading, redemption, or retirement of long-term securities from ordinary income tax.

The term “gain” as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of money.  Gains from sale or exchange or retirement of bonds or other certificate of indebtedness fall within the general category of “gains derived from dealings in property” under Section 32(A)(3), while interest from bonds or other certificate of indebtedness falls within the category of “interests” under Section 32(A)(4).204  The use of the term “gains from sale” in Section 32(B)(7)(g) shows the intent of Congress not to include interest as referred under Sections 24, 25, 27, and 28 in the exemption.205chanRoblesvirtualLawlibrary

Hence, the “gains” contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before their maturity date, which is the difference between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds.  For discounted instruments, like the zero-coupon bonds, the trading gain shall be the excess of the selling price over the book value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of sale) of the instruments.206chanRoblesvirtualLawlibrary

The Bureau of InternalRevenue rulings

The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent with law.207  Its interpretation of “at any one time” to mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that “all treasury bonds . . . regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes.”208  Being the subject of this petition, it is, thus, declared void because it completely disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code.  It also created a distinction for government debt instruments as against those issued by private corporations when there was none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act.  Their constituent provisions must be read together, endeavoring to make every part effective, harmonious, and sensible.209  That construction which will leave every word operative will be favored over one that leaves some word, clause, or sentence meaningless and insignificant.210chanRoblesvirtualLawlibrary

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997 National Internal Revenue Code is an authoritative construction of great weight, but the principle is not absolute and may be overcome by strong reasons to the contrary.  If through a misapprehension of law an officer has issued an erroneous interpretation, the error must be corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National Internal Revenue Code and, hence, “[cannot] be given weight for to do so would, in effect, amend the statute.”212  Thus:chanroblesvirtuallawlibrary

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC.  In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue.  It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts.  Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous.  Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and implement.213 (Citations omitted)

This court further held that “[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action [because] there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.”214chanRoblesvirtualLawlibrary

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops.216  It was held that “the [Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars not consistent with the law sought to be applied.  Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out.  Only Congress can repeal or amend the law.”217chanRoblesvirtualLawlibrary

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated that the Commissioner of Internal Revenue is not bound by the ruling of his predecessors,219but, to the contrary, the overruling of decisions is inherent in the interpretation of laws:chanroblesvirtuallawlibrary

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability or wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed those questions to administrative judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of power a court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an “agricultural food product” within the meaning of § 103(b) of the NIRC. As the Solicitor General contends, “copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food.” That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis supplied, citations omitted)

Tax treatment of income derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at P10.2 billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds were issued at the time of origination.  However, a reading of the underwriting agreement221and RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately P11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC.  In reality, therefore, the entire P10.2 billion borrowing received by the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or issuance.  At this point, however, we do not know as to how many investors the PEACe Bonds were sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds.  Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by individuals from long-term deposits or investments with a holding period of not less than five (5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO, or any lender or investor if such be the case, as the withholding agents.

The collection of tax is not barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, to be computed from the time of discovery of the falsity, fraud, or omission.  Section 203 states:chanroblesvirtuallawlibrary

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied)

. . . .

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.    (a)  In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-intervenors.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the 20% final withholding tax on October 18, 2011 was justified  

Under the Rules of Court, court orders are required to be “served upon the parties affected.”224  Moreover, service may be made personally or by mail.225  And, “[p]ersonal service is complete upon actual delivery [of the order.]”226  This court’s temporary restraining order was received only on October 19, 2011, or a day after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of service of pleadings, court orders, or processes.  Moreover, the news reports227cited by petitioners were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they did not give the exact contents of the temporary restraining order.

“[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that such injunction or order was served on him personally or that he had notice of the issuance or making of such injunction or order.”228chanRoblesvirtualLawlibrary

At any rate, “[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax due”229 and return the amount of the tax withheld should it be finally determined that the income paid is not subject to withholding.230  Hence, respondent Bureau of Treasury was justified in withholding the amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this court’s temporary restraining order only on October 19, 2011, or the day after this tax had been withheld.

Respondents’ retention of the amounts withheld is a defiance of the temporary restraining order 

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20% final withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance of this court’s temporary restraining order.231chanRoblesvirtualLawlibrary

The temporary restraining order is not moot.  The acts sought to be enjoined are not fait accompli.  For an act to be considered fait accompli, the act must have already been fully accomplished and consummated.232  It must be irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and hearings on cases.235  When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature,236 the defense of fait accompli cannot prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue.  Even though the Bureau of Treasury had already withheld the 20% final withholding tax237 when it received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10, 2011.238  The act enjoined by the temporary restraining order had not yet been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following month after the said taxes had been withheld.240  The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury,241 which shall be the basis for recording the remittance of the tax collection.242  The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax collection in the Journal of Tax Remittance by government agencies based on its copies of the TRA.243  Respondents did not submit any withholding tax return or TRA to prove that the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to this court shows:chanroblesvirtuallawlibrary

Account Code Debit Amount Credit AmountBonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00Coupon T/Bonds(Peace Bonds) – 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59Due to BIR 412-002  4,966,207,796.41

To record redemption of 10yr Zero  coupon

(Peace Bond) net of the 20% final  withholding tax pursuant to BIR Ruling No. 378-2011, value date, October 18, 2011 per BTr letter authority and BSP Bank Statements.

The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011.  The entries merely show that the monies corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to “show cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the corresponding funds in escrow pending resolution of the petition.”245  The 20% final withholding tax was effectively placed in custodia legis when this court ordered the deposit of the amount in escrow.  The Bureau of Treasury could still release the money withheld to petitioners for the latter to place in escrow pursuant to this court’s directive.  There was no legal obstacle to the release of the 20% final withholding tax to petitioners.

Congressional appropriation is not required for the servicing of public debts in view of the automatic appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary

Section 31. Automatic Appropriations.  All expenditures for (a) personnel retirement premiums, government service insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national government guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no obligations shall be incurred or payments made from funds thus automatically appropriated except as issued in the form of regular budgetary allotments.

Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans, or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the Republic of the Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations and/or government financial institutions;

b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the Philippines;

d. other public or private institutions and guaranteed by government-owned or controlled corporations and/or government financial institutions.

The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a lawful and valid obligation of the Republic under the Government Bonds.  Since said obligation represents a public debt, the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the National Treasury and is not required to be the subject of another appropriation legislation:chanroblesvirtuallawlibrary

SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such sinking funds the principal amount of any obligations which have matured, or which have been called for redemption or for which redemption has been demanded in accordance with terms prescribed by him prior to date of issue . . . In the case of interest-bearing obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by the terms and conditions under which such obligations were originally issued. There are hereby appropriated as a continuing appropriation out of any moneys in the National

Treasury not otherwise appropriated, such sums as may be necessary from time to time to carry out the provisions of this section. The Secretary of Finance shall transmit to Congress during the first month of each regular session a detailed statement of all expenditures made under this section during the calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:chanroblesvirtuallawlibrary

Section 38. Demand Deposit Account. – The Treasurer of the Philippines maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury Bills and Bonds shall be charged.

Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court has held:chanroblesvirtuallawlibrary

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment and wisdom formulates an appropriation act precisely following the process established by the Constitution, which specifies that no money may be paid from the Treasury except in accordance with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since authorization therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself with details for implementation by the Executive, but largely with annual levels and approval thereof upon due deliberations as part of the whole obligation program for the year. Upon such approval, Congress has spoken and cannot be said to have delegated its wisdom to the Executive, on whose part lies the implementation or execution of the legislative wisdom.246(Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which remained in full force and effect, until set aside, vacated, or modified.  Its conduct finds no justification and is reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED.  BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final withholding tax despite this court’s directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011.

VALUE ADDED TAX

VISAYAS GEOTHERMAL POWER COMPANY, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the February 7, 2011 Decision1 and the June 27, 2011 Resolution2 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB Case Nos. 561 and 562, which reversed and set aside the April 17, 2009 Decision of the CT A Second Division in CTA Case No. 7559.

The Facts:

Petitioner Visayas Geothermal Power Company (VGPC) is a special limited partnership duly organized and existing under Philippine Laws with its principal office at Milagro, Ormoc City, Province of Leyte. It is principally engaged in the business of

power generation through geothermal energy and the sale of generated power to the Philippine National Oil Company (PNOC),pursuant to the Energy Conversion Agreement.

VGPC filed with the Bureau of Internal Revenue (BIR)its Original Quarterly VAT Returns for the first to fourth quarters of taxable year 2005 on April 25, 2005, July 25, 2005, October 25, 2006, and January 20, 2006, respectively.

On December 6, 2006, it filed an administrative claim for refund for the amount of 14,160,807.95 with the BIR District Office No. 89 of Ormoc City on the ground that it was entitled to recover excess and unutilized input VAT payments for the four quarters of taxable year 2005, pursuant to Republic Act (R.A.) No. 9136,3 which treated sales of generated power subject to VAT to a zero percent (0%) rate starting June 26, 2001.

Nearly one month later, on January3, 2007, while its administrative claim was pending, VGPC filed its judicial claim via a petition for review with the CTA praying for a refund or the issuance of a tax credit certificate in the amount of 14,160,807.95, covering the four quarters of taxable year 2005.

In its April 17, 2009 Decision, the CTA Second Division partially granted the petition as follows:

WHEREFORE, in view of the foregoing considerations, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of SEVEN MILLION SIX HUNDRED NINENTY NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized input VAT paid on domestic purchases of non-capital goods and services, services rendered by non-residents, and importations of non-capital goods for the first to fourth quarters of taxable year 2005.

SO ORDERED.4

The CTA Second Division found that only the amount of 7,699,366.37 was duly substantiated by the required evidence. As to the timeliness of the filing of the judicial claim, the Court ruled that following the case of Commissioner of Internal Revenue (CIR) v. Mirant Pagbilao Corporation (Mirant),5 both the administrative and judicial claims were filed within the two-year prescriptive period provided in Section 112(A) of the National Internal Revenue Code of 1997 (NIRC),the reckoning point of the period being the close of the taxable quarter when the sales were made.

In its October 29, 2009 Resolution,6 the CTA Second Division denied the separate motions for partial reconsideration filed by VGPC and the CIR. Thus, both VGPC and the CIR appealed to the CTA En Banc.

In the assailed February 7, 2011 Decision,7 the CTA En Banc reversed and set aside the decision and resolution of the CTA Second Division, and dismissed the original petition for review for having been filed prematurely, to wit:

WHEREFORE, premises considered:

i. As regards CTA EB Case No. 562, the Petition for Review is hereby DISMISSED; and

ii. As regards CTA EB Case No. 561, the Petition for Review is hereby GRANTED.

Accordingly, the Decision, dated April 17, 2009, and the Resolution, dated October 29, 2009, of the CTA Former Second Division are hereby REVERSED and SET ASIDE, and another one is hereby entered DISMISSING the Petition for Review filed in CTA Case No. 7559 for having been filed prematurely.

SO ORDERED.8

The CTA En Banc explained that although VGPC seasonably filed its administrative claim within the two-year prescriptive period, its judicial claim filed with the CTA Second Division was prematurely filed under Section 112(D) of the National Internal Revenue Code (NIRC).Citing the case of CIR v. Aichi Forging Company of Asia, Inc. (Aichi),9 the CTA En Banc held that the judicial claim filed 28 days after the petitioner filed its administrative claim, without waiting for the expiration of the 120-day period, was premature and, thus, the CTA acquired no jurisdiction over the case.

The VGPC filed a motion for reconsideration, but the CTA En Banc denied it in the assailed June 27, 2011 Resolution for lack of merit. It stated that the case of Atlas Consolidated Mining v. CIR (Atlas)10 relied upon by the petitioner had long been abandoned.

Hence, this petition.

ASSIGNMENT OF ERRORS

I

The CTA En Banc erred in finding that the 120-day and 30-day periods prescribed under Section 112(D) of the 1997 Tax Code are jurisdictional and mandatory in the filing of the judicial claim for refund. The CTA-Division should take cognizance of the judicial appeal as long as it is filed with the two-year prescriptive period under Section 229 of the 1997 Tax Code.

II

The CTA En Banc erred in finding that Aichi prevails over and/or overturned the doctrine in Atlas, which upheld the primacy of the two-year period under Section 229 of the Tax Code. The law and jurisprudence have long established the doctrine that the taxpayer is duty-bound to observe the two-year period under Section 229 of the Tax Code when filing its claim for refund of excess and unutilized VAT.

III

The CTA En Banc erred in finding that Respondent CIR is not estopped from questioning the jurisdiction of the CTA. Respondent CIR, by her actions and pronouncements, should have been precluded from questioning the jurisdiction of the CTA-Division.

IV

The CTA En Banc erred in applying Aichi to Petitioner VGPC’s claim for refund. The novel interpretation of the law in Aichi should not be made to apply to the present case for being contrary to existing jurisprudence at the time Petitioner VGPC filed its administrative and judicial claims for refund.11

Petitioner VGPC argues that (1) the law and jurisprudence have long established the rule regarding compliance with the two-year prescriptive period under Section 112(D) in relation to Section 229 of the 1997 Tax Code; (2) Aichi did not overturn the doctrine in Atlas, which upheld the primacy of the two-year period under Section 229; (3) respondent CIR is estopped from questioning the jurisdiction of the CTA and Aichi cannot be indiscriminately applied to all VAT refund cases; (4) applying Aichi invariably to all VAT refund cases would effectively grant respondent CIR unbridled discretion to deprive a taxpayer of the right to effectively seek judicial recourse, which clearly violates the standards of fairness and equity; and (5) the novel interpretation of the law in Aichi should not be made to apply to the present case for being contrary to existing jurisprudence at the time VGPC filed its administrative and judicial claims for refund. Aichi should be applied prospectively.

Ruling of the Court

Judicial claim not premature

The assignment of errors is rooted in the core issue of whether the petitioner’s judicial claim for refund was prematurely filed.

Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section 229, 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 of 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.

x x x

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.- In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day period, appeal the decision or the unacted claim with the Court of Tax Appeals.

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

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

[Emphases supplied]

It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation (San Roque),12that it is Section 112 of the NIRC which applies to claims for tax credit certificates and tax refunds arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which are, simply put, claims for unutilized creditable input VAT.

Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when the sales were made, via an administrative claim with the CIR, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D), the CIR must then act on the claim within 120 days from the submission of the taxpayer’s complete documents. In case of (a) a full or partial denial by the CIR of the claim, or (b) the CIR’s failure to act on the claim within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR decision or unacted claim, within 30 days (a) from receipt of the decision; or (b) after the expiration of the 120-day period.

The 2-year period under Section 229 does not apply to appeals before the CTA in relation to claims for a refund or tax credit for unutilized creditable input VAT.Section 229 pertains to the recovery of taxes erroneously, illegally, or excessively collected.13 San Roque stressed that "input VAT is not ‘excessively’ collected as understood under Section 229 because, at the time the input VAT is collected, the amount paid is correct and proper."14 It is, therefore, Section 112 which applies specifically with regard to claiming a refund or tax credit for unutilized creditable input VAT.15

Upholding the ruling in Aichi,16 San Roque held that the 120+30 day period prescribed under Section 112(D) mandatory and jurisdictional.17 The jurisdiction of the CTA over decisions or inaction of the CIR is only appellate in nature and, thus, necessarily requires the prior filing of an administrative case before the CIR under Section 112.18 The CTA can only acquire jurisdiction over a case after the CIR has rendered its decision, or after the lapse of the period for the CIR to act, in which case such inaction is considered a denial.19 A petition filed prior to the lapse of the 120-day period prescribed under said Section would be premature for violating the doctrine on the exhaustion of administrative remedies.20

There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The Court in San Roque noted that BIR Ruling No. DA-489-03, dated December 10, 2003, expressly stated that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review."21 This BIR Ruling was recognized as a general interpretative rule issued by the CIR under Section 422 of the NIRC and, thus, applicable to all taxpayers. Since the CIR has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting in good faith should not be made to suffer for adhering to such interpretations. Section 24623 of the Tax Code, in consonance with equitable estoppel, expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Hence, taxpayers can rely on BIR Ruling No. DA-489-03

from the time of its issuance on December 10, 2003 up to its reversal by this Court in Aichion October 6, 2010, where it was held that the 120+30 day period was mandatory and jurisdictional.

Accordingly, the general rule is that the 120+30 day period is mandatory and jurisdictional from the effectivity of the 1997 NIRC on January 1, 1998, up to the present. As an exception, judicial claims filed from December 10, 2003 to October 6, 201024 need not wait for the exhaustion of the 120-day period.

A review of the facts of the present case reveals that petitioner VGPC timely filed its administrative claim with the CIR on December 6, 2006, and later, its judicial claim with the CTA on January 3, 2007. The judicial claim was clearly filed within the period of exception and was, therefore, not premature and should not have been dismissed by the CTA En Banc.

In the present petition, VGPC prays that the Court grant its claim for refund or the issuance of a tax credit certificate for its unutilized input VAT in the amount of P14,160,807.95. The CTA Second Division, however, only awarded the amount of P7,699,366.37. The petitioner has failed to present any argument to support its entitlement to the former amount.

In any case, the Court would have been precluded from considering the same as such would require a review of the evidence, which would constitute a question of fact outside the Court’s purview under Rule 45 of the Rules of Court. The Court, thus, finds that the petitioner is entitled to the refund awarded to it by the CTA Second Division in the amount of P7,699,366.37.

Atlas doctrine has no relevanceto the 120+30 day period forfiling judicial claim

Although the core issue of prematurity of filing has already been resolved, the Court deems it proper to discuss the petitioner’s argument that the doctrine in Atlas, which allegedly upheld the primacy of the 2-year prescriptive period under Section 229,should prevail over the ruling in Aichi regarding the mandatory and jurisdictional nature of the 120+30 day period in Section 112.

In this regard, it was thoroughly explained in San Roque that the Atlas doctrine only pertains to the reckoning point of the 2-year prescriptive period from the date of payment of the output VAT under Section 229, and has no relevance to the 120+30 day period under Section 112, to wit:

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section 112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba legis rule, thus applying Section 112(A) in computing the two year prescriptive period in claiming refund or credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day periods are mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue the tax credit within one hundred twenty (120) days from the date of submission of complete documents," the law clearly gives the Commissioner 120 days within which to decide the taxpayer’s claim. Resort to the courts prior to the expiration of the 120-day period is a patent violation of the doctrine of exhaustion of administrative remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the doctrine of exhaustion of administrative remedies. Such doctrine is basic and elementary.25

[Underscoring supplied]

Thus, Atlas is only relevant in determining when to file an administrative claim with the CIR for refund or credit of unutilized creditable input VAT, and not for determining when to file a judicial claim with the CTA. From June 8, 2007 to September 12, 2008, the 2-year prescriptive period to file administrative claims should be counted from the date of payment of the output VAT tax. Before and after said period, the 2-year prescriptive period is counted from the close of the taxable quarter when the sales were made, in accordance with Section 112(A). In either case, the mandatory and jurisdictional 120+30 day period must be complied with for the filing of the judicial claim with the CTA, except for the period provided under BIR Ruling No. DA-489-03, as previously discussed.

The Court further noted that Atlas was decided in relation to the 1977 Tax Code which had not yet provided for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the CIR over claims for unutilized input VAT. Clearly then, the Atlas doctrine cannot be invoked to disregard compliance with the 120+30 day mandatory and jurisdictional period.26 In San Roque, it was written:

The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioner’s decision if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.27

At any rate, even assuming that the Atlas doctrine was relevant to the present case, it could not be applied since it was held to be effective only from its promulgation on June 8, 2007 until its abandonment on September 12, 2008 when Mirant was promulgated. The petitioner in this case filed both its administrative and judicial claims outside the said period of effectivity.

Aichi not applied prospectively

Petitioner VGPC also argues that Aichi should be applied prospectively and, therefore, should not be applied to the present case. This position cannot be given consideration.

Article 8 of the Civil Code provides that judicial decisions applying or interpreting the law shall form part of the legal system of the Philippines and shall have the force of law. The interpretation placed upon a law by a competent court establishes the contemporaneous legislative intent of the law. Thus, such interpretation constitutes a part of the law as of the date the statute is enacted. It is only when a prior ruling of the Court is overruled, and a different view adopted, that the new doctrine may have to be applied prospectively in favor of parties who have relied on the old doctrine and have acted in good faith.28

Considering that the nature of the 120+30 day period was first settled in Aichi, the interpretation by the Court of its being mandatory and jurisdictional in nature retro acts to the date the NIRC was enacted. It cannot be applied prospectively as no old doctrine was overturned.

The petitioner cannot rely either on the alleged jurisprudence prevailing at the time it filed its judicial claim. The Court notes that the jurisprudence relied upon by the petitioner consists of CTA cases. It is elementary that CTA decisions do not constitute precedent and do not bind this Court or the public. Only decisions of this Court constitute binding precedents, forming part of the Philippine legal system.29

As regards the cases30 which were later decided allegedly in contravention of Aichi, it is of note that all of them were decided by Divisions of this Court, and not by the Court En Banc.1âwphi1 Any doctrine or principle of law laid down by the Court, either rendered En Bancor in Division, may be overturned or reversed only by the Court sitting En Banc.31 Thus, the cases cited by the petitioner could not have overturned the doctrine laid down in Aichi.

CIR not estopped

The petitioner’s argument that the CIR should have been estopped from questioning the jurisdiction of the CTA after actively participating in the proceedings before the CTA Second Division deserves scant consideration.

It is a well-settled rule that the government cannot be estopped by the mistakes, errors or omissions of its agents.32 It has been specifically held that estoppel does not apply to the government, especially on matters of taxation. Taxes are the nation’s lifeblood through which government agencies continue to operate and with which the State discharges its functions for the welfare of its constituents.33 Thus, the government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon taxation depends the ability of the government to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people.34

Rules on claims for refund or tax credit of unutilized input VAT

For clarity and guidance, the Court deems it proper to outline the rules laid down in San Roque with regard to claims for refund or tax credit of unutilized creditable input VAT. They are as follows:

1. When to file an administrative claim with the CIR:

a. General rule – Section 112(A) and Mirant Within 2 years from the close of the taxable quarter when the sales were made.

b. Exception – Atlas

Within 2 years from the date of payment of the output VAT, if the administrative claim was filed from June 8, 2007 (promulgation of Atlas) to September 12, 2008 (promulgation of Mirant).

2. When to file a judicial claim with the CTA:

a. General rule – Section 112(D); not Section 229

i. Within 30 days from the full or partial denial of the administrative claim by the CIR; or

ii. Within 30 days from the expiration of the 120-day period provided to the CIR to decide on the claim. This is mandatory and jurisdictional beginning January L 1998 ( effectivity of 1997 NI RC).

b. Exception - BIR Ruling No. DA-489-03

The judicial claim need not await the expiration of the 120-day period, if such was filed from December 10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010 (promulgation of Aichi).

WHEREFORE, the petition is PARTIALLY GRANTED. The February 7, 2011 Decision and the June 27, 2011 Resolution of the Court of Tax Appeals En Banc, in CT A EB Case Nos. 561 and 562 are REVERSED and SET ASIDE. The April 17, 2009 Decision and the October 29, 2009 Resolution of the CTA Former Second Division in CTA Case No. 7559 are REINSTATED.

Public respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT CERTIFICATE, in favor or the petitioner the amount of SEVEN MILLION SIX HUNDRED NINETY NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized input VAT paid on domestic purchases of non-capital goods and services, services rendered by nonresidents, and importations of non-capital goods for the first to fourth quarters of taxable year 2005.

MIRAMAR FISH COMPANY, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

PEREZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to reverse and set aside the 18 November 2008 Decision1 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 375 affirming in toto the 22 October 2007 Decision and the 19 February 2008 Resolution of the Second Division of the CTA (CTA in Division) in C.T.A. Case No." 6905, which denied due course and dismissed petitioner's claim for the issuance of a tax credit certificate (TCC) in its favor representing the alleged unutilized and/or unapplied input Value Added Tax (VAT) on purchases of goods and services attributable to zero-rated sales in the amount ofP12,741,136.81 for taxable years 2002 and 2003.

The Facts

The undisputed factual antecedents of the case, as stipulated by the parties,2 are as follows:

Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office located at Brgy. Recodo, Zamboanga City. It is registered with the Bureau of Internal Revenue (BIR) as a VAT

taxpayer in accordance with Section 236 of the National Internal Revenue Code (NIRC) of 1997, as amended, with VAT Registration No. 01-930-001570-V and Tax Identification No. (TIN) 005-847-661. On the other hand, respondent is the duly appointed Commissioner of Internal Revenue empowered to perform the duties of said office including, among others, the power to decide, approve and grant refunds or tax credits of erroneously or excessively paid taxes.

On 4 June 2002, petitioner was registered with the Board of Investments (BOI) as a new export producer of canned tuna and canned pet food with non-pioneer status, having been issued BOI Certificate of Registration No. EP 2002-077.

Petitioner filed its Quarterly VAT Returns (BIR Form No. 2550Q) for taxable year 2002 with the BIR on the following dates:

Particular QuarterDate of Filing of Quarterly VAT

Return

First Quarter 25 April 2002

Second Quarter 8 July 2002

Third Quarter 22 October 2002

Fourth Quarter 27 January 2003

The administrative claim for refund in the form of a TCC of petitioner’s alleged unutilized input VAT in the amount of P6,751,751.65 for taxable year 2002 was filed with the BIR on 24 February 2003.3

Petitioner filed its Quarterly VAT Returns (BIR Form No. 2550Q) for taxable year 2003 with the BIR on the following dates:

Particular QuarterDate of Filing of Quarterly VAT

Return

First Quarter 10 April 2003

Second Quarter 16 July 2003

Third Quarter 17 October 2003

Fourth Quarter 26 January 2004

Its administrative claim for refund in the form of a TCC of the alleged unutilized input VAT in the amount ofP5,895,912.38 for taxable year 2003 was thereafter filed on 15 March 2004.4

Subsequently, an administrative claim for the refund or issuance of a TCC in the aggregate amount ofP12,741,136.81 allegedly representing unutilized or unapplied VAT input taxes attributable to petitioner’s zero rated transactions or its export sales for taxable years 2002 and 2003, was filed on 25 March 2004.5

Consequently, since no final action has been taken by respondent on petitioner’s various administrative claims, the latter filed a Petition for Review before the CTA on 30 March 2004 docketed as C.T.A. Case No. 6905.

The Ruling of the CTA in Division

In a Decision dated 22 October 2007,6 the CTA in Division denied due course and dismissed petitioner’s claim for the issuance of a TCC on the sole ground that the sales invoices presented in support thereof did not comply with the invoicing requirements provided for under Section 1137 of the NIRC of 1997, as amended, and Section 4.108-1 of Revenue Regulations (RR) No. 7-95.8 The court a quo explained that petitioner’s failure to indicate that it is a VAT-registered entity and/or to imprint the word "zero rated" on the subject invoices or receipts were fatal to its claim; hence, it was left with no other recourse but to deny petitioner’s claim. Having rendered such ruling, the CTA in Division decided not to pass upon other incidental issues raised before it for being moot.9

On 19 February 2008, the CTA in Division denied petitioner’s Motion for Reconsideration for lack of merit.

Aggrieved, respondent appealed to the CTA En Banc by filing a Petition for Review under Section 18 of Republic Act (RA) No. 1125, as amended by RA No. 9282, on 2 April 2008, docketed as C.T.A. EB No. 375.

The Ruling of the CTA En Banc

The CTA En Banc ruled in its 18 November 2008 Decision,10 that the contentions raised by petitioner are mere reiterations of its arguments contained in its Motion for Reconsideration of the 22 October 2007 Decision in C.T.A. Case No. 6905. Simply put, it dismissed the petition and affirmed in its entirety the subject Decision and Resolution of the CTA in Division considering that it found no cogent reason and justification to disturb the findings and conclusion spelled out therein.

Consequently, this Petition for Review wherein petitioner seeks the reversal of the aforementioned Decision for being not in accord with the law and the applicable Decisions of this Court, constituting a departure from the accepted and usual course of judicial proceedings as to call for an exercise of the power of supervision, based on the following grounds:

A. PETITIONER HAS COMPLIEDWITH THE STATUTORY REQUIREMENTS FOR CLAIMING A REFUND OF EXCESS AND UNUTILIZED INPUT VAT UNDER SECTION 112(A), IN RELATION TO SECTION 106(A)(2)(A)(1), TAX CODE. COMPLIANCE WITH THE INVOICING REQUIREMENTS UNDER THE TAX CODE AND RR NO. 7-95 IS NOT A CONDITION PRECEDENT FOR CLAIMING A REFUND OF EXCESS AND UNUTULIZED INPUT VAT UNDER SECTION 106(A)(2)(A)(1), IN RELATION TO SECTION 112(A) OF THE TAX CODE.

B. THERE IS NOTHING IN THE TAX CODE AND IN RR NO. 7-95 WHICH STATES THAT FAILURE TO COMPLY WITH THE BIR’S INVOICING REQUIREMENTS WILL NULLIFY THE VAT ZERO-RATING OF AN EXPORT SALE UNDER SECTION 106(A)(2)(A)(1) OF THE TAX CODE.

C. BASED ON THE SUPREME COURT’S RULING IN INTEL CASE, FAILURE TO INDICATE THE WORDS "TIN-V" AND "ZERORATED" ON THE INVOICES COVERING EXPORT SALES IS NOT FATAL TO A TAXPAYER’S CLAIM FOR REFUND OF EXCESS INPUT VAT UNDER SECTION 112(A), IN RELATION TO SECTION 106(A)(2)(A)(1) OF THE TAX CODE.

D. REVENUE MEMORANDUM CIRCULAR NO. 42-03 IS INVALID BECAUSE IT OVERRIDES THE CLEAR PROVISION OF THE TAX CODE.11

The Issue

The issue for this Court’s consideration is whether or not petitioner is entitled to a TCC in the amount ofP12,741,136.81 allegedly representing its excess and unutilized input VAT for the taxable years 2002 and 2003, in accordance with the provisions of the NIRC of 1997, as amended, other pertinent laws, and applicable jurisprudential proclamations.

Our Ruling

In view of the recent pronouncements made in the consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation,12 which has finally settled the issue on proper observance of the prescriptive periods in claiming for refund of creditable input tax due or paid attributable to any zero-rated or effectively zero-rated sales, we find a need for this Court to review the factual findings of the CTA in order to attain a complete determination of the issue presented.

At the outset, this Court is not unaware that in a petition for review on certiorari under Rule 45 of the Rules of Court, only questions of law may be raised.13 The Court is not a trier of facts and does not normally undertake the re-examination of the evidence presented by the contending parties during the trial of the case considering that the findings of facts of the [CTA] are conclusive and binding on the Court14 – and they carry even more weight when the [CTA En Banc] affirms the factual findings of the trial court.15 However, this Court had recognized several exceptions to this rule,16 including instances when the appellate court manifestly overlooked relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.

Records of this case reveal that the CTA in Division in C.T.A. Case No. 6905 merely focused on the strict compliance with the invoicing and accounting requirements set forth under Sections 113 and 237 of the NIRC of 1997, as amended, in relation to Section 4.108-1 of Revenue Regulations (RR) No. 7-95. These same findings were adopted and affirmed in toto by the CTA En Banc in the assailed 18 November 2008 Decision.17

While the invoicing requirements is a valid issue, we find it imperative to first and foremost determine whether or not the CTA properly acquired jurisdiction over petitioner’s claim covering taxable years 2002 and 2003, taking into consideration the timeliness of the filing of its judicial claim pursuant to Section 112 of the NIRC of 1997, as amended, and consistent with the pronouncements made in the San Roque case. Clearly, the claim of petitioner for the TCC can proceed only upon compliance with the jurisdictional requirement.

Section 7 of RA No. 1125,18 which was thereafter amended by RA No. 9282,19 clearly defined the appellate jurisdiction of the CTA:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided.

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;20(Emphasis supplied)

x x x x

Relative thereto, Section 11 of the same law prescribes how the said appeal should be taken, to wit:

Section 11. Who may appeal; effect of appeal. – Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling.21 (Emphasis and underscoring supplied)

x x x x

The timeliness in the administrative and judicial claims can be found in Section 112 of the NIRC of 1997, as amended. It reads:

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 at tributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: x x x

x x x x

(D)22 Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals.

x x x x (Emphasis and underscoring supplied)

As earlier stated, the proper interpretation of the above-quoted provision was finally settled in the San Roque case23 by this Court sitting En Banc. The relevant portions of the discussion pertinent to the focal issue in the present case are quoted hereunder as follows:

To repeat, a claim for tax refund or credit, like a claim for tax refund exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling No.

DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.24(Emphasis supplied)

In Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue,25 the Second Division of this Court, in applying therein the ruling in the San Roque case, provided a Summary of Rules on Prescriptive Periods Involving VAT as a guide for all parties concerned, to wit:

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

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

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

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying the administrative claim or from the expiration of the 120-day period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.26 (Emphasis supplied)

Certainly, it is evident from the foregoing jurisprudential pronouncements that a taxpayer-claimant only had a limited period of thirty (30) days from the expiration of the 120-day period of inaction of the Commissioner of Internal Revenue (CIR) to file its judicial claim with the CTA, with the exception of claims made during the effectivity of BIR Ruling No. DA-489-03 (from 10 December 2003 to 5 October 2010).27 Failure to do so, the judicial claim shall prescribe or be considered as filed out of time.

Applying the foregoing discussion in the case at bench, although it appears that petitioner has indeed complied with the required two-year period within which to file a refund/tax credit claim with the BIR by filing its administrative claims on 24 February 2003 and 25 March 2004 (within the period from the close of the taxable quarters for the years 2002 and 2003, respectively, when the relevant sales or purchases were made), this Court finds that petitioner’s corresponding judicial claim insofar as to the four quarters of taxable year 2002 was filed beyond the 30-day period, detailed hereunder as follows:

Taxable year (closeof taxablequarters)

Filing date of theadministrative claim

(within the 2-yearperiod)

Last day of the 120-day period underSection 112(D) from

the date of submissionof complete documents

in support of itsapplication

Last day of the30-day period tojudicially appeal

said inaction

Filingdate of the

Petitionfor Review

Taxable year 20021st Quarter(31 March 2002)2nd Quarter(30 June 2002)3rd Quarter(30 September2002)4th Quarter(31 December2002)

24 February 200328 24 June 2003 24 July 200330

March2004

Taxable year 20031st Quarter(31 March 2003)

25 March 20042923 July 2004 22 August 2004 30

March2004

2nd Quarter(30 June 2003)3rd Quarter(30 September2003)4th Quarter(31 December2003)

Section 112(D) specifically states that in case of failure on the part of the respondent to act on the application within the 120-day period prescribed by law, petitioner only has thirty (30) days after the expiration of the 120-day period to appeal the unacted claim with the CTA. Since petitioner’s judicial claim for the aforementioned quarters for taxable year 2002 was filed before the CTA only on 30 March 2004,30 which was way beyond the mandatory 120+30 days to seek judicial recourse, such non-compliance with the mandatory period of thirty (30) days is fatal to its refund claim on the ground of prescription.

Distinctly, in its attempt to justify the timeliness of its judicial claim covering taxable year 2002, petitioner made it appear in its Letter dated 25 March 2004 that there has been an amendment on its administrative claim covering taxable year 2002. It explained:

We wish to make it clear that this letter, insofar as the 2002 claim is concerned, amends the original claim for refund or issuance of TCC filed on February 24, 2003. Please note that the difference between the amount claimed in the original administrative claim filed (P6,751,751.65) and that claimed in this letter (P6,845,224.42) is in view of the fact that the original claim merely took into consideration the amount which, at that time, could be supported by the "Summary Name of Suppliers, Invoices and Official Receipts". As abovementioned, the amount for 2002 subject of the instant claim is based on the figures reflected in the VAT returns filed for 2002.31

(Emphasis supplied)

However, we are not persuaded by such allegation considering that while there was a supposed difference in the amounts being claimed for refund in the Letter of Request for VAT Claim dated 24 February 2003 and in the Letter dated 25 March 2004, a scrutiny of the subject letters reveals that both rely on the figures reflected in the VAT returns filed for 2002. Contrary to petitioner’s assertion, the Transmittal Receipt attached to the 24 February 2003 Letter visibly shows that it has simultaneously submitted various documents in support of its 2002 claim, including a copy of the VAT return for 2002.32 Thus, this Court cannot consider the subsequent Letter dated 25 March 2004 to have amended the previous one covering its refund claim for taxable year 2002. For this reason, failure of petitioner to observe the 30-day period under Section 112 of the NIRC of 1997, as amended, through its belated filing of the Petition for Review before the CTA warrants a dismissal with prejudice for lack of jurisdiction.

On the other hand, this Court has allowed the amendment of petitioner’s refund claim covering taxable year 2003 contained in the 25 March 2004 Letter since there was a statement therein that there were amended quarterly VAT returns filed on 12 March 2004.33 Such undisputed factual allegation is considered a valid justification in amending its earlier administrative letter dated 15 March 2004. The aforesaid rationalization is not without any legal basis as can be gleaned from the declaration in the San Roque case, wherein the High Court considered the administrative claims for refund of San Roque properly amended by reason of the amended quarterly VAT returns.34 As a result, the 120+30 day prescriptive periods to seek judicial recourse for petitioner’s refund claim involving taxable year 2003 shall commence only on 25 March 2004, and not on 15 March 2004.

Parenthetically, even if it is shown that petitioner did not strictly comply with the mandatory 120+30 day prescriptive periods35 under Section 112 of the NIRC of 1997, as amended, its administrative claim covering taxable year 2003 falls within the effectivity of BIR Ruling No. DA-489-03 (10 December 2003 to 5 October 2010), being an exception thereto. Hence, there is no more need for petitioner to wait for the 120-day period to expire before it can file its appropriate judicial claim before the CTA. Accordingly, the CTA indeed acquired jurisdiction over petitioner’s refund claim for taxable year 2003.

It must be emphasized that jurisdiction over the subject matter or nature of an action is fundamental for a court to act on a given controversy,36 and is conferred only by law and not by the consent or waiver upon a court which, otherwise, would have no jurisdiction over the subject matter or nature of an action. Lack of jurisdiction of the court over an action or the subject matter of an action cannot be cured by the silence, acquiescence, or even by express consent of the parties.37 If the court has no jurisdiction over the nature of an action, its only jurisdiction is to dismiss the case. The court could not decide the case on the merits.38

Having ruled on the jurisdictional aspect of this case, we next discuss the significance of strict compliance with the invoicing requirements under existing laws and prevailing jurisprudence in order to be entitled to a refund claim of excess and/or unutilized input VAT.

This is not novel.

It is worth mentioning that the High Court already ruled on the significance of imprinting the word "zero-rated" for zero-rated sales covered by its receipts or invoices, pursuant to Section 4.108-1 of Revenue Regulations No. 7-95.39 Thus, in Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue,40 the Second Division of this Court enunciated:

But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the printing of the word "zero-rated" on the invoices covering zero-rated sales.1âwphi1 When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the enactment of that law.

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

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

x x x x

This Court held that, since the "BIR authority to print" is not one of the items required to be indicated on the invoices or receipts, the BIR erred in denying the claim for refund. Here, however, the ground for denial of petitioner Panasonic’s claim for tax refund—the absence of the word ‘zero-rated’ on its invoices—is one which is specifically and precisely included in the above enumeration. Consequently, the BIR correctly denied Panasonic’s claim for tax refund.41 (Emphasis supplied)

For emphasis, the settled rule is that absence or non-printing of the word "zero-rated" in petitioner’s invoices is fatal to its claim for the refund and/or tax credit representing its unutilized input VAT attributable to its zero-rated sales.

Equally essential herein, Section 113 of the NIRC of 1997, as amended, categorically provides that a VAT-registered entity, like petitioner, shall issue a duly registered VAT invoice or official receipt, which must contain "a statement that the seller is a VAT-registered person." Therefore, as correctly articulated by the CTA En Banc, compliance with the aforesaid invoicing requirements is mandatory. Thus:

It bears stressing that the law and regulations are explicit in emphasizing strict compliance with the invoicing requirements because for the same transactions the output VAT of the seller becomes the input VAT of the purchaser. Pursuant to Sections 106(D)(1) and 108(C) of the NIRC of 1997, as amended, in relation to Section 110 of the same Code, the output or input tax on the sale or purchase of goods is determined by the total amount indicated in the invoice, while the output or input tax on the sale or purchases of services is determined by the total amount indicated in the official receipt. Since petitioner is engaged in the sale of goods, specifically, canned tuna and canned pet food (Joint Stipulation of Facts and Issues, par. 3), its output tax, if any, will be determined by the total amount indicated in the invoices. Thus, as required by Section 113 of the NIRC of 1997, as amended, petitioner’s sales invoices must indicate that it is a VAT-registered person, which in this case was not complied with by petitioner.42 (Emphasis supplied)

At this juncture, and to settle strictness in compliance, we go to the textbook lesson that if the language of the law is clear, explicit and unequivocal, it admits no room for interpretation but merely application. A statute clear and unambiguous on its face need not be interpreted; stated otherwise, the rule is that only statutes with an ambiguous or doubtful meaning may be the subject of statutory construction.43 The provisions of Sections 113 and 237 of the NIRC of 1997, as amended, and Section 4.108-1 of RR No. 7-95, are clear in enumerating the invoicing requirements necessary to be shown in order to qualify as duly

registered receipts or sales or commercial invoices issued by VAT-registered entities, such as petitioner herein, for the purpose of claiming for refund of creditable input tax due or paid attributable to any zero-rated or effectively zero-rates sales. Absent compliance, the unavoidable result is immediate denial of the claim.

By way of reiteration, the CTA has no jurisdiction over petitioner's judicial appeal covering its refund claim for taxable year 2002 on the ground of prescription, consistent with the ruling in the San Roque case. While as to its refund claim for taxable year 2003, the same shall likewise be denied for failure of petitioner to comply with the mandatory invoicing requirements provided for under Section 113 of the NIRC of 1997, as amended, and Section 4.108-1 of RR No. 7-95.

WHEREFORE, the petition is DENIED. No costs.

SAN ROQUE POWER CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari under Rule 16, Section 1 of A.M. No. 05-11-07-CTA, otherwise known as the Revised Rules of the Court of Tax Appeals, in relation to Rule 45 of the Rules of Court, filed by San Roque Power Corporation (San Roque), seeking the reversal of the Decision1 dated June 4, 2012 and Resolution2 dated January 21, 2013 of the Court of Tax Appeals (CTA) en bane in C.T.A. EB No. 789. The CTA en bane, in its assailed Decision, affirmed the Decision3 dated January 10, 2011 of the CTA First Division in C.T.A. Case Nos. 7744 & 7802, which dismissed the judicial claims of San Roque for the refund or tax credit of its excess/unutilized creditable input taxes for the four quarters of 2006; and in its assailed Resolution, denied the Motion for Reconsideration of San Roque.

San Roque is a domestic corporation principally engaged in the power-generation business. It is registered with the Board of Investments on a preferred pioneer status for the construction and operation of hydroelectric power-generating plants, as well as with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) taxpayer.

On October 11, 1997, San Roque entered intoa Power Purchase Agreement (PPA) with the National Power Corporation (NPC) to develop the San Roque hydroelectric facilities located at Lower Agno River in San Miguel, Pangasinan (Project) on a build-operate-transfer basis. During the co-operation period of 25 years, commencing from the completion date of the power station, all the electricity generated by the Project would be sold to and purchased exclusively by NPC.San Roque commenced commercial operations in May 2003.

San Roque alleged that in 2006, it incurred creditable input taxes from its purchase of capital goods, importation of goods other than capital goods, and payment for the services of non-residents. San Roque subsequently filed with the BIR separate claims for refund or tax credit of its creditable input taxes for all four quarters of 2006. San Roque averred that it did not have any output taxes to which it could have applied said creditable input taxes because: (a) the sale by San Roque of electricity, generated through hydropower, a renewable source of energy, is subject to 0% VAT under Section 108(B)(7) of the National Internal Revenue Code (NIRC) of 1997, as amended; and (b) NPC is exempted from all taxes, direct and indirect, under Republic Act No. 6395, otherwise known as the NPC Charter, so the sale by San Roque of electricity exclusively to NPC, under the PPA dated October 11, 1997, is effectively zero-rated under Section 108(B)(3) of the NIRC of 1997, as amended.4 When the Commissioner of Internal Revenue (CIR) failed to take action on its administrative claims, San Roque filed two separate Petitions for Review before the CTA, particularly, C.T.A. Case No. 7744 (covering the first, third, and fourth quarters of 2006) and C.T.A. Case No. 7802 (covering the second quarter of 2006). The two cases were consolidated before the CTA First Division.

The details concerning the administrative and judicial claims of San Roque for refund or tax credit of its creditable input taxes for the four quarters of 2006 are summarized in table form below:

TaxPeriod2006

VAT Return Administrative Claim Judicial Claim

FirstQuarter

Filed: April 21, 2006Amended: November 7,2006

Filed: April 11, 2007Amount: P2,857,174.95

Amended: March 10, 2008Amount: P3,128,290.74

Filed: March 28, 2008CTA Case No. 7744Amount: P12,114,877.34(for 1st, 3rd, and 4thQuartersof 2006)

SecondQuarter

Filed: July 15, 2006Amended: November 8,2006Amended: February 5,2007

Filed: July 10, 2007Amount: P15,044,030.82

Amended: March 10, 2008Amount: P15,548,630.55

Filed: June 27, 2008CTA Case No. 7802Amount: P15,548,630.55

ThirdQuarter

Filed: October 19, 2006Amended: February 5,2007

Filed: August 31, 2007Amount: P4,122,741.54

Amended: September 21,2007Amount: P3,675,574.21

Filed: March 28, 2008CTA Case No. 7744Amount: P12,114,877.34(for 1st, 3rd, and 4thQuartersof 2006)

FourthQuarter

Filed: January 22, 2007Amended: May 12, 2007

Filed: August 31, 2007Amount: P6,223,682.61

Amended: September 21,2007Amount: P5,311,012.39

Filed: March 28, 2008CTA Case No. 7744Amount: P12,114,877.34(for 1st, 3rd, and 4thQuartersof 2006)

On January 10, 2011, the CTA First Division rendered a Decision on the consolidated judicialclaims of San Roque, with the following findings:

As to [San Roque’s] original applications for refund is concerned, the Commissioner of Internal Revenuehas one hundred twenty days or until August 9, 2007, November 7, 2007 and December 29, 2007 within which to make decision. After the lapse of the one hundred twenty[-]day period, [San Roque] should have elevated its claim with the Court within thirty (30) days starting from August 10, 2007 to September 8, 2007 for its first quarter claim, November 8, 2007 to December 7, 2007 for its second quarter claim, and December 30, 2007 toJanuary 28, 2008 for its third and fourth quarters claims pursuant to Section 112(D) of the NIRC in relation to Section 11 of [Republic Act No.] 1125, as amended by Section 9 of [Republic Act No.] 9282. Unfortunately, the Petitions for Review on March 28, 2008 for the first, third and fourth quarters claims and on June 27, 2008 for the second quarter claim, were filed beyond the 30-day period set by law and therefore, the Court has no jurisdiction to entertain the subject matter of the case considering that the 30-day appeal period provided under Section 11 of [RepublicAct No.] 1125 is a jurisdictional requirement as held in the case of Ker & Co., Ltd. vs. Court of Tax Appeals, x x x:x x x x

Likewise, if we reckoned the one hundred twenty[-]day period from the date of the amended applications for refund on March 10, 2008 for the first and second quarters claims and September 21, 2007 for the third and fourth quarters claims, both Petitions for Reviewwould still be denied.

With respect to the amended application for refund of input tax for the first and second quarters of 2006 on March 10, 2008, the Commissioner of Internal Revenue has one hundred twenty days or until July 8, 2008 within which to make a decision. After the lapse of the said 120-day period, [San Roque] had thirty days or until August 7, 2008 within which to appeal to this Court.[San Roque], however, appealed via Petitions for Review on March 28, 2008 for its first quarter claim and on June 27, 2008 for its second quarter claim, which are clearly before the lapse of the 120-day period. This violates the rule on exhaustion of administrative remedies.

x x x x

The premature invocation ofthe court’s intervention, like the instant Petitions for Review, is fatal to one’s cause of action; and the case is susceptible of dismissal for failure to state a cause of action. Moreover, such premature appeal will also warrant the dismissal of the Petitions for Review inasmuch as no jurisdiction was acquired by the Court in line with the recent pronouncement made by the Supreme Court in the case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc.

As far as the amended application for refund covering the third and fourth quarter[s] filed on September 21, 2007 is concerned, the Commissioner of Internal Revenue has one hundred twenty days or until January 19, 2008 within which to make a decision. After the lapse of the said one hundred twenty day[-]period, [San Roque] should have elevated its claim with the Court within thirty (30) daysstarting from January 20, 2008 to February 18, 2008. Unfortunately, the Petition for Review covering said third and fourth quarter[s] was filed March 28, 2008 beyond the 30-day period set by law and therefore, the Court has no jurisdiction to entertain the subject matter of the case.

Other issues raised now become moot and academic.5

The dispositive portion of the foregoing Decision of the CTA First Division reads:

WHEREFORE, these consolidated Petitions for Review, CTA Case Nos. 7744 covering the first, third and fourth quarter[s] and 7802 covering [the] second quarter are hereby DISMISSEDsince the Court has no jurisdiction thereof.6

San Roque filed a Motion for Reconsideration but it was denied by the CTA First Division in a Resolution7 dated May 31, 2011.

San Roque filed a Petition for Review before the CTA en banc, protesting against the retroactive application of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.8 In Aichi, promulgated on October 6, 2010, the Supreme Court strictly required compliance with the 120+30 day periods under Section 112 of the NIRC of 1997, as amended.

In its Decision dated June 4, 2012, the CTA en bancupheld the application of Aichiand explained that there was no retroactive application of the same. The 120+30 day periods had already been provided in the NIRC of 1997, as amended, evenbefore the promulgation of Aichi. Aichi merely interpreted the provisions of Section 112 of the NIRC of 1997, as amended.

The CTA en bancapplied the 120+30 day periods and found, same as the CTA First Division, that while San Roque timely filed its administrative claims for refund or tax credit of creditable input taxes for the four quarters of 2006, it filed its judicial claimsbeyond the 30-day prescriptive period, reckoned from the lapse of the 120-day period for the CIR to act on the original administrative claims. The CTA en bancstressed that the 30-day period within which to appeal with the CTA is jurisdictional and failure to comply therewith would bar the appeal and deprive the CTA of its jurisdiction.9

The CTA en bancfurther stated in its Decision that even if it counted the 120-day period from the filing of the amended administrative claims for refund on March 10, 2008 for the first and second quarter claims, and on September 21, 2007 for the third and fourth quarter claims, the CTA still did not acquire jurisdiction over C.T.A.Case Nos. 7744 and 7802. Following the 120+30 day periods, the judicial claims of San Roque for the first and second quarters were prematurely filed,while the judicial claims for the third and fourth quarters were filed late.

Lastly, the CTA en bancadjudged that San Roque cannot rely on San Roque Power Corporation v. Commissioner of Internal Revenue, promulgated on November 25, 2009 [San Roque (2009)],10 which granted the claims for refund or tax credit of the creditable input taxes of San Roque for the four quarters of 2002, on the following grounds: (a) The main issue in San Roque (2009)was whether or not San Roque had zero-rated or effectively zero-rated sales in 2002, to which the creditable input taxes could be attributed, while the pivotal issue inthe instant case is whether or not San Roque complied with the prescriptive periods under Section 112 of the NIRC of 1997, as amended, when it filed its administrative and judicial claims for refund or tax credit of itscreditable input taxes for the four quarters of 2006; (b) The claims for refund or tax credit in San Roque (2009) involved the four quarters of 2002,when sales of electric power by generation companies to the NPC were explicitly VAT zero-rated under Section 6 of Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act (EPIRA) of 2001. Eventually, Republic Act No. 9337, otherwise known as the Extended VAT Law (EVAT Law), took effect on November 1, 2005, and Section 24 of said law already expressly repealed Section 6 of the EPIRA; and (3) In San Roque (2009), San Roque failed to comply with Section 112(A)11 of the NIRC of 1997, as amended, and prematurely filed its administrative claim for the third quarter of 2002 on October 25, 2002, when its zero-rated sales of electric power to NPC were made only in the fourth quarter of 2002, which closed on December 31. 2002. In the instant case, San Roquedid not comply with the 120+30 day periods under Section 112(C) of the NIRC, as amended, thus, the CTA did not acquire jurisdiction over the judicial claims.

In the end, the CTA en bancdecreed:

Finding no reversible error, we affirm the assailed Decision dated January 10, 2011 and Resolution dated May 31, 2011 rendered by the First Division in C.T.A. Case Nos. 7744 and 7802.

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly DISMISSEDfor lack of merit.12

In its Resolution dated January 21, 2013, the CTA en bancdenied the Motion for Reconsideration of San Roque.

Hence, San Roque filed the Petition at bar assigning six reversible errors on the part of the CTA en banc, viz:

I.

THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN DISMISSING [SAN ROQUE’S] PETITIONS FOR REVIEW AND APPLYING RETROACTIVELY THE AICHI RULING IN THAT AT THE TIME IT FILED ITS PETITIONS FOR REVIEW, [SAN ROQUE] ACTED IN GOOD FAITH IN ACCORDANCE WITH THE THEN PREVAILING RULE AND JURISPRUDENCE CONSISTENTLY UPHELD FOR ALMOST A DECADE BY THE HONORABLE CTA IN THE ABSENCE THEN OF A RULING FROM THIS HONORABLE COURT.

II.

THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING THE AICHI RULING TO [SAN ROQUE’S] CLAIM FILED YEARS BEFORE ITS PROMULGATION IN THAT THE AICHI RULING, WHICH LAID DOWN A NEW RULE OF PROCEDURE WHICH AFFECTS SUSBSTANTIVE RIGHTS, SHOULD BE APPLIED PROSPECTIVELY IN LIGHT OF THE LAW AND SETTLED JURISPRUDENCE UPHOLDING THE PRINCIPLE OF PROSPECTIVITY.

III.

THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING RETROACTIVELY THE AICHI RULING IN THAT ITS RETROACTIVE APPLICATION TO [SAN ROQUE’S] PENDING CLAIM WILL BE UNJUST AND UNFAIR AND WILL CERTAINLY PRODUCE SUBSTANTIAL INEQUITABLE RESULTS AND GRAVE INJUSTICE TO [SAN ROQUE] AND MANY TAXPAYERS WHO RELIED IN GOOD FAITH ON ITS THEN CONSISTENT RULINGS FOR ALMOST A DECADE.

IV.

THE HONORABLE CTA EN BANCCOMMITTED REVERSIBLE ERROR IN APPLYING RETROACTIVELY THE AICHI RULING IN THAT ITS RETROACTIVE APPLICATION GOES AGAINST THE BASIC POLICIES AND THE SPIRIT OF THE EPIRA LAW.

V.

[SAN ROQUE] SHOULD BE GIVEN THE SAME TREATMENT AS THOSE DECIDED IN PRECEDENT CASES PROMULGATED PRIOR TO THE PROMULGATION OF THE AICHI RULING IN ACCORDANCE WITH THE EQUAL PROTECTION CLAUSE OF THE CONSTITUTION AND THE DOCTRINEOF EQUITABLE ESTOPPEL.

VI.

RECENTLY, THIS HONORABLE COURT EN BANCHAS CATEGORICALLY RULED THAT THE AICHI RULING SHALL BE APPLIED PROSPECTIVELY.13

There is no merit in the instant Petition.

At the crux of the controversy are the prescriptive periods for the filing of administrative and judicial claims for refund or tax credit of creditable input taxes under Section 112 of the NIRC of 1997, as amended, which provide:

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

(A) Zero-Rated or Effectively Zero-Rated Sales. – Any VATregistered 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 paidattributable to such sales, except transitional input tax, to the extent thatsuch input tax has not been applied against output tax: x x x

x x x x

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made.– In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) daysfrom the date of submission of complete documentsin support of the application filed in accordance with Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the partof the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration ofthe one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeal. (Emphases supplied.)

Contrary to the assertion of San Roque, it was only in Aichithat the issue of the prescriptive periods under Section 112 of the NIRC of 1997, as amended, was first squarelyraised before and addressed by the Court. The Court significantly ruled in Aichithat: (a) Section 112 of the NIRC of 1997, as amended, particularly governs claims for refund or tax credit of creditable input taxes, which is distinct from Sections 204(C) and 229 of the same statute which concern erroneously or illegally collected taxes; (b) The twoyear prescriptive period under Section 112(A) of the NIRC of 1997, as amended, pertains only to administrative claims for refund or tax credit of creditable input taxes, and not to judicial claims for the same; (c) Following Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,14 the two-year prescriptive period under Section 112(A) of the NIRC of 1997, as amended, is reckoned from the close ofthe taxable quarter when the sales were made; (d) In determining the end of the two-year prescriptive period under Section 112(A) of the NIRC of 1997, as amended, the Administrative Code of 1987 prevails over the Civil Code, so that a year is composed of 12 calendar months; and (e) The 120-day period, under what is presently Section 112(C) of the NIRC of 1997, asamended, is crucial in filing an appeal with the CTA, for whether the CIR issues a decision on the administrative claim beforethe lapse of the 120-day period or the CIR made no decision on the administrative claim after the 120-day period, the taxpayer has 30 days within which to file an appeal with the CTA.

The Court en banchad the opportunity tofurther expound on the prescriptive periods under Section 112 of the NIRC of 1997, as amended, in its Decision in the consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue, promulgated in 2013 [San Roque (2013)].15

According to the Court in San Roque (2013), the prescriptive periods under Section 112 of the NIRC of 1997, asamended, shall be interpreted as follows:

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation of Section 112(A) and (C).16 (Emphasis deleted.)

The Court emphasized in San Roque (2013)that a claim for refund or tax credit, like a claim for tax exemption, is construed strictly against the taxpayer. It cited Aichiand pointed out that one of the conditions for a judicial claim for refund or tax credit under the VAT system is compliance with the 120+30 day mandatory and jurisdictional periods under Section 112(C) of the NIRC of 1997, as amended.17

Guided by the aforementioned law and jurisprudence, the Court now determines whether or not San Roque complied in the instant case with the prescriptive periods under Section 112 ofthe NIRC of 1997, as amended.

As the following tables will show, San Roque filed its administrative claims for refund or tax credit of its creditable input taxes for the four quarters of 2006 within the two-yearprescriptive period under Section 112(A) of the NIRC of 1997, as amended, whether reckoned from the close of the taxable quarter when the relevant zero-rated or effectively zero-rated sales were made, in accordance with Mirantand Aichi; or from the date of filing of the quarterly VAT return and payment of the tax due 20 days after the close of the taxable quarter, following Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue18:

According to Mirant and Aichi

Tax Period2006

Close of QuarterWhen Relevant Sales

were Made

End of the Two-YearPrescriptive Period

Date of Filing ofAdministrative

Claim

First Quarter March 31, 2006 March 31, 2008 April 11, 2007

Second Quarter June 30, 2006 June 30, 2008 July 10, 2007

Third Quarter September 30, 2006 September 30, 2008 August 31, 2007

Fourth Quarter December 31, 2006 December 31, 2008 August 31, 2007

According to Atlas

Tax Period2006

Filing of Returns andPayment of Taxes 20Days after the Closeof Taxable Quarter

End of the Two-YearPrescriptive Period

Date of Filing ofAdministrative

Claim

First Quarter April 20, 2006 April 20, 2008 April 11, 2007

Second Quarter July 20, 2006 July 20, 2008 July 10, 2007

Third Quarter October 20, 2006 October 20, 2008 August 31, 2007

Fourth Quarter January 21, 200619 January 21, 2009 August 31, 2007

San Roque, however, failed to comply with the 120+30 day periods for the filing of its judicial claims, as can be gleaned from the table below:

TaxPeriod2006

Date ofFiling of

AdministrativeClaim

End of 120-Day Period for

CIR to Decide

End of 30-day

Period to FileAppeal with

CTA

Date of Actual

Filing ofJudicial Claim

No. of Days:End of 120-

dayPeriod to

Filingof Judicial

Claim

FirstQuarter

April 11, 2007 August 9, 2007 September 8,200720

March 28, 2008

232 days

SecondQuarter

July 10, 2007 November 7,2007

December 7,2007

June 27, 2008 233 days

ThirdQuarter

August 31, 2007 December 29,2007

January 28,2008

March 28, 2008

90 days

FourthQuarter

August 31, 2007

 

December 29,2007

January 28,2008

March 28, 2008

90 days

Because San Roque filed C.T.A. Case Nos. 7744 and 7802 beyond the 30-day mandatory period under Section 112(C) of the NIRC of 1997, as amended, the CTA First Division did not acquire jurisdiction over said cases and correctly dismissed the same.

San Roque in the present case is in exactly the same position as Philex Mining Corporation (Philex) in San Roque (2013). Hence, the ruling of the Court on the judicial claim of Philex in San Roque (2013) is worth reproducing hereunder:

Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period. Even if the two-year prescriptive period is computed from the date of payment of the output VAT under Section 229, Philex still filed its administrative claim on time. Thus, the Atlasdoctrine is immaterial in this case.The Commissioner had until 17 July 2006, the last day ofthe 120-day period, to decide Philex’s claim. Since the Commissioner did not act on Philex’s claim on or before 17 July 2006, Philex had until 17 August 2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that 17 August 2006 was indeed the last day for Philex to file its judicial claim.However, Philex filed its Petition for Review withthe

CTA only on 17 October 2007, or four hundred twenty-six (426) days after the last day of filing. In short, Philex was late by one year and 61 days in filing its judicial claim.As the CTA EB correctly found: Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late.Thus, the Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA Division; x x x.

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long afterthe expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of late filing.Whether the two-year prescriptive period is counted from the date of payment of the output VAT following the Atlasdoctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the Mirantand Aichidoctrines, Philex’s judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inactionof the Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the consequences.21 (Citations omitted.)

Both the CTA First Division and CTA en bancwent a step further and also computed the 120+30 day periods from the date of filing by San Roque of its amended administrative claimson March 10, 2008 for the first and second quarters of 2006, and on September 21, 2007 for the third and fourth quarters of 2006. According to the CTA First Division and CTA en banc, if the 120-day period was reckoned from the dates of filing of the amended administrative claims, the judicial claims for the first and second quarters were premature, while the judicial claims for the third and fourth quarters were late.

For the Court, there is no morepoint in considering the amended administrative claims for the first and second quarters of 2006. The amended administrative claims were filed on March 10, 2008after the 120+30 day periods for filing the judicialclaims, counting from the date of filing of the original administrative claims for the first and second quarters of 2006, had already expired on September 8, 2007and December 7, 2007, respectively. Taking cognizance of the amended administrative claims in such a situation would result in the revival of judicial claims that had already prescribed.

Meanwhile, San Roque filed its amended administrative claims for the third and fourth quarters of 2006 on September 21, 2007, before the end of the 120-day period for the CIR to decide on the original administrative claims for the same taxable quarters. Nonetheless, even if the Court counts the 120+30 day periods from the dateof filing of said amended administrative claims, the judicial claims of San Roque would still be belatedly filed:

 

TaxPeriod2006

Date ofFiling of

AdministrativeClaim

End of 120-Day Period for

CIR to Decide

End of 30-day

Period to File

Appeal withCTA

Date of Actual

Filing ofJudicial Claim

No. of Days:End of 120-

dayPeriod to

Filingof Judicial

Claim

ThirdQuarter

September 21,2007

January 19,2008

February 18,2008

March 28, 2008

69 days

FourthQuarter

September 21,2007

January 19,2008

February 18,2008

March 28, 2008

69 days

Unable to contest the belated filing of its judicial claims, San Roque argues against the supposedly retroactive application of Aichiand the strict observance of the 120+30 day periods.

As the CTA en bancheld, Aichiwas not applied retroactively to San Roque in the instant case. The 120+30 day periods have already been prescribed under Section 112(C) of the NIRC of 1997, as amended, when San Roque filed its administrative and judicial claims for refund or tax credit of its creditable input taxes for the four quarters of 2006. The Court highlights the pronouncement in San Roque (2013)that strict compliance with the 120+30 day periods is necessary for the judicial claim to prosper, except for the period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 to October 6, 2010when Aichiwas promulgated, which again reinstated the 120+30day periods as mandatory and jurisdictional.22

It is still necessary for the Court toexplain herein how BIR Ruling No. DA-489-03 is an exception to the strict observance of the 120+30 day periods for judicial claims. BIR Ruling No. DA-489-03 affected only the 120-day period as the BIR held therein that "a taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review. Neither is it required that the Commissioner should first act on the claim of a particulartaxpayer before the CTA may acquire jurisdiction, particularly if the claim is about to prescribe." Consequently, BIR Ruling No. DA-489-03 may only be invoked by taxpayers who relied on the same and prematurely filedtheir judicial claims before the expiration of the 120-day period for the CIR to act on their administrative claims, provided that the taxpayers filed such judicial claims from December 10, 2003 to October 6,2010. BIR Ruling No. DA-489-03 did not touch upon the 30-day prescriptive period for filing an appeal with the CTA and cannot be cited by taxpayers, such as San Roque, who belatedly filedtheir judicial claims more than 30 days after receipt of the adverse decision of the CIR on their administrative claims or the lapse of 120 days without the CIR acting on their administrative claims. Pertaining to the similarly situated Philex, the Court ruled in San Roque (2013) that:

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed verylate filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means nonexhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.23

San Roque harps that the Court itself categorically declared in the following paragraph in San Roque (2013)that Aichishall be applied prospectively:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law.The abandonment of the Atlasdoctrine by Mirantand Aichiis proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlasdoctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could have received under Atlasprior to its abandonment. This Court is applying Mirantand Aichi prospectively.Absent fraud, bad faith or misrepresentation, the reversal by thisCourt of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply prospectively.x x x.24 (Emphases included.)

The Court is not persuaded. The aforequoted paragraph should be understood in the context of the entire San Roque (2013). The statement of the Court on applying Mirantand Aichiprospectively should be understood relative to, and never apart from, Atlasand BIR Ruling No. DA-489-03.

The Court explained in San Roque (2013), under the heading "Effectivity and Scope of the Atlas, Mirant and Aichi Doctrines," that:

The Atlasdoctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlasdoctrine was limited to the reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlasdoctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section 112(A) following the verba legisrule. The Mirantruling, which abandoned the Atlas doctrine, adopted the verba legisrule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming refund or credit of input VAT.

The Atlasdoctrine has no relevance to the 120+30 day periods under Section 112(C) because the application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods was first raised in Aichi, which adopted the verba legisrule in holding that the 120+30 day periods are mandatory and jurisdictional. x x x.

x x x x

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and

jurisdictional periods. Thus, strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlasdoctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichidoctrine was adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.25 (Emphases supplied.)

As for BIR Ruling No. DA-489-03, the Court clarified its period of effectivity, thus:

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads a particular taxpayer to prematurely file a judicialclaim with the CTA. Such specific ruling is applicable only to suchparticular taxpayer. The second exception is where the Commissioner, through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTA’s assumption of jurisdiction over such claim since equitable estoppel has set in as expressly authorized under Section 246 of the Tax Code.

x x x x

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

Clearly, BIR Ruling No. DA-489-03 isa general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuanceon 10 December 2003 up to its reversal by this Court in Aichion 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.26 (Emphasis supplied.)

Based on the foregoing, "prospective application" of Aichiand Mirant, in the context of San Roque (2013), only meant that the rulings in said cases would not retroactively affect taxpayers who relied on Atlasand/or DA-489-03 when they filed their administrative and judicial claims for refund or tax credit of creditable input taxes during the period when Atlasand DA-489-03 were still in effect. Aichiand Mirantcan still be applied to cases involving administrative and judicial claims filed prior to the promulgation of said cases and outside the period of effectivity of Atlas and DA-489-03, such as the instant case.

WHEREFORE, premises considered, the instant Petition for Review is DENIED and the Decision dated June 4, 2012 and Resolution dated January 21, 2013 of the Court of Tax Appeals en bane in C.T.A. EB No. 789 are AFFIRMED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.CE LUZON GEOTHERMAL POWER COMPANY, INC., Respondent.

D E C I S I O N

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated September 1, 2009 and the Resolution3 dated November 6, 2009 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 474 which affirmed the Decision4 dated November 25, 2008 and the Resolution5 dated March 9, 2009 of the CTA Second Division (CTA Division) in C.T.A. Case Nos. 6792 and 683 7 ordering petitioner Commissioner of Internal Revenue (CIR) to issue a refund or a tax credit certificate in the amount of P13,926,697.51 in favor of respondent CE Luzon Geothermal Power Company Inc. (CE Luzon).

The Facts

CE Luzon is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines and engaged in the business of power generation. Being one of the generating companies recognized by the Department of Energy – and pursuant to the provisions of Republic Act No. (RA) 9136,6 otherwise known as the "Electric Power Industry Reform Act of 2001," which took effect on June 26, 2001 – it treated the delivery and supply of electric energy to the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) as valueadded tax (VAT) zero-rated.7

On October 25, 2001, CE Luzon timely filed its VAT return for the third quarter of 2001, in which it declared unutilized input VAT in the amount of 2,921,085.31. On January10, 2002, April 10, 2002, May 15, 2003, May 15, 2003, and April 1, 2003, respectively, it likewise filed its VAT returns for the fourth quarter of2001 and all quarters of 2002 whereby it declared unutilized input VAT in the amount of P21,229,990.80.8

On September 26, 2003, CE Luzon filed an administrative claim for refund of unutilized input VAT for the third quarter of 2001 before the Bureau of Internal Revenue (BIR). Alleging inaction on the part of the CIR, it filed a judicial claim for refund before the CTA on September 30, 2003, docketed as C.T.A. Case No. 6792.9

Thereafter, on December 18, 2003, CE Luzon likewise filed an administrative claim for refund of unutilized input VAT for the fourth quarter of 2001 and all quarters of 2002 before the BIR. It then filed a judicial claim for such refund before the CTA on December 19, 2003, docketed as C.T.A. Case No. 6837.10

In its answer to the judicial claimsin both C.T.A. Case Nos. 6792 and 6837, the CIR alleged, inter alia, that CE Luzon’s claims for refund are subject to its administrative investigation/examination; and that CE Luzon has the burden to prove its entitlement thereto.11

On oral motion of CE Luzon, the CTA First Division issued a Resolution dated March 1, 2004 orderingthe consolidation of C.T.A. Case Nos. 6792 and 6837.12

The CTA Division Ruling

In a Decision13 dated November 25, 2008, the CTA Division partially granted CE Luzon’s claims for refund, ordering the CIR to refund or issue a tax credit certificate in favor of CE Luzon in the amount of P13,926,697.51, representing the unutilized input VAT attributable to its zero-rated sales for the third and fourth quarters of 2001 and all quarters of 2002.14

The CTA Division found that while CE Luzon incurred input VAT in the amount of P25,749,880.18, onlyP13,926,697.51 should be allowed as refund for the following reasons: (a) input VAT in the amount of 10,199,791.42 was disallowed for failure to meet the substantiation requirements laid down by law; and (b) input VAT in the amount of P1,598,804.08 was offset against the output VAT liability of CE Luzon.15

The CTA Division further found that petitioner timely filed its administrative and judicial claims for refund as they were filed within the prescriptive period provided by law, i.e., within two (2) years from the date of filing of the corresponding quarterly VAT returns.16

Both parties moved for partial reconsideration, which were, however, denied in a Resolution17 dated March 9, 2009. Aggrieved, the CIR appealed to the CTA En Banc, contending that: (a) CE Luzon’s administrative claims are pro forma in that it failed to submit at the administrative level all the necessary documents to prove entitlement to their claims for refund; and (b) CE Luzon filed its judicial claims prematurely in violation of Section 112 (D) of the National Internal Revenue Code (NIRC).18

On the other hand, records are bereft of any showing that CE Luzon appealed the partial denial of its claims for refund which had, thus, lapsed into finality.

The CTA En BancRuling

In a Decision19 dated September 1, 2009, the CTA En Bancdenied the CIR’s appeal, and accordingly affirmed the CTA Division’s Ruling.20 It held that CE Luzon’s non-submission of the complete supporting documents at the administrative level did not make its administrative claims pro forma, holding that their non-submission will not necessarily result in the dismissal of its judicial claims for lack of jurisdiction. In this relation, the CTA En Bancopined that all that is required is for the taxpayer to elevate its claim for refund to the CTA within 30 daysfrom receipt of the denial of its administrative claim or after the expiration of the 120-day period granted to the CIR to decide on such administrative claim, which must all be done within two (2) years from payment of the tax.21

Corollary thereto, the CTA En Banc further held that CE Luzon’s judicial claims were not prematurely filed, despite the fact that it filed its petitions for review before the CTA only days after it filed its administrative claims before the BIR. It opined that the use of the word "may" in Section 112 (D) of the NIRC indicates that judicial recourse within 30 days after the lapse of the 120-day period is directory and permissive, and is neither mandatory nor jurisdictional as long as the said period is within the 2-year prescriptive period enshrined in Section 229 of the NIRC.22 Aggrieved, the CIR moved for reconsideration which was, however, denied in a Resolution23 dated November 6, 2009,hence, this petition.

The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not the CTA En Banc correctly ruled that CE Luzon did not prematurely file its judicial claims for refund.

The Court’s Ruling

The petition is partly meritorious.

Executive Order No. 273, series of 1987,24 or the original VAT law first allowed the refund or credit of unutilized excess inputVAT. Thereafter, the provision on refund or credit was amended several times by RA 7716,25 RA 8424,26 and RA 9337,27 which took effect on July 1, 2005. Since CE Luzon’s claims for refund covered periods before the effectivity of RA 9337, Section 112 of the NIRC, as amended by RA 8424, should apply, to wit:

Section 112. Refunds or Tax Credits of Input Tax.–

(A) Zero-rated or Effectively Zero-rated Sales. – any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent thatsuch input tax has not been applied against output tax: x x x.

x x x x

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date ofsubmission of complete documents in support of the application filed inaccordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twentyday-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphases and underscoring supplied)

x x x x

In CIR v. Aichi Forging Company of Asia, Inc.28 (Aichi), the Court held that the observance of the 120-day period is a mandatory and jurisdictional requisite to the filing of a judicial claim for refund before the CTA. Consequently, its non-observance would lead to the dismissal of the judicial claim on the ground of lack of jurisdiction. Aichialso clarified that the two (2)-year prescriptive period applies only to administrative claims and not to judicial claims.29Succinctly put, once the administrative claim is filed within the two (2)-year prescriptive period, the claimant must wait for the 120-day period to end and, thereafter,he is given a 30-day period to file his judicial claim before the CTA, even if said 120-day and 30-day periods would exceed the aforementioned two (2)-year prescriptive period.30

However, in CIR v. San Roque Power Corporation(San Roque),31 the Court categorically recognized anexception to the mandatory and jurisdictional nature of the 120-day period. It ruled that BIR Ruling No. DA-489-03 dated December 10, 2003 provided a valid claim for equitable estoppel under Section 24632 of the NIRC. In essence, the aforesaid BIR Ruling stated that "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review."33

Recently, in Taganito Mining Corporation v. CIR,34 the Court reconciled the pronouncements in the Aichi and San Roque cases in the following manner:

Reconciling the pronouncements in the Aichi and San Roque cases, the rule must therefore be that during the period December 10, 2003 (when BIR Ruling No. DA-489-03 was issued) to October 6, 2010(when the Aichi case was promulgated), taxpayers-claimants need not observe the 120-day periodbefore it could file a judicial claim for refund of excess input VAT before the CTA. Before and after the aforementioned period (i.e., December 10, 2003 to October 6, 2010), the observance of the 120-day period is mandatory and jurisdictional tothe filing of such claim.35 (Emphases and underscoring supplied)

In the case at bar, the following facts are undisputed: (a) in C.T.A. Case No. 6792, CE Luzon filed its administrative claim for refund of unutilized input VAT for the third quarter of 2001 on September 26, 2003 and the corresponding judicial claim on September 30, 2003; and (b) in C.T.A. Case No. 6837, the administrative claim for refund of unutilized input VAT for the fourth quarter of 2001 and all quarters of 2002 was filed on December 18, 2003 and the judicial claim on December 19, 2003.

While both claims for refund were filed within the two (2)-year prescriptive period, CE Luzon failed tocomply with the 120-day period as it filed its judicial claim in C.T.A. Case No. 6792 four (4) days after the filing of the administrative claim, while in C.T.A. Case No. 6837, the judicial claim was filed a day after the filing of the administrative claim. Proceeding from the aforementioned jurisprudence, only C.T.A. Case No. 6792 should be dismissed on the ground of lack of jurisdiction for being prematurely filed. In contrast, CE Luzon filed its administrative and judicial claims for refund in C.T.A. Case No. 6837 during the period, i.e., from December 10, 2003 to October 6, 2010, when BIR Ruling No. DA-489-03 was in place. As such, the aforementioned rule on equitable estoppel operates in its favor, thereby shielding it from any supposed jurisdictional defect which would have attended the filing of its judicial claim before the expiration of the 120-day period.

At this point, the Court notes that due to the consolidation of C.T.A. Case Nos. 6792 and 6837, the CTA Division made a cumulative determination of the total amount of unutilized input VAT to be refunded/credited in favor of CE Luzon in the amount of P13,926,697.51. Considering, however, the foregoing disquisition, there is a need to ascertain the specific amounts adjudged that pertain to C.T.A. Case No. 6792 and to C.T.A. Case No. 6837, and consequently limit CE Luzon's entitlement to refund/tax credit of unutilized input VAT only with reference to C. T.A. Case No. 6837. For this purpose, the Court deems it proper to remand the instant case to the CTA.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated September 1, 2009 and the Resolution dated November 6, 2009, of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 474 are hereby. AFFIRMED with MODIFICATION DENYING CE Luzon Geothermal Power Company, Inc. 's (CE Luzon) claim for refund in C.T.A. Case No. 6792 on the ground of lack of jurisdiction for being prematurely filed. On the other hand, the instant case is REMANDED to the CTA to determine the proper amount of input Value Added Tax refunded/tax credited in favor of CE Luzon in relation to its claim for refund in C.T.A. Case No. 6837.

TAGANITO MINING CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the October 19, 2011 Decision1 and the March 22, 2012 Resolution2 of the Court of Tax Appeals (CTA) En Banc, in CTA EB Case No. 656, which affirmed as to result only, the April 8, 20 I 0 Decision3 and the June 3, 2010 Resolution4 of the CTA Second Division (CTA Division) denying the petitioner's claim for refund.

The Facts

Petitioner Taganito Mining Corporation (Taganito), a value-added tax (VAT) and Board of Investments (BOI) registered corporation primarily engaged in the business of exploring, extracting, mining, selling, and exporting precious metals and all kinds of ores, metals, and their byproducts, filed through the Bureau of Internal Revenue’s (BIR) computerized filing system, its Original Quarterly VAT Returns for the first to fourth quarters of taxable year 2006 on the following dates:

Taxable Quarter Date of Filing

First April 24, 2006

Second July 19, 2006

Third October 18, 2006

Fourth January 25, 2007

Subsequently, Taganito filed its Amended Quarterly VAT Returns on October 18, 2006 for the first and second quarters of 2006, and on March 25, 2008 for the fourth quarter of 2006.

On March 26, 2008, Taganito filed with respondent Commissioner of Internal Revenue (CIR), through the Excise Taxpayers’ Assistance Division under the Large Taxpayers Division (LTAID-II), a claim for credit/refund of input VAT paid on its domestic purchases of taxable goods and services and importation of goods amounting toP22,421,260.26, for the period covering January 1, 2006 to December 31, 2006.

On April 17, 2008, as respondent CIR had not yet issued a final decision on the administrative claim, Taganito filed a judicial claim before the CTA Division with the intention oftolling the running of the two-year period to judicially claim a tax credit/refund under Section 229 of the National Internal Revenue Code of 1997 (NIRC).

On March 17, 2009, Taganito filed a motion for partial withdrawal of petition, to the extent of P17,810,137.26,in view of the approval by the BIR of its application for tax credit/refund in the amount of P15,725,188.58 and the allowance of the previously disallowed amount of P2,084,648.68.

On May 26, 2009, in accordance with the order of the CTA, Taganito filed a supplemental petition for review limiting the issue of the case to the remaining amount of P4,611,123.00, representing alleged excess input VAT paid on the importation of capital goods from January 1, 2006 to December 31, 2006. The following official receipts (OR) were submitted in support of its claim:

Month OR No. Net Amount Input

January 0028847 P11,314,310.00 P 1,131,431.00

February 014371 28,997,433.33 3,479,692.00

Total     P 4,611,123.00

On April 8, 2010, the CTA Division denied Taganito’s petition for review and its supplemental petiton for review for lack of merit.5 It held that the official receipts did not prove Taganito’s actual payment of the claimed input VAT. Specifically, no year was indicated in OR No. 0028847. It further held that the claim should be denied for failure to meet the substantiation requirements under Section 4.110-8(a)(1) of Revenue Regulation (R.R.) No. 16-05, providing that input taxes for the importation of goods must be substantiated by the import entry or other equivalent document showing actual payment of VAT on the imported goods.

It also ruled that Taganito failed to prove that the importations pertaining to the input VAT claim werein the nature of capital goods or properties, and assuming arguendo that they were capital goods, the input VAT was not amortized over the estimated useful life of the said goods, all in accordance with Sections 4.110-3 and 4.113-3 of R.R. No. 16-05, as amended by R.R. No. 4-2007.

The CTA Division later denied Taganito’s motion for reconsideration. Taganito, thus, appealed to the CTA En Banc.

In the assailed Decision, dated October 19, 2011, the CTA En Banc disposed, as follows:

WHEREFORE, in light of the foregoing considerations, the Petition for Review is hereby DENIED for lack of merit. The instant Petition for Review filed thereto is DISMISSED for lack of jurisdiction.

The Decision dated April 8, 2010 and the Resolution dated June 3, 2010 of the Court in Division in CTA Case No. 7769 are hereby AFFIRMED as to result only.

SO ORDERED.6

In light of the ruling in CIR v. Aichi Forging Company of Asia, Inc.7 (Aichi), the CTA En Banc held that in accordance with Section 112(C) of the NIRC, it was incumbent upon the taxpayer to give the CIR a period of 120 days to either partially or fully

deny the claim; and it was only upon the denial of the claim or after the expiration of the 120-day period without action, that the taxayer could seek judicial recourse. Considering that Taganito filed its judicial claim beforethe expiration of the 120-day period, the CTA En Banc ruled that the judicial claim was prematurely filed and, consequently, it had no jurisdiction to entertain the case.

Nonetheless, in the exercise of its judicial prerogative to resolve the merits of the case, the CTA En Banc held that it agreed with the ruling of the CTA Division that Taganito failed toprove that it complied with the substantiation requirements, considering that the burden of proof rested upon the taxpayer to establish by sufficient and competent evidence its entitlement to the refund.

In the assailed Resolution, dated March 22, 2012, the CTA En Banc denied Taganito’s motion for reconsideration.8

Hence, the present petition where Taganito raises the following:

Grounds for the Petition

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 erroneously applying the Aichi doctrine to the instant case for the following reasons:

A. The Aichi ruling is issued in violation of Art. VIII, Sec. 4(3)9 of the 1987 Constitution;

B. The Aichi doctrine is an erroneous application of the law; and

C. Even if the Aichi doctrine is good law, its application to the instant case will be in violation of petitioner’s right to due process and the principles of stare decisis and lex prospicit, non respicit

II. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of discretion tantamount to lack or excess of jurisdiction:

A. By failing to consider that the findings of fact of the CTA Division are not in accordance with the evidence on record and with existing laws and jurisprudence

B. By failing to state in the Questioned Decision, the factual and legal bases for its agreement to the CTA Division’s finding that Petitioner failed to prove compliance with substantiation requirements

C. By not granting the amount of petitioner’s excess VAT input taxes being claimed for refund which are clearly supported by evidence on record.10

Taganito basically argues that prior to Aichi, it was a well-settled doctrine that a taxpayer need not wait for the decision of the CIR on its administrative claim for refund before filing its judicial claim, in accordance with the period provided inSection 229 of the NIRC stating that no suit for the recovery of erroneously or illegally collected tax shall be filed after the expiration of two years from the date of payment of the tax.

The petitioner also insists that the official receipts issued by the authorized agent banks acting as collection agents of the respondent, constituted more than sufficient proof of payment of the VAT. It further points to the report of the independent certified public accountant (CPA), showing that the purchases and input VAT paid/incurred were properly recorded in the books of accounts. It adds that the balance sheet in its 2006 audited financial statements should be considered as it contained a note providing the details of its subsidiary ledger recording the purchase of capital goods. Taganito explains that it is not difficult to understand that a dump truck is capital equipment in a mining operation, as contained in the import entry internal revenue declaration (IEIRD) and testified to by its Vice-President for Finance. Lastly, the petitioner argues that because the CTA found that the purchases were not capital goods, the rule on the amortization of input tax cannot, thus, be applied to it.

In the Comment11 to the petition, the CIR counters that Aichiis a sound decision and that pursuant thereto, the petitioner’s judicial claim for refund was prematurely filed. The CIR further argues that Taganito failed to comply with the necessary substantiation requirements to prove actual payment of the claimed input VAT.

In its Reply,12 Taganito concedes that the issue on the prescriptive periods for filing of tax credit/refund ofunutilized input tax has been finally put to rest in the Court’s En Banc decision in the consolidated cases of Commission of Internal Revenue vs. San

Roque Power Corporation (G.R. No. 187485), Taganito Mining Corporation vs. Commissioner of Internal Revenue (G.R. No. 196113), and Philex Mining Corporation vs. Commissioner of Internal Revenue (G.R. No. 197156).13

Taganito, in accordance with the saiddecision, now argues that since it filed its judicial claim after the issuance of BIR Ruling No. DA-489-03, but before the adoption of the Aichi doctrine, it can invoke the said BIR ruling which provided that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." Taganito avers that its petition for review was, therefore, not prematurely filed before the CTA.

As to the issue of substantiation, the petitioner points out that respondent CIR directed that the amount ofP4,611,123.00 be indorsed to the Bureau of Customs, which it insists is further proof that it actually paid the input taxes claimed.

Ruling of the Court

Judicial claim timely filed

The Court agrees with petitioner that the prevailing doctrine pertinent to the issue at hand is CIR v. San Roque Power Corporation (San Roque).14 It was conclusively settled therein thatit is Section 112 of the NIRC which is applicable specifically to claims for tax credit certificates and tax refunds for unutilized creditable input VAT, and not Section 229. The recent case of Visayas Geothermal Power Company vs. Commissioner of Internal Revenue encapsulates the relevant ruling in San Roque:

Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section 229, 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 zerorated 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 of 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.

x x x

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.- In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the applicationfiled in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30)days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day period, appeal the decision or the unacted claim with the Court of Tax Appeals.

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

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

(Emphases supplied)

It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation(San Roque), that it is Section 112 of the NIRC which applies to claims for tax credit certificates and tax refunds arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which are, simply put, claims for unutilized creditable input VAT.

Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when the sales were made, via an administrative claim with the CIR, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D), the CIR must then act on the claim within 120 days from the submission of the taxpayer’s complete documents. In case of (a) a full or partial denial by the CIR of the claim, or (b) the CIR’s failure to act on the claim within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR decision or unacted claim, within 30 days (a) from receipt of the decision; or (b) after the expiration of the 120-day period.

The 2-year period under Section 229 does not apply to appeals before the CTA in relation to claims for a refund or tax credit for unutilized creditable input VAT. Section 229 pertains to the recovery of taxes erroneously, illegally, or excessively collected. San Roque stressed that "input VAT is not ‘excessively’ collected as understood under Section 229 because, at the time the input VAT is collected, the amount paid is correct and proper." It is, therefore, Section 112 which applies specifically with regard to claiming a refund or tax credit for unutilized creditable input VAT.

Upholding the ruling in Aichi, San Roqueheld that the 120+30 day period prescribed under Section 112(D) mandatory and jurisdictional. The jurisdiction of the CTA over decisions or inaction of the CIR is only appellate in nature and, thus, necessarily requires the prior filing of an administrative case before the CIR under Section 112. The CTA can only acquire jurisdiction over a case after the CIR has rendered its decision, orafter the lapse of the period for the CIR to act, in which case such inaction is considered a denial. A petition filed prior to the lapse of the 120-day period prescribed under said Section would be premature for violating the doctrine on the exhaustion of administrative remedies.

There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The Court in San Roquenoted that BIR Ruling No. DA-489-03, dated December 10, 2003, expressly stated that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." This BIR Ruling was recognized as a general interpretative rule issued by the CIR under Section 4 of the NIRC and, thus, applicable to all taxpayers. Since the CIR has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting in good faith should not be made to suffer for adhering to such interpretations. Section 246 of the Tax Code, in consonance with equitable estoppel, expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Hence, taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on December 10, 2003 up to its reversal by this Court in Aichion October 6, 2010, where it was held that the 120+30 day period was mandatory and jurisdictional.

Accordingly, the general rule is that the 120+30 day period is mandatory and jurisdictional from the effectivity of the 1997 NIRC on January 1, 1998, up to the present. As an exception, judicial claims filed from December 10, 2003 to October 6, 2010 need not wait for the exhaustion of the 120-day period.15

(Emphases supplied)

From the foregoing, it is clear that the two-year period under Section 229 does not apply to appeals before the CTA with respect to claims for a refund or tax credit for unutilized creditable input VAT since input VAT is not considered "excessively" collected. Instead, it was settled that it is Section 112 which applies, thereby making the 120+30 day period prescribed therein mandatory and jurisdictional in nature.

As an exception to the mandatory and jurisdictional nature of the 120+30 day period, judicial claims filed from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 up to its reversal in Aichion October 6, 2010, need not wait for the lapse of the 120+30 day period, in consonance with the principle of equitable estoppel.

In the present case, Taganito filed its judicial claim with the CTA on April 17, 2008, clearly within the period of exception of December 10, 2003 to October 6, 2010. Its judicial claim was, therefore, not prematurely filed.

Failure to comply with substantiation requirements

It is apparent from the petitioner’s assertions that it calls on the Court to review the evidence it submitted before the CTA in order to determine whether the input taxes being claimed were paid and duly substantiated. This clearly constitutes a question of fact that is beyond the Court’s ambit of review under Rule 45 of the Rules of Court, especially considering that the findings of fact of the CTA Division were affirmed by the CTA En Banc.

In any case, the Court finds no reason to deviate from the factual findings of the CTA. The Court agrees with the finding of the CTA Division that petitioner failed to duly substantiate its claim. Taganito insists that the official receipts issued by the bank authorized to collect import duties and taxes are the best evidence to prove its payment of the input tax being claimed. Two official receipts were presented in support of its claim, namely, ORNo. 0028847 and OR No. 014371. As noted by the CTA, there was no year indicated in OR No. 0028847, in support of the claim of P1,131,431.00. Itis plain that this claim cannot be deemed to have been properly substantiated. Even assuming that the proper year was indicated, these official receipts would still not comply with the substantiation requirements provided by law. Indeed, under Sections 110(A) and 113(A) of the NIRC, any input tax that is subject of a claim for refund must be evidenced by a VAT invoice or official receipt. With regard to the importation of goods or properties, however, Section 4.110-8 of R.R. No. 16-05, as amended, further requires that an import entry or other equivalent document showing actual payment of VAT on the imported goods must also be submitted, to wit: SECTION 4.110-8. Substantiation of Input Tax Credits. – (a) Input taxes for the importation of goods or the domestic purchase of goods, properties or services made in the course of trade or business, whether such input taxes shall be credited against zero-rated sale, non-zero-rated sales, or subjected to the 5% Final Withholding VAT, must be substantiated and supported by the following documents and must be reported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods – import entry or other equivalent document showing actual payment of VAT on the imported goods.

(Emphasis supplied)

In relation to this requirement, Customs Administrative Order No. 2-95 provides:

2.3 The Bureau of Customs Official Receipt (BCOR) will no longer be issued by the AABs (Authorized Agent Banks) for the duties and taxes collected. In lieu thereof, the amount of duty and tax collected including other required information must be machine validated directly on the following import documents and signed by the duly authorized bank official:

2.3.1 Import Entry and Internal Revenue Declaration (IEIRD) for final payment of duties and taxes.

x x x

From the foregoing, it is apparent that an IEIRD is required to properly substantiate the payment of the duties and taxes on imported goods. Considering that the petitioner failed to submit the import entries relevant to its claim, the CTA did not err in ruling that the petitioner’s claim was not sufficiently proven.

Assuming arguendo that Taganito had submitted the valid import entries, its claim would still fail. Its claim of refund of input VAT relates to its importation of dump trucks, allegedly a purchase of capital goods. In this regard, Sections 4.110-3 and 4.113-3 of R.R. No. 16-05, as amended by R.R. No. 4-2007, provide:

SECTION 4.110-3. Claim for Input Tax on Depreciable Goods. – Where a VAT-registered person purchases or imports capital goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) in a calendar month exceeds one million pesos (P1,000,000.00), regardless of the acquisition cost of each capital good, shall be claimed as credit against output tax in the following manner:

(a) If the estimated useful life of a capital good is five (5) years or more – The input tax shall be spread evenly over a period of sixty (60) months and the claim for input tax credit will commence in the calendar month when the capital good is acquired. The total input taxes on purchases or importations of this type of capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly.

(b) If the estimated useful life of a capital good is less than five (5) years – The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of a capital good. The claim for input tax credit shall commence in the month that the capital goods were acquired.

Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported during any calendar month does not exceed one million pesos (P1,000,000.00), the total input taxes will be allowable as credit against output tax in the month of acquisition.

Capital goods or properties refersto goods or properties with estimated useful life greater than1 year and which are treated as depreciable assets under Sec. 34(F) of the tax Code, used directly or indirectly in the production or sale of taxable goods or services.

The aggregate acquisition cost of depreciable assets in any calendar month refers to the total price, excluding VAT, agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus, an asset acquired on installment for an acquisition cost of more than P1,000,000.00, excluding the VAT, will be subject to the amortization of input tax despite the fact that the monthly payments/installments may not exceed P1,000,000.00.

SECTION 4.113-3. Accounting Requirements. – Notwithstanding the provisions of Sec. 233, all persons subject to VAT under Sec. 106 and 108 of the Tax Code shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which every sale or purchase on any given day is recorded. The subsidiary journal shall contain such information as may be required by the Commissioner of Internal Revenue.

A subsidiary record in ledger form shall be maintained for the acquisition, purchase or importation of depreciable assets or capital goods which shall contain, among others, information on the total input tax thereon as well as the monthly input tax claimed in VAT declaration or return. (Emphases supplied)

Taganito argues that the report of the independent CPA shows that purchases and input VAT paid/incurred were properly recorded in its books of accounts. In addition, it avers that the Balance Sheet in its 2006 Audited Financial Statements showing an account item for property and equipment under its non-current assets indicates that details are found on Note 7 on page 19 of the Notes to Financial Statements, which provide the complete details of its subsidiary ledger. It also alleges that the pertinent IERIDs were reviewed by the independent CPA and they clearly state that the items imported were dump trucks, and that its Vice-President for Finance testified what consists of its purchases of capital goods.

These arguments cannot be given credence.

First, Taganito failed to prove that the importations pertaining to the input VAT are in the nature of capital goods and properties as defined in the above quoted section. It points to the report of the independent CPA which allegedly reviewed the IERIDs and subsidiary ledger containing the description of the dump trucks. Nonetheless, the petitioner failed to present the actual IERIDs and subsidiary ledger, which would constitute the best evidence rather than a report merely citing them. It did not give any reason either to explain its failure to present these documents.1âwphi1 The testimony of its Vice-President for Finance would be insufficient to prove the nature of the importation without these supporting documents.

Second, even assuming that the importations were duly proven to be capital goods, Taganito's claim still would not prosper because it failed to present evidence to show that it properly amortized the related input VAT over the estimated useful life of the capital goods in its subsidiary ledger, as required by the abovequoted sections. This is made apparent by the fact that Taganito's claim for refund is for the full amount of the input VAT on the importation, rather than for an amortized amount, and by its failure to present its subsidiary ledger.

In sum, the CTA indeed erred in dismissing the case for having been prematurely filed. The petitioner, nonetheless, failed to properly substantiate its claim for refund of the input VAT on its importations.

WHEREFORE, the petition is DENIED. The October 19, 2011 Decision of the Court of Tax Appeals En Banc, and its March 22, 2012 Resolution, in CTA EB Case No. 656, are SET ASIDE. The April 8, 2010 Decision and June 3, 2010 Resolution of the CTA Former Second Division in CTA Case No. 7769 are REINSTATED.

ROHM APOLLO SEMICONDUCTOR PHILIPPINES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondents.

D E C I S I O N

SERENO, C.J.:

This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to petitioner's judicial claim for refund or credit of unutilized input Value-Added Tax (VAT) under Sections 112(A) and 112(D)2 of the 1997 Tax Code. Petitioner Rohm Apollo Semiconductor Philippines., Inc. (Rohm Apollo) assails the Decision3 and Resolution4 of the Court of

Tax Appeals En Banc (CTA En Banc) in CTA En Banc Case No. 59, affirming the Decision in CTA Case No. 6534 of the CTA First Division.5 The latter denied the claim for the refund or issuance of a tax credit certificate filed by petitioner Rohm Apollo in the amount of P30,359,615.40 representing unutilized input VAT paid on capital goods purchased for the months of July and August 2000.cralawred

FACTS

Petitioner Rohm Apollo is a domestic corporation registered with the Securities and Exchange Commission.6 It is also registered with the Philippine Economic Zone Authority as an Ecozone Export Enterprise.7 Rohm Apollo is in the business of manufacturing semiconductor products, particularly microchip transistors and tantalium capacitors at the People’s Technology Complex – Special Economic Zone, Barangay Maduya, Carmona Cavite.8 Further, it is registered with the Bureau of Internal Revenue (BIR) as a value-added taxpayer.9chanRoblesvirtualLawlibrary

Sometime in June 2000, prior to the commencement of its operations on 1 September 2001, Rohm Apollo engaged the services of Shimizu Philippine Contractors, Inc. (Shimizu) for the construction of a factory.10  For services rendered by Shimizu, petitioner made initial payments of P198,551,884.28  on 7 July 2000 and P132,367,923.58 on 3 August 2000.11chanRoblesvirtualLawlibrary

It should be noted at this point that Section 112(B), 12  in relation to Section 112(A) 13  of the 1997 Tax Code, allows a taxpayer to file an application for the refund or tax credit of unutilized input VAT when it comes to the purchase of capital goods. The provision sets a time frame for the filing of the application at two years from the close of the taxable quarter when the purchase was made.

Going back to the case, petitioner treated the payments as capital goods purchases and thus filed with the BIR an administrative claim for the refund or credit of accumulated unutilized creditable input taxes on 11 December 2000.14 As the close of the taxable quarter when the purchases were made was 30 September 2000, the administrative claim was filed well within the two-year prescriptive period.

Pursuant to Section 112(D)15 of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR) had a period of 120 days from the filing of the application for a refund or credit on 11 December 2000, or until 10 April 2001, to act on the claim. The waiting period, however, lapsed without any action by the CIR on the claim.

Instead of filing a judicial claim within 30 days from the lapse of the 120-day period on 10 April, or until 10 May 2001, Rohm Apollo filed a Petition for Review with the CTA docketed as CTA Case No. 6534 on  11 September 2002. It was under the belief that a judicial claim had to be filed within the two-year prescriptive period ending on 30 September 2002.16chanRoblesvirtualLawlibrary

On 27 May 2004, the CTA First Division rendered a Decision17 denying the judicial claim for a refund or tax credit. In support of its ruling, the CTA First Division held, among others, that petitioner must have at least submitted its VAT return for the third quarter of 2001, since it was in that period that it began its business operations. The purpose was to verify if indeed petitioner did not carry over the claimed input VAT to the third quarter or the succeeding quarters.

On 14 July 2004, petitioner Rohm Apollo filed a Motion for Reconsideration, but the tax court stood by its Decision.18chanRoblesvirtualLawlibrary

On 18 January 2005, the taxpayer elevated the case to the CTA En Banc via a Petition for Review.19chanRoblesvirtualLawlibrary

On 22 June 2005, the CTA En Banc rendered its Decision denying Rohm Apollo’s Petition for Review.20The appellate tax court held that the failure to present the VAT returns for the subsequent taxable year proved to be fatal to the claim for a refund/tax credit, considering that it could not be determined whether the claimed amount to be refunded remained unutilized.

Petitioner filed a Motion for Reconsideration of the Decision, but it was denied for lack of merit.

Persistent, the taxpayer filed this Rule 45 Petition, arguing that it has satisfied all the legal requirements for a valid claim for refund or tax credit of unutilized input VAT.cralawred

ISSUE

The threshold question to be resolved is whether the CTA acquired jurisdiction over the claim for the refund or tax credit of unutilized input VAT.cralawred

THE COURT’S RULING

We deny the Petition on the ground that the taxpayer’s judicial claim for a refund/tax credit was filed beyond the prescriptive period.

The judicial claim was filed out of time.  

Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for the refund or tax credit of input VAT. The legal provision speaks of two periods: the period of 120 days, which serves as a waiting period to give time for the CIR to act on the administrative claim for a refund or credit; and the period of 30 days, which refers to the period for filing a judicial claim with the CTA. It is the 30-day period that is at issue in this case.

The landmark case of Commissioner of Internal Revenue v. San Roque Power Corporation21 has interpreted Section 112 (D). The Court held that the taxpayer can file an appeal in one of two ways: (1) file the judicial claim within 30 days after the Commissioner denies the claim within the 120-day waiting period, or (2) file the judicial claim within 30 days from the expiration of the 120-day period if the Commissioner does not act within that period.

In this case, the facts are not up for debate. On 11 December 2000, petitioner filed with the BIR an application for the refund or credit of accumulated unutilized creditable input taxes. Thus, the CIR had a period of 120 days from 11 December 2000, or until 10 April 2001, to act on the claim. It failed to do so, however. Rohm Apollo should then have treated the CIR’s inaction as a denial of its claim. Petitioner would then have had 30 days, or until 10 May 2001, to file a judicial claim with the CTA. But Rohm Apollo filed a Petition for Review with the CTA only on 11 September 2002. The judicial claim was thus filed late.

The error of the taxpayer lies in the fact that it had mistakenly believed that a judicial claim need not be filed within 30 days from the lapse of the 120-day period. It had believed that the only requirement is that the judicial claim must be filed within the two-year period under Sections 112(A) and (B) of the 1997 Tax Code. In other words, Rohm Apollo erroneously thought that the 30-day period does not apply to cases of the CIR’s inaction after the lapse of the 120-day waiting period, and that a judicial claim is seasonably filed so long as it is done within the two year-period. Thus, it filed the Petition for Review with the CTA only on  11 September 2002.

These mistaken notions have already been dispelled by Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi)22 and San Roque. Aichi clarified that it is only the administrative claim that must be filed within the two-year prescriptive period.23 San Roque, on the other hand, has ruled that the 30-day period always applies, whether there is a denial or inaction on the part of the CIR.24chanRoblesvirtualLawlibrary

Justice Antonio Carpio, writing for the Court in San Roque, explained that the 30-day period is a 1997 Tax Code innovation that does away with the old rule where the taxpayer could file a judicial claim when there is inaction on the part of the CIR and the two-year statute of limitations is about to expire. Justice Carpio stated:chanroblesvirtuallawlibrary

The old rule  that the taxpayer may file the judicial claim, without waiting for the Commissioner's decision if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.25 (Emphases supplied)

The 30-day period to appeal ismandatory and jurisdictional.

As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. The only exception to the general rule is when BIR Ruling No. DA-489-03 was still in force, that is, between 10 December 2003 and 5 October 2010, The BIR Ruling excused premature filing, declaring that the taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review. In San Roque, the High Court explained both the general rule and the exception:chanroblesvirtuallawlibrary

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is with the 120+30 day mandatory and jurisdictional periods.Thus, strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine,except for the period from the issuance of BIR Ruling No. DA-489-03

on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.26  (Emphases supplied)

San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court held that the BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30 day periods, is limited to premature filing and does not extend to the late filing of a judicial claim.27chanRoblesvirtualLawlibrary

In sum, premature filing is allowed for cases falling during the time when BIR Ruling No. DA-489-03 was in force; nevertheless, late filing is absolutely prohibited even for cases falling within that period.

As mentioned above, the taxpayer filed its judicial claim with the CTA on 11 September 2002. This was before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Thus, Rohm Apollo could not have benefited from the BIR Ruling. Besides, its situation was not a case of premature filing of its judicial claim but one of late filing.  To repeat, its judicial claim was filed on 11 September 2002 – long after 10 May 2001, the last day of the 30-day period for appeal. The case thus falls under the general rule – the 30-day period is mandatory and jurisdictional.cralawred

CONCLUSION

In fine, our finding is that the judicial claim for the refund or credit of unutilized input VAT was belatedly filed. Hence, the CTA lost jurisdiction over Rohm Apollo’s claim for a refund or credit.

The foregoing considered, there is no need to go into the merits of this case.

A final note, the taxpayers are reminded that that when the 120-day period lapses and there is inaction on the part of the CIR, they must no longer wait for it to come up with a decision thereafter. The CIR’s inaction is the decision itself. It is already a denial of the refund claim. Thus, the taxpayer must file an appeal within 30 days from the lapse of the 120-day waiting period.chanrobleslaw

WHEREFORE, the Petition is DENIED for lack of merit.

NORTHERN MINDANAO POWER CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

SERENO, CJ:

This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by Northern Mindanao Power Corporation (petitioner). The Petition assails the Decision2 dated 18 July 2008 and Resolution3dated 27 October 2008 issued by the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No. 312.

THE FACTS

Petitioner is engaged in the production sale of electricity as an independent power producer and sells electricity to National Power Corporation (NPC). It allegedly incurred input value-added tax (VAT) on its domestic purchases of goods and services that were used in its production and sale of electricity to NPC. For the 3rd and the 4th quarters of taxable year 1999, petitioner’s input VAT totaled to P2,490,960.29, while that incurred for all the quarters of taxable year 2000 amounted to P3,920,932.55.4

Petitioner filed an administrative claim for a refund on 20 June 2000 for the 3rd and the 4th quarters of taxable year 1999, and on 25 July 2001 for taxable year 2000 in the sum of P6,411,892.84.5

Thereafter, alleging inaction of respondent on these administrative claims, petitioner filed a Petition6 with the CTA on 28 September 2001.

The CTA First Division denied the Petition and the subsequent Motion for Reconsideration for lack of merit. The Court in Division found that the term "zero-rated" was not imprinted on the receipts or invoices presented by petitioner in violation of

Section 4.108-1 of Revenue Regulations No. 7-95. Petitioner failed to substantiate its claim for a refund and to strictly comply with the invoicing requirements of the law and tax regulations.7 In his Concurring and Dissenting Opinion, however, then Presiding Justice Ernesto D. Acosta opined that the Tax Code does not require that the word "zero-rated" be imprinted on the face of the receipt or invoice. He further pointed out that the absence of that term did not affect the admissibility and competence of the receipt or invoice as evidence to support the claim for a refund.8

On appeal to the CTA En Banc, the Petition was likewise denied. The court ruled that for every sale of services, VAT shall be computed on the basis of gross receipts indicated on the official receipt. Official receipts are proofs of sale of services and cannot be interchanged with sales invoices as the latter are used for the sale of goods. Further, the requirement of issuing duly registered VAT official receipts with the term "zero-rated" imprinted is mandatory under the law and cannot be substituted, especially for input VAT refund purposes. Then Presiding Justice Acosta maintained his dissent.

Hence, this appeal before us.

ISSUES

Petitioner’s appeal is anchored on the following grounds:

Section 4.108-1 of Revenue Regulations (RR) No. 7-95 which expanded the statutory requirements for the issuance of official receipts and invoices found in Section 113 of the 1997 Tax Code by providing for the additional requirement of the imprinting of the terms "zero-rated" is unconstitutional.

Company invoices are sufficient to establish the actual amount of sale of electric power services to the National Power Corporation and therefore sufficient to substantiate Petitioner’s claim for refund.9

THE COURT’S RULING

To start with, this Court finds it appropriate to first determine the timeliness of petitioner’s judicial claim in order to determine whether the tax court properly acquired jurisdiction, although the matter was never raised as an issue by the parties. Well-settled is the rule that the issue of jurisdiction over the subject matter may, at any time, be raised by the parties or considered by the Court motu proprio.10 Therefore, the jurisdiction of the CTA over petitioner’s appeal may still be considered and determined by this Court.

Section 112 of the National Internal Revenue Code (NIRC) of 1997 laid down the manner in which the refund or credit of input tax may be made. For a VAT-registered person whose sales are zero-rated or effectively zero-rated, Section 112(A) specifically provides for a two-year prescriptive period after the close of the taxable quarter when the sales were made within which such taxpayer may apply for the issuance of a tax credit certificate or refund of creditable input tax. In the consolidated tax cases Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue11 (hereby collectively referred to as San Roque), the Court clarified that the two-year period refers to the filing of an administrative claim with the BIR.

In this case, petitioner had until 30 September 2001 and 31 December 2001 for the claims covering the 3rd and the 4th quarters of taxable year 1999; and 31 March, 30 June, 30 September and 31 December in 2002 for the claims covering all four quarters of taxable year 2000 −or the close of the taxable quarter when the zero-rated sales were made −within which to file its administrative claim for a refund. On this note, we find that petitioner had sufficiently complied with the two-year prescriptive period when it filed its administrative claim for a refund on 20 June 2000 covering the 3rd and the 4th quarters of taxable year 1999 and on 25 July 2001covering all the quarters of taxable year 2000.

Pursuant to Section 112(D) of the NIRC of 1997, respondent had one hundred twenty (120) days from the date of submission of complete documents in support of the application within which to decide on the administrative claim. The burden of proving entitlement to a tax refund is on the taxpayer. Absent any evidence to the contrary, it is presumed that in order to discharge its burden, petitioner attached to its applications complete supporting documents necessary to prove its entitlement to a refund.12 Thus, the 120-day period for the CIR to act on the administrative claim commenced on 20 June 2000 and 25 July 2001.

As laid down in San Roque, judicial claims filed from 1 January 1998 until the present should strictly adhere to the 120+30-day period referred to in Section 112 of the NIRC of 1997.The only exception is the period 10 December 2003 until 6 October 2010. Within this period, BIR Ruling No. DA-489-03 is recognized as an equitable estoppel, during which judicial claims may be filed even before the expiration of the 120-day period granted to the CIR to decide on a claim for a refund.

For the claims covering the 3rd and the 4th quarters of taxable year 1999 and all the quarters of taxable year2000, petitioner filed a Petition with the CTA on 28 September 2001.

Both judicial claims must be disallowed.

a) Claim for a refund of input VATcovering the 3rd and the 4thquarters of taxable year 1999

Counting 120 days from 20 June 2000, the CIR had until 18 October 2000 within which to decide on the claim of petitioner for an input VAT refund attributable to its zero-rated sales for the period covering the 3rd and the 4th quarters of taxable year 1999. If after the expiration of that period respondent still failed to act on the administrative claim, petitioner could elevate the matter to the court within 30 days or until 17 November 2000.

Petitioner belatedly filed its judicial claim with the CTA on 28 September 2001. Just like in Philex, this was a case of late filing. The Court explained thus:

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the date of payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the consequences.

x x x x

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.13 (Emphasis in the original)

Petitioner’s claim for the 3rd and the 4th quarters of taxable year 1999 was filed 319 days after the expiration of the 30-day period. To reiterate, the right to appeal is a mere statutory privilege that requires strict compliance with the conditions attached by the statute for its exercise. Like Philex, petitioner failed to comply with the statutory conditions and must therefore bear the consequences. It already lost its right to claim a refund or credit of its alleged excess input VAT attributable to zero-rated or effectively zero-rated sales for the 3rd and the 4th quarters of taxable year 1999 by virtue of its own failure to observe the prescriptive periods.

b) Claim for the refund of inputVAT covering all quarters oftaxable year 2000

For the year 2000, petitioner timely filed its administrative claim on 25 July 2001within the two-year period from the close of the taxable quarter when the zero-rated sales were made. Pursuant to Section 112(D) of the NIRC of 1997, respondent had 120 days or until 22 November 2001 within which to act on petitioner’s claim. It is only when respondent failed to act on the claim after the expiration of that period that petitioner could elevate the matter to the tax court. Records show, however, that petitioner filed its Petition with the CTA on 28 September 2001 without waiting for the expiration of the 120-day period. Barely 64 days had lapsed when the judicial claim was filed with the CTA. The Court in San Roquehas already settled that failure of the petitioner to observe the mandatory 120-day period is fatal to its judicial claim and renders the CTA devoid of jurisdiction over that claim. On 28

September 2001 – the date on which petitioner filed its judicial claim for the period covering taxable year 2000 −the 120+30 day mandatory period was already in the law and BIR Ruling No. DA-489-03 had not yet been issued. Considering this fact, petitioner did not have an excuse for not observing the 120+30 day period. Again, as enunciated in San Roque, it is only the period between 10 December 2003 and 6 October 2010 that the 120-day period may not be observed. While the ponente had disagreed with the majority ruling in San Roque, the latter is now the judicial doctrine that will govern like cases.

The judicial claim was thus prematurely filed for failure of petitioner to observe the 120-day waiting period.1âwphi1 The CTA therefore did not acquire jurisdiction over the claim for a refund of input VAT for all the quarters of taxable year 2000.

In addition, the issue of the requirement of imprinting the word "zero-rated" has already been settled by this Court in a number of cases. In Western Mindanao Power Corporation v. CIR,14 we ruled:

RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the Secretary of Finance by the NIRC for the efficient enforcement of the same Tax Code and its amendments. In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue, we ruled that this provision is "reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services." Moreover, we have held in Kepco Philippines Corporation v. Commissioner of Internal Revenue that the subsequent incorporation of Section 4.108-1 of RR 7-95 in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts – a case falling under the principle of legislative approval of administrative interpretation by reenactment.

In fact, this Court has consistently held as fatal the failure to print the word "zero-rated" on the VAT invoices or official receipts in claims for a refund or credit of input VAT on zero-rated sales, even if the claims were made prior to the effectivity of R.A. 9337. Clearly then, the present Petition must be denied.

Finally, as regards the sufficiency of a company invoice to prove the sales of services to NPC, we find this claim is without sufficient legal basis. Section 113 of the NIRC of 1997 provides that a VAT invoice is necessary for every sale, barter or exchange of goods or properties, while a VAT official receipt properly pertains to every lease of goods or properties; as well as to every sale, barter or exchange of services.

The Court has in fact distinguished an invoice from a receipt m Commissioner of Internal Revenue v. Manila Mining Corporation:15

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer.

A VAT invoice is the seller's best proof of the sale of goods or services to the buyer, while a VAT receipt is the buyer's best evidence of the payment of goods or services received from the seller. A VAT invoice and a VAT receipt should not be confused and made to refer to one and the same thing. Certainly, neither does the law intend the two to be used alternatively.16 WHEREFORE, premises considered, the instant Petition is DENIED.

CARGILL PHILIPPINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.

D E C I S I O N

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated June 18, 2012 and the Resolution3 dated September 27, 2012 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 779, which affirmed the Amended Decision4 dated April 20, 2011 of the CTA Special First Division (CTA Division) in CTA Case Nos. 6714 and 7262, dismissing petitioner Cargill Philippines, Inc.’s (Cargill) claims for refund of unutilized input value-added tax (VAT) for being prematurely filed.chanroblesvirtuallawlibrary

The Facts

Cargill is a domestic corporation duly organized and existing under Philippine laws whose primary purpose is to own, operate, run, and manage plants and facilities for the production, crushing, extracting, or otherwise manufacturing and refining of coconut oil, coconut meal, vegetable oil, lard, margarine, edible oil, and other articles of similar nature and their by-products. It is a VAT-registered entity with Tax Identification No./VAT Registration No.000-110-659-000.5As such, it filed its quarterly VAT returns for the second quarter of calendar year 2001 up to the third quarter of fiscal year 2003, covering the period April 1, 2001 to February 28, 2003, which showed an overpayment of P44,920,350.92 and, later, its quarterly VAT returns for the fourth quarter of fiscal year 2003 to the first quarter of fiscal year 2005, covering the period March 1, 2003 to August 31, 2004 which reflected an overpayment of P31,915,642.26.6 Cargill maintained that said overpayments were due to its export sales of coconut oil, the proceeds of which were paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentralng Pilipinas and, thus, are zero-rated for VAT purposes.7cralawred

On June 27, 2003, Cargill filed an administrative claim for refund of its unutilized input VAT in the amount of P26,122,965.81 for the period of April 1, 2001 to February 28, 2003 (first refund claim) before the Bureau of Internal Revenue (BIR). Thereafter, or on June 30, 2003, it filed a judicial claim for refund, by way of a petition for review, before the CTA, docketed as CTA Case No. 6714. On September 29, 2003, it subsequently filed a supplemental application with the BIR increasing its claim for refund of unutilized input VAT to the amount of P27,847,897.72.8cralawred

On May 31, 2005, Cargill filed a second administrative claim for refund of its unutilized input VAT in the amount of P22,194,446.67 for the period of March 1, 2003 to August 31, 2004 (second refund claim) before the BIR. On even date, it filed a petition for review before the CTA, docketed as CTA Case No. 7262.9cralawred

For its part, respondent Commissioner of Internal Revenue (CIR) claimed, inter alia, that the amounts being claimed by Cargill as unutilized input VAT in its first and second refund claims were not properly documented and, hence, should be denied.10cralawred

On Cargill’s motion for consolidation,11 the CTA Division, in a Resolution12 dated July 10, 2007, ordered the consolidation of CTA Case No. 6714 with CTA Case No. 7262 for having common questions of law and facts.13cralawred

The CTA Division Ruling

In a Decision14 dated August 24, 2010 (August 24, 2010 Decision), the CTA Division partially granted Cargill’s claims for refund of unutilized input VAT and thereby ordered the CIR to issue a tax credit certificate in the reduced amount of P3,053,469.99, representing Cargill’s unutilized input VAT attributable to its VAT zero-rated export sales for the period covering April 1, 2001 to August 31, 2004.15 It found that while Cargill timely filed its administrative and judicial claims within the two (2)-year prescriptive period,16 as held in the case of CIR v. Mirant Pagbilao Corp.,17 it, however, failed to substantiate the remainder of its claims for refund of unutilized input VAT, resulting in the partial denial thereof.18cralawred

Dissatisfied, CIR respectively moved for reconsideration,19 and for the dismissal of Cargill’s petitions,claiming that they were prematurely filed due to its failure to exhaust administrative remedies.20 Cargill likewise sought for reconsideration,21 maintaining that the CTA Division erred in disallowing the rest of its refund claims.

In an Amended Decision22dated April 20, 2011, the CTA Division preliminarily denied the individual motions of both parties, to wit: (a) CIR’s motion for reconsideration for lack of notice of hearing; (b) CIR’s motion to dismiss on the ground of estoppel; and (c) Cargill’s motion for reconsideration for lack of merit.23cralawred

Separately, however, the CTA Division superseded and consequently reversed its August 24, 2010 Decision. Citing the case of CIR v. Aichi Forging Company of Asia, Inc. (Aichi),24it held that the 120-day period provided under Section 112(D) of the National Internal Revenue Code (NIRC) must be observed prior to the filing of a judicial claim for tax refund.25As Cargill failed to comply therewith, the CTA Division, without ruling on the merits, dismissed the consolidated cases for being prematurely filed.26cralawred

Aggrieved, Cargill elevated its case to the CTA En Banc.

The CTA En Banc Ruling

In a Decision27 dated June 18, 2012, the CTA En Banc affirmed the CTA Division’s April 20, 2011 Amended Decision, reiterating that Cargill’s premature filing of its claims divested the CTA of jurisdiction, and perforce, warranted the dismissal of its petitions. To be specific, it highlighted that Cargill’s petition in CTA Case No. 6714 was filed on June 30, 2003, or after the lapse of three (3) days from the time it filed its administrative claim with the BIR; while its petition in CTA Case No. 7672 was filed on the same date it filed its administrative claim with the BIR, i.e., on May 31, 2005. As such, the CTA En Banc ruled that

Cargill’s judicial claims were correctly dismissed for being filed prematurely.28cralawred

Cargill moved for reconsideration29 which was, however, denied by the CTA En Banc in a Resolution30 dated September 27, 2012, hence, this petition.chanroblesvirtuallawlibrary

The Issue Before the Court

The core issue in this case is whether or not the CTA En Banc correctly affirmed the CTA Division’s outright dismissal of Cargill’s claims for refund of unutilized input VAT on the ground of prematurity.chanroblesvirtuallawlibrary

The Court’s Ruling

The petition is partly meritorious.

Allowing the refund or credit of unutilized input VAT finds its genesis in Executive Order No. 273,31series of 1987, which is recognized as the “Original VAT Law.” Thereafter, it was amended through the passage of Republic Act No. (RA)  7716,32 RA 8424,33 and, finally by RA 9337,34 which took effect on November 1, 2005. Considering that Cargill’s claims for refund covered periods before the effectivity of RA 9337, Section 112 of the NIRC, as amended by RA 8424, should, therefore, be the governing law,35the pertinent portions of which read:chanRoblesvirtualLawlibrary

Section 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. – any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: x x x.chanrobleslaw

x x x x

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphases and underscoring supplied)

x x x xcralawlawlibrary

In the landmark case of Aichi, it was held that the observance of the 120-day period is a mandatory and jurisdictional requisite to the filing of a judicial claim for refund before the CTA. As such, its non-observance would warrant the dismissal of the judicial claim for lack of jurisdiction. It was, withal, delineated in Aichi that the two (2)-year prescriptive period would only apply to administrative claims, and not to judicial claims.36 Accordingly, once the administrative claim is filed within the two (2)-year prescriptive period, the taxpayer-claimant must wait for the lapse of the 120-day period and, thereafter, he has a 30-day period within which to file his judicial claim before the CTA, even if said 120-day and 30-day periods would exceed the aforementioned two (2)-year prescriptive period.37cralawred

Nevertheless, the Court, in the case of CIR v. San Roque Power Corporation38 (San Roque), recognized an exception to the mandatory and jurisdictional nature of the 120-day period. San Roqueenunciated that BIR Ruling No. DA-489-03 dated December 10, 2003, which expressly declared that the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of petition for review,” provided a valid claim for equitable estoppel under Section 24639 of the NIRC.40cralawred

In the more recent case of Taganito Mining Corporation v. CIR,41 the Court reconciled the pronouncements in Aichi and San Roque, holding that from December 10, 2003 to October 6, 2010which refers to the interregnum when BIR Ruling No. DA-489-03 was issued until the date of promulgation of Aichi, taxpayer-claimants need not observe the stringent 120-day period; but before and aftersaid window period, the mandatory and jurisdictional nature of the 120-day period remained in force, viz.:chanRoblesvirtualLawlibrary

Reconciling the pronouncements in the Aichi and San Roque cases, the rule must therefore be that during the period December 10, 2003 (when BIR Ruling No. DA-489-03 was issued) to October 6, 2010 (when the Aichi case was promulgated),taxpayers-claimants need not observe the 120-day period before it could file a judicial claim for refund of excess input VAT before the CTA. Before and after the aforementioned period ( i.e ., December 10, 2003 to October 6, 2010), the observance of the 120-day period is mandatory and jurisdictional to the filing of such claim.42 (Emphases and underscoring supplied)cralawlawlibrary

In this case, records disclose that anent Cargill’s first refund claim, it filed its administrative claim with the BIR on June 27, 2003, and its judicial claim before the CTA on June 30, 2003, or before the period when BIR Ruling No. DA-489-03 was in effect, i.e., from December 10, 2003 to October 6, 2010. As such, it was incumbent upon Cargill to wait for the lapse of the 120-day period before seeking relief with the CTA, and considering that its judicial claim was filed only after three (3) days later, the CTA En Banc, thus, correctly dismissed Cargill’s petition in CTA Case No. 6714for being prematurely filed.

In contrast, records show that with respect to Cargill’s second refund claim, its administrative and judicial claims were both filed on May 31, 2005, or during the period of effectivity of BIR Ruling NO. DA-489-03, and, thus, fell within the exemption window period contemplated in San Roque, i.e., when taxpayer-claimants need not wait for the expiration of the 120-day period before seeking judicial relief. Verily, the CTA En Banc erred when it outrightly dismissed CTA Case No. 7262on the ground of prematurity.

This notwithstanding, the Court finds that Cargill’s second refund claim in the amount of P22,194,446.67 which allegedly represented unutilized input VAT covering the period March 1, 2003 to August 31, 2004 should not be instantly granted. This is because the determination of Cargill’s entitlement to such claim, if any, would necessarily involve factual issues and, thus, are evidentiary in nature which are beyond the pale of judicial review under a Rule 45 petition where only pure questions of law, not of fact, may be resolved.43 Accordingly, the prudent course of action is to remand CTA Case No. 7262 to the CTA Division for resolution on the merits, consistent with the Court’s ruling in Panay Power Corporation v. CIR.44cralawred

WHEREFORE, the petition is PARTLY GRANTED. Accordingly, the Decision dated June 18, 2012 and the Resolution dated September 27, 2012 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 779 are hereby AFFIRMED only insofar as it dismissed CTA Case No. 6714. On the other hand, CTA Case No. 7262 is REINSTATED and REMANDED to the CTA Special First Division for its resolution on the merits.

EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

REYES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court which seeks to reverse and set aside the Decision2 dated  April 30, 2008 and Resolution3 dated July 2, 2008 of the Court of Tax Appeals (CTA) en banc in C.T.A. EB No. 327 affirming the denial of Eastern Telecommunications Philippines, Inc.’s (ETPI) claim for refund of its unutilized input value-added tax (VAT) in the amount of P9,265,913.42 allegedly attributable to ETPI’s zero-rated sales of services to non-resident foreign corporation for the taxable year 1998.

The Antecedents

ETPI is a domestic corporation located at the Telecoms Plaza Building, No. 316, Sen. Gil Puyat Avenue, Salcedo Village, Makati City.  It registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer with Certificate of Registration bearing RDO Control No. 49-490-000205 dated June 10, 1994.4

As a telecommunications company, ETPI entered into various international service agreements with international telecommunications carriers and handles incoming telecommunications services for non-resident foreign telecommunication companies and the relay of said international calls within and around other places in the Philippines.  Consequently, to broaden its distribution coverage of telecommunications services throughout the country, ETPI entered into various interconnection agreements with local carriers  that  can  readily  relay  the  said  foreign  calls  to  the  intended local end-receiver.5

The non-resident foreign corporations pays ETPI in US dollars inwardly remitted through the Philippine local banks, Metropolitan Banking Corporation, HongKong and Shanghai Banking Corporation and Citibank through the manner and mode of payments based on an internationally established standard which is embodied in a Blue Book, or Manual, prepared by the

Consultative Commission of International Telegraph and Telephony and implemented between the contracting parties in consonance with a set  of procedural guidelines denominated as Traffic Settlement Procedure.6

ETPI seasonably filed its Quarterly VAT Returns for the year 1998 which were, however, simultaneously amended on February 22, 2001 to correct its input VAT on domestic purchases of goods and services and on importation of goods and to reflect its zero-rated and exempt sales for said year.7

On January 25, 2000, ETPI filed an administrative claim with the BIR for the refund of the amount of P9,265,913.42 representing excess input tax attributable to its effectively zero-rated sales in 1998 pursuant to Section 1128 of the Republic Act (R.A.) No. 8424, also known as the National Internal Revenue Code of 1997 (NIRC), as implemented by Revenue Regulations (RR) No. 5-87 and as amended by RR No. 7-95.9

Pending review by the BIR, ETPI filed a Petition for Review10 before the CTA on February 21, 2000 in order to toll the two-year reglementary period under Section 22911 of the NIRC.  The case was docketed as C.T.A. Case No. 6019.  The BIR Commissioner opposed the petition and averred that no judicial action can be instituted by a taxpayer unless a claim has been duly filed before it.  Considering the importance of such procedural requirement, the BIR stressed that ETPI did not file a formal/written claim for refund but merely submitted a quarterly VAT return for the 4th quarter of 1998 contrary to what Section 229 of the NIRC prescribes.12

In a Decision13 dated November 19, 2003, the CTA denied the petition because the VAT official receipts presented by ETPI to support its claim failed to imprint the word “zero-rated” on its face in violation of the invoicing requirements under Section 4.108-1 of RR No. 7-95 which reads:

Sec. 4.108-1. Invoicing Requirements.– All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show:

1. the name, TIN and address of seller;2. date of transaction;3. quantity, unit cost and description of merchandise or nature of service;4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;5. the word “zero-rated” imprinted on the invoice covering zero-rated sales; and6. the invoice value or consideration. x x x (Emphasis ours)

The CTA further mentioned that even if ETPI is entitled to a refund, it still failed to present sales invoices covering its VATable and exempt sales for purposes of allocating its input taxes.  It also criticized ETPI for filing its 1998 audited financial records on February 22, 2001 when the same should have been reported to the BIR as early as February 22, 1999.  It being so, the CTA  ratiocinated  that  tax  refunds,  being  in  the  nature  of  tax exemptions, are construed in strictissimi jurisagainst the taxpayer.14  Thus, ETPI’s non-compliance with what the tax laws and regulations require resulted to the denial of its claim for VAT refund.

ETPI moved for the CTA’s reconsideration15 but it was denied in the Resolution16 dated March 19, 2004.  It was discussed: (1) that ETPI’s failure to imprint the word “zero-rated” on the face of its receipts and invoices gives the presumption that it is 10% VATable; (2) that its validly supported input VAT may still be claimed as an automatic tax credit in payment of its future output VAT liability; (3) that the total sales appearing on its 1998 Quarterly Return affects the determination of its allowable refund even if the amounts of the reported zero-rated sales indicated in the amended Quarterly VAT Returns and company-provided zero-rated sales are the same; (4) that there is a need to verify the truthfulness regarding ETPI’s claim that the discrepancy in the sales was due to “write off” accounts; and (5) that the denial of the claim for refund was based on the allocation it provided to its independent certified public accountant (CPA) which it failed to support and which the independent CPA failed to include in its audit.

Undaunted, ETPI filed a petition before the Court of Appeals (CA) which referred the case to the CTAen banc due to the passage of R.A. No. 9282.17

On April 30, 2008, the CTA en banc rendered a Decision18 which affirmed the decision of the old CTA.  In its disquisition, the CTA en banc stated that VAT-registered persons must comply with the invoicing requirements prescribed in Sections 113(A)19 and 23720 of the NIRC.  Moreover,  the  invoicing  requirements  enumerated  in  Section  4.108-1  of RR No. 7-95 are mandatory due to the word “shall” and not “may”.  Hence, non-compliance with any thereof would disallow any claim for tax credit or VAT refund.

CTA Presiding Justice Ernesto Acosta (PJ Acosta) filed a Concurring and Dissenting Opinion21 wherein he disagreed with the

majority’s view regarding  the  supposed  mandatory  requirement  of  imprinting  the  term “zero-rated” on official receipts or invoices.  He stated that Section 113 in relation to Section 237 of the NIRC does not require the imprinting of the phrase “zero-rated” on an invoice or official receipt for the document to be considered valid for the purpose of claiming a refund or an issuance of a tax credit certificate.  Hence, the absence of the term “zero-rated” in an invoice or official receipt does not affect its admissibility or competency as evidence in support of a refund claim.  Assuming that stamping the term “zero-rated” on an invoice or official receipt is a requirement of the current NIRC, the denial of a refund claim is not the imposable penalty for failure to comply with that requirement.  Nevertheless, PJ Acosta agreed with the majority’s decision to deny the claim due to ETPI’s failure to prove the input taxes it paid on its domestic purchases of goods and services during the period involved.

ETPI filed a motion for reconsideration which was denied in the Resolution22 dated July 2, 2008.  Hence, this petition.

The Issue

Whether or not the CTA erred in denying ETPI’s claim for refund of input taxes resulting from its zero-rated sales.

Ruling of the Court

The petition is bereft of merit.

Foremost, it should be noted that the CTA has developed an expertise on the subject of taxation because it is a specialized court dedicated exclusively to the study and resolution of tax problems.  As such, its findings of fact are accorded the highest respect and are generally conclusive upon this Court, in the absence of grave abuse of discretion or palpable error.  Its decisions shall not be lightly set aside on appeal, unless this Court finds that the questioned decision is not supported by substantial evidence or there is a showing of abuse or improvident exercise of authority.23

The word “zero-rated” is required on the invoices or receipts issued byVAT-registered taxpayers.

ETPI posits that the NIRC allows VAT-registered taxpayers to file a claim for refund of input taxes directly attributable to zero-rated transactions subject to compliance with certain conditions.  To bolster its averment, ETPI pointed out that the imprint of the word “zero-rated” on the face of the sales invoice or receipt is merely required in RR No. 7-95 which cannot prevail over a taxpayer’s substantive right to claim a refund or tax credit for its input taxes.  And, that the lack of the word “zero-rated” on its invoices and receipts does not justify an outright denial of its claim for refund or tax credit considering that it has presented equally relevant and competent evidence to prove its claim.  Moreover, its clients are non-resident foreign corporations which are exempted from paying VAT.  Thus, it cannot take advantage of its omission to print the word “zero-rated” on its invoices and sales receipts.

The Secretary of Finance has the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the NIRC.  Such rules and regulations are given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.24

An  applicant  for  a  claim  for  tax  refund  or  tax  credit  must  not only prove entitlement to the claim but also compliance with all the documentary and evidentiary requirements.25  Consequently, the old CTA, as affirmed by the CTA en banc, correctly ruled that a claim for the refund of creditable input taxes must be evidenced by a VAT invoice or official receipt in accordance with Section 110(A)(1)26 of the NIRC.  Sections 237 and 23827 of the same Code as well as Section 4.108-1 of RR No. 7-95 provide for the invoicing requirements that all VAT-registered taxpayers should observe, such as: (a) the BIR Permit to Print; (b) the Tax Identification Number of the VAT-registered purchaser; and (c) the word “zero-rated” imprinted thereon.  Thus, the failure to indicate the words “zero-rated” on the invoices and receipts issued by a taxpayer would result in the denial of the  claim  for  refund  or  tax  credit.  Revenue  Memorandum  Circular  No. 42-2003 on this point reads:

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

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

In this respect, the Court has consistently ruled on the denial of a claim for refund or tax credit whenever the word “zero-rated” has been omitted on the invoices or sale receipts of the taxpayer-claimant as pronounced in Panasonic Communications Imaging Corporation of the Philippines v. CIR28wherein it was ratiocinated, viz:

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

Further, the printing of the word “zero-rated” on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated.  Unable to submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund.29 (Citations omitted and emphasis ours)

ETPI failed to substantiate its claimfor refund or tax credit.

ETPI argues that its quarterly returns for the year 2008 substantiate the amounts of its taxable and exempt sales which show the amounts of its taxable sales, zero-rated sales and exempt sales.  Moreover, the submission of its invoices and receipts including the verification of its independent CPA are all sufficient to support its claim.

The Court is not persuaded.

ETPI failed to discharge its burden to prove its claim.  Tax refunds, being in the nature of tax exemptions, are construed in strictissimi juris against the taxpayer and liberally in favor of the government.  Accordingly, it is a claimant’s burden to prove the factual basis of a claim for refund or tax credit.  Considering that ETPI is engaged in mixed transactions that cover its zero-rated sales, taxable and exempt sales, it is only appropriate and reasonable for it to present competent evidence to validate all entries in its returns in order to properly determine which transactions are zero-rated and which are taxable.  Clearly, compliance with all the VAT invoicing requirements provided by tax laws and regulations is mandatory.  A claim for unutilized input taxes attributable to zero-rated sales will be given due course; otherwise, the claim should be struck off for failure to do so, such as what ETPI did in the present case.

As aptly discussed by the old CTA:

But even assuming that the VAT official receipts which failed to indicate the word “zero-rated” are accepted because of the corroborating evidence, still we cannot grant petitioner’s claim for refund. This court noted that the amounts of sales appearing on the 1998 quarterly returns differ from those of the amounts used by the commissioned independent CPA as bases for the allocation of verified input taxes, to wit:

Type of  Income

Per Amended Quarterly 

VAT Returns  (A)

Per allocation Provided by

  the Company (B)

Discrepancy (Over/Under)

A)-(B)Taxable Sales P 8,594,177.20 P 59,584,311.25 P(50,990,134.05)Zero-rated Sales 1,388,297,621.52 1,388,297,621.52 -Exempt Sales 855,372,356.09 562,282,775.64 293,089,580.45Total P2,252,264,154.81 P2,010,164,708.41 P242,099,446.40

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

The above table shows that [ETPI] adjusted its taxable sales by reducing the same to P8,594,177.20 or a reduction of P50,990,134.05 while the amount of exempt sales was overstated by P293,089,580.45.  The adjustments, according to [ETPI’s] Assistant Vice-President – Finance Controllership Regina E. De Leon, were due to write-off of accounts. Such being the case, the court believes that [ETPI] should have presented additional documents to prove the accuracy of the adjustments made. Earlier, we have noted that petitioner failed to present its VAT official receipts for taxable sales and non-VAT official receipts for its exempt sales.  These documents are necessary to verify the amounts of taxable and exempt sales and for the court to properly allocate the verified input taxes among the taxable, zero-rated and exempt sales.  It is pertinent to state that while a decrease in taxable sales will not affect [ETPI’s] claim for refund, the increase in the exempt sales has the effect of a proportionate reduction on its claimed input VAT credits.  Thus, in the absence of the aforementioned documents, the court

has no basis in the computation of the allowable refund that may be granted to [ETPI].

The disparity between the amounts declared as taxable or exempt sales by [ETPI] in its amended 1998 quarterly VAT returns and the revenue allocation provided by petitioner has further created a doubt as to the accuracy of [ETPI’s] claim, considering further that the 1998 audited financial statements, which were the bases of the revenue allocation, were already available as early as February 22, 1999 while [ETPI] filed its amended 1998 quarterly VAT returns on February 22, 2001.30

Lastly, the old CTA and the CTA en banc, including PJ Acosta in his Concurring and Dissenting Opinion, both found that ETPI failed to sufficiently substantiate the existence of its effectively zero-rated sales for taxable year 1998.  It is noteworthy to state that the CTA is a highly specialized court dedicated exclusively to the study and consideration of revenue-related problems, in which it has necessarily developed an expertise.  Hence, its factual findings, when supported by substantial evidence, will not be disturbed on appeal.  Verily, this Court finds no sufficient reason to rule otherwise.

WHEREFORE, in view of the foregoing premises, the Decision dated April 30, 2008 and Resolution dated July 2, 2008 of the Court of Tax Appeals en banc in C.T.A. EB No. 327 are AFFIRMED.