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G.R. No. 188260 November 13, 2013

LUZON HYDRO CORPORATION, Petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

BERSAMIN, J.:

This case involves a claim for refund or tax credit to cover petitioner Luzon HydroCorporation's unutilized Input Value-Added Tax (VAT) worth 1 2,920,665 .16 corresponding tothe four quarters of taxable year 2001.

The Case

The petitioner brought this action in the Court of Tax Appeals (CTA) after the Commissionerof Internal Revenue (respondent) did not act on the claim (CTA Case No. 6669). The CTA 2ndDivision denied the claim on May 2, 2008 on the ground that the petitioner did not prove thatit had zero-rated sales for the four quarters of 2001.1The CT A En Banc denied the petitioner'smotion for reconsideration, and affirmed the decision of the CTA 2nd Division through itsdecision dated May 5, 2009.2 Hence, the petitioner appeals the decision of the CTA En Banc.

Antecedents

The petitioner, a corporation duly organized under the laws of the Philippines, has been

registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer under TaxpayerIdentification No. 004-266-526. It was formed as a consortium of several corporations,namely: Northern Mini Hydro Corporation, Aboitiz Equity Ventures, Inc., Ever ElectricalManufacturing, Inc. and Pacific Hydro Limited.

Pursuant to the Power Purchase Agreement entered into with the National PowerCorporation (NPC), the electricity produced by the petitioner from its operation of the BakunHydroelectric Power Plant was to be sold exclusively to NPC.3 Relative to its sale to NPC, thepetitioner was granted by the BIR a certificate for Zero Rate for VAT purposes in the periodsfrom January 1, 2000 to December 31, 2000; February 1, 2000 to December 31, 2000 (CertificateNo. Z-162-2000); and from January 2, 2001 to December 31, 2001 (Certificate No. 2001-269).4

The petitioner alleged herein that it had incurred input VAT in the amount of P9,795,427.89on its domestic purchases of goods and services used in its generation and sales of electricityto NPC in the four quarters of 2001;5 and that it had declared the input VAT of P9,795,427.89in its amended VAT returns for the four quarters on 2001, as follows:6

Exhibit Date Filed Period Covered Input VAT (P)

http://www.lawphil.net/judjuris/juri2013/nov2013/gr_188260_2013.html#fnt1

























F May 25, 2001 1st quarter – 2001 1,903,443.96

I July 23, 2001 2nd quarter – 2001 2,166,051.96

L July 23, 2002 3rd quarter –2001 1,598,482.39

O July 24, 2002 4th quarter – 2001 4,127,449.58Total 9,795,427.89

On November 26, 2001, the petitioner filed a written claim for refund or tax credit relative toits unutilized input VAT for the period from October 1999 to October 2001aggregating P14,557,004.38.7 Subsequently, on July 24, 2002, it amended the claim for refundor tax credit to cover the period from October 1999 to May 2002 forP20,609,047.56.8

The BIR, through Revenue Examiner Felicidad Mangabat of Revenue District Office No. 2 inVigan City, concluded an investigation, and made a recommendation in its report dated

August 19, 2002 favorable to the petitioner’s claim for the period from January 1, 2001 toDecember 31, 2001.9

Respondent Commissioner of Internal Revenue (Commissioner) did not ultimately act on thepetitioner’s claim despite the favorable recommendation. Hence, on April 14, 2003, thepetitioner filed its petition for review in the CTA, praying for the refund or tax credit certificate(TCC) corresponding to the unutilized input VAT paid for the four quarters of 2001totalling P9,795,427.88.10

Answering on May 29, 2003,11 the Commissioner denied the claim, and raised the followingspecial and affirmative defenses, to wit:

x x x x

7. The petitioner has failed to demonstrate that the taxes sought to be refunded wereerroneously or illegally collected;

8. In an action for tax refund, the burden is upon the taxpayer to prove that he isentitled thereto, and failure to sustain the same is fatal to the action for tax refund;

9. It is incumbent upon petitioner to show compliance with the provisions of Section

112 and Section 229, both of the National Internal Revenue Code, as amended;

10. Claims for refund are construed strictly against the claimant for the same partakesthe nature of exemption from taxation (Commissioner of Internal Revenue vs.Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and as such they are lookedupon [with] disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue,124 SCRA 121);























11. Taxes paid and collected are presumed to have been made in accordance with thelaw and regulations, hence, not refundable.12

x x x x

On October 30, 2003, the parties submitted a Joint Stipulation of Facts and Issues,13 which theCTA in Division approved on November 10, 2003. The issues to be resolved were consequentlythe following:

1. Whether or not the input value added tax being claimed by petitioner is supportedby sufficient documentary evidence;

2. Whether petitioner has excess and unutilized input VAT from its purchases ofdomestic goods and services, including capital goods in the amount of P9,795,427.88;

3. Whether or not the input VAT being claimed by petitioner is attributable to its zero-rated sale of electricity to the NPC;

4.Whether or not the operation of the Bakun Hydroelectric Power Plant is directlyconnected and attributable to the generation and sale of electricity to NPC, the solebusiness of petitioner; and 5. Whether or not the claim filed by the petitioner was filedwithin the reglementary period provided by law.14

While the case was pending hearing, the Commissioner, through the Assistant Commissionerfor Assessment Services, informed the petitioner by the letter dated March 3, 2005 that itsclaim had been granted in the amount of P6,874,762.72, net of disallowances

of P2,920,665.16. Accompanying the letter was the TCC forP6,874,762.72 (TCC No.00002618).15

On May 3, 2005, the petitioner filed a Motion for Leave of Court to Amend Petition for Reviewin consideration of the partial grant of the claim through TCC No. 00002618. The CTA inDivision granted the motion on May 11, 2005, and admitted the Amended Petition for Review,whereby the petitioner sought the refund or tax credit in the reduced amountof P2,920,665.16. The CTA in Division also directed the respondent to file a supplementalanswer within ten days from notice.16

When no supplemental answer was filed within the period thus allowed, the CTA in Division

treated the answer filed on May 16, 2003 as the Commissioner’s answer to the AmendedPetition for Review.17

Thereafter, the petitioner presented testimonial and documentary evidence to support itsclaim. On the other hand, the Commissioner submitted the case for decision based on thepleadings.18 On May 2, 2007, the case was submitted for decision without the memorandumof the Commissioner .19



































Ruling of the CTA in Division

The CTA in Division promulgated its decision in favor of the respondent denying the petitionfor review, viz:

In petitioner’s VAT returns for the four quarter s of 2001, no amount of zero-rated sales wasdeclared. Likewise, petitioner did not submit any VAT official receipt of payments for servicesrendered to NPC. The only proof submitted by petitioner is a letter from Regional DirectorRene Q. Aguas, Revenue Region No. 1, stating that the financial statements and annual incometax return constitute sufficient secondary proof of effectively zero-rated and that based ontheir examination and evaluation of the financial statements and annual income tax return ofpetitioner for taxable year 2000, it had annual gross receipts of PhP187,992,524.00. This Courtcannot give credence to the said letter as it refers to taxable year 2000, while the instant caserefers to taxable year 2001.

Without zero-rated sales for the four quarters of 2001, the input VAT payments ofPhP9,795,427.88 (including the present claim of PhP2,920,665.16) allegedly attributablethereto cannot be refunded. It is clear under Section 112 (A) of the NIRC of 1997 that therefund/tax credit of unutilized input VAT is premised on the existence of zero-rated oreffectively zero-rated sales.

x x x x

For petitioner’s non-compliance with the first requisite of proving that it had effectively zero-rated sales for the four quarters of 2001, the claimed unutilized input VAT payments ofPhP2,920,665.16 cannot be granted.

WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.

SO ORDERED.20

On May 21, 2008, the petitioner moved to reconsider the decision of the CTA inDivision.21 However, the CTA in Division denied the petitioner’s motion for reconsideration onSeptember 5, 2008.22

Decision of the CTA En Banc

On October 17, 2008, the petitioner filed a petition for review in the CTA En Banc (CTA E.B No.420), posing the main issue whether or not the CTA in Division erred in denying its claim forrefund or tax credit upon a finding that it had not established its having effectively zero-ratedsales for the four quarters of 2001.

On May 5, 2009, the CTA En Banc promulgated the assailed decision affirming the Division,and denying the claim for refund or tax credit, stating:















The other argument of petitioner that even if the tax credit certificate will not be used asevidence, it was able to prove that it has zero-rated sale as shown in its financial statementsand income tax returns quoting the letter opinion of Regional Director Rene Q. Aguas that thestatements and the return are considered sufficient to establish that it generated zero-ratedsale of electricity is bereft of merit. As found by the Court a quo, the letter opinion refers to

taxable year 2000, while the instant case covers taxable year 2001; hence, cannot be givencredence. Even assuming for the sake of argument that the financial statements, the returnand the letter opinion relates to 2001, the same could not be taken plainly as it is becausethere is still a need to produce the supporting documents proving the existence of such zero-rated sales, which is wanting in this case. Considering that there are no zero-rated sales tospeak of for taxable year 2001, petitioner is, therefore, not entitled to a refund ofPhP2,920,665.16 input tax allegedly attributable thereto since it is basic requirement underSection 112 (A) of the NIRC that there should exists a zero-rated sales in order to be entitledto a refund of unutilized input tax.

It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayerand that the claimant has the burden of proof to establish the factual basis of its claim for taxcredit or refund. Failure in this regard, petitioner’s claim must therefore, fail.

WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.

SO ORDERED.23

On June 10, 2009, the CTA En Banc also denied the petitioner’s motion for reconsideration.24

Issue

Aggrieved, the petitioner has appealed, urging as the lone issue: –

WHETHER THE CTA EN BANC COMMITTED A REVERSIBLE ERROR IN AFFIRMING THEDECISION OF THE CTA.

In its August 3, 2009 petition for review,25 the petitioner has argued as follows:

(1) Its sale of electricity to NPC was automatically zero-rated pursuant to Republic ActNo. 9136 (EPIRA Law); hence, it need not prove that it had zero-rated sales in theperiod from January 1, 2001 to December 31, 2001 by the presentation of VAT official

receipts that would contain all the necessary information required under Section 113 ofthe National Internal Revenue Code of 1997, as implemented by Section 4.108-1 ofRevenue Regulations No. 7-95. Evidence of sale of electricity to NPC other than officialreceipts could prove zero-rated sales.

(2) The TCC, once issued, constituted an administrative opinion that deservedconsideration and respect by the CTA En Banc.















(3) The CTA En Banc was devoid of any authority to determine the existence of thepetitioner’s zero-rated sales, inasmuch as that would constitute an encroachment onthe powers granted to an administrative agency having expertise on the matter.

(4) The CTA En Banc manifestly overlooked evidence not disputed by the parties and

which, if properly considered, would justify a different conclusion.26

The petitioner has prayed for the reversal of the decision of the CTA En Banc, and for theremand of the case to the CTA for the reception of its VAT official receipts as newly discoveredevidence. It has supported the latter relief prayed for by representing that the VAT officialreceipts had been misplaced by Edwin Tapay, its former Finance and Accounting Manager,but had been found only after the CTA En Banc has already affirmed the decision of the CTAin Division. In the alternative, it has asked that the Commissioner allow the claim for refund ortax credit of P2,920,665.16.

In the comment submitted on December 3, 2009,27 the Commissioner has insisted that thepetitioner’s claim cannot be granted because it did not incur any zero -rated sale; that itsfailure to comply with the invoicing requirements on the documents supporting the sale ofservices to NPC resulted in the disallowance of its claim for the input tax; and the claim shouldalso be denied for not being substantiated by appropriate and sufficient evidence.

In its reply filed on February 4, 2010,28 the petitioner reiterated its contention that it hadestablished its claim for refund or tax credit; and that it should be allowed to present theofficial receipts in a new trial.

Ruling of the Court

The petition is without merit.

Section 112 of the National Internal Revenue Code 1997 provides:

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

(A) Zero-rated or Effectively Zero-rated Sales--Any VAT-registered person, whose sales arezero-rated or effectively zero-rated may, within two (2) years after the close of the taxablequarter when the sales were made, apply for the issuance of a tax credit certificate or refundof 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 Section108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been dulyaccounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and theamount 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 ofsales.

x x x x

A claim for refund or tax credit for unutilized input VAT may be allowed only if the followingrequisites concur, namely: (a) the taxpayer is VAT-registered; (b) the taxpayer is engaged inzero-rated or effectively zero-rated sales; (c) the input taxes are due or paid; (d) the inputtaxes are not transitional input taxes; (e) the input taxes have not been applied against outputtaxes during and in the succeeding quarters; (f) the input taxes claimed are attributable tozero-rated or effectively zero-rated sales; (g) for zero-rated sales under Section 106(A)(2)(1)and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency exchange proceedshave been duly accounted for in accordance with the rules and regulations of the BangkoSentral ng Pilipinas; (h) where there are both zero-rated or effectively zero-rated sales andtaxable or exempt sales, and the input taxes cannot be directly and entirely attributable toany of these sales, the input taxes shall be proportionately allocated on the basis of salesvolume; and (i) the claim is filed within two years after the close of the taxable quarter whensuch sales were made.29

The petitioner did not competently establish its claim for refund or tax credit.1avvphi1 Weagree with the CTA En Banc that the petitioner did not produce evidence showing that it hadzero-rated sales for the four quarters of taxable year 2001. As the CTA En Banc precisely found,the petitioner did not reflect any zero-rated sales from its power generation in its fourquarterly VAT returns, which indicated that it had not made any sale of electricity. Had therebeen zero-rated sales, it would have reported them in the returns. Indeed, it carried theburden not only that it was entitled under the substantive law to the allowance of its claim

for refund or tax credit but also that it met all the requirements for evidentiary substantiationof its claim before the administrative official concerned, or in the de novo litigation before theCTA in Division.30

Although the petitioner has correctly contended here that the sale of electricity by a powergeneration company like it should be subject to zero-rated VAT under Republic Act No.9136,31 its assertion that it need not prove its having actually made zero-rated sales ofelectricity by presenting the VAT official receipts and VAT returns cannot be upheld. It oughtto be reminded that it could not be permitted to substitute such vital and material documentswith secondary evidence like financial statements.

We further find to be lacking in substance and bereft of merit the petitioner’s insistence thatthe CTA En Banc should not have disregarded the letter opinion by BIR Regional Director ReneQ. Aguas to the effect that its financial statements and its return were sufficient to establishthat it had generated zero-rated sale of electricity. To recall, the CTA En Banc rejected theinsistence because, firstly, the letter opinion referred to taxable year 2000 but this caserelated to taxable year 2001, and, secondly, even assuming for the sake of argument that thefinancial statements, the return and the letter opinion had related to taxable year 2001, they















still could not be taken at face value for the purpose of approving the claim for refund or taxcredit due to the need to produce the supporting documents proving the existence of thezero-rated sales, which did not happen here. In that respect, the CTA En Banc properlydisregarded the letter opinion as irrelevant to the present claim of the petitioner.

We further see no reason to grant the prayer of the petitioner for the remand of this case toenable it to present before the CTA newly discovered evidence consisting in VAT officialreceipts.

Ordinarily, the concept of newly discovered evidence is applicable to litigations in which alitigant seeks a new trial or the re-opening of the case in the trial court. Seldom is the conceptappropriate when the litigation is already on appeal, particularly in this Court. The absence ofa specific rule on newly discovered evidence at this late stage of the proceedings is notwithout reason. The propriety of remanding the case for the purpose of enabling the CTA toreceive newly discovered evidence would undo the decision already on appeal and require theexamination of the pieces of newly discovered evidence, an act that the Court could not doby virtue of its not being a trier of facts. Verily, the Court has emphasized in Atlas ConsolidatedMining and Development Corporation v. Commissioner of Internal Revenue32 that a judicialclaim for tax refund or tax credit brought to the CTA is by no means an original action but anappeal by way of a petition for review of the taxpayer’s unsuccessful administrative claim;hence, the taxpayer has to convince the CTA that the quasi-judicial agency a quo should nothave denied the claim, and to do so the taxpayer should prove every minute aspect of its caseby presenting, formally offering and submitting its evidence to the CTA, including whateverwas required for the successful prosecution of the administrative claim as the means ofdemonstrating to the CTA that its administrative claim should have been granted in the firstplace.

Nonetheless, on the proposition that we may relax the stringent rules of procedure for thesake of rendering justice, we still hold that the concept of newly discovered evidence may notapply herein. In order that newly discovered evidence may be a ground for allowing a newtrial, it must be fairly shown that: (a) the evidence is discovered after the trial; (b) suchevidence could not have been discovered and produced at the trial even with the exercise ofreasonable diligence; (c) such evidence is material, not merely cumulative, corroborative, orimpeaching; and (d) such evidence is of such weight that it would probably change thejudgment if admitted.33

The first two requisites are not attendant. To start with, the proposed evidence was plainlynot newly discovered considering the petitioner s admission that its former Finance andAccounting Manager had misplaced the VAT official receipts. If that was true, the misplacedreceipts were forgotten evidence. And, secondly, the receipts, had they truly existed, couldhave been sooner discovered and easily produced at the trial with the exercise of reasonablediligence. But the petitioner made no convincing demonstration that it had exercisedreasonable diligence. The Court cannot accept its tender of such receipts and return now, for,indeed, the non-production of documents as vital and material as such receipts and return










were to the success of its claim for refund or tax credit was improbable, as it goes against thesound business practice of safekeeping relevant documents precisely to ensure their futureuse to support an eventual substantial claim for refund or tax credit.

WHEREFORE, the Court DENIES the petition for review on certiorari for its lack of merit;

AFFIRMS the decision dated May 5, 2009 of the Court of Tax Appeals En Bane; and ORDERSthe petitioner to pay the costs of suit.

SO ORDERED.

LUCAS P. BERSAMIN Associate Justice

WE CONCUR:

G.R. No. 175410, November 12, 2014

SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner , v. COMMISSIONER OF INTERNALREVENUE, Respondent.

D E C I S I O N

LEONEN, J.:

In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals maydetermine whether there are taxes that should have been paid in lieu of the taxes

paid. Determining the proper category of tax that should have been paid is not anassessment. It is incidental to determining whether there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has nevercommenced operations may not avail the tax incentives and preferential rates given to PEZA-registered enterprises. Such corporation is subject to ordinary tax rates under the NationalInternal Revenue Code of 1997.

This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax Appeals EnBanc decision.2 It affirmed the Cour t of Tax Appeals Second Division’s decision3 andresolution4 denying petitioner SMI-Ed Philippines Technology, Inc.’s (SMI-Ed Philippines) claim

for tax refund.5

SMI-Ed Philippines is a PEZA-registered corporation authorized “to engage in the business ofmanufacturing ultra high-density microprocessor unit package.”6

After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings andpurchased machineries and equipment.7 As of December 31, 1999, the total cost of the



properties amounted to P3,150,925,917.00.8

SMI-Ed Philippines “failed to commence operations.”9 Its factory was temporarily closed,effective October 15, 1999. On August 1, 2000, it sold its buildings and some of its installedmachineries and equipment to Ibiden Philippines, Inc., another PEZA-registered enterprise,

for ¥2,100,000,000.00 (P893,550,000.00). SMI-Ed Philippines was dissolved on November 30,2000.10

In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire grosssales of its properties to 5% final tax on PEZA-registered corporations. SMI-Ed Philippines paidtaxes amounting to P44,677,500.00.11

On February 2, 2001, after requesting the cancellation of its PEZA registration and amendingits articles of incorporation to shorten its corporate term, SMI-Ed Philippines filed anadministrative claim for the refund of P44,677,500.00 with the Bureau of Internal Revenue

(BIR). SMI-Ed Philippines alleged that the amount was erroneously paid. It also indicated therefundable amount in its final income tax return filed on March 1, 2001. It also alleged that itincurred a net loss of P2,233,464,538.00.12

The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petitionfor review before the Court of Tax Appeals on September 9, 2002.13

The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund in thedecision dated December 29, 2004.14

The Court of Tax Appeals Second Division found that SMI-Ed Philippines’ administrative claim

for refund and the petition for review with the Court of Tax Appeals were filed within the two-year prescriptive period.15 However, fiscal incentives given to PEZA-registered enterprisesmay be availed only by PEZA-registered enterprises that had already commencedoperations.16 Since SMI-Ed Philippines had not commenced operations, it was not entitled tothe incentives of either the income tax holiday or the 5% preferential tax rate. 17 Payment ofthe 5% preferential tax amounting to P44,677,500.00 was erroneous.18

After finding that SMI-Ed Philippines sold properties that were capital assets under Section39(A)(1) of the National Internal Revenue Code of 1997, the Court of Tax Appeals SecondDivision subjected the sale of SMI-Ed Philippines’ assets to 6% capital gains tax under Section

27(D)(5) of the same Code and Section 2 of Revenue Regulations No. 8-98.19

It was foundliable for capital gains tax amounting to P53,613,000.00.20 Therefore, SMI-Ed Philippines muststill pay the balance of P8,935,500.00 as deficiency tax,21 “which respondent should perhapslook into.”22 The dispositive portion of the Court of Tax Appeals Second Division’s decisionreads:



WHEREFORE, premises considered, the instant petition is hereby DENIED.

SO ORDERED.23

The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration in its June 15,2005 resolution.24

On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax AppealsEn Banc.25 It argued that the Court of Tax Appeals Second Division erroneously assessed the6% capital gains tax on the sale of SMI-Ed Philippines’ equipment, machineries, andbuildings.26 It also argued that the Court of Tax Appeals Second Division cannot make anassessment at the first instance.27 Even if the Court of Tax Appeals Second Division has suchpower, the period to make an assessment had already prescribed. 28

In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc

dismissed SMI-Ed Philippines’ petition and affirmed the Court of Tax Appeals SecondDivision’s decision and resolution.29 The dispositive portion of the Court of Tax Appeals EnBanc’s decision reads:

WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated onDecember 29, 2004 and the Resolution dated June 15, 2005, the instant petition for review ishereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby AFFIRMED.

SO ORDERED.30

SMI-Ed Philippines filed a petition for review before this court on December 27, 2006,31

prayingfor the grant of its claim for refund and the reversal of the Court of Tax Appeals En Banc’sdecision.32

SMI-Ed Philippines assigned the following errors:

A. The honorable CTA En Banc grievously erred and acted beyond its jurisdictionwhen it assessed for deficiency tax in the first instance.

B. Even assuming that the honorable CTA En Banc has the right to make anassessment against the petitioner-appellant, it grievously erred in finding that

the machineries and equipment sold by the petitioner-appellant is subject tothe six percent (6%) capital gains tax under Section 27(D)(5) of the Tax Code.33

Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an assessmentsince its jurisdiction, with respect to the decisions of respondent, is merelyappellate.34 Moreover, the power to make assessment had already prescribed under Section203 of the National Internal Revenue Code of 1997 since the return for the erroneous paymentwas filed on September 13, 2000. This is more than three (3) years from the last day prescribed



by law for the filing of the return.35

Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjectedpetitioner’s machineries to 6% capital gains tax.36 Section 27(D)(5) of the National InternalRevenue Code of 1997 is clear that the 6% capital gains tax on domestic corporations applies

only on the sale of lands and buildings and not to machineries and equipment.37 Since¥1,700,000,000.00 of the ¥2,100,000,000.00 constituted the consideration for the sale ofpetitioner’s machineries, only ¥400,000,000.00 or P170,200,000.00 should be subjected tothe 6% capital gains tax.38 Petitioner should be liable only for P10,212,000.00.39 It should beentitled to a refund of P34,464,500.00 after deducting P10,212,000.00 from the erroneouslypaid final tax of P44,677,500.00.40

In its comment, respondent argued that the Court of Tax Appeals’ determination ofpetitioner’s liability for capital gains tax was not an assessment. Such determination wasnecessary to settle the question regarding the tax consequence of the sale of the

properties.

41

This is clearly within the Court of Tax Appeals’ jurisdiction under Section 7 ofRepublic Act No. 9282.42 Respondent also argued that “petitioner failed to justify its claim forrefund.”43

The petition is meritorious.

IJurisdiction of the Court of Tax Appeals

The term “assessment” refers to the determination of amounts due from a person obligatedto make payments. In the context of national internal revenue collection, it refers the

determination of the taxes due from a taxpayer under the National Internal Revenue Code of1997.

The power and duty to assess national internal revenue taxes are lodged with theBIR.44 Section 2 of the National Internal Revenue Code of 1997 provides:

SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenueshall be under the supervision and control of the Department of Finance andits powers and

duties shall comprehend the assessment and collection of all national internal revenue taxes,

fees, and charges, and the enforcement of all forfeitures, penalties, and fines connectedtherewith, including the execution of judgments in all cases decided in its favor by the Courtof Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer thesupervisory and police powers conferred to it by this Code or other laws. (Emphasis supplied)

The BIR is not mandated to make an assessment relative to every return filed with it. Taxreturns filed with the BIR enjoy the presumption that these are in accordance with thelaw.45 Tax returns are also presumed correct since these are filed under the penalty ofperjury.46 Generally, however, the BIR assesses taxes when it appears, after a return had been



filed, that the taxes paid were incorrect,47 false,48 or fraudulent.49 The BIR also assesses taxeswhen taxes are due but no return is filed.50 Thus:

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additionalRequirements for Tax Administration and Enforcement.–

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed asrequired under the provisions of this Code, the Commissioner or his duly authorizedrepresentative may authorize the examination of any taxpayer and the assessment of thecorrect amount of tax: Provided, however; That failure to file a return shall not prevent the

Commissioner from authorizing the examination of any taxpayer. The tax or any deficiency taxso assessed shall be paid upon notice and demand from the Commissioner or from his dulyauthorized representative.

. . . .

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 preceeding in court for the collection of such tax may be filedwithout assessment, at any time within ten (10) years after the discovery of the falsity, fraudor omission: Provided, That in a fraud assessment which has become final and executory, thefact of fraud shall be judicially taken cognizance of in the civil or criminal action for thecollection thereof. (Emphasis supplied)

The Court of Tax Appeals has no power to make an assessment at the first instance. On

matters such as tax collection, tax refund, and others related to the national internal revenuetaxes, the Court of Tax Appeals’ jurisdiction is appellate in nature.

Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by Republic Act No.9282,52 provide that the Court of Tax Appeals reviews decisions and inactions of theCommissioner of Internal Revenue in disputed assessments and claims for tax refunds. Thus:

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 othercharges, penalties in relation thereto, or other matters arising under theNational Internal Revenue or other laws administered by the Bureau ofInternal Revenue;



2. Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or othercharges, penalties in relations thereto, or other matters arising underthe National Internal Revenue Code or other laws administered by theBureau of Internal Revenue, where the National Internal Revenue Code

provides a specific period of action, in which case the inaction shall bedeemed a denial[.] (Emphasis supplied)

Based on these provisions, the following must be present for the Court of Tax Appeals to havejurisdiction over a case involving the BIR’s decisions or inactions:

a) A case involving any of the following:

i. Disputed assessments;ii. Refunds of internal revenue taxes, fees, or other charges, penalties in relation

thereto; andiii. Other matters arising under the National Internal Revenue Code of 1997.

b) Commissioner of Internal Revenue’s decision or inaction in a case submitted to him or her

Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the BIR makesthe assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIRissues a decision that is unfavorable to the taxpayer or if the BIR fails to act on a disputebrought by the taxpayer, the BIR’s decision or inaction may be brought on appeal to the Courtof Tax Appeals. The Court of Tax Appeals then acquires jurisdiction over the case.

When the BIR’s unfavorable decision is brought on appeal to the Court of Ta x Appeals, theCourt of Tax Appeals reviews the correctness of the BIR’s assessment and decision. Inreviewing the BIR’s assessment and decision, the Court of Tax Appeals had to make its owndetermination of the taxpayer’s tax liabilities. The Court of Tax Appeals may not make suchdetermination before the BIR makes its assessment and before a dispute involving suchassessment is brought to the Court of Tax Appeals on appeal.

The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR mak es anassessment or a decision unfavorable to the taxpayer. Because Republic Act No. 112553 also

vests the Court of Tax Appeals with jurisdiction over the BIR’s inaction on a taxpayer’s refundclaim, there may be instances when the Court of Tax Appeals has to take cognizance of casesthat have nothing to do with the BIR’s assessments or decisions. When the BIR fails to act ona claim for refund of voluntarily but mistakenly paid taxes, for example, there is no decisionor assessment involved.

Taxes are generally self-assessed. They are initially computed and voluntarily paid by thetaxpayer. The government does not have to demand it. If the tax payments are correct, the



BIR need not make an assessment.

The self-assessing and voluntarily paying taxpayer, however, may later find that he or she haserroneously paid taxes. Erroneously paid taxes may come in the form of amounts that shouldnot have been paid. Thus, a taxpayer may find that he or she has paid more than the amount

that should have been paid under the law. Erroneously paid taxes may also come in the formof tax payments for the wrong category of tax. Thus, a taxpayer may find that he or she haspaid a certain kind of tax that he or she is not subject to.

In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request forrefund, the taxpayer may bring the matter to the Court of Tax Appeals.

From the taxpayer’s self-assessment and tax payment up to his or her request for refund andthe BIR’s inaction, the BIR’s participation is limited to the receipt of the taxpayer’spayment. The BIR does not make an assessment; the BIR issues no decision; and there is no

dispute yet involved.

Since there is no BIR assessment yet, the Court of Tax Appeals may not determine the amountof taxes due from the taxpayer. There is also no decision yet to review. However, there wasinaction on the part of the BIR. That inaction is within the Court of Tax Appeals’ jurisdiction.

In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they donot involve BIR assessments or decisions.

In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner broughtthe case on appeal before the Court of Tax Appeals after the BIR had failed to act on

petitioner’s claim for refund of erroneously paid taxes. The Court of Tax Appeals did notacquire jurisdiction as a result of a disputed assessment of a BIR decision.

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capitalgains tax or other taxes at the first instance. The Court of Tax Appeals has no power to makean assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating thatpetitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appealswas not making an assessment. It was merely determining the proper category of tax that

petitioner should have paid, in view of its claim that it erroneously imposed upon itself andpaid the 5% final tax imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid is anincidental matter necessary for the resolution of the principal issue, which is whetherpetitioner was entitled to a refund. 54

The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes



that are due from petitioner. A claim for tax refund carries the assumption that the tax returnsfiled were correct.55 If the tax return filed was not proper, the correctness of the amount paidand, therefore, the claim for refund become questionable. In that case, the court mustdetermine if a taxpayer claiming refund of erroneously paid taxes is more properly liable fortaxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue,56 South African Airways claimedfor refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did notimmediately grant South African’s claim for refund. This is because although this court foundthat South African Airways was not subject to the 2½% tax on its gross Philippine billings, thiscourt also found that it was subject to 32% tax on its taxable income. 57

In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that thequarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner wasentitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if

petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other thanthe 5% final tax. As in South African Airways, petitioner’s request for refund can neither begranted nor denied outright without such determination.58

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, theamount of the taxpayer’s liability should be computed and deducted from the refundableamount.

Any liability in excess of the refundable amount, however, may not be collected in a caseinvolving solely the issue of the taxpayer’s entitlement to refund. The question of taxdeficiency is distinct and unrelated to the question of petitioner’s entitlement to refund. Tax

deficiencies should be subject to assessment procedures and the rules of prescription. Thecourt cannot be expected to perform the BIR’s duties whenever it fails to do so either throughneglect or oversight. Neither can court processes be used as a tool to circumvent lawsprotecting the rights of taxpayers.

IIPetitioner’s entitlement to benefits given to PEZA-registered enterprises

Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5%preferential tax rate under Republic Act No. 7916 or the Special Economic Zone Act of1995. This is because it never began its operation.

Essentially, the purpose of Republic Act No. 7916 is to promote development and encourageinvestments and business activities that will generate employment.59 Giving fiscal incentivesto businesses is one of the means devised to achieve this purpose. It comes with theexpectation that persons who will avail these incentives will contribute to the purpose’sachievement. Hence, to avail the fiscal incentives under Republic Act No. 7916, the law didnot say that mere PEZA registration is sufficient.



Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:

SEC. 23. Fiscal Incentives. — Business establishments operating within the ECOZONESshall beentitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law

creating the Export Processing Zone Authority, or those provided under Book VI of ExecutiveOrder No. 226, otherwise known as the Omnibus Investment Code of 1987.

Furthermore, tax credits for exporters using local materials as inputs shall enjoy the samebenefits provided for in the Export Development Act of 1994.

SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision ofexisting laws, rules and regulations to the contrary notwithstanding, no taxes, local andnational, shall be imposed on business establishments operating within the ECOZONE. In lieu ofpaying taxes, five percent (5%) of the gross income earned by all businesses and enterpriseswithin the ECOZONE shall be remitted to the national government. This five percent (5%) shallbe shared and distributed as follows:

a. Three percent (3%) to the national government;b. One percent (1%) to the local government units affected by the declaration of

the ECOZONE in proportion to their population, land area, and equal sharingfactors; and

c.

One percent (1%) for the establishment of a development fund to be utilized forthe development of municipalities outside and contiguous to eachECOZONE:Provided, however, That the respective share of the affected localgovernment units shall be determined on the basis of the following formula:

1.

Population - fifty percent (50%);2.

Land area - twenty-five percent (25%); and3.

Equal sharing - twenty-five percent (25%). (Emphasis supplied)

Based on these provisions, the fiscal incentives and the 5% preferential tax rate are availableonly to businesses operating within the Ecozone.60 A business is considered in operationwhen it starts entering into commercial transactions that are not merely incidental to but arerelated to the purposes of the business. It is similar to the definition of “doing business,” asapplied in actions involving the right of foreign corporations to maintain court

actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al.,61 this court said that the terms“doing” or “engaging in” or “transacting” business”:

. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to thatextent, the performance of acts or works or the exercise of some of the functions normallyincident to, and in progressive prosecution of, the purpose and object of its organization.62



Petitioner never started its operations since its registration on June 29, 199863 because of theAsian financial crisis.64 Petitioner admitted this.65 Therefore, it cannot avail the incentivesprovided under Republic Act No. 7916. It is not entitled to the preferential tax rate of 5% ongross income in lieu of all taxes. Because petitioner is not entitled to a preferential rate, it is

subject to ordinary tax rates under the National Internal Revenue Code of 1997.

IIIImposition of capital gains tax

The Court of Tax Appeals found that petitioner’s sale of its properties is subject to capitalgains tax.

For petitioner’s properties to be subjected to capital gains tax, the properties must form partof petitioner’s capital assets.

Section 39(A)(1) of the National Internal Revenue Code of 1997 defines “capital assets”:

SEC. 39. Capital Gains and Losses. -

(A) Definitions. - As used in this Title -

(1) Capital Assets. - the term ‘capital assets’ means property held by the taxpayer (whether ornot connected with his trade or business), but does not include stock in trade of the taxpayeror other property of a kind which would properly be included in the inventory of the taxpayerif on hand at the close of the taxable year, or property held by the taxpayer primarily for sale

to customers in the ordinary course of his trade or business, or property used in the trade orbusiness, of a character which is subject to the allowance for depreciation provided inSubsection (F) of Section 34; or real property used in trade or business of the taxpayer.(Emphasis supplied)

Thus, “capital assets” refers to taxpayer’s property that is NOT any of the following:

1. Stock in trade;2. Property that should be included in the taxpayer’s inventory at the close of the taxable

year;

3.

Property held for sale in the ordinary course of the taxpayer’s business; 4.

Depreciable property used in the trade or business; and5.

Real property used in the trade or business.

The properties involved in this case include petitioner’s buildings, equipment, andmachineries. They are not among the exclusions enumerated in Section 39(A)(1) of theNational Internal Revenue Code of 1997. None of the properties were used in petitioner’s



trade or ordinary course of business because petitioner never commenced operations. Theywere not part of the inventory. None of them were stocks in trade. Based on the definitionof capital assets under Section 39 of the National Internal Revenue Code of 1997, they arecapital assets.

Respondent insists that since petitioner’s machineries and equipment are classified as capitalassets, their sales should be subject to capital gains tax. Respondent is mistaken.

In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this court said:

The rule in the interpretation of tax laws is that a statute will not be construed as imposing atax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed withoutclear and express words for that purpose. Accordingly, the general rule of requiringadherence to the letter in construing statutes applies with peculiar strictness to tax laws andthe provisions of a taxing act are not to be extended by implication. In answering the questionof who is subject to tax statutes, it is basic that in case of doubt, such statutes are to beconstrued most strongly against the government and in favor of the subjects or citizensbecause burdens are not to be imposed nor presumed to be imposed beyond what statutesexpressly and clearly import. As burdens, taxes should not be unduly exacted nor assumedbeyond the plain meaning of the tax laws.67 (Citations omitted)

Capital gains of individuals and corporations from the sale of real properties are taxeddifferently.

Individuals are taxed on capital gains from sale of all real properties located in the Philippinesand classified as capital assets. Thus:

SEC. 24. Income Tax Rates.

. . . .

(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 withSection 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 ofconditional sales, by individuals, including estates and trusts: Provided, That the tax liability, ifany, on gains from sales or other dispositions of real property to the government or any of itspolitical subdivisions or agencies or to government-owned or controlled corporations shall bedetermined either under Section 24 (A) or under this Subsection, at the option of thetaxpayer.68 (Emphasis supplied)



For corporations, the National Internal Revenue Code of 1997 treats the sale of land andbuildings, and the sale of machineries and equipment, differently. Domestic corporations areimposed a 6% capital gains tax only on the presumed gain realized from the sale of landsand/or buildings. The National Internal Revenue Code of 1997 does not impose the 6% capital

gains tax on the gains realized from the sale of machineries and equipment. Section 27(D)(5)of the National Internal Revenue Code of 1997 provides:

SEC. 27. Rates of Income tax on Domestic Corporations. -

. . . .

(D) Rates of Tax on Certain Passive Incomes. -

. . . .

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. -A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on

the sale, exchange or disposition of lands and/or buildings which are not actually used in thebusiness of a corporation and are treated as capital assets, based on the gross selling price offair market value as determined in accordance with Section 6(E) of this Code, whichever ishigher, of such lands and/or buildings. (Emphasis supplied)

Therefore, only the presumed gain from the sale of petitioner’s land and/or building may besubjected to the 6% capital gains tax. The income from the sale of petitioner’s machineriesand equipment is subject to the provisions on normal corporate income tax.

To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax forthe sold land and/or building of petitioner and the amount of corporate income tax for thesale of petitioner’s machineries and equipment should be deducted from the total final taxpaid.

Petitioner indicated, however, in its March 1, 2001 income tax return for the 11-month periodending on November 30, 2000 that it suffered a net loss of P2,233,464,538.00. 69 Thisdeclaration was made under the pain of perjury. Section 267 of the National Internal RevenueCode of 1997 provides:

SEC. 267. Declaration under Penalties of Perjury . - Any declaration, return and otherstatement required under this Code, shall, in lieu of an oath, contain a written statement thatthey are made under the penalties of perjury. Any person who willfully files a declaration,return or statement containing information which is not true and correct as to every materialmatter shall, upon conviction, be subject to the penalties prescribed for perjury under theRevised Penal Code.



Moreover, Rule 131, Section 3(ff) of the Rules of Court provides for the presumption that thelaw has been obeyed unless contradicted or overcome by other evidence, thus:

SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if

uncontradicted, but may be contradicted and overcome by other evidence:

. . . .

(ff) That the law has been obeyed;

The BIR did not make a deficiency assessment for this declaration. Neither did the BIR disputethis statement in its pleadings filed before this court. There is, therefore, no reason to doubtthe truth that petitioner indeed suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to the minimumcorporate income tax of 2% on gross income.70 Therefore, petitioner is not liable for anyincome tax.

IVPrescription

Section 203 of the National Internal Revenue Code of 1997 provides that as a general rule, theBIR has three (3) years from the last day prescribed by law for the filing of a return to makean assessment. If the return is filed beyond the last day prescribed by law for filing, the three-year period shall run from the actual date of filing. Thus:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided inSection 222, internal revenue taxes shall be assessed within three (3) years after the last dayprescribed by law for the filing of the return, and no proceeding in court without assessmentfor 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)-yearperiod shall be counted from the day the return was filed. For purposes of this Section, areturn filed before the last day prescribed by law for the filing thereof shall be considered asfiled on such last day.

This court said that the prescriptive period to make an assessment of internal revenue taxesis provided “primarily to safeguard the interests of taxpayers from unreasonableinvestigation.”71

This court explained in Commissioner of Internal Revenue v. FMF Development Corporation72 thereason behind the provisions on prescriptive periods for tax assessments:



Accordingly, the government must assess internal revenue taxes on time so as not to extendindefinitely the period of assessment and deprive the taxpayer of the assurance that it will nolonger be subjected to further investigation for taxes after the expiration of reasonableperiod of time.73

Rules derogating taxpayers’ right against prolonged and unscrupulous investigations arestrictly construed against the government.74

[T]he law on prescription should be interpreted in a way conducive to bringing about thebeneficent purpose of affording protection to the taxpayer within the contemplation of theCommission which recommended the approval of the law. To the Government, its tax officersare obliged to act promptly in the making of assessment so that taxpayers, after the lapse ofthe period of prescription, would have a feeling of security against unscrupulous tax agentswho will always try to find an excuse to inspect the books of taxpayers, not to determine thelatter’s real liability, but to take advantage of a possible opportunity to harass even law -

abiding businessmen. Without such legal defense, taxpayers would be open season toharassment by unscrupulous tax agents.75

Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76

For the purpose of safeguarding taxpayers from any unreasonable examination, investigationor assessment, our tax law provides a statute of limitations in the collection of taxes. Thus,the law on prescription, being a remedial measure, should be liberally construed in order toafford such protection. As a corollary, the exceptions to the law on prescription shouldperforce be strictly construed[.]

. . . .

. . . . Such instances of negligence or oversight on the part of the BIR cannot prejudicetaxpayers, considering that the prescriptive period was precisely intended to give them peaceof mind. (Citation omitted)

The BIR had three years from the filing of petitioner’s final tax return in 2000 to assesspetitioner’s taxes. Nothing stopped the BIR from making the correct assessment. Theelevation of the refund claim with the Court of Tax Appeals was not a bar again st the BIR’sexercise of its assessment powers.

The BIR, however, did not initiate any assessment for deficiency capital gains tax.78 Sincemore than a decade have lapsed from the filing of petitioner’s return, the BIR can no longerassess petitioner for deficiency capital gains taxes, if petitioner is later found to have capitalgains tax liabilities in excess of the amount claimed for refund.

The Court of Tax Appeals should not be expected to perform the BIR’s duties of assessing and



collecting taxes whenever the BIR, through neglect or oversight, fails to do so within theprescriptive period allowed by law.

WHEREFORE, the Court of Tax Appeals’ November 3, 2006 decision is SET ASIDE. The Bureauof Internal Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the

amount of 5% final tax paid to the BIR, less the 6% capital gains tax on the sale of petitionerSMI-Ed Philippines Technology, Inc.’s land and building. In view of the lapse of the prescriptiveperiod for assessment, any capital gains tax accrued from the sale of its land and building thatis in excess of the 5% final tax paid to the Bureau of Internal Revenue may no longer berecovered from petitioner SMI-Ed Philippines Technology, Inc.

SO ORDERED.

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