taxation cases -b

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 TAXATION I - BATCH B 1 FIRST DIVISION  SYSTRA PHILIPPINES, INC., G.R. No. 176290 - v e r s u s COMMISSIONER OF INTERNAL REVENUE, Respondent. Promulgated: September 21, 2007 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x R E S O L U T I O N CORONA, J .: This resolves petitioner Systra Philippines, Inc.’s (1) motion for leave to file a second motion for reconsideration and (2) second motion for reconsideration of the Court’s March 28, 2007 resolution.  On March 9, 2007, petitioner filed a petition for review on certiorari assailing the January 18, 2007 decision of the Court of Tax Appeals (CTA) in CTA EB Case No. 135. The Court denied the petition in its March 28, 2007 resolution on the following grounds: (a) failure of petitioner’s counsel to submit his IBP O.R. number showing proof of payment of IBP dues for the current year (the IBP O.R. No. was for 2006, i.e., it was dated November 20, 2006); (b) submitting a verification of the petition, certification of non-forum shopping and affidavit of service that failed to comply with the 2004 Rules on Notarial Practice with respect to competent evidence of affiants’ identities and (c) failure to give an explanation why service was not done personally as required by Section 11, Rule 13 in relation to Section 3, Rule 45 and Section 5(d), Rule 56 of the Rules of Court. On July 5, 2007, petitioner’s motion for reconsiderati on was denied with finality as there was no compelling reason to warrant a modification of the March 28, 2007 resolution. Thus, the present motions. Petitioner claims that this Court has granted second and even third motions for reconsideration for “extraordinarily persuasive reasons.” It avers that this Court should look into the importance of the issues involved in deciding whether leave to file a second motion for reconsideration should be granted or not. It prays that its petition should not be denied on the basis of procedural lapses alone and points out that the substantial amount involved in the petition justifies relaxation of technical rules. It asserts that there is an important legal issue involved in this case: whether the exercise of the option to carry over excess income tax credits under Section 76 of the National Internal Revenue Code of 1997, as amended (Tax Code) bars a taxpayer from claiming the excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year. Finally, it contends that the assailed CTA decision was contradictory to the decisions of the Court of Appeals (CA) in Bank of the Philippine Islands v. Commissioner of Internal Revenue and Raytheon Ebasco Overseas Ltd. Philippine Branch v. Commissioner of Internal Revenue which involved the

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TAXATION I - BATCH B 1

FIRST DIVISION  

SYSTRA PHILIPPINES, INC., G.R. No. 176290 

- v e r s u s

COMMISSIONER OF INTERNAL REVENUE, Respondent. Promulgated:

September 21, 2007

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

R E S O L U T I O N 

CORONA, J .: 

This resolves petitioner Systra Philippines, Inc.’s (1) motion for leave to file a second motion for reconsideration

and (2) second motion for reconsideration of the Court’s March 28, 2007 resolution.  

On March 9, 2007, petitioner filed a petition for review on certiorari assailing the January 18, 2007 decision ofthe Court of Tax Appeals (CTA) in CTA EB Case No. 135. The Court denied the petition in its March 28, 2007 resolution onthe following grounds:

(a)  failure of petitioner’s counsel to submit his IBP O.R. number showing proof of payment of IBP dues for the

current year (the IBP O.R. No. was for 2006, i.e., it was dated November 20, 2006);

(b)  submitting a verification of the petition, certification of non-forum shopping and affidavit of service thatfailed to comply with the 2004 Rules on Notarial Practice with respect to competent evidence of affiants’identities and

(c) failure to give an explanation why service was not done personally as required by Section 11, Rule 13 inrelation to Section 3, Rule 45 and Section 5(d), Rule 56 of the Rules of Court.

On July 5, 2007, petitioner’s motion for reconsideration was denied with finality as there was no compellingreason to warrant a modification of the March 28, 2007 resolution. Thus, the present motions.

Petitioner claims that this Court has granted second and even third motions for reconsideration for

“extraordinarily persuasive reasons.” It avers that this Court should look into the importance of the issues involved indeciding whether leave to file a second motion for reconsideration should be granted or not. It prays that its petitionshould not be denied on the basis of procedural lapses alone and points out that the substantial amount involved in thepetition justifies relaxation of technical rules. It asserts that there is an important legal issue involved in this casewhether the exercise of the option to carry over excess income tax credits under Section 76 of the National InternalRevenue Code of 1997, as amended (Tax Code) bars a taxpayer from claiming the excess tax credits for refund even if theamount remains unutilized in the succeeding taxable year. Finally, it contends that the assailed CTA decision wascontradictory to the decisions of the Court of Appeals (CA) in Bank of the Philippine Islands v. Commissioner of Internal

Revenue and Raytheon Ebasco Overseas Ltd. Philippine Branch v. Commissioner of Internal Revenue which involved the

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TAXATION I - BATCH B 2

same issue as that in this case. According to petitioner, in view of those CA decisions, it is unjust to deprive it of the rightto claim a refund.

We deny petitioner’s motions. 

 A SECOND MOTION FOR RECONSIDERATION IS PROHIBITED 

The denial of a motion for reconsideration is final. It means that the Court will no longer entertain and consider furtherarguments or submissions from the parties respecting the correctness of its decision or resolution. It signifies that, in the

Court’s considered view, nothing more is left to be discussed, clarified or done in the case since all issues raised havebeen passed upon and definitely resolved. Any other issue which could and should have been raised is deemed waivedand is no longer available as ground for a second motion. A denial with finality underscores that the case is consideredclosed. Thus, as a rule, a second motion for reconsideration is a prohibited pleading. The Court stressed in Ortigas and

Company Limited Partnership v. Velasco:

 A second motion for reconsideration is forbidden except for extraordinarily persuasivereasons, and only upon express leave first obtained. (emphasis supplied)It is true that procedural rules may be relaxed in the interest of substantial justice. They are not, however, to be

disdained as mere technicalities that may be ignored at will to suit the convenience of a party. They are intended toensure the orderly administration of justice and the protection of substantive rights in judicial proceedings. Thusprocedural rules are not to be belittled or dismissed simply because their non-observance may have resulted inprejudicing a party’s substantive rights. Like all rules, they are required to be followed except only when, for t he mos

persuasive of reasons, they may be relaxed to relieve a litigant of negative consequences commensurate with the degreeof thoughtlessness in not complying with the prescribed procedure.

In this case, contrary to petitioner’s claim, there was no c ompelling reason to excuse non-compliance with therules. Nor were the grounds raised by it extraordinarily persuasive.

Moreover, petitioner can neither properly nor successfully rely on the decisions of the CA in the Bank of the

Philippine Islands and Raytheon Ebasco Overseas Ltd. Philippine Branch cases. First, the CA and the CTA are now of thesame level pursuant to RA 9282. Decisions of the CA are thus no longer superior to nor reversive of those of the CTASecond, a decision of the CA in an action in personam binds only the parties in that case. A third party in an action in

 personam cannot claim any right arising from a decision therein. Finally and most importantly, while a ruling of the CA onany question of law is not conclusive on this Court, all rulings of this Court on questions of law are conclusive and binding

on all courts including the CA. All courts must take their bearings from the decisions of this Court.

ON THE SUBSTANTIVE ASPECT, THE PETITION HAS NO MERIT 

The antecedents of this case are as follows:

On April 16, 2001, petitioner filed with the [Bureau of Internal Revenue (BIR)] its AnnualIncome Tax Return (“ITR”) for the taxable year ended December 31, 2000 declaring revenues in theamount of [P18,252,719] the bulk of which consists of income from management consultancy servicesrendered to the Philippine Branch of Group Systra SA, France. Subjecting said income from consultancyservices of petitioner to 5% creditable withholding tax, a total amount of [P4,703,019] was declared bypetitioner as creditable taxes withheld for the taxable year 2000.

For the same period, petitioner reflected a total gross income of [P3,752,129], a net loss of [P17,930] and a minimum corporate income tax (MCIT) of [P75,043]. Said MCIT of P75,043 was offset against its total tax credits for the year 2000 amounting to [P4,703,019] thereby leaving a totalunutilized tax credits of [P4,627,976], computed as follows:

Gross Income P3,752,129.00Less: Deductions P3,770,059.00

Net loss P 17,930.00Minimum Corporate Income Tax Due P75,043.00

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TAXATION I - BATCH B 3

Less: Tax CreditsPrior year’s excess credits P -Creditable taxes withheld P4,703,019.00 P4,703,019.00

during the yearTax Overpayment P4,627,976.00

Petitioner opted to carry over the said excess tax credit to the succeeding taxable year 2001.

For the taxable year ended December 31, 2001, petitioner filed with the BIR its Annual ITR onApril 12, 2002, reflecting a total gross income of [P4,771,419] and a total creditable taxes withheld of [P1,111,587] for consultancy services. It likewise declared a taxable income of [P1,936,851] withcorresponding normal income tax due in the amount of [P619,792]. After deducting the unexpiredexcess of the previous year MCIT [1999 and 2000] in the amount of [P222,475] from the normal incometax due for the period, petitioner’s net tax due of [P397,317] was applied against the accumulated taxcredits of [P5,739,563]. Said reported tax credits comprised of prior year’s excess tax credits in theamount of [P4,627,976] and creditable taxes withheld during the year 2001 in the sum of [P1,111,587].These excess tax credits were utilized to pay off the income tax still due of [P397,317] resulting to anoverpayment of [P5,342,246], computed as follows:

Gross Income P4,771,419.00Less: Deductions P2,834,568.00

Taxable Income P1,936,851.00

Income Tax Due at the Normal Rate of 32% P 619,792.00Less: Unexpired Excess of Prior Year’s MCIT

Over Normal Income Tax Rate P 222,475.00P 397,317.00

Income Tax Still Due

Less: Tax Credits

Prior year’s excess credits P4,627,976.00

Creditable taxes withheldduring the year 1,111,587.00 P5,739,563.00

Tax Overpayment P5,342,246.00

Petitioner indicated in the 2001 ITR the option “To be issued a Tax Credit Certificate” relative toits tax overpayments.

On August 9, 2002, petitioner instituted a claim for refund or issuance of a tax credit certificatewith the BIR of its unutilized creditable withholding taxes in the amount of P5,342,246.00 as of December 31, 2001.” 

Due to the inaction of the BIR on petitioner’s claim for refund and to preserve its right to claim

for the refund to its unutilized CWT for CYs 2000 and 2001 by judicial action, petitioner filed a petitionfor review with the Court in Division on April 14, 2003.

In its August 3, 2005 decision, the First Division of the CTA partially granted the petition and ordered theissuance of a tax credit certificate to petitioner in the amount of P1,111,587 representing the excess or unutilizedcreditable withholding taxes for taxable year 2001. The CTA, however, denied petitioner’s claim for refund of the excesstax credits for the year 2000 in the amount of P4,627,976. It ruled that petitioner was precluded from claiming a refundthereof or requesting a tax credit certificate therefor. Once it was made for a particular taxable period, the option to carryover became irrevocable.

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TAXATION I - BATCH B 4

Petitioner moved for reconsideration but it was denied. Petitioner elevated the case to the CTA en banc whichrendered the assailed decision. Thus, this petition.

As already stated, petitioner formulated the issue in this petition as follows: whether the exercise of the optionto carry-over excess income tax credits under Section 76 of the Tax Code bars a taxpayer from claiming the excess taxcredits for refund even if the amount remains unutilized in the succeeding taxable year. Petitioner contends that it doesnot.

We disagree.

Section 76 of the Tax Code provides:

SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file afinal adjustment return covering the total taxable income for the preceding calendar or fiscal year. If thesum of the quarterly tax payments made during the said taxable year is not equal to the total tax due onthe entire taxable net income of that year the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterlyincome taxes paid, the excess amount shown on its final adjustment return may be carried over andcredited against the estimated quarterly income tax liabilities for the taxable quarters of the succeedingtaxable years. Once the option to carry-over and apply the excess quarterly income tax against 

income tax due for the taxable quarters of the succeeding taxable years has been made, such

option shall be considered irrevocable for that taxable period and no application for cash refund

or issuance of a tax credit certificate shall be allowed therefor. (emphasis supplied)

A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two

options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cashrefund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period.

In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking theoption box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitatetax collection, these remedies are in the alternative and the choice of one precludes the other.

This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. Thephrase “such option shall be considered irrevocable for that taxable period” means that the option to carry over theexcess tax credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit againsttaxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a taxcredit either for which a tax credit certificate will be issued or which will be claimed for cash refund.

In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocableoption to carry them over as tax credits for the next taxable year. Under Section 76 of the Tax Code, a claim for refund ofsuch excess credits can no longer be made. The excess credits will only be applied “against income tax due for the taxablequarters of the succeeding taxable years.” 

The legislative intent to make the option irrevocable becomes clearer when Section 76 is viewed in comparisonto Section 69 of the (old) 1977 Tax Code:

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TAXATION I - BATCH B 5

SECTION 69. Final Adjustment Return. – Every corporation liable to tax under Section 24 shallfile a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax dueon the entire taxable net income of that year the corporation shall either:

(A) Pay the excess tax still due; or

(B) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterlyincome taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.

Under Section 69 of the 1977 Tax Code, there was no irrevocability rule. Instead of claiming a refund, the excesstax credits could be “credited against the estimated quarterly income tax liabilities for the taxable quarters of thesucceeding taxable year,” that is, the immediately following year only. In contrast, Section 76 of the present Tax Codeformulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as alternative, notcumulative. It also provides that the excess tax credits “may be carried over and credited against the estimated quarterlyincome tax liabilities for the taxable quarters of the succeeding taxable years” until fully utilized. 

Furthermore, this case is closely similar to Philam Asset Management, Inc. v. Commissioner of Internal Revenue. Inthat case, Philam Asset Management, Inc. had an unapplied creditable withholding tax in the amount of P459,756.07 for

the year 1998. It carried over the said excess tax to the following taxable year, 1999. In the next succeeding year, it had atax due in the amount of P80,042 and a creditable withholding tax in the amount of P915,995. As such, the amount duefor the year 1999 (P80,042) was credited to its P915,995 creditable withholding tax for that year. Thus, its 1998creditable withholding tax in the amount of P459,756.07 remained unutilized. Thereafter, it filed a claim for refund withrespect to the unapplied creditable withholding tax of P459,756.07 for the year 1998. The Court denied the claim and

ruled :

Section 76 [is] clear and unequivocal. Once the carry-over option is taken, actually or

constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditablewithholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07, which corresponds to its1998 excess tax credit. Nonetheless, the amount will not be forfeited in the government’s favor, becauseit may be claimed by petitioner as tax credits in the succeeding taxable years. (emphasis supplied)Since petitioner elected to carry over its excess credits for the year 2000 in the amount of P4,627,976 as tax

credits for the following year, it could no longer claim a refund. Again, at the risk of being repetitive, once the carry overoption was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax creditswere actually or fully utilized. Nevertheless, as held in Philam Asset Management, Inc., the amount will not be forfeited infavor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in thesucceeding taxable years, creditable against future income tax liabilities until fully utilized.

WHEREFORE, petitioner’s motion for leave to file a second motion for reconsiderat ion and the second motionfor reconsideration are hereby DENIED.

Costs against petitioner.No further pleadings shall be entertained. Let entry of judgment be made in due course.

SO ORDERED. 

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TAXATION I - BATCH B 6

G.R. No. 163345 July 4, 2008 

COMMISSIONER OF INTERNAL REVENUE, petitioners,vs.PERF REALTY CORPORATION, respondent.

D E C I S I O N

REYES, R.T., J.: 

FOR Our review on certiorari is the Decision1 of the Court of Appeals (CA) granting the claim for refund of respondent PERF Realty Corporation (PERF) for creditable withholding tax for the year 1997.

Facts 

Petitioner Commissioner is the head of the Bureau of Internal Revenue (BIR) whose principal duty is to assess and collect internal revenue taxes. Respondent PERF is a domestic corporation engaged in the business of leasing properties tovarious clients including the Philippine American Life and General Insurance Company (Philamlife) and Read-RitePhilippines (Read-Rite).

On April 14, 1998, PERF filed its Annual Income Tax Return (ITR) for the year 1997 showing a net taxable income in the

amount of P6,430,345.00 and income tax due of P2,250,621.00.

For the year 1997, its tenants, Philamlife and Read-Rite, withheld and subsequently remitted creditable withholding taxesin the total amount of P3,531,125.00.

After deducting creditable withholding taxes in the total amount of P3,531,125.00 from its total income tax due of P2,250,621.00, PERF showed in its 1997 ITR an overpayment of income taxes in the amount of P1,280,504.00.

On November 3, 1999, PERF filed an administrative claim with the appellate division of the BIR for refund of overpaidincome taxes in the amount of P1,280,504.00.

On December 3, 1999, due to the inaction of the BIR, PERF filed a petition for review with the Court of Tax Appeals (CTA)

seeking for the refund of the overpaid income taxes in the amount of P1,280,504.00.

CTA Disposition 

In a Decision dated November 20, 2001, the CTA denied the petition of PERF on the ground of insufficiency of evidence.The CTA noted that PERF did not indicate in its 1997 ITR the option to either claim the excess income tax as a refund ortax credit pursuant to Section 692 (now 76) of the National Internal Revenue Code (NIRC)

Further, the CTA likewise found that PERF failed to present in evidence its 1998 annual ITR. It held that the failure of PERF to signify its option on whether to claim for refund or opt for an automatic tax credit and to present its 1998 ITRleft the Court with no way to determine with certainty whether or not PERF has applied or credited the refundableamount sought for in its administrative and judicial claims for refund.

PERF moved for reconsideration attaching to its motion its 1998 ITR. The motion was, however, denied by the CTA in itsResolution dated March 26, 2002.

Aggrieved by the decision of the CTA, PERF filed a petition for review with the CA under Rule 43 of the Rules of Court.

CA Disposition 

In a Decision dated July 18, 2003, the CA ruled in favor of PERF, disposing as follows:

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TAXATION I - BATCH B 7

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated November 20, 2001, and Resolutionof March 26, 2002 of the Court of Tax Appeals are SET ASIDE. The Commissioner of Internal Revenue is orderedto REFUND to the petitioner the amount of P1,280,504.00 as creditable withholding tax for the year 1997.

SO ORDERED.3 

According to the appellate court, even if the taxpayer has indicated its option for refund or tax credit in its ITR, it does not mean that it will automatically be entitled to either option since the Commissioner of Internal Revenue (CIR) must begiven the opportunity to investigate and confirm the veracity of the claim. Thus, there is still a need to file a claim for

refund.

As to the failure of PERF to present its 1998 ITR, the CA observed that there is no need to rule on its admissibility sincethe CTA already held that PERF had complied with the requisites for applying for a tax refund. The sole purpose of requiring the presentation of PERF's 1998 ITR is to verify whether or not PERF had carried over the 1997 excess incometax claimed for refund to the year 1998. The verification process is not incumbent upon PERF; rather, it is the duty of theBIR to disprove the taxpayer's claim.

The CIR filed a motion for reconsideration which was subsequently denied by the CA. Thus, this appeal to Us under Rule45.

Issues 

Petitioner submits the following assignment:

I

THE COURT OF APPEALS ERRED IN GRANTING RESPONDENT'S TAX REFUND CONSIDERING THE LATTER'SFAILURE TO SUBSTANTIALLY ESTABLISH ITS CLAIM FOR REFUND.

II

THE COURT OF APPEALS ERRED IN CONSIDERING RESPONDENT'S ANNUAL CORPORATE INCOME TAXRETURN FOR 1998 NOTWITHSTANDING THAT IT WAS NOT FORMALLY OFFERED IN EVIDENCE.4 (Underscoring supplied)

Our Ruling 

We rule in favor of respondent.

I. Respondent substantially complied with the requisites for claim of refund.  

The CTA, citing Section 10 of Revenue Regulations 6-85 and Citibank, N.A. v. Court of Appeals ,5 determined the requisitesfor a claim for refund, thus:

1) That the claim for refund was filed within the two (2) year period as prescribed under Section 230 of theNational Internal Revenue Code;

2) That the income upon which the taxes were withheld were included in the return of the recipient;

3) That the fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by thepayor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom.6 

We find that PERF filed its administrative and judicial claims for refund on November 3, 1999 and December 3, 1999,respectively, which are within the two-year prescriptive period under Section 230 (now 229) of the National Internal TaxCode.

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The CTA noted that based on the records, PERF presented certificates of creditable withholding tax at source reflectingcreditable withholding taxes in the amount of P4,153,604.18 withheld from PERF's rental income of P83,072,076.81(Exhibits B, C, D, E, and H). In addition, it submitted in evidence the Monthly Remittance Returns of its withholding agentsto prove the fact of remittance of said taxes to the BIR. Although the certificates of creditable withholding tax at source for1997 reflected a total amount of P4,153,604.18 corresponding to the rental income of P83,072,076.81, PERF is claimingonly the amount of P3,531,125.00 pertaining to a rental income of P70,813,079.00. The amount of P3,531,125.00 less theincome tax due of PERF of P2,250,621.00 leaves the refundable amount of P1,280,504.00.

It is settled that findings of fact of the CTA are entitled to great weight and will not be disturbed on appeal unless it is

shown that the lower courts committed gross error in the appreciation of facts. We see no cogent reason not to apply thesame principle here.

II. The failure of respondent to indicate its option in its annual ITR to avail itself of either the tax refund or tax credit

is not fatal to its claim for refund.  

Respondent PERF did not indicate in its 1997 ITR the option whether to request a refund or claim the excess withholdingtax as tax credit for the succeeding taxable year.

Citing Section 76 of the NIRC, the CIR opines that such failure is fatal to PERF's claim for refund.

We do not agree.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,7 the Court had occasion to trace the history of theFinal Adjustment Return found in Section 69 (now 76) of the NIRC. Thus:

The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential Decree(PD) No. 1158, otherwise known as the "National Internal Revenue Code of 1977." On August 1, 1980, thisprovision was restated as Section 86 in PD 1705.

On November 5, 1985, all prior amendments and those introduced by PD 1994 were codified into the NationalInternal Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered as Section 79.

On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all "net income" phrases appearing in TitleII of the NIRC of 1977 to "taxable income." Section 79 of the NIRC of 1985, however, was not amended.

On July 25, 1987, EO 273 renumbered Section 86 of the NIRC as Section 76, which was also rearranged to fallunder Chapter of Title II of the NIRC. Section 79, which had earlier been renumbered by PD 1994, remainedunchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 underPD 1994; then, as Section 76 under EO 273. Finally, after being renumbered and reduced to the chaff of a grain,Section 69 was repealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:

"Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final

adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on theentire taxable net income of that year the corporation shall either:

"(a) Pay the excess tax still due; or

"(b) Be refunded the excess amount paid, as the case may be.

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In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundableamount shown on its final adjustment return may be credited against the estimated quarterly income taxliabilities for the taxable quarters of the succeeding taxable year."8 

Section 76 offers two options: (1) filing for tax refund and (2) availing of tax credit. The two options are alternative andthe choice of one precludes the other. However, in Philam Asset Management, Inc. v. Commissioner of Internal Revenue,9 the Court ruled that failure to indicate a choice, however, will not bar a valid request for a refund, should this option bechosen by the taxpayer later on. The requirement is only for the purpose of easing tax administration particularly theself-assessment and collection aspects. Thus:

These two options under Section 76 are alternative in nature. The choice of one precludes the other. Indeed, inPhilippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that a corporation must signify its intention - whether to request a tax refund or claim a tax credit - by marking the corresponding optionbox provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, thisrequirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure tosignify one's intention in the FAR does not mean outright barring of a valid request for a refund, should one stillchoose this option later on. A tax credit should be construed merely as an alternative remedy to a tax refundunder Section 76, subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration,

particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty orpreference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expressesuncertainty or lack of preference and hence shows simple negligence or plain oversight.

x x x x

Third , there is no automatic grant of a tax refund . As a matter of procedure, the BIR should be given theopportunity "to investigate and confirm the veracity" of a taxpayer's claim, before it grants the refund.Exercising the option for a tax refund or a tax credit does not ipso facto confer upon a taxpayer the right to an immediate availment of the choice made. Neither does it impose a duty on the government to allowtax collection to be at the sole control of a taxpayer.

Fourth, the BIR ought to have on file its own copies of petitioner's FAR for the succeeding year, on thebasis of which it could rebut the assertion that there was a subsequent credit of the excess income taxpayments for the previous year. Its failure to present this vital document to support its contentionagainst the grant of a tax refund to petitioner is certainly fatal.

Fifth, the CTA should have taken judicial notice of the fact of filing and the pendency of petitioner'ssubsequent claim for a refund of excess creditable taxes withheld for 1998. The existence of the claimought to be known by reason of its judicial functions. Furthermore, it is decisive to and will easilyresolve the material issue in this case. If only judicial notice were taken earlier, the fact that there was nocarry-over of the excess creditable taxes withheld for 1997 would have already been crystal clear.

Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two yearsafter payment of the taxes erroneously received by the BIR. Despite the failure of petitioner to make the

appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of its choice to request a tax refund , instead of a tax credit. To assert that any future claim for a tax refundwill be instantly hindered by a failure to signify one's intention in the FAR is to render nugatory the clearprovision that allows for a two-year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA, this Court even ordered the refund of a taxpayer's excess creditabletaxes, despite the express declaration in the FAR to apply the excess to the succeeding year. When circumstancesshow that a choice of tax credit has been made, it should be respected. But when indubitable circumstancesclearly show that another choice - a tax refund - is in order, it should be granted. "Technicalities and legalisms,

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however exalted, should not be misused by the government to keep money not belonging to it and thereby enrichitself at the expense of its law-abiding citizens."

In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it perform anyact indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an administrative claimfor the refund of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply theexcess creditable taxes. Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess taxcredits in the amount of P522,092.10 

In this case, PERF did not mark the refund box in its 1997 FAR. Neither did it perform any act indicating that it chose taxcredit. In fact, in its 1998 ITR, PERF left blank the portion "Less: Tax Credit/ Payments." That action coupled with thefiling of a claim for refund indicates that PERF opted to claim a refund. Under these circumstances, PERF is entitled to arefund of its 1997 excess tax credits in the amount of P1,280,504.00.

III. The failure of respondent to present in evidence the 1998 ITR is not fatal to its claim for refund.  

The CIR takes the view that the CA erred in considering the 1998 ITR of PERF. It was not formally offered in evidence.Section 34, Rule 132 of the Revised Rules of Court states that the court shall consider no evidence which has not beenformally offered.

The reasoning is specious.

PERF attached its 1998 ITR to its motion for reconsideration. The 1998 ITR is a part of the records of the case and clearlyshowed that income taxes in the amount of P1,280,504.00 were not claimed as tax credit in 1998.

In Filinvest Development Corporation v. Commissioner of Internal Revenue,11 the Court held that the 1997 ITR attached tothe motion for reconsideration is part of the records of that case and cannot be simply ignored by the CTA. Moreover,technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. Wequote:

In the proceedings before the CTA, petitioner presented in evidence its letter of claim for refund before the BIR toshow that it was made within the two-year reglementary period; its Income Tax Returns for the years 1995 and1996 to prove its total creditable withholding tax and the fact that the amounts were declared as part of its grossincome; and several certificates of income tax withheld at source corresponding to the period of claim to prove

the total amount of the taxes erroneously withheld. More importantly, petitioner attached its 1997 Income TaxReturn to its Motion for Reconsideration, making the same part of the records of the case. The CTA cannot simplyignore this document.1avvphi1

Thus, we hold that petitioner has complied with all the requirements to prove its claim for tax refund. The CA,therefore, erred in denying the petition for review of the CTA's denial of petitioner's claim for tax refund on theground that it failed to present its 1997 Income Tax Return.

The CA's reliance on Rule 132, Section 34 26 of the Rules on Evidence is misplaced. This provision must 

be taken in the light of Republic Act No. 1125, as amended, the law creating the CTA, which provides that 

proceedings therein shall not be governed strictly by technical rules of evidence. Moreover, this Court 

has held time and again that technicalities should not be used to defeat substantive rights, especially

those that have been established as a matter of fact.  

x x x x

We must also point out that, simply by exercising the CIR's power to examine and verify petitioner's claim for taxexemption as granted by law, respondent CIR could have easily verified petitioner's claim by presenting thelatter's 1997 Income Tax Return, the original of which it has in its files. However, records show that in theproceedings before the CTA, respondent CIR failed to comment on petitioner's formal offer of evidence, waivedits right to present its own evidence, and failed to file its memorandum. Neither did it file an opposition topetitioner's motion to reconsider the CTA decision to which the 1997 Income Tax Return was appended.

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That no one shall unjustly enrich oneself at the expense of another is a long-standing principle prevailing in ourlegal system. This applies not only to individuals but to the State as well. In the field of taxation where the Stateexacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty.The harsh power of taxation must be tempered with evenhandedness. Hence, under the principle of  solutio

indebiti, the Government has to restore to petitioner the sums representing erroneous payments of taxes .12 

Further, We sustain the CA that there is no need to rule on the issue of the admissibility of the 1998 ITR since the CTAruled that PERF already complied with the requisites of applying for a tax refund. The verification process is not incumbent on PERF; it is the duty of the CIR to verify whether or not PERF had carried over the 1997 excess income taxes.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

Ynares-Santiago, Chairperson, Austria-Martinez, Chico-Nazario, Nachura, JJ., concur.

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THIRD DIVISION 

G.R. Nos. 141104 & 148763 June 8, 2007 

 ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N 

CHICO-NAZARIO, J.: 

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner Atlas ConsolidatedMining and Development Corporation (petitioner corporation) for the refund/credit of the input Value Added Tax (VAT)on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992, the denialof which by the Court of Tax Appeals (CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral products, such asgold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was initially issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register anew with the appropriate revenue district office (RDO) of theBureau of Internal Revenue (BIR) when it moved its principal place of business, and it was re-issued VAT Registration No.

32-0-004622, dated 15 August 1990.1

 

G.R. No. 141104 

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992 .2 It alleged that it likewise filed withthe BIR the corresponding application for the refund/credit of its input VAT on its purchases of capital goods and on itszero-rated sales in the amount of P26,030,460.00.3 When its application for refund/credit remained unresolved by theBIR, petitioner corporation filed on 20 April 1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102.Asserting that it was a "zero-rated VAT person," it prayed that the CTA order herein respondent Commissioner of InternalRevenue (respondent Commissioner) to refund/credit petitioner corporation with the amount of P26,030,460.00,representing the input VAT it had paid for the first quarter of 1992. The respondent Commissioner opposed and sought the dismissal of the petition for review of petitioner corporation for failure to state a cause of action. After due trial, theCTA promulgated its Decision4 on 24 November 1997 with the following disposition – 

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the ground of prescription, insufficiency of evidence and failure to comply with Section 230 of the Tax Code, as amended.Accordingly, the petition at bar is hereby DISMISSED for lack of merit.

The CTA denied the motion for reconsideration of petitioner corporation in a Resolutio n5 dated 15 April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in its Decision ,6 dated 6July 1999, dismissed the appeal of petitioner corporation, finding no reversible error in the CTA Decision, dated 24November 1997. The subsequent motion for reconsideration of petitioner corporation was also denied by the Court of Appeals in its Resolution,7 dated 14 December 1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under Rule 45 of the RevisedRules of Court, assigning the following errors committed by the Court of Appeals – 

ITHE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE REGULATIONS NO. 2-88THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUSTCONSIST OF EXPORTS FOR ZERO-RATING TO APPLY.

IITHE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO SUBMIT SUFFICIENT EVIDENCESINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.

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IIITHE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED BEYOND THEPRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE FILING OFTHE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-OPENING OF THE CASE FORPETITIONER TO PRESENT ADDITIONAL EVIDENCE.8 

G.R. No. 148763 

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except that it relates to theclaims of petitioner corporation for refund/credit of input VAT on its purchases of capital goods and on its zero-ratedsales made in the last three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of 1990, on 20 July1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate applications to the BIR for therefund/credit of the input VAT paid on its purchases of capital goods and on its zero-rated sales, the details of which arepresented as follows – 

Date of Application Period Covered Amount Applied For

21 August 1990 2nd Quarter, 1990 P 54,014,722.04

21 November 1990 3rd Quarter, 1990 75,304,774.77

19 February 1991 4th Quarter, 1990 43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the CTA the followingpetitions for review – 

Date Filed Period Covered CTA Case No.

20 July 1992 2nd Quarter, 1990 4831

9 October 1992 3rd Quarter, 1990 4859

14 January 1993 4th Quarter, 1990 4944

which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions and prayed for thedismissal thereof. The CTA ruled in favor of respondent Commissioner and in its Decision ,9 dated 30 October 1997,dismissed the Petitions mainly on the ground that the prescriptive periods for filing the same had expired. In aResolution,10 dated 15 January 1998, the CTA denied the motion for reconsideration of petitioner corporation since thelatter presented no new matter not already discussed in the court's prior Decision. In the same Resolution, the CTA alsodenied the alternative prayer of petitioner corporation for a new trial since it did not fall under any of the grounds citedunder Section 1, Rule 37 of the Revised Rules of Court, and it was not supported by affidavits of merits required bySection 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R. SP No. 46718. On 15September 2000, the Court of Appeals rendered its Decision,11 finding that although petitioner corporation timely filed itsPetitions for Review with the CTA, it still failed to substantiate its claims for the refund/credit of its input VAT for the last three quarters of 1990. In its Resolution,12 dated 27 June 2001, the appellate court denied the motion for reconsiderationof petitioner corporation, finding no cogent reason to reverse its previous Decision.

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Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under Rule 45 of theRevised Rules of Court, docketed as G.R. No. 148763, raising the following issues – 

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S CLAIM IS BARREDUNDER REVENUE REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR FAILURE TO PTOVE [ sic] THE 70% THRESHOLDFOR ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANTCLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO BASIS TO GRANTPETITIONER'S MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were consolidated pursuant toa Resolution, dated 4 September 2006, issued by this Court. The ruling of this Court in these cases hinges on how it willresolve the following key issues: (1) prescription of the claims of petitioner corporation for input VAT refund/credit; (2)validity and applicability of Revenue Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for theVAT zero-rating of its sales, the burden of proving that the buyer companies were not just BOI-registered but alsoexporting 70% of their total annual production; (3) sufficiency of evidence presented by petitioner corporation toestablish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for granting the motion of petitionercorporation for re-opening of its cases or holding of new trial before the CTA so it could be given the opportunity topresent the required evidence.

Prescription 

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales made in 1990 and1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as amended, which provided that  – 

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by paragraph (a) above, whosesales are zero-rated may, within two years after the close of the quarter when such sales were made, apply for

the issuance of a tax credit certificate or refund of the input taxes attributable to such sales to the extent that such input tax has not been applied against output tax.

x x x x

(e) Period within which refund of input taxes may be made by the Commissioner. – The Commissioner shall refundinput taxes within 60 days from the date the application for refund was filed with him or his duly authorizedrepresentative. No refund of input taxes shall be allowed unless the VAT-registered person files an applicationfor refund within the period prescribed in paragraphs (a), (b) and (c) as the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from the close of thequarter when the zero-rated sales were made, but from the date of filing of the quarterly VAT return and payment of thetax due 20 days thereafter, in accordance with Section 110(b) of the Tax Code of 1977, as amended, quoted as follows – 

SEC. 110. Return and payment of value-added tax. – x x x.

(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid within 20 daysfollowing the end of each quarter specifically prescribed for a VAT-registered person under regulations to bepromulgated by the Secretary of Finance: Provided, however, That any person whose registration is cancelled in

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accordance with paragraph (e) of Section 107 shall file a return within 20 days from the cancellation of suchregistration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for recovery of corporate income tax erroneously or illegally paid under Section 23013 of the Tax Code of 1977, as amended, was to becounted from the filing of the final adjustment return. This Court already set out in ACCRA Investments Corporation v.

Court of Appeals ,14 the rationale for such a rule, thus – 

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the respondent 

Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refundmust show in its final adjustment return the income it received from all sources and the amount of withholdingtaxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed itsfinal adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in thecase of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filingof the adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to file itsclaim for refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the respondent Commissioner who failed to take any action thereon and considering further that the non-resolution of its claimfor refund with the said Commissioner prompted ACCRAIN to reiterate its claim before the Court of Tax Appealsthrough a petition for review on April 13, 1984, the respondent appellate court manifestly committed a

reversible error in affirming the holding of the tax court that ACCRAIN's claim for refund was barred byprescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with respect tothe petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its businessoperations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon itsfiling of its final adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded on the same matter – 

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is warranted under

the circumstances to lay down a categorical pronouncement on the question as to when the two-yearprescriptive period in cases of quarterly corporate income tax commences to run. A full-blown decision in thisregard is rendered more imperative in the light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in relation to theother provisions of the Tax Code in order to give effect the legislative intent and to avoid an application of thelaw which may lead to inconvenience and absurdity. In the case of  People vs. Rivera (59 Phil. 236 [1933]), thisCourt stated that statutes should receive a sensible construction, such as will give effect to the legislativeintention and so as to avoid an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER

FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM . Where there is ambiguity, such interpretation aswill avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give effect to the generallegislative intent that can be discovered from or is unraveled by the four corners of the statute, and in order to

discover said intent, the whole statute, and not only a particular provision thereof, should be considered. ( ManilaLodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause of thestatute must be expounded by reference to each other in order to arrive at the effect contemplated by thelegislature. The intention of the legislator must be ascertained from the whole text of the law and every part of the act is to be taken into view. (Chartered Bank vs. Imperial , 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47Phil. 249, cited in Aboitiz Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now Section 230) of theNational Internal Revenue Code but also the other provisions of the Tax Code, particularly Sections 84, 85 (nowboth incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly

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Corporate Income Tax Payment and Section 321 (now Section 232) on keeping of books of accounts. All theseprovisions of the Tax Code should be harmonized with each other.

x x x x

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68) and implementedper BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments of theannual tax due. These quarterly tax payments which are computed based on the cumulative figures of grossreceipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of 

the annual income tax due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section87 (now Section 69) which provides for the filing of adjustment returns and final payment of income tax.Consequently, the two-year prescriptive period provided in Section 292 (now Section 230) of the Tax Codeshould be computed from the time of filing the Adjustment Return or Annual Income Tax Return and finalpayment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that when atax is paid in installments, the prescriptive period of two years provided in Section 306 (Section 292) of theNational Internal Revenue Code should be counted from the date of the final payment. This ruling is reiterated inCommissioner of Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that wherethe tax account was paid on installment, the computation of the two-year prescriptive period under Section 306(Section 292) of the Tax Code, should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year prescriptiveperiod should be counted from the filing of the Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period for claims for refundof illegally or erroneously collected income tax may also apply to the Petitions at bar involving the same prescriptiveperiod for claims for refund/credit of input VAT on zero-rated sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but is eventuallysubjected to a final adjustment at the end of the taxable year, VAT is computed and paid on a purely quarterly basiswithout need for a final adjustment at the end of the taxable year. However, it is also equally true that until and unless theVAT-registered taxpayer prepares and submits to the BIR its quarterly VAT return, there is no way of knowing with

certainty just how much input VAT16

 the taxpayer may apply against its output VAT;17

 how much output VAT it is due topay for the quarter or how much excess input VAT it may carry-over to the following quarter; or how much of its input VAT it may claim as refund/credit. It should be recalled that not only may a VAT-registered taxpayer directly applyagainst his output VAT due the input VAT it had paid on its importation or local purchases of goods and services duringthe quarter; the taxpayer is also given the option to either (1) carry over any excess input VAT to the succeeding quartersfor application against its future output VAT liabilities, or (2) file an application for refund or issuance of a tax credit certificate covering the amount of such input VAT.18 Hence, even in the absence of a final adjustment return, thedetermination of any output VAT payable necessarily requires that the VAT-registered taxpayer make adjustments in itsVAT return every quarter, taking into consideration the input VAT which are creditable for the present quarter or hadbeen carried over from the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it does haverefundable or creditable input VAT, and the same has not been applied against its output VAT liabilities – information

which are supposed to be reflected in the taxpayer's VAT returns. Thus, an application for refund/credit must beaccompanied by copies of the taxpayer's VAT return/s for the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally or erroneouslycollected, its refund/credit is a privilege extended to qualified and registered taxpayers by the very VAT system adoptedby the Legislature. Such input VAT, the same as any illegally or erroneously collected national internal revenue tax,consists of monetary amounts which are currently in the hands of the government but must rightfully be returned to thetaxpayer. Therefore, whether claiming refund/credit of illegally or erroneously collected national internal revenue tax, orinput VAT, the taxpayer must be given equal opportunity for filing and pursuing its claim.

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For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period for filing a claimfor refund/credit of input VAT on zero-rated sales from the date of filing of the return and payment of the tax due which,according to the law then existing, should be made within 20 days from the end of each quarter. Having established thus,the relevant dates in the instant cases are summarized and reproduced below – 

Period Covered Date of Filing(Return w/ BIR)

Date of Filing(Application w/ BIR)

Date of Filing (Casew/ CTA)

2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992

4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993

1st Quarter, 1992 20 April 1992 -- 20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT on its zero-ratedsales for the first quarter of 1992. Even though it may seem that petitioner corporation filed in time its judicial claim with

the CTA, there is no showing that it had previously filed an administrative claim with the BIR. Section 106(e) of the TaxCode of 1977, as amended, explicitly provided that no refund of input VAT shall be allowed unless the VAT-registeredtaxpayer filed an application for refund with respondent Commissioner within the two-year prescriptive period. Theapplication of petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was not only unsignedby its supposed authorized representative, Ma. Paz R. Semilla, Manager-Finance and Treasury, but it was not dated,stamped, and initialed by the BIR official who purportedly received the same. The CTA, in its Decision ,19 dated 24November 1997, in CTA Case No. 5102, made the following observations – 

This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of VAT Paid (BIR FormNo. 2552) [Exhibit "B'] formally offered in evidence by the petitioner on account of the fact that it does not bearthe BIR stamp showing the date when such application was filed together with the signature or initial of thereceiving officer of respondent's Bureau. Worse still, it does not show the date of application and the signature of a certain Ma. Paz R. Semilla indicated in the form who appears to be petitioner's authorized filer.

A review of the records reveal that the original of the aforecited application was lost during the time petitionertransferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt was made to prove that petitionerexerted efforts to recover the original copy, but to no avail. Despite this, however, We observe that petitionercompletely failed to establish the missing dates and signatures abovementioned. On this score, said applicationhas no probative value in demonstrating the fact of its filing within two years after the [filing of the VAT returnfor the quarter] when petitioner's sales of goods were made as prescribed under Section 106(b) of the Tax Code.We believe thus that petitioner failed to file an application for refund in due form and within the legal period set by law at the administrative level. Hence, the case at bar has failed to satisfy the requirement on the prior filing ofan application for refund with the respondent before the commencement of a judicial claim for refund, asprescribed under Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation timely filed itsadministrative claim for refund of its input VAT for the first quarter of 1992, but also whether petitioner corporationactually filed such administrative claim in the first place. For failing to prove that it had earlier filed with the BIR anapplication for refund/credit of its input VAT for the first quarter of 1992, within the period prescribed by law, then thecase instituted by petitioner corporation with the CTA for the refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement  

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Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross selling price or grossvalue in money of goods sold, bartered or exchanged. Yet, the same provision subjected the following sales made by VAT-registered persons to 0% VAT – 

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international agreements to which thePhilippines is a signatory effectively subjects such sales to zero-rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a foreign country,irrespective of any shipping arrangement that may be agreed upon which may influence or determine thetransfer of ownership of the goods so exported, or foreign currency denominated sales. "Foreign currencydenominated sales", means sales to nonresidents of goods assembled or manufactured in the Philippines, fordelivery to residents in the Philippines and paid for in convertible foreign currency remitted through the bankingsystem in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT purposes, althoughthe VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall not result inany output VAT, while the input VAT on its purchases of goods or services related to such zero-rated sale shall beavailable as tax credit or refund.20 

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said regulations imposedadditional requirements, not found in the law itself, for the zero-rating of its sales to Philippine Smelting and RefiningCorporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS), both of which are registered not only with the BOI, but also with the then Export Processing Zone Authority (EPZA).21 

The contentious provisions of Revenue Regulations No. 2-88 read – 

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw materials to export-oriented BOI-registered enterprises whose export sales, under rules and regulations of the Board of Investments,exceed seventy percent (70%) of total annual production, shall be subject to zero-rate under the followingconditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for zero-rating for each

and every separate buyer, in accordance with Section 8(d) of Revenue Regulations No. 5-87. Theapplication should be accompanied with a favorable recommendation from the Board of Investments."

"(2) The raw materials sold are to be used exclusively by the buyer in the manufacture, processing orrepacking of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice. The exporter(buyer) can no longer claim from the Bureau of Internal Revenue or any other government office taxcredits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign buyer for delivery toa resident local export-oriented BOI-registered enterprise to be used in manufacturing, processing or repacking

of the said buyer's goods and paid for in foreign currency, inwardly remitted in accordance with Central Bank rules and regulations shall be subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that Section 2 of Revenue Regulations No. 2-88 should be applied in the cases at bar; and to be entitled to the zero-rating of its sales toPASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller, must be able to prove not only that PASAR andPHILPHOS are BOI-registered corporations, but also that more than 70% of the total annual production of thesecorporations are actually exported. Revenue Regulations No. 2-88 merely echoed the requirement imposed by the BOI onexport-oriented corporations registered with it.

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While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds that its applicationmust be limited and placed in the proper context. Note that Section 2 of Revenue Regulations No. 2-88 referred only tothe zero-rated sales of raw materials to export-oriented BOI-registered enterprises whose export sales, under BOI rulesand regulations, should exceed seventy percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the sales made bypetitioner corporation to PASAR and PHILPHOS. At the onset, it must be emphasized that PASAR and PHILPHOS, inaddition to being registered with the BOI, were also registered with the EPZA and located within an export-processingzone. Petitioner corporation does not claim that its sales to PASAR and PHILPHOS are zero-rated on the basis that said

sales were made to export-oriented BOI-registered corporations, but rather, on the basis that the sales were made toEPZA-registered enterprises operating within export processing zones. Although sales to export-oriented BOI-registeredenterprises and sales to EPZA-registered enterprises located within export processing zones were both deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as amended, shall be subject to 0% VAT distinction must bemade between these two types of sales because each may have different substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and shipment or exportationof goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed uponwhich may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominatedsales." Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987 - which, in the yearsconcerned (i.e., 1990 and 1992), governed enterprises registered with both the BOI and EPZA, provided a morecomprehensive definition of export sales, as quoted below:

"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from invoices, bills of lading,inward letters of credit, landing certificates, and other commercial documents, of export products exporteddirectly by a registered export producer or the net selling price of export product sold by a registered export producer or to an export trader that subsequently exports the same: Provided, That sales of export products toanother producer or to an export trader shall only be deemed export sales when actually exported by the latter,as evidenced by landing certificates of similar commercial documents: Provided, further, That without actualexportation the following shall be considered constructively exported for purposes of this provision: (1) sales tobonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones; (3)sales to registered export traders operating bonded trading warehouses supplying raw materials used in themanufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions and otheragencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repackedproducts whether paid for in foreign currency or not: Provided, further, That export sales of registered export 

trader may include commission income; and Provided, finally, That exportation of goods on consignment shallnot be deemed export sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and othernon-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of thegovernment and paid for in convertible foreign currency inwardly remitted through the Philippine bankingsystems shall also be considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the sales of export products to another producer or to an export trader, provided that the export products are actually exported. Forpurposes of VAT zero-rating, such producer or export trader must be registered with the BOI and is required to actuallyexport more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers constructive exportationas export sales. Among other types of constructive exportation specifically identified by the said provision are sales toexport processing zones. Sales to export processing zones are subjected to special tax treatment. Article 77 of the sameCode establishes the tax treatment of goods or merchandise brought into the export processing zones. Of particularrelevance herein is paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise from thecustoms territory and subsequently brought into the zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the Destination Principleand Cross Border Doctrine to which the Philippine VAT system adheres. According to the Destination Principle ,22 goods

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and services are taxed only in the country where these are consumed. In connection with the said principle, the CrossBorder Doctrine23 mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumptionoutside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to aforeign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposedwith 10% VAT.24 Export processing zones25 are to be managed as a separate customs territory from the rest of thePhilippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by personsfrom the Philippine customs territory to those inside the export processing zones are already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export sales, which, under the Tax Code of 

1977, as amended, were subject to 0% VAT. It is on this ground that petitioner corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises operating within export processing zones isactually supported by subsequent development in tax laws and regulations. In Revenue Regulations No. 7-95, theConsolidated VAT Regulations, as amended,26 the BIR defined with more precision what are zero-rated export sales – 

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shippingarrangement that may be agreed upon which may influence or determine the transfer of ownership of the goodsso exported paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for inaccordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) ; 

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident localexport-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rulesand regulations of the Bangko Sentral ng Pilipinas (BSP) ; 

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceedseventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shallbe considered an export-oriented enterprise upon accreditation as such under the provisions of the Export Development Act (R.A. 7844) and its implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as theOmnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as theBases Conversion and Development Act of 1992.

The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which applied to zero-ratedexport sales to export-oriented BOI-registered enterprises, should not be applied to the applications for refund/credit of input VAT filed by petitioner corporation since it based its applications on the zero-rating of export sales to enterprisesregistered with the EPZA and located within export processing zones.

 Sufficiency of evidence 

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual bases of its claim fortax credit or refund, but once it has submitted all the required documents, it is the function of the BIR to assess thesedocuments with purposeful dispatch.28 It therefore falls upon herein petitioner corporation to first establish that its salesqualify for VAT zero-rating under the existing laws (legal basis), and then to present sufficient evidence that said saleswere actually made and resulted in refundable or creditable input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover only input VAT on itspurportedly zero-rated sales to PASAR and PHILPHOS; however, a more thorough perusal of its applications, VAT

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returns, pleadings, and other records of these cases would reveal that it is also claiming refund/credit of its input VAT onpurchases of capital goods and sales of gold to the Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the Tax Code of 1977, asamended, allowed the refund/credit of input VAT on export sales to enterprises operating within export processing zonesand registered with the EPZA, since such export sales were deemed to be effectively zero-rated sales .29 The fact that PASAR and PHILPHOS, to whom petitioner corporation sold its products, were operating inside an export processing

zone and duly registered with EPZA, was never raised as an issue herein. Moreover, the same fact was already judiciallyrecognized in the case Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-registered taxpayer to apply for refund/credit of the input VATpaid on capital goods imported or locally purchased to the extent that such input VAT has not been applied against itsoutput VAT. Meanwhile, the effective zero-rating of sales of gold to the CBP from 1989 to 1991 31 was already affirmed bythis Court in Commissioner of Internal Revenue v. Benguet Corporation,32 wherein it ruled that – 

At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon byrespondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of theNIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall beconsidered export and therefore shall be subject to the export and premium duties. In coming out with thisinterpretation, the BIR also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are considered constructive exports. x x x.

This Court now comes to the question of whether petitioner corporation has sufficiently established the factual bases forits applications for refund/credit of input VAT. It is in this regard that petitioner corporation has failed, both in theadministrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue regulations. As thisCourt has already ruled, Revenue Regulations No. 2-88 is not relevant to the applications for refund/credit of input VATfiled by petitioner corporation; nonetheless, the said applications must have been in accordance with RevenueRegulations No. 3-88, amending Section 16 of Revenue Regulations No. 5-87, which provided as follows – 

SECTION 16. Refunds or tax credits of input tax. – 

x x x x

(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax Paid (BIR Form No.2552) shall be filed with the Revenue District Office of the city or municipality where the principal place of business of the applicant is located or directly with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted togetherwith the application. The original copy of the said invoice/receipt, however, shall be presented for cancellationprior to the issuance of the Tax Credit Certificate or refund. In addition, the following documents shall beattached whenever applicable:

x x x x

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the sale of goods orservices were delivered, date of delivery, amount of consideration, and description of goods orservices delivered.

"iii) evidence of actual receipt of goods or services.

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"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase price, amount of value-added tax paid and description of the capital equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import entry document forinternal revenue tax purposes and the confirmation receipt issued by the Bureau of Customs forthe payment of the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies, a statement therefrom showing the amount and description of sale of goods and services, name of persons or entities (except in case of exports) to whom the goods or services were sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction during the period coveredby the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and services, and theVAT paid (inputs) on purchases of goods and services cannot be directly attributed to any of the aforementioned

transactions, the following formula shall be used to determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated SaleTotal Sales

XTotal Amount of Input Taxes

=Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR, and before thelapse of the two-year prescriptive period, the taxpayer-applicant may already file a Petition for Review before the CTA. If 

the taxpayer's claim is supported by voluminous documents, such as receipts, invoices, vouchers or long accounts, theirpresentation before the CTA shall be governed by CTA Circular No. 1-95, as amended, reproduced in full below – 

In the interest of speedy administration of justice, the Court hereby promulgates the following rules governingthe presentation of voluminous documents and/or long accounts, such as receipts, invoices and vouchers, asevidence to establish certain facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrineenunciated in Compania Maritima vs. Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after motion and approvalby the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers, dates and amountscovered by the invoices or receipts and the amount/s of tax paid; and (b) a Certification of anindependent Certified Public Accountant attesting to the correctness of the contents of the summaryafter making an examination, evaluation and audit of the voluminous receipts and invoices. The name of the accountant or partner of the firm in charge must be stated in the motion so that he/she can becommissioned by the Court to conduct the audit and, thereafter, testify in Court relative to suchsummary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for marking, identificationand comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after theintroduction of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other

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documents covering the said accounts or payments to be introduced in evidence must be pre-marked by theparty concerned and submitted to the Court in order to be made accessible to the adverse party who desires tocheck and verify the correctness of the summary and CPA certification. Likewise, the originals of the voluminousreceipts, invoices or accounts must be ready for verification and comparison in case doubt on the authenticitythereof is raised during the hearing or resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when the said Circular was issued,then petitioner corporation must have complied therewith during the course of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of therein respondent,Manila Mining Corporation, for refund of the input VAT on its supposed zero-rated sales of gold to the CBP because it wasunable to substantiate its claim. In the same case, this Court emphasized the importance of complying with thesubstantiation requirements for claiming refund/credit of input VAT on zero-rated sales, to wit – 

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registeredentity and that it filed its claims within the prescriptive period. It must  substantiate the input VAT paid by 

 purchase invoices or official receipts. 

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the requirements in claimingtax credits/refunds.

x x x x

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before it are litigated de novo,party litigants should prove every minute aspect of their cases. No evidentiary value can be given the purchaseinvoices or receipts submitted to the BIR as the rules on documentary evidence require that these documentsmust be formally offered before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does notipso fact mean that [the seller] is entitled to the amount of refund sought as it is required by law to

 present evidence showing the input taxes it paid during the year in question. What is being claimed in theinstant petition is the refund of the input taxes paid by the herein petitioner on its purchase of goods andservices. Hence, it is necessary for the Petitioner to show proof that it had indeed paid the input taxes

during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not adduce in

evidence the sales invoice, receipts or other documents showing the input value added tax on the purchase

of goods and services. 

x x x

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of 

Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo)

where the parties must present their evidence accordingly  if they desire the Court to take such evidence into

consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the pricescharged therefor or a list by whatever name it is known which is used in the ordinary course of businessevidencing 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.

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These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount orquantity of goods sold and their selling price, and taken collectively are the best means to prove the input VATpayments.36 

Although the foregoing decision focused only on the proof required for the applicant for refund/credit to establish theinput VAT payments it had made on its purchases from suppliers, Revenue Regulations No. 3-88 also required it topresent evidence proving actual zero-rated VAT sales to qualified buyers, such as (1) photocopy of the approvedapplication for zero-rate if filing for the first time; (2) sales invoice or receipt showing the name of the person or entity towhom the goods or services were delivered, date of delivery, amount of consideration, and description of goods or

services delivered; and (3) the evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the certification by the independent certifiedpublic accountant (CPA), thus – 

Respondent contends, however, that the certification of the independent CPA attesting to the correctness of thecontents of the summary of suppliers' invoices or receipts which were examined, evaluated and audited by saidCPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate itsclaims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which eitherexpressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified by anindependent CPA, suffice as evidence of input VAT payments.

x x x x

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-consumingprocedure of presenting, identifying and marking of documents before the Court. It does not relieve respondent of its imperative task of  pre-marking photocopies of sales receipts and invoices and submitting the same to the

court after the independent CPA shall have examined and compared them with the originals. Without presentingthese pre-marked documents as evidence – from which the summary and schedules were based, the court cannotverify the authenticity and veracity of the independent auditor's conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to confirmwhether they are VAT invoices. Under Section 21 of Revenue Regulation, No. 5-87, all purchases covered by

invoices other than a VAT invoice shall not be entitled to a refund of input VAT.

x x x x

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends inthemselves but are primarily intended as tools in the administration of justice, the presentation of the purchasereceipts and/or invoices is not mere procedural technicality which may be disregarded considering that it is theonly means by which the CTA may ascertain and verify the truth of the respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input VAT refund for the first semester of 1991. Except for the summary and schedules of input VAT payments prepared by respondent itself, no other evidence was adduced in support of its claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a certification that:

We have examined the information shown below concerning the input tax payments made by the MakatiOffice of Manila Mining Corporation for the period from July 1 to December 31, 1991. Our examinationincluded inspection of the pertinent suppliers' invoices and official receipts and such other auditingprocedures as we considered necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary" and not auditingprocedures which are in accordance with generally accepted auditing principles and standards, and that the

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examination was made on "input tax payments by the Manila Mining Corporation," without specifying that thesaid input tax payments are attributable to the sales of gold to the Central Bank, this Court cannot rely thereonand regard it as sufficient proof of the respondent's input VAT payments for the second semester .37 

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-rated sales in the first quarter of 1992, this Court already found that the petitioner corporation failed to comply with Section 106(b) of the TaxCode of 1977, as amended, imposing the two-year prescriptive period for the filing of the application for refund/credit thereof. This bars the grant of the application for refund/credit, whether administratively or judicially, by expressmandate of Section 106(e) of the same Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT on its zero-ratedsales in the first quarter of 1992 was actually and timely filed, petitioner corporation still failed to present together withits application the required supporting documents, whether before the BIR or the CTA. As the Court of Appeals ruled – 

In actions involving claims for refund of taxes assessed and collected, the burden of proof rests on the taxpayer.As clearly discussed in the CTA's decision, petitioner failed to substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue Regulations No. 2-88in determining compliance with the documentary requirements for a successful refund or issuance of taxcredit. Unmentioned is the applicable and specific amendment later introduced by Revenue RegulationsNo. 3-88 dated April 7, 1988 (issued barely after two months from the promulgation of RevenueRegulations No. 2-88 on February 15, 1988), which amended Section 16 of Revenue Regulations No. 5-

87 on refunds or tax credits of input tax. x x x.

x x x x

"A thorough examination of the evidence submitted by the petitioner before this court reveals outright the failure to satisfy documentary requirements laid down under the above-cited regulations.Specifically, petitioner was not able to present the following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment locally purchased; and

"f) photocopy of import entry document and confirmation receipt on imported capitalequipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the actual amount orquantity of goods sold and their selling price. Without them, this Court cannot verify the correctness of petitioner's claim inasmuch as the regulations require that the input taxes being sought for refund

should be limited to the portion that is directly and entirely attributable to the particular zero-ratedtransaction. In this instance, the best evidence of such transaction are the said sales invoices or receipts.

"Also, even if sales invoices are produced, there is the further need to submit evidence that such goodswere actually received by the buyer, in this case, by CBP, Philp[h]os and PASAR.

x x x x

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"Lastly, this Court cannot determine whether there were actual local and imported purchase of capitalgoods as well as domestic purchase of non-capital goods without the required purchase invoice orreceipt, as the case may be, and confirmation receipts.

"There is, thus, the imperative need to submit before this Court the original or attested photocopies of petitioner's invoices or receipts, confirmation receipts and import entry documents in order that a fullascertainment of the claimed amount may be achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing documents

abovementioned. Cases filed before this Court are litigated de novo. This means that party litigantsshould endeavor to prove at the first instance every minute aspect of their cases strictly in accordancewith the Rules of Court, most especially on documentary evidence." (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, andshould be construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer whoclaims for exemption must justify his claim by the clearest grant of organic or statute law and should not bepermitted to stand on vague implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. TobaccoCorp. v. Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc.v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co., Inc. v. Commissioner of Customs, 44 SCRA122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-destructive", as it finds

comfort in the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the Company. Wemake no presentation regarding the sufficiency of these procedures for such purpose. We did not compare the total of the input tax claimed each quarter against the pertinent VAT returns and books of accounts. The above procedures do not constitute an audit made in accordance with generally acceptedauditing standards. Accordingly, we do not express an opinion on the company's claim for input VATrefund or credit. Had we performed additional procedures, or had we made an audit in accordance withgenerally accepted auditing standards, other matters might have come to our attention that we wouldhave accordingly reported on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent auditor. Indeed, SGV

expressed that it "did not compare the total of the input tax claimed each quarter against the VAT returns andbooks of accounts."38 

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on its zero-rated sales inthe second, third, and fourth quarters of 1990, the appellate court likewise found that petitioner corporation failed tosufficiently establish its claims. Already disregarding the declarations made by the Court of Appeals on its erroneousapplication of Revenue Regulations No. 2-88, quoted hereunder is the rest of the findings of the appellate court afterevaluating the evidence submitted in accordance with the requirements under Revenue Regulations No. 3-88 – 

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to Sec. 245 of theNational Internal Revenue Code, which recognized his power to "promulgate all needful rules and regulations forthe effective enforcement of the provisions of this Code." Thus, it is incumbent upon a taxpayer intending to file aclaim for refund of input VATs or the issuance of a tax credit certificate with the BIR x x x to prove sales to such

buyers as required by Revenue Regulations No. 3-98. Logically, the same evidence should be presented insupport of an action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing sales of gold,copper concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS], respectively, and the dates and amountsof the same, nor any evidence of actual receipt by the said buyers of the mineral products. It merely presentedreceipts of purchases from suppliers on which input VATs were allegedly paid. Thus, the Court of Tax Appealscorrectly denied the claims for refund of input VATs or the issuance of tax credit certificates of petitioner[corporation]. Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to filememoranda discussing, among others, the submission of proof for "its [petitioner's] sales of gold, copper

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concentrates, and pyrite to buyers." Nevertheless, the parties, including the petitioner, failed to address thisissue, thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this point .39 

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is the general rulethat the jurisdiction of this Court in cases brought before it from the Court of Appeals, by way of a Petition for Review onCertiorari under Rule 45 of the Revised Rules of Court, is limited to reviewing or revising errors of law; findings of fact of the latter are conclusive.40 This Court is not a trier of facts. It is not its function to review, examine and evaluate or weighthe probative value of the evidence presented.41 

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a questionof fact when the doubt or difference arises as to the truth or falsehood of alleged facts. "42 

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales in the amount it had declared in its returns; whether all the input VAT subject of its applications for refund/credit can be attributed to itszero-rated sales; and whether it had not previously applied the input VAT against its output VAT liabilities, are allquestions of fact which could only be answered after reviewing, examining, evaluating, or weighing the probative value ofthe evidence it presented, and which this Court does not have the jurisdiction to do in the present Petitions for Review onCertiorari under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact under particularcircumstances,43 none of these exist in the instant cases. The Court of Appeals, in both cases, found a dearth of evidence to

support the claims for refund/credit of the input VAT of petitioner corporation, and the records bear out this finding.Petitioner corporation itself cannot dispute its non-compliance with the requirements set forth in Revenue RegulationsNo. 3-88 and CTA Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the substantiationrequirements under Revenue Regulations No. 2-88 should not have applied to it, while being conspicuously silent on theevidentiary requirements mandated by other relevant regulations.

Re-opening of cases/holding of new trial before the CTA 

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening of its cases orholding of new trial before the CTA for the reception of additional evidence, may be granted. Petitioner corporation praysthat the Court exercise its discretion on the matter in its favor, consistent with the policy that rules of procedure beliberally construed in pursuance of substantive justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered in accordance withSection 1, Rule 37 of the revised Rules of Court, which provides – 

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within the period for takingan appeal, the aggrieved party may move the trial court to set aside the judgment or final order and grant a newtrial for one or more of the following causes materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial, and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the grounds that thedamages awarded are excessive, that the evidence is insufficient to justify the decision or final order, or that thedecision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to adduce the necessary evidence should beconstrued as excusable negligence or mistake which should constitute basis for such re-opening of trial as for a new trial,

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as counsel was of the belief that such evidence was rendered unnecessary by the presentation of unrebutted evidenceindicating that respondent [Commissioner] has acknowledged the sale of [ sic] PASAR and [PHILPHOS] to be zero-rated."44 The CTA denied such motion on the ground that it was not accompanied by an affidavit of merit as required by Section2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed the denial of the motion, but apart from thistechnical defect, it also found that there was no justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases and/or holding of new trial based on the technicality that said motion was unaccompanied by an affidavit of merit, this Court rules in favorof the petitioner corporation. The facts which should otherwise be set forth in a separate affidavit of merit may, with

equal effect, be alleged and incorporated in the motion itself; and this will be deemed a substantial compliance with theformal requirements of the law, provided, of course, that the movant, or other individual with personal knowledge of thefacts, take oath as to the truth thereof, in effect converting the entire motion for new trial into an affidavit .45 The motionof petitioner corporation was prepared and verified by its counsel, and since the ground for the motion was premised onsaid counsel's excusable negligence or mistake, then the obvious conclusion is that he had personal knowledge of thefacts relating to such negligence or mistake. Hence, it can be said that the motion of petitioner corporation for the re-opening of its cases and/or holding of new trial was in substantial compliance with the formal requirements of therevised Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the re-opening of itscases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA in another case, CTA

Case No. 5296, involving the claim of petitioner corporation for refund/credit of input VAT for the third quarter of 1993.The said Resolution allowed the re-opening of CTA Case No. 5296, earlier dismissed by the CTA, to give the petitionercorporation the opportunity to present the missing export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court ,47 may likewise beextended to the CTA. When the denial of the motion rests upon the discretion of a lower court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof .48 

That the CTA granted the motion for re-opening of one case for the presentation of additional evidence and, yet, deny asimilar motion in another case filed by the same party, does not necessarily demonstrate grave abuse of discretion orarbitrariness on the part of the CTA. Although the cases involve identical parties, the causes of action and the evidence tosupport the same can very well be different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No.5296, petitioner corporation was claiming refund/credit of the input VAT on its zero-rated sales, consisting of actualexport sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into account the presentation by petitionercorporation of inward remittances of its export sales for the quarter involved, its Supply Contract with Mitsubishi MetalCorporation, its 1993 Annual Report showing its sales to the said foreign corporation, and its application for refund. Incontrast, the present Petitions involve the claims of petitioner corporation for refund/credit of the input VAT on itspurchases of capital goods and on its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR andPHILPHOS for the second, third, and fourth quarters of 1990 and first quarter of 1992. There being a difference as to thebases of the claims of petitioner corporation for refund/credit of input VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting variances as to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by petitioner corporation,emphasizes that the decision of the CTA to allow petitioner corporation to present evidence "is applicable  pro hac vice orin this occasion only as it is the finding of [the CTA] that petitioner [corporation] has established a few of the

aforementioned material points regarding the possible existence of the export documents together with the prior andsucceeding returns for the quarters involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by its ruling in CTA Case No. 5296, when these cases do not involve the exact same circumstances that compelled it to grant the motion of petitioner corporation for re-opening of CTA Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the required documents was due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute excusable negligence or mistake whichwould warrant the re-opening of the cases and/or holding of new trial.

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Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and generally imputable to theparty because if it is imputable to the counsel, it is binding on the client. To follow a contrary rule and allow a party todisown his counsel's conduct would render proceedings indefinite, tentative, and subject to re-opening by the meresubterfuge of replacing the counsel. What the aggrieved litigant should do is seek administrative sanctions against theerring counsel and not ask for the reversal of the court's ruling.49 

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action of his counsel in theconduct of his case and he cannot therefore complain that the result of the litigation might have been otherwise had hiscounsel proceeded differently. It has been held time and again that blunders and mistakes made in the conduct of the

proceedings in the trial court as a result of the ignorance, inexperience or incompetence of counsel do not qualify as aground for new trial. If such were to be admitted as valid reasons for re-opening cases, there would never be an end tolitigation so long as a new counsel could be employed to allege and show that the prior counsel had not been sufficientlydiligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could not have guardedagainst .51 Revenue Regulations No. 3-88, which was issued on 15 February 1988, had been in effect more than two yearsprior to the filing by petitioner corporation of its earliest application for refund/credit of input VAT involved herein on 21August 1990. CTA Circular No. 1-95 was issued only on 25 January 1995, after petitioner corporation had filed itsPetitions before the CTA, but still during the pendency of the cases of petitioner corporation before the tax court. Thecounsel of petitioner corporation does not allege ignorance of the foregoing administrative regulation and tax court circular, only that he no longer deemed it necessary to present the documents required therein because of thepresentation of alleged unrebutted evidence of the zero-rated sales of petitioner corporation. It was a judgment call made

by the counsel as to which evidence to present in support of his client's cause, later proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the requireddocumentary evidence was due to the excusable mistake of its counsel, a ground under Section 1, Rule 37 of the revisedRules of Court for the grant of a new trial. "Mistake," as it is referred to in the said rule, must be a mistake of fact, not of law, which relates to the case.52 In the present case, the supposed mistake made by the counsel of petitioner corporationis one of law, for it was grounded on his interpretation and evaluation that Revenue Regulations No. 3-88 and CTACircular No. 1-95, as amended, did not apply to his client's cases and that there was no need to comply with thedocumentary requirements set forth therein. And although the counsel of petitioner corporation advocated an erroneouslegal position, the effects thereof, which did not amount to a deprivation of his client's right to be heard, must bindpetitioner corporation. The question is not whether petitioner corporation succeeded in establishing its interests, but whether it had the opportunity to present its side.53 

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the ground of mistake mustshow that ordinary prudence could not have guarded against it. A new trial is not a refuge for the obstinate .54 Ordinaryprudence in these cases would have dictated the presentation of all available evidence that would have supported theclaims for refund/credit of input VAT of petitioner corporation. Without sound legal basis, counsel for petitionercorporation concluded that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not applyto its client's claims. The obstinacy of petitioner corporation and its counsel is demonstrated in their failure, nay, refusal,to comply with the appropriate administrative regulations and tax court circular in pursuing the claims for refund/credit,now subject of G.R. Nos. 141104 and 148763, even though these were separately instituted in a span of more than twoyears. It is also evident in the failure of petitioner corporation to address the issue and to present additional evidencedespite being given the opportunity to do so by the Court of Appeals. As pointed out by the appellate court, in its Decision,dated 15 September 2000, in CA-G.R. SP No. 46718 – 

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file memorandadiscussing, among others, the submission of proof for "its [petitioner's] sales of gold, copper concentrates, andpyrite to buyers." Nevertheless, the parties, including the petitioner, failed to address this issue, therebynecessitating the affirmance of the ruling of the Court of Tax Appeals on this point .55 

 Summary  

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that salesto EPZA-registered enterprises operating within economic processing zones were effectively zero-rated and were not 

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covered by Revenue Regulations No. 2-88, it still denies the claims of petitioner corporation for refund of its input VAT onits purchases of capital goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 andthe first quarter of 1992, for not being established and substantiated by appropriate and sufficient evidence. Petitionercorporation is also not entitled to the re-opening of its cases and/or holding of new trial since the non-presentation of therequired documentary evidence before the BIR and the CTA by its counsel does not constitute excusable negligence ormistake as contemplated in Section 1, Rule 37 of the revised Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the Decisions, dated 6 July1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby

 AFFIRMED. Costs against petitioner.

Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.

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THIRD DIVISION

G.R. Nos. 156637/162004 December 14, 2005  

PHILAM ASSET MANAGEMENT, INC., Petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

PANGANIBAN, J.: 

Under Section 76 of the National Internal Revenue Code, a taxable corporation with excess quarterly income taxpayments may apply for either a tax refund or a tax credit , but not both. The choice of one precludes the other. Failure toindicate a choice, however, will not bar a valid request for a refund, should this option be chosen by the taxpayer later on.

The Case

Before us are two consolidated Petitions for Review1 under Rule 45 of the Rules of Court, seeking to review and reversethe December 19, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 69197 and its January 30, 2004 Decision 3 in CA-GR SP No. 70882.

The dispositive portion of the assailed December 19, 2002 Decision, on the one hand, reads as follows:

"WHEREFORE, the petition is hereby DENIED. The assailed decision and resolution of the Court of Tax Appeals are AFFIRMED."4 

That of the assailed January 30, 2004 Decision, on the other hand, was similarly worded, except that it referred to the May2, 2002 Decision of the Court of Tax Appeals (CTA).5 

The Facts

In GR No. 156637, the CA adopted the CTA’s narration of the facts as follows:  

"Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation duly organized and existing under thelaws of the Republic of the Philippines. It acts as the investment manager of both Philippine Fund, Inc. (PFI) and PhilamBond Fund, Inc. (PBFI), which are open-end investment companies[,] in the sale of their shares of stocks and in theinvestment of the proceeds of these sales into a diversified portfolio of debt and equity securities. Being an investment manager, [p]etitioner provides management and technical services to PFI and PBFI. Petitioner is, likewise, PFI’s andPBFI’s principal distributor which takes charge of the sales of said companies’ shares to prospective investors. Pursuant to the separate [m]anagement and [d]istribution agreements between the [p]etitioner and PFI and PBFI, both PFI andPBFI [agree] to pay the [p]etitioner, by way of compensation for the latter’s services and facilities, a monthlymanagement fee from which PFI and PBFI withhold the amount equivalent to [a] five percent (5%) creditable tax[,]pursuant to the Expanded Withholding Tax Regulations.

"On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome [t]ax [r]eturn for the taxable year 1997 representing

a net loss of P2,689,242.00. Consequently, it failed to utilize the creditable tax withheld in the amount of Five HundredTwenty-Two Thousand Ninety-Two Pesos (P522,092.00) representing [the] tax withheld by [p]etitioner’s withholdingagents, PFI and PBFI[,] on professional fees.

"The creditable tax withheld by PFI and PBFI in the amount of P522,092.00 is broken down as follows:

PFI P496,702.05PBFI 25,389.66_Total P522,091.71

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"On September 11, 1998, [p]etitioner filed an administrative claim for refund with the [Bureau of Internal Revenue (BIR)]-- Appellate Division in the amount of P522,092.00 representing unutilized excess tax credits for calendar year 1997.Thereafter, on July 28, 1999, a written request was filed with the same division for the early resolution of [p]etitioner’sclaim for refund.

"Respondent did not act on [p]etitioner’s claim for refund[;] hence, a Petition for Review was filed with this Cour t 6 onNovember 29, 1999 to toll the running of the two-year prescriptive period."7 

On October 9, 2001, the CTA rendered a Decision denying petitioner’s Petition for Review. Its Motion for Reconsideration

was likewise denied in a Resolution dated January 29, 2002.

In GR No. 162004, the antecedents are narrated by the CA in this wise:

"On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR] for the taxable year 1998 declaring anet loss of P1,504,951.00. Thus, there was no tax due against [petitioner] for the taxable year 1998. Likewise, [petitioner]had an unapplied creditable withholding tax in the amount of P459,756.07, which amount had been previously withheldin that year by petitioner’s withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam Strategic Growth Fund, Inc.(PSGFI).

"In the next succeeding year, [petitioner] had a tax due in the amount of P80,042.00, and a creditable withholding tax inthe amount of P915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount of P459,756.07, whichrepresents its prior excess credit for taxable year 1998.

"Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District Office No. 50, Revenue Region No. 8, awritten administrative claim for refund with respect to the unapplied creditable withholding tax of P459,756.07.According to [petitioner,] the amount of P80,042.00, representing the tax due for the taxable year 1999 has been creditedfrom its P915,995.00 creditable withholding tax for taxable year 1999, thus leaving its 1998 creditable withholding tax inthe amount of P459,756.07 still unapplied.

"The claim for refund yielded no action on the part of the BIR. [Petitioner] then filed a Petition for Review before the CTAon December 26, 2000, asserting that it is entitled [to] the refund [of P459,756.07,] since said amount has not beenapplied against its tax liabilities in the taxable year 1998.

"On May 2, 2002, the CTA rendered [a] x x x decision denying [petitioner’s] Petition for Review. x x x."8 

Ruling of the Court of Appeals

The CA denied the claim of petitioner for a refund of the latter’s excess creditable taxes withheld for the years 1997 and1998, despite compliance with the basic requirements of Revenue Regulations (RR) No. 12-94. The appellate court pointed out that, in the respective Income Tax Returns (ITRs) for both years, petitioner did not indicate its option to havethe amounts either refunded or carried over and applied to the succeeding year. It was held that to request for either arefund or a credit of income tax paid, a corporation must signify its intention by marking the corresponding option box onits annual corporate adjustment return.

The CA further held in GR No. 156637 that the failure to present the 1998 ITR was fatal to the claim for a refund, becausethere was no way to verify if the tax credit for 1997 could not have been applied against the 1998 tax liabilities of 

petitioner.

In GR No. 162004, however, the subsequent acts of petitioner demonstrated its option to carry over its tax credit for1998, even if it again failed to tick the appropriate box for that option in its 1998 ITR. Under RR 12-94, its failure toindicate that option resulted in the automatic carry-over of any excess tax credit for the prior year. The appellate court said that the government would not be unjustly enriched by denying a refund, because there would be no forfeiture of theamount in its favor. The amount claimed as a refund would remain in the account of the taxpayer until utilized insucceeding taxable years.

Hence, these Petitions.9 

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The Issues

Petitioner raises two issues in GR No. 156637 for the Court’s consideration:  

"A.

"Whether or not the failure of the [p]etitioner to indicate in its [a]nnual [i]ncome [t]ax [r]eturn the option to refund itscreditable withholding tax is fatal to its claim for refund.

"B.

"Whether or not the presentation in evidence of the [p]etitioner’s [a]nnual [ i]ncome [t]ax [r]eturn for the succeedingcalendar year is a legal requisite in a claim for refund of unapplied creditable withholding tax."10 

In GR No. 162004, petitioner raises one question only:

"Whether or not the petitioner is entitled to the refund of its unutilized creditable withholding tax in the taxable year1998 in the amount of P459,756.07."11 

In both cases, a simple issue needs to be resolved: whether petitioner is entitled to a refund of its creditable taxeswithheld for taxable years 1997 and 1998.

The Court’s Ruling 

The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.

Main Issue: 

Entitlement to Refund  

The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential Decree (PD) No.1158, otherwise known as the "National Internal Revenue Code of 1977."12 On August 1, 1980, this provision wasrestated as Section 8613 in PD 1705.14 

On November 5, 1985, all prior amendments and those introduced by PD 199415 were codified16 into the NationalInternal Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered17 as Section 79.18 

On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all "net income" phrases appearing in Title II of theNIRC of 1977 to "taxable income." Section 79 of the NIRC of 1985,19 however, was not amended.

On July 25, 1987, EO 27320 renumbered21 Section 86 of the NIRC22 as Section 76,23 which was also rearranged24 to fallunder Chapter 10 of Title II of the NIRC. Section 79, which had earlier been renumbered by PD 1994, remainedunchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 under PD 1994;25

then, as Section 76 under EO 273.26

 Finally, after being renumbered and reduced to the chaff of a grain, Section 69 wasrepealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:

"Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income27 for the preceding calendar or fiscal year. If the sum of the quarterly tax paymentsmade during the said taxable year is not equal to the total tax due on the entire taxable net income 28 of that year thecorporation shall either:

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"(a) Pay the excess tax still due; or

"(b) Be refunded the excess amount paid, as the case may be.

"In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundableamount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities forthe taxable quarters of the succeeding taxable year."

GR No. 156637  

This section applies to the first case before the Court. Differently numbered in 1977 but similarly worded 20 years later(1997), Section 76 offers two options to a taxable corporation whose total quarterly income tax payments in a giventaxable year exceeds itstotal income tax due. These options are (1) filing for a tax refund or (2) availing of a tax credit .

The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may berefunded, provided that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against theestimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature.29 The choice of one precludes the other. Indeed, inPhilippine Bank of Communications v. Commissioner of Internal Revenue,30 the Court ruled that a corporation must signifyits intention -- whether to request a tax refund or claim a tax credit -- by marking the corresponding option box providedin the FAR.31 While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only forthe purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signifyone’s intention in the FAR does not mean outright barring of a valid request for a refund, should on e still choose thisoption later on. A tax credit should be construed merely as an alternative remedy to a tax refund under Section 76,subject to prior verification and approval by respondent .32 

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration ,33 particularly theself-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus

demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preferenceand hence shows simple negligence or plain oversight.

In the present case, respondent denied the claim of petitioner for a refund of excess taxes withheld in 1997, because thelatter(1) had not indicated in its ITR for that year whether it was opting for a credit or a refund; and (2) had not submitted asevidence its 1998 ITR, which could have been the basis for determining whether its claimed 1997 tax credit had not beenapplied against its 1998 tax liabilities.

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis inlaw and jurisprudence.

First , Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the  preceding -- notthe succeeding -- taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year may becredited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year. However,nowhere is there even a tinge of a hint in any of the provisions of the Tax Code that the FAR of the taxable year followingthe period to which the tax credits are originally being applied should also be presented to the BIR.

Second , Section 534 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for the refund of incometaxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the ITR that the income payment received is being declared part of the taxpayer’s gross income; and (2) when the fact of withholdingis established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paidand the income tax withheld from that amount .35 

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Undisputedly, the records do not show that the income payments received by petitioner have not been declared as part ofits gross income, or that the fact of withholding has not been established. According to the CTA, "[p]etitioner substantiallycomplied with the x x x requirements" of RR 12-94 "[t]hat the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheldtherefrom; and x x x [t]hat the income upon which the taxes were withheld were included in the return of the recipient." 36

The established procedure is that a taxpayer that wants a cash refund shall make a written request for it, and the ITRshowing the excess expanded withholding tax credits shall then be examined by the BIR. For the grant of refund, RRs 12-94 and 6-85 state that all

pertinent accounting records should be submitted by the taxpayer. These records, however, actually refer only to (1) thewithholding tax statements; (2) the ITR of the present quarter to which the excess withholding tax credits are beingapplied; and (3) the ITR of the quarter for the previous taxable year in which the excess credits arose .37 To stress, theseregulations implementing the law do not require the proffer of the FAR for the taxable year following the period to whichthe tax credits are being applied.

Third , there is no automatic grant of a tax refund . As a matter of procedure, the BIR should be given the opportunity "toinvestigate and confirm the veracity"38 of a taxpayer’s claim, before it grants the refund. Exercising the option for a taxrefund or a tax credit does not ipso facto confer upon a taxpayer the right to an immediate availment of the choice made.Neither does it impose a duty on the government to allow tax collection to be at the sole control of a taxpayer .39 

Fourth, the BIR ought to have on file its own copies of petitioner’s FAR for the succeeding year, on the basis of which it could rebut the assertion that there was a subsequent credit of the excess income tax payments for the previous year. Its

failure to present this vital document to support its contention against the grant of a tax refund to petitioner is certainlyfatal.

Fifth, the CTA should have taken judicial notice40 of the fact of filing and the pendency of petitioner’s subsequent claim fora refund of excess creditable taxes withheld for 1998. The existence of the claim ought to be known by reason of itsjudicial functions. Furthermore, it is decisive to and will easily resolve the material issue in this case. If only judicial noticewere taken earlier, the fact that there was no carry-over of the excess creditable taxes withheld for 1997 would havealready been crystal clear.

Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two years after payment of thetaxes erroneously received by the BIR.41 Despite the failure of petitionerto make the appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of itschoice to request a tax refund , instead of a tax credit . To assert that any future claim for a tax refund will be instantlyhindered by a failure to signify one’s intention in the FAR is to render nugatory the clear provision that allows for a two -year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA,42 this Court even ordered the refund of a taxpayer’s excess creditable taxes,despite the express declaration in the FAR to apply the excess to the succeeding year.43 When circumstances show that achoice of tax credit has been made, it should be respected. But when indubitable circumstances clearly show that anotherchoice -- a tax refund -- is in order, it should be granted. "Technicalities and legalisms, however exalted, should not bemisused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abidingcitizens."44 

In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it perform any act indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an administrative claim for the refund

of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply the excess creditable taxes.Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess tax credits in the amount of P522,092.

GR No. 162004 

As to the second case, Section 76 also applies. Amended by Republic Act (RA) No. 8424, otherwise known as the "TaxReform Act of 1997," it now states:

"SEC. 76. Final Adjustment Return. -- Every corporation liable to tax under Section 27 shall file a final adjustment returncovering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made

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during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporationshall either:

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

"In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, theexcess amount shown on its final adjustment return may be carried over and credited against the estimated quarterlyincome tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply theexcess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has beenmade, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuanceof a tax credit certificate shall be allowed therefor."

The carry-over option under Section 76 is permissive. A corporation that is entitled to a tax refund or a tax credit forexcess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a given taxable yearagainst the estimated income tax liabilities of the succeeding quarters. Once chosen, the carry-over option shall beconsidered irrevocable45 for that taxable period, and no application for a tax refund or issuance of a tax credit certificate shall then be allowed.

According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR.46 As this option was not chosen, it seems that there is nothing that can be considered irrevocable. In other words, petitioner argues that it is stillentitled to a refund of its 1998 excess income tax payments.

This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively chosen the carry-overoption.

First , the fact that it filled out the portion "Prior Year’s Excess Credits" in its 1999 FAR means that it categorically availeditself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states "Less: TaxCredits/Payments." The contention that it merely filled out that portion because it was a requirement -- and that to havedone otherwise would have been tantamount to falsifying the FAR -- is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found theitemization and summary of additions to and deductions from income taxes due. These entries are not without rhyme orreason. They are required, because they facilitate the tax administration process.

Failure to indicate the amount of "prior year’s excess credits" does not mean falsification by a taxpayer of its current year’s FAR. On the contrary, if an application for a tax refund has been -- or will be -- filed, then that portion of the BIRform should necessarily be blank, even if the FAR of the previous taxable year already shows an overpayment in taxes.

Second , the resulting redundancy in the claim of petitioner for a refund of its 1998 excess tax credits on November 14,200047 cannot be countenanced. It cannot be allowed to avail itself of a tax refund and a tax credit at the same time for thesame excess income taxes paid. Besides, disallowing it from getting a tax refund of those excess tax credits will not enervate the two-year prescriptive period under the Tax Code. That period will apply if the carry-over option has not 

been chosen.

Besides, "tax refunds x x x are construed strictly against the taxpayer."48 Petitioner has failed to meet the burden of proof required in order to establish the factual basis of its claim for a tax refund .

Third , the "first-in first-out" (FIFO) principle enunciated by the CTA49 does not apply.50 Money is fungible property.51 Theamount to be applied against the P80,042 income tax due in the 1998 FAR52 of petitioner may be taken from its excesscredits in 1997 or from those withheld in 1998 or from both. Whichever of these the amount will be taken from will not make a difference.

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Even if the FIFO principle were to be applied, the tax credits would have to be in consonance with the usual and normalcourse of events. In fact, the FAR is cumulative in nature.53 Following a natural sequence, the prior year’s excess taxcredits will have to be reduced first to answer for any current tax liabilities before the current year’s withheld amountscan be applied. Otherwise, there will be no sense in requiring a taxpayer to fill out the line items in the FAR to segregateits sources of tax credits.

Whether the FIFO principle is applied or not, Section 76 remains clear and unequivocal. Once the carry-over option istaken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditablewithholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07, which corresponds to its 1998 excess tax

credit. Nonetheless, the amount will not be forfeited in the government’s favor, because it may be claimed by petitioner astax credits in the succeeding taxable years.

WHEREFORE, the Petition in GR No. 156637 is GRANTED and the assailed December 19, 2002 Decision REVERSED and SET ASIDE . No pronouncement as to costs.

The Petition in GR No. 162004 is, however, DENIED and the assailed January 30, 2004 Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

 ARTEMIO V. PANGANIBAN 

Associate Justice

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SECOND DIVISION 

G.R. No. 154068 August 3, 2007 

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.

D E C I S I O N 

QUISUMBING, J .: 

Assailed in this petition for review are the Decision1 and Resolution2 dated February 13, 2002 and May 29, 2002,respectively, of the Court of Appeals in CA-G.R. SP No. 55572 which had reversed the Resolutio n3 dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 and ordered the latter to resolve respondent’s petition for review.  

The facts are as follows:

Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to December 31,1996, respondent was assigned in a foreign country. During that period, Intel withheld the taxes due on respondent’scompensation income and remitted to the Bureau of Internal Revenue (BIR) the amount of P308,084.56.

On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual Income Tax Return for the year1996. Later, on June 17, 1997, respondent, through her representative, filed an amended return and a Non-Resident Citizen Income Tax Return, and paid the BIR P17,693.37 plus interests in the amount of P14,455.76. On October 8, 1997,she filed another amended return indicating an overpayment of P358,274.63.

Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment of P340,918.92 ,4 respondent filed on April 15, 1999 a petition for review docketed as C.T.A. Case No. 5828 with the Court of Tax Appeals(CTA). The Commissioner of Internal Revenue (CIR) moved to dismiss the petition for failure of respondent to file themandatory written claim for refund before the CIR.

In its Resolution dated August 4, 1999, the CTA dismissed respondent’s petition. For one, the CTA ruled that respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing of a petition for review before theCTA.5 Second, the CTA noted that respondent’s omission, inadvertently or otherwise, to alle ge in her petition the date of filing the final adjustment return, deprived the court of its jurisdiction over the subject matter of the case .6 The decretalport ion of the CTA’s resolution states: 

WHEREFORE, in view of all the foregoing, Respondent’s Motion to Dismiss is GRANTED. Accordingly[,] thePetition for Review is hereby DISMISSED.

SO ORDERED.7 

Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondent’s petition for review.Applying Section 204(c)8 of the 1997 National Internal Revenue Code (NIRC), the Court of Appeals ruled that respondent’s filing of an amended return indicating an overpayment was suffici ent compliance with the requirement of a

written claim for refund.9 The decretal portion of the Court of Appeals’ decision reads:  

WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course and REVERSES theappealed Resolutions and DIRECTS the Court of Tax Appeal[s] to resolve the petition for review on the merits.

SO ORDERED.10 

Petitioner sought reconsideration, but it was denied. Hence, the instant petition raising the following questions of law:

I.

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WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.

II.

WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE [COGNIZANCE] OF RESPONDENT’S PETITION FORREVIEW.11 

While the main concern in this controversy is the CTA’s jurisdiction, we must first r esolve two issues. First, does theamended return filed by respondent indicating an overpayment constitute the written claim for refund required by law,

thereby vesting the CTA with jurisdiction over this case? Second, can the 1997 NIRC be applied retroactively?

Petitioner avers that an amended return showing an overpayment does not constitute the written claim for refundrequired under Section 23012 of the 1993 NIRC13 (old Tax Code). He claims that an actual written claim for refund isnecessary before a suit for its recovery may proceed in any court.

On the other hand, respondent contends that the filing of an amended return indicating an overpayment of P358,274.63constitutes a written claim for refund pursuant to the clear proviso stated in the last sentence of Section 204(c) of the1997 NIRC (new Tax Code), to wit:

x x x x

…Provided, however , That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

x x x x

Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases, conformably withour ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals.14 We are, however, unable to agree with respondent’ssubmission on this score.

The applicable law on refund of taxes pertaining to the 1996 compensation income is Section 230 of the old Tax Code,which was the law then in effect, and not Section 204(c) of the new Tax Code, which was effective starting only onJanuary 1, 1998.

Noteworthy, the requirements under Section 230 for refund claims are as follows:

1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner;

2. The claim for refund must be a categorical demand for reimbursement;

3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in courtwithin two (2) years from date of payment of the tax or penalty regardless of any supervening cause .15 (Emphasis ours.)

In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR anopportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have beenquestioned, and the notice should then be borne in mind in estimating the revenue available for expenditure.16 

Thus, on the first issue, we rule against respondent’s contention. Entrenched in our jurisprudence is the principle that taxrefunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally infavor of the government. As tax refunds involve a return of revenue from the government, the claimant must showindubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vagueimplication or inference17 nor can it be extended beyond the ordinary and reasonable intendment of the languageactually used by the legislature in granting the refund.18 To repeat, strict compliance with the conditions imposed for thereturn of revenue collected is a doctrine consistently applied in this jurisdiction.19 

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TAXATION I - BATCH B 40

Under the circumstances of this case, we cannot agree that the amended return filed by respondent constitutes thewritten claim for refund required by the old Tax Code, the law prevailing at that time. Neither can we apply the liberalinterpretation of the law based on our pronouncement in the case of  BPI-Family Savings Bank, Inc. v. Court of Appeals, asthe taxpayer therein filed a written claim for refund aside from presenting other evidence to prove its claim, unlike thiscase before us.

On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively as the instant case involvedrefund of taxes withheld on a 1996 income. Respondent, however, points out that when the petition was filed with theCTA on April 15, 1999, the 1997 NIRC was already in effect, hence, Section 204(c) should apply, despite the fact that the

refund being sought pertains to a 1996 income tax. Note that the issue on the retroactivity of Section 204(c) of the 1997NIRC arose because the last paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thoroughconsideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have tostress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise .20 

Moreover, it should be emphasized that a party seeking an administrative remedy must not merely initiate the prescribedadministrative procedure to obtain relief, but also pursue it to its appropriate conclusion before seeking judicialintervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to court action.21 This the respondent did not follow through. Additionally, it could notescape notice that at the time respondent filed her amended return, the 1997 NIRC was not yet in effect. Hence,respondent had no reason at that time to think that the filing of an amended return would constitute the written claim forrefund required by applicable law.

Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return was omitted, inadvertently orotherwise, by respondent in her petition for review. This omission was fatal to respondent’s claim, for it deprived the CTAof its jurisdiction over the subject matter of the case.

Finally, we cannot agree with the Court of Appeals’ finding that the nature of the instant case calls for the application of remedial laws. Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally construed .22 Considering that taxes are the lifeblood of the government and in Holmes’s memorable metaphor, the price we pay for civilization, tax lawsmust be faithfully and strictly implemented.

WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated February 13, 2002 and May 29,2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED and SET ASIDE. The Resolution datedAugust 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.

Carpio, Carpio-Morales, Tinga, Velasco, Jr., JJ., concur.

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FIRST DIVISION 

COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 179045-46 

Petitioner, Present:

CORONA, C. J., Chairperson, 

VELASCO, JR.,

- versus - LEONARDO-DE CASTRO,

DEL CASTILLO, and  PEREZ, JJ. 

SMART COMMUNICATION, INC.,* Promulgated:

Respondent. August 25, 2010

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

D E C I S I O N 

DEL CASTILLO, J .: 

The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibilityto return the same to the principal taxpayer.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision1 dated June 28,2007 and the Resolution2 dated July 31, 2007 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents 

Respondent Smart Communications, Inc. is a corporation organized and existing under Philippine law. It is an enterpriseduly registered with the Board of Investments.

On May 25, 2001, respondent entered into three Agreements for Programming and Consultancy Service s3 with Prism

Transactive (M) Sdn. Bhd. (Prism), a non-resident corporation duly organized and existing under the laws of Malaysia.Under the agreements, Prism was to provide programming and consultancy services for the installation of the ServiceDownload Manager (SDM) and the Channel Manager (CM), and for the installation and implementation of Smart Moneyand Mobile Banking Service SIM Applications (SIM Applications) and Private Text Platform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45, broken down as follows:SDM Agreement US$236,000.00CM Agreement 296,000.00SIM Application Agreement 15,822.45Total US$547,822.454 

Thinking that these payments constitute royalties, respondent withheld the amount of US$136,955.61 or P7,008,840.43 ,5

representing the 25% royalty tax under the RP-Malaysia Tax Treaty.6 

On September 25, 2001, respondent filed its Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No.1601-F)7 for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund, respondent filed with the Bureau of InternalRevenue (BIR), through the International Tax Affairs Division (ITAD), an administrative claim for refund8 of the amount of P7,008,840.43.

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Proceedings before the CTA Second Division 

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent filed a Petition for Review9 with the CTA, docketed as CTA Case No. 6782 which was raffled to its Second Division.

In its Petition for Review, respondent claimed that it is entitled to a refund because the payments made to Prism are not royalties10 but "business profits,"11 pursuant to the definition of royalties under the RP-Malaysia Tax Treaty,12 and in viewof the pertinent Commentaries of the Organization for Economic Cooperation and Development (OECD) Committee onFiscal Affairs through the Technical Advisory Group on Treaty Characterization of Electronic Commerce Payments .13 

Respondent further averred that since under Article 7 of the RP-Malaysia Tax Treaty, "business profits" are taxable in thePhilippines "only if attributable to a permanent establishment in the Philippines, the payments made to Prism, aMalaysian company with no permanent establishment in the Philippines,"14 should not be taxed.15 

On December 1, 2003, petitioner filed his Answer16 arguing that respondent, as withholding agent, is not a party-in-interest to file the claim for refund,17 and that assuming for the sake of argument that it is the proper party, there is noshowing that the payments made to Prism constitute "business profits."18 

Ruling of the CTA Second Division

In a Decision19 dated February 23, 2006, the Second Division of the CTA upheld respondent’s right, as a withholdingagent, to file the claim for refund citing the cases of  Commissioner of Internal Revenue v. Wander Philippines, Inc. ,20 

Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation21 and Commissioner of 

Internal Revenue v. The Court of Tax Appeals.22 

However, as to the claim for refund, the Second Division found respondent entitled only to a partial refund. Although it agreed with respondent that the payments for the CM and SIM Application Agreements are "business profits, "23 andtherefore, not subject to tax24 under the RP-Malaysia Tax Treaty, the Second Division found the payment for the SDMAgreement a royalty subject to withholding tax.25 Accordingly, respondent was granted refund in the amount of P3,989,456.43, computed as follows:26 

Particulars Amount (in US$)

1. CM 296,000.00

2. SIM Application 15,822.45

Total US$311,822.45

Particulars Amount 

Tax Base US$311,822.45

Multiply by: Withholding Tax Rate 25%

Final Withholding Tax US$ 77,955.61

Multiply by: Prevailing Exchange Rate 51.176

Tax Refund Due P3,989,456.43

The dispositive portion of the Decision of the CTA Second Division reads:

WHEREFORE, premises considered, the instant petition is partially GRANTED. Accordingly, respondent Commissioner of 

Internal Revenue is hereby ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE to petitioner Smart Communications, Inc. in the amount of P3,989,456.43, representing overpaid final withholding taxes for the month of August 2001.

SO ORDERED.27 

Both parties moved for partial reconsideration28 but the CTA Second Division denied the motions in a Resolution 29 datedJuly 18, 2006.

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Ruling of the CTA En Banc  

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions for Review,30 which wereconsolidated per Resolution31 dated February 8, 2007.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial refund granted to respondent. In sustainingrespondent’s right to file the claim for refund, the CTA En Banc said that although respondent "and Prism are unrelatedentities, such circumstance does not affect the status of [respondent] as a party-in-interest [as its legal interest] is basedon its direct and independent liability under the withholding tax system. "32 The CTA En Banc also concurred with the

Second Division’s characterization of the payments made to Prism, specifically that the payments for the CM and S IMApplication Agreements constitute "business profits,"33 while the payment for the SDM Agreement is a royalty.34 

The dispositive portion of the CTA En Banc Decision reads:

WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are herebyAFFIRMED.

SO ORDERED.35 

Only petitioner sought reconsideration36 of the Decision. The CTA En Banc, however, found no cogent reason to reverseits Decision, and thus, denied petitioner’s motion for reconsideration in a Resolution37 dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Issues 

The two issues to be resolved are: (1) whether respondent has the right to file the claim for refund; and (2) if respondent has the right, whether the payments made to Prism constitute "business profits" or royalties.

Petitioner’s Arguments 

Petitioner contends that the cases relied upon by the CTA in upholding respondent’s right to claim the refund areinapplicable since the withholding agents therein are wholly owned subsidiaries of the principal taxpayers, unlike in the

instant case where the withholding agent and the taxpayer are unrelated entities. Petitioner further claims that sincerespondent did not file the claim on behalf of Prism, it has no legal standing to claim the refund. To rule otherwise wouldresult to the unjust enrichment of respondent, who never shelled-out any amount to pay the royalty taxes. Petitioner,thus, posits that the real party-in-interest to file a claim for refund of the erroneously withheld taxes is Prism. He cites asbasis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue ,38 where it was ruled that the properparty to file a refund is the statutory taxpayer.39 Finally, assuming that respondent is the proper party, petitionercounters that it is still not entitled to any refund because the payments made to Prism are taxable as royalties, havingbeen made in consideration for the use of the programs owned by Prism.

Respondent’s Arguments 

Respondent, on the other hand, maintains that it is the proper party to file a claim for refund as it has the statutory andprimary responsibility and liability to withhold and remit the taxes to the BIR. It points out that under the withholding

tax system, the agent-payor becomes a payee by fiction of law because the law makes the agent personally liable for thetax arising from the breach of its duty to withhold. Thus, the fact that respondent is not in any way related to Prism isimmaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under the definition of royalties since theagreements are for programming and consultancy services only, wherein Prism undertakes to perform services for thecreation, development or the bringing into existence of software applications solely for the satisfaction of the peculiarneeds and requirements of respondent.

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Our Ruling 

The petition is bereft of merit.

Withholding agent may file a claim for refund  

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. – The Commissioner may – 

x x x x

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem orchange unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim forcredit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filedshowing an overpayment shall be considered as a written claim for credit or refund.

x x x x

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in any court forthe recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed orcollected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have beenexcessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with theCommissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paidunder 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 thetax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That theCommissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return uponwhich payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the taxpayer. However, in case the taxpayer doesnot file a claim for refund, the withholding agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation ,40 a withholding agent wasconsidered a proper party to file a claim for refund of the withheld taxes of its foreign parent company. Pertinent portionsof the Decision read:

The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax onIncome]." It thus becomes important to note that under Section 53(c)41 of the NIRC, the withholding agent who is"required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against anyclaims and demands which the stockholder might wish to make in questioning the amount of payments effected by thewithholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly andindependently liable for the correct amount of the tax that should be withheld from the dividend remittances. The

withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should theamount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms"liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeedconceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By anyreasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legalinterest, to bring a suit for refund of taxes he believes were illegally collected from him.

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TAXATION I - BATCH B 45

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinarygovernment agent:

"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel thewithholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax aswell as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, thewithholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collectionand/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return and

the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is noordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is dutybound to withhold; whereas the Commissioner and his deputies are not made liable by law."

If, as pointed out in Philippine Guaranty , the withholding agent is also an agent of the beneficial owner of the dividendswith respect to the filing of the necessary income tax return and with respect to actual payment of the tax to thegovernment, such authority may reasonably be held to include the authority to file a claim for refund and to bring anaction for recovery of such claim. This implied authority is especially warranted where, as in the instant case, thewithholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under theeffective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny theimplied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

x x x x

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" withinthe meaning of Section 309,42 NIRC, and as impliedly authorized to file the claim for refund and the suit to recover suchclaim. (Emphasis supplied.)

Petitioner, however, submits that this ruling applies only when the withholding agent and the taxpayer are relatedparties, i.e., where the withholding agent is a wholly owned subsidiary of the taxpayer.

We do not agree.

Although such relation between the taxpayer and the withholding agent is a factor that increases the latter’s legal interest to file a claim for refund, there is nothing in the decision to suggest that such relationship is required or that the lack of 

such relation deprives the withholding agent of the right to file a claim for refund. Rather, what is clear in the decision isthat a withholding agent has a legal right to file a claim for refund for two reasons. First , he is considered a "taxpayer"under the NIRC as he is personally liable for the withholding tax as well as for deficiency assessments, surcharges, andpenalties, should the amount of the tax withheld be finally found to be less than the amount that should have beenwithheld under law. Second , as an agent of the taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring an action forrecovery of such claim.

In this connection, it is however significant to add that while the withholding agent has the right to recover the taxeserroneously or illegally collected, he nevertheless has the obligation to remit the same to the principal taxpayer. As anagent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right tofile a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue43 cited by the petitioner, we find the sameinapplicable as it involves excise taxes, not withholding taxes. In that case, it was ruled that the proper party to question,or seek a refund of, an indirect tax "is the statutory taxpayer, the person on whom the tax is imposed by law and who paidthe same even if he shifts the burden thereof to another."

In view of the foregoing, we find no error on the part of the CTA in upholding respondent’s right as a withholding agent tofile a claim for refund.

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TAXATION I - BATCH B 46

The payments for the CM and the SIM Application Agreements constitute

"business profits"

Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind received as consideration for:"(i) the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, any copyright of literary, artistic or scientific work, or for the use of, or the right to use, industrial, commercial, or scientific equipment,or for information concerning industrial, commercial or scientific experience; (ii) the use of, or the right to use,cinematograph films, or tapes for radio or television broadcasting."44 These are taxed at the rate of 25% of the gross

amount .45 

Under the same Treaty, the "business profits" of an enterprise of a Contracting State is taxable only in that State, unlessthe enterprise carries on business in the other Contracting State through a permanent establishment .46 The term"permanent establishment" is defined as a fixed place of business where the enterprise is wholly or partly carried on .47 However, even if there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent establishment in the other Contracting State if it carries on supervisory activities in that other State for more than sixmonths in connection with a construction, installation or assembly project which is being undertaken in that otherState.48 

In the instant case, it was established during the trial that Prism does not have a permanent establishment in thePhilippines. Hence, "business profits" derived from Prism’s dealings with respondent are not taxable. The question iswhether the payments made to Prism under the SDM, CM, and SIM Application agreements are "business profits" and not 

royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement ,49 reads:

1.3 Intellectual Property Rights (IPR)

The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be retained by PRISM. PRISM,however, shall provide the Client the APIs for the SDM at no cost to the Client. The Client shall be permitted to developprograms to interface with the SDM or the SDM Libraries, using the related APIs as appropriate .50 (Emphasis supplied.)

Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement and paragraph 1.3 of theProgramming Services (Schedule A) of the SIM Agreement provide:

1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the exception of the following components, which areprovided, without technical or commercial restraints or obligations:

• ConfigurationException.java • DataStructures (DblLinkedListjava, DbIListNodejava, List EmptyException.java, ListFullException.java, ListNodeNotFoundException.java,QueueEmptyException.java, QueueFullException.java, QueueList.java, QueuListEx.java, andQueueNodeNotFoundException.java)• FieldMappedObjeet.java 

• LogFileEx.java • Logging (BaseLogger.java and Logger.java) • PrismGeneric Exception.java • PrismGenericObject.java • ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData. java, DeliverMessage.java, Login.java, Logout.java, Nack.java, SubmitMessage.java,• TemplateManagement (FileTemplateDataBag.java, TemplateDataBag.java, TemplateManagerExBag.java, and TemplateParserExBag.java)• TemplateManager.class • TemplateServer.class • TemplateServer$RequestThread.class 

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• Template Server_skel.class • TemplateServer_stub.class• TemplateService.class • Prism Crypto Server module for PHP451 

x x x x

1.3 Intellectual Property Rights (IPR)

The Client shall own the IPR for the Specifications and the Source Code for the SIM Applications. PRISM shall develop anexecutable compiled code (the "Executable Version") of the SIM Applications for use on the aSIMetric card which,however, shall only be for the Client’s use. The Execut able Version may not be provided by PRISM to any third [party]without the prior written consent of the Client. It is further recognized that the Client anticipates licensing the use of theSIM Applications, but it is agreed that no license fee will be charged to PRISM or to a licensee of the aSIMetrix card fromPRISM when SIMs are supplied to the Client .52 (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right over the SDM program, but not over theCM and SIM Application programs as the proprietary rights of these programs belong to respondent. In other words, out of the payments made to Prism, only the payment for the SDM program is a royalty subject to a 25% withholding tax. Arefund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application Agreementsis therefore in order.

Indeed, the government has no right to retain what does not belong to it. "No one, not even the State, should enrichoneself at the expense of another."53 

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007 and the Resolution dated July 31, 2007of the Court of Tax Appeals En Banc are hereby  AFFIRMED. The Bureau of Internal Revenue is hereby ordered to issue aTax Credit Certificate to Prism Transactive (M) Sdn. Bhd. in the amount of P3,989,456.43 representing the overpaid finalwithholding taxes for the month of August 2001.

SO ORDERED.

MARIANO C. DEL CASTILLO

 Associate Justice