tax ii assignment 19 jul 2013 ii.pdf

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Non-retroactivity of rulings (Sec. 246, NIRC)

G.R. No. 168129 April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

PHILIPPINE HEALTH CARE PROVIDERS, INC.,Respondent.

D E C I S I O N

SANDOVAL-GUTIERREZ,J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997

Rules of Civil Procedure, as amended, seeking to reverse the Decision1dated February 18, 2005

and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No.

76449.

The factual antecedents of this case, as culled from the records, are:

The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and

existing under the laws of the Republic of the Philippines. Pursuant to its Articles of

Incorporation,2its primary purpose is "To establish, maintain, conduct and operate a prepaid

group practice health care delivery system or a health maintenance organization to take care of

the sick and disabled persons enrolled in the health care plan and to provide for theadministrative, legal, and financial responsibilities of the organization." 1^vvphi1.net

On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending

the National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by imposing Value-

Added Tax (VAT) on the sale of goods and services. This E.O. took effect on January 1, 1988.

Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the

Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the services it provides

to the participants in its health care program are exempt from the payment of the VAT.

On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of InternalRevenue (BIR), issued VAT Ruling No. 231-88 stating that respondent, as a provider of medical

services, is exempt from the VAT coverage. This Ruling was subsequently confirmed by

Regional Director Osmundo G. Umali of Revenue Region No. 8 in a letter dated April 22, 1994.

Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law)

took effect, amending further the National Internal Revenue Code of 1977. Then on January 1,

1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became effective. This new Tax
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Code substantially adopted and reproduced the provisions of E.O. No. 273 on VAT and R.A. No.

7716 on E-VAT.

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice

for deficiency in its payment of the VAT and documentary stamp taxes (DST) for taxable years

1996 and 1997.

On October 20, 1999, respondent filed a protest with the BIR.

On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of

"deficiency VAT" in the amount of P100,505,030.26 and DST in the amount of P124,196,610.92,

or a total of P224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter

were four (4) assessment notices.

On February 23, 2000, respondent filed another protest questioning the assessment notices.

Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000,

respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA

Case No. 6166.

On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.

Petitioner is hereby ORDERED TO PAY the deficiency VAT amounting to P22,054,831.75

inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996

VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January

20, 1998 until paid for the 1997 VAT deficiency. 1awphi1.ntAccordingly, VAT Ruling No. 231-88 is declared

void and without force and effect. The 1996 and 1997 deficiency DST assessment against

petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from

collecting the said DST deficiency tax.

SO ORDERED.

Respondent filed a motion for partial reconsideration of the above judgment concerning its

liability to pay the deficiency VAT.

In its Resolution3dated March 23, 2003, the CTA granted respondent's motion, thus:

WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is

GRANTED. Accordingly, the VAT assessment issued by herein respondent against petitioner for

the taxable years 1996 and 1997 is hereby WITHDRAWN and SET ASIDE.

SO ORDERED.
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The CTA held:

Moreover, this court adheres to its conclusion that petitioner is a service contractorsubject to

VAT since it does not actually render medical service but merely acts as a conduit between the

members and petitioner's accredited and recognized hospitals and clinics.

However, after a careful review of the facts of the case as well as the Law and jurisprudence

applicable, this court resolves to grant petitioner's "Motion for Partial Reconsideration." We

are in accord with the view of petitioner that it is entitled to the benefit of non-retroactivity of

rulings guaranteed under Section 246 of the Tax Code, in the absence of showing of bad faith

on its part. Section 246 of the Tax Code provides:

Sec. 246. Non-Retroactivity of Rulings.- Any revocation, modification or reversal of any of the

rules and regulations promulgated in accordance with the preceding Sections or any of the

rulings or circulars promulgated by the Commissioner shall not be given retroactive applicationif the revocation, modification or reversal will be prejudicial to the taxpayers, x x x.

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88

will be retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the

respondent itself has confirmed petitioner's entitlement to VAT exemption under Section 103

of the Tax Code. In saying so, respondent has actually broadened the scope of "medical

services" to include the case of the petitioner. This VAT ruling was even confirmed

subsequently by Regional Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit

M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of the

petitioner sufficiently described the business of petitioner and there is no way BIR could be

misled by the said representation as to the real nature of petitioner's business. Such being the

case, this court is convinced that petitioner's reliance on the said ruling is premised on good

faith. The facts of the case do not show that petitioner deliberately committed mistakes or

omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue.

Thus, in the absence of such proof, this court upholds the application of Section 246 of the Tax

Code. Consequently, the pronouncement made by the BIR in VAT Ruling No. 231-88 as to the

VAT exemption of petitioner should be upheld.

Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R.

SP No. 76449.

In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.

Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its

Resolution4dated May 9, 2005.

Hence, the instant petition for review on certiorari raising these two issues: (1) whether

respondent's services are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting

respondent from payment of VAT has retroactive application.
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On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for

taxable years 1996 and 1997.

Section 1025of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT

Law) and R.A. No. 7716 (E-VAT Law), provides:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base

of tax. - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of

gross receipts derived from the sale or exchange of services, including the use or lease of

properties.

The phrase "sale or exchange of service" means the performance of all kinds of services in the

Philippines for a fee, remuneration or consideration, including those performed or rendered by

construction and service contractors x x x.

Section 1036of the same Code specifies the exempt transactions from the provision of Section

102, thus:

SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:

x x x

(l) Medical, dental, hospital and veterinary services except those rendered by professionals

x x x

The import of the above provision is plain. It requires no interpretation. It contemplates the

exemption from VAT of taxpayers engaged in the performance of medical, dental, hospital, and

veterinary services. In Commissioner of International Revenue v. Seagate Technology

(Philippines),7we defined an exempt transaction as one involving goods or services which, by

their nature, are specifically listed in and expressly exempted from the VAT, under the Tax

Code, without regard to the tax status of the party in the transaction. In Commissioner of

Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8we reiterated this definition.

In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described

its services as follows:

Under the prepaid group practice health care delivery system adopted by Health Care,

individuals enrolled in Health Care's health care program are entitled to preventive, diagnostic,

and corrective medical services to be dispensed by Health Care's duly licensed physicians,

specialists, and other professional technical staff participating in said group practice health care

delivery system established and operated by Health Care. Such medical services will be

dispensed in a hospital or clinic owned, operated, or accredited by Health Care. To be entitled

to receive such medical services from Health Care, an individual must enroll in Health Care's
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health care program and pay an annual fee. Enrollment in Health Care's health care program is

on a year-to-year basis and enrollees are issued identification cards.

From the foregoing, the CTA made the following conclusions:

a) Respondent"is not actually rendering medical service but merely acting as a conduit

between the members and their accredited and recognized hospitals and clinics."

b) It merely "provides and arranges for the provision of pre-need health care services to

its members for a fixed prepaid fee for a specified period of time."

c) It then "contracts the services of physicians, medical and dental practitioners, clinics

and hospitals to perform such services to its enrolled members;" and

d) Respondent "also enters into contract with clinics, hospitals, medical professionals andthen negotiates with them regarding payment schemes, financing and other procedures

in the delivery of health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court

of Appeals. It is a doctrine that findings of fact of the CTA, a special court exercising particular

expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon

this Court, more so where these do not conflict with the findings of the Court of

Appeals.9Perforce, as respondent does not actually provide medical and/or hospital services,

as provided under Section 103 on exempt transactions, but merely arranges for the same, its

services are not VAT-exempt.

Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that

rulings, circulars, rules and regulations promulgated by the Commissioner of Internal Revenue

have no retroactive application if to apply them would prejudice the taxpayer. The exceptions

to this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his

return or in any document required of him by the Bureau of Internal Revenue; (2) where the

facts subsequently gathered by the Bureau of Internal Revenue are materially different from

the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith.

We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying

its VAT liabilities has retroactive application.

In its Resolution dated March 23, 2003, the CTA found that there is no showing that

respondent "deliberately committed mistakes or omitted material facts" when it obtained VAT

Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis

for the VAT ruling "sufficiently described" its business and "there is no way the BIR could be

misled by the said representation as to the real nature" of said business.

In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to

itself as a health maintenance organization is not an indication of bad faith or a deliberate
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attempt to make false representations." As "the term health maintenance organization did not

as yet have any particular significance for tax purposes," respondent's failure "to include a term

that has yet to acquire its present definition and significance cannot be equated with bad

faith."

We agree with both the Tax Court and the Court of Appeals that respondent acted in good

faith. In Civil Service Commission v. Maala,10we described good faith as "that state of mind

denoting honesty of intention and freedom from knowledge of circumstances which ought to

put the holder upon inquiry; an honest intention to abstain from taking any unconscientious

advantage of another, even through technicalities of law, together with absence of all

information, notice, or benefit or belief of facts which render transaction unconscientious."

According to the Court of Appeals, respondent's failure to describe itself as a "health

maintenance organization," which is subject to VAT, is not tantamount to bad faith. We note

that the term "health maintenance organization" was first recorded in the Philippine statutebooks only upon the passage of "The National Health Insurance Act of 1995" (Republic Act No.

7875). Section 4 (o) (3) thereof defines a health maintenance organization as "an entity that

provides, offers, or arranges for coverage of designated health services needed by plan

members for a fixed prepaid premium." Under this law, a health maintenance organization is

one of the classes of a "health care provider."

It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term

"health maintenance organization" was yet unknown or had no significance for taxation

purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the taxable

years 1996 and 1997 on the basis of VAT Ruling No. 231-88.

InABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11this Court held that under Section 246

of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from adopting a

position contrary to one previously taken where injustice would result to the

taxpayer.Hence, where an assessment for deficiency withholding income taxes was made,

three years after a new BIR Circular reversed a previous one upon which the taxpayer had

relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined the

Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling inABS-CBN Broadcasting Corp. in the later

cases ofCommissioner of Internal Revenue v. Borroughs, Ltd.,12Commissioner of InternalRevenue v. Mega Gen. Mdsg. Corp.13Commissioner of Internal Revenue v. Telefunken

Semiconductor (Phils.) Inc.,14andCommissioner of Internal Revenue v. Court of Appeals.15The

rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to

the prejudice of the taxpayer, as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16wherein the

taxpayer was entitled to tax refunds or credits based on the BIR's own issuances but later was

suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of
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the taxpayer's transactions for the purpose of paying its VAT, this Court ruled that applying

such ruling retroactively would be prejudicial to the taxpayer.

WHEREFORE, we DENYthe petition and AFFIRMthe assailed Decision and Resolution of the

Court of Appeals in CA-G.R. SP No. 76449. No costs.

SO ORDERED.

ANGELINA SANDOVAL GUTIERREZ

Associate Justice

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF

APPEALS,respondent.

QUISUMBING,J.:

This petition for review assails the Resolution 1of the Court of Appeals dated September 22,

1993 affirmingthe Decision2and a Resolution 3of the Court Of Tax Appeals which denied the

claims of the petitioner for tax refund and tax credits, and disposingas follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due

course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its

resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED.4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for

1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond

the reglementary period. The 1986 claim for refund amounting to P234,077.69 islikewise denied since petitioner has opted and in all likelihood automatically

credited the same to the succeeding year. The petition for review is dismissed for

lack of merit.

SO ORDERED.5

The facts on record show the antecedent circumstances pertinent to this case.


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Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly

organized under Philippine laws, filed its quarterly income tax returns for the first and second

quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due

were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal

Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and

P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns

for the year-ended December 31, 1986, the petitioner likewise reported a net loss of

P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees

withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and

P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for

a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second

quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their

lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner

instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The

petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs.

Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit

for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00

Tax Withheld at Source 282,795.50 234,077.69


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Excess Tax Payments P5,299,749.50*P234,077.69

=============== =============

*CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A

forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request

of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it

was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for

refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was

automatically credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the

same was denied due course for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the

Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in totothe CTA's

resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom which relied in good faith on the formal

assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a

petition for review asking for the refund/tax credit of its 1985-86 excess

quarterly income tax payments can be prejudiced by the subsequent BIR

rejection, applied retroactivity, of its assurances in RMC No. 7-85 that theprescriptive period for the refund/tax credit of excess quarterly income tax

payments is not two years but ten (10).7

II. Whether the Court of Appeals seriously erred in affirming the CTA decision

which denied PBCom's claim for the refund of P234,077.69 income tax

overpaid in 1986 on the mere speculation, without proof, that there were

taxes due in 1987 and that PBCom availed of tax-crediting that year.8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea

for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No.

7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying

on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular

states that overpaid income taxes are not covered by the two-year prescriptive period under the

tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax

with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the

circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85


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SUBJECT: PROCESSING OF REFUND OR TAX CREDIT

OF EXCESS CORPORATE INCOME TAX RESULTING

FROM THE FILING OF THE FINAL ADJUSTMENT

RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos.

10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax payments,

corporations file claims for recovery of overpaid income tax with the Court of Tax

Appeals within the two-year period from the date of payment, in accordance with

sections 292 and 295 of the National Internal Revenue Code. It is obvious that the

filing of the case in court is to preserve the judicial right of the corporation to claim

the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid

tax under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the

refund of the overpaid income tax or claim for automatic tax credit. To insure

prompt action on corporate annual income tax returns showing refundable

amounts arising from overpaid quarterly income taxes, this Office has promulgated

Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the

procedure in processing said returns. Under these procedures, the returns are

merely pre-audited which consist mainly of checking mathematical accuracy of the

figures of the return. After which, the refund or tax credit is granted, and, this

procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals

in order to preserve the right to claim refund or tax credit the two year period. As already stated,

actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax

returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income

tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of

payment considering that it is an obligation created by law (Article 1144 of the Civil

Code).9

(Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its

declared circular if it would result to injustice to taxpayers. CitingABS CBN Broadcasting

Corporation vs. Court of Tax Appeals 10petitioner claims that rulings or circulars promulgated by


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the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to

taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a

position inconsistent with one previously taken where injustice would result therefrom or

where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this

rules as follows:

Sec. 246 Non-retroactivity of rulingsAny revocation, modification or reversal of

any of the rules and regulations promulgated in accordance with the preceding

section or any of the rulings or circulars promulgated by the Commissioner shall not

be given retroactive application if the revocation, modification or reversal will be

prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates oromits material facts from his return or in any

document required of him by the Bureau of

Internal Revenue;

b). where the facts subsequently gathered by the

Bureau of Internal Revenue are materially different

from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of

Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is

generally done on April 15 following the close of the calendar year. As precedents, respondent

Commissioner cited cases which adhered to this principle, to witACCRA Investments Corp. vs.

Court of Appeals, et al., 11and Commissioner of Internal Revenuevs. TMX Sales, Inc., et

al.. 12Respondent Commissioner also states that since the Final Adjusted Income Tax Return of

the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter

had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner

stresses that when the petitioner filed the case before the CTA on November 18, 1988, the

same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of

action.

After a careful study of the records and applicable jurisprudence on the matter, we find that,

contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not

warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to

generate funds for the State to finance the needs of the citizenry and to advance the common

weal. 13Due process of law under the Constitution does not require judicial proceedings in tax


12/147

cases. This must necessarily be so because it is upon taxation that the government chiefly relies

to obtain the means to carry on its operations and it is of utmost importance that the modes

adopted to enforce the collection of taxes levied should be summary and interfered with as

little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time

fixed by law because the BIR being an administrative body enforced to collect taxes, its functions

should not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)

provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously

or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenuetax hereafter alleged to have been erroneously or illegally assessed or collected, or

of any penalty claimed to have been collected without authority, or of any sum

alleged to have been excessive or in any manner wrongfully collected, until a claim

for refund or credit has been duly filed with the Commissioner; but such suit or

proceeding may be maintained, whether or not such tax, penalty, or sum has been

paid under protest or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years

from the date of payment of the tax or penalty regardless of any supervening cause

that may arise after payment;Provided however, That the Commissioner may, even

without a written claim therefor, refund or credit any tax, where on the face of thereturn upon which payment was made, such payment appears clearly to have been

erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of

Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced.

The two-year prescriptive period provided, should be computed from the time of filing the

Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15this Court

explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that

the refund is ascertained, which can only be determined after a final adjustment return is

accomplished. In the present case, this date is April 16, 1984, and two years from this date

would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections

68.16

69,17

and 7018

on Quarterly Corporate Income Tax Payment and Section 321 should be

considered in conjunction with it19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive

period of two years to ten years on claims of excess quarterly income tax payments, such circular


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created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did

not simply interpret the law; rather it legislated guidelines contrary to the statute passed by

Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings

(in the sense of more specific and less general interpretations of tax laws) which are issued

from time to time by the Commissioner of Internal Revenue. It is widely accepted that the

interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is

entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and

will be ignored if judicially found to be erroneous. 20Thus, courts will not countenance

administrative issuances that override, instead of remaining consistent and in harmony with

the law they seek to apply and implement. 21

In the case of People vs. Lim, 22it was held that rules and regulations issued by administrative

officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with

but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the

prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five

years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all

time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an

oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of

discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to

implement a law cannot go beyond the terms and provisions of the

latter. . . . In this connection, the attention of the technical men in the offices of Department

Heads who draft rules and regulation is called to the importance and necessity of closely

following the terms and provisions of the law which they intended to implement, this to avoidany possible misunderstanding or confusion as in the present case.23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or

errors of its officials or agents. 24As pointed out by the respondent courts, the nullification of

RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative

interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the

express provision of a statute. Hence, his interpretation could not be given weight for to do so

would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-

85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. TheMemorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10

years from date of payment because this is an obligation created by law, was issued by the

Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the

taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review

within the

two-year prescription period, and that the lengthening of the period of limitation on refund from

two to ten years would be adverse to public policy and run counter to the positive mandate of

Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel

has no application in the case at bar because it was not the Commissioner of Internal Revenue

who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals


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who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the

Commissioner of Internal Revenue is an administrative interpretation which is out of harmony

with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot

be given weight for to do so would in effect amend the statute.25

Art. 8 of the Civil Code 26recognizes judicial decisions, applying or interpreting statutes as part

of the legal system of the country. But administrative decisions do not enjoy that level of

recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer

with shield against judicial action. For there are no vested rights to speak of respecting a wrong

construction of the law by the administrative officials and such wrong interpretation could not

place the Government in estoppel to correct or overrule the same. 27Moreover, the non-

retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case

because the nullity of RMC No. 7-85 was declared by respondent courts and not by the

Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this

Court, a claim for refund is in the nature of a claim for exemption and should be construed

in strictissimi juris against the taxpayer.28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming

CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere

speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29(now Sec. 76 of the 1997 NIRC) provides that any excess of the total

quarterly payments over the actual income tax computed in the adjustment or final corporate

income tax return, shall either(a) be refunded to the corporation, or (b) may be credited

against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable

year.

The corporation must signify in its annual corporate adjustment return (by marking the option box

provided in the BIR form) its intention, whether to request for a refund or claim for an automatic

tax credit for the succeeding taxable year. To ease the administration of tax collection, these

remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals,

after examining the adjusted final corporate annual income tax return for taxable year 1986,

found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-

avisthe fact that the 1987 annual corporate tax return was not offered by the petitioner as

evidence) by the CTA in concluding that petitioner had indeed availed of and applied the

automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the

two remedies of refund and tax credit are alternative.30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977

NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we

must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not

offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by


15/147

respondent courts, there being no showing of gross error or abuse on their part to disturb our

reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is

AFFIRMED, with COSTS against the petitioner.1wphi1.nt

SO ORDERED.

Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 117982 February 6, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES, INC., respondents.

BELLOSILLO,J.:

ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale

of cigar and cigarette products. On 7 May 1991 private respondent received a letter dated 26

April 1991 from the Commissioner of Internal Revenue assessing it deficiency Ad Valorem Tax

(AVT) in the total amount of Four Hundred Eighty-Eight Thousand Three Hundred Ninety-Six

Pesos and Sixty-Two Centavos (P488,396.62), inclusive of increments, on the removals of

cigarette products from their place of production during the period 2 November 1990 to 22

January 1991.1Petitioner computes the deficiency thus

Total AVT due per manufacturer's declaration P 4,279,042.33

Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85

Deficiency AVT 373,693.48

Add: Penalties:

25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37

20% Interest (P467,116.85 x 82/360 days) 21,279.27


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Total Amount Due P 488,396.62

In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru

counsel filed a protest against the proposed assessment with a request that the same be

withdrawn and cancelled. On 31 May 1991 private respondent received petitioner's reply

dated 27 May 1991 denying its protest and request for cancellation stating that the decision

was final, and at the same time requesting payment of the revised amount of Five Hundred

Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29),

with interest updated, within ten (10) days from receipt thereof. In a letter dated 10 June 1991

which petitioner received on the same day, private respondent requested for the

reconsideration of petitioner's denial of its protest. Without waiting for petitioner's reply to its

request for reconsideration, private respondent filed on 19 June 1991 a petition for review

with the Court of Tax Appeals. On 25 June 1991 private respondent received from petitioner a

letter dated 21 June 1991 denying its request for reconsideration declaring again that itsdecision was final. On 8 July 1991 private respondent paid under protest the disputed ad

valorem tax in the sum of P520,835.29.2

In its Decision3of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to

private respondent the amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five

Pesos and Twenty-Nine Centavos (P520,835.29) representing erroneously paid ad valorem tax

for the period 2 November 1990 to 22 January 1991.

The Court of Tax Appeals explained that the subject deficiency excise tax assessment resulted from

private respondent's use of the computation mandated by BIR Ruling 473-88 dated 4 October 1988

as basis for computing the fifteen percent (15%) ad valorem tax due on its removals of cigarettes

from 2 November 1990 to 22 January 1991. BIR Circular 473-88 was issued by Deputy

Commissioner Eufracio D. Santos to Insular-Yebana Tobacco Corporation allowing the latter to

exclude the value-added tax (VAT) in the determination of the gross selling price for purposes of

computing the ad valorem tax of its cigar and cigarette products in accordance with Sec. 127 of the

Tax Code as amended by Executive Order No. 273 which provides as follows:

Sec. 127. Payment of excise taxes on domestic products. . . . . (b) Determination

of gross selling price of goods subject to ad valorem tax. Unless otherwise

provided, the price, excluding the value-added tax, at which the goods are sold at

wholesale in the place of production or through their sales agents to the public shall

constitute the gross selling price.

The computation, pursuant to the ruling, is illustrated by way of example thus

P 44.00x1/1 = P 4.00 VAT

P 44.00 - P 4.00 = P 40.00 price without VAT

P 40.00 x 15% = P 6.00 Ad Valorem Tax


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For the period 2 November 1990 to 22 January 1991 private respondent paid P3,905,348.85

ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted by BIR Ruling 473-88 by

excluding the VAT in the determination of the gross selling price.

Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana Tobacco

Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included

back the VAT to the gross selling price in determining the tax base for computing the ad valorem

tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the Tax Code, as amended by E.O. No.

273

Sec. 142. Cigar and cigarettes. . . For purposes of this section, manufacturer's or

importer's registered. wholesale price shall include the ad valorem tax imposed in

paragraphs (a), (b), (c) or (d) hereof and the amount intended to cover the value

added tax imposed under Title IV of this Code.

Petitioner sought to apply the revocation retroactively to private respondent's removals of

cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground that

private respondent allegedly acted in bad faith which is an exception to the rule on non-

retroactivity of BIR Rulings. 4

On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the retroactive

application of BIR Ruling 017-91 cannot be allowed since private respondent did not act in bad

faith; private respondent's computation under BIR Ruling 473-88 was not shown to be motivated

by ill will or dishonesty partaking the nature of fraud; hence, this petition.

Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private respondent'sreliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code does not confer vested

rights to private respondent in the computation of its ad valorem tax; (2) in failing to consider that

good faith and prejudice to the taxpayer in cases of reliance on a void BIR Ruling is immaterial and

irrelevant and does not place the government in estoppel in collecting taxes legally due; (3) in

holding that private respondent acted in good faith in applying BIR Ruling 473-88; and, (4) in failing

to consider that the assessment of petitioner is presumed to be regular and the claim for tax refund

must be strictly construed against private respondent for being in derogation of sovereign

authority.

Petitioner claims that the main issue before us is whether private respondent's reliance on a

void BIR ruling conferred upon the latter a vested right to apply the same in the computation ofits ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax Code, which provides for the

inclusion of the VAT in the tax base for purposes of computing the 15% ad valorem tax, is the

applicable law in the instant case as it specifically applies to the manufacturer's wholesale price

of cigar and cigarette products and not Sec. 127 (b) of the Tax Code which applies in general to

the wholesale of goods or domestic products. Sec. 142 being a specific provision applicable to

cigar and cigarettes must perforce prevail over Sec. 127 (b), a general provision of law insofar

as the imposition of the ad valorem tax on cigar and cigarettes is concerned.5Consequently,

the application of Sec. 127 (b) to the wholesale price of cigar and cigarette products for


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purposes of computing the ad valorem tax is patently erroneous. Accordingly, BIR Ruling 473-

88 is void ab initioas it contravenes the express provisions of Sec. 142 (d) of the Tax Code. 6

Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b) of

the Tax Code does not confer any vested right to private respondent as to exempt it from the

retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the New Civil Code is explicit

that "(n)o vested or acquired right can arise from acts or omissions which are against the law . .

. "7It is argued that the Court of Appeals erred in ruling that retroactive application cannot be

made since private respondent acted in good faith. The following circumstances would show

that private respondent's reliance on BIR Ruling 473-88 was induced by ill will:first, private

respondent despite knowledge that Sec. 142 of the Tax Code was the specific provision

applicable still shifted its accounting method pursuant to Sec. 127 (b) of the Tax Code; and,

second, the shift in accounting method was made without any prior consultation with the BIR. 8

It is further contended by petitioner that claims for tax refund must be construed againstprivate respondent. A tax refund being in the nature of a tax exemption is regarded as in

derogation of the sovereign authority and is strictly construed against private respondent as

the same partakes the nature of a tax exemption. Tax exemptions cannot merely be implied

but must be categorically and unmistakably expressed.9

We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against private

respondent is without legal basis because of the prohibition against the retroactive application of

the revocation of BIR rulings in the absence of bad faith on the part of private respondent.

The present dispute arose from the discrepancy in the taxable base on which the excise tax is to

apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988

which excludedthe VAT from the tax base in computing the fifteen percent (15%) excise tax due;

and, (2) BIR Ruling 017-91 dated 11 February 1991 which included back the VAT in computing the

tax base for purposes of the fifteen percent (15%) ad valorem tax.

The question as to the correct computation of the excise tax on cigarettes in the case at bar has

been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling

473-88 dated 4 October 1988

It is to be noted that Section 127 (b) of the Tax Code as amended applies in general

to domestic products and excludes the value-added tax in the determination of the

gross selling price, which is the tax base for purposes of the imposition of ad

valorem tax. On the other hand, the last paragraph of Section 142 of the same Code

which includes the value-added tax in the computation of the ad valorem tax, refers

specifically to cigar and cigarettes only. It does not include/apply to any other

articles or goods subject to the ad valorem tax. Accordingly, Section 142 must

perforce prevail over Section 127 (b) which is a general provision of law insofar as

the imposition of the ad valorem tax on cigar and cigarettes is concerned.


19/147

Moreover, the phrase unless otherwise providedin Section 127 (b) purports of

exceptions to the general rule contained therein, such as that of Section 142, last

paragraph thereof which explicitly provides that in the case of cigarettes, the tax

base for purposes of the ad valorem tax shall include, among others, the value-

added tax.

Private respondent did not question the correctness of the above BIR ruling. In fact, upon

knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately

implemented the method of computation mandated therein by restoring the VAT in computing the

tax base for purposes of the 15% ad valorem tax.

However, well-entrenched is the rule that rulings and circulars, rules and regulations

promulgated by the Commissioner of Internal Revenue would have no retroactive application if

to so apply them would be prejudicial to the taxpayers. 10

The applicable law is Sec. 246 of the Tax Code which provides

Sec. 246. Non-retroactivity of rulings. Any revocation, modification, or reversal of

any rules and regulations promulgated in accordance with the preceding section or

any of the rulings or circulars promulgated by the Commissioner of Internal

Revenue shall not be given retroactive application if the revocation, modification, or

reversal will be prejudicial to the taxpayers except in the following cases: a) where

the taxpayer deliberately misstates or omits material facts from his return or in any

document required of him by the Bureau of Internal Revenue; b) where the facts

subsequently gathered by the Bureau of Internal Revenue are materially different

from the facts on which the ruling is based; or c) where the taxpayer acted in badfaith.

Without doubt, private respondent would be prejudiced by the retroactive application of the

revocation as it would be assessed deficiency excise tax.

What is left to be resolved is petitioner's claim that private respondent falls under the third

exception in Sec. 246,i.e., that the taxpayer has acted in bad faith.

Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It

partakes of the nature of fraud; a breach of a known duty through some motive of interest or ill

will.11

We find no convincing evidence that private respondent's implementation of thecomputation mandated by BIR Ruling 473-88 was ill-motivated or attended with a dishonest

purpose. To the contrary, as a sign of good faith, private respondent immediately reverted to

the computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11

February 1991.

As regards petitioner's argument that private respondent should have made consultations with it

before private respondent used the computation mandated by BIR Ruling 473-88, suffice it to state

that the aforesaid BIR Ruling was clear and categorical thus leaving no room for interpretation. The


20/147

failure of private respondent to consult petitioner does not imply bad faith on the part of the

former.

Admittedly the government is not estopped from collecting taxes legally due because of

mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the

interest of justice and fair play, as where injustice will result to the taxpayer. 12

WHEREFORE, there being no reversible error committed by respondent Court of Appeals, the

petition is DENIED and petitioner COMMISSIONER OF INTERNAL REVENUE is ordered to refund

private respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29 upon finality of this

Decision.

SO ORDERED.

Padilla, Kapunan and Hermosisima, Jr., JJ., concur.

Separate Opinions

VITUG, J., concurring:

I concur in theponenciawritten by my esteemed colleague, Mr. Justice Josue N. Bellosillo. I only

would like to stress that the 1988 opinion of the Commissioner of Internal Revenue cannot be

considered void, considering that it evinces what the former Commissioner must have felt to be a

real inconsistency between Section 127 and Section 142 of the Tax Code. The non-retroactivity

proscription under Section 246 of the Tax Code can thus aptly apply. I reserve my vote, however, in

a situation where, as the Solicitor General so points out, the revoked ruling is patently null and void

in which case it could possibly be disregarded as being in existent from the very beginning.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION


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G.R. No. 153205 January 22, 2007

COMMISSIONER OF INTERNAL REVENUE,Petitioner,

vs.

BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

D E C I S I O N

CARPIO,J.:

The Case

This petition for review1seeks to set aside the 16 April 2002 Decision2of the Court of Appeals in CA-G.R.

SP No. 66341 affirming the 8 August 2001 Decision3of the Court of Tax Appeals (CTA). The CTA ordered

the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in

favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of

the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao

City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor

A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into acontract with the National Power Corporation (NAPOCOR) for the operation and maintenance of

[NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as its coordination

manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance

of NAPOCORs two power barges as well as the performance of other duties and acts which necessarily

have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and

Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank

accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and

special designated bank account in the Philippines. On the other hand, the Consortium pays

[respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from

the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if

[respondent] chooses to register as a VAT person and the consideration for its services is paid for in
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acceptable foreign currency and accounted for in accordance with the rules and regulations of the

Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration

bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue DistrictOffice No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,

among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,

detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It

allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its

case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read

as follows:

Section 4.102-2(b)(2)"Services other than processing, manufacturing or repacking for other persons

doing business outside the Philippines for goods which are subsequently exported, as well as services by

a resident to a non-resident foreign client such as project studies, information services, engineering and

architectural designs and other similar services, the consideration for which is paid for in acceptable

foreign currency and accounted for in accordance with the rules and regulations of the BSP."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to

the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December

1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum

of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently,

[respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes

for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIRs collecting

agent, PCIBank, as its output tax liability for the year 1996, computed as follows:


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Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review

Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered

by BWSCMI is subject to VAT at zero percent (0%)."

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the

issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed thatit erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program

(VAP) of the BIR.4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of

the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate

for P6,994,659.67 in favor of respondent. The CTAs ruling stated:

[Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly

remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko

Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish

Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the

consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang

Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-

Denmark for the account of [respondent]. Clearly, [respondents] sale of services to the Consortium is

subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

x x x x

The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the

[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated

January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to

VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by

paying output tax for its sale of services. x x x
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x x x Considering the principle of solutio indebitiwhich requires the return of what has been delivered

by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x

x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack ofmerit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals Ruling

In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are

not destined for consumption abroad, they are not of the same nature as project studies, information

services, engineering and architectural designs, and other similar services mentioned in Section 4.102-

2(b)(2) of Revenue Regulations No. 5-967as subject to 0% VAT. Thus, according to petitioner,

respondents services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8

The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98,

respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary to

petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT

under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing

business outside the Philippines which goods are subsequently exported; and (b) services by a resident

to a non-resident foreign client, such as project studies, information services, engineering and

architectural designs and other similar services, the consideration for which is paid for in acceptable

foreign currency and accounted for in accordance with the rules and regulations of the BangkoSentral

ng Pilipinas(BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be

consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied

stipulation in the statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of

Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to

the Tax Code. Petitioner went beyond merely providing the implementing details by adding another

requirement to zero-rating. "This is indicated by the additional phrase as well as services by a resident

to a non-resident foreign client, such as project studies, information services and engineering and

architectural designs and other similar services. In effect, this phrase adds not just one but two

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

nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12for services which were

performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit:

(1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the

BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for

consumption abroad" in order to be VAT zero-rated.13

The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the

destination principle (i.e., exports exempt, imports taxable).14The Court of Appeals stated that "if
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indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper

remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such

amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to

administrative legislation, as what [he] had done in this case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as

erroneously paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that

respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of theprejudicial revocation of BIR Ruling No. 023-9517and VAT Ruling No. 003-99,18which held that

respondents services are subject to 0% VAT and which respondent invoked in applying for refund of the

output VAT.

Section 102(b) of the Tax Code,19the applicable provision in 1996 when respondent rendered the

services and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. The following servicesperformed in the Philippines by VAT-

registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside thePhilippineswhich goods are subsequently exported, where the services are paid for in acceptable

foreign currency and accounted for in accordance with the rules and regulations of the Bangko

Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for

which is paid for in acceptable foreign currency and accounted for in accordance with the rules and

regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international

agreements to which the Philippines is a signatory effectively subjects the supply of such services to

zero rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total

annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the

requirements of the Tax Code for zero rating under the second paragraph of Section 102(b).

Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there
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was inward remittance of the foreign currency into the Philippines, and (3) accounting of such

remittance was in accordance with BSP rules. Moreover, respondent contends that its services which

"constitute the actual operation and management of two (2) power barges in Mindanao" are not "even

remotely similar to project studies, information services and engineering and architectural designs

under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondents services need notbe "destined to be consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking

of goods" and that payment for such services be in acceptable foreign currency accounted for in

accordance with BSP rules. Another essential condition for qualification to zero-rating under Section

102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this

requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in

the first paragraph of Section 102(b) where the listed services must be "for other persons doing

business outside the Philippines." The phrase "for other persons doing business outside the Philippines"not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to

the general term "services" appearing in the second paragraph of Section 102(b). In short, services

other than processing, manufacturing, or repacking of goods must likewise be performed for persons

doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the

"other services" are both doing business in the Philippines, the payment of foreign currency is

irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT

by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To

interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is

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

taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment

in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section

102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a

mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law

clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those

not doing business in the Philippines can be required under BSP rules20to pay in acceptable foreign

currency for their purchase of goods or services from the Philippines. In a domestic transaction, where

the provider and recipient of services are both doing business in the Philippines, the BSP cannot require

any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient

of services is doing business outside the Philippines. Under BSP rules,21the proceeds of export sales

must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of

services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The

same rationale does not apply if the provider and recipient of the services are both doing business in

the Philippines since their transaction is not in the nature of an export sale even if payment is

denominated in foreign currency.
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Further, when the provider and recipient of services are both doing business in the Philippines, their

transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed,

this is a purely local sale or exchange of services subject to the regular VAT, unless of course the

transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding

subparagraph," the legislative intent is thatonly the services are different between subparagraphs 1

and 2. The requirements for zero-rating, including the essential condition that the recipient of services

is doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22[previously Section 102(b)] of the present Tax Code clarifies

this legislative intent. Expressly included among the transactions subject to 0% VAT are " [s]ervices other

than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in

business conducted outside the Philippines or to a nonresident person not engaged in business who is

outside the Philippines when the services are performed, the consideration for which is paid for in

acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture

doing business in the Philippines. While the Consortiums principal members are non-resident foreign

corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR

Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-

year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a

contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S

("BWSC"), Mit

tax ii assignment 19 jul 2013 ii.pdf

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