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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
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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
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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.
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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
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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
http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt1http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt1http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt3http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt2http://www.lawphil.net/judjuris/juri2007/jan2007/gr_153205_2007.html#fnt18/14/2019 Tax II Assignment 19 Jul 2013 ii.pdf
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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