COMMISSIONER OF INTERNAL REVENUE another tax case involving the same parties,

vs. COURT OF APPEALS and where it was held that COMASERCO was not
COMMONWEALTH MANAGEMENT AND liable to pay fixed and contractor’s tax for
SERVICES CORPORATION services rendered to Philamlife and its
affiliates. The Court of Appeals, in that case,
Commonwealth Management and Services
reasoned that COMASERCO was not
Corporation (COMASERCO, for brevity), is a
engaged in business of providing services to
corporation duly organized and existing under
Philamlife and its affiliates. In the same
the laws of the Philippines. It is an affiliate of
manner, the Court of Appeals held that
Philippine American Life Insurance Co.
COMASERCO was not liable to pay VAT for
(Philamlife), organized by the latter to perform
it was not engaged in the business of selling
collection, consultative and other technical
services.
services, including functioning as an internal
auditor, of Philamlife and its other affiliates. Hence, this case.
Petitioner, Commissioner of the Bureau of ISSUE: Whether or not COMASERCO was
Internal Revenue (BIR) issued an engaged in the sale of services, and thus
assessment to private respondent liable to pay VAT thereon?
COMASERCO for deficiency value-added tax
RULING:
(VAT) amounting to P351,851.01, for taxable
year 1988. YES.
With this, COMASERCO filed with the BIR, a The Court agreed with the Petitioner that to
letter-protest objecting to the latter’s finding of “engage in business” and to “engage in the
deficiency VAT. In lieu however, the sale of services” are two different things.
Commissioner of Internal Revenue sent a Petitioner maintains that the services
collection letter to COMASERCO demanding rendered by COMASERCO to Philamlife and
payment of the deficiency VAT. its affiliates, for a fee or consideration, are
subject to VAT. VAT is a tax on the value
As a result, COMASERCO filed with the
added by the performance of the service. It is
Court of Tax Appeals a petition for review
immaterial whether profit is derived from
contesting the Commissioner’s assessment
rendering the service.
asserting that the services it rendered to
Philamlife and its affiliates, relating to Pursuant to Republic Act No. 7716, the
collections, consultative and other technical Expanded VAT Law (EVAT), amending
assistance, including functioning as an among other sections, Section 99 of the Tax
internal auditor, were on a “no-profit, Code, it is provided that:
reimbursement-of-cost-only” basis. It averred
that it was not engaged in the business of Sec. 105. Persons Liable. — Any person
providing services to Philamlife and its who, in the course of trade or business, sells,
affiliates. COMASERCO stressed that it was barters, exchanges, leases goods or
not profit-motivated, thus not engaged in properties, renders services, and any person
business. In fact, it did not generate profit but who imports goods shall be subject to the
suffered a net loss in taxable year 1988, value-added tax (VAT) imposed in Sections
hence not liable to pay VAT. 106 and 108 of this Code.

The Court of Tax Appeals rendered decision The value-added tax is an indirect tax and the
in favor of the Commissioner of Internal amount of tax may be shifted or passed on to
Revenue. the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise
On its appeal with the Court of Appeals, the apply to existing sale or lease of goods,
appellate court rendered decision reversing properties or services at the time of the
that of the Court of Tax Appeals. The former effectivity of Republic Act No. 7716.
anchored its decision on the ratiocination in
The phrase “in the course of trade or scientific, industrial or commercial
business” means the regular conduct or undertaking or project.” 11
pursuit of a commercial or an economic
On February 5, 1998, the Commissioner of
activity, including transactions incidental
Internal Revenue issued BIR Ruling No. 010-
thereto, by any person regardless of whether
98 12 emphasizing that a domestic
or not the person engaged therein is a
corporation that provided technical, research,
nonstock, nonprofit organization (irrespective
management and technical assistance to its
of the disposition of its net income and
affiliated companies and received payments
whether or not it sells exclusively to members
on a reimbursement-of-cost basis, without
of their guests), or government entity.
any intention of realizing profit, was subject to
The rule of regularity, to the contrary VAT on services rendered. In fact, even if
notwithstanding, services as defined in this such corporation was organized without any
Code rendered in the Philippines by intention realizing profit, any income or profit
nonresident foreign persons shall be generated by the entity in the conduct of its
considered as being rendered in the course activities was subject to income tax.
of trade or business.
Hence, it is immaterial whether the primary
Contrary to COMASERCO’s contention the purpose of a corporation indicates that it
above provision clarifies that even a non- receives payments for services rendered to
stock, non-profit, organization or government its affiliates on a reimbursement-on-cost
entity, is liable to pay VAT on the sale of basis only, without realizing profit, for
goods or services. VAT is a tax on purposes of determining liability for VAT on
transactions, imposed at every stage of the services rendered. As long as the entity
distribution process on the sale, barter, provides service for a fee, remuneration or
exchange of goods or property, and on the consideration, then the service rendered is
performance of services, even in the absence subject to VAT.
of profit attributable thereto. The term “in the
course of trade or business” requires the
regular conduct or pursuit of a commercial or
an economic activity regardless of whether or
not the entity is profit-oriented.
The definition of the term “in the course of
trade or business” present law applies to all
transactions even to those made prior to its
enactment. Executive Order No. 273 stated
that any person who, in the course of trade or
business, sells, barters or exchanges goods
and services, was already liable to pay VAT.
The present law merely stresses that even a
nonstock, nonprofit organization or
government entity is liable to pay VAT for the
sale of goods and services.
Sec. 108 of the National Internal Revenue
Code of 1997 10 defines the phrase “sale of
services” as the “performance of all kinds of
services for others for a fee, remuneration or
consideration.” It includes “the supply of
technical advice, assistance or services
rendered in connection with technical
management or administration of any
COMMISSIONER OF INTERNAL Interest up to 3-31-2000 P
REVENUE,vs. 3,157,314.41
SONY PHILIPPINES, INC., Respondent. Compromise 25,000.00
3,182,314.41
This petition for review on certiorari seeks to
set aside the May 17, 2007 Decision and the Deficiency VAT Due P
July 5, 2007 Resolution of the Court of Tax 11,141,014.41
Appeals – En Banc1 (CTA-EB), in C.T.A. EB
No. 90, affirming the October 26, 2004
Decision of the CTA-First Division2 which, in DEFICIENCY EXPANDED WITHHOLDING
turn, partially granted the petition for review of TAX (EWT)
respondent Sony Philippines, Inc. (Sony).
The CTA-First Division decision cancelled the (Assessment No. ST-EWT-97-0125-2000)
deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) Basic Tax Due P1,416,976.90
against Sony for Value Added Tax (VAT) but
upheld the deficiency assessment for Add: Penalties
expanded withholding tax (EWT) in the Interest up to 3-31-2000 P550,485.82
amount of ₱1,035,879.70 and the penalties
for late remittance of internal revenue taxes in
the amount of ₱1,269, 593.90.3 Compromise 25,000.00
575,485.82
Deficiency EWT Due P
THE FACTS: 1,992,462.72

On November 24, 1998, the CIR issued DEFICIENCY OF VAT ON ROYALTY

Letter of Authority No. 000019734 (LOA PAYMENTS
19734) authorizing certain revenue officers to
examine Sony’s books of accounts and other (Assessment No. ST-LR1-97-0126-2000)
accounting records regarding revenue taxes
for "the period 1997 and unverified prior Basic Tax Due P
years." On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and Add: Penalties
penalties was issued by the CIR which Sony Surcharge P 359,177.80
protested. Thereafter, acting on the protest,
the CIR issued final assessment notices, the Interest up to 3-31-2000 87,580.34
formal letter of demand and the details of
discrepancies.4 Said details of the deficiency
Compromise 16,000.00
taxes and penalties for late remittance of
462,758.14
internal revenue taxes are as follows:
Penalties Due P
462,758.14
DEFICIENCY VALUE -ADDED TAX (VAT)

LATE REMITTANCE OF FINAL

(Assessment No. ST-VAT-97-0124-2000)
WITHHOLDING TAX

Basic Tax Due P 7,958,700.00

(Assessment No. ST-LR2-97-0127-2000)
Add: Penalties
Basic Tax Due P After trial, the CTA-First Division disallowed
the deficiency VAT assessment because the
Add: Penalties
subsidized advertising expense paid by Sony
Surcharge P 1,729,690.71 which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards
Interest up to 3-31-2000 508,783.07 the EWT, the CTA-First Division maintained
the deficiency EWT assessment on Sony’s
Compromise 50,000.00 motor vehicles and on professional fees paid
2,288,473.78 to general professional partnerships. It also
assessed the amounts paid to sales agents
Penalties Due P as commissions with five percent (5%) EWT
2,288,473.78 pursuant to Section 1(g) of Revenue
Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on
LATE REMITTANCE OF INCOME rental expense since it found that the total
PAYMENTS rental deposit of ₱10,523,821.99 was
(Assessment No. ST-LR3-97-0128-2000) incurred from January to March 1998 which
was again beyond the coverage of LOA
19734. Except for the compromise penalties,
Basic Tax Due P the CTA-First Division also upheld the
Add: Penalties penalties for the late payment of VAT on
royalties, for late remittance of final
25 % Surcharge P 8,865.34 withholding tax on royalty as of December
1997 and for the late remittance of EWT by
some of Sony’s branches.8 In sum, the CTA-
Interest up to 3-31-2000 58.29
First Division partly granted Sony’s petition by
cancelling the deficiency VAT assessment
Compromise 2,000.00 but upheld a modified deficiency EWT
10,923.60 assessment as well as the penalties. Thus,
the dispositive portion reads:
Penalties Due P
10,923.60
WHEREFORE, the petition for review is
hereby PARTIALLY GRANTED. Respondent
is ORDERED to CANCEL and WITHDRAW
GRAND TOTAL P the deficiency assessment for value-added
15,895,632.655 tax for 1997 for lack of merit. However, the
deficiency assessments for expanded
withholding tax and penalties for late
Sony sought re-evaluation of the remittance of internal revenue taxes are
aforementioned assessment by filing a UPHELD.
protest on February 2, 2000. Sony submitted
relevant documents in support of its protest
on the 16th of that same month.6 Accordingly, petitioner is DIRECTED to PAY
the respondent the deficiency expanded
withholding tax in the amount of
On October 24, 2000, within 30 days after the ₱1,035,879.70 and the following penalties for
lapse of 180 days from submission of the said late remittance of internal revenue taxes in
supporting documents to the CIR, Sony filed the sum of ₱1,269,593.90:
a petition for review before the CTA.7
1. VAT on Royalty P 429,242.07 3. Whether or not the withholding assessment
with respect to the 5% withholding tax on
2. Withholding Tax on Royalty 831,428.20
rental deposit in the amount of
3. EWT of Petitioner's Branches 8,923.63 ₱10,523,821.99 is proper; and

Total P 1,269,593.90 4. Whether or not the remittance of final

withholding tax on royalties covering the
Plus 20% delinquency interest from January period January to March 1998 was filed
17, 2000 until fully paid pursuant to Section outside of time.11
249(C)(3) of the 1997 Tax Code.
SO ORDERED.9
Finding no cogent reason to reverse the
The CIR sought a reconsideration of the decision of the CTA-First Division, the CTA-
above decision and submitted the following EB dismissed CIR’s petition on May 17, 2007.
grounds in support thereof: CIR’s motion for reconsideration was denied
A. The Honorable Court committed reversible by the CTA-EB on July 5, 2007.
error in holding that petitioner is not liable for
the deficiency VAT in the amount of
₱11,141,014.41; The CIR is now before this Court via this
petition for review relying on the very same
B. The Honorable court committed reversible grounds it raised before the CTA-First
error in holding that the commission expense Division and the CTA-EB. The said grounds
in the amount of P2,894,797.00 should be are reproduced below:
subjected to 5% withholding tax instead of the
10% tax rate;
C. The Honorable Court committed a GROUNDS FOR THE ALLOWANCE OF THE
reversible error in holding that the withholding PETITION
tax assessment with respect to the 5%
I THE CTA EN BANC ERRED IN RULING
withholding tax on rental deposit in the
THAT RESPONDENT IS NOT LIABLE FOR
amount of ₱10,523,821.99 should be
DEFICIENCY VAT IN THE AMOUNT OF
cancelled; and
PHP11,141,014.41.
D. The Honorable Court committed reversible
II AS TO RESPONDENT’S DEFICIENCY
error in holding that the remittance of final
EXPANDED WITHHOLDING TAX IN THE
withholding tax on royalties covering the
AMOUNT OF PHP1,992,462.72:
period January to March 1998 was filed on
time.10
A. THE CTA EN BANC ERRED IN RULING
THAT THE COMMISSION EXPENSE IN THE
On April 28, 2005, the CTA-First Division
AMOUNT OF PHP2,894,797.00 SHOULD BE
denied the motion for
SUBJECTED TO A WITHHOLDING TAX OF
reconsideration.1avvphi1 Unfazed, the CIR
5% INSTEAD OF THE 10% TAX RATE.
filed a petition for review with the CTA-EB
raising identical issues:
1. Whether or not respondent (Sony) is liable B. THE CTA EN BANC ERRED IN RULING
for the deficiency VAT in the amount of THAT THE ASSESSMENT WITH RESPECT
P11,141,014.41; TO THE 5% WITHHOLDING TAX ON
RENTAL DEPOSIT IN THE AMOUNT OF
2. Whether or not the commission expense in
PHP10,523,821.99 IS NOT PROPER.
the amount of ₱2,894,797.00 should be
subjected to 10% withholding tax instead of
the 5% tax rate;
III THE CTA EN BANC ERRED IN RULING of any taxpayer and the assessment of the
THAT THE FINAL WITHHOLDING TAX ON correct amount of tax: Provided, however,
ROYALTIES COVERING THE PERIOD That failure to file a return shall not prevent
JANUARY TO MARCH 1998 WAS FILED ON the Commissioner from authorizing the
TIME.12 examination of any taxpayer. x x x
[Emphases supplied]

Upon filing of Sony’s comment, the Court

ordered the CIR to file its reply thereto. The Clearly, there must be a grant of authority
CIR subsequently filed a manifestation before any revenue officer can conduct an
informing the Court that it would no longer file examination or assessment. Equally
a reply. Thus, on December 3, 2008, the important is that the revenue officer so
Court resolved to give due course to the authorized must not go beyond the authority
petition and to decide the case on the basis given. In the absence of such an authority,
of the pleadings filed.13 the assessment or examination is a nullity.

The Court finds no merit in the petition. As earlier stated, LOA 19734 covered "the
period 1997 and unverified prior years." For
said reason, the CIR acting through its
The CIR insists that LOA 19734, although it revenue officers went beyond the scope of
states "the period 1997 and unverified prior their authority because the deficiency VAT
years," should be understood to mean the assessment they arrived at was based on
fiscal year ending in March 31, 1998.14 The records from January to March 1998 or using
Court cannot agree. the fiscal year which ended in March 31,
1998. As pointed out by the CTA-First
Division in its April 28, 2005 Resolution, the
Based on Section 13 of the Tax Code, a CIR knew which period should be covered by
Letter of Authority or LOA is the authority the investigation. Thus, if CIR wanted or
given to the appropriate revenue officer intended the investigation to include the year
assigned to perform assessment functions. It 1998, it should have done so by including it in
empowers or enables said revenue officer to the LOA or issuing another LOA.
examine the books of account and other
accounting records of a taxpayer for the
purpose of collecting the correct amount of Upon review, the CTA-EB even added that
tax.15 The very provision of the Tax Code the coverage of LOA 19734, particularly the
that the CIR relies on is unequivocal with phrase "and unverified prior years," violated
regard to its power to grant authority to Section C of Revenue Memorandum Order
examine and assess a taxpayer. No. 43-90 dated September 20, 1990, the
pertinent portion of which reads:

SEC. 6. Power of the Commissioner to Make

Assessments and Prescribe Additional 3. A Letter of Authority should cover a taxable
Requirements for Tax Administration and period not exceeding one taxable year. The
Enforcement. – practice of issuing L/As covering audit of
"unverified prior years is hereby prohibited. If
(A)Examination of Returns and Determination the audit of a taxpayer shall include more
of tax Due. – After a return has been filed as than one taxable period, the other periods or
required under the provisions of this Code, years shall be specifically indicated in the
the Commissioner or his duly authorized L/A.16 [Emphasis supplied]
representative may authorize the examination
 The fact that due to adverse economic
conditions, Sony-Singapore has granted to
On this point alone, the deficiency VAT
our client a subsidy equivalent to the latter’s
assessment should have been disallowed. Be
advertising expenses will not affect the
that as it may, the CIR’s argument, that
validity of the input taxes from such
Sony’s advertising expense could not be
expenses. Thus, at the most, this is an
considered as an input VAT credit because
additional income of our client subject to
the same was eventually reimbursed by Sony
income tax. We submit further that our client
International Singapore (SIS), is also
is not subject to VAT on the subsidy income
erroneous.
as this was not derived from the sale of
goods or services.22

The CIR contends that since Sony’s

advertising expense was reimbursed by SIS,
Insofar as the above-mentioned subsidy may
the former never incurred any advertising
be considered as income and, therefore,
expense. As a result, Sony is not entitled to a
subject to income tax, the Court agrees.
tax credit. At most, the CIR continues, the
However, the Court does not agree that the
said advertising expense should be for the
same subsidy should be subject to the 10%
account of SIS, and not Sony.17
VAT. To begin with, the said subsidy termed
by the CIR as reimbursement was not even
exclusively earmarked for Sony’s advertising
The Court is not persuaded. As aptly found expense for it was but an assistance or aid in
by the CTA-First Division and later affirmed view of Sony’s dire or adverse economic
by the CTA-EB, Sony’s deficiency VAT conditions, and was only "equivalent to the
assessment stemmed from the CIR’s latter’s (Sony’s) advertising expenses."
disallowance of the input VAT credits that
should have been realized from the
advertising expense of the latter.18 It is
Section 106 of the Tax Code explains when
evident under Section 11019 of the 1997 Tax
VAT may be imposed or exacted. Thus:
Code that an advertising expense duly
covered by a VAT invoice is a legitimate SEC. 106. Value-added Tax on Sale of
business expense. This is confirmed by no Goods or Properties. –
less than CIR’s own witness, Revenue Officer
(A) Rate and Base of Tax. – There shall be
Antonio Aluquin.20 There is also no denying
levied, assessed and collected on every sale,
that Sony incurred advertising expense.
barter or exchange of goods or properties,
Aluquin testified that advertising companies
value-added tax equivalent to ten percent
issued invoices in the name of Sony and the
(10%) of the gross selling price or gross value
latter paid for the same.21 Indubitably, Sony
in money of the goods or properties sold,
incurred and paid for advertising expense/
bartered or exchanged, such tax to be paid
services. Where the money came from is
by the seller or transferor.
another matter all together but will definitely
not change said fact.

Thus, there must be a sale, barter or

exchange of goods or properties before any
The CIR further argues that Sony itself
VAT may be levied. Certainly, there was no
admitted that the reimbursement from SIS
such sale, barter or exchange in the subsidy
was income and, thus, taxable. In support of
given by SIS to Sony. It was but a dole out by
this, the CIR cited a portion of Sony’s protest
SIS and not in payment for goods or
filed before it:
properties sold, bartered or exchanged by
Sony.
 brokers and agents of professional
entertainers – five per centum (5%).25
In the case of CIR v. Court of Appeals
(CA),23 the Court had the occasion to rule
that services rendered for a fee even on
In denying the very same argument of the
reimbursement-on-cost basis only and
CIR in its motion for reconsideration, the
without realizing profit are also subject to
CTA-First Division, held:
VAT. The case, however, is not applicable to
the present case. In that case, COMASERCO
rendered service to its affiliates and, in turn,
the affiliates paid the former reimbursement- x x x, commission expense is indeed subject
on-cost which means that it was paid the cost to 10% withholding tax but payments made to
or expense that it incurred although without broker is subject to 5% withholding tax
profit. This is not true in the present case. pursuant to Section 1(g) of Revenue
Sony did not render any service to SIS at all. Regulations No. 6-85. While the commission
The services rendered by the advertising expense in the schedule of Selling, General
companies, paid for by Sony using SIS dole- and Administrative expenses submitted by
out, were for Sony and not SIS. SIS just gave petitioner (SPI) to the BIR is captioned as
assistance to Sony in the amount equivalent "commission/dealer salesman incentive" the
to the latter’s advertising expense but never same does not justify the automatic
received any goods, properties or service imposition of flat 10% rate. As itemized by
from Sony. petitioner, such expense is composed of
"Commission Expense" in the amount of
P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26
Regarding the deficiency EWT assessment,
more particularly Sony’s commission
expense, the CIR insists that said deficiency
EWT assessment is subject to the ten The Court agrees with the CTA-EB when it
percent (10%) rate instead of the five percent affirmed the CTA-First Division decision.
(5%) citing Revenue Regulation No. 2-98 Indeed, the applicable rule is Revenue
dated April 17, 1998.24 The said revenue Regulations No. 6-85, as amended by
regulation provides that the 10% rate is Revenue Regulations No. 12-94, which was
applied when the recipient of the commission the applicable rule during the subject period
income is a natural person. According to the of examination and assessment as specified
CIR, Sony’s schedule of Selling, General and in the LOA. Revenue Regulations No. 2-98,
Administrative expenses shows the cited by the CIR, was only adopted in April
commission expense as "commission/dealer 1998 and, therefore, cannot be applied in the
salesman incentive," emphasizing the word present case. Besides, the withholding tax on
salesman. brokers and agents was only increased to
10% much later or by the end of July 2001
under Revenue Regulations No. 6-2001.27
Until then, the rate was only 5%.
On the other hand, the application of the five
percent (5%) rate by the CTA-First Division is
based on Section 1(g) of Revenue
Regulations No. 6-85 which provides: The Court also affirms the findings of both the
CTA-First Division and the CTA-EB on the
deficiency EWT assessment on the rental
deposit. According to their findings, Sony
(g) Amounts paid to certain Brokers and
incurred the subject rental deposit in the
Agents. – On gross payments to customs,
amount of ₱10,523,821.99 only from January
insurance, real estate and commercial
to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying
the coverage, the CIR’s deficiency EWT LICENSOR a statement, certified by an
assessment from January to March 1998, is officer of the LICENSEE, showing quantities
not valid and must be disallowed. of the MODELS sold, leased or otherwise
disposed of by the LICENSEE during such
respective semi-annual period and amount of
Finally, the Court now proceeds to the third royalty due pursuant this ARTICLE X
ground relied upon by the CIR. therefore, and the LICENSEE shall pay the
royalty hereunder to the LICENSOR
concurrently with the furnishing of the above
The CIR initially assessed Sony to be liable statement.30
for penalties for belated remittance of its FWT
on royalties (i) as of December 1997; and (ii)
for the period from January to March 1998. Withal, Sony was to pay Sony-Japan royalty
Again, the Court agrees with the CTA-First within two (2) months after every semi-annual
Division when it upheld the CIR with respect period which ends in June 30 and December
to the royalties for December 1997 but 31. However, the CTA-First Division found
cancelled that from January to March 1998. that there was accrual of royalty by the end of
December 1997 as well as by the end of June
1998. Given this, the FWTs should have been
The CIR insists that under Section 328 of paid or remitted by Sony to the CIR on
Revenue Regulations No. 5-82 and Sections January 10, 1998 and July 10, 1998. Thus, it
2.57.4 and 2.58(A)(2)(a)29 of Revenue was correct for the CTA-First Division and the
Regulations No. 2-98, Sony should also be CTA-EB in ruling that the FWT for the royalty
made liable for the FWT on royalties from from January to March 1998 was seasonably
January to March of 1998. At the same time, filed. Although the royalty from January to
it downplays the relevance of the March 1998 was well within the semi-annual
Manufacturing License Agreement (MLA) period ending June 30, which meant that the
between Sony and Sony-Japan, particularly royalty may be payable until August 1998
in the payment of royalties. pursuant to the MLA, the FWT for said royalty
had to be paid on or before July 10, 1998 or
10 days from its accrual at the end of June
The above revenue regulations provide the 1998. Thus, when Sony remitted the same on
manner of withholding remittance as well as July 8, 1998, it was not yet late.
the payment of final tax on royalty. Based on
the same, Sony is required to deduct and
withhold final taxes on royalty payments In view of the foregoing, the Court finds no
when the royalty is paid or is payable. After reason to disturb the findings of the CTA-EB.
which, the corresponding return and WHEREFORE, the petition is DENIED. SO
remittance must be made within 10 days after ORDERED.
the end of each month. The question now is
when does the royalty become payable?

Under Article X(5) of the MLA between Sony

and Sony-Japan, the following terms of
royalty payments were agreed upon:

(5)Within two (2) months following each semi-

annual period ending June 30 and December
31, the LICENSEE shall furnish to the
 companies shall be subjected to a zero rate of
VAT.10 Pursuant to EPIRA, Mindanao I and II filed
with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes
due to VAT zero-rated sales in 2003. Mindanao I
and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division

MINDANAO II GEOTHERMAL
cases, CTA Case Nos. 7227, 7287, and 7317,
PARTNERSHIP, Petitioner,
which were consolidated as CTA EB No. 513. CTA
vs.
Case Nos. 7227, 7287, and 7317 claim a tax refund
COMMISSIONER OF INTERNAL
or credit of Mindanao II’s alleged excess or
REVENUE, Respondent
unutilized input taxes due to VAT zero-rated sales.
In CTA Case No. 7227, Mindanao II claims a tax
G.R. No. 193301 is a petition for review1 assailing refund or credit of ₱3,160,984.69 for the first quarter
the Decision2 promulgated on 10 March 2010 as of 2003. In CTA Case No. 7287, Mindanao II claims
well as the Resolution3 promulgated on 28 July 2010 a tax refund or credit of ₱1,562,085.33 for the
by the Court of Tax Appeals En Banc (CTA En second quarter of 2003. In CTA Case No. 7317,
Banc) in CTA EB No. 513. The CTA En Banc Mindanao II claims a tax refund or credit of
affirmed the 22 September 2008 Decision 4 as well ₱3,521,129.50 for the third and fourth quarters of
as the 26 June 2009 Amended Decision 5 of the First 2003.
Division of the Court of Tax Appeals (CTA First
Division) in CTA Case Nos. 7227, 7287, and 7317.
The CTA First Division’s narration of the pertinent
The CTA First Division denied Mindanao II
facts is as follows:
Geothermal Partnership’s (Mindanao II) claims for
refund or tax credit for the first and second quarters
of taxable year 2003 for being filed out of time (CTA xxxx
Case Nos. 7227 and 7287). The CTA First Division,
however, ordered the On March 11, 1997, [Mindanao II] allegedly entered
into a Built (sic)-Operate-Transfer (BOT) contract
Commissioner of Internal Revenue (CIR) to refund with the Philippine National Oil Corporation –
or credit to Mindanao II unutilized input value-added Energy Development Company (PNOC-EDC) for
tax (VAT) for the third and fourth quarters of taxable finance, engineering, supply, installation, testing,
year 2003 (CTA Case No. 7317). commissioning, operation, and maintenance of a
48.25 megawatt geothermal power plant, provided
that PNOC-EDC shall supply and deliver steam to
G.R. No. 194637 is a petition for review6 assailing
Mindanao II at no cost. In turn, Mindanao II shall
the Decision7 promulgated on 31 May 2010 as well
convert the steam into electric capacity and energy
as the Amended Decision8 promulgated on 24
for PNOC-EDC and shall deliver the same to the
November 2010 by the CTA En Banc in CTA EB
National Power Corporation (NPC) for and in behalf
Nos. 476 and 483. In its Amended Decision, the
of PNOC-EDC. Mindanao II alleges that its sale of
CTA En Banc reversed its 31 May 2010 Decision
generated power and delivery of electric capacity
and granted the CIR’s petition for review in CTA
and energy of Mindanao II to NPC for and in behalf
Case No. 476. The CTA En Banc denied Mindanao
of PNOC-EDC is its only revenue-generating activity
I Geothermal Partnership’s (Mindanao I) claims for
which is in the ambit of VAT zero-rated sales under
refund or tax credit for the first (CTA Case No.
the EPIRA Law, x x x.
7228), second (CTA Case No. 7286), third, and
fourth quarters (CTA Case No. 7318) of 2003.
xxxx
Both Mindanao I and II are partnerships registered
with the Securities and Exchange Commission, Hence, the amendment of the NIRC of 1997
value added taxpayers registered with the Bureau of modified the VAT rate applicable to sales of
Internal Revenue (BIR), and Block Power generated power by generation companies from ten
Production Facilities accredited by the Department (10%) percent to zero (0%) percent.
of Energy. Republic Act No. 9136, or the Electric
Power Industry Reform Act of 2000 (EPIRA), In the course of its operation, Mindanao II makes
effectively amended Republic Act No. 8424, or the domestic purchases of goods and services and
Tax Reform Act of 1997 (1997 Tax Code), 9 when it accumulates therefrom creditable input taxes.
decreed that sales of power by generation Pursuant to the provisions of the National Internal
Revenue Code (NIRC), Mindanao II alleges that it 1. There must be zero-rated or effectively zero-rated
can use its accumulated input tax credits to offset its sales;
output tax liability. Considering, however that its
only revenue-generating activity is VAT zero-rated 2. That input taxes were incurred or paid;
under RA No. 9136, Mindanao II’s input tax credits
remain unutilized. 3. That such input VAT payments are directly
attributable to zero-rated sales or effectively zero-
Thus, on the belief that its sales qualify for VAT rated sales;
zero-rating, Mindanao II adopted the VAT zero-
rating of the EPIRA in computing for its VAT 4. That the input VAT payments were not applied
payable when it filed its Quarterly VAT Returns on against any output VAT liability; and
the following dates:
5. That the claim for refund was filed within the two-
year prescriptive period.13

CTA Period Date of Filing With respect to the fifth requirement, the CTA First
Case Covered Division tabulated the dates of filing of Mindanao II’s
Original Amended
No. (2003) return as well as its administrative and judicial
Return Return
claims, and concluded that Mindanao II’s
7227 1st April 23, July 3, administrative and judicial claims were timely filed in
Quarter 2003 2002 (sic), compliance with this Court’s ruling in Atlas
April 1, Consolidated Mining and Development Corporation
2004 & v. Commissioner of Internal Revenue (Atlas). 14 The
October CTA First Division declared that the two-year
22, 2004 prescriptive period for filing a VAT refund claim
7287 2nd July 22, April 1, should not be counted from the close of the quarter
Quarter 2003 2004 but from the date of the filing of the VAT return. As
ruled in Atlas, VAT liability or entitlement to a refund
7317 3rd Oct. 27, April 1, can only be determined upon the filing of the
Quarter 2003 2004 quarterly VAT return.
7317 4th Jan. 26, April 1,
Quarter 2004 2204 CTA Period Date Filing
Cas Covere
Origin Amende Administrati Judici
Considering that it has accumulated unutilized e d
al d ve al
creditable input taxes from its only income- No. (2003)
Return Return Return Claim
generating activity, Mindanao II filed an application
for refund and/or issuance of tax credit certificate 722 1st 23 1 April 13 April 22
with the BIR’s Revenue District Office at Kidapawan 7 Quarte April 2004 2005 April
City on April 13, 2005 for the four quarters of 2003. r 2003 2005
728 2nd 22 1 April 13 April 7 July
To date (September 22, 2008), the application for 7 Quarte July 2004 2005 2005
refund by Mindanao II remains unacted upon by the r 2003
CIR. Hence, these three petitions filed on April 22, 731 3rd 25 1 April 13 April 9
2005 covering the 1st quarter of 2003; July 7, 2005 7 Quarte Oct. 2004 2005 Sept.
for the 2nd quarter of 2003; and September 9, 2005 r 2003 2005
for the 3rd and 4th quarters of 2003. At the instance
of Mindanao II, these petitions were consolidated on 731 4th 26 1 April 13 April 9
March 15, 2006 as they involve the same parties 7 Quarte Jan. 2004 2005 Sept.
and the same subject matter. The only difference r 2004 200515
lies with the taxable periods involved in each
petition.11 Thus, counting from 23 April 2003, 22 July 2003, 25
October 2003, and 26 January 2004, when
The Court of Tax Appeals’ Ruling: Division Mindanao II filed its VAT returns, its administrative
claim filed on 13 April 2005 and judicial claims filed
In its 22 September 2008 Decision, 12 the CTA First on 22 April 2005, 7 July 2005, and 9 September
Division found that Mindanao II satisfied the twin 2005 were timely filed in accordance with Atlas.
requirements for VAT zero rating under EPIRA: (1) it
is a generation company, and (2) it derived sales The CTA First Division found that Mindanao II is
from power generation. The CTA First Division also entitled to a refund in the modified amount of
stated that Mindanao II complied with five ₱7,703,957.79, after disallowing ₱522,059.91 from
requirements to be entitled to a refund: input VAT16 and deducting ₱18,181.82 from
Mindanao II’s sale of a fully depreciated sale of the Nissan Patrol is not incidental to
₱200,000.00 Nissan Patrol. The input taxes Mindanao II’s VAT zero-rated operations. Moreover,
amounting to ₱522,059.91 were disallowed for Mindanao II’s submitted documents failed to
failure to meet invoicing requirements, while the substantiate the requisites for the refund or credit
input VAT on the sale of the Nissan Patrol was claims.
reduced by ₱18,181.82 because the output VAT for
the sale was not included in the VAT declarations. The CTA First Division modified its 22 September
2008 Decision to read as follows:
The dispositive portion of the CTA First Division’s 22
September 2008 Decision reads: WHEREFORE, the Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, the CIR is
WHEREFORE, the Petition for Review is hereby hereby ORDERED to REFUND or to ISSUE A TAX
PARTIALLY GRANTED. Accordingly, the CIR is CREDIT CERTIFICATE to Mindanao II Geothermal
hereby ORDERED to REFUND or to ISSUE A TAX Partnership in the modified amount of TWO
CREDIT CERTIFICATE in the modified amount of MILLION NINE HUNDRED EIGHTY THOUSAND
SEVEN MILLION SEVEN HUNDRED THREE EIGHT HUNDRED EIGHTY SEVEN AND 77/100
THOUSAND NINE HUNDRED FIFTY SEVEN AND PESOS (₱2,980,887.77) representing its unutilized
79/100 PESOS (₱7,703,957.79) representing its input VAT for the third and fourth quarters of the
unutilized input VAT for the four (4) quarters of the taxable year 2003.
taxable year 2003.
SO ORDERED.21
SO ORDERED. 17

Mindanao II filed a Petition for Review, 22 docketed

Mindanao II filed a motion for partial as CTA EB No. 513, before the CTA En Banc.
reconsideration.18 It stated that the sale of the fully
depreciated Nissan Patrol is a one-time transaction The Court of Tax Appeals’ Ruling: En Banc
and is not incidental to its VAT zero-rated
operations. Moreover, the disallowed input taxes On 10 March 2010, the CTA En Banc rendered its
substantially complied with the requirements for Decision23 in CTA EB No. 513 and denied Mindanao
refund or tax credit. II’s petition. The CTA En Banc ruled that (1) Section
112(A) clearly provides that the reckoning of the
The CIR also filed a motion for partial two-year prescriptive period for filing the application
reconsideration. It argued that the judicial claims for for refund or credit of input VAT attributable to zero-
the first and second quarters of 2003 were filed rated sales or effectively zero-rated sales shall be
beyond the period allowed by law, as stated in counted from the close of the taxable quarter when
Section 112(A) of the 1997 Tax Code. The CIR the sales were made; (2) the Atlas and Mirant cases
further stated that Section 229 is a general applied different tax codes: Atlas applied the 1977
provision, and governs cases not covered by Tax Code while Mirant applied the 1997 Tax Code;
Section 112(A). The CIR countered the CTA First (3) the sale of the fully-depreciated Nissan Patrol is
Division’s 22 September 2008 decision by citing this incidental to Mindanao II’s VAT zero-rated
Court’s ruling in Commisioner of Internal Revenue v. transactions pursuant to Section 105; (4) Mindanao
Mirant Pagbilao Corporation (Mirant), 19 which stated II failed to comply with the substantiation
that unutilized input VAT payments must be claimed requirements provided under Section 113(A) in
within two years reckoned from the close of the relation to Section 237 of the 1997 Tax Code as
taxable quarter when the relevant sales were made implemented by Section 4.104-1, 4.104-5, and
regardless of whether said tax was paid. 4.108-1 of Revenue Regulation No. 7-95; and (5)
the doctrine of strictissimi juris on tax exemptions
The CTA First Division denied Mindanao II’s motion cannot be relaxed in the present case.
for partial reconsideration, found the CIR’s motion
for partial reconsideration partly meritorious, and The dispositive portion of the CTA En Banc’s 10
rendered an Amended Decision20 on 26 June 2009. March 2010 Decision reads:
The CTA First Division stated that the claim for
refund or credit with the BIR and the subsequent WHEREFORE, on the basis of the foregoing
appeal to the CTA must be filed within the two-year considerations, the Petition for Review en banc is
period prescribed under Section 229. The two-year DISMISSED for lack of merit. Accordingly, the
prescriptive period in Section 229 was denominated Decision dated September 22, 2008 and the
as a mandatory statute of limitations. Therefore, Amended Decision dated June 26, 2009 issued by
Mindanao II’s claims for refund for the first and the First Division are AFFIRMED.
second quarters of 2003 had already prescribed.
SO ORDERED.24
The CTA First Division found that the records of
Mindanao II’s case are bereft of evidence that the
The CTA En Banc issued a Resolution 25 on 28 July capacity and energy for PNOC-EDC and shall
2010 denying for lack of merit Mindanao II’s Motion subsequently supply and deliver the same to the
for Reconsideration.26 The CTA En Banc highlighted National Power Corporation (NPC), for and in behalf
the following bases of their previous ruling: of PNOC-EDC.

1. The Supreme Court has long decided that Mindanao I’s 47-megawatt geothermal power plant
the claim for refund of unutilized input VAT project has been accredited by the Department of
must be filed within two (2) years after the Energy (DOE) as a Private Sector Generation
close of the taxable quarter when such sales Facility, pursuant to the provision of Executive Order
were made. No. 215, wherein Certificate of Accreditation No. 95-
037 was issued.
2. The Supreme Court is the ultimate arbiter
whose decisions all other courts should take On June 26, 2001, Republic Act (R.A.) No. 9136
bearings. took effect, and the relevant provisions of the
National Internal Revenue Code (NIRC) of 1997
3. The words of the law are clear, plain, and were deemed modified. R.A. No. 9136, also known
free from ambiguity; hence, it must be given as the "Electric Power Industry Reform Act of 2001
its literal meaning and applied without any (EPIRA), was enacted by Congress to ordain
interpretation.27 reforms in the electric power industry, highlighting,
among others, the importance of ensuring the
reliability, security and affordability of the supply of
electric power to end users. Under the provisions of
this Republic Act and its implementing rules and
regulations, the delivery and supply of electric
energy by generation companies became VAT zero-
G.R. No. 194637 rated, which previously were subject to ten percent
Mindanao I v. CIR (10%) VAT.

The Facts xxxx

G.R. No. 194637 covers two cases consolidated by The amendment of the NIRC of 1997 modified the
the CTA EB: CTA EB Case Nos. 476 and 483. Both VAT rate applicable to sales of generated power by
CTA EB cases consolidate three cases from the generation companies from ten (10%) percent to
CTA Second Division: CTA Case Nos. 7228, 7286, zero percent (0%). Thus, Mindanao I adopted the
and 7318. CTA Case Nos. 7228, 7286, and 7318 VAT zero-rating of the EPIRA in computing for its
claim a tax refund or credit of Mindanao I’s VAT payable when it filed its VAT Returns, on the
accumulated unutilized and/or excess input taxes belief that its sales qualify for VAT zero-rating.
due to VAT zero-rated sales. In CTA Case No.
7228, Mindanao I claims a tax refund or credit of
Mindanao I reported its unutilized or excess
₱3,893,566.14 for the first quarter of 2003. In CTA
creditable input taxes in its Quarterly VAT Returns
Case No. 7286, Mindanao I claims a tax refund or
for the first, second, third, and fourth quarters of
credit of ₱2,351,000.83 for the second quarter of
taxable year 2003, which were subsequently
2003. In CTA Case No. 7318, Mindanao I claims a
amended and filed with the BIR.
tax refund or credit of ₱7,940,727.83 for the third
and fourth quarters of 2003.
On April 4, 2005, Mindanao I filed with the BIR
separate administrative claims for the issuance of
Mindanao I is similarly situated as Mindanao II. The
tax credit certificate on its alleged unutilized or
CTA Second Division’s narration of the pertinent
excess input taxes for taxable year 2003, in the
facts is as follows:
accumulated amount of ₱14,185, 294.80.
xxxx
Alleging inaction on the part of CIR, Mindanao I
elevated its claims before this Court on April 22,
In December 1994, Mindanao I entered into a 2005, July 7, 2005, and September 9, 2005
contract of Build-Operate-Transfer (BOT) with the docketed as CTA Case Nos. 7228, 7286, and 7318,
Philippine National Oil Corporation – Energy respectively. However, on October 10, 2005,
Development Corporation (PNOC-EDC) for the Mindanao I received a copy of the letter dated
finance, design, construction, testing, September 30, 2003 (sic) of the BIR denying its
commissioning, operation, maintenance and repair application for tax credit/refund.28
of a 47-megawatt geothermal power plant. Under
the said BOT contract, PNOC-EDC shall supply and
The Court of Tax Appeals’ Ruling: Division
deliver steam to Mindanao I at no cost. In turn,
Mindanao I will convert the steam into electric
On 24 October 2008, the CTA Second Division that Mindanao I failed to exhaust administrative
rendered its Decision29 in CTA Case Nos. 7228, remedies before it filed its petition for review. The
7286, and 7318. The CTA Second Division found CTA Second Division denied the CIR’s motion, and
that (1) pursuant to Section 112(A), Mindanao I can cited Atlas33 as the basis for ruling that it is more
only claim 90.27% of the amount of substantiated practical and reasonable to count the two-year
excess input VAT because a portion was not prescriptive period for filing a claim for refund or
reported in its quarterly VAT returns; (2) out of the credit of input VAT on zero-rated sales from the
₱14,185,294.80 excess input VAT applied for date of filing of the return and payment of the tax
refund, only ₱11,657,447.14 can be considered due.
substantiated excess input VAT due to
disallowances by the Independent Certified Public The dispositive portion of the CTA Second
Accountant, adjustment on the disallowances per Division’s 10 March 2009 Resolution reads:
the CTA Second Division’s further verification, and
additional disallowances per the CTA Second WHEREFORE, premises considered, the CIR’s
Division’s further verification; Motion for Partial Reconsideration and Mindanao I’s
Motion for Partial Reconsideration with Motion for
(3) Mindanao I’s accumulated excess input VAT for Clarification are hereby DENIED for lack of merit.
the second quarter of 2003 that was carried over to
the third quarter of 2003 is net of the claimed input SO ORDERED.34
VAT for the first quarter of 2003, and the same
procedure was done for the second, third, and
The Ruling of the Court of Tax Appeals: En Banc
fourth quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year
prescriptive period reckoned from the respective On 31 May 2010, the CTA En Banc rendered its
dates of filing of the quarterly VAT returns. Decision35 in CTA EB Case Nos. 476 and 483 and
denied the petitions filed by the CIR and Mindanao
I. The CTA En Banc found no new matters which
The dispositive portion of the CTA Second
have not yet been considered and passed upon by
Division’s 24 October 2008 Decision reads:
the CTA Second Division in its assailed decision
and resolution.
WHEREFORE, premises considered, the
consolidated Petitions for Review are hereby
The dispositive portion of the CTA En Banc’s 31
PARTIALLY GRANTED. Accordingly, the CIR is
May 2010 Decision reads:
hereby ORDERED TO ISSUE A TAX CREDIT
CERTIFICATE in favor of Mindanao I in the reduced
amount of TEN MILLION FIVE HUNDRED WHEREFORE, premises considered, the Petitions
TWENTY THREE THOUSAND ONE HUNDRED for Review are hereby DISMISSED for lack of merit.
SEVENTY SEVEN PESOS AND 53/100 Accordingly, the October 24, 2008 Decision and
(₱10,523,177.53) representing Mindanao I’s March 10, 2009 Resolution of the CTA Former
unutilized input VAT for the four quarters of the Second Division in CTA Case Nos. 7228, 7286, and
taxable year 2003. 7318, entitled "Mindanao I Geothermal Partnership
vs. Commissioner of Internal Revenue" are hereby
AFFIRMED in toto.
SO ORDERED.30
SO ORDERED.36
Mindanao I filed a motion for partial reconsideration
with motion for Clarification 31 on 11 November 2008.
It claimed that the CTA Second Division should not Both the CIR and Mindanao I filed Motions for
have allocated proportionately Mindanao I’s Reconsideration of the CTA En Banc’s 31 May 2010
unutilized creditable input taxes for the taxable year Decision. In an Amended Decision promulgated on
2003, because the proportionate allocation of the 24 November 2010, the CTA En Banc agreed with
amount of creditable taxes in Section 112(A) applies the CIR’s claim that Section 229 of the NIRC of
only when the creditable input taxes due cannot be 1997 is inapplicable in light of this Court’s ruling in
directly and entirely attributed to any of the zero- Mirant. The CTA En Banc also ruled that the
rated or effectively zero-rated sales. Mindanao I procedure prescribed under Section 112(D) now
claims that its unreported collection is directly 112(C)37 of the 1997 Tax Code should be followed
attributable to its VAT zero-rated sales. The CTA first before the CTA En Banc can act on Mindanao
Second Division denied Mindanao I’s motion and I’s claim. The CTA En Banc reconsidered its 31 May
maintained the proportionate allocation because 2010 Decision in light of this Court’s ruling in
there was a portion of the gross receipts that was Commissioner of Internal Revenue v. Aichi Forging
undeclared in Mindanao I’s gross receipts. Company of Asia, Inc. (Aichi).38

The CIR also filed a motion for partial The pertinent portions of the CTA En Banc’s 24
reconsideration32 on 11 November 2008. It claimed November 2010 Amended Decision read:
C.T.A. Case No. 7228: 2005 and December 31, 2005, respectively, within
which to file its administrative claim for the third and
(1) For calendar year 2003, Mindanao I filed with the fourth quarters of 2003;
BIR its Quarterly VAT Returns for the First Quarter
of 2003. Pursuant to Section 112(A) of the NIRC of (2) On April 4, 2005, Mindanao I applied an
1997, as amended, Mindanao I has two years from administrative claim for refund of unutilized input
March 31, 2003 or until March 31, 2005 within which VAT for the third and fourth quarters of taxable year
to file its administrative claim for refund; 2003 with the BIR, which is well within the two-year
prescriptive period, provided under Section 112(A)
(2) On April 4, 2005, Mindanao I applied for an of the NIRC of 1997, as amended;
administrative claim for refund of unutilized input
VAT for the first quarter of taxable year 2003 with (3) From April 4, 2005, which is also presumably the
the BIR, which is beyond the two-year prescriptive date Mindanao I submitted supporting documents,
period mentioned above. together with the aforesaid application for refund,
the CIR has 120 days or until August 2, 2005, to
C.T.A. Case No. 7286: decide the claim;

(1) For calendar year 2003, Mindanao I filed with the (4) Within thirty (30) days from the lapse of the 120-
BIR its Quarterly VAT Returns for the second day period or from August 3, 2005 until September
quarter of 2003. Pursuant to 1, 2005 Mindanao I should have elevated its claim
for refund to the CTA;
Section 112(A) of the NIRC of 1997, as amended,
Mindanao I has two years from June 30, 2003, (5) However, Mindanao I filed its Petition for Review
within which to file its administrative claim for refund with the CTA in Division only on September 9, 2005,
for the second quarter of 2003, or until June 30, which is 8 days beyond the 30-day period to appeal
2005; to the CTA.

(2) On April 4, 2005, Mindanao I applied an Evidently, the Petition for Review was filed way
administrative claim for refund of unutilized input beyond the 30-day prescribed period. Thus, the
VAT for the second quarter of taxable year 2003 Petition for Review should have been dismissed for
with the BIR, which is within the two-year being filed late.
prescriptive period, provided under Section 112 (A)
of the NIRC of 1997, as amended; In recapitulation:

(3) The CIR has 120 days from April 4, 2005 (1) C.T.A. Case No. 7228
(presumably the date Mindanao I submitted the
supporting documents together with the application Claim for the first quarter of 2003 had already
for refund) or until August 2, 2005, to decide the prescribed for having been filed beyond the two-
administrative claim for refund; year prescriptive period;

(4) Within 30 days from the lapse of the 120-day (2) C.T.A. Case No. 7286
period or from August 3, 2005 to September 1,
2005, Mindanao I should have elevated its claim for Claim for the second quarter of 2003 should be
refund to the CTA in Division; dismissed for Mindanao I’s failure to comply with a
condition precedent when it failed to exhaust
(5) However, on July 7, 2005, Mindanao I filed its administrative remedies by filing its Petition for
Petition for Review with this Court, docketed as CTA Review even before the lapse of the 120-day period
Case No. 7286, even before the 120-day period for for the CIR to decide the administrative claim;
the CIR to decide the claim for refund had lapsed on
August 2, 2005. The Petition for Review was, (3) C.T.A. Case No. 7318
therefore, prematurely filed and there was failure to
exhaust administrative remedies;
Petition for Review was filed beyond the 30-day
prescribed period to appeal to the CTA.
C.T.A. Case No. 7318:
xxxx
(1) For calendar year 2003, Mindanao I filed with the
BIR its Quarterly VAT Returns for the third and
IN VIEW OF THE FOREGOING, the Commissioner
fourth quarters of 2003. Pursuant to Section 112(A)
of Internal Revenue’s Motion for Reconsideration is
of the NIRC of 1997, as amended, Mindanao I
hereby GRANTED; Mindanao I’s Motion for Partial
therefore, has two years from September 30, 2003
Reconsideration is hereby DENIED for lack of merit.
and December 31, 2003, or until September 30,
The May 31, 2010 Decision of this Court En Banc is C. The amount of ₱487,355.93 was unapplied
hereby REVERSED. and/or was not included in Mindanao II’s claim for
refund or tax credit for the year 2004 subject matter
Accordingly, the Petition for Review of the of CTA Case No. 7507.
Commissioner of Internal Revenue in CTA EB No.
476 is hereby GRANTED and the entire claim of IV. The doctrine of strictissimi juris on tax
Mindanao I Geothermal Partnership for the first, exemptions should be relaxed in the present case. 40
second, third and fourth quarters of 2003 is hereby
DENIED. G.R. No. 194637
Mindanao I v. CIR
SO ORDERED.39
Mindanao I raised the following grounds in its
The Issues Petition for Review:

G.R. No. 193301 I. The administrative claim and judicial claim in CTA
Mindanao II v. CIR Case No. 7228 were timely filed pursuant to the
Mindanao II raised the following grounds in its case of Atlas Consolidated Mining and Development
Petition for Review: Corporation vs. Commissioner of Internal Revenue,
which was then the controlling ruling at the time of
I. The Honorable Court of Tax Appeals erred filing.
in holding that the claim of Mindanao II for
the 1st and 2nd quarters of year 2003 has A. The recent ruling in the Commissioner of Internal
already prescribed pursuant to the Mirant Revenue vs. Mirant Pagbilao Corporation, which
case. uses the end of the taxable quarter when the sales
were made as the reckoning date in counting the
A. The Atlas case and Mirant case have conflicting two-year prescriptive period, cannot be applied
interpretations of the law as to the reckoning date of retroactively in the case of Mindanao I.
the two year prescriptive period for filing claims for
VAT refund. B. The Atlas case promulgated by the Third Division
of this Honorable Court on June 8, 2007 was not
B. The Atlas case was not and cannot be and cannot be superseded by the Mirant Pagbilao
superseded by the Mirant case in light of Section case promulgated by the Second Division of this
4(3), Article VIII of the 1987 Constitution. Honorable Court on September 12, 2008 in light of
the explicit provision of Section 4(3), Article VIII of
C. The ruling of the Mirant case, which uses the the 1987 Constitution.
close of the taxable quarter when the sales were
made as the reckoning date in counting the two- II. Likewise, the recent ruling of this Honorable
year prescriptive period cannot be applied Court in Commissioner of Internal Revenue vs. Aichi
retroactively in the case of Mindanao II. Forging Company of Asia, Inc., cannot be applied
retroactively to Mindanao I in the present case.41
II. The Honorable Court of Tax Appeals erred in
interpreting Section 105 of the 1997 Tax Code, as In a Resolution dated 14 December 2011, 42 this
amended in that the sale of the fully depreciated Court resolved to consolidate G.R. Nos. 193301 and
Nissan Patrol is a one-time transaction and is not 194637 to avoid conflicting rulings in related cases.
incidental to the VAT zero-rated operation of
Mindanao II. The Court’s Ruling

III. The Honorable Court of Tax Appeals erred in Determination of Prescriptive Period
denying the amount disallowed by the Independent
Certified Public Accountant as Mindanao II G.R. Nos. 193301 and 194637 both raise the
substantially complied with the requisites of the question of the determination of the prescriptive
1997 Tax Code, as amended, for refund/tax credit. period, or the interpretation of Section 112 of the
1997 Tax Code, in light of our rulings in Atlas and
A. The amount of ₱2,090.16 was brought about by Mirant.
the timing difference in the recording of the foreign
currency deposit transaction. Mindanao II’s unutilized input VAT tax credit for the
first and second quarters of 2003, in the amounts of
B. The amount of ₱2,752.00 arose from the out-of- ₱3,160,984.69 and ₱1,562,085.33, respectively, are
pocket expenses reimbursed to SGV & Company covered by G.R. No. 193301, while Mindanao I’s
which is substantially suppoerted [sic] by an official unutilized input VAT tax credit for the first, second,
receipt. third, and fourth quarters of 2003, in the amounts of
₱3,893,566.14, ₱2,351,000.83, and ₱7,940,727.83, accordance with the rules and regulations of the
respectively, are covered by G.R. No. 194637. Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-
C Period Close Last Actual Last Actua rated or effectively zero-rated sale and also in
T covered of day date of day l Date
by quarte for filing taxable or exempt sale of goods or properties or
A for of services, and the amount of creditable input tax due
VAT r filing applicat
C Sales in when applic ion for filing filing or paid cannot be directly and entirely attributed to
as 2003 sales ation tax case case any one of the transactions, it shall be allocated
e and were of tax refund/ with with proportionately on the basis of the volume of sales.
N amount made refund credit CTA45 CTA
o. /tax with the (judici
credit CIR xxxx
al
certific (admini
ate strative claim)
(D) Period within which Refund or Tax Credit of
with claim)44
the
Input Taxes shall be Made. - In proper cases, the
CIR Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
72 1st 31 31 13 April 12 22 hundred twenty (120) days from the date of
27 Quarter March March 2005 Septe April
, 2003 2005 submission of complete documents in support of the
mber 2005 application filed in accordance with Subsections (A)
₱3,160,
984.69 2005 and (B) hereof.
72 2nd 30 30 13 April 12 7 July
87 Quarter June June 2005 Septe 2005 In case of full or partial denial of the claim for tax
, 2003 2005
mber refund or tax credit, or the failure on the part of the
₱1,562, Commissioner to act on the application within the
085.33 2005
period prescribed above, the taxpayer affected may,
73 3rd and 30 30 13 April 12 9 within thirty (30) days from the receipt of the
17 4th Septe Septe 2005 Septe Septe decision denying the claim or after the expiration of
Quarter mber mber the one hundred twenty day-period, appeal the
mber mber
s, 2003 2005
₱3,521, 2005 2005 decision or the unacted claim with the Court of Tax
129.50 31 2 Appeals.
Dece Janu
mber ary x x x x 43 (Underscoring supplied)
2003 2006
(31 The relevant dates for G.R. No. 193301 (Mindanao
Dece II) are:
mber
2005
being
a
The relevant dates for G.R. No. 194637 (Minadanao I) are:
Satur
day)
Period CT Close Last Actual Last Actual
Section 112 of the 1997 Tax Code covered of day date of day for Date
Ca by quarter for filing filing filing of filing
The pertinent sections of the 1997 Tax Code, the VAT Sales when applicat applicatio case case
No. in sales ion n for with with
law applicable at the time of Mindanao II’s and 2003 and were of tax tax refund/ CTA47 CTA
Mindanao I’s administrative and judicial claims, amount made refund/t credit with (judicial
provide: ax the claim)
credit CIR
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) certifica (administr
te ative
Zero-rated or Effectively Zero-rated Sales. - Any with the claim)46
VAT-registered person, whose sales are zero-rated CIR
or effectively zero-rated may, within two (2) years
722 1st 31 31 4 April 1 22 April
after the close of the taxable quarter when the sales Quarter, March March 2005 Septem 2005
were made, apply for the issuance of a tax credit ₱3,893,56 2003 2005 ber
certificate or refund of creditable input tax due or 6.14 2005
paid attributable to such sales, except transitional
728 2nd 30 30 4 April 1 7 July
input tax, to the extent that such input tax has not Quarter, June June 2005 Septem 2005
been applied against output tax: Provided, however, ₱2,351,00 2003 2005 ber
That in the case of zero-rated sales under Section 0.83 2005
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) 731 3rd 30 30 4 April 1 9
and (2), the acceptable foreign currency exchange and 4th Septem Septem 2005 Septem Septem
proceeds thereof had been duly accounted for in Quarters, ber ber ber ber
₱7,940,72 2003 2005 2005 2005 "decision" of the Commissioner to review and thus
7.83 the CTA as a court of special jurisdiction has no
31 2
Decem Januar jurisdiction over the appeal. The charter of the CTA
ber y also expressly provides that if the Commissioner
2003 2006 fails to decide within "a specific period" required by
(31 law, such "inaction shall be deemed a denial" of the
Decem application for tax refund or credit. It is the
ber
Commissioner’s decision, or inaction "deemed a
2005
being denial," that the taxpayer can take to the CTA for
a review. Without a decision or an "inaction x x x
Saturda deemed a denial" of the Commissioner, the CTA
y) has no jurisdiction over a petition for review.

When Mindanao II and Mindanao I filed their San Roque’s failure to comply with the 120-day
respective administrative and judicial claims in mandatory period renders its petition for review with
2005, neither Atlas nor Mirant has been the CTA void. Article 5 of the Civil Code provides,
promulgated. Atlas was promulgated on 8 June "Acts executed against provisions of mandatory or
2007, while Mirant was promulgated on 12 prohibitory laws shall be void, except when the law
September 2008. It is therefore misleading to state itself authorizes their validity." San Roque’s void
that Atlas was the controlling doctrine at the time of petition for review cannot be legitimized by the CTA
filing of the claims. The 1997 Tax Code, which took or this Court because Article 5 of the Civil Code
effect on 1 January 1998, was the applicable law at states that such void petition cannot be legitimized
the time of filing of the claims in issue. As this Court "except when the law itself authorizes its validity."
explained in the recent consolidated cases of There is no law authorizing the petition’s validity.
Commissioner of Internal Revenue v. San Roque
Power Corporation, Taganito Mining Corporation v. It is hornbook doctrine that a person committing a
Commissioner of Internal Revenue, and Philex void act contrary to a mandatory provision of law
Mining Corporation v. Commissioner of Internal cannot claim or acquire any right from his void act.
Revenue (San Roque):48 A right cannot spring in favor of a person from his
own void or illegal act. This doctrine is repeated in
Clearly, San Roque failed to comply with the 120- Article 2254 of the Civil Code, which states, "No
day waiting period, the time expressly given by law vested or acquired right can arise from acts or
to the Commissioner to decide whether to grant or omissions which are against the law or which
deny San Roque’s application for tax refund or infringe upon the rights of others." For violating a
credit. It is indisputable that compliance with the mandatory provision of law in filing its petition with
120-day waiting period is mandatory and the CTA, San Roque cannot claim any right arising
jurisdictional. The waiting period, originally fixed at from such void petition. Thus, San Roque’s petition
60 days only, was part of the provisions of the first with the CTA is a mere scrap of paper.
VAT law, Executive Order No. 273, which took
effect on 1 January 1988. The waiting period was This Court cannot brush aside the grave issue of the
extended to 120 days effective 1 January 1998 mandatory and jurisdictional nature of the 120-day
under RA 8424 or the Tax Reform Act of 1997. period just because the Commissioner merely
Thus, the waiting period has been in our statute asserts that the case was prematurely filed with the
books for more than fifteen (15) years before San CTA and does not question the entitlement of San
Roque filed its judicial claim. Roque to the refund. The mere fact that a taxpayer
has undisputed excess input VAT, or that the tax
Failure to comply with the 120-day waiting period was admittedly illegally, erroneously or excessively
violates a mandatory provision of law. It violates the collected from him, does not entitle him as a matter
doctrine of exhaustion of administrative remedies of right to a tax refund or credit. Strict compliance
and renders the petition premature and thus without with the mandatory and jurisdictional conditions
a cause of action, with the effect that the CTA does prescribed by law to claim such tax refund or credit
not acquire jurisdiction over the taxpayer’s petition. is essential and necessary for such claim to
Philippine jurisprudence is replete with cases prosper. Well-settled is the rule that tax refunds or
upholding and reiterating these doctrinal principles. credits, just like tax exemptions, are strictly
construed against the taxpayer.
The charter of the CTA expressly provides that its
jurisdiction is to review on appeal "decisions of the The burden is on the taxpayer to show that he has
Commissioner of Internal Revenue in cases strictly complied with the conditions for the grant of
involving x x x refunds of internal revenue taxes." the tax refund or credit.
When a taxpayer prematurely files a judicial claim
for tax refund or credit with the CTA without waiting This Court cannot disregard mandatory and
for the decision of the Commissioner, there is no jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the prescribed, pursuant to Section 112(A) of the 1997
numerical correctness of the claim for tax refund or Tax Code.
credit of the taxpayer. Non-compliance with
mandatory periods, non-observance of prescriptive (2) The last day for filing an application for tax
periods, and non-adherence to exhaustion of refund or credit with the CIR for the second quarter
administrative remedies bar a taxpayer’s claim for of 2003 was on 30 June 2005. Mindanao II filed its
tax refund or credit, whether or not the administrative claim before the CIR on 13 April
Commissioner questions the numerical correctness 2005, while Mindanao I filed its administrative claim
of the claim of the taxpayer. This Court should not before the CIR on 4 April 2005. Both claims were
establish the precedent that non-compliance with filed on time, pursuant to Section 112(A) of the 1997
mandatory and jurisdictional conditions can be Tax Code.
excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such (3) The last day for filing an application for tax
precedent will render meaningless compliance with refund or credit with the CIR for the third quarter of
mandatory and jurisdictional requirements, for then 2003 was on 30 September 2005. Mindanao II filed
every tax refund case will have to be decided on the its administrative claim before the CIR on 13 April
numerical correctness of the amounts claimed, 2005, while Mindanao I filed its administrative claim
regardless of non-compliance with mandatory and before the CIR on 4 April 2005. Both claims were
jurisdictional conditions. filed on time, pursuant to Section 112(A) of the 1997
Tax Code.
San Roque cannot also claim being misled,
misguided or confused by the Atlas doctrine (4) The last day for filing an application for tax
because San Roque filed its petition for review with refund or credit with the CIR for the fourth quarter of
the CTA more than four years before Atlas was 2003 was on 2 January 2006. Mindanao II filed its
promulgated. The Atlas doctrine did not exist at the administrative claim before the CIR on 13 April
time San Roque failed to comply with the 120-day 2005, while Mindanao I filed its administrative claim
period. Thus, San Roque cannot invoke the Atlas before the CIR on 4 April 2005. Both claims were
doctrine as an excuse for its failure to wait for the filed on time, pursuant to Section 112(A) of the 1997
120-day period to lapse. In any event, the Atlas Tax Code.
doctrine merely stated that the two-year prescriptive
period should be counted from the date of payment
Prescriptive Period for
of the output VAT, not from the close of the taxable
the Filing of Judicial Claims
quarter when the sales involving the input VAT were
made. The Atlas doctrine does not interpret,
expressly or impliedly, the 120+30 day In determining whether the claims for the second,
periods.49 (Emphases in the original; citations third and fourth quarters of 2003 have been properly
omitted) appealed, we still see no need to refer to either
Atlas or Mirant, or even to Section 229 of the 1997
Tax Code. The second paragraph of Section 112(C)
Prescriptive Period for
of the 1997 Tax Code is clear: "In case of full or
the Filing of Administrative Claims
partial denial of the claim for tax refund or tax credit,
or the failure on the part of the Commissioner to act
In determining whether the administrative claims of on the application within the period prescribed
Mindanao I and Mindanao II for 2003 have above, the taxpayer affected may, within thirty (30)
prescribed, we see no need to rely on either Atlas or days from the receipt of the decision denying the
Mirant. Section 112(A) of the 1997 Tax Code is claim or after the expiration of the one hundred
clear: "Any VAT-registered person, whose sales are twenty day-period, appeal the decision or the
zero-rated or effectively zero-rated may, within two unacted claim with the Court of Tax Appeals."
(2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax
The mandatory and jurisdictional nature of the
credit certificate or refund of creditable input tax due
120+30 day periods was explained in San Roque:
or paid attributable to such sales x x x."
At the time San Roque filed its petition for review
We rule on Mindanao I and II’s administrative claims
with the CTA, the 120+30 day mandatory periods
for the first, second, third, and fourth quarters of
were already in the law. Section 112(C) expressly
2003 as follows:
grants the Commissioner 120 days within which to
decide the taxpayer’s claim. The law is clear, plain,
(1) The last day for filing an application for tax and unequivocal: "x x x the Commissioner shall
refund or credit with the CIR for the first quarter of grant a refund or issue the tax credit certificate for
2003 was on 31 March 2005. Mindanao II filed its creditable input taxes within one hundred twenty
administrative claim before the CIR on 13 April (120) days from the date of submission of complete
2005, while Mindanao I filed its administrative claim documents." Following the verba legis doctrine, this
before the CIR on 4 April 2005. Both claims have law must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer cannot days from the date of submission of complete
simply file a petition with the CTA without waiting for documents in support of the application filed in
the Commissioner’s decision within the 120-day accordance with Subsection (A)." The reference in
mandatory and jurisdictional period. The CTA will Section 112(C) of the submission of documents "in
have no jurisdiction because there will be no support of the application filed in accordance with
"decision" or "deemed a denial" decision of the Subsection A" means that the application in Section
Commissioner for the CTA to review. In San 112(A) is the administrative claim that the
Roque’s case, it filed its petition with the CTA a Commissioner must decide within the 120-day
mere 13 days after it filed its administrative claim period. In short, the two-year prescriptive period in
with the Commissioner. Indisputably, San Roque Section 112(A) refers to the period within which the
knowingly violated the mandatory 120-day period, taxpayer can file an administrative claim for tax
and it cannot blame anyone but itself. refund or credit. Stated otherwise, the two-year
prescriptive period does not refer to the filing of the
Section 112(C) also expressly grants the taxpayer a judicial claim with the CTA but to the filing of the
30-day period to appeal to the CTA the decision or administrative claim with the Commissioner. As held
inaction of the Commissioner, thus: in Aichi, the "phrase ‘within two years x x x apply for
the issuance of a tax credit or refund’ refers to
x x x the taxpayer affected may, within thirty (30) applications for refund/credit with the CIR and not to
days from the receipt of the decision denying the appeals made to the CTA."
claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the Third, if the 30-day period, or any part of it, is
unacted claim with the Court of Tax Appeals. required to fall within the two-year prescriptive
(Emphasis supplied) period (equivalent to 730 days), then the taxpayer
must file his administrative claim for refund or credit
This law is clear, plain, and unequivocal. Following within the first 610 days of the two-year prescriptive
the well-settled verba legis doctrine, this law should period. Otherwise, the filing of the administrative
be applied exactly as worded since it is clear, plain, claim beyond the first 610 days will result in the
and unequivocal. As this law states, the taxpayer appeal to the CTA being filed beyond the two-year
may, if he wishes, appeal the decision of the prescriptive period. Thus, if the taxpayer files his
Commissioner to the CTA within 30 days from administrative claim on the 611th day, the
receipt of the Commissioner’s decision, or if the Commissioner, with his 120-day period, will have
Commissioner does not act on the taxpayer’s claim until the 731st day to decide the claim. If the
within the 120-day period, the taxpayer may appeal Commissioner decides only on the 731st day, or
to the CTA within 30 days from the expiration of the does not decide at all, the taxpayer can no longer
120-day period. file his judicial claim with the CTA because the two-
year prescriptive period (equivalent to 730 days)
has lapsed. The 30-day period granted by law to the
There are three compelling reasons why the 30-day
taxpayer to file an appeal before the CTA becomes
period need not necessarily fall within the two-year
utterly useless, even if the taxpayer complied with
prescriptive period, as long as the administrative
the law by filing his administrative claim within the
claim is filed within the two-year prescriptive period.
two-year prescriptive period.
First, Section 112(A) clearly, plainly, and
The theory that the 30-day period must fall within
unequivocally provides that the taxpayer "may,
the two-year prescriptive period adds a condition
within two (2) years after the close of the taxable
that is not found in the law. It results in truncating
quarter when the sales were made, apply for the
120 days from the 730 days that the law grants the
issuance of a tax credit certificate or refund of the
taxpayer for filing his administrative claim with the
creditable input tax due or paid to such sales." In
Commissioner. This Court cannot interpret a law to
short, the law states that the taxpayer may apply
defeat, wholly or even partly, a remedy that the law
with the Commissioner for a refund or credit "within
expressly grants in clear, plain, and unequivocal
two (2) years," which means at anytime within two
language.
years. Thus, the application for refund or credit may
be filed by the taxpayer with the Commissioner on
the last day of the two-year prescriptive period and it Section 112(A) and (C) must be interpreted
will still strictly comply with the law. The two-year according to its clear, plain, and unequivocal
prescriptive period is a grace period in favor of the language. The taxpayer can file his administrative
taxpayer and he can avail of the full period before claim for refund or credit at anytime within the two-
his right to apply for a tax refund or credit is barred year prescriptive period. If he files his claim on the
by prescription. last day of the two-year prescriptive

Second, Section 112(C) provides that the period, his claim is still filed on time. The
Commissioner shall decide the application for Commissioner will have 120 days from such filing to
refund or credit "within one hundred twenty (120) decide the claim. If the Commissioner decides the
claim on the 120th day, or does not decide it on that
day, the taxpayer still has 30 days to file his judicial G.R. No. 194637
claim with the CTA. This is not only the plain Mindanao I v. CIR
meaning but also the only logical interpretation of
Section 112(A) and (C).50 (Emphases in the original; Mindanao I filed its administrative claims for the
citations omitted) second, third, and fourth quarters of 2003 on 4 April
2005. Counting 120 days after filing of the
In San Roque, this Court ruled that "all taxpayers administrative claim with the CIR (2 August 2005)
can rely on BIR Ruling No. DA-489-03 from the time and 30 days after the CIR’s denial by inaction, 52 the
of its issuance on 10 December 2003 up to its last day for filing a judicial claim with the CTA for the
reversal in Aichi on 6 October 2010, where this second, third, and fourth quarters of 2003 was on 1
Court held that the 120+30 day periods are September 2005. However, the judicial claim cannot
mandatory and jurisdictional." 51 We shall discuss be filed earlier than 2 August 2005, which is the
later the effect of San Roque’s recognition of BIR expiration of the 120-day period for the
Ruling No. DA-489-03 on claims filed between 10 Commissioner to act on the claim.
December 2003 and 6 October 2010. Mindanao I
and II filed their claims within this period. (1) Mindanao I filed its judicial claim for the second
quarter of 2003 before the CTA on 7 July 2005,
We rule on Mindanao I and II’s judicial claims for the before the expiration of the 120-day period.
second, third, and fourth quarters of 2003 as Pursuant to Section 112(C) of the 1997 Tax Code,
follows: Mindanao I’s judicial claim for the second quarter of
2003 was prematurely filed. However, pursuant to
G.R. No. 193301 San Roque’s recognition of the effect of BIR Ruling
Mindanao II v. CIR No. DA-489-03, we rule that Mindanao I’s judicial
claim for the second quarter of 2003 qualifies under
Mindanao II filed its administrative claims for the the exception to the strict application of the 120+30
second, third, and fourth quarters of 2003 on 13 day periods.
April 2005. Counting 120 days after filing of the
administrative claim with the CIR (11 August 2005) (2) Mindanao I filed its judicial claim for the third
and 30 days after the CIR’s denial by inaction, the quarter of 2003 before the CTA on 9 September
last day for filing a judicial claim with the CTA for the 2005. Mindanao I’s judicial claim for the third quarter
second, third, and fourth quarters of 2003 was on 12 of 2003 was thus filed after the prescriptive period,
September 2005. However, the judicial claim cannot pursuant to Section 112(C) of the 1997 Tax Code.
be filed earlier than 11 August 2005, which is the
expiration of the 120-day period for the (3) Mindanao I filed its judicial claim for the fourth
Commissioner to act on the claim. quarter of 2003 before the CTA on 9 September
2005. Mindanao I’s judicial claim for the fourth
(1) Mindanao II filed its judicial claim for the second quarter of 2003 was thus filed after the prescriptive
quarter of 2003 before the CTA on 7 July 2005, period, pursuant to Section 112(C) of the 1997 Tax
before the expiration of the 120-day period. Code.
Pursuant to Section 112(C) of the 1997 Tax Code,
Mindanao II’s judicial claim for the second quarter of San Roque: Recognition of BIR Ruling No. DA-489-
2003 was prematurely filed. 03

However, pursuant to San Roque’s recognition of In the consolidated cases of San Roque, the Court
the effect of BIR Ruling No. DA-489-03, we rule that En Banc53 examined and ruled on the different
Mindanao II’s judicial claim for the second quarter of claims for tax refund or credit of three different
2003 qualifies under the exception to the strict companies. In San Roque, we reiterated that
application of the 120+30 day periods. "following the verba legis doctrine, Section 112(C)
must be applied exactly as worded since it is clear,
(2) Mindanao II filed its judicial claim for the third plain, and unequivocal. The taxpayer cannot simply
quarter of 2003 before the CTA on 9 September file a petition with the CTA without waiting for the
2005. Mindanao II’s judicial claim for the third Commissioner’s decision within the 120-day
quarter of 2003 was thus filed on time, pursuant to mandatory and jurisdictional period. The CTA will
Section 112(C) of the 1997 Tax Code. have no jurisdiction because there will be no
‘decision’ or ‘deemed a denial decision’ of the
(3) Mindanao II filed its judicial claim for the fourth Commissioner for the CTA to review."
quarter of 2003 before the CTA on 9 September
2005. Mindanao II’s judicial claim for the fourth
quarter of 2003 was thus filed on time, pursuant to
Section 112(C) of the 1997 Tax Code.
Notwithstanding a strict construction of any claim for Taganito can claim that in filing its judicial claim
tax exemption or refund, the Court in San Roque prematurely without waiting for the 120-day period
recognized that BIR Ruling No. DA-489-03 to expire, it was misled by BIR Ruling No. DA-489-
constitutes equitable estoppel54 in favor of 03. Thus, Taganito can claim the benefit of BIR
taxpayers. BIR Ruling No. DA-489-03 expressly Ruling No. DA-489-03, which shields the filing of its
states that the "taxpayer-claimant need not wait for judicial claim from the vice of prematurity.
the lapse of the 120-day period before it could seek (Emphasis in the original)
judicial relief with the CTA by way of Petition for
Review." This Court discussed BIR Ruling No. DA- Summary of Administrative and Judicial Claims
489-03 and its effect on taxpayers, thus:
G.R. No. 193301
Taxpayers should not be prejudiced by an Mindanao II v. CIR
erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The G.R. No. 194637
abandonment of the Atlas doctrine by Mirant and
Aichi is proof that the reckoning of the prescriptive   Administrative Judicial Claim Action on Claim
Claim
periods for input VAT tax refund or credit is a
difficult question of law. The abandonment of the 1st Filed late -- Deny, pursuant to
Quarter, Section 112(A) of the
Atlas doctrine did not result in Atlas, or other 2003 1997 Tax Code
taxpayers similarly situated, being made to return
2nd Filed on time Prematurely filed Grant, pursuant to
the tax refund or credit they received or could have Quarter, BIR Ruling No. DA-489-03
received under Atlas prior to its abandonment. This 2003
Court is applying Mirant and Aichi prospectively. 3rd Filed on time Filed on time Grant, pursuant to
Absent fraud, bad faith or misrepresentation, the Quarter, Section 112(C) of the
reversal by this Court of a general interpretative rule 2003 1997 Tax Code
issued by the Commissioner, like the reversal of a 4th Filed on time Filed on time Grant, pursuant to
specific BIR ruling under Section 246, should also Quarter, Section 112(C) of the
apply prospectively. x x x. 2003 1997 Tax Code
Mindanao I v. CIR
Thus, the only issue is whether BIR Ruling No. DA-
489-03 is a general interpretative rule applicable to   Administrativ Judicial Claim Action on
all taxpayers or a specific ruling applicable only to a e Claim
particular taxpayer. Claim
1st Quarter, Filed late -- Deny, pursuant
BIR Ruling No. DA-489-03 is a general
2003 to
interpretative rule because it was a response to a
Section 112(A)
query made, not by a particular taxpayer, but by a
of the
government agency tasked with processing tax
1997 Tax Code
refunds and credits, that is, the One Stop Shop
Inter-Agency Tax Credit and Drawback Center of 2nd Filed on time Prematurely Grant,
the Department of Finance. This government Quarter, filed pursuant to
agency is also the addressee, or the entity 2003 BIR Ruling No.
responded to, in BIR Ruling No. DA-489-03. Thus, DA-489-03
while this government agency mentions in its query
3rd Filed on time Filed late Grant,
to the Commissioner the administrative claim of Lazi
Quarter, pursuant to
Bay Resources Development, Inc., the agency was
2003 Section 112(C)
in fact asking the Commissioner what to do in cases
of the
like the tax claim of Lazi Bay Resources
1997 Tax Code
Development, Inc., where the taxpayer did not wait
for the lapse of the 120-day period. 4th Quarter, Filed on time Filed late Grant,
2003 pursuant to
Clearly, BIR Ruling No. DA-489-03 is a general Section 112(C)
interpretative rule. Thus, all taxpayers can rely on of the
BIR Ruling No. DA-489-03 from the time of its 1997 Tax Code
issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this Summary of Rules on Prescriptive Periods Involving
Court held that the 120+30 day periods are VAT
mandatory and jurisdictional.
We summarize the rules on the determination of the
Taganito, however, filed its judicial claim with the prescriptive period for filing a tax refund or credit of
CTA on 14 February 2007, after the issuance of BIR unutilized input VAT as provided in Section 112 of
Ruling No. DA-489-03 on 10 December 2003. Truly, the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the whether or not it sells exclusively to members or
CIR within two years after the close of the taxable their guests), or government entity.
quarter when the zero-rated or effectively zero-rated
sales were made. The rule of regularity, to the contrary
notwithstanding, services as defined in this Code
(2) The CIR has 120 days from the date of rendered in the Philippines by nonresident foreign
submission of complete documents in support of the persons shall be considered as being rendered in
administrative claim within which to decide whether the course of trade or business. (Emphasis
to grant a refund or issue a tax credit certificate. The supplied)
120-day period may extend beyond the two-year
period from the filing of the administrative claim if Mindanao II relies on Commissioner of Internal
the claim is filed in the later part of the two-year Revenue v. Magsaysay Lines, Inc.
period. If the 120-day period expires without any (Magsaysay)55 and Imperial v. Collector of Internal
decision from the CIR, then the administrative claim Revenue (Imperial)56 to justify its position.
may be considered to be denied by inaction. Magsaysay, decided under the NIRC of 1986,
involved the sale of vessels of the National
(3) A judicial claim must be filed with the CTA within Development Company (NDC) to Magsaysay Lines,
30 days from the receipt of the CIR’s decision Inc. We ruled that the sale of vessels was not in the
denying the administrative claim or from the course of NDC’s trade or business as it was
expiration of the 120-day period without any action involuntary and made pursuant to the Government’s
from the CIR. policy for privatization. Magsaysay, in quoting from
the CTA’s decision, imputed upon Imperial the
(4) All taxpayers, however, can rely on BIR Ruling definition of "carrying on business." Imperial,
No. DA-489-03 from the time of its issuance on 10 however, is an unreported case that merely stated
December 2003 up to its reversal by this Court in that "‘to engage’ is to embark in a business or to
Aichi on 6 October 2010, as an exception to the employ oneself therein."
mandatory and jurisdictional 120+30 day periods.
Mindanao II’s sale of the Nissan Patrol is said to be
"Incidental" Transaction an isolated transaction.  However, it does not follow
1âwphi1

that an isolated transaction cannot be an incidental

Mindanao II asserts that the sale of a fully transaction for purposes of VAT liability. Indeed, a
depreciated Nissan Patrol is not an incidental reading of Section 105 of the 1997 Tax Code would
transaction in the course of its business; hence, it is show that a transaction "in the course of trade or
an isolated transaction that should not have been business" includes "transactions incidental thereto."
subject to 10% VAT.
Mindanao II’s business is to convert the steam
Section 105 of the 1997 Tax Code does not support supplied to it by PNOC-EDC into electricity and to
Mindanao II’s position: deliver the electricity to NPC. In the course of its
business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol
SEC. 105. Persons Liable. - Any person who, in the
was part of Mindanao II’s property, plant, and
course of trade or business, sells barters,
equipment. Therefore, the sale of the Nissan Patrol
exchanges, leases goods or properties, renders
is an incidental transaction made in the course of
services, and any person who imports goods shall
Mindanao II’s business which should be liable for
be subject to the value-added tax (VAT) imposed in
VAT.
Sections 106 to 108 of this Code.
Substantiation Requirements
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties Mindanao II claims that the CTA’s disallowance of a
or services. This rule shall likewise apply to existing total amount of ₱492,198.09 is improper as it has
contracts of sale or lease of goods, properties or substantially complied with the substantiation
services at the time of the effectivity of Republic Act requirements of Section 113(A)58 in relation to
No. 7716. Section 23759 of the 1997 Tax Code, as
implemented by Section 4.104-1, 4.104-5 and
4.108-1 of Revenue Regulation No. 7-95.60
The phrase "in the course of trade or business"
means the regular conduct or pursuit of a
commercial or an economic activity, including We are constrained to state that Mindanao II’s
transactions incidental thereto, by any person compliance with the substantiation requirements is a
regardless of whether or not the person engaged finding of fact. The CTA En Banc evaluated the
therein is a nonstock, nonprofit private organization records of the case and found that the transactions
(irrespective of the disposition of its net income and in question are purchases for services and that
Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding Secretary of Justice in OSJ Case No. 2007- 3 for
of fact, which in turn affirmed the finding of the CTA lack of jurisdiction.
First Division. We see no reason to overturn their
findings. The Facts

WHEREFORE, we PARTIALLY GRANT the Petitioner Power Sector Assets and Liabilities
petitions. The Decision of the Court of Tax Appeals Management Corporation (PSALM) is a
En Bane in CT A EB No. 513 promulgated on 10 government-owned and controlled corporation
March 2010, as well as the Resolution promulgated created under Republic Act No. 9136 (RA 9136),
on 28 July 2010, and the Decision of the Court of also known as the Electric Power Industry Reform
Tax Appeals En Bane in CTA EB Nos. 476 and 483 Act of 2001 (EPIRA).  Section 50 of RA 9136 states
4

promulgated on 31 May 2010, as well as the that the principal purpose of PSALM is to manage
Amended Decision promulgated on 24 November the orderly sale, disposition, and privatization of the
2010, are AFFIRMED with MODIFICATION. National Power Corporation (NPC) generation
assets, real estate and other disposable assets, and
For G.R. No. 193301, the claim of Mindanao II Independent Power Producer (IPP) contracts with
Geothermal Partnership for the first quarter of 2003 the objective of liquidating all NPC financial
is DENIED while its claims for the second, third, and obligations and stranded contract costs in an
fourth quarters of 2003 are GRANTED. For G.R. optimal manner.
No. 19463 7, the claims of Mindanao I Geothermal
Partnership for the first, third, and fourth quarters of PSALM conducted public biddings for the
2003 are DENIED while its claim for the second privatization of the Pantabangan-Masiway
quarter of 2003 is GRANTED. SO ORDERED. Hydroelectric Power Plant (Pantabangan-Masiway
Plant) and Magat Hydroelectric Power Plant (Magat
Plant) on 8 September 2006 and 14 December
2006, respectively. First Gen Hydropower
Corporation with its $129 Million bid and SN Aboitiz
Power Corporation with its $530 Million bid were the
winning bidders for the PantabanganMasiway Plant
and Magat Plant, respectively.

On 28 August 2007, the NPC received a

letter  dated 14 August 2007 from the Bureau of
5

Internal Revenue (BIR) demanding immediate

payment of ₱3,813,080,472  deficiency value-added
6

tax (VAT) for the sale of the Pantabangan-Masiway

Plant and Magat Plant. The NPC indorsed BIR's
demand letter to PSALM.

On 30 August 2007, the BIR, NPC, and PSALM

executed a Memorandum of Agreement
(MOA),  wherein they agreed that:
7

A) NPC/PSALM shall remit under protest to the BIR

the amount of Php 3,813,080,472.00, representing
basic VAT as shown in the BIR letter dated August
14, 2007, upon execution of this Memorandum of
Agreement (MOA).

POWER SECTOR ASSETS AND LIABILITIES B) This remittance shall be without prejudice to the
MANAGEMENT CORPORATION, Petitioner, outcome of the resolution of the Issues before the
vs. appropriate courts or body.
COMMISSIONER OF INTERNAL
REVENUE, Respondent C) NPC/PSALM and BIR mutually undertake to
seek final resolution of the Issues by the appropriate
The Case courts or body.

This petition for review  assails the 27 September

1
D) BIR shall waive any and all interests and
2010 Decision  and the 3 August 2011 Resolution  of
2 3
surcharges on the aforesaid BIR letter, except when
the Court of Appeals in CA-G.R. SP No. 108156. the case is elevated by the BIR before an appellate
The Court of Appeals nullified the Decisions dated court.
13 March 2008 and 14 January 2009 of the
E) Nothing contained in this MOA shall be claimed government-owned and controlled corporation and
or construed to be an admission against interest as government bureau, the issue is best settled in this
to any party or evidence of any liability or Department. In the final analysis, there is but one
wrongdoing whatsoever nor an abandonment of any party in interest, the Government itself in this
position taken by NPC/PSALM in connection with litigation.
the Issues.
The instant petition is an original petition involving
F) Each Party to this MOA hereto expressly only [a] question of law on whether or not the sale of
represents that the authorized signatory hereto has the Pantabangan-Masiway and Magat Power Plants
the legal authority to bind [the] party to all the terms to private entities under the mandate of the EPIRA
of this MOA. is subject to VAT. It is to be stressed that this is not
an appeal from the decision of the Commissioner of
G) Any resolution by the appropriate courts or body Internal Revenue involving disputed assessments,
in favor of the BIR, other than a decision by the refunds of internal revenue taxes, fees or other
Supreme Court, shall not constitute as precedent charges, or other matters arising under the National
and sufficient legal basis as to the taxability of Internal Revenue Code or other law.
NPC/PSALM's transactions pursuant to the
privatization of NPC's assets as mandated by the Moreover, it must be noted that respondent already
EPIRA Law. invoked this Office's jurisdiction over it by praying in
respondent's Motion for Extension of Time to File
H) Any resolution in favor of NPC/PSALM by any Comment (On Petitioner's Petition dated 21
appropriate court or body shall be immediately September 2007) and later, Omnibus Motion To Lift
executory without necessity of notice or demand Order dated 22 October 2007 and To Admit
from NPC/PSALM. A ruling from the Department of Attached Comment. The Court has held that the
Justice (DOJ) that is favorable to NPC/PSALM shall filing of motions seeking affirmative relief, such as,
be tantamount to the filing of an application for to admit answer, for additional time to answer, for
refund (in cash)/tax credit certificate (TCC), at the reconsideration of a default judgment, and to lift
option of NPC/PSALM. BIR undertakes to order of default with motion for reconsideration, are
immediately process and approve the application, considered voluntary submission to the jurisdiction
and release the tax refund/TCC within fifteen (15) of the court. Having sought this Office to grant
working days from issuance of the DOJ ruling that is extension of time to file answer or comment to the
favorable to NPC/PSALM. instant petition, thereby submitting to the jurisdiction
of this Court [sic], respondent cannot now repudiate
I) Either party has the right to appeal any adverse the very same authority it sought.
decision against it before any appropriate court or
body. When petitioner was created under Section 49 of
R.A. No. 9136, for the principal purpose to manage
J) In the event of failure by the BIR to fulfill the the orderly sale, disposition, and privatization of
undertaking referred to in (H) above, NPC/PSALM NPC generation assets, real estate and other
shall assign to DOF its right to the refund of the disposable assets, IPP contracts with the objective
subject remittance, and the DOF shall offset such of liquidating all NPC financial obligations and
amount against any liability of NPC/PSALM to the stranded contract costs in an optimal manner, there
National Government pursuant to the objectives of was, by operation of law, the transfer of ownership
the EPIRA on the application of the privatization of NPC assets. Such transfer of ownership was not
proceeds. 8 carried out in the ordinary course of transfer which
must be accorded with the required elements
present for a valid transfer, but in this case, in
In compliance with the MOA, PSALM remitted under
accordance with the mandate of the law, that
protest to the BIR the amount of ₱3, 813, 080, 472,
is, EPIRA. Thus, respondent cannot assert that it
representing the total basic VAT due.
was NPC who was the actual seller of the
Pantabangan-Masiway :md Magat Power Plants,
On 21 September 2007, PSALM filed with the because at the time of selling the aforesaid power
Department of Justice (DOJ) a petition for the plants, the owner then was already the petitioner
adjudication of the dispute with the BIR to resolve and not the NPC. Consequently, petitioner cannot
the issue of whether the sale of the power plants also be considered a successor-in-· interest of NPC.
should be subject to VAT. The case was docketed
as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of

PSALM, thus:

In cases involving purely question[s] of law, such as

in the instant case, between and among the
Since it was petitioner who sold the Pantabangan- The Ruling of the Court of Appeals
Masiway and Magat Power Plants and not the NPC,
through a competitive and public bidding to the The Court of Appeals held that the petition filed by
private entities, Section 24(A) of R.A. No. 9337 PSALM with the DOJ was really a protest against
cannot be applied to the instant case. Neither the the assessment of deficiency VAT, which under
grant of exemption and revocation of the tax Section 204  of the NIRC of 1997 is within the
14

exemption accorded to the NPC, be also affected to authority of the Commissioner of Internal Revenue
petitioner. (CIR) to resolve. In fact, PSALM's objective in filing
the petition was to recover the ₱3,813,080,472 VAT
Clearly, the disposition of Pantabangan-Masiway which was allegedly assessed erroneously and
and Magat Power Plants was not in the regular which PSALM paid under protest to the BIR.
conduct or pursuit of a commercial or an economic
activity, but was effected by the mandate of the Quoting paragraph H  of the MOA among the BIR,
15

EPIRA upon petitioner to direct the orderly sale, NPC, and PSALM, the Court of Appeals stated that
disposition, and privatization of NPC generation the parties in effect agreed to consider a DOJ ruling
assets, real estate and other disposable assets, and favorable to PSALM as the latter's application for
IPP contracts, and afterward, to liquidate the refund.
outstanding obligations of the NPC.
Citing Section 4  of the NIRC of 1997, as amended
16

Verily, to subject the sale of generation assets in by Section 3 of Republic Act No. 8424 (RA
accordance with a privatization plan submitted to 8424)  and Section 7  of Republic Act No. 9282 (RA
17 18

and approved by the President, which is a one time 9282),  the Court of Appeals ruled that the CIR is
19

sale, to VAT would run counter to the purpose of the proper body to resolve cases involving disputed
obtaining optimal proceeds since potential bidders assessments, refunds of internal revenue taxes,
would necessarily have to take into account such fees or other charges, penalties imposed in relation
extra cost of VAT. thereto, or other matters arising under the NIRC or
other laws administered by the BIR. The Court of
WHEREFORE, premises considered, the imposition Appeals stressed that jurisdiction is conferred by
by respondent Bureau of lnternal Revenue of law or by the Constitution; the parties, such as in
deficiency Value-Added Tax in the amount of this case, cannot agree or stipulate on it by
₱3,813,080,472.00 on the privatization sale of the conferring jurisdiction in a body that has none.
Pantabangan Masiway and Magat Power Plants, Jurisdiction over the person can be waived but not
done in accordance with the mandate of the Electric the jurisdiction over the subject matter which is
Power Industry Reform Act of 2001, is hereby neither subject to agreement nor conferred by
declared NULL and VOID. Respondent is directed consent of the parties. The Court of Appeals held
to refund the amount of ₱3,813,080,472.00 remitted that the DOJ Secretary erred in ruling that the CIR is
under protest by petitioner to respondent. 9
estopped from assailing the jurisdiction of the DOJ
after having agreed to submit to its jurisdiction. As a
The BIR moved for reconsideration, alleging that the general rule, estoppel does not confer jurisdiction
DOJ had no jurisdiction since the dispute involved over a cause of action to a tribunal where none, by
tax laws administered by the BIR and therefore law, exists.
within the jurisdiction of the Court of Tax Appeals
(CTA). Furthermore, the BIR stated that the sale of In conclusion, the Court of Appeals found that the
the subject power plants by PSALM to private DOJ Secretary gravely abused his discretion
entities is in the course of trade or business, as amounting to lack of jurisdiction when he assumed
contemplated under Section 105 of the National jurisdiction over OSJ Case No. 2007-3. The
Internal Revenue Code (NIRC) of 1997, which dispositive portion of the Court of Appeals' 27
covers incidental transactions. Thus, the sale is September 2010 Decision reads:
subject to VAT. On 14 January 2009, the DOJ
denied BIR's Motion for Reconsideration. 10
WHEREFORE, premises considered, we hereby
GRANT the petition. Accordingly: (1) the [D]ecision
On 7 April 2009,  the BIR Commissioner
11
dated March 13, 2008, and the Decision dated
(Commissioner of Internal Revenue) filed with the January 14, 2009 both issued by the public
Court of Appeals a petition for certiorari, seeking to respondent Secretary of Justice in [OSJ Case No.]
set aside the DOJ's decision for lack of jurisdiction. 2007-3 are declared NULL and VOID for having
In a Resolution dated 23 April 2009, the Court of been issued without jurisdiction.
Appeals dismissed the petition for failure to attach
the relevant pleadings and documents.  Upon 12
No costs.
motion for reconsideration, the Court of Appeals
reinstated the petition in its Resolution dated 10 July SO ORDERED. 20

2009.13
PSALM moved for reconsideration, which the Court petitioner PSALM. Under Presidential Decree No.
of Appeals denied in its 3 August 2011 Resolution. 242  (PD
24
242), all disputes and
Hence, this petition. claims solely between government agencies and
offices, including government-owned or
The Issues controlled· corporations, shall be
administratively settled or adjudicated by the
Petitioner PSALM raises the following issues: Secretary of Justice, the Solicitor General, or the
Government Corporate Counsel, depending on
the issues and government agencies involved.
I. DID THE COURT OF APPEALS MISAPPLY THE
As regards cases involving only questions of law, it
LAW IN GIVING DUE COURSE TO THE PETITION
is the Secretary of Justice who has jurisdiction.
FOR CERTIORARI IN CA-G.R. SP NO. 108156?
Sections 1, 2, and 3 of PD 242 read:
II. DID THE SECRETARY OF JUSTICE ACT IN
Section 1. Provisions of law to the contrary
ACCORDANCE WITH THE LAW IN ASSUMING
notwithstanding, all disputes, claims and
JURISDICTION AND SETTLING THE DISPUTE BY
controversies solely between or among the
AND BETWEEN THE BIR AND PSALM?
departments, bureaus, offices, agencies and
instrumentalities of the National Government,
III. DID THE SECRETARY OF JUSTICE ACT IN including constitutional offices or agencies,
ACCORDANCE WITH THE LAW AND arising from the interpretation and application of
JURISPRUDENCE IN RENDERING JUDGMENT statutes, contracts or
THAT THERE SHOULD BE·NO VAT ON THE agreements, shall henceforth be
PRIVATIZATION, SALE OR DISPOSAL OF administratively settled or adjudicated as
GENERATION ASSETS? provided hereinafter: Provided, That, this shall not
apply to cases already pending in court at the time
IV. DOES PUBLIC RESPONDENT DESERVE THE of the effectivity of this decree.
RELIEF OF CERTIORARI? 21

Section 2. In all cases involving only questions

The Ruling of the Court of law, the same shall be submitted to and
settled or adjudicated by the Secretary of
We find the petition meritorious. Justice, as Attorney General and ex officio adviser
of all government owned or controlled corporations
I. Whether the Secretary of Justice has and entities, in consonance with Section 83 of the
jurisdiction over the case. Revised Administrative Code. His ruling or
determination of the question in each case shall
The primary issue in this case is whether the DOJ be conclusive and binding upon all the parties
Secretary has jurisdiction over OSJ Case No. 2007- concerned.
3 which involves the resolution of whether the sale
of the Pantabangan-Masiway Plant and Magat Plant Section 3. Cases involving mixed questions of law
is subject to VAT. and of fact or only factual issues shall be submitted
to and settled or adjudicated by:
We agree with the Court of Appeals that jurisdiction
over the subject matter is vested by the Constitution (a) The Solicitor General, with respect to disputes or
or by law, and not by the parties to an claims [or] controversies between or among the
action.  Jurisdiction cannot be conferred by consent
22 departments, bureaus, offices and other agencies of
or acquiescence of the parties  or by erroneous
23 the National Government;
belief of the court, quasi-judicial office or
government agency that it exists. (b) The Government Corporate Counsel, with
respect to disputes or claims or controversies
However, contrary to the ruling of the Court of between or among the government-owned or
Appeals, we find that the DOJ is vested by law with controlled corporations or entities being served by
jurisdiction over this case. This case involves a the Office of the Government Corporate Counsel;
dispute between PSALM and NPC, which are both and
wholly government owned corporations, and the
BIR, a government office, over the imposition of (c) The Secretary of Justice, with respect to all other
VAT on the sale of the two power plants. There is disputes or claims or controversies which do not fall
no question that original jurisdiction is with the CIR, under the categories mentioned in paragraphs (a)
who issues the preliminary and the final tax and (b). (Emphasis supplied)
assessments. However, if the government entity
disputes the tax assessment, the dispute is already The use of the word "shall" in a statute connotes a
between the BIR (represented by the CIR) and mandatory order or an imperative obligation.  Its 25

another government entity, in this case, the use rendered the provisions mandatory and not
merely permissive, and unless PD 242 is declared PD 242 is only applicable to disputes, claims, and
unconstitutional, its provisions must be followed. controversies solely between or among the
The use of the word "shall" means that departments, bureaus, offices, agencies and
administrative settlement or adjudication of disputes instrumentalities of the National Government,
and claims between government agencies and including government-owned or controlled
offices, including government-owned or controlled corporations, and where no private party is
corporations, is not merely permissive but involved. In other words, PD 242 will only apply
mandatory and imperative. Thus, under PD 242, it is when all the parties involved are purely
mandatory that disputes and claims "solely" government offices and government-owned or
between government agencies and offices, controlled corporations.  Since this case is a
28

including government-owned or controlled dispute between PSALM arid NPC, both

corporations, involving only questions of law, be government owned and controlled corporations, and
submitted to and settled or adjudicated by the the BIR, a National Government office, PD 242
Secretary of Justice. clearly applies and the Secretary of Justice has
jurisdiction over this case. In fact, the MOA
The law is clear and covers "all disputes, claims executed by the BIR, NPC, and PSALM explicitly
and controversies solely between or among the provides that "[a] ruling from the Department of
departments, bureaus, offices, agencies and Justice (DOJ) that is favorable to NPC/PSALM shall
instrumentalities of the National Government, be tantamount to the filing of an application for
including constitutional offices or agencies refund (in cash)/tax credit certificate (TCC), at the
arising from the interpretation and application of option of NPC/PSALM."  Such provision indicates
29

statutes, contracts or agreements." When the law that the BIR and petitioner PSALM and the NPC
says "all disputes, claims and controversies solely" acknowledged that the Secretary of Justice indeed
among government agencies, the law means all, has jurisdiction to resolve their dispute.
without exception. Only those cases already
pending in court at the time of the effectivity of PD This case is different from the case of Philippine
242 are not covered by the law. National Oil Company v. Court of Appeals,  (PNOC
30

v. CA) which involves not only the BIR (a

The purpose of PD 242 is to provide for a speedy government bureau) and the PNOC and PNB (both
and efficient administrative settlement or government-owned or controlled corporations), but
adjudication of disputes between government also respondent Tirso Savellano, a private citizen.
offices or agencies under the Executive branch, Clearly, PD 242 is not applicable to the case
as well as to filter cases to lessen the clogged of PNOCv.CA. Even the ponencia in PNOC v. CA
dockets of the courts. As explained by the Court stated that the dispute in that case is not covered by
in Philippine Veterans Investment Development PD 242, thus:
Corp. (PHIVIDEC) v. Judge Velez: 26

Even if, for the sake of argument, that P.D. No. 242
Contrary to the opinion of the lower court, P.D. No. should prevail over Rep. Act No. 1125, the present
242 is not unconstitutional. It does not diminish the dispute would still not be covered by P.D. No. 242.
jurisdiction of [the] courts but only prescribes an Section 1 of P.D. No. 242 explicitly provides that
administrative procedure for the settlement of only disputes, claims and controversies solely
certain types of disputes between or among between or among departments, bureaus, offices,
departments, bureaus, offices, agencies, and agencies, and instrumentalities of the National
instrumentalities of the National Government, Government, including constitutional offices or
including government-owned or controlled agencies, as well as government-owned and
corporations, so that they need not always repair to controlled corporations, shall be administratively
the courts for the settlement of controversies arising settled or adjudicated. While the BIR is obviously
from the interpretation and application of statutes, a government bureau, and both PNOC and PNB
contracts or agreements. The procedure is not are government-owned and controlled
much different, and no less desirable, than the corporations, respondent Savellano is a private.
arbitration procedures provided in Republic Act No. citizen. His standing in the controversy could not be
876 (Arbitration Law) and in Section 26, R.A. 6715 lightly brushed aside. It was private respondent
(The Labor Code). It is an alternative to, or a Savellano who gave the BIR the information that
substitute for, traditional litigation in court with the resulted in the investigation of PNOC and PNB; who
added advantage of avoiding the delays, vexations requested the BIR Commissioner to reconsider the
and expense of court proceedings. Or, as P.D. No. compromise agreement in question; and who
242 itself explains, its purpose is "the elimination of initiated the CTA Case No. 4249 by filing a Petition
needless clogging of court dockets to prevent the for Review.  (Emphasis supplied)
31

waste of time and energies not only of the

government lawyers but also of the courts, and In contrast, since this case is a
eliminates expenses incurred in the filing and dispute solely between PSALM and NPC, both
prosecution of judicial actions."27
government-owned and controlled corporations, and
the BIR, a National Government office, PD 242
clearly applies and the Secretary of Justice has in Rufino v. Endriga,  Congress cannot by law
34

jurisdiction over this case. deprive the President of his power of control, thus:

It is only proper that intra-governmental disputes be The Legislature cannot validly enact a law· that puts
settled administratively since the opposing a government office in the Executive branch outside
government offices, agencies and the control of the President in the guise of insulating
instrumentalities are all under the President's that office from politics or making it independent. If
executive control and supervision. Section 17, the office is part of the Executive branch, it must
Article VII of the Constitution states unequivocally remain subject to the control of the President.
that: "The President shall have control of all the Otherwise, the Legislature can deprive the
executive departments, bureaus and offices. He President of his constitutional power of control
shall ensure that the laws be faithfully executed." over "all the executive x x x offices." If the
In Carpio v. Executive Secretary,  the Court
32
Legislature can do this with the Executive
expounded on the President's control over all the branch, then the Legislature can also deal a
executive departments, bureaus and offices, thus: similar blow to the Judicial branch by enacting a
law putting decisions of certain lower courts
This presidential power of control over the executive beyond the review power of the Supreme
branch of government extends over all executive Court. This will destroy the system of checks and
officers from Cabinet Secretary to the lowliest clerk balances finely structured in the 1987 Constitution
and has been held by us, in the landmark case among the Executive, Legislative, and Judicial
of Mondano vs. Silvosa, to mean "the power of [the branches.  (Emphasis supplied)
35

President] to alter or modify or nullify or set aside

what a subordinate officer had done in the Clearly, the President's constitutional power of
performance of his duties and to substitute the control over all the executive departments, bureaus
judgment of the former with that of the latter." It is and offices cannot be curtailed or diminished by law.
said to be at the very "heart of the meaning of Chief "Since the Constitution has given the President the
Executive." power of control, with all its awesome implications, it
is the Constitution alone which can curtail such
Equally well accepted, as a corollary rule to the power."  This. constitutional power of control of
36

control powers of the President, is the "Doctrine of the President cannot be diminished by the CTA.
Qualified Political Agency." As the President cannot Thus, if two executive offices or agencies
be expected to exercise his control powers all at the cannot agree, it is only proper and logical that
same time and in person, he will have to delegate the President, as the sole Executive who under
some of them to his Cabinet members. the Constitution has control over both offices or
agencies in dispute, should resolve the dispute
Under this doctrine, which recognizes the instead of the courts. The judiciary should not
establishment of a single executive, "all executive intrude in this executive function of determining
and administrative organizations are adjuncts of the which is correct between the opposing
Executive Department, the heads of the various government offices or agencies, which are both
executive departments are assistants and agents of under the sole control of the President. Under
the Chief Executive, and, except in cases where the his constitutional power of control, the
Chief Executive is required by the Constitution or President decides the dispute between the two
law to act in person on the exigencies of the executive offices. The judiciary cannot
situation demand that he act personally, the substitute its decision over that of the
multifarious executive and administrative functions President. Only after the President has decided or
of the Chief Executive are performed by and settled the dispute can the courts' jurisdiction be
through the executive departments, and the acts of invoked. Until such time, the judiciary should not
the Secretaries of such departments, performed and interfere since the issue is not yet ripe for judicial
promulgated in the regular course of business, are, adjudication. Otherwise, the judiciary would infringe
unless disapproved or reprobated by the Chief on the President's exercise of his constitutional
Executive presumptively the acts of the Chief power of control over all the executive departments,
Executive." bureaus, and offices.

Thus, and in short, "the President's power of control Furthermore, under the doctrine of exhaustion
is directly exercised by him over the members of the of administrative remedies, it is mandated that
Cabinet who, in turn, and by his authority, control where a remedy before an administrative body is
the bureaus and other offices under their respective provided by statute, relief must be sought by
jurisdictions in the executive department. " 33 exhausting this remedy prior to bringing an
action in court in order to give the administrative
body every opportunity to decide a matter that
This power of control vested by the Constitution in
comes within its jurisdiction.  A litigant cannot go
37

the President cannot be diminished by law. As held

to court without first pursuing his administrative
remedies; otherwise, his action is premature and his
case is not ripe for judicial determination.  PD 242
38
subject to the exclusive appellate jurisdiction of the
(now Chapter 14, Book IV of Executive Order No. Court of Tax Appeals. (Emphasis supplied)
292), provides for such administrative remedy.
Thus, only after the President has decided the The first paragraph of Section 4 of the 1997 NIRC
dispute between government offices and agencies provides that the power of the CIR to interpret the
can the losing party resort to the courts, if it so NIRC provisions and other tax laws is subject to
desires. Otherwise, a resort to the courts would be review by the Secretary of Finance, who is the
premature for failure to exhaust administrative alter ego of the President. Thus, the constitutional
remedies. Non-observance of the doctrine of power of control of the President over all the
exhaustion of administrative remedies would result executive departments, bureaus, and offices  is still
45

in lack of cause of action,  which is one of the

39
preserved. The President's power of control, which
grounds for the dismissal of a complaint. cannot be limited or withdrawn by Congress, means
the power of the President to alter, modify, nullify, or
The rationale of the doctrine of exhaustion. of set aside the judgment or action of a subordinate in
administrative remedies was aptly explained by the the performance of his duties. 46

Court in Universal Robina Corp. (Corn Division) v.

Laguna Lake Development Authority: 40
The second paragraph of Section 4 of the 1997
NIRC, providing for the exclusive appellate
The doctrine of exhaustion of administrative jurisdiction of the CTA as regards the CIR's
remedies is a cornerstone of our judicial system. decisions on matters involving disputed
The thrust of the rule is that courts must allow assessments, refunds in internal revenue taxes,
administrative agencies to carry out their functions fees or other charges, penalties imposed in relation
and discharge their responsibilities within the thereto, or other matters arising under NIRC, is in
specialized areas of their respective competence. conflict with PD 242. Under PD 242, all disputes
The rationale for this doctrine is obvious. It entails and claims solely between government agencies
lesser expenses and provides for the speedier and offices, including government-owned or
resolution of the controversies. Comity and controlled corporations, shall be administratively
convenience also impel courts of justice to shy away settled or adjudicated by the Secretary of Justice,
from a dispute until the system of administrative the Solicitor General, or the Government Corporate
redress has been completed. 41
Counsel, depending on the issues and government
agencies involved.
In requiring parties to exhaust administrative
remedies before pursuing action in a court, the To harmonize Section 4 of the 1997 NIRC with PD
doctrine prevents overworked courts from 242, the following interpretation should be adopted:
considering issues when remedies are available (1) As regards private entities and the BIR, the
through administrative channels.  Furthermore, the
42
power to decide disputed assessments, refunds of
doctrine endorses a more economical and less internal revenue taxes, fees or other charges,
formal means of resolving disputes,  and promotes
43
penalties in relation thereto, or other matters arising
efficiency since disputes and claims are generally under the NIRC or other laws administered by the.
resolved more quickly and economically through BIR is vested in the CIR subject to the exclusive
administrative proceedings rather than through court appellate jurisdiction of the CTA, in accordance with
litigations.
44
Section 4 of the NIRC; and (2) Where the disputing
parties are all public entities (covers disputes
The Court of Appeals ruled that under the 1997 between the BIR and other government entities), the
NIRC, the dispute between the parties is within the case shall be governed by PD 242.
authority of the CIR to resolve. Section 4 of the
1997 NIRC reads: Furthermore, it should be noted that the 1997 NIRC
is a general law governing the imposition of national
SEC 4. Power of the Commissioner to Interpret Tax internal revenue taxes, fees, and charges.  On the
47

Laws and to Decide Tax Cases. - The power to other hand, PD 242 is a special law that applies
interpret the provisions of this Code and other tax only to disputes involving solely government
laws shall be under the exclusive and original offices, agencies, or instrumentalities. The
jurisdiction of the Commissioner, subject to review difference between a special law and a general law
by the Secretary of Finance. was clarified in Vinzons-Chato v. Fortune Tobacco
Corporation: 48

The power to decide disputed assessments, refunds

in internal revenue taxes, fees or other charges. A general statute is one which embraces a class of
penalties imposed in relation thereto, or other subjects or places and does not omit any subject or
matters arising under this Code or other laws or place naturally belonging to such class. A special
portions thereof administered by the Bureau of statute, as the term is generally understood, is one
Internal Revenue is vested in the Commissioner, which relates to particular persons or things of a
class or to a particular portion or section of the state approve the application, and release the tax
only. refund/TCC within fifteen (15) working days from
issuance of the DOJ ruling that is favorable to
A general law and a special law on the same NPC/PSALM. (Emphasis supplied)
subject are statutes in pari materia and should,
accordingly, be read together and harmonized, if PD 242 is now embodied in Chapter 14, Book IV of
possible, with a view to giving effect to both. The Executive Order No. 292 (EO 292), otherwise
rule is that where there are two acts, one of which is known as the Administrative Code of 1987, which
special and particular and the other general which, if took effect on 24 November 1989.51 The pertinent
standing alone, would include the same matter and provisions read:
thus conflict with the special act, the special law
must prevail since it evinces the legislative intent Chapter 14- Controversies Among Government
more clearly than that of a general statute and must Offices and Corporations
not be taken as intended to affect the more
particular and specific provisions of the earlier act, SEC. 66. How Settled. - All disputes, claims and
unless it is absolutely necessary so to construe it in controversies, solely between or among the
order to give its words any meaning at all. departments, bureaus, offices, agencies and
instrumentalities of the National Government,
The circumstance that the special law is passed including government-owned or controlled
before or after the general act does not change the corporations, such as those arising from the
principle. Where the special law is later, it will be interpretation and application of statutes, contracts
regarded as an exception to, or a qualification of, or agreements, shall be administratively settled or
the prior general act; and where the general act is adjudicated in the manner provided in this Chapter.
later, the special statute will be construed as This Chapter shall, however, not apply to disputes
remaining an exception to its terms, unless repealed involving the Congress, the Supreme Court, the
expressly or by necessary implication. 49
Constitutional Commissions, and local
governments.
Thus, even if the 1997 NIRC, a general statute, is
a later act, PD 242, which is a special law, will SEC. 67. Disputes Involving Questions of Law. - All
still prevail and is treated as an exception to the cases involving only questions of law shall be
terms of the 1997 NIRC with regard solely to submitted to and settled or adjudicated by the
intragovernmental disputes. PD 242 is a special Secretary of Justice as Attorney-General of the
law while the 1997 NIRC is a general law, insofar as National Government and as ex officio legal adviser
disputes solely between or among government of all government-owned or controlled corporations.
agencies are concerned. Necessarily, such disputes His ruling or decision thereon shall be conclusive
must be resolved under PD 242 and not under the and binding on all the parties concerned.
NIRC, precisely because PD 242 specifically
mandates the settlement of such disputes in SEC. 68. Disputes Involving Questions of Fact and
accordance with PD 242. PD 242 is a valid law Law. - Cases involving mixed questions of law and
prescribing the procedure for administrative of fact or only factual issues shall be submitted to
settlement or adjudication of disputes among and settled or adjudicated by:
government offices, agencies, and instrumentalities
under the executive control and supervision of the
(1) The Solicitor General, if the dispute, claim or
President.50

controversy involves only departments, bureaus,

offices and other agencies of the National
Even the BIR, through its authorized representative, Government as well as government-owned or
then OIC-Commissioner of Internal Revenue Lilian controlled corporations or entities of whom he is the
B. Hefti, acknowledged in the MOA executed by the principal law officer or general counsel; and
BIR, NPC, and PSALM, that the Secretary of Justice
has jurisdiction to resolve its dispute with petitioner
(2) The Secretary of Justice, in all other cases not
PSALM and the NPC. This is clear from the
falling under paragraph (1).
provision in the MOA which states:
SEC. 69. Arbitration. - The determination of factual
H) Any resolution in favor of NPC/PSALM by any
issues may be referred to an arbitration panel
appropriate court or body shall be immediately
composed of one representative each of the parties
executory without necessity of notice or demand
involved and presided over by a representative of
from NPC/PSALM. A ruling from the Department
the Secretary of Justice or the Solicitor General, as
of Justice (DOJ) that is favorable to NPC/PSALM
the case may be.
shall be tantamount to the filing of an
application for refund (in cash)/tax credit
certificate (TCC), at the option of NPC/PSALM. SEC. 70. Appeals. - The decision of the Secretary of
BIR undertakes to immediately process and Justice as well as that of the Solicitor General, when
approved by the Secretary of Justice, shall be final
and binding upon the parties involved. Appeals may, persons shall be considered as being rendered in
however, be taken to the President where the the course of trade or business. (Emphasis
amount of the claim or the value of the property supplied)
exceeds one million pesos. The decision of the
President shall be final. Under Section 50 of the EPIRA law, PSALM's
principal purpose is to manage the orderly sale,
SEC. 71. Rules and Regulations. - The Secretary of disposition, and privatization of the NPC generation
Justice shall promulgate the rules and regulations assets, real estate and other disposable assets, and
necessary to carry out the provisions of this IPP contracts with the objective of liquidating all
Chapter. NPC financial obligations and stranded contract
costs in an optimal manner.
Since the amount involved in this case is more than
one million pesos, the DOJ Secretary's decision PSALM asserts that the privatization of NPC assets,
may be appealed to the Office of the President in such as the sale of the Pantabangan-Masiway and
accordance with Section 70, Chapter 14, Book IV of Magat Power Plants, is pursuant to PSALM's
EO 292 and Section 552 of PD 242. If the appeal to mandate under the EPIRA law and is not conducted
the Office of the President is denied, the aggrieved in the course of trade or business. PSALM cited the
party can still appeal to the Court of Appeals under 13 May 2002 BIR Ruling No. 020- 02, that PSALM' s
Section 1, Rule 43 of the 1997 Rules of Civil sale of assets is not conducted in pursuit of any
Procedure.  However, in order not to further delay
53
commercial or profitable activity as to fall within the
the disposition of this case, the Court resolves to ambit of a VAT-able transaction under Sections 105
decide the substantive issue raised in the petition.54
and 106 of the NIRC. The pertinent portion of the
ruling adverted to states:
II. Whether the sale of the power plants is
subject to VAT. 2. Privatization of assets by PSALM is not subject to
VAT
To resolve the issue of whether the sale of the
Pantabangan-Masiway and Magat Power Plants by Pursuant to Section 105 in relation to Section 106,
petitioner PSALM to private entities is subject to both of the Tax Code of 1997, a value-added tax
VAT, the Court must determine whether the sale is equivalent to ten percent (10%) of the gross selling
"in the course of trade or business" as contemplated price or gross value in money of the goods, is
under Section 105 of the NIRC, which reads: collected from any person, who, in the course of
trade or business, sells, barters, exchanges, leases
SEC 105. Persons Liable. - Any person who, in goods or properties, which tax shall be paid by the
the course of trade or business, sells, barters, seller or transferor.
exchanges, leases goods or properties, renders
services, and any person who imports .goods The phrase "in the course of trade or business"
shall be subject to the value-added tax (VAT) means the regular conduct or pursuit of a
imposed in Sections 106 to 108 of this Code. commercial activity, including transactions incidental
thereto.
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the Since the disposition or sale of the assets is a
buyer, transferee or lessee of the goods, properties consequence of PSALM's mandate to ensure the
or services. This rule shall likewise apply to existing orderly sale or disposition of' the property and
contracts of sale or lease of goods, properties or thereafter to liquidate the outstanding loans and
services at the time of the effectivity of Republic Act obligations of NPC, utilizing the proceeds from sales
7716. and other property contributed to it, including the
proceeds from the Universal Charge, and not
The phrase 'in the course of trade or business' conducted in pursuit of any commercial or profitable
means the regular conduct or pursuit of a activity, including transactions incidental thereto, the
commercial or an economic activity, including same will be considered an
transactions incidental thereto, by any person isolated ,transaction, which will therefore not be
regardless of whether or not the person subject to VAT. (BIR Ruling No. 113-98 dated
engaged therein is a nonstock, nonprofit private July 23, 1998)  (Emphasis supplied)
55

organization (irrespective of the disposition of

its net income and whether or not it sells On the other hand, the CIR argues that the previous
exclusively to members or their guests), or exemption of NPC from VAT under Section 13 of
government entity. Republic Act No. 6395  (RA 6395) was expressly
56

repealed by Section 24 of Republic Act No.

The rule of regularity, to the contrary 9337  (RA 9337), which reads:
57

notwithstanding, services as defined in this Code

rendered in the Philippines by nonresident foreign
SEC. 24. Repealing Clause. - The following laws or In any event, even if PSALM is deemed a
provisions of laws are hereby repealed and the successor-in-interest of NPC, still the sale of the
persons and/or transactions affected herein are power plants is not "in the course of trade or
made subject to the value-added tax subject to the business" as contemplated under Section 105 of the
provisions of Title IV of the National Internal NIRC, and thus, not subject to VAT. The sale of the
Revenue Code of 1997, as amended: power plants is not in pursuit of a commercial or
economic activity but a governmental function
(A) Section 13 of R.A. No. 6395 on the exemption mandated by law to privatize NPC generation
from value-added tax of National Power Corporation assets. PSALM was created primarily to liquidate all
(NPC); NPC financial obligations and stranded contract
costs in an optimal manner. The purpose and
(B) Section 6, fifth paragraph of R.A. No. 9136 on objective of PSALM are explicitly stated in Section
the zero VAT rate imposed on the sale of generated 50 of the EPIRA law, thus:
power by generation companies; and
SEC. 50. Purpose and Objective, Domicile and
(C) All other laws, acts, decrees, executive orders, Term of Existence. - The principal purpose of the
issuances and rules and regulations or parts thereof PSALM Corp. is to manage the orderly sale,
which are contrary to and inconsistent with any disposition, and privatization of NPC generation
provisions of this Act are hereby repealed, amended assets, real estate and other disposable assets,
or modified accordingly. and IPP contracts with the objective of
liquidating all NPC financial obligations and
stranded contract costs in an optimal manner.
As a consequence, the CIR posits that the VAT
exemption accorded to PSALM under BIR Ruling
No. 020-02 is also deemed revoked since PSALM is The PSALM Corp. shall have its principal office and
a successor-in-interest of NPC. Furthermore, the place of business within Metro Manila.
CIR avers that prior to the sale, NPC still owned the
power plants and not PSALM, which is just The PSALM Corp. shall exist for a period of twenty-
considered as the trustee of the NPC properties. five (25) years from the effectivity of this Act, unless
Thus, the sale made by NPC or its successors-in- otherwise provided by law, and all assets held by it,
interest of its power plants should be subject to the all moneys and properties belonging to it, and all its
10% VAT beginning 1 November 2005 and 12% liabilities outstanding upon the expiration of its term
VAT beginning 1 February 2007. of existence shall revert to and be assumed by the
National Government. (Emphasis supplied)
We do not agree with the CIR's position, which is
anchored on the wrong premise that PSALM is a PSALM is limited to selling only NPC assets and
successor-in-interest of NPC. PSALM is not a IPP contracts of NPC. The sale of NPC assets by
successor-in-interest of NPC. Under its charter, PSALM is not "in the course of trade or business"
NPC is mandated to "undertake the development of but purely for the specific purpose of privatizing
hydroelectric generation of power and the NPC assets in order to liquidate all NPC financial
production of electricity from nuclear, geothermal obligations. PSALM is tasked to sell and privatize
and other sources, as well as the transmission of the NPC assets within the term of its
electric power on a nationwide basis."  With the
58 existence.  The EPIRA law even requires PSALM to
60

passage of the EPIRA law which restructured the submit a plan for the endorsement by the Joint
electric power industry into generation, Congressional Power Commission and the approval
transmission, distribution, and supply sectors, the of the President of the total privatization of the NPC
NPC is now primarily mandated to perform assets and IPP contracts. Section 47 of the EPIRA
missionary electrification function through the Small law provides:
Power Utilities Group (SPUG) and is responsible for
providing power generation and associated power SEC 47. NPC Privatization. - Except for the assets
delivery systems in areas that are not connected to of SPUG, the generation assets, real estate, and
the transmission system.  On the other hand,
59
other disposable assets as well as IPP contracts of
PSALM, a government-owned and controlled NPC shall be privatized in accordance with this Act.
corporation, was created under the EPIRA law to Within six (6) months from the effectivity of this Act,
manage the orderly sale and privatization of NPC the PSALM Corp. shall submit a plan for the
assets with the objective of liquidating all of NPC's endorsement by the Joint Congressional Power
financial obligations in an optimal manner. Clearly, Commission and the approval of the President of
NPC and PSALM have different functions. Since the Philippines, on the total privatization of the
PSALM is not a successor-in-interest of NPC, generation assets, real estate, other disposable
the repeal by RA 9337 of NPC's VAT exemption assets as well as existing IPP contracts of NPC and
does not affect PSALM. thereafter, implement the same, in accordance with
the following guidelines, except as provided for in
Paragraph (f) herein:
(a) The privatization value to the National Said complexes may be privatized not earlier than
Government of the NPC generation assets, real ten (10) years from the effectivity of this Act, and,
estate, other disposable assets as well as IPP except for Agus Ill, shall not be subject to
contracts shall be optimized; BuildOperate-Transfer (B-0-T), Build-Rehabilitate-
OperateTransfer (B-R-0-T) and other variations
(b) The participation by Filipino citizens and thereof pursuant to Republic Act No. 6957. as
corporations in the purchase of NPC assets shall be amended by Republic Act No. 7718. The
encouraged. In the case of foreign investors, at privatization of Agus and Pulangi complexes hall be
least seventy-five percent (75%) of the funds used left to the discretion of PSALM Corp. in consultation
to acquire NPC-generation assets and IPP contracts with Congress;
shall be inwardly remitted and registered with the
Bangko Sentral ng Pilipinas; (g) The steamfield assets and generating plants of
each geothermal complex shall not be sold
(c) The NPC plants and/or its IPP contracts separately. They shall be combined and each
assigned to IPP Administrators, its related assets geothermal complex shall be sold as one package
and assigned liabilities, if any, shall be grouped in a through public bidding. The geothermal complexes
manner which shall promote the viability of the covered by this requirement include, but are not
resulting generation companies (gencos), ensure limited to, Tiwi-Makban, Leyte A and B (Tongonan),
economic efficiency, encourage competition, foster Palinpinon, and Mt. Apo;
reasonable electricity rates and create market
appeal to optimize returns to the government from (h) The ownership of the Caliraya-Botokan-
the sale and disposition of such assets in a manner Kalayaan (CBK) pump storage complex shall be
consistent with the objectives of this Act. In the transferred to the PSALM Corporation;
grouping of the generation assets and IPP contracts
of NPC, the following criteria shall be considered: (i) Not later than three (3) years from the effectivity
of this Act, and in no case later than the initial
(1) A sufficient scale of operations and balance implementation of open access, at least seventy
sheet strength to promote the financial viability of percent (70%) of the total capacity of generating
the restructured units; assets of NPC and of the total capacity of the power
plants under contract with NPC located in Luzon
(2) Broad geographical groupings to ensure and Visayas spall have been privatized: Provided,
efficiency of operations but without the formation of That any unsold capacity shall be privatized not
regional companies or consolidation of market later than eight (8) years from the effectivity of this
power; Act; and

(3) Portfolio of plants and IPP contracts to achieve (j) NPC may generate and sell electricity only from
management and operational synergy without the undisposed generating assets and IPP contracts
dominating any part of the market or the load curve; of PSALM Corp. and shall not incur any new
and obligations to purchase power through bilateral
contracts with generation companies or other
(4) Such other factors as may be deemed beneficial suppliers.
to the best interest of the National Government
while ensuring attractiveness to potential investors. Thus, it is very clear that the sale of the power
plants was an exercise of a governmental
(d) All assets of NPC shall be sold in open and function mandated by law for the primary
transparent manner through public bidding, and the purpose of privatizing NPC assets in
same shall apply to the disposition of IPP contracts; accordance with the guidelines imposed by the
EPIRA law.
(e) In cases of transfer of possession,
control, operation or privatization of multi- In the 2006 case of Commissioner of Internal
purpose hydro facilities, safeguards shall be Revenue v. Magsaysay Lines, Inc.
prescribed to ensure that the national (Magsaysay),  the Court ruled that the sale of the
61

government may direct water usage in vessels of the National Development Company
cases of shortage to protect potable water, (NDC) to Magsaysay Lines, Inc. is not subject to
irrigation, and all other requirements imbued VAT since it was not in the course of trade or
with public interest; business, as it was involuntary and made pursuant
to the government's policy of privatization. The
Court cited the CT A ruling that the phrase "course
(f) The Agus and Pulangi complexes in Mindanao
of business" or "doing business" connotes regularity
shall be excluded from an1ong the generation
of activity. Thus, since the sale of the vessels was
companies that will be initially privatized. Their
an isolated transaction, made pursuant to the
ownership shall be transferred to the PSALM Corp.
government's privatization policy, and which
and both shall continue to be operated by the NPC.
transaction could no longer be repeated or carried necessary or proper, subject to applicable laws,
on with regularity, such sale was not in the course of rules and regulations;
trade or business and was not subject to VAT.
SEC. 55. Property of PSALM Corp. -The following
Similarly, the sale of the power plants in this case is funds, assets, contributions and other property
not subject to VAT since the sale was made shall constitute the property of PSALM Corp.:
pursuant to PSALM' s mandate to privatize NPC
assets, and was not undertaken in the course of (a) The generation assets, real estate, IPP
trade or business. In selling the power plants, contracts, other disposable assets of
PSALM was merely exercising a governmental NPC, proceeds from the sale or disposition of such
function for which it was created under the EPIRA assets and residual assets from B-0-T, R-0-T, and
law. other variations thereof;

The CIR argues that the Magsaysay case, which (b) Transfers from the National Government;
involved the sale in 1988 of NDC vessels, is not
applicable in this case since it was decided under (c) Proceeds from loans incurred to restructure or
the 1986 NIRC. The CIR maintains that under refinance NPC's transferred liabilities: Provided,
Section 105 of the 1997 NIRC, which amended however, That all borrowings shall be fully paid for
Section 99  of the 1986 NIRC, the phrase "in the
62
by the end of the life of the PSALM Corp.;
course of trade or business" was expanded, and
now covers incidental transactions. Since NPC still
(d) Proceeds from the universal charge allocated for
owns the power plants and PSALM may only be
stranded contract costs and the stranded debts of
considered as trustee of the NPC assets, the sale of
the NPC;
the power plants is considered an incidental
transaction which is subject to VAT.
(e) Net profit of NPC;
We disagree with the CIR's position. PSALM owned
the power plants which were sold. PSALM's (f) Net profit of TRANSCO;
ownership of the NPC assets is clearly stated under
Sections 49, 51, and 55 of the EPIRA law. The (g) Official assistance, grants, and donations from
pertinent provisions read: external sources; and

SEC. 49. Creation of Power Sector Assets and (h) Other sources of funds as may be determined by
Liabilities Management Corporation. - There is PSALM Corp. necessary for the above-mentioned
hereby created a government-owned and - purposes. (Emphasis supplied)
controlled corporation to be known as the
"Power Sector Assets and Liabilities Under the EPIRA law, the ownership of the
Management Corporation," hereinafter referred generation assets, real estate, IPP contracts, and
to as "PSALM Corp.," which shall take other disposable assets of the NPC was transferred
ownership of all existing NPC generation assets, to PSALM. Clearly, PSALM is not a mere trustee of
liabilities, IPP contracts, real estate and all other the NPC assets but is the owner thereof. Precisely,
disposable assets. All outstanding obligations of PSALM, as the owner of the NPC assets, is the
the NPC arising from loans, issuances of bonds, government entity tasked under the EPIRA law to
securities and other instruments of indebtedness privatize such NPC assets.
shall be transferred to and assumed by the PSALM
Corp. within one hundred eighty (180) days from the In the more recent case of Mindanao II Geothermal
approval of this Act. Partnership v. Commissioner of Internal Revenue
(Mindanao 11),  which was decided under the 1997
63

SEC 51. Powers. - The Corporation shall, in the NIRC, the Court held that the sale of a fully
performance of its functions and for the attainment depreciated vehicle that had been used in Mindanao
of its objectives, have the following powers: II's business was subject to VAT, even if such sale
may be considered isolated. The Court ruled that it
(a) To formulate and implement a program for the does not follow that an isolated transaction cannot
sale and privatization of the NPC assets and IPP be an incidental transaction for VAT purposes. The
contracts and the liquidation of the NPC debts and Court then cited Section 105 of the 1997 NIRC
stranded costs, such liquidation to be completed which shows that a transaction "in the course of
within the term of existence of the PSALM Corp.; trade or business" includes "transactions incidental
thereto." Thus, the Court held that the sale of the
(b) To take title to and possession of, administer vehicle is an incidental transaction made in the
and conserve the assets transferred to it; to sell course of Mindanao II's business which should be
or dispose of the same at such price and under subject to VAT.
such terms and conditions as it may deem
The CIR alleges that the sale made by NPC and/or
its successors-in-interest of the power plants is an
incidental transaction which should be subject to
VAT. This is erroneous. As previously discussed,
the power plants are already owned by PSALM, not
NPC. Under the EPIRA law, the ownership of these
power plants was transferred to PSALM for sale,
disposition, and privatization in order to liquidate all
NPC financial obligations. Unlike the Mindanao
II case, the power plants in this case were not
previously used in PSALM's business. The power
plants, which were previously owned by NPC were
transferred to PSALM for the specific purpose of
privatizing such assets. The sale of the power plants
cannot be considered as an incidental transaction
made in the course of NPC's or PSALM's business.
Therefore, the sale of the power plants should not
be subject to VAT.

Hence, we agree with the Decisions dated 13 March

2008 and 14 January 2009 of the Secretary of
Justice in OSJ Case No. 2007-3 that it was Commissioner of Internal Revenue vs. First E-
erroneous for the BIR to hold PSALM liable for Bank Tower Condominium Corporation
deficiency VAT in the amount of ₱3,813,080,472 for
the sale of the Pantabangan-Masiway and Magat These twin cases refer to the: 1) Petition for Review
Power Plants. The ₱3,813,080,472 deficiency VAT filed by the Bureau of Intemal Revenue (BIR) (G.R.
remitted by PSALM under protest should therefore No. 215801); and 2) Special Civil Action for
be refunded to PSALM. Certiorari initiated by the First E-Bank Tower
Condominium Corp. (First E-Bank) (G.R. No.
However, to give effect to Section 70, Chapter 14, 218924). Both cases assail the following
Book IV of the Administrative Code of 1987 on dispositions of the Court of Appeals in CA-G.R. CV
appeals from decisions of the Secretary of Justice, No. 102266 entitled "In the Matter of Declaratory
the BIR is given an opportunity to appeal the Relief on the Validity of BIR Revenue Memorandum
Decisions dated 13 March 2008 and 14 January Circular No. 65-2012 'Clarifying the Taxability of
2009 of the Secretary of Justice to the Office of the Association Dues, Membership Fees and Other
President within 10 days from finality of this Assessments !Charges Collected by Condominium
Decision.64 Corporations, 'First E-Bank Tower Condominium
Corp. v. Bureau of Internal Revenue ( BIR )
WHEREFORE, we GRANT the petition. represented by its Commissioner Kim S.Jacinto-
We SETASIDE the 27 September 2010 Decision Henares, et al."
and the 3 August 2011 Resolution of the Court of
Appeals in CA-G.R. SP No. 108156. The Decisions 1) Resolution1 dated June 26, 2014 dismissing for
dated 13 March 2008 and 14 January 2009 of the alleged lack of jurisdiction the respective appeals of
Secretary of Justice in OSJ Case No. 2007- 3 the First E-Bank and the BIR et al., viz.:
are REINSTATED. No costs.SO ORDERED.
It appearing from the records that the subject matter
of the instant appeal is the Resolution dated 05
September 2013 of the RTC-Branch 146, Makati
City, declaring "to have been invalidly issued" BIR
Revenue Memorandum Circular No. 65-2012 dated
31 October 2 012 which imposed 12% value added
tax and 32% income tax on association
dues/membership fees and other charges collected
by condominium corporation from its members and
tenants, taking into account Section 7 (a) of
Republic Act No. 9282 (which took effect on 23 April
2004) which expressly provides that the Court of
Tax Appeals has exclusive appellate jurisdiction
over "Decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their
original or appellate jurisdiction," considering that
the Court of Tax Appeals is a highly specialized
body specifically created for the purpose of Moreover, since a condominium corporation is
reviewing tax cases and resolving tax problems, the subject to income tax, income payments made to it
instant appeal is hereby DISMISSED outright for are subject to applicable withholding taxes under
lack of jurisdiction over the nature and subject existing regulations.
matter of the action.
II. Value-Added Tax (VAT) -Association dues,
The Compliance/Manifestation dated 16 May 2014 membership fees, and other assessments/charges
of RTC Judge Encarnacion Jaja G. Moya and collected by a condominium corporation are subject
Branch Clerk of Court Therese Lynn R. Bandong, to VAT since they constitute income payment or
Manifestations dated 29 May 2014 and 30 May compensation for the beneficial services it provides
2014 of First E-Bank Tower Condominium to its members and tenants.
Corporation and the Manifestation dated 02 June
2014 ofthe Republic ofthe Philippines are NOTED. Section 105 of the National Internal Revenue Code
of 1997, as amended, provides:
Let the instant appeal be
considered CLOSED and TERMINATED. "SECTION 105. Persons Liable. -Any person who,
in the course of trade or business, sells, barters,
Let the original records be returned to the trial court. exchanges, leases goods or properties, renders
services, and any person who imports goods shall
SO ORDERED. be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
2) Resolution2 dated November 27, 2014 denying
the parties' respective motions for reconsideration. xxx

The Facts The phrase 'in the course of trade or business'

means the regular conduct or pursuit of a
The First E-Bank filed the petition below for commercial or an economic activity, including
declaratory relief seeking to declare as invalid transactions incidental thereto, by any person
Revenue Memorandum Circular No. 65-2012 (RMC regardless of whether or not the person engaged
No. 65-2012) dated October 31, 2012.3 The case therein is a nonstock, nonprofit private organization
was raffled to the Regional Trial Court, Branch 146, (irrespective of the disposition of its net income and
Makati City. whether or not it sells exclusively to members or
their guests), or government entity." (Emphasis
supplied)
RMC No. 65-2012 entitled "Clarifying the Taxability
of Association Dues, Membership Fees and Other
Assessments/ Charges Collected by Condominium The above provision is clear -- even a non-stock,
Corporations" relevantly reads: non-profit organization or government entity is liable
to pay VAT on the sale of goods or services. This
conclusion was affirmed by the Supreme Court in
CLARIFICATION
Commissioner of Internal Revenue v. Court of
Appeals and Commonwealth Management and
The taxability of association dues, membership Services Corporation, G.R. No. 125355, March 30,
fees, and other assessments/charges collected by a 2000. In this case, the Supreme Court held:
condominium corporation from its members, tenants
and other entities are discussed hereunder.
"(E)ven a non-stock, non-profit organization or
government entity, is liable to pay VAT on the sale
I. Income Tax -- The amounts paid in as dues or of goods or services. VAT is a tax on transactions,
fees by members and tenants of a condominium imposed at every stage of the distribution process
corporation form part of the gross income of the on the sale, barter, exchange of goods or property,
latter subject to income tax. This is because a and on the performance of services, even in the
condominium corporation furnishes its members absence of profit attributable thereto. The term "in
and tenants with benefits, advantages, and the course of trade or business" requires the regular
privileges in return for such payments. For tax conduct or pursuit of a commercial or an economic
purposes, the association dues, membership fees, activity, regardless of whether or not the entity is
and other assessments/charges collected by a profit- oriented.
condominium corporation constitute income
payments or compensation for beneficial services it
The definition of the term "in the course of trade or
provides to its members and tenants. The previous
business" incorporated in the present law applies to
interpretation that the assessment dues are funds
all transactions even to those made prior to its
which are merely held in trust by a condominium
enactment. Executive Order No. 273 stated that any
corporation lacks legal basis and is hereby
person who, in the course of trade or business,
abandoned.
sells, barters or exchanges goods and services, was
already liable to pay VAT. The present law merely owners to produce additional amounts for the thirty-
stresses that even a nonstock, nonprofit two percent (32%) income tax and twelve percent
organization or government entity is liable to pay (12%) VAT.6
VAT for the sale of goods and services.
Through the Makati Commercial Estate Association,
Section 108 of the National Internal Revenue Code Inc., it sent a Letter dated December 5, 2012 to the
of 1997 defines the phrase "sale of services" as the BIR Commissioner requesting deferment of RMC
"performance of all kinds of services for others for a No. 65-2012. A Letter dated December 19, 2012
fee, remuneration or consideration. " It includes "the was likewise sent to Makati City Revenue District
supply of technical advice, assistance or services Officer Ricardo B. Espiritu informing him of the
rendered in connection with technical management continuous judicial consignation of the income tax
or administration of any scientific, industrial or and VAT payments due under RMC No. 65-2012.7
commercial undertaking or project."
The BIR et al .'s Comments
On February 5, 1998, the Commissioner of Internal
Revenue issued BIR Ruling No. 010-98 Under Comment dated February 11, 2013, the BIR
emphasizing that a domestic corporation that and RDO Espiritu through the Office of the Solicitor
provided technical, research, management and General (OSG) riposted that declaratory relief was
technical assistance to its affiliated companies and no longer proper here considering that RMC No. 65-
received payments on a reimbursemen-of-cost 2012 already took effect on October 31, 2012. The
basis, without any intention of realizing profit, was alleged injury which the First E-Bank sought to
subject to VAT on services rendered. In fact, even if prevent had already arisen as of that date.8
such corporation was organized without any
intention of realizing profit, any income or profit By its separate comment,* the BIR's Litigation
generated by the entity in the conduct of its activities Division argued that the petition should be
was subject to income tax. dismissed for violation of the principle of primary
jurisdiction. Several condominium corporations had
Hence, it is immaterial whether the primary purpose already referred the issue to the BIR Law Division
of a corporation indicates that it receives payments for further clarification. Ultimately, only the Secretary
for services rendered to its affiliates on a of Finance had primary jurisdiction over the issue
reimbursement-on-cost basis only, without realizing raised here. Too, a petition for declaratory relief will
profit, for purposes of determining liability for VAT not prosper if the questioned statute had already
on services rendered. As long as the entity provides been breached, as in this case. RMC No. 65-2012
service for a fee, remuneration or consideration, was only a clarificatory issuance on pertinent laws,
then the service rendered is subject to VAT." specifically the National Internal Revenue Code
(NIRC). It was merely a restatement of the BIR's
Accordingly, the gross receipts of condominium prevailing position on the issue of taxation.9
corporations including association dues,
membership fees, and other assessments/charges The First E-Bank's Reply
are subject to VAT, income tax and income
payments made to it are subject to applicable The First E-Bank replied that judicial consignation of
withholding taxes under existing regulations.4 its tax payments under protest was necessary.10

The First E-Bank's Allegations The Trial Court's Ruling

In its Petition dated December 20, 2012, the First E- By Resolution11 dated September 5, 2013, the trial
Bank essentially alleged: It was a non-stock non- court ruled that the First E-Bank correctly resorted
profit condominium corporation. It owned and to a petition for declaratory relief for the purpose of
possessed, through its members, a condominium invalidating RMC No. 65-2012. On this score, the
office building. RMC No. 65-2012 imposed on it two trial court declared as invalid RMC No. 65-2012 for
(2) tax liabilities: 1) value-added tax (VAT) of it purportedly expanded the law, created an
P118,971. 53 to be paid on December 2012 and additional tax burden on condominium corporations,
every month thereafter; and b) income tax and was issued without the requisite notice and
ofP665,904.12 to be paid on or before April 15, hearing, thus:
2013 and every year thereafter.5
As to the validity of the Memorandum Circular
RMC No. 65-2012 burdened the owners of the issued, it is respondent's contention that it merely
condominium units with income tax and VAT on clarified and was simply issued to restate and clarify
their own money which they exclusively used for the the prevailing position and ruling of the BIR. It was a
maintenance and preservation of the building and its mere interpretation of an existing law which has
premises. RMC No. 65-2012 was oppressive and already been in effect and which was not set to be
confiscatory because it required condominium unit amended. However, the same appears to be not
true as it goes beyond its objective to clarify the arbitrarily and in violation of the due process clause
existing statute. The assailed Revenue of the constitution. The respondent in imposing
Memorandum Circular not merely interpreted or additional tax burden on petitioner violated the
clarified the existing BIR Ruling but in fact legislated latter's constitutional right to due notice and
or introduced a new legislation under the mantle of hearing.15
its quasi-legislative authority. The BIR
Commissioner, under the guise of clarifying income  In another vein, the trial court noted the absence of
tax on association dues, made Revenue proof that the First E-Bank actually made a judicial
Memorandum Circular effective immediately. In so consignation of its purported tax payments.16
doing, the passage contravenes the constitutional
mandate of due process of law.12 The BIR et al. moved for reconsideration. It argued
that the petition was premature, RMC No. 65-2012
 The above cited portion of the Memorandum was valid, and the petition for declaratory relief
Circular failed to show what particular law it clarified. should be dismissed for violating the principle of
Instead it shows that it merely departed from the primary jurisdiction. For its part, the First E-Bank
several rulings of the Bureau exempting from moved for partial reconsideration, praying that the
income tax the assessments/charges collected by consignated funds be released.17
condominium corporations from its members, on the
ground that the collection of association dues and By Order18 dated December 18,2013, the trial court
other assessments/charges are merely held in trust denied the parties' respective motions for
to be used solely for administrative expenses in reconsideration.  It reiterated that the First E-Bank
implementing its purpose. The new circular in effect
1avvph!1

properly resorted to a petition for declaratory relief

made its own legislation abandoning the previous for the purpose of invalidating RMC No. 65-2012. It
rulings of the BIR which became the practice of the also noted that the First E-Bank appeared to have
condominium corporations including herein judicially consignated the funds only on November
petitioner. The Revenue Circular changed and 17, 2013, following the resolution of the case on
departed from the long standing ruling of the BIR September 5, 2013. For sure, this judicial
that association dues and other fees and charges consignation, which was belatedly done, cannot
collected from members are tax exempt. In so justify a modification of the aforesaid resolution. The
doing, it abruptly charges from taxpayer an trial court, nonetheless, pronounced that the First E-
imposition which was then not existing, and worse Bank was not precluded from filing the proper
made it immediately effective which is prejudicial to motion to withdraw the consignated amounts upon
the rights of the petitioner. It did not merely interpret the finality of the ruling on the validity of RMC 65-
or clarify but changed altogether the long standing 2012.
rules of the Bureau of Internal revenue.13
The Proceedings before the Court of Appeals
 Moreover, it is already the common business
practice of petitioner that the association dues,
Aggrieved, both parties appealed to the Court of
membership fees and the like are not included as
Appeals. On one hand, the BIR et al. challenged the
part of its income and therefore of the VAT. The
trial court's ruling insofar as it: a) decreed that the
advent of the Memorandum Circular 65-2012 issued
First E-Bank correctly availed of the petition for
by the Commissioner changes the tax liability of
declaratory relief when it sought to nullify RMC No.
petitioner in the sense that it is now subject to tax. It
65-2012; and b) declared the same as invalid. On
created a new tax burden upon petitioner. Petitioner
the other hand, the First E-Bank assailed the trial
then could not be faulted to consign judicially as
court's ruling insofar as it declined to order the
they claim, the [VAT) amount pending resolution of
release of the judicially consignated amounts.
the petition for declaratory relief herein filed.
Respondent BIR Commissioner should have
accorded petitioner the opportunity to be heard, The Court of Appeals' Dispositions
which was the bone of contention of the letter sent
to the Honorable Commissioner which was not By its first assailed Resolution dated June 26, 2014,
acted upon. the Court of Appeals dismissed the appeal of the
First E-Bank and the joint appeal of the BIR et al. on
The Revenue Memorandum Circular did not only ground of lack of jurisdiction. It emphasized that
clarify an existing law, but changes its import and jurisdiction over the case was exclusively vested in
interpretation that in so doing it prejudices the right the Court of Tax Appeals since the trial court's
of the petitioner as a tax payer.14 impugned resolution involved a tax matter.

 Since the BIR in passing the subject memorandum Both the First E-Bank and the BIR et al., moved for
circular failed to accord respondent or those reconsideration. They commonly asserted that the
similarly situated as a tax payer due notice and Court of Appeals had appellate jurisdiction over their
opportunity to be heard, before issuing said circular respective appeals emanating from a petition for
it is this court's opinion that the issuance was
declaratory relief which sought to invalidate RMC written instrument, or whose rights are affected by a
No. 65-2012.19 statute, executive order or regulation, ordinance, or
any other governmental regulation may, before
By its second assailed Resolution20 dated breach or violation thereof bring an action in the
November 27, 2014, the Court of Appeals denied appropriate Regional Trial Court to determine any
the motions for reconsideration and stressed anew question of construction or validity arising, and for a
that the Court of Tax Appeals had exclusive declaration of his rights or duties, thereunder.
jurisdiction over the appeals.
Declaratory relief requires the following elements:
The Present Petitions (1) the subject matter of the controversy must be a
deed, will, contract or other written instrument,
In G.R. No. 218924, the First E-Bank initiated, on statute, executive order or regulation, or ordinance;
alleged ground of grave abuse of discretion, a (2) the terms of said documents and the validity
Special Civil Action for Certiorari21 to nullify the thereof are doubtful and require judicial
assailed dispositions of the Court of Appeals. construction; (3) there must have been no breach of
According to the First E-Bank, the Court of Appeals, the documents in question; (4) there must be an
not the Court of Tax Appeals, has jurisdiction over actual justiciable controversy or the "ripening seeds"
its appeal since the subject matter of the case is not of one between persons whose interests are
local tax or taxes per se but a petition to declare as adverse; (5) the issue must be ripe for judicial
invalid RMC No. 65-2012. The Court of Appeals determination; and (6) adequate relief is not
purportedly based its rulings on conjectures and available through other means or other forms of
surmises, not on established facts and law. action or proceeding.23

In G.R. No. 215801,22 the BIR et al. availed ofRu1e The Court rules that certiorari or prohibition, not
45 of the Revised Rules of Court. They plead the declaratory relief, is the proper remedy to assail the
same legal issue pertaining to which court has validity or constitutionality of executive
jurisdiction over the trial court's decision. issuances. DOTR v. PPSTA24 is apropos:

Issues The Petition for Declaratory Relief is not the proper

remedy
First: Is a petition for declaratory relief proper for the
purpose of invalidating RMC No. 65-2012? One of the requisites for an action for declaratory
relief is that it must be filed before any breach or
violation of an obligation. Section 1, Rule
Second: Did the Court of Appeals validly dismiss the
twin appeals on ground of lack of jurisdiction?
63 of the Rules of Court states, thus:
Third: Is RMC No. 65-2012 valid?
Thus, there is no actual case involved in a Petition
for Declaratory Relief . It cannot, therefore, be the
a) Is a condominium corporation engaged in trade
proper vehicle to invoke the judicial review powers
or business?
to declare a statute unconstitutional.
b) Are assoc1atwn dues, membership fees, and
It is elementary that before this Court can rule on a
other assessments/charges subject to income tax,
constitutional issue, there must first be a justiciable
value-added tax, and withholding tax?
controversy. A justiciable controversy refers to an
existing case or controversy that is appropriate or
Fourth: Is the First E-Bank entitled to the release of ripe for judicial determination, not one that is
its judicially consignated tax payments? conjectural or merely anticipatory. As We
emphasized in Angara v. Electoral Commission, any
Ruling attempt at abstraction could only lead to dialectics
and barren legal questions and to sterile
A petition for declaratory conclusions unrelated to actualities.
relief is not the proper
remedy to seek the invalidation To question the constitutionality of the subject
of RMC No. 65-2012 issuances, respondents should have invoked the
expanded certiorari jurisdiction under Section 1 of
An action for declaratory relief is governed by Article VIII of the 1987 Constitution . The adverted
Section 1, Rule 63 of the Revised Rules of Court, section defines judicial power as the power not only
thus: "to settle actual controversies involving rights which
are legally demandable and enforceable," but also
Section l. Who may file petition. Any person "to determine whether or not there has been a grave
interested under a deed, will, contract or other abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or who use the tollways everyday, but more so on the
instrumentality of the Government." government's effort to raise revenue for funding
various projects and for reducing budgetary deficits.
There is a grave abuse of discretion when there is (Emphasis supplied)
patent violation of the Constitution, the law, or
existing jurisprudence. On this score, it has been Here, RMC No. 65-2012 has far-reaching
ruled that "the remedies of certiorari and prohibition ramifications among condominium corporations
are necessarily broader in scope and reach, and the which have proliferated throughout the country. For
writ of certiorari or prohibition may be issued to numerous Filipino families, professionals, and
correct errors of jurisdiction committed not only by a students have, for quite sometime now, opted for
tribunal, corporation, board or officer exercising condominium living as their new way of life. The
judicial, quasi-judicial or ministerial functions, but matter of whether indeed the contributions of unit
also to set right, undo[,] and restrain any act of owners solely intended for maintenance and upkeep
grave abuse of discretion amounting to lack or of the common areas of the condominium building
excess of jurisdiction by any branch or are taxable is imbued with public interest. Suffice it
instrumentality of the Government, even if the latter to state that taxes, being the lifeblood of the
does not exercise judicial, quasi-judicial or government, occupy a high place in the hierarchy of
ministerial functions." Thus, petitions for certiorari State priorities, hence, all questions pertaining to
and prohibition are the proper remedies where an their validity must be promptly addressed with the
action of the legislative branch is seriously alleged least procedural obstruction.
to have infringed the Constitution. (Emphasis
supplied   Notably, the issue at hand has already pended for
six (6) years now, first with the trial court, then with
In Diaz v. The Secretary of Finance, et al.,25 the the Court of Appeals, and now with this Court.
Court, nonetheless, held that a petition for Hence, to forestall any further delay, instead of
declaratory relief may be treated as one for remanding the cases to the Court of Appeals, we
prohibition if the case has far-reaching implications here and now write finis to these cases once and for
and raises questions that need to be resolved for all, Diaz  enunciated:
the public good; or if the assailed act or acts of
executive officials are alleged to have usurped To dismiss the petition and resolve the issues later,
legislative authority, thus: after the challenged VAT has been imposed, could
cause more mischief both to the tax-paying public
On August 24, 2010 the Court issued a resolution, and the government. A belated declaration of nullity
treating the petition as one for prohibition rather of the BIR action would make any attempt to refund
than one for declaratory relief, the characterization to the motorists what they paid an administrative
that petitioners Diaz and Timbol gave their action. nightmare with no solution. Consequently, it is not
The government has sought reconsideration of the only the right, but the duty of the Court to take
Court's resolution, however, arguing that petitioners' cognizance of and resolve the issues that the
allegations clearly made out a case for declaratory petition raises.
relief: an action over which the Court has no original
jurisdiction. The government adds, moreover, that Although the petition does not strictly comply with
the petition does not meet the requirements of Rule the requirements of Rule 65, the Court has ample
65 for actions for prohibition since the BIR did not power to waive such technical requirements when
exercise judicial, quasi-judicial, or ministerial the legal questions to be resolved are of great
functions when it sought to impose VAT on toll fees. importance to the public. The same may be said of
Besides, petitioners Diaz and Timbo !has a plain, the requirement of locus standi which is a mere
speedy, and adequate remedy in the ordinary procedural requisite.
course of law against the BIR action in the form of
an appeal to the Secretary of Finance. G.R. No. 218924

But there are precedents for treating a petition for The First E-Bank faults the Court of Appeals with
declaratory relief as one for prohibition if the case grave abuse of discretion amounting to lack or
has far-reaching implications and raises questions excess of jurisdiction when the latter dismissed the
that need to be resolved for the public good. The former's appeal from the trial court's Resolution
Court has also held that a petition for prohibition is a dated September 5, 2013 and Order dated
proper remedy to prohibit or nullify acts of executive December 18, 2013.
officials that amount to usurpation of legislative
authority.
A petition for certiorari is proper where the
impugned dispositions, as in this case, are tainted
Here, the imposition of VAT on toll fees has far- with grave abuse of discretion amounting to lack or
reaching implications. Its imposition would impact, excess ofjurisdiction.26 More so where a petition for
not only on the more than half a million motorists review on certiorari does not appear to be a plain,
speedy, and adequate remedy to address the First 2. Inaction by the Commissioner of Internal
E Bank's urgent concerns on its accumulated Revenue in cases involving disputed assessments,
supposed tax liabilities which will never get halted refunds of internal revenue taxes, fees or other
until the validity of RMC No. 65-2012 is finally charges, penalties in relations thereto, or other
resolved, and considerations of public welfare and matters arising under the National Internal Revenue
public policy compel the speedy resolution of the Code or other laws administered by the Bureau
cases through the extraordinary remedy of oflnternal Revenue, where the National Internal
certiorari. Revenue Code provides a specific period of action,
in which case the inaction shall be deemed a denial;
The Court, in some instances, allowed a petition for
certiorari to prosper notwithstanding the availability 3. Decisions, orders or resolutions of the Regional
of appeal. Mallari v. Banco Filipino Savings & Trial Courts in local tax cases originally decided or
Mortgage Bank27  enumerates these resolved by them in the exercise of their original or
instances, viz.: appellate jurisdiction;

Indeed, the Court in some instances has allowed a 4. Decisions of the Commissioner of Customs in
petition for certiorari to prosper notwithstanding the cases involving liability for customs duties, fees or
availability of an appeal, such as, (a) when public other money charges, seizure, detention or release
welfare and the advancement of public policy dictate of property affected, fines, forfeitures or other
it; (b) when the broader interest of justice so penalties in relation thereto, or other matters arising
requires; (c) when the writs issued are null; and (d) under the Customs Law or other laws administered
when the questioned order amounts to an by the Bureau of Customs;
oppressive exercise of judicial authority.
5. Decisions of the Central Board of Assessment
So must it be. Appeals in the exercise of its appellate jurisdiction
over cases involving the assessment and taxation of
G.R. No. 215801 real property originally decided by the provincial or
city board of assessment appeals;
On the part of the BIR et al., they opted to pursue
the regular route under Rule 45 of the Revised 6. Decisions of the Secretary of Finance on customs
Rules of Court. Surely, being the beneficiary of the cases elevated to him automatically for review from
taxes paid by the First E-Bank, the State has no decisions of the Commissioner of Customs which
compelling need to avail of the extraordinary are adverse to the Government under Section 2315
remedy under Rule 65. At any rate, Rule 45 is of the Tariff and Customs Code;
undoubtedly an available remedy in the ordinary
course of law. 7. Decisions of the Secretary of Trade and Industry,
in the case of non-agricultural product, commodity
The parties' resort to the Court of or article, and the Secretary of Agriculture in the
Appeals was proper in light of the case of agricultural product, commodity or article,
then prevailing jurisprudence involving dumping and countervailing duties under
Section 301 and 302, respectively, of the Tariff and
We now resolve the issue of jurisdiction. Customs Code, and safeguard measures under
Republic Act No. 8800, where either party may
appeal the decision to impose or not to impose said
Section 7 of Republic Act No. 9282 (RA
duties.
9282)28 outlines the appellate jurisdiction of the
Court of Tax Appeals, viz.:
On August 30, 2008, the Court en banc decreed
in British American Tobacco v. Camacho, et
Sec. 7. Jurisdiction. -The CTA shall exercise:
al. 29 that the Court of Tax Appeals did not have
jurisdiction to pass upon the constitutionality or
a. Exclusive appellate jurisdiction to review by validity of a law or rule, thus:
appeal, as herein provided:
While the above statute confers on the CTA
1. Decisions of the Commissioner of Internal jurisdiction to resolve tax disputes in general, this
Revenue in cases involving disputed assessments, does not include cases where the constitutionality of
refunds of internal revenue taxes, fees or other a law or rule is challenged. Where what is assailed
charges, penalties in relation thereto, or other is the validity or constitutionality of a law, or a rule or
matters arising under the National Internal Revenue regulation issued by the administrative agency in
or other laws administered by the Bureau of Internal the performance of its quasi-legislative function, the
Revenue; regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule
or set of rules issued by an administrative agency
contravenes the law or the constitution is within the grant of jurisdiction, in addition to those expressly
jurisdiction of the regular courts. Indeed, the conferred on them. These inherent powers are such
Constitution vests the power of judicial review or the powers as are necessary for the ordinary and
power to declare a law, treaty, international or efficient exercise of jurisdiction; or are essential to
executive agreement, presidential decree, order, the existence, dignity and functions of the courts, as
instruction, ordinance, or regulation in the courts, well as to the due administration of justice; or are
including the regional trial courts. This is within the directly appropriate, convenient and suitable to the
scope of judicial power, which includes the authority execution of their granted powers; and include the
of the courts to determine in an appropriate action power to maintain the court's jurisdiction and render
the validity of the acts of the political departments. it effective in behalf of the litigants.
Judicial power includes the duty of the courts of
justice to settle actual controversies involving rights Thus, this Court has held that "while a court may be
which are legally demandable and enforceable, and expressly granted the incidental powers necessary
to determine whether or not there has been a grave to effectuate its jurisdiction, a grant of jurisdiction, in
abuse of discretion amounting to lack or excess of the absence of prohibitive legislation, implies the
jurisdiction on the part of any branch or necessary and usual incidental powers essential to
instrumentality of the Government. (Emphasis effectuate it, and, subject to existing laws and
supplied ) constitutional provisions, every regularly constituted
court has power to do all things that are reasonably
The prevailing dictum then was only regular courts necessary for the administration of justice within the
had jurisdiction to pass upon the constitutionality or scope of its jurisdiction and for the enforcement of
validity of tax laws and regulations. its judgments and mandates." Hence, demands,
matters or questions ancillary or incidental to, or
On February 4, 2014, the Court en bane recognized growing out of, the main action, and coming within
that the Court of Tax Appeals possessed all such the above principles, may be tal{en cognizance of
implied, inherent, and incidental powers necessary by the court and determined, since such jurisdiction
to the full and effective exercise of its appellate is in aid of its authority over the principal matter,
jurisdiction over tax cases. City of Manila v. Judge even though the court may thus be called on to
Grecia-Cuerdo30  is relevant, thus: consider and decide matters which, as original
causes of action, would not be within its
A grant of appellate jurisdiction implies that there is cognizance. (Emphasis supplied)
included in it the power necessary to exercise it
effectively, to make all orders that will preserve the Consequently, the Court held that the authority of
subject of the action, and to give effect to the final the Court of Tax Appeals to take cognizance of
determination of the appeal. It carries with it the petitions for certiorari against interlocutory orders of
power to protect that jurisdiction and to make the the RTC in local tax cases was deemed included in
decisions of the court thereunder effective. The the authority or jurisdiction granted it by law.
court, in aid of its appellate jurisdiction, has authority
to control all auxiliary and incidental matters The Court underscored that the grant of appellate
necessary to the efficient and proper exercise of jurisdiction to the Court of Tax Appeals included
that jurisdiction. For this purpose, it may, when such power necessary to exercise it effectively.
necessary, prohibit or restrain the performance of Besides, a split-jurisdiction between the Court of
any act which might interfere with the proper Tax Appeals and the Court of Appeals is anathema
exercise of its rightful jurisdiction in cases pending to the orderly administration of justice. "The Court
before it. cannot accept that such was the legislative motive,
especially considering that the law expressly
Lastly, it would not be amiss to point out that a court confers on the CTA, the tribunal with the specialized
which is endowed with a particular jurisdiction competence over tax and tariff matters, the role of
should have powers which are necessary to enable judicial review over local tax cases without mention
it to act effectively within such jurisdiction. These of any other court that may exercise such
should be regarded as powers which are inherent in power." 31
its jurisdiction and the court must possess them in
order to enforce its rules of practice and to suppress On August 16, 2016, in Banco de Oro v. Republic of
any abuses of its process and to defeat any the Phils., et al., 32 the Court en bane pronounced
attempted thwarting of such process. in no uncertain terms that the Court of Tax Appeals
had jurisdiction to rule on the constitutionality or
In this regard, Section 1 of RA 9282 states that the validity of a tax law or regulation or administrative
CTA shall be of the same level as the CA and shall issuance, viz.:
possess all the inherent powers of a court of justice.
The Court of Tax Appeals has undoubted
Indeed, courts possess certain inherent powers jurisdiction to pass upon the constitutionality or
which may be said to be implied from a general validity of a tax law or regulation when raised by the
taxpayer as a defense in disputing or contesting an Here, following the trial court's denial of their
assessment or claiming a refund. It is only in the respective motions for reconsideration, the parties
lawful exercise of its power to pass upon all maters appealed to the Court of Appeals. On June 26,
brought before it, as sanctioned by Section 7 of 2014, the Court of Appeals dismissed the appeals,
Republic Act No. 1125, as amended. and on November 27, 2014, denied the parties'
motions for reconsideration.33
This Court, however, declares that the Court of Tax
Appeals may likewise take cognizance of cases Based on this sequence of events, the whole time
directly challenging the constitutionality or validity of the case was ongoing below, the prevailing doctrine
a tax law or regulation or administrative issuance had been British American Tobacco ordaining that
(revenue orders, revenue memorandum circulars, the Court of Tax Appeals did not have jurisdiction to
rulings). decide the validity or constitutionality of laws or
rules. Consequently, the parties correctly elevated
Section 7 of Republic Act No. 1125, as amended, is the trial court's resolution to the Court of Appeals,
explicit that, except for local taxes, appeals from the which should have taken cognizance of, and
decisions of quasi-judicial agencies (Commissioner resolved, the appeals on the merits.
of Internal Revenue, Commissioner of Customs,
Secretary of Finance, Central Board of Assessment RMC No. 65-2012 is invalid
Appeals, Secretary of Trade and Industry) on tax-
related problems must be brought exclusively to the We now turn to the substantive issue: Is RMC No.
Court of Tax Appeals. 65-2012 valid?

In other words, within the judicial system, the law a) A condominium corporation is not engaged in
intends the Court of Tax Appeals to have exclusive trade or business
jurisdiction to resolve all tax problems. Petitions for
writs of certiorari against the acts and omissions The issue on whether association dues,
ofthe said quasi-judicial agencies should, thus, be membership fees, and other assessments/charges
filed before the Court of Tax Appeals. collected by a condominium corporation in the usual
course of trade or business is not novel. Yamane v.
Republic Act No. 9282, a special and later law than BA Lepanto Condominium Corp.34 positively
Batas Pambansa Big . 129 provides an exception to resolved it, viz.:
the original jurisdiction of the Regional Trial Courts
over actions questioning the constitutionality or Obviously, none of these stated corporate purposes
validity of tax laws or regulations. Except for local are geared towards maintaining a livelihood or the
tax cases, actions directly challenging the obtention of profit. Even though the Corporation is
constitutionality or validity of a tax law or regulation empowered to levy assessments or dues from the
or administrative issuance may be filed directly unit owners, these amounts collected are not
before the Court of Tax Appeals. intended for the incurrence of profit by the
Corporation or its members, but to shoulder the
Furthermore, with respect to administrative multitude of necessary expenses that arise from the
issuances (revenue orders, revenue memorandum maintenance of the Condominium Project. Just as
circulars, or rulings), these are issued by the much is confirmed by Section 1, Article V of the
Commissioner under its power to make rulings or Amended By-Laws, which enumerate the particular
opinions in connection with the implementation of expenses to be defrayed by the regular
the provisions of internal revenue laws. Tax rulings, assessments collected from the unit owners. These
on the other hand, are official positions of the would include the salaries of the employees of the
Bureau on inquiries of taxpayers who request Corporation, and the cost of maintenance and
clarification on certain provisions of the National ordinary repairs of the common areas.
Internal Revenue Code, other tax laws, or their
implementing regulations. Hence, the determination
of the validity of these issuances clearly falls within
the exclusive appellate jurisdiction of the Court of
Tax Appeals under Section 7 (1) of Republic Act No.
1125, as amended, subject to prior review by the
Secretary of Finance, as required under Republic
Act No. 8424. (Emphasis supplied)

Banco de Oro further stressed that such undoubted

jurisdiction is exclusively vested in the Court of Tax
Appeals whether it is raised by the taxpayer directly
or as a defense.
The City Treasurer nonetheless contends that the 4726 )35 (The Condominium Act). Under the law, a
collection of these assessments and dues are "with condominium is an interest in real property
the end view of getting fu11 appreciative living consisting of a separate interest in a unit in a
values" for the condominium units, and as a result, residential, industrial or commercial building and an
profit is obtained once these units are sold at higher undivided interest in common, directly or indirectly,
prices. The Court cites with approval the two in the land on which it is located and in other
counterpoints raised by the Court of Appeals in common areas of the building. To enable the orderly
rejecting this contention. First, if any profit is administration over these common areas which the
obtained by the sale of the units, it accrues not to unit owners jointly own, RA 4726 permits the
the corporation but to the unit owner. Second, if the creation of a condominium corporation for the
unit owner does obtain profit from the sale of the purpose of holding title to the common areas. The
corporation, the owner is already required to pay unit owners shall in proportion to the appurtenant
capital gains tax on the appreciated value of the interests of their respective units automatically be
condominium unit. members or shareholders of the condominium
corporation to the exclusion of others.36
Moreover, the logic on this point of the City
Treasurer is baffling. By this rationale, every Makati Sections 10 and 22 of RA 4726 focus on the non-
City car owner may be considered as being profit purpose of a condominium corporation. Under
engaged in business, since the repairs or Section 10,37 the corporate purposes of a
improvements on the car may be deemed oriented condominium corporation are limited to holding the
towards appreciating the value of the car upon common areas, either in ownership or any other
resale. There is an evident distinction between interest in real property recognized by law;
persons who spend on repairs and improvements management of the project; and to such other
on their personal and real property for the purpose purposes necessary, incidental, or convenient to the
of increasing its resale value, and those who defray accomplishment of these purposes. Additionally,
such expenses for the purpose of preserving the Section 10 prohibits the articles of incorporation or
property. The vast majority of persons fall under the by-laws of the condominium corporation from
second category, and it would be highly specious to containing any provisions contrary to the provisions
subject these persons to local business taxes .The of RA 4726, the enabling or master deed, or the
profit motive in such cases is hardly the driving declaration of restrictions of the condominium
factor behind such improvements, if it were project.38
contemplated at all. Any profit that would be derived
under such circumstances would merely be Also, under Section 22,39 the condominium
incidental, if not accidental. corporation, as the management body, may only act
for the benefit of the condominium owners in
Besides, we shudder at the thought of upholding tax disposing tangible and intangible personal property
liability on the basis of the standard of "full by sale or otherwise in proportion to the
appreciative living values," a phrase that defies condominium owners' respective interests in the
statutory explication, commonsensical meaning, the common areas.
English language, or even definition from Google."
Full appreciative living values" is nothing but blather Further, Section 940 allows a condominium
in search of meaning, and to impose a tax hinged corporation to provide for the means by which it
on that standard is both arbitrary and oppressive. should be managed. Specifically, it authorizes a
condominium corporation to collect association
 Again, whatever capacity the Corporation may have dues, membership fees, and other
pursuant to its power to exercise acts of ownership assessments/charges for: a) maintenance of
over personal and real property is limited by its insurance policies; b) maintenance, utility,
stated corporate purposes, which are by themselves gardening and other services benefiting the
further limited by the Condominium Act .A common areas, for the employment of personnel
condominium corporation, while enjoying such necessary for the operation of the building, and
powers of ownership, is prohibited by law from legal, accounting and other professional and
transacting its properties for the purpose of gainful technical services; c) purchase of materials,
profit. (Emphasis supplied) supplies and the like needed by the common areas;
d) reconstruction of any portion or portions of any
Yamane  did emphasize that a corporation damage to or destruction of the project; and e)
condominium is not designed to engage in activities reasonable assessments to meet authorized
that generate income or profit. A discussion on the expenditures.
nature of a condominium corporation is, indubitably,
in order. In fine, the collection of association dues,
membership fees, and other assessments/charges
The creation of the condominium corporation is is purely for the benefit of the condominium owners.
sanctioned by Republic Act No. 4726 (RA It is a necessary incident to the purpose to
effectively oversee, maintain, or even improve the
common areas of the condominium as well as its Sec. 31. Taxable Income Defined. The term "taxable
governance. income" means the pertinent items of gross income
specified in this Code, less deductions if any,
As held in Yamane "[t]he profit motive in such cases authorized for such types of income by this Code or
is hardly the driving factor behind such other special laws.
improvements,  if  it were contemplated at all. Any
profit that would be derived under such There is no substantial difference between the
circumstances would merely be incidental, if  not original definition under RA 8424 and the
accidental." More, a condominium corporation is subsequent definition under the TRAIN Law. The
especially formed for the purpose of holding title to only difference is that the phrase "and/or personal
the common area and exists only for the benefit of and additional exemptions" was deleted. Still, both
the condominium owners. Nothing more. the former and current definitions are consistent---
'taxable income' refers to "the pertinent items of
RMC No. 65-2012, sharply departs from Yamane  gross income specified in this Code." A comparison
and the law on condominium corporations. It of RA 8424 and the TRAIN Law shows the items
invalidly declares that the amounts paid as dues or under gross income insofar as they are relevant to
fees by members and tenants of a condominium the present case, viz.:
corporation form part of the gross income of the
latter, thus, subject to income tax, value-added tax, RA 842445 (the law in RA 10963 (signed into
and withholding tax. The reason given --- a effect when RMC No. law on December 19,
condominium corporation furnishes its members 65-2012 was issued on 2017 and took effect
and tenants with benefits, advantages, and October 31, 2012) on January 1, 2018)
privileges in return for such payments,
consequently, these payments constitute taxable Section 32. Gross Section 32. Gross
income or compensation for beneficial services it Income. - Income.-
provides to its members and tenants, hence, subject
to income tax, value-added tax, and withholding tax. (A) General Definition. - (A) General Definition. -
Except when otherwise Except when otherwise
We cannot agree. provided in this Title, provided in this Title,
gross income means all gross income means all
b) Association dues, membership fees, and other income derived from income derived from
assessments/charges are not subject to income tax, whatever source, whatever source,
value-added tax and withholding tax including (but not limited including (but not limited
to) the following items: to) the following items:
First.  Capital is a fund or property existing at one
distinct point in time while income denotes a flow of (1) Compensation for (1) Compensation for
wealth during a definite period of time. Income is services in whatever services in whatever
gain derived and severed from capital.41 Republic form paid, including, but form paid, including, but
Act No. 8424 (RA 8424)42 or the Tax Reform Act of not limited to fees, not limited to fees,
1997 was in effect when RMC No. 65-201 2 was salaries, wages, salaries, wages,
issued on October 31, 2012. In defining taxable commissions, and commissions, and
income, Section 31 of RA 8424 states: similar items; similar items;

Section 31. Taxable Income Defined.- The term (2) Gross income (2) Gross income
taxable income means the pertinent items of gross derived from the derived from the conduct
income specified in this Code, less the deductions conduct of trade or of trade or business or
and/or personal and additional exemptions, if any, business or the exercise the exercise of a
authorized for such types of income by this Code or of a profession; profession;
other special laws.
xxx xxx
Gross income means income derived from whatever
source, including compensation for services; the Section 32. Gross Income. - Section 32. Gross
conduct of trade or business or the exercise of a Income.-
profession; dealings in propetiy; interests; rents;
royalties; dividends; annuities; prizes and winnings;
(A) General Definition. - Except when otherwise
pensions; and a partner's distributive share in the
provided in this Title, gross income means all
net income of a general professional
income derived from whatever source, including (but
partnership,43 among others.
not limited to) the following items: (A) General
Definition. - Except when otherwise provided in this
On December 19, 2017, Section 31 was amended Title, gross income means all income derived from
by Republic Act No. 10963 (RA 10963 )44 (The
TRAIN Law). The provision now reads:
whatever source, including (but not limited to) the accommodations: In these latter examples,
following items:  regardless of the purpose of the fees' eventual use,
gain is already realized fi:om the moment they are
(1) Compensation for services in whatever form collected because capital maintenance,
paid, including, but not limited to fees, salaries, preservation. or upkeep is not their pre-determined
wages, commissions, and similar items;        (1) purpose. As such, recreational clubs are generally
Compensation for services in whatever form paid, free to use these fees for whatever purpose they
including, but not limited to fees, salaries, wages, desire and thus, considered as unencumbered
commissions, and similar items; "fruits" coming from a business transaction.

(2) Gross income derived from the conduct of trade Further, given these recreational clubs' non-profit
or business or the exercise of a profession;  (2) nature, membership fees and assessment dues
Gross income derived from the conduct of trade or cannot be considered as funds that would represent
business or the exercise of a profession;  these clubs' interest or profit from any investment. In
fact, these fees are paid by the clubs' members
Section 32 of RA 8424 does not include association without any expectation of any yield or gain (unlil{e
dues, membership fees, and other in stock subscriptions), but only for the above-stated
assessments/charges collected by condominium purposes and in order to retain their membership
corporations as sources of gross income. The therein.
subsequent amendment under the TRAIN Law
substantially replicates the old Section 32. In fine, for as long as these membership fees,
assessment dues, and the like are treated as
Clearly, RMC No. 65-2012 expanded, if not altered, collections by recreational clubs from their members
the list of taxable items in the law. RMC No. 65- as an inherent consequence of their membership,
2012, therefore, is void. Besides, where the basic and are, by nature, intended for the maintenance,
law and a rule or regulation are in conflict, the basic preservation, and upkeep of the clubs' general
law prevails.46 operations and facilities, then these fees cannot be
classified as "the income of recreational clubs from
whatever source" that are "subject to income tax.
As established in Yamane, the expenditures
Instead, they only form part of capital from which no
incurred by condominium corporations on behalf of
income tax may be collected or imposed. (Emphasis
the condominium owners are not intended to
supplied)
generate revenue nor equate to the cost of doing
business.
Similarly, therefore, assocmtwn dues, membership
fees, and other assessments/charges are not
In the very recent case of ANPC  v. BIR, 47 the
subject to income tax because they do not
Court pronounced that membership fees,
constitute profit or gain. To repeat, they are
assessment dues, and other fees collected by
collected purely for the benefit of the condominium
recreational clubs are not subject to income tax,
owners and are the incidental consequence of a
thus:
condominium corporation's responsibility to
effectively oversee, maintain, or even Improve the
As corectly argued by ANPC, membership fees, common areas of the condominium as well as its
assessment dues, and other fees of similar nature governance.
only constitute contributions to and/or replenishment
of the funds for the maintenance and operations of
Second. Association dues, membership fees, and
the facilities offered by recreational clubs to their
other assessments/charges do not arise from
exclusive members . They represent funds "held in
transactions involving the sale, barter, or exchange
trust" by these clubs to defray their operating and
of goods or property. Nor are they generated by the
general costs and hence, only constitute infusion of
performance of services. As such, they are not
capital.
subject to value-added tax per Section 105 ofRA
8424, viz.:
Case law provides that in order to constitute
"income," there must be realized "gain." Clearly,
Section 105. Persons Liable. -Any person who, in
because of the nature of membership fees and
the course of trade or business, sells, barters,
assessment dues as funds inherently dedicated for
exchanges, leases goods or properties, renders
the maintenance, preservation, and upkeep of the
services, and any person who imports goods shall
clubs' general operations and facilities, nothing is to
be subject to the value-added tax (VAT) imposed in
be gained from their collection. This stands in
Sections 106 to 108 of this Code.
contrast to the tees received by recreational clubs
coming from their income-generating facilities, such
as bars, restaurants, and food concessionaires, or The value-added tax is an indirect tax and the
from income-generating activities, like the renting amount of tax may be shifted or passed on to the
out of sports equipment, services, and other buyer, transferee or lessee of the goods, properties
or services. This rule shall likewise apply to existing contractors on their transport of goods or cargoes,
contracts of sale or lease of goods, properties or including persons who transport goods or cargoes
services at the time of the effectivity of Republic Act for hire and other domestic common carriers by land
No. 7716. relative to their transport of goods or cargoes;
common carriers by air and sea relative to their
The phrase "in the course of trade or business" transport of passengers, goods or cargoes from one
means the regular conduct or pursuit of a place in the Philippines to another place in the
commercial or an economic activity including Philippines; sales of electricity by generation
transactions incidental thereto, by any person companies, transmission, and distribution
regardless of whether or not the person engaged companies; services of franchise grantees of
therein is a non-stock, non-profit private electric utilities, telephone and telegraph, radio and
organization (irrespective of the disposition of its net television broadcasting and all other franchise
income and whether or not it sells exclusively to grantees except those under Section 119 of this
members or their guests), or government entity. Code and non-life insurance companies (except
their crop insurances), including surety, fidelity,
The rule of regularity, to the contrary indemnity and bonding companies; and similar
notwithstanding, services as defined in this Code services regardless of whether or not the
rendered in the Philippines by nonresident foreign performance thereof calls for the exercise or use of
persons shall be considered as being course of the physical or mental faculties. x
trade or business. (Emphasis supplied)
The phrase 'sale or exchange of services' shall
The value-added tax is a burden on transactions include the use of intellectual property, use of
imposed at every stage of the distribution process certain types of equipment, supplying certain types
on the sale, barter, exchange of goods or property, of knowledge or information, lease of motion picture
and on the performance of services, even in the films, and use of transmission or air time.
absence of profit attributable thereto, so much so
that even a non-stock, non-profit organization or Both under RA 8424 (Sections 106, 107,52 and
government entity, is liable to pay value-added tax 108) and the TRAIN Law, there, too, is no mention
on the sale of goods or services.48 of association dues, membership fees, and other
assessments/charges collected by condominium
Section 106 ofRA 8424 imposes value-added tax on corporations being subject to VAT. And rightly so.
the sale of goods and properties. The term 'goods' For when a condominium corporation manages,
or 'properties' shall mean all tangible and intangible maintains, and preserves the common areas in the
objects which are capable of pecuniary estimation. building, it does so only for the benefit of the
These 'goods' or 'properties' include real property, condominium owners. It cannot be said to be
intellectual property, equipment, and rights over engaged in trade or business, thus, the collection of
motion picture films.49 Section 106 ofRA 8424 association dues, membership fees, and other
likewise imposes value-added tax on transactions assessments/charges is not a result of the regular
such as transfer of goods, properties, profits, or conduct or pursuit of a commercial or an economic
inventories.50 activity, or any transactions incidental thereto.

Section 108 of RA 8424 further imposes value- Neither can it be said that a condominium
added tax on sale of services and use or lease of corporation is rendering services to the unit owners
properties. It defines "sale or exchange of services," for a fee, remuneration or consideration. Association
as follows: dues, membership fees, and other
assessments/charges form part of a pool from which
a condominium corporation must draw funds in
The phrase 'sale or exchange of services'51 means
order to bear the costs for maintenance, repair,
the performance of all kinds of services in the
improvement, reconstruction expenses and other
Philippines for others for a fee, remuneration or
administrative expenses.
consideration, including those performed or
rendered by construction and service contractors;
stock, real estate, commercial, customs and Indisputably, the nature and purpose of a
immigration brokers; lessors of property, whether condominium corporation negates the carte
personal or real; warehousing services; lessors or blanche application of our value-added tax
distributors of cinematographic films; persons provisions on its transactions and activities. CIR v.
engaged in milling, processing, manufacturing or Magsaysay Lines, Inc.,53 stated:
repacking goods for others; proprietors, operators or
keepers of hotels, motels, rest-houses, pension Yet VAT is not a singular-minded tax on every
houses, inns, resorts; proprietors or operators of transactional level. Its assessment bears direct
restaurants, refreshment parlors, cafes and other relevance to the taxpayer's role or link in the
eating places, including clubs and caterers; dealers production chain. Hence, as affirmed by Section 99
in securities; lending investors; transportation of the Tax Code and its subsequent
incarnations, the tax is levied only on the sale, (A) Withholding of Final Tax on Certain Incomes.-
barter or exchange of goods or services by persons Subject to rules and regulations the Secretary of
who engage in such activities, in the course of trade Finance may promulgate, upon the recommendation
or business. These transactions outside the course of the Commissioner, requiring the filing of income
of trade or business may invariably contribute to the tax return by certain income payees, the tax
production chain, but they do so only as a matter of imposed or prescribed by Sections 24(8)(1), 24(8)
accident or incident. As the sales of goods or (2), 24(C), 24(D)(l); 25(A)(2), 25(A)(3), 25(8), 25(C),
services do not occur within the course of trade or 25(D), 25(E), 27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5),
business, the providers of such goods or services 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)( b), 28(A)
would hardly, if at all, have the opportunity to (7) (c), 28(8)(1), 28(8)(2), 28(8)(3), 28(8)(4), 28(B)
appropriately credit any VAT liability as against their (5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
own accumulated VAT collections since the Code on specified items of income shall be withheld
accumulation of output VAT arises in the first place by payor-corporation and/or person and paid in the
only through the ordinary course of trade or same manner and subject to the same conditions as
business. (Emphasis supplied) provided in Section 58 ofthis Code.

Too, ANPC54 held that membership fees, (B) Withholding of Creditable Tax at Source.- The
assessment dues, and the like collected by Secretary ofFinance may, upon the
recreational clubs are not subject to value-added recommendation of the Commissioner, require the
tax "because in collecting such fees, the club is not withholding of a tax on the items of income payable
selling its service to the members. Conversely, the to natural or juridical persons, residing in the
members are not buying services from the club Philippines, by payor-corporation/persons as
when dues are paid; hence, there is no economic or provided for by law, at the rate of not less than one
commercial activity to speak of as these dues are percent (l%) but not more than thirty-two percent
devoted for the operations/maintenance of the (32%) thereof, which shall be credited against the
facilities of the organization. As such, there could be income tax liability of the taxpayer for the taxable
no 'sale, barter or exchange o.f goods or properties, year.
or sale of a service' to speak of, which would then
be subject to VAT under the 1997 NIRC." This Although Section 57 (B) was later amended by the
principle equally applies to condominium TRAIN Law, it still decrees that the withholding of
corporations which are similarly situated with tax covers only the income payable to natural or
recreational clubs insofar as membership fees, juridical persons, thus:
assessment dues, and other fees of similar nature
collected from condominium owners are devoted to Sec. 57. Withholding ofTax at Source.-
the operations and maintenance of the facilities of
the condominium. In sum, RMC No. 65-2012
(A) x x-
illegally imposes value-added tax on association
dues, membership fees, and other
assessments/charges collected and received by (B) Withholding of Creditable Tax at Source. - The
condominium corporations. Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of a tax on the items of income payable
Third.  The withholding tax system was devised for
to natural or juridical persons, residing in the
three (3) primary reasons, i.e. --- (1) to provide
Philippines, by payor-corporation/persons as
taxpayers a convenient manner to meet their
provided for by law, at the rate of not less than one
probable income tax liability; (2) to ensure the
percent (1%) but not more than thirty-two percent
collection of income tax which can otherwise be lost
(32%) thereof, which shall be credited against the
or substantially reduced through failure to file the
income tax liability of the taxpayer for the taxable
corresponding returns; and (3) to improve the
year: Provided, That, beginning January 1, 2019,
government's cash flow. This results in
the rate of withholding shall not be less than one
administrative savings, prompt and efficient
percent (1%) but not more than fifteen percent
collection of taxes, prevention of delinquencies and
(15%) of the income payment.
reduction of governmental effort to collect taxes
through more complicated means and remedies.55 
Succinctly put, withholding tax is intended to Yamane  aptly stated "[e]ven though the
facilitate the collection of income tax. And if there is Corporation is empowered to levy assessments or
no income tax, withholding tax cannot be collected. dues from the unit owners, these amounts collected
are not intended for the incurrence of profit by the
Corporation or its members, but to shoulder the
Section 57 of RA 8424 directs that only income, be
multitude of necessary expenses that arise from the
it active or passive, earned by a payor-corporation
maintenance of the Condominium Project. "
can be subject to withholding tax, viz. :

Section 57. Withholding of Tax at Source.-

Fourth.  Section 4 of RA 8424 empowers the BIR In sum, the BIR Commissioner is empowered to
Commissioner to interpret tax laws and to decide interpret our tax laws but not expand or alter them.
tax cases: In the case ofRMC No. 65-2012, however, the BIR
Commissioner went beyond, if not, gravely abused
SEC. 4. Power of the Commissioner to Interpret Tax such authority.
Laws and to Decide Tax Cases- The power to
interpret the provisions of this Code and other tax If  proper,  the First E-Bank may
laws shall be under the exclusive and original recover the consignated amounts,
jurisdiction of the Commissioner, subject to review through a separate action or
by the Secretary of Finance. proceeding

The power to decide disputed assessments, refunds The general rule is that a void law or administrative
of internal revenue taxes, fees or other charges, act cannot be the source of legal rights or duties.
penalties imposed in relation thereto, or other Article 7 of the Civil Code enunciates this general
matters arising under this Code or other laws or rule, as well as its exception: "Laws are repealed
portions thereof administered by the Bureau of only by subsequent ones, and their violation or non-
Internal Revenue is vested in the Commissioner, observance shall not be excused by disuse, or
subject to the exclusive appellate jurisdiction of the custom or practice to the contrary. When the courts
Court of Tax Appeals. declared a law to be inconsistent with the
Constitution, the former shall be void and the latter
But the BIR Commissioner cannot, in the exercise of shall govern. Administrative or executive acts,
such power, issue administrative rulings or circulars orders and regulations shall be valid only when they
inconsistent with the law to be implemented. are not contrary to the laws or the
Administrative issuances must not override, Constitution. "58 Jurisprudence is replete with
supplant, or modify the law, they must remain instances when this Court had directed the refund of
consistent with the law intended to carry out. Surely, taxes that were paid under invalid tax measures,
courts will not countenance administrative thus:
issuances that override, instead of remaining
consistent and in harmony with the law they seek to 1) In Icard v. The City Council of Baguio , 59 this
apply and implement .56 Court held that the City of Baguio's ordinances,
namely, Ordinance No. 6 -V (which imposed an
As shown, the BIR Commissioner expanded or amusement tax of 0.20 for each person entering a
modified the law when she declared that association night club) and Ordinance No. 11 -V (which provides
dues, membership fees, and other for a property tax on motor vehicles) were ultra
assessments/charges are subject to income tax, vires. As a consequence, this Court ordered the City
value-added tax, and withholding tax. In doing so, of Baguio to refund to petitioner-appellee in that
she committed grave abuse of discretion amounting case the sum of P254.80 which he paid as
to lack or excess of jurisdiction. As to what amusement tax.
constitutes 'grave abuse of discretion' and when a
government branch, agency, or instrumentality is 2) In Matalin Coconut Co., Inc. v. The Municipal
deemed to have committed it, Kilusang Mayo Uno v. Council of Malabang 60 the Court agreed with the
Aquino III57 instructs: trial court's finding that the Municipality of
Malabang's Municipal Ordinance No. 45-66,
Grave abuse of discretion denotes a "capricious, imposing a "police inspection fee" of P0.30 per sack
arbitrary[,] and whimsical exercise of power. The of cassava starch or flour was an invalid act of
abuse of discretion must be patent and gross as to taxation. The trial court's directive to the municipal
amount to an evasion of positive duty or to a virtual treasurer "to refund to the petitioner the payments it
refusal to perform a duty enjoined by law, as not to made under the said ordinance from September 27,
act at all in contemplation of law, or where the 1966 to May 2, 1967, amounting to P25,500.00, as
power is exercised in an arbitrary and despotic well as all payments made subsequently
manner by reason of passion or hostility." thereafter" was likewise affirmed by this Court.

Any act of a government branch, agency, or 3) In Cagayan Electric Power and Light, Co. Inc. v.
instrumentality that violates a statute or a treaty is City of Cagayan de Oro , 61 this Court directed the
grave abuse of discretion. However, grave abuse of City of Cagayan de Oro to refund to CEPALCO the
discretion pertains to acts of discretion exercised in tax payments made by the latter "on the lease or
areas outside an agency's granted authority and, rental of electric and/or telecommunication posts,
thus, abusing the power granted to it. Moreover, it is poles or towers by pole owners to other pole users
the agency's exercise of its power that is examined at ten percent (10%) of the annual rental income
and adjudged, not whether its application of the law derived from such lease or rental" after the city's tax
is correct. (Emphasis supplied) Ordinance No. 9503-2005 was declared invalid.
Petitioner resorted to judicial consignation of its
alleged tax payments in the court, thus, reckons
with the requirements of judicial
consignation, viz.: (1) a debt due; (2) the creditor to
whom tender of payment was made refused without
just cause to accept the payment, or the creditor
was absent, unknown or incapacitated, or several
persons claimed the same right to collect, or the title
of the obligation was lost; (3) the person interested
in the performance of the obligation was given
notice before consignation was made; (4) the
amount was placed at the disposal of the court; and
(5) the person interested in the performance of the
obligation was given notice after the consignation
was made.62

Here, it is imperative to determine whether the First

E-Bank actually complied with the requirements for
judicial consignation. This is a question of fact which
by this Court, not being a trial court cannot pass
upon. The trial court, therefore, thus correctly held
that the First E-Bank may initiate the appropriate
motion for the release of the consignated funds,
upon finality of the judicial determination on the
validity ofRMC No. 65-2012 and only after it has
determined the presence of the requirements for
judicial consignation.

A final word

RMC No. 65-2012 is invalid for ordaining that "gross

receipts of condominium corporations including
association dues, membership fees, and other
assessments/charges are subject to VAT, income
tax and income payments made to it are subject to
applicable withholding taxes." A law will not be
construed as imposing a tax unless it does so
clearly and expressly. In case of doubt, tax laws
must be construed strictly against the government
and in favor of the taxpayer.63 Taxes, as burdens
that must be endured by the taxpayer, should not be
presumed to go beyond what the law expressly and
clearly declares.64

ACCORDINGLY, the Court RESOLVES:

1) To REVERSE and SET ASIDE the assailed

Resolutions dated June 26, 2014 and November 27,
2014 of the Court of Appeals in CA-G.R. CV No.
102266;

2) To DENY the Petition for Review dated February

17,2015 in G.R. No. 215801 and the Special Civil
Action for Certiorari dated February 12, 2015 in
G.R. No. 218924; and

3) To AFFIRM the Resolution dated September 5,

2013 and Order dated December 18, 2013 of the
Regional Trial Court, Branch 146, Makati City in
Special Civil Action No. 12-1236.SO ORDERED.