Contex vs. CIR, GR No.

151135, 2 July 2004

DOCTRINE: See Ruling.

FACTS: Petitioner is a domestic corporation engaged in the business of manufacturing hospital

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in
the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively. Acting on the
belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act
No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter,
dated December 29, 1998.

Petitioner on May 4, 1999, filed another application for tax refund/credit, with the regional director
of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit
certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period
January 1, 1997 to November 30, 1998. When no response was forthcoming from the BIR
Regional Director, petitioner then elevated the matter to the CTA. Petitioner stressed that Section
112(A) if read in relation to Section 106(A)(2)(a) of the National Internal Revenue Code, as
amended and Section 12(b) and (c) of Rep. Act No. 7227 would show that it was not liable in any
way for any value-added tax.

BIR asked the CTA to apply the rule that claims for refund are strictly construed against the
taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 204 and 229 of the Tax Code,
its claim should be denied.

CTA: In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a)
and 112(A) of the Tax Code. The tax court stressed that these provisions apply only to those
entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under
this category, since it is a non-VAT taxpayer. CTA held that the petitioner is exempt from the
imposition of input VAT on its purchases of supplies and materials. It pointed out that under
Section 12(c) of Rep. Act No. 7227 and the IRR of the Bases Conversion and Development Act of
1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential
tax. The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997
for being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax
court also limited the refund only to the input VAT paid by the petitioner on the supplies and
materials directly used by the petitioner in the manufacture of its goods. It struck down all claims
for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the petitioner’s Makati and Pasay City offices.
CA: Reversed CTA ruling. It held that the exemption from duties and taxes on the importation of
raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227
and its implementing rules covers only “the VAT imposable under Section 107 of the [Tax Code],
which is a direct liability of the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an additional costs of the goods.”
This was because the exemption granted by Rep. Act No. 7227 relates to the act of importation
and Section 107 of the Tax Code specifically imposes the VAT on importations. The appellate
court applied the principle that tax exemptions are strictly construed against the taxpayer. The
Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining
only to those for which they may be directly liable. It then stated that apparently, the legislative
intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-
registered enterprise may be liable for and only in connection with their importation of raw
materials, capital, and equipment as well as the sale of their goods and services.

ISSUE(S)/RULING:

1. Whether CA is correct in finding that the VAT exemption embodied in Rep. Act No. 7227
does not apply to petitioner as a purchaser.

Yes. It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the
goods, properties or services bought, transferred, or leased may be shifted or passed on by the
seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the
income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth,
an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of consumer
expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and
the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed
on by the seller to the buyer. What is transferred in such instances is not the liability for the tax,
but the tax burden. In adding or including the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated
differently, a seller who is directly and legally liable for payment of an indirect tax, such as the
VAT on goods or services is not necessarily the person who ultimately bears the burden of the
same tax. It is the final purchaser or consumer of such goods or services who, although not
directly and legally liable for the payment thereof, ultimately bears the burden of the tax.

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under
VAT, the transaction can have preferential treatment, which are VAT exemption or Zero-rated
sales.

Petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw
materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes, including VAT and Section 4
(A)(a) of BIR Revenue Regulations No. 1-95.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can
claim Input VAT Credit/Refund.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed
on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is
not the proper party to claim such VAT refund. Since the transaction is deemed a zero-rated sale,
petitioner’s supplier may claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.

2. Whether petitioner is entitled to a tax refund on its purchases of supplies and raw
materials for 1997 and 1998.

No. it may not be amiss to reemphasize that the petitioner is registered as a NONVAT taxpayer
and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on
VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden
of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or refund
on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is the
petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund
the petitioner of the VAT erroneously passed on to the latter.