SECOND DIVISION

[G.R. NO. 151135 : July 2, 2004]

CONTEX CORPORATION, Petitioner, v. HON. COMMISSIONER OF INTERNAL REVENUE,Respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823,
which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA) .The
CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit
certificate for said [Link] also assails the appellate courts Resolution,3dated December 19, 2001,
denying the motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments
and other hospital supplies for [Link] place of business is at the Subic Bay Freeport Zone (SBFZ)
.It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from
all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of
Rep. Act No. [Link] also registered with the Bureau of Internal Revenue (BIR) as a non-VAT
taxpayer under Certificate of Registration RDO Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary
in the conduct of its manufacturing [Link] 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.6 c ralawre d

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 [Link]. Edilberto Carlos,
revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time
directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. [Link] 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 Court of Tax Appeals, in a Petition for Review docketed as CTA Case No. [Link] stressed that
Section 112(A)7 if read in relation to Section 106(A) (2) (a)8 of the National Internal Revenue Code, as
amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for
any value-added tax.

In opposing the claim for tax refund or tax credit, the 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 20410 and
22911 of the Tax Code, its claim should be denied, according to the BIR.

On October 13, 2000, the CTA decided CTA Case No. 5895 as follows: chan roblesv irtua1awli bra ry

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY [Link] is
hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of
Petitioner the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.12 cralawred
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A) (2) (a) and 112(A) of the
Tax [Link] tax court stressed that these provisions apply only to those entities registered as VAT
taxpayers whose sales are [Link] does not fall under this category, since it is a non-VAT
taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO
Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT,
pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the 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 Implementing
Rules and Regulations 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 [Link] 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 [Link] struck down all claims for input VAT paid on maintenance, office
supplies, freight charges, and all materials and supplies shipped or delivered to the petitioners Makati and
Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by
the Court of [Link] maintained that the exemption of Contex Corp. under Rep. Act No. 7227
was limited only to direct taxes and not to indirect taxes such as the input component of the [Link]
Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT
registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not
Contex.

Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor,
thus:chanrob lesvi rtua 1awlib rary

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET [Link]
claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13 cralawred

In reversing the CTA, the Court of Appeals 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.14 This was because the exemption
granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically
imposes the VAT on [Link] 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 [Link] 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.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.

Hence, the instant petition raising as issues for our resolution the following: c han roblesv irt ua1awli bra ry

[Link] OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY
FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
[Link] OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR
THE YEARS 1997 AND 1998.16 cralaw red

Simply stated, we shall resolve now the issues concerning:(1) the correctness of the finding of the Court of
Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser;
and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for
1997 and 1998.

On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal
[Link] contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local
and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the
[Link] calls our attention to regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition
of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly [Link], SBFZ locators are not relieved from the indirect taxes that
may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect [Link] 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.17 Unlike a direct tax, such as the income tax, which
primarily taxes an individuals 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 [Link] 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 [Link] 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 [Link] adding or
including the VAT due to the selling price, the seller remains the person primarily and legally liable for the
payment of the [Link] is shifted only to the intermediate buyer and ultimately to the final purchaser is
the burden of the tax.18 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 [Link] 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.19 cralawred

Exemptions from VAT are granted by express provision of the Tax Code or special [Link] VAT, the
transaction can have preferential treatment in the following ways: chanrob lesvi rtua 1awlib rary

(a) VAT [Link] exemption means that the sale of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the
point of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to [Link] the other hand, a VAT-registered purchaser
of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or receipt.21 c ralawred

(b) Zero-rated [Link] are sales by VAT-registered persons which are subject to 0% rate, meaning the
tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output [Link], the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or
refund in accordance with these regulations.22 c ralawred
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or [Link] contrast, exemption
only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes
paid by the exempt firms business or non-retail [Link] is for this reason that a sharp distinction must
be made between zero-rating and exemption in designating a value-added tax.23 cralawred

Apropos, the petitioners 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. 1-95.24 cralaw red

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
[Link] fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25issued by
the [Link] such, it is exempt from VAT on all its sales and importations of goods and services.

Petitioners 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.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.

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.

Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-Added Tax
Regulations provide: chan roble svi rtua1aw lib rary

Sec. [Link]-rated Sales.A zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output [Link], the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance
with these regulations.

The following sales by VAT-registered persons shall be subject to 0%: chan rob lesvi rtua1aw lib rary

(a) Export Sales

Export Sales shall mean

.. .

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

.. .

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and
accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority
(CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a
signatory effectively subject such sales to zero-rate.

Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT credit with
no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT
taxpayer and thus, is exempt from [Link] an exempt VAT taxpayer, it is not allowed any tax credit on VAT
(input tax) previously [Link] fine, even if we are to assume that exemption from the burden of VAT on
petitioners 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 petitioners 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.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a
seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases
of raw materials and supplies.

WHEREFORE, the petition is DENIEDfor lack of [Link] Decision dated September 3, 2001, of the Court
of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are [Link]
pronouncement as to costs.

SO ORDERED.