G.R. No.

140230 December 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

DECISION

GARCIA, J.:

In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner) seeks
the review and reversal of the September 17, 1999 Decision of the Court of Appeals (CA) in CA-
1 

G.R. No. SP 47895, affirming, in effect, the February 18, 1998 decision of the Court of Tax Appeals
2 

(CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted by respondent Philippine Long
Distance Company (PLDT) against petitioner for taxes it paid to the Bureau of Internal Revenue
(BIR) in connection with its importation in 1992 to 1994 of equipment, machineries and spare parts.

The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain
a telecommunications system throughout the Philippines.

For equipment, machineries and spare parts it imported for its business on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of ₱164,510,953.00, broken down
as follows: (a) compensating tax of ₱126,713,037.00; advance sales tax of ₱12,460,219.00 and
other internal revenue taxes of ₱25,337,697.00. For similar importations made between March 1994
to May 31, 1994, PLDT paid ₱116,041,333.00 value-added tax (VAT).

On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax
exemption privilege under Section 12 of R.A. 7082, which reads:

Sec. 12. The grantee … shall be liable to pay the same taxes on their real estate, buildings, and
personal property, exclusive of this franchise, as other persons or corporations are now or hereafter
may be required by law to pay. In addition thereto, the grantee, … shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee, its successors or assigns, and the said
percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the
grantee … shall continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or repeal shall be applicable thereto.
(Emphasis supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94, pertinently reading, as follows:
3 

PLDT shall be subject only to the following taxes, to wit:

xxx xxx xxx

7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or
earnings thereof.
xxx xxx xxx

The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes
including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary in the conduct of its business
covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly
made liable.

xxx xxx xxx

In view thereof, this Office … hereby holds that PLDT, is exempt from VAT on its importation of
equipment, machineries and spare parts … needed in its franchise operations.

Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim for tax credit/refund of
4 

the VAT, compensating taxes, advance sales taxes and other taxes it had been paying "in
connection with its importation of various equipment, machineries and spare parts needed for its
operations". With its claim not having been acted upon by the BIR, and obviously to forestall the
running of the prescriptive period therefor, PLDT filed with the CTA a petition for review, therein
5 

seeking a refund of, or the issuance of a tax credit certificate in, the amount of ₱280,552,286.00,
representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes
alleged to have been erroneously paid on its importations from October 1992 to May 1994. The
petition was docketed in said court as CTA Case No. 5178.

On February 18, 1998, the CTA rendered a decision granting PLDT’s petition, pertinently saying:
6 

This Court has noted that petitioner has included in its claim receipts covering the period prior to
December 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find that the
petitioner is entitled to the reduced amount of ₱223,265,276.00 after excluding from the final
computation those taxes that were paid prior to December 16, 1992 as they fall outside the two-year
prescriptive period for claiming for a refund as provided by law. The computation of the refundable
amount is summarized as follows:

COMPENSATING TAX

Total amount claimed ₱126,713.037.00

Less:

a) Amount already prescribed: xxx

Total P 38,015,132.00

b) Waived by petitioner

(Exh. B-216) ₱ 1,440,874.00 ₱39,456,006.00

Amount refundable ₱87,257,031.00

ADVANCE SALES TAX

Total amount claimed ₱12,460.219.00

Amount refundable ₱7,416,391.00

OTHER BIR TAXES

Total amount claimed ₱25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable ₱14,149,957.00

VALUE ADDED TAX

Total amount claimed ₱116.041,333.00

Less amount waived by petitioner

(unaccounted receipts) 1,599,436.00

Amount refundable ₱114,441,897.00

TOTAL AMOUNT REFUNDABLE ₱223,265,276.00,

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

(Breakdown omitted)

and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and in
accordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount of ₱223,265,276.00 representing
erroneously paid value-added taxes, compensating taxes, advance sales taxes and other BIR taxes
on its importation of equipments (sic), machineries and spare parts for the period covering the
taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then CTA
Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion of Associate
7 

Judge Amancio Q. Saga who maintained that the phrase "in lieu of all taxes" found in Section 12 of
R.A. No. 7082, supra, refers to exemption from "direct taxes only" and does not cover "indirect
taxes", such as VAT, compensating tax and advance sales tax.

In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution of May 7,
8 

1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.9

Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of
Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the herein challenged Decision dated
10 

September 17, 1999, dismissed the BIR’s petition, thereby effectively affirming the CTA’s judgment.

Relying on its ruling in an earlier case between the same parties and involving the same issue – CA-
G.R. SP No. 40811, decided 16 February 1998 – the appellate court partly wrote in its assailed
decision:

This Court has already spoken on the issue of what taxes are referred to in the phrase "in lieu of all
taxes" found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and the
same must be followed pursuant to the doctrine of stare decisis. xxx. "Stare decisis et non quieta
movere. Stand by the decision and disturb not what is settled."

Hence, this recourse by the BIR Commissioner on the lone assigned error that:

THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROM THE
PAYMENT OF VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES TAXES AND
OTHER BIR TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS
FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE IN LIEU OF
ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.

There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently
raises had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal
Revenue vs. Philippine Long Distance Company. There, the Sixteenth Division of the appellate court
declared that under the express provision of Section 12 of R.A. 7082, supra, "the payment [by
PLDT] of the 3% franchise tax of [its] gross receipts shall be in lieu of all taxes" exempts PLDT from
payment of compensating tax, advance sales tax, VAT and other internal revenue taxes on its
importation of various equipment, machinery and spare parts for the use of its telecommunications
system.

Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court a
motion for time to file a petition for review, docketed in this Court as G.R. No. 134386. However, on
the last day for the filing of the intended petition, the then BIR Commissioner had a change of heart
and instead manifested that he will no longer pursue G.R. No. 134386, there being no compelling
11 

grounds to disagree with the Court of Appeals’ decision in CA-G.R. 40811. Consequently, on
September 28, 1998, the Court issued a Resolution in G.R. No. 134386 notifying the parties that
12 

"no petition" was filed in said case and that the CA judgment sought to be reviewed therein "has now
become final and executory". Pursuant to said Resolution, an Entry of Judgment was issued by the
13 

Court of Appeals in CA-G.R. SP No. 40811. Hence, the CA’s dismissal of CA-G.R. No. 47895 on the
additional ground of stare decisis.

Under the doctrine of stare decisis et non quieta movere, a point of law already established will,
generally, be followed by the same determining court and by all courts of lower rank in subsequent
cases where the same legal issue is raised. For reasons needing no belaboring, however, the Court
14 

is not at all concluded by the ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895.

The Court has time and again stated that the rule on stare decisis promotes stability in the law and
should, therefore, be accorded respect. However, blind adherence to precedents, simply as
precedent, no longer rules. More important than anything else is that the court is right, thus its duty
15 

to abandon any doctrine found to be in violation of the law in force.16

As it were, the former BIR Commissioner’s decision not to pursue his petition in G.R. No. 134386
denied the BIR, at least as early as in that case, the opportunity to obtain from the Court an
authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the government
is not estopped by acts or errors of its agents, particularly on matters involving taxes. Corollarily, the
erroneous application of tax laws by public officers does not preclude the subsequent correct
application thereof. Withal, the errors of certain administrative officers, if that be the case, should
17 

never be allowed to jeopardize the government’s financial position. 18

Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the "in lieu of all taxes" clause found in Section 12 of PLDT’s
franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in no
uncertain terms, that PLDT’s payment of the 3% franchise tax on all its gross receipts from
businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earnings
thereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word
"all" encompasses any and all taxes collectible under the National Internal Revenue Code (NIRC),
save those specifically mentioned in PLDT’s franchise, such as income and real property taxes.

The BIR Commissioner excepts. He submits that the exempting "in lieu of all taxes" clause covers
direct taxes only, adding that for indirect taxes to be included in the exemption, the intention to
include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously
declaring PLDT exempt from payment of VAT and other indirect taxes on its importations. To the
Commissioner, PLDT’s claimed entitlement to tax refund/credit is without basis inasmuch as the 3%
franchise tax being imposed on PLDT is not a substitute for or in lieu of indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt
from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its
importations.

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of
taxation, taxes may be classified into either direct tax or indirect tax.

In context, direct taxes are those that are exacted from the very person who, it is intended or
desired, should pay them; they are impositions for which a taxpayer is directly liable on the
19 

transaction or business he is engaged in. 20

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid
by, one person in the expectation and intention that he can shift the burden to someone else. Stated
21 

elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person
but the burden thereof can be shifted or passed on to another person, such as when the tax is
imposed upon goods before reaching the consumer who ultimately pays for it. When the seller
passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services rendered.

To put the situation in graphic terms, by tacking 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
22 

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 end-user of such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax. 23
There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes on its
importations in question, is effectively claiming exemption from taxes not falling under the category
of direct taxes. The claim covers VAT, advance sales tax and compensating tax.

The NIRC classifies VAT as "an indirect tax … the amount of [which] may be shifted or passed on to
the buyer, transferee or lessee of the goods". As aptly pointed out by Judge Amancio Q. Saga in his
24 

dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax
levied on the privilege of importing articles. It is not a tax on the franchise of a business enterprise or
on its earnings. It is imposed on all taxpayers who import goods (unless such importation falls under
the category of an exempt transaction under Sec. 109 of the Revenue Code) whether or not the
goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on
importation replaces the advance sales tax payable by regular importers who import articles for sale
or as raw materials in the manufacture of finished articles for sale. 25

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for
sale or of raw materials to be processed into merchandise can shift the tax or, to borrow
from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue, lay the "economic burden
26 

of the tax", on the purchaser, by subsequently adding the tax to the selling price of the imported
article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who import
articles, whether in the course of business or not. The rationale for compensating tax is to place, for
27 

tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis
with those who buy directly from foreign countries. 28

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the
goods or services, not in the buyer thereof. Thus, one cannot invoke one’s exemption privilege to
avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods
he purchased. Hence, it is important to determine if the tax exemption granted to a taxpayer
29 

specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it
is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable. 30

Time and again, the Court has stated that taxation is the rule, exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. To him, therefore, who claims a refund or
31 

exemption from tax payments rests the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted. 32

As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed
by the limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the
exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDT’s franchise or
earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT’s franchise or
earnings, are outside the purview of the "in lieu" provision.

If we were to adhere to the appellate court’s interpretation of the law that the "in lieu of all
taxes" clause encompasses the totality of all taxes collectible under the Revenue Code, then, the
immediately following limiting clause "on this franchise and its earnings" would be nothing more than
a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of interpretation
cannot be accorded a governing sway following the familiar legal maxim redendo singula
singulis meaning, take the words distributively and apply the reference. Under this principle, each
word or phrase must be given its proper connection in order to give it proper force and effect,
rendering none of them useless or superfluous.  33
Significantly, in Manila Electric Company [Meralco] vs. Vera, the Court declared the relatively
34 

broader exempting clause "shall be in lieu of all taxes and assessments of whatsoever nature …
upon the privileges earnings, income franchise ... of the grantee" written in par. # 9 of Meralco’s
franchise as not so all encompassing as to embrace indirect tax, like compensating tax. There, the
Court said:

It is a well-settled rule or principle in taxation that a compensating tax … is an excise tax … one that
is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a
privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied
upon property because of its use is an excise duty. ….

The compensating tax being imposed upon … MERALCO, is an impost on its use of imported
articles and is not in the nature of a direct tax on the articles themselves, the latter tax falling within
the exemption. Thus, in International Business Machine Corporation vs. Collector of Internal
Revenue, … which involved the collection of a compensating tax from the plaintiff-petitioner on
business machines imported by it, this Court stated in unequivocal terms that "it is not the act of
importation that is taxed under section 190 but the uses of imported goods not subjected to a sales
tax" because the "compensating tax was expressly designated as a substitute to make up or
compensate for the revenue lost to the government through the avoidance of sales taxes by means
of direct purchases abroad.

xxx xxx xxx

xxx If it had been the legislative intent to exempt MERALCO from paying a tax on the use of
imported equipments, the legislative body could have easily done so by expanding the provision of
paragraph 9 and adding to the exemption such words as "compensating tax" or "purchases from
abroad for use in its business," and the like.

It may be so that in Maceda vs. Macaraig, Jr. the Court held that an exemption from "all taxes"
35 

granted to the National Power Corporation (NPC) under its charter includes both direct and indirect
36 

taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner,
the correct lesson of Maceda being that an exemption from "all taxes" excludes indirect taxes,
unless the exempting statute, like NPC’s charter, is so couched as to include indirect tax from the
exemption. Wrote the Court:

xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to
cover, among others, both direct and indirect taxes on all petroleum products used in its operation.
Presidential Decree No. 938 [NPC’s amended charter) amended the tax exemption by simplifying
the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties fees …."

The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the
tax exemptions it has been enjoying before. ….

xxx xxx xxx

It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of
NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if
it is to attain its goals. (Italics in the original; words in bracket added)
Of similar import is what we said in Borja vs. Collector of Internal Revenue. There, the Court upheld
37 

the decision of the CTA denying a claim for refund of the compensating taxes paid on the
importation of materials and equipment by a grantee of a heat and power legislative franchise
containing an "in lieu" provision, rationalizing as follows:

xxx Moreover, the petitioner’s alleged exemption from the payment of compensating tax in the
present case is not clear or expressed; unlike the exemption from the payment of income tax which
was clear and expressed in the Carcar case. Unless it appears clearly and manifestly that an
exemption is intended, the provision is to be construed strictly against the party claiming exemption.
xxx.

Jurisprudence thus teaches that imparting the "in lieu of all taxes" clause a literal meaning, as did
the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it is
the duty of courts to seek the real intent of the legislature, even if, by so doing, they may limit the
literal meaning of the broad language. 38

It cannot be over-emphasized that tax exemption represents a loss of revenue to the government
and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against
the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist,
it must not be enlarged by construction, since the reasonable presumption is that the state has
granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the
very terms of the statute the favor would be extended beyond dispute in ordinary cases. 39

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption
from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or
earnings. PLDT has not shown its eligibility for the desired exemption. None should be granted.

As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT’s allegation
that the Bureau of Customs assessed the company for advance sales tax and compensating tax for
importations entered between October 1, 1992 and May 31, 1994 when the value-added tax system
already replaced, if not totally eliminated, advance sales and compensating taxes. Indeed, pursuant
40 

to Executive Order No. 273 which took effect on January 1, 1988, a multi-stage value-added tax
41 

was put into place to replace the tax on original and subsequent sales tax. It stands to reason then,
42 

as urged by PLDT, that compensating tax and advance sales tax were no longer collectible internal
revenue taxes under the NILRC when the Bureau of Customs made the assessments in question
and collected the corresponding tax. Stated a bit differently, PLDT was no longer under legal
obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDT’s allegations concerning the abolition
of the provisions of the Tax Code imposing the payment of compensating and advance sales tax on
importations and the non-existence of these taxes during the period under review. On the contrary,
petitioner admits that the VAT on importation of goods has "replace[d] the compensating tax and
advance sales tax under the old Tax Code". 43

Given the above perspective, the amount PLDT paid in the concept of advance sales tax and
compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments and
would theoretically be refundable. It should be emphasized, however, that, such importations were,
when made, already subject to VAT.

Factoring in the fact that a portion of the claim was barred by prescription, the CTA had determined
that PLDT is entitled to a total refundable amount of ₱94,673,422.00 (₱87,257,031.00 of
compensating tax + ₱7,416,391.00 = ₱94,673,422.00). Accordingly, it behooves the BIR to grant a
refund of the advance sales tax and compensating tax in the total amount of ₱94,673,422.00,
subject to the condition that PLDT present proof of payment of the corresponding VAT on said
transactions.

WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R.

SO ORDERED.