REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

THIRD DIVISION

HERMANO (SAN) MIGUEL FEBRES

CORDERO MEDICAL EDUCATION
FOUNDATION (DE LA SALLE -
HEALTH SCIENCES INSTITUTE), INC.
herein represented by BR.
AUGUSTINE BOQUER FSC and DR.
ALVIN CRUDO,
Petitioner,
CTA CASE NO. 8194

M embers:
- versu s-
BAUTISTA, Chairperson
PALANCA-ENRIQUEZ, and
COTANGCO-MANALASTAS, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENU E,
Respondent. MAY 15 2012
X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X

AMENDED DECISION

COTANGCO-MANALASTAS, !..:_:

1
Thi s reso lves the Motion fo r Reconsideration fi led by res pond ent

Commi ss ion er of Intern al Reven ue, by coun se l, on Janu ary 27, 20 12. Res pond ent

prays th at th e Pet ition for Revi ew be di smi ssed for lack of m erit and jud gm ent be

rend ered ord erin g petit ion er t o pay t he amount of P2,607,933 .07 as defici ency

va lue-add ed tax (VAT) for th e ca lendar year 2006 and 20% defi cien cy and y

1
Do cket, pp . 30 2-306.
AMENDED DECISION
CTA Case No . 8194
Hermano (San) Miguel Febres Cordero Medical Education Foundation vs. CIR Page 2 of 13

delinquency interest from February 4, 2010 (due date indicated in the Formal Letter

of Demand) and compromise penalty until fully paid pursuant to Sections 248 and

249 (B) of the 1997 National Internal Revenue Code (NIRC), as amended .

In said Motion, respondent alleges that :

THE HONORABLE COURT ERRED IN GRANTING PETITIONER'S

PETITION AND CANCELLING OF THE ASSESSMENT AGAINST

PETITIONER

In support of the aforementioned allegation, respondent interposes the

following arguments/discussions:

I. The sa le of pharmacy drugs/medicine to in -patients is not covered by

the exemption from VAT under Section 109 (L) [now Section 109 {G)}

of the NIRC of 1997, as amended; and

II. Petitioner is liabl e for Deficiency VAT assessments for its failure

submit sufficient documents to prove their exemption.

On the first argument, respondent contends that since the drugs being sold

by petitioner are tangible and capable of pecuniary estimation, drugs are

considered 'goods' which when sold is subject to VAT under Section 106 (A)(1) of

the NIRC of 1997. Respondent pointed out that petitioner's exemption ba se d on

Section 109 (G) of the NIRC of 1997, as amended, pertains to services .

Anent the second argument, respondent manifests that the Bureau of

Internal Revenue (BIR) Ruling No . DA-122-2005 being cited by petitioner is only for

applicants who have submitted the proper documents for the BIR to determineV
AMENDED DECISION
CTA Case No. 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR P<Jgc 3 of 13

whether they are deserving of such exemption . Re spondent avers that in thi s case

petitioner did not submit sufficient documents to prove their exemption .

In re sponse, petitioner filed its Comm ent/Opposition (to th e Motion for

Reconsideration dated 27 January 2012} Fe bruary 23, 2012. Petitioner maintain s

th at its ph arm acy sa les to in -patient s are exe mpt from VAT con sid erin g that th ey

are included in the term 'hospital servic es' in Section 109 (G) ofthe NIRC of 1997, as

am end ed, as interpret ed by t hi s Cou rt in th e ca se of Perp etual Succour Hospital,

In c., et a/., vs. Commission er of In ternal Revenue, CTA Case No . 7304, Decemb er 1,

2010.

Al so, petitioner asserts t hat its relian ce on BIR Rule No . DA-122-2005 is in

ord er as t he facts and issues of the in stant ca se are similar to th at discu ssed in t he

BIR rulin g. Involved in the subject BIR rulin g is a hospital which operates a

ph armacy providing medicine to its in -patients and th e issue th erein is wheth er or

not ph arm acy sal es to in -pati ents are subj ect to VAT. Petition er likewi se cit ed th e

ca se of Dumaguet e Cath edral Credit Cooperative vs. Commission er of Internal

Revenue, G.R. No. 182722, January 22, 2010, to emph asize its position th at parti es

are allowed to invoke doctrines enunciated in a BIR ruling even thou gh th e sa id

ruling wa s not issu ed particularly to that party invoking it.

THE COURT'S RULING

After a judiciou s evaluation of t he arguments of both part ies, and a second

hard look on the evidenc e on record and juri sprud ence appli cabl e in t his case, t h e~
AMENDED DECISION
CTA Case No . 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR P<Jge 4 of 13

Court is constrained to reconsider the findings in the assailed Decision with respect

to the issue on sa le of drugs or pharmaceutical items by petitioner.

Whether the sale of pharmacy

drugs/medicine to in-patients is not covered
by the exemption from VAT under Section
109 (G) of the NIRC of 1997, as amended.

The first argument advanced by respondent in her Motion for

Reconsideration is that the sa le of pharmacy drugs/medicine to in-patients is not

covered by the exemption from VAT under Section 109 (G) of the NIRC of 1997, as

amended. On this point, We do not agree.

Section 109 (G) of the NIRC of 1997, as amended, provides :

"SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection

(2) hereof, the following transactions shall be exempt from the value -a dded

tax :

XXX XXX XXX

"(G) Medical, dental, hospital and veteri nary services exce pt those rendered

by professionals;

XXX XXX xxx"

The Court stands by its pronouncement that sale of drugs or pharmaceutical

item s to in-patients of the hospital is considered part of the term ~~hospital services"

covered by th e exemption from VAT under Section 109 (G) of the NIRC of 1997, as

amended, 'because the maintenance and operation of a pharmacy or drugstore by a

hospital is a necessary and essentia l service or facility rendered by any hospital for~
AMENDED DECISION
CTA Case No. 8194
Hermano (San) Miguel Febres Cordero Medical Education Foundation vs. CIR Page 5 or 13
7
its patients' . To recapitulate, reproduced hereunder are the pertinent cases that

guid ed this Court in rendering the above pronouncem en t :

Perpetual Succour Hospital, Inc., et a!., vs . Commissioner of

Internal Revenue 3 :

"Pursuant to the above Supreme Court decision, taxpayers

engaged in hospital services are exempt from VAT. Republic
Act No. 4226 defines hospital as a place devoted primarily
to the maintenance and operation of facilities for the
diagnosis, treatment and care of individuals suffering from
illness, disease, injury or deformity, or in need of obstetrical
or other medical and nursing care (Section 2 (a) thereof). In
other words, a hospital is a place where persons are given
medical or surgical treatment. Hence, hospital services
includes not on ly the services of the doctors, nurses and
allied medical personnel, but also the necessary laboratory
services, and making availab le the medicines, drugs and
pharmaceutical items that are necessary in the diagnosis,
treatment and care of patients. Sale of drugs or
pharmaceutical items to in-patients of the hospital are (sic),
therefore, considered part of the hospital services covered
by Section 109 (I) of the NIRC of 1997, as amended."

Commissioner of In ternal Revenue vs . Professional Services,

"The said ruling cited the decision of the Court of Appeals in

St. Luke's M edica l Center v. Court of Tax Appeals and
Commissioner of Internal Revenue. 32 In that case, the
Court of Appeals ruled that the item " hospital services" in
Section 103 (I) 33 should include the sale of drugs to in-
patients of the hospital because the maintenance and
operation of a pharmacy or drugstore by a hospital is a
necessary and essential service or facility rendered by any
hospital for its patients. The Court of Appeals further
exp lained that, "a person who resorts to the hospital for
medical treatment can reasonably expect that the hospital
would make avai lable to its patients immediate and prompt
access not on ly to the services of doctors, nurses and al lied
medical personnel, but also to necessary laboratory services
as well as medicines, drugs and pharmaceutical items which
are dispensable aids in practically any form of medical
treatment and care of patients". It went on to say that, "the V
2
Commissioner of Interna l Revenue vs. Professional Services, Inc., CTi\ El3 no. 409, January 8, 2009 .
3
CTA Case No . 7304, December 1, 2010.
~ CTA EB No. 409, January 8, 2009.
AMENDED DECISION
CTA Case No . 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR P<Jge 6 of 13

sale of drugs or pharmaceutical items to in-patients of the

hospital should be exempted from VAT because unlike the
sale of retailing of drugs or medicines by drugstores in
general, the procurement of medicines and pharmaceutical
items from the hospital drugstore or pharmacy amounts to
the availment of service rendered or made available by the
hospital for its in-patients and not simply the buying of such
goods" .

Whether petitioner is liable for Deficiency

VAT assessments for its failure submit
sufficient documents to prove their
exemption.

For her second argument, respondent reasoned that petitioner did not

submit sufficient documents in order to fully thresh out the details and prove that

petitioner is truly deserving of such exemption .

It is on this second argument that We found strong reasons for this Court to

humbly yield and reconsider the findings in the assailed Decision of this Court with

respect to the issue on sale of drugs or pharmaceutical items by petitioner.

First, petitioner Hermano (San) Miguel Febres Cordero Medical Education

Foundation (De La Salle - Health Institute) failed to establish by competent

evidence that it is an entity that operates a hospital.

The above finding was arrived at after due consideration of the following

notable precepts in this jurisdiction:

(1) Under Section 109 (G) of the NIRC of 1997, as amended, those

contemplated to be exempt from VAT are taxpayers engaged in the

performance of medical, dental, hospital and veterinary services; and V

AMENDED DECISION
CTA Case No . 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR Page 7 or 13

(2) In line with th e foregoing, it is now well -est ab li shed that the sa le of

dru gs or ph armace uti ca l items to in-patients of the hospital is

considered part of th e t erm 'hospit al services' covered by the VAT

exem ption und er Section 109 (G) of the NIRC of 1997, as amended .

This is so " beca use th e maintenance an d operation of a pharmacy or

drugstore by a hospital is a necessary and essentia l service or faci lity

rendered by any hospita l for its patients" ~; and also because "unlike

the sa le of reta ilin g of dru gs or medi ci nes by dru gsto res in genera l,

the procurement of medicines and pharmaceutical items from the

hospital drugstore or pharmacy amounts to the availment of service

rendered or made available by the hospital for its in-patients and

6
not simp ly t he buying of such goods" .

Clearly, before a t axpayer may claim that its sa le of drugs or pharmaceutical

item s is classified as 'hospital services' exempt from VAT under Section 109 (G) of

the NIR C of 1997, as amen ded, the following mu st be est ab lished: (i) that the

taxpayer operates a hospital ; (ii) th at th e said hospital has a pharmacy or drugstore;

and (ii) that th e sa le of dru gs - claimed to be exempt from VAT - was ma de by the

said hospital drugstore or pharmacy to in-patients of the hospital being operated by

the t axpayer;

Now, in this case, since petitioner is claiming t hat its sale of drugs and

pharmacy ite ms to in -pa t ients is part ofthe term 'hospita l services' exe mpt from VAT V

5
Commissioner of Internal Revenue vs. Professional Services, Inc., CTi\ m no. 409, January 8, 2009 .
6
Supra, Note 5.
AMENDED DECISION
CTA Ca se No. 8194
Hermano (San) Migu el Febres Cordero M edico/ Education Foundation vs. CIR Page 8 of 13

under Section 109 (G) of the NIRC of 1997, as amended, it is essential for the

petitioner to first estab li sh that it operates a hospital.

Records show that petitioner utterly failed to discharge this duty. No

substantial evidence was presented to prove that petitioner actually operates a

hospital or is engaged in the operation of a hospital as defined under Republic Act

No. 4226. Under RA No. 4226, 'hospital' means a place devoted primarily to the

maintenance and operation of facilities for the diagnosis, treatment and care of

individuals suffering from illness, disease, injury or deformity, or in need of

obstetrical or other medical and nursing care (Section 2 (a) thereof).

A perusal of petitioner's Articles of Incorporation ' reveals that, essentially,

petitioner is a non-stock, non-profit educational corporation, formed to provide

institutional medium for financing programs dedicated to the establishment,

maintenance, operation and management of educational facility in the field of

medical and physical sciences; to organize, conduct and carry on the operation of

health science, educational institutions such as Medicine, Dentistry, Nursing,

Midwifery, Pharmacy, Physical Medicine and other health and medical sciences; to

promote for the scientific development of the institution of medicine; to conduct

applied researches and development activities and studies; to function and operate

on private science and research foundation; to provide financial support, within the

Philippines and abroad for the studies of selected students and for the attendance at

scientific influences by qualified and competent scholars; to receive and/or give

grants, gifts, legacies, donations, contributions endowments and financial aids or~

7
Docket, pp . 223-233, Exhibit " V".
AMENDED DECISION
CTA Case No. 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR PtJge 9 of 13

loans from any source; to establish, maintain and operate medical research centers,

technological, vocational and manpower development schools; to establish

scholarship and professional chairs in the social, medical and physical sciences; and

to do any and all things which may be rea sonably necessary for the due carrying on

of the purposes of the corporation .

Further, petitioner itself made the representation in its Petition for Review

which states that "HERMANO is a non-stock, non-profit educational corporation duly

organized and existing under the laws of the Philippines, with principal office address

at xxx" [Emphasis supplied]. Likewise, an examination of the Joint Stipulation of

8
Facts and lssues reveals that the parties have not agreed or stipulated on the

information that petitioner operates a hospital.

Petitioner alleges that it is engaged in providing medical and hospital

9
se rvices including the operation of a pharmacy in its hospital , however, although its

Articles of Incorporation could have implied the operation of a hospital, the records

of this case and the evidence offered before thi s Court does not indicate so. There

is nowhere in the records or in the documents formally offered by petitioner from

which thi s Court can at the very least infer the fact that petitioner actually operates

a hospital or is engaged in the operation of a hospital as defined under Republic Act

No. 4226 .

"The offer of evidence is necessary because it is the duty of the court to rest

its findings of fact and its judgment only and strictly upon the evidence offered by

the parties . Unless and until admitted by the court in evidence for the purpose or~

8
Docket , pp. 133 136.
9
Docket, p. 249, Memorandum of petitioner.
AMENDED DECISION
CTA Case No. 8194
Hermono (Son) Migu el Febres Cordero Medical Education Foundation vs. CIR P<Jgc 10 of 13

purposes for which such document is offered, the same is merely a scrap of paper

10
barren of probative weight."

Thus, considering that petitioner failed to establish by competent evidence

that it operates a hospital, its alleged sale of drugs or pharmaceutical items cannot

be considered as part of the term 'hospital services' exempt from VAT under

Section 109 (G) of the NIRC of 1997, as amended; thereby making the alleged sale

of drugs or pharmaceutical items by petitioner an appropriate subject of the

deficiency VAT assessment.

Second, even if petitioner is able to prove that it operates a hospital, the

denial of its petition for cancellation of deficiency VAT assessment is still in order,

this is because petitioner likewise failed to fully account for and substantiate by

competent evidence its stance that the NET discrepancy in the deficiency VAT

assessment consists of {1} sales of pharmacy items to its in-patients and/or special

units such as operating and delivery rooms during medical procedures, which are

exempt from VAT under Section 109 {G) of the NIRC of 1997, as amended; [2} items

which are no longer sold or passed on to patients or clients such as equipment and

supplies; and thus not subject to VAT.

To support its stance, petitioner offered in evidence an Itemized Summary

11
and Comparative Table for its VAT returns for the year 2006, and the Monthly

for the period of January to December 2006. However,~

12
Value-Added Tax Returns

10
Westmont Investment Corporation vs. Amos P. Francia, Jr. et at., G.R. No . 194128, December 7,
2011 citing Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc., G.R. No .
146428, J<Jnu<Jry 19, 2009, 576 SCR/\ 137, 145.
11
Docket, pp. 80-87, Exhibit "5"
12
Docket, pp . 42-58, 59 70, Exhibits " G-R" inclu sive of sub-m<Jrkings.
AMENDED DECISION
CTA Case No . 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR P<Jgc 11 or 13

We find that the truth in petitioner's stance cannot be verified solely by examining

the above-mentioned documents.

The hands of this Court are tied from giving credence to the Itemized

and the Monthly Value-Added Tax Returns ~ in

13 1
Summary and Comparative Tab le

view of the fact that the source documents (e .g. receipts, invoices, financial

statement of income for services to patients, inventory) where the inputs in the

itemized summary and tax returns were taken were not offered as evidence for the

petitioner; consequently these documents cannot stand to support petitioner's

claim .

In view of the fact that the records of this case is wanting in competent

evidence, the Court cannot verify if there were indeed sales of pharmacy items to

in -patients and items not so ld to clients; as well as identify the actual portion or

amount of the NET discrepancy that pertain s to sales of pharmacy items to in-

patients and/or special units such as operating and delivery rooms during medical

procedures, and the actual portion or amount of the NET discrepancy attributable

to items which are no longer sold or passed on to patients or clients such as

equipment and supplies.

Hence, for petitioner's failure to substantiate by competent evidence its

claim that the NET discrepancy in the assessment pertains to sales of pharmacy

items to in-patients and/or special units such as operating and delivery rooms

during medical procedures, and items which are no longer sold or passed on to

patients or clients such as equipment and supplies; this Court has no other recourse V
13
Docket, pp. 80-87, Exhibit "S"
14
Docket, pp . 42-58,59 -70, Exhibits "G R" inclusive or sub m<Jrkings.
AMENDED DECISION
CTA Ca se No. 8194
Hermano (San) Mig uel Febres Cordero M edical Education Foundation vs. CIR Page 12 of 13

but to recon sid er th e findin gs in th e assa il ed Deci sion and uphold res pond ent's

assess m ent for defici ency VAT again st petition er.

WHEREFORE, findin g m erit in res pond ent' s Motion for Recon sid eration , th e

sa m e is hereby GRANTED. Accordingly, th e Deci sion dated Janu ary 9, 2012 is hereby

MODIFIED with res pect to th e iss ue on sal e of dru gs or pharmaceut ical items by

petit ion er. Petitioner Hermano (San) Miguel Febres Cordero M edi ca l Edu cation

Foundation is hereby ORDERED to PAY res pond ent Commi ssion er of Inte rn al

Revenu e t he amount of TWO MILLION SIX HUNDRED SEVEN THOUSAND NINE

HUNDRED THIRTY THREE AND 07/100 PESOS (P2,607,933 .07) re prese nti ng defi ciency

valu e add ed t ax for t axabl e year 2006, and 20% deficiency interest per annum from

th e date prescrib ed for it s paym ent unt il t he full paym ent t hereof, pursuant t o

Sect ion 249 (B) of th e NIRC of 199 7, as am end ed.

SO ORDERED .

AMELIA R. COTANGCO- MANALASTAS

Associat e Ju sti ce

WE CONCUR:

L ~ic~;;;_t?;RIQtJEZ
Ass ociate Ju stice
AMENDED DECISION
CTA Ca se No . 8194
Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR Page 13 of 13

ATTESTATION

I att est th at th e conclu sion s in th e above Am en ded Decis ion w ere reached in

con sultation before th e case w as assigned to th e writ er of th e op in ion of th e Court ' s

Divi sion .

CERTIFICATION

Pursuant to Section 13, Articl e VIII of th e Co nstitution and th e Division

Chairp erson 's Att est at ion , it is hereby ce rtifi ed th at th e conclu sion s in th e above

Am end ed Decision w ere reac hed in con sultation before th e case w as assigned t o th e

writ er of th e opinion of th e Court .

~ . ~-~
ERNEST~ D. ACOSTA
Pres idin g Ju sti ce