SECOND DIVISION

COMMISSIONER OF G.R. No. 153205

INTERNAL REVENUE,
Petitioner, Present:

QUISUMBING, J.
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
BURMEISTER AND WAIN VELASCO, JR., JJ.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007

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DECISION

CARPIO , J. :

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision 2 of the Court of
Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision 3 of the Court of Tax
Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax
credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

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 [Respondent] is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines with principal address located at Daruma
Building, Jose P. Laurel Avenue, Lanang, Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain

Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding,
Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power
Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two
power barges. The Consortium appointed BWSC-Denmark as its coordination
manager.

BWSC-Denmark established [respondent] which subcontracted the actual

operation and maintenance of NAPOCORs two power barges as well as the
performance of other duties and acts which necessarily have to be done in the
Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of

currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is
deposited directly to the Consortiums bank accounts in Denmark and Japan, while
the Peso-denominated component is deposited in a separate and special designated
bank account in the Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to the Philippines through the
banking system.

In order to ascertain the tax implications of the above transactions,

[respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-
95 dated February 14, 1995, declaring therein that if [respondent] chooses to register
as a VAT person and the consideration for its services is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at
zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the

Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in
favor of [respondent] by the Revenue District Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax
Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT
input taxes of P3,361,174.14, detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
----------------------------------------------------------------------------------
1st E 04-18-96 P 33,019,651.07P608,953.48
nd
2 F 07-16-96 37,108,863.33 756,802.66

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 3rd G 10-14-96 34,196,372.35 930,279.14
th
4 H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment

Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96
dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96
provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No.

7-95 are hereby amended to read as follows:

Section 4.102-2(b)(2) Services other than processing, manufacturing or

repacking for other persons doing business outside the Philippines for
goods which are subsequently exported, as well as services by a
resident to a non-resident foreign client such as project studies,
information services, engineering and architectural designs and other
similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the BSP.

xxx xxx x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent]

subjected its sale of services to the Consortium to the 10% VAT in the total amount
of P103,558,338.11 representing April to December 1996 sales since said Revenue
Regulations No. 5-96 became effective only on April 1996. The sum of
P43,893,951.07, representing January to March 1996 sales was subjected to zero
rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating
therein the VAT output and input taxes for the four calendar quarters of 1996. It paid
the amount of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax
liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99
from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 insofar as it
held that the services being rendered by BWSCMI is subject to VAT at zero percent
(0%).

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 On the strength of the aforementioned rulings, [respondent] on April 22,1999,
filed a claim for the issuance of a tax credit certificate with Revenue District No. 113
of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996
due to its availment of the Voluntary Assessment Program (VAP) of the BIR. 4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the
running of the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for
P6,994,659.67 in favor of respondent. The CTAs ruling stated:

[Respondents] sale of services to the Consortium [was] paid for in acceptable

foreign currency inwardly remitted to the Philippines and accounted for in accordance
with the rules and regulations of Bangko Sentral ng Pilipinas. These were established
by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US
dollars (US$) as payments for the specific invoices billed by [respondent] to the
consortium. These remittances were further certified by the Branch Manager x x x of
BPI-Davao Lanang Branch to represent payments for sub-contract fees that came
from Den Danske Aktieselskab Bank-Denmark for the account of [respondent].
Clearly, [respondents] sale of services to the Consortium is subject to VAT at 0%
pursuant to Section 108(B)(2) of the Tax Code.

xxxx

The zero-rating of [respondents] sale of services to the Consortium was even

confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and
later by VAT Ruling No. 003-99 dated January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by

[respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly
availed of the Voluntary Assessment Program by paying output tax for its sale of
services. x x x

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 x x x Considering the principle of solutio indebiti which requires the return of
what has been delivered by mistake, the [petitioner] is obligated to issue the tax
credit certificate prayed for by [respondent]. x x x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition
for lack of merit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals Ruling

In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents
services are not destined for consumption abroad, they are not of the same nature as project
studies, information services, engineering and architectural designs, and other similar services
mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 7 as subject to 0% VAT. Thus,
according to petitioner, respondents services cannot legally qualify for 0% VAT but are subject to
the regular 10% VAT.8

The Court of Appeals found untenable petitioners contention that under VAT Ruling No.
040-98, respondents services should be destined for consumption abroad to enjoy zero-rating.
Contrary to petitioners interpretation, there are two kinds of transactions or services subject to
zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods
for other persons doing business outside the Philippines which goods are subsequently exported;
and (b) services by a resident to a non-resident foreign client, such as project studies, information
services, engineering and architectural designs and other similar services, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).9

The Court of Appeals stated that only the first classification is required by the provision to
be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or
implied stipulation in the statute, the second classification need not be consumed abroad. 10

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 The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an
amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by
adding another requirement to zero-rating. This is indicated by the additional phrase as well as
services by a resident to a non-resident foreign client, such as project studies, information services
and engineering and architectural designs and other similar services. In effect, this phrase adds
not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and
(b) these must be in the nature of project studies, information services, etc. 11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code, 12 for services
which were performed in the Philippines to enjoy zero-rating, these must comply only with two
requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance
with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be
destined for consumption abroad in order to be VAT zero-rated.13

The Court of Appeals disagreed with petitioners argument that our VAT law generally follows
the destination principle (i.e., exports exempt, imports taxable). 14 The Court of Appeals stated that
if indeed the destination principle underlies and is the basis of the VAT laws, then petitioners
proper remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without
such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not
resort to administrative legislation, as what [he] had done in this case. 15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of

(2) Services other than those mentioned in the preceding sub-paragraph ,

the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special

laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero rate;

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12

13

14

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 (4) Services rendered to vessels engaged exclusively in international shipping;
and

(5) Services performed by subcontractors and/or contractors in processing,

converting, or manufacturing goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with
the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2)
there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules. Moreover, respondent contends that its services
which constitute the actual operation and management of two (2) power barges in Mindanao are
not even remotely similar to project studies, information services and engineering and architectural
designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96. As such, respondents
services need not be destined to be consumed abroad in order to be VAT zero-rated.

Respondent is mistaken.

The Tax Code not only requires that the services be other than processing, manufacturing or
repacking of goods and that payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential condition for qualification to zero-
rating under Section 102(b)(2) is that the recipient of such services is doing business outside
the Philippines. While this requirement is not expressly stated in the second paragraph of Section
102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services
must be for other persons doing business outside the Philippines. The phrase for other
persons doing business outside the Philippines not only refers to the services enumerated in the
first paragraph of Section 102(b), but also pertains to the general term services appearing in the
second paragraph of Section 102(b). In short, services other than processing, manufacturing, or
repacking of goods must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient
of the other services are both doing business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the
VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in
the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the
generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it
by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

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 When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules,
the law clearly envisions the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines can be required under BSP rules 16 to
pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In
a domestic transaction, where the provider and recipient of services are both doing business in the
Philippines, the BSP cannot require any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the Philippines. Under BSP rules, 17 the
proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is
reason to require the provider of services under Section 102(b) (1) and (2) to account for the
foreign currency proceeds to the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines since their transaction is not in
the nature of an export sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the
Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or
exchange of services. Indeed, this is a purely local sale or exchange of services subject to the
regular VAT, unless of course the transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned in the
preceding subparagraph, the legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the
recipient of services is doing business outside the Philippines, remain the same under both
subparagraphs.

Significantly, the amended Section 108(b)18 [previously Section 102(b)] of the present
Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0%
VAT are [s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered
to a person engaged in business conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP.

In this case, the payer-recipient of respondents services is the Consortium which is a joint-
venture doing business in the Philippines. While the Consortiums principal members are non-
resident foreign corporations, the Consortium itself is doing business in the Philippines . This
is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:

16

17

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 This refers to your letter dated January 14, 1994 requesting for a clarification
of the tax implications of a contract between a consortium composed of Burmeister
& Wain Scandinavian Contractor A/S (BWSC), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. (MITSUI), all referred to hereinafter as the Consortium,
and the National Power Corporation (NAPOCOR) for the operation and
maintenance of two 100-Megawatt power barges (Power Barges) acquired by
NAPOCOR for a 15-year term. 19 (Emphasis supplied)

Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power
barges cannot be classified as a single or isolated transaction. The Consortium does not fall
under Section 102(b)(2) which requires that the recipient of the services must be a person doing
business outside the Philippines. Therefore, respondents services to the Consortium, not being
supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power

barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly
in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign
currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme
does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v.
American Express International, Inc. (Philippine Branch) ,20 the place of payment is immaterial,
much less is the place where the output of the service is ultimately used. An essential condition for
entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a
person doing business outside the Philippines. In this case, the recipient of the services is the
Consortium, which is doing business not outside, but within the Philippines because it has
a 15-year contract to operate and maintain NAPOCORs two 100-megawatt power barges in
Mindanao.

The Court recognizes the rule that the VAT system generally follows the destination principle
(exports are zero-rated whereas imports are taxed). However, as the Court stated in American
Express, there is an exception to this rule. 21 This exception refers to the 0% VAT on services
enumerated in Section 102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business outside the
Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the
services must be (a) performed in the Philippines; (b) for a person doing business outside the
Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP
rules.

19

20

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 Respondents reliance on the ruling in American Express22 is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-

registered person that facilitates the collection and payment of receivables belonging
to its non-resident foreign client [American Express International, Inc. (Hongkong
Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and
accounted for in accordance with BSP rules and regulations. x x x x 23 (Emphasis
supplied)

In contrast, this case involves a recipient of services the Consortium which is doing business in the
Philippines. Hence, American Express services were subject to 0% VAT, while respondents services
should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling
No. 003-99,24 which reconfirmed BIR Ruling No. 023-9525 insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents reliance on these BIR
rulings binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for refund
effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However,
such revocation cannot be given retroactive effect since it will prejudice respondent. Changing
respondents status will deprive respondent of a refund of a substantial amount representing
excess output tax.26 Section 246 of the Tax Code provides that any revocation of a ruling by the
Commissioner of Internal Revenue shall not be given retroactive application if the revocation will
prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions
enumerated in Section 246 of the Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA
contesting respondents claim for refund, respondents services shall be subject to the regular 10%
VAT.27 Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

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26

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 SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR

MINDANAO, INC. - Value Added Tax, Zero Rated

FACTS:

A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The
foreign entity then subcontracted the actual O&M to Burmeister. NPC paid the foreign consortium
a mixture of currencies while the consortium, in turn, paid Burmeister foreign currency inwardly
remitted into the Philippines. BIR did not want to grant refund since the services are “not destined
for consumption abroad” (or the destination principle).

ISSUE:

Are the receipts of Burmeister entitled to VAT zero-rated status?

HELD:

PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior
to the filing of CIR’s Answer in the CTA.

The claim has no merit since the consortium, which was the recipient of services rendered by
Burmeister, was deemed doing business within the Philippines since its 15-year O&M with NPC can
not be interpreted as an isolated transaction.

In addition, the services referring to ‘processing, manufacturing, repacking’ and ‘services other than
those in (1)’ of Sec. 102 both require (i) payment in foreign currency; (ii) inward remittance; (iii)
accounted for by the BSP; AND (iv) that the service recipient is doing business outside the
Philippines. The Court ruled that if this is not the case, taxpayers can circumvent just by stipulating
payment in foreign currency.

The refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-
rating of its sales to foreign consortium. However, the ruling is only valid until the time that CIR
filed its Answer in the CTA which is deemed revocation of the previously-issued ruling. The Court
said the revocation can not retroact since none of the instances in Section 246 (bad faith,
omission of facts, etc.) are present.

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