A.C. No. 1892 - Artiaga, Jr. vs. Villanueva

Eastern Telecommunications Philippines, Inc. (Eastern) is a domestic corporation granted by Congress a telecommunications franchise under Republic Act No. 7617 (June 25, 1992) to install, operate, and maintain telecommunications systems in the Philippines.
From July 1, 1995 to December 31, 1996, Eastern imported various equipment, machinery, and spare parts for its business, paying 10% value‐added tax (VAT) on importation to the Bureau of Customs.

On September 19, 1997, Eastern filed with the Commissioner of Internal Revenue (CIR) an application for refund or tax credit of unapplied input VAT amounting to ₱22,013,134.00, covering its imported capital goods for taxable years 1995–1996.
Eastern’s primary basis was Section 10 of RA 7617 (3% of gross receipts in lieu of all taxes on its franchise), and alternatively Section 106(B) of the 1977 Tax Code authorizing refund of input taxes on capital goods.

The CIR’s Answer raised defenses: claim pending administrative investigation; franchise’s “in lieu” clause covers only internal revenue taxes on franchise; input VAT on importation is a privilege tax not covered; strict construction against tax exemptions; presumption of regularity of tax payments; burden of proof on Eastern.
On July 17, 2000, the CTA partially granted the claim, awarding a refund of ₱16,229,100.00 for unapplied input VAT on 1996 imports, disallowing certain undocumented 1996 credits and all 1995 input taxes (as those were already included in asset cost and depreciation).
The CIR’s motions for reconsideration were denied by the CTA on September 20, 2000.

The CIR elevated the case to the CA via a petition for review under Rule 43.
On October 1, 2003 (Decision) and May 26, 2004 (Resolution), the CA affirmed the CTA’s partial refund award of ₱16,229,100.00 to Eastern.

Whether Section 104(A) of the 1977 Tax Code—on the apportionment of creditable input taxes when a VAT‐registered person engages in both VAT‐taxable and non‐VAT transactions—applies to Eastern’s claim, given its VAT returns disclosing exempt sales.
Whether the CIR improperly raised the applicability of Section 104(A) for the first time on appeal, in violation of the rule against raising new issues and Eastern’s right to due process.