G.R. No. 151135 - Contex Corp. vs. Commissioner of Internal Revenue

Petitioner Contex Corporation (Contex) is a domestic corporation manufacturing hospital textiles and garments for export, located in the Subic Bay Freeport Zone (SBFZ). It is registered with the Subic Bay Metropolitan Authority (SBMA) under Republic Act No. 7227 (Bases Conversion and Development Act of 1992) as a Subic Bay Freeport Enterprise.
Contex is also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-000133.
Respondent is the Hon. Commissioner of Internal Revenue (CIR).

From January 1, 1997 to December 31, 1998, Contex purchased various supplies and materials and paid input VAT of ₱539,411.88 (1997) and ₱504,057.49 (1998), believing itself exempt under RA 7227.
Contex filed two administrative applications for refund or tax credit of the VAT paid. The first, dated December 29, 1998, was denied by the RDO. The second, filed May 4, 1999, to the BIR Regional Director, went unanswered.
Contex then petitioned the Court of Tax Appeals (CTA) in CTA Case No. 5895. On October 13, 2000, the CTA partially granted relief and ordered the CIR to refund or issue a tax credit certificate for ₱683,061.90, representing VAT on directly used manufacturing supplies, excluding periods barred by prescription and non-manufacturing purchases.
The CIR appealed to the Court of Appeals (CA) in CA-G.R. SP No. 62823, arguing the VAT exemption under RA 7227 covers only direct tax liability on importations (Sec. 107, Tax Code) and not the indirect VAT component passed by sellers.
On September 3, 2001, the CA reversed and set aside the CTA decision, denying Contex’s refund claim. Contex’s motion for reconsideration was denied by CA resolution dated December 19, 2001. Contex then appealed to the Supreme Court.

Does the exemption from all local and national internal revenue taxes under RA 7227 cover the value-added tax paid by a Subic Bay Freeport enterprise on its purchases of supplies and materials?
Was the CTA correct in holding that Contex is entitled to a tax credit or refund of the VAT paid on its purchases of supplies and raw materials for 1997 and 1998?