Title
Fort Bonifacio Development Corp. vs. Commissioner of Internal Revenue
Case
G.R. No. 158885
Decision Date
Apr 2, 2009
FBDC claimed transitional input tax credit on land inventory under NIRC Section 105; SC ruled in favor, invalidating RR 7-95's restrictive provision.

Case Summary (G.R. No. 158885)

Petitioner

FBDC acquired the Fort Bonifacio tract by sale from the national government on 8 February 1995, developed the property, and sold lots beginning October 1996. FBDC filed an inventory of beginning goods (book value P71,227,503,200) and claimed transitional/presumptive input tax credits derived from that beginning inventory. It applied a portion of the claimed credit (P28,413,783.00) against output VAT for the fourth quarter of 1996 and later sought refund/credit for third quarter 1997 VAT payments.

Respondent

The Bureau of Internal Revenue, through the Commissioner and regional/district officers, disallowed the claimed transitional/presumptive input tax to the extent it was computed on the value of land as opposed to improvements, relying on Revenue Regulation No. 7‑95 (RR 7‑95) and related guidance. The BIR issued a Pre‑Assessment Notice and later an Assessment Notice reflecting the disallowance.

Key Dates

  • VAT system introduced by E.O. No. 273: effective 1 January 1988.
  • FBDC purchase of land from government: 8 February 1995.
  • Republic Act (R.A.) No. 7716 (EVAT) effectivity: 1 January 1996 (imposed VAT on sale of real properties).
  • RR 7‑95 issued: 9 December 1995 (implemented RA 7716).
  • RR 6‑97 issued (amending RR 7‑95): 2 January 1997 (deleted the RR 7‑95 limitation on real property).
  • BIR Pre‑Assessment Notice: 23 December 1997; CIR letter disallowing credit received by FBDC: 5 March 1998.
  • Court of Tax Appeals (CTA) decisions: 11 August 2000 (docket No. 5665) and 17 October 2000 (docket No. 5926).
  • Court of Appeals (CA) decisions: 15 November 2002 (affirming CTA with modification) and decisions in 2003 (affirming other CTA disposition).
  • Supreme Court decision (consolidated petitions): final disposition reversing lower courts (decision rendered under the 1987 Constitution).

Applicable Law and Regulations

  • Executive Order No. 273 (1987): introduced VAT and provided transitory measures, including transitional and presumptive input tax credits.
  • Old National Internal Revenue Code (NIRC) Section 105 (as amended by E.O. 273): allowed transitional input tax credit equal to 8% of beginning inventory value or actual VAT paid, whichever is higher, creditable against output tax, subject to filing of inventory “as prescribed by regulations.”
  • R.A. No. 7716 (EVAT, 1994/implemented 1996): expanded VAT coverage to include “real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business” by amending Section 100. It left Section 105 intact.
  • Revenue Regulation No. 7‑95 (RR 7‑95): implemented RA 7716 and, by its Sec. 4.105‑1 and transitory provisions, treated real estate dealers as allowed presumptive input tax only on improvements constructed on or after 1 January 1988 (not on the land itself).
  • Revenue Regulation No. 6‑97 (RR 6‑97): amended RR 7‑95 and deleted the paragraph restricting transitional input tax for real estate dealers to improvements.

Factual Background

FBDC acquired the land from the national government in a VAT‑free transaction (government not subject to VAT). After RA 7716 made the sale of real properties subject to VAT starting 1 January 1996, FBDC registered as a VAT taxpayer and claimed transitional input tax credits computed on its beginning inventory (including land). For Q4 1996 FBDC applied P28,413,783 of the claimed transitional credit against output VAT due on two lots sold to Metro Pacific; for Q3 1997 FBDC claimed the remaining transitional credits in seeking refund/credit of cash VAT payments. The BIR investigated, concluded that the transitional credit could apply only to improvements (per RR 7‑95), disallowed the portion applied to land, and assessed deficiency VAT; CTA and CA sided with BIR until the consolidated appeal to the Supreme Court.

Procedural History

  • Administrative disallowance and assessment by BIR (Pre‑Assessment Notice, Assessment Notice).
  • FBDC challenged assessment before the CTA (CTA Case Nos. 5665 and 5926); CTA denied relief, sustaining BIR’s limitation to improvements.
  • FBDC appealed to the Court of Appeals; CA affirmed CTA rulings (with modification in one instance removing penalties).
  • FBDC filed consolidated petitions for review to the Supreme Court (G.R. Nos. 158885 and 170680). The petitions were consolidated for hearing and resolution.

Central Legal Issues Presented

  1. Whether the 8% transitional input tax credit under Section 105 (Old NIRC) applies only to improvements on real property or to the value of the entire real property (land plus improvements) in the beginning inventory of a real estate dealer.
  2. Whether Revenue Regulation No. 4.105‑1 (RR 7‑95) and its transitory provisions validly limit the 8% transitional input tax credit to improvements for real estate dealers, given the statutory language.

Statutory Construction and Analysis — Core Reasoning

  • Textual scope of Section 105: Section 105 authorizes a transitional input tax credit on a “beginning inventory of goods, materials and supplies” equivalent to 8% of such inventory value or actual VAT paid, whichever is higher. The statutory term “goods or properties” as amended by RA 7716 expressly includes “real properties held primarily for sale to customers or held for lease,” thereby placing real property within the class of goods subject to the VAT. The Old NIRC did not distinguish real properties from other goods in the definition of “goods or properties” for purposes of Section 105.
  • Absence of legislative limitation: RA 7716 expanded VAT coverage to real properties but left Section 105 intact. There is no textual indication that Congress intended to limit transitional credits for real estate dealers only to improvements. Because the statute is silent on such a limitation, administrative regulation cannot validly expand or restrict the statute’s coverage beyond legislative intent.
  • Purpose of transitional input tax credit: The Court rejected the narrower theory adopted by the CTA and the CIR—that transitional credits are intended only to capture previously paid sales taxes or VATs on inputs and therefore should be limited to items on which VAT had actually been paid. The Court explained that transitory provisions in E.O. 273 (Section 25) and the continued reenactment of transitional credit provisions in subsequent statutes indicate a broader remedial and transitional purpose: to mitigate the burden on persons becoming subject to VAT (or electing VAT registration) even where they had not previously paid VAT on beginning inventory.
  • Limitations of administrative regulation: The Commissioner’s regulation (RR 7‑95) that narrows “goods” to “improvements” for real estate dealers conflicts with the statutory definition and is therefore invalid. The authority to prescribe regulations extends to technical matters of implementation, not to redefining or altering statutory terms and coverage. Where a regulation conflicts with the enabling statute, the statute controls.
  • Practical and doctrinal inconsistencies of the narrower view: The Court emphasized examples where acquisitions may not have borne VAT (sale not in ordinary course, donation, succession) and showed that conditioning transitional credit on prior VAT payment would produce anomalous and inequitable results contrary to the remedial purpose of Section 105. The 8% formula in the statute (alternative to actual VAT paid) further undermines an interpretation premised solely on prior VAT payment.

Application to FBDC’s Claims

  • Q4 1996 (G.R. No. 158885): The portion of the transitional input tax credit (P28,413,783.00) that FBDC applied against output VAT was disallowed by the BIR under RR 7‑95. The Supreme Court found RR 7‑95’s restriction invalid and held that FBDC was entitled to the transitional input tax credit claimed for that quarter; respondents were restrained from collecting that assessed amount.
  • Q3 1997 (G.R. No. 170680): RR 6‑97 (issued 2 January 1997) had already deleted the restrictive provision of RR 7‑95; transactions in 1997 therefore occurred after the repeal of the limiting regulation. The Court directed refund or issuance of tax credit for the amount paid as output VAT for the third quarter of 1997 (P347,741,695.74), in light of FBDC’s persisting transitional input tax credit entitlement.

Holding

The Supreme Court granted the consolidated petitions, reversed and set aside the decisions of the CTA and the Court of Appeals to the extent they sustained the BIR’s limitation of transitional input tax credits to improvements only. The Court (1) restrained the respondents from collecting P28,413,783.00 representing the transitional input tax credit for the fourth quarter of 1996, and (2) directed respondents to refund or issue a tax credit for P347,741,695.74 paid as output VAT for the third quarter of 1997, attributable to the transitional input tax credit available to petitioner.

Rationale Regarding RR 7‑95 and RR 6‑97

  • RR 7‑95’s limiting interpretation conflicted with the Old NIRC as amended by R.A. No. 7716 and exceeded the Commissioner’s regulatory authority by effectively amending statutory coverage. Administrative rules must conform to and be consistent with the enabling statute; rules inconsistent with the statute are invalid.
  • RR 6‑

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