G.R. No. 151135 July 2, 2004
Contex Corporation, petitioner, vs. Hon. Commissioner of Internal Revenue, respondent.

FACTS

Petitioner Contex Corporation, a domestic corporation registered as a Subic Bay Freeport Zone (SBFZ) enterprise under Republic Act No. 7227, is engaged in manufacturing hospital textiles for export. As an SBFZ-registered firm, it is exempt from all national and local internal revenue taxes except for a 5% preferential tax. From 1997 to 1998, Contex purchased supplies and materials for its manufacturing business. Its suppliers shifted the 10% input value-added tax (VAT) onto these purchases, which Contex paid. Believing this payment to be erroneous due to its tax-exempt status, Contex filed administrative claims for refund or tax credit of the input VAT. After these were denied, it elevated the case to the Court of Tax Appeals (CTA).
The CTA partially granted Contex’s claim, ordering a refund of P683,061.90, representing erroneously paid input VAT on supplies directly used in manufacture. The CTA ruled that as a non-VAT taxpayer exempt under R.A. No. 7227, Contex was not liable for the input VAT passed on by its suppliers. The Commissioner of Internal Revenue appealed to the Court of Appeals, which reversed the CTA. The appellate court denied the refund, holding that the tax exemption under R.A. No. 7227 covers direct taxes on importation but not the indirect input VAT passed on by domestic suppliers.

ISSUE

Whether petitioner Contex Corporation, as an SBFZ-registered enterprise exempt from taxes under R.A. No. 7227, is entitled to a refund or credit for input VAT paid on its domestic purchases of supplies and materials.

RULING

No. The Supreme Court denied the petition and affirmed the Court of Appeals’ decision. The legal logic centers on the nature of VAT as an indirect tax and the principle of strict construction of tax exemptions. The VAT is a consumption tax levied on the sale, barter, exchange, or lease of goods or properties and services. By its nature, it is an indirect tax where the statutory liability falls on the seller, but the economic burden is passed on to the buyer as part of the purchase price. When Contex’s suppliers, who are VAT-registered persons, sold goods to Contex, they correctly imposed output VAT and passed this cost on. Contex, as the buyer, merely bore the economic burden; the legal liability for remitting the tax remained with the suppliers.
The tax exemption granted to SBFZ enterprises under Section 12 of R.A. No. 7227 is explicit only for customs and import duties and internal revenue taxes on importations. It does not expressly cover the indirect input VAT on domestic purchases. Tax exemptions are construed strictly against the taxpayer and liberally in favor of the taxing authority. Since the law does not unequivocally exempt Contex from this indirect tax burden, it cannot claim a refund. The refund mechanism under the Tax Code is for VAT-registered persons, which Contex is not. Therefore, having legally and correctly paid the passed-on input VAT to its suppliers, Contex has no claim for erroneous payment.