G.R. No. 173425; September 4, 2012
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

FACTS

Petitioner Fort Bonifacio Development Corporation (FBDC) purchased a portion of the Fort Bonifacio reservation from the national government in 1995. Following the expansion of the Value-Added Tax (VAT) system under Republic Act No. 7716, which took effect on January 1, 1996, FBDC, as a real estate dealer, became subject to VAT. Pursuant to Section 105 of the National Internal Revenue Code (NIRC), FBDC claimed an 8% transitional input tax credit based on the book value of its real property inventory, amounting to P5.6 billion. For the first quarter of 1997, FBDC paid its output VAT in cash, totaling P359,652,009.47, without applying the claimed transitional input tax credit. It subsequently filed a claim for refund of this amount, asserting it had erroneously paid the tax.
The Commissioner of Internal Revenue (CIR) denied the claim. The Court of Tax Appeals (CTA) and the Court of Appeals (CA) affirmed the denial. The lower courts ruled that FBDC could not avail of the transitional input tax credit because it acquired the property through a VAT-free transaction from the government, and thus did not pay any VAT that could be credited. They also upheld Revenue Regulations No. 7-95, which limited the basis of the credit to the value of improvements on the land, not the land itself.

ISSUE

Whether FBDC is entitled to claim the 8% transitional input tax credit under Section 105 of the NIRC based on the total book value of its real property inventory, including land, and consequently to a refund of the output VAT it paid for the first quarter of 1997.

RULING

Yes. The Supreme Court granted the petition and ordered the refund. The legal logic is anchored on statutory construction and the principle against judicial legislation. Section 105 of the NIRC explicitly grants the transitional input tax credit to a VAT-registered person “who has an inventory of goods” as of December 31, 1995. The law does not distinguish between types of inventory or impose a condition that the taxpayer must have previously paid VAT on the acquisition of such inventory. The Court held that the lower courts erred in reading such a precondition into the law, which constitutes judicial legislation. The transitional input tax credit is a statutory benefit designed to alleviate the impact of the new VAT system on existing inventories, not a credit for taxes previously paid.
Furthermore, the Court invalidated the restrictive provision in RR 7-95 that limited the credit to the value of improvements. The revenue regulation contravened the clear language of Section 105, which applies to “goods” broadly, and thus constituted an invalid administrative legislation that narrowed the law’s application. Since FBDC’s inventory, which included the land, constituted “goods” held for sale, it was entitled to compute the 8% credit on its total book value. Having established its rightful claim to the credit, which exceeded its output VAT liability for the period, FBDC was entitled to a refund of the cash it erroneously paid.