Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc.

In claims for refund or tax credit of unutilized input VAT attributable to zero-rated sales under Section 112 of the National Internal Revenue Code of 1997, the two-year prescriptive period is reckoned from the close of the taxable quarter when the relevant sales were made, computed as 24 calendar months rather than 365 days per year. Furthermore, the filing of a judicial claim with the Court of Tax Appeals prior to the lapse of the 120-day period granted to the Commissioner of Internal Revenue to decide the administrative claim, or prior to receipt of a denial, is premature and deprives the court of jurisdiction.

The case involves a Value-Added Tax registered corporation engaged in the manufacturing of steel products with pioneer status from the Board of Investments, which generated zero-rated sales and sought to recover unutilized input VAT paid on purchases and importations attributable to such sales, raising issues regarding the computation of prescriptive periods and the sequence of administrative and judicial remedies.

• Aichi Forging Company of Asia, Inc., a corporation duly organized under Philippine laws, is engaged in the manufacturing, producing, and processing of steel and its by-products with Board of Investments pioneer status.
• The company is registered with the Bureau of Internal Revenue as a Value-Added Tax entity and its products are registered as pioneer status with the Board of Investments.
• For the taxable quarter July 1, 2002 to September 30, 2002, the company generated zero-rated sales in the amount of ₱131,791,399.00 paid pursuant to Section 106(A)(2)(a) of the National Internal Revenue Code of 1997.
• For the same period, the company incurred and paid input VAT amounting to ₱3,912,088.14 from purchases and importations attributable to its zero-rated sales.
• On September 30, 2004, the company filed an administrative claim for refund or tax credit of input VAT in the amount of ₱3,891,123.82 with the Department of Finance One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center.
• On the same date, September 30, 2004, the company filed a Petition for Review with the Court of Tax Appeals Second Division seeking the same refund or tax credit.
• The Court of Tax Appeals Second Division partially granted the claim, finding the filing timely from the close of the taxable quarter on September 30, 2002, but reduced the refundable amount to ₱3,239,119.25 after disallowing certain claims.
• The Court of Tax Appeals En Banc affirmed this decision, ruling that the two-year prescriptive period should be reckoned from the date of payment of tax (filing of the VAT return on October 20, 2002) pursuant to Section 114(A), making the September 30, 2004 filing timely, and holding that simultaneous filing of administrative and judicial claims is permissible provided both are within the two-year period.

• The administrative and judicial claims were filed beyond the two-year prescriptive period provided under Sections 112(A) and 229 of the National Internal Revenue Code of 1997.
• Applying Article 13 of the Civil Code, which defines a year as 365 days, and considering that 2004 was a leap year, the two-year period expired on September 29, 2004, rendering the filing on September 30, 2004 untimely.
• The Court of Tax Appeals En Banc erred in applying Section 114(A) regarding the filing of Value-Added Tax returns to determine the reckoning point for the prescriptive period instead of Section 112(A), which specifically governs Value-Added Tax refund claims and provides that the period starts from the close of the taxable quarter when the sales were made.
• The simultaneous filing of the administrative claim with the Bureau of Internal Revenue and the judicial claim with the Court of Tax Appeals on the same day contravenes Section 229 and the doctrine of exhaustion of administrative remedies, as prior filing of an administrative claim and awaiting its resolution is a condition precedent for judicial recourse.

• The company is entitled to the refund or tax credit of unutilized input VAT attributable to zero-rated sales as a matter of right, having complied with all statutory requirements including Value-Added Tax registration and zero-rated status.
• Section 112(A) should be read in conjunction with Section 114(A), making the reckoning point the date of payment of tax (filing of the quarterly Value-Added Tax return on October 20, 2002), thus the filing on September 30, 2004 was within the two-year period.
• The administrative claim was filed first with the Department of Finance One-Stop Shop before the judicial claim with the Court of Tax Appeals, as evidenced by attachments to the Petition for Review.
• Non-observance of the 120-day waiting period under Section 112(D) is not fatal to the claim as long as both administrative and judicial claims are filed within the two-year prescriptive period, citing precedent that suits must be started before the end of the two-year period without awaiting the Commissioner's decision if the period is about to end.
• The prescriptive period is not jurisdictional and may be suspended for reasons of equity.

• Procedural Issues: Whether the filing of the judicial claim with the Court of Tax Appeals on the same day as the administrative claim, without waiting for the Commissioner of Internal Revenue's decision or the lapse of the 120-day period under Section 112(D) of the National Internal Revenue Code of 1997, is premature and deprives the court of jurisdiction.
• Substantive Issues: Whether the two-year prescriptive period for claiming refund or tax credit of unutilized input VAT should be reckoned from the close of the taxable quarter when the sales were made under Section 112(A) or from the date of payment of tax under Section 229 of the National Internal Revenue Code of 1997, and whether the computation of the period should be based on 365 days per year under the Civil Code or 12 calendar months under the Administrative Code of 1987.

• Procedural: The Supreme Court granted the petition and reversed the Court of Tax Appeals En Banc decisions, directing the dismissal of CTA Case No. 7065. The Court held that the filing of the judicial claim was premature because Section 112(D) of the National Internal Revenue Code of 1997 requires the Commissioner of Internal Revenue to have 120 days from submission of complete documents to grant or deny the claim, and the taxpayer may only appeal to the Court of Tax Appeals within 30 days from receipt of a denial or from the expiration of the 120-day period. The simultaneous filing on September 30, 2004, without awaiting the lapse of the 120-day period or a denial decision, violated this mandatory procedural requirement, rendering the judicial claim premature and depriving the Court of Tax Appeals of jurisdiction.
• Substantive: The Court ruled that Section 112(A), not Section 229, governs the refund or credit of unutilized input VAT, and the two-year prescriptive period is reckoned from the close of the taxable quarter when the sales were made. The Court further held that under the doctrine of lex posteriori derogat priori, Section 31 of the Administrative Code of 1987, which defines a year as 12 calendar months, prevails over Article 13 of the Civil Code, which defines a year as 365 days. Consequently, the two-year period consists of 24 calendar months from September 30, 2002, expiring on September 30, 2004, making the administrative claim timely filed. However, because the judicial claim was filed prematurely, the claim must be dismissed notwithstanding the timely administrative filing.

• Lex posteriori derogat priori — This legal maxim means that a later law repeals a prior law on the same subject matter. The Supreme Court applied this doctrine to hold that Section 31 of the Administrative Code of 1987, which defines a year as 12 calendar months, governs the computation of legal periods over Article 13 of the Civil Code, which defines a year as 365 days, because the Administrative Code is the more recent law.
• Exhaustion of Administrative Remedies — This doctrine requires that administrative remedies must be exhausted before judicial recourse is sought. The Court applied this principle in interpreting Section 112(D) of the National Internal Revenue Code of 1997, holding that a taxpayer must wait for the Commissioner of Internal Revenue to act on the claim within the 120-day period or receive a denial before filing an appeal with the Court of Tax Appeals.
• Nature of Creditable Input VAT — The Court distinguished creditable input VAT from erroneously paid taxes, explaining that input VAT is an indirect tax that can be shifted to the buyer, and its refund is governed by Section 112(A) with a prescriptive period reckoned from the close of the taxable quarter, unlike erroneous tax refunds under Sections 204(C) and 229 which are reckoned from the date of payment.

• "A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due process as non-observance of the prescriptive periods within which to file the administrative and the judicial claims would result in the denial of his claim."
• "The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid."
• "Both provisions [Sections 204(C) and 229] apply only to instances of erroneous payment or illegal collection of internal revenue taxes."
• "Lex posteriori derogat priori."
• "Section 112(D) of the NIRC clearly provides that the CIR has '120 days, from the date of the submission of the complete documents in support of the application [for tax refund/credit],' within which to grant or deny the claim."
• "Applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR."

• Commissioner of Internal Revenue v. Mirant Pagbilao Corporation (G.R. No. 172129, September 12, 2008) — The Supreme Court cited this case as controlling precedent establishing that Section 112(A) of the National Internal Revenue Code of 1997 is the applicable provision for determining the start of the two-year prescriptive period for claiming refund or tax credit of unutilized input VAT, reckoned from the close of the taxable quarter when the sales were made, and that Sections 204(C) and 229 are inapplicable as they apply only to instances of erroneous payment or illegal collection of taxes.
• Commissioner of Internal Revenue v. Primetown Property Group, Inc. (G.R. No. 162155, August 28, 2007) — The Court cited this case to establish that in case of conflict between Article 13 of the Civil Code (365 days) and Section 31 of the Administrative Code of 1987 (12 calendar months), the latter prevails under the principle of lex posteriori derogat priori for computing legal periods.
• Commissioner of Internal Revenue v. Victorias Milling Co., Inc. (130 Phil. 12 (1968)) — The Court distinguished this case, noting it was relied upon by the respondent but held inapplicable because it involved Section 306 (now Section 229) of the National Internal Revenue Code concerning recovery of tax erroneously or illegally collected, not refund of input VAT under Section 112.

• Section 112(A) and (D) of the National Internal Revenue Code of 1997 — Section 112(A) provides the two-year period for filing a claim for refund or tax credit of input VAT attributable to zero-rated sales, reckoned from the close of the taxable quarter when the sales were made. Section 112(D) provides the 120-day period for the Commissioner of Internal Revenue to decide the claim and the 30-day period for the taxpayer to appeal to the Court of Tax Appeals.
• Section 229 of the National Internal Revenue Code of 1997 — Provides for the recovery of tax erroneously or illegally collected with a two-year prescriptive period reckoned from the date of payment; held inapplicable to input VAT refunds which are not considered erroneously paid taxes.
• Section 114(A) of the National Internal Revenue Code of 1997 — Provides that Value-Added Tax returns must be filed within 25 days following the close of each taxable quarter; the Court of Tax Appeals En Banc erroneously applied this to determine the reckoning point for the prescriptive period for refund claims.
• Article 13 of the Civil Code — Provides that when the law speaks of years, it shall be understood that years are of three hundred sixty-five days each; held superseded by the Administrative Code of 1987 for computing legal periods.
• Section 31, Chapter VIII, Book I of the Administrative Code of 1987 — Provides that a year is composed of 12 calendar months; applied by the Supreme Court to compute the two-year prescriptive period as 24 calendar months from the close of the taxable quarter.