Toshiba Information Equipment (Phils.), Inc. vs. Commissioner of Internal Revenue

A party is bound by judicial admissions made in a stipulation of facts approved during pre-trial, and cannot later contradict such admissions by raising a defense that was available but not pleaded in the answer or during trial; defenses and objections not pleaded are deemed waived.

Toshiba is a domestic corporation principally engaged in manufacturing and exporting electric machinery, equipment, and related goods, including computer hardware and software. It is registered with PEZA as an ECOZONE export enterprise in the Laguna Technopark under Certificate of Registration No. 95-99 dated September 27, 1995, and is also registered with the BIR as a VAT taxpayer. The dispute concerns whether Toshiba, as a PEZA-registered enterprise availing of the income tax holiday under the Omnibus Investments Code of 1987, was entitled to a refund/credit of unutilized input VAT on its domestic purchases attributable to its zero-rated export sales for the first and second quarters of 1997. The applicable legal framework involves the Tax Code of 1977 (prior to the effectivity of R.A. 8424 on January 1, 1998), R.A. 7916 (the Special Economic Zone Act), and the distinction between VAT-exempt entities and VAT-exempt transactions, as well as the "old rule" on VAT treatment of PEZA-registered enterprises prior to the issuance of RMC No. 74-99 on October 15, 1999.

Toshiba is a domestic corporation principally engaged in manufacturing and exporting electric machinery, equipment, and related goods, including computer hardware and software. It is registered with PEZA as an ECOZONE export enterprise in the Laguna Technopark under Certificate of Registration No. 95-99 dated September 27, 1995, and is likewise registered with the BIR as a VAT taxpayer with TIN 004-739-137.

In its VAT returns for the first and second quarters of 1997, filed on April 14, 1997 and July 21, 1997, respectively, Toshiba declared input VAT payments on its domestic purchases of taxable goods and services in the aggregate sum of ₱3,875,139.65, with no zero-rated sales reported. Toshiba subsequently submitted amended VAT returns for the same quarters on July 23, 1997, reporting the same amount of input VAT but now including zero-rated sales totaling ₱7,494,677,000.00.

On March 30, 1999, Toshiba filed with the DOF One-Stop Shop two separate applications for tax credit/refund of its unutilized input VAT payments for the first half of 1997, in the total amount of ₱3,685,446.73. The following day, March 31, 1999, Toshiba filed a Petition for Review with the CTA, docketed as CTA Case No. 5762, to toll the running of the two-year prescriptive period under Section 230 of the Tax Code of 1977, praying that the CIR be ordered to refund or issue a tax credit certificate in the amount of ₱3,875,139.65.

The CIR opposed the claim in his Answer, asserting that the claim was subject to administrative investigation, that Toshiba failed to show the input taxes were erroneously or illegally collected or properly documented, that taxes paid are presumed lawful and not refundable, and that claims for refund are construed strictly against the taxpayer. Upon advice from the CTA, the parties filed a Joint Stipulation of Facts and Issues, wherein both agreed and admitted that Toshiba was a duly registered VAT entity under Section 107 of the Tax Code, that it was subject to 0% VAT on its export sales under Section 100(a)(2)(A) of the Tax Code, that it filed its quarterly VAT returns within the prescribed period, and that the petition was filed within the two-year prescriptive period. During trial before the CTA, Toshiba presented documentary evidence in support of its claim, while the CIR did not present any evidence at all. Both parties waived the submission of memoranda.

The CTA rendered its Decision on October 16, 2000, granting Toshiba's claim but reducing the refundable amount to ₱1,385,282.08 after disallowing portions of the claimed input VAT that were not properly substantiated by VAT invoices and official receipts. Both parties moved for reconsideration. Toshiba asserted it had proper substantiation for the disallowed ₱1,887,545.65. The CIR, for the first time, argued that Toshiba was not entitled to the refund because as a PEZA-registered ECOZONE export enterprise, it was VAT-exempt under Section 24 of R.A. 7916, which imposed a 5% preferential tax on gross income in lieu of all taxes, and that its export sales were VAT-exempt transactions under Section 103(q) of the Tax Code. The CTA denied both motions on January 17, 2001, standing by its disallowance of the unsubstantiated amounts and holding that Section 23, not Section 24, of R.A. 7916 applied to Toshiba because it availed of the income tax holiday under the Omnibus Investments Code, making it subject to VAT at 0% on its export sales and entitled to refund of input VAT.

The CIR appealed to the Court of Appeals, which rendered its Decision on August 29, 2002, reversing the CTA. The appellate court ruled that Toshiba was a tax-exempt entity under Section 24 of R.A. 7916, that its export sales were VAT-exempt (not zero-rated) transactions, and that the CIR's admissions in the Joint Stipulation were made through "palpable mistake" which should not be taken against the State, as the State could not be put in estoppel by the mistakes of its officials. Toshiba's Motion for Reconsideration was denied by the Court of Appeals on February 19, 2003, prompting the instant petition.

• Waiver of Defenses: Toshiba argued that the CIR never raised as an issue before the CTA that Toshiba was tax-exempt under Section 24 of R.A. 7916, and that the Court of Appeals erred in giving due course to the CIR's petition notwithstanding this failure.
• Inapplicability of Section 24: Toshiba maintained that Section 24 of R.A. 7916, subjecting gross income earned by a PEZA-registered enterprise to a 5% preferential rate in lieu of all taxes, did not apply to Toshiba, which availed itself of the income tax holiday under Section 23 of the same statute.
• Substantial Evidence for Zero-Rating: Toshiba argued that the CTA's conclusion that its export sales were zero-rated was supported by substantial evidence other than the CIR's admission in the Joint Stipulation of Facts and Issues.
• Sufficiency of Evidence: Toshiba contended that the CTA's judgment granting the refund was supported by substantial evidence and should not have been set aside by the Court of Appeals.

• VAT-Exempt Entity: The CIR argued that under Section 24 of R.A. 7916, all businesses within the ECOZONE were to remit 5% of gross income in lieu of all taxes including VAT, making Toshiba a VAT-exempt entity.
• VAT-Exempt Transactions: The CIR contended that Toshiba's export sales were VAT-exempt transactions under Section 103(q) of the Tax Code of 1977, as transactions exempt under special laws.
• No Input Tax Credit for Exempt Entities: The CIR maintained that under Section 4.103-1 of RR No. 7-95, a VAT-exempt seller was not allowed any tax credit on input VAT previously paid.
• Palpable Mistake: The CIR argued, as affirmed by the Court of Appeals, that the admissions in the Joint Stipulation were made through palpable mistake, and that the State could not be put in estoppel by the mistakes or errors of its officials or agents.

• Timeliness of Defenses: Whether the CIR waived the defense that Toshiba was VAT-exempt and its export sales were VAT-exempt transactions by failing to raise these in the Answer or during trial before the CTA.
• Binding Effect of Judicial Admissions: Whether the CIR was bound by his judicial admissions in the Joint Stipulation that Toshiba was a VAT-registered entity and its export sales were subject to 0% VAT.
• Palpable Mistake: Whether the CIR's admissions in the Joint Stipulation were made through palpable mistake such that they should not be binding on the CIR.
• Entitlement to Refund: Whether Toshiba was entitled to the refund/credit of its unutilized input VAT payments in the amount of ₱1,385,282.08.

• Timeliness of Defenses: Yes. The CIR was deemed to have waived the VAT-exemption defenses by failing to plead them in the Answer or prove them during trial, raising them only in a Motion for Reconsideration before the CTA.
• Binding Effect of Judicial Admissions: Yes. The CIR was bound by his judicial admissions in the Joint Stipulation, which required no proof and could be contradicted only by showing palpable mistake or that no such admission was made.
• Palpable Mistake: No. There was no evidence of palpable mistake; the CIR never alleged mistake in his Motion for Reconsideration or Petition for Review, and the presumption of regularity in the performance of official duty applied to the CIR's counsel who signed the Joint Stipulation.
• Entitlement to Refund: Yes. The CTA's factual findings on the amount of refundable input VAT were supported by substantial evidence, unrefuted by the CIR, and were accorded the highest respect.

• Timeliness of Defenses: Under Rule 9, Section 1 of the Rules of Court, defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. The CIR did not raise the VAT-exemption issues in his Answer, Pre-Trial Brief, or during trial before the CTA, and even waived the submission of a Memorandum. These defenses were already available when the CIR filed his Answer. It is axiomatic that no new issue may be raised in a pleading which by due diligence could have been raised in previous pleadings. Procedural rules are designed to facilitate the adjudication of cases, and the Court cannot grant relaxation based on a general averment of substantive justice. The liberal interpretation and application of rules apply only in proper cases of demonstrable merit and under justifiable causes and circumstances.

• Binding Effect of Judicial Admissions: The Joint Stipulation was executed and submitted by the parties upon advice of the CTA at the end of the pre-trial conference held on June 23, 1999, and was subsequently approved by the tax court in its Resolution dated July 12, 1999. Admissions made in a stipulation of facts at pre-trial are judicial admissions under Section 4, Rule 129 of the Rules of Court, requiring no proof and contradictable only by showing palpable mistake or that no such admission was made. The CIR expressly admitted that Toshiba was a duly registered VAT entity and that it was subject to 0% VAT on its export sales. These admissions were consistent with the "old rule" on VAT treatment of PEZA-registered enterprises prior to RMC No. 74-99, under which a PEZA-registered enterprise availing of the income tax holiday was subject to VAT (including 0% on export sales) and entitled to refund of input VAT. The admissions were also consistent with the Court's ruling in the previous Toshiba case. The BIR itself, as late as July 15, 2003, through RMC No. 42-2003, acknowledged that PEZA-registered enterprises availing of the income tax holiday could claim VAT credit for purchases prior to RMC No. 74-99.

• Palpable Mistake: The Court of Appeals concluded that the admissions were made through palpable mistake based on its own deduction from the CIR's Answer, not on any allegation or evidence presented by the CIR. The CIR never alleged mistake in his Motion for Reconsideration before the CTA or in his Petition for Review before the Court of Appeals; he began to aver the existence of a palpable mistake only after the Court of Appeals made such a declaration. The presumption of regularity in the performance of official duty applies to the CIR's counsel, Atty. Biazon, who signed the Joint Stipulation. The Joint Stipulation was a more recent pleading than the Answer, submitted after pre-trial; any discrepancy between the two was more logically explained by the CIR conceding points during pre-trial rather than by palpable mistake. The judicial admissions were not intrinsically false, wrong, or illegal. The Court of Appeals provided no explanation as to why the admissions in the Answer deserved more weight than those in the Joint Stipulation.

• Entitlement to Refund: Under the old rule applicable to the period in question (first and second quarters of 1997, before RMC No. 74-99), a PEZA-registered enterprise availing of the income tax holiday was subject to VAT, including 0% on export sales, and entitled to refund of unutilized input VAT. Section 103(q) of the Tax Code could not apply to Toshiba's transactions because P.D. No. 66, the precursor of R.A. 7916, was expressly excepted from that provision. The CTA's factual findings — that Toshiba incurred input VAT directly attributable to its zero-rated sales, that said input VAT was not carried over or was later deducted, and that Toshiba was entitled to ₱1,385,282.08 after disallowing unsubstantiated amounts — were supported by substantial evidence, unrefuted by the CIR, and untouched by the Court of Appeals. The findings of fact by the CTA are accorded the highest respect, as it is dedicated exclusively to the resolution of tax problems and has developed expertise on the subject.

• Judicial Admissions — Admissions made by a party in a stipulation of facts at pre-trial, approved by the court, are judicial admissions requiring no proof. They may be contradicted only by showing that they were made through palpable mistake or that no such admission was made. The Court cannot lightly set aside a judicial admission especially when the opposing party relied upon the same and dispensed with further proof. In this case, the CIR was bound by admissions in the Joint Stipulation that Toshiba was VAT-registered and its export sales were zero-rated, as there was no evidence of palpable mistake.

• Waiver of Defenses (Rule 9, Section 1) — Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. No new issue in a case can be raised in a pleading which by due diligence could have been raised in previous pleadings. The Court applied this by holding that the CIR waived the VAT-exemption defense by raising it only in a Motion for Reconsideration before the CTA, despite its availability when the Answer was filed.

• Cross Border Doctrine — No VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. ECOZONES are treated as foreign territory under Section 8 of R.A. 7916, making PEZA-registered enterprises VAT-exempt entities. The Court noted this doctrine was clearly established only upon issuance of RMC No. 74-99 on October 15, 1999; prior to that date, the "old rule" based on the choice of fiscal incentives applied, under which a PEZA enterprise availing of the income tax holiday was subject to VAT.

• Distinction Between VAT-Exempt Entities and VAT-Exempt Transactions — An exempt transaction involves goods or services specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status of the party. An exempt party is a person or entity granted VAT exemption under the Tax Code, a special law, or an international agreement, by virtue of which its taxable transactions become exempt from VAT. The Court applied this distinction to reject the CIR's conflation of Toshiba's status as a (putative) VAT-exempt entity with the characterization of its export sales as VAT-exempt transactions.

• Respect for CTA Findings of Fact — The findings of fact by the CTA are accorded the highest respect, as it is dedicated exclusively to the resolution of tax problems and has developed expertise on the subject. Such findings will not be overturned unless there has been an abuse or improvident exercise of authority, or the findings are not supported by substantial evidence. The Court applied this by upholding the CTA's factual findings on the refundable amount.

• "Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." — This passage states the controlling procedural rule, quoting Rule 9, Section 1 of the Rules of Court, central to the Court's holding that the CIR's failure to timely raise the VAT-exemption defense resulted in waiver.

• "The admission having been made in a stipulation of facts at pre-trial by the parties, it must be treated as a judicial admission." — This defines the nature and binding effect of admissions in a pre-trial stipulation, anchoring the Court's ruling that the CIR was bound by the Joint Stipulation.

• "Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66 are not." — This passage, quoted from the prior Toshiba case, explains why the CIR's reliance on the VAT-exempt transaction provision fails, as P.D. No. 66 (precursor of R.A. 7916) is expressly excepted from Section 103(q).

• Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.) Inc., G.R. No. 150154, August 9, 2005 — Controlling precedent involving the same parties, where the Court explained the VAT treatment of PEZA-registered enterprises, the Cross Border Doctrine, the distinction between VAT-exempt entities and transactions, the inapplicability of Section 103(q) due to the P.D. No. 66 exception, and the old rule versus the new rule under RMC No. 74-99. Followed and applied.

• Commissioner of Internal Revenue vs. Seagate Technology (Philippines), 491 Phil. 317 (2005) — Cited for the distinction between VAT-exempt transactions and VAT-exempt entities, which the Court applied to separate the CIR's two grounds for opposing the refund.

• Barcelon, Roxas Securities, Inc. vs. Commissioner of Internal Revenue, G.R. No. 150764, August 7, 2006 — Cited for the doctrine that findings of fact by the CTA are accorded the highest respect and will not be overturned absent abuse or improvident exercise of authority.

• Section 230, Tax Code of 1977 — Prescribes the two-year prescriptive period for filing suits for recovery of taxes erroneously or illegally collected. Toshiba filed its Petition for Review with the CTA within this period, as judicially admitted by the CIR.

• Section 100(a)(2)(A), Tax Code of 1977 — Provides that export sales by VAT-registered persons shall be subject to 0% VAT. The CIR admitted in the Joint Stipulation that Toshiba's export sales were zero-rated under this provision.

• Section 106(a), Tax Code of 1977 — Allows a VAT-registered person whose sales are zero-rated to apply for tax credit or refund of creditable input tax attributable to such sales, provided the input tax has not been applied against output tax. This was the legal basis for Toshiba's refund claim.

• Section 103(q), Tax Code of 1977 — Exempts from VAT transactions exempt under special laws, except those under P.D. Nos. 66, 529, 972, 1491, and 1950. The Court held this provision could not apply to Toshiba because P.D. No. 66, the precursor of R.A. 7916, was expressly excepted.

• Section 24, R.A. 7916 — Imposes a 5% preferential tax on gross income of ECOZONE businesses in lieu of all taxes. The Court held this did not apply to Toshiba, which availed of the income tax holiday under Section 23 instead.

• Section 23, R.A. 7916 — Grants fiscal incentives to ECOZONE business establishments, including those under P.D. No. 66 and the Omnibus Investments Code of 1987. The CTA correctly applied this provision to Toshiba, which availed of the income tax holiday.

• Rule 9, Section 1, Rules of Court — Provides that defenses and objections not pleaded in a motion to dismiss or in the answer are deemed waived. Applied to hold that the CIR waived the VAT-exemption defense by raising it only in a Motion for Reconsideration.

• Rule 129, Section 4, Rules of Court — Provides that judicial admissions require no proof and may be contradicted only by showing palpable mistake or that no such admission was made. Applied to bind the CIR to his admissions in the Joint Stipulation.

• Rule 18, Section 2, Rules of Court — Defines the nature and purpose of pre-trial, including the possibility of obtaining stipulations or admissions of facts and documents to avoid unnecessary proof. Applied to characterize the Joint Stipulation as a product of the mandatory pre-trial process.

• Section 4.102-2, Revenue Regulations No. 7-95 — Provides that input tax on purchases related to zero-rated sales shall be available as tax credit or refund. Applied to support Toshiba's entitlement to refund of input VAT on its zero-rated export sales.

• Section 4.103-1, Revenue Regulations No. 7-95 — Defines VAT exemption: an exempt seller cannot pass on output VAT and is not allowed tax credit on input VAT previously paid. The CIR invoked this provision, but the Court held it inapplicable because Toshiba's transactions were zero-rated, not exempt.

• RMC No. 74-99 — Issued October 15, 1999, declaring all sales to ECOZONE enterprises subject to 0% VAT regardless of PEZA registration type. The Court held this circular was not yet in effect during the period of Toshiba's claim (first and second quarters of 1997), so the "old rule" based on the choice of fiscal incentives governed.

• RMC No. 42-2003 — Issued July 15, 2003, acknowledging that PEZA-registered enterprises availing of the income tax holiday could claim VAT credit for purchases prior to RMC No. 74-99, provided certain conditions were met. The Court cited this as an express BIR acknowledgment that prior to RMC No. 74-99, some PEZA-registered enterprises were liable for VAT and entitled to refund.

Reynato S. Puno (Chief Justice, Chairperson), Conchita Carpio Morales, Lucas P. Bersamin, Martin S. Villarama, Jr.