G.R. No. 168129, April 24, 2007


Philippine Health Care Providers, Inc., (PHCPI) is a corporation whose purpose is to establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization (HMO) and to provide for the administrative, legal, and financial responsibilities of the organization.

E.O. 273 was issued amending the NIRC by imposing VAT on the sale of goods and services. Before the effectivity of the said E.O., PHCPI inquired whether their services in its health care program are exempt from the payment of the VAT. On June 8, 1988, CIR issued VAT Ruling No. 231-88 stating that PHCPI, as a provider of medical services, is exempt from the VAT coverage.

Meanwhile, on January 1, 1996,  R.A. 7716 (Expanded VAT or E-VAT Law) took effect, amending further the NIRC of 1977. On January 1, 1998, R.A. No. 8424 (NIRC of 1997) became effective with the adoption and reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.

On October 1, 1999, the BIR sent PHCPI a Preliminary Assessment Notice for deficiency in its payment of “deficiency VAT” in the amount of ₱100,505,030.26 and DST in the amount of ₱124,196,610.92, or a total of ₱224,702,641.18 for taxable years 1996 and 1997.

Subsequently, respondent filed a protest with the BIR. Another protest was filed questioning the assessment notices on February 23, 2000 by which the CIR did not take action on the protests. Hence, on September 21, 2000, PHCPI filed with the CTA a petition for review.

On April 5, 2002, the CTA rendered its Decision partially granting the petition where it ordered PHCPI to pay the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT deficiency.1awphi1.nét Accordingly, VAT Ruling No. 231-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the deficiency VAT where the CTA granted PHCPI’s motion, thus the VAT assessment issued for the taxable years 1996 and 1997 were WITHDRAWN and SET ASIDE.

The CTA held that the PHCPI is a service contractor subject to VAT since it does not actually render medical service but merely acts as a conduit between the members and petitioner’s accredited and recognized hospitals and clinics.

CIR filed a motion for reconsideration but it was denied, hence the instant petition for review on certiorari:


(1) whether respondent’s services are subject to VAT; and
(2) whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has retroactive application.


(1) Respondent does not actually provide medical and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the same, its services are not VAT-exempt.

(2) NO. It shall not have retroactive application. Section 246 of the 1997 Tax Code, as amended, provides that any revocation, modification or reversal of rulings, circulars, rules and regulations promulgated by the CIR have no retroactive application if it would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR;; (2) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith.

There is no showing that respondent deliberately committed mistakes or omitted material facts when it obtained VAT Ruling from the BIR. Respondent’s failure to describe itself as a health maintenance organization, which is subject to VAT, is not tantamount to bad faith. Respondent’s letter which served as the basis for the VAT ruling sufficiently described its business. When the CIR ruling was issued the term health maintenance organization was yet unknown or had no significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997. The CIR is precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer.

Therefore, the VAT assessment against respondent for the taxable years 1996 and 1997 is hereby withdrawn and set side.

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