FACTS:

The petitioner in this case is seeking to set aside the Decision and Resolution of the Court of Tax Appeals (CTA). The respondents, SM Prime Holdings, Inc. and First Asia Realty Development Corporation, are domestic corporations engaged in the business of operating cinema houses. Several cases were filed before the CTA involving the value-added tax (VAT) deficiency on cinema ticket sales for different taxable years. SM Prime received a Preliminary Assessment Notice (PAN) for VAT deficiency for taxable year 2000 and First Asia received a PAN for VAT deficiency for taxable years 1999, 2000, 2002, and 2003. The BIR denied the protests of the respondents and ordered them to pay the VAT deficiencies. The respondents then filed Petitions for Review before the CTA, which were consolidated. The main issue before the CTA was whether gross receipts derived from admission tickets by cinema/theater operators are subject to VAT. The CTA First Division ruled in favor of the respondents, stating that showing cinematographic films is not a service subject to VAT but an activity subject to amusement tax under the Local Government Code. The CTA First Division cited legislative history and House Joint Resolution No. 13 to support its ruling.

The case involves the question of whether the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are subject to value-added tax (VAT). The Court of Tax Appeals (CTA) First Division ruled in favor of the cinema operators, holding that the exhibition of movies by cinema operators is subject to amusement tax under the Local Government Code (LGC) of 1991, and the national government should be precluded from imposing its own business tax in addition to the tax already imposed and collected by local government units. The CTA First Division also found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, did not comply with procedural due process for tax issuances. The CTA First Division canceled the assessment notices issued by the Commissioner of Internal Revenue (CIR). The CIR appealed to the CTA En Banc, which affirmed the ruling of the CTA First Division. The CIR argues that the gross receipts derived from admission tickets are subject to VAT because it is a sale of service, while the cinema operators argue that it is subject to amusement tax under the LGC.

ISSUES:

1. Whether the showing or exhibition of motion pictures or films by cinema/theater operators or proprietors is subject to value-added tax (VAT).

2. Whether cinema/theater operators or proprietors are subject to amusement tax or value-added tax (VAT)?

3. Whether the imposition of VAT on cinema/theater operators or proprietors violates the non-impairment clause?

4. Whether cinema/theater operators or proprietors are subject to VAT on gross receipts from admission tickets.

5. Whether the repeal of the Local Tax Code by the LGC of 1991 grants the power to impose VAT on cinema/theater operators or proprietors.

6. Whether Revenue Memorandum Circular No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, is valid.

7. Whether the rule on tax exemption applies to cinema/theater operators or proprietors.

8. Whether the respondents need to prove their entitlement to an exemption from the coverage of value-added tax (VAT).

9. Whether the imposition of a tax can be presumed in case of doubt.

RULING:

1. No, the showing or exhibition of motion pictures or films by cinema/theater operators or proprietors is not subject to VAT.

2. Cinema/theater operators or proprietors are subject to amusement tax. Under the Local Tax Code, the jurisdiction to levy amusement tax on gross receipts derived from admission to places of amusement has been transferred to the local government units. The national government, through the Bureau of Internal Revenue (BIR), has no legal mandate to levy amusement tax on admission receipts. Only the gross receipts of amusement places derived from sources other than admission tickets are subject to amusement tax under the National Internal Revenue Code (NIRC).

3. The imposition of VAT on cinema/theater operators or proprietors does not violate the non-impairment clause. The amendments made to the NIRC, particularly RA 7716 and RA 8241, expanded the coverage of VAT but did not include cinema/theater operators or proprietors. At present, only lessors or distributors of cinematographic films are subject to VAT. Persons subject to amusement tax under the NIRC are exempt from the coverage of VAT.

4. Cinema/theater operators or proprietors are not subject to VAT on gross receipts from admission tickets. The legislative intent and the consistent amendments to the VAT law exempt persons subject to amusement tax under the NIRC from the coverage of VAT.

5. The repeal of the Local Tax Code by the LGC of 1991 does not grant the power to impose VAT on cinema/theater operators or proprietors. The removal of the prohibition under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors. The power to impose amusement tax on cinema/theater operators or proprietors remains with the local government.

6. Revenue Memorandum Circular No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, is invalid. There is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. RMCs must not override, supplant, or modify the law and must remain consistent and in harmony with the law they seek to apply and implement.

7. The rule on tax exemption does not apply to cinema/theater operators or proprietors as they are not subject to VAT on gross receipts from admission tickets.

8. The respondents do not need to prove their entitlement to an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed.

9. In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.

PRINCIPLES:

• The enumeration of services subject to VAT under Section 108 of the National Internal Revenue Code (NIRC) is not exhaustive. The phrase "sale or exchange of services" includes "similar services" and is to be interpreted as by way of example only.

• Since the activity of showing motion pictures, films, or movies by cinema/theater operators or proprietors is not included in the enumeration, it is necessary to determine whether such activity falls under the phrase "similar services." The intent of the legislature must be ascertained.

• The legislature did not intend operators or proprietors of cinema/theater houses to be covered by VAT.

• Under the NIRC of 1939 and subsequent amendments, the national government imposed amusement tax on proprietors, lessees, or operators of various places of amusement, including theaters and cinematographs. However, the power to impose amusement tax on admission from theaters, cinematographs, and other places of amusement was transferred exclusively to the local government.

• When the VAT Law was enacted in 1988, it imposed VAT on sales of services. However, the specific activity of showing or exhibition of motion pictures or films by cinema/theater operators or proprietors was not included in the list of services subject to VAT.

• The power to impose amusement tax on gross receipts derived from admission to places of amusement is exclusive with the local government units (LGUs) and not the national government.

• The amendments made to the NIRC, specifically RA 7716 and RA 8241, expanded the coverage of VAT but did not include cinema/theater operators or proprietors.

• The non-impairment clause does not apply as there is no violation of any existing right or obligation in the imposition of VAT on cinema/theater operators or proprietors.

• The power of taxation must be exercised with caution to minimize injury to the proprietary rights of taxpayers and must be exercised fairly, equally, and uniformly.

• The imposition of a tax cannot be presumed nor can it be extended by implication; a law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously.

• Revenue Memorandum Circulars must not override, supplant, or modify the law and must remain consistent and in harmony with the law they seek to apply and implement.

• Tax exemptions should be construed strictly against the taxpayer when the taxpayer is clearly subject to the tax being levied against him.

• The imposition of a tax cannot be presumed unless a statute imposes a tax clearly, expressly, and unambiguously.

• In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer.