KELPHIL., INC. v. COMMISSIONER OF INTERNAL REVENUE

,.• I-,., ,. . ~.,. ~- ,..,!J_ t \. :.i~ <.• .._. '-""..., \,..:; > """f" ! ~ i H- ..... • ~ . . . . . . . ... .., ...... , t. •·l. ·-•· e lr lt•ih. -s Cve:::-~ f OF Ttd~ .~.t F' ::!~lS QUEZO ~CITY SPECIAl FIRST DIVISION KELPHil, INC., CTA CASE NO. 7749 Petitioner, ~1embers: - versl!s - ACOSTA, Chairperson BAUTISTA, and Ct~ SANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, P.espondent. ill! 1 ~ ·; .;; ';.2__! ~\- 2rJ10 .. ; -'-~~~~~~ 1(,:-:t;~Y- ~~/..t/.f~ ~ X-- -- - --- - --- ------------ --- -------------- .,:- ------- '\---- X '\ Dt:CIS.~.ON BAUTISTA, J.: This case involves a claim fe:.r :-efuncl of the amount of P4,984,324.13, allegedly representing excess or unutiliL:ed input value -added tax (VAT) on domestic purchases of goods and services that is attributable to zero-rated sales of services for taxable years 2006 and 2007. Kelphil, Inc. (Petitioner) is a domestic co! pCJrat ion duly orga11ized and existing under Pllilippine laws, with pri ncipal office and place of business at: 28'h Floor, Ante! Global Corporate Center, 3 Dont:• Ju lia Vargas Avenue, Ortigas /) / / 103C

DECISION CTA CASE NO. Tl'lS• Center, Pasig City . Petit:u1 'Ci i:; aiso a V/\T-n~·;Jbter-cd ta xpayer as evidenced by its Certificate of Registration No. OCN 3RC0000174570. 1 Respondent is the Commissioner of the Bureau of Internal Revenue (BIR), the public official charged with the administration and enforcement of the national internal revenue laws, including the granting of refund or tax credit of taxes erroneously or illegally collected, and other refundable or creditable taxes under the provisions of the National Internal Revenue Code (NIRC). He holds office at the BIR NJtional Office Building, BI R Road, Diliman, Quezon City. Based on petitioner's Articles of Inco rporation, its principal purpose is to "produce drafts, designs and drawings, by Ph ilippine Nationals, of civil structures, offshore structures, bridges, buildings, piping, plants and other works or installation of whatever kind, for companies in Japan and ot her countries." 2 Petitioner filed with the BIR Revenue District Office (RDO) No. 43-Pasig City its Original and Ame'lded Quarte rly VAT Returns for taxable years 2006 and 2007 on the following dates: Original Quarterly Amended Quarterly 2006 VAT Return VAT Return --~~- -~- First April 20, 2006 March 19, 2008 Second July 19, 20 06 March 19. 2008 Third October 18 , 2006 March 19, 2008 Fourth Januar~ 18, 2007 March 19, 2008 Original Quarterly Am ended Qua rterly 2007 VAT Return VAT Return First April 20, 2007 March 18, 2_008 Second Jul:r 23 , 2007 March 18, 2008 Third October 22 , 2007 -- r-- March 18 , 2008 Fourth January 25, 2008 March 18, 2008 1 Annex "A", Petition for Review, docket, p. 8; Pars. 1 and 2, Summary of Facts Admitted, Stipulation of Facts, docket, pp. 59-60 2 Par. 8, Summary of Facts Admitted, Stipulation of Facts, docket, p. 60 / 1037

DECISION CfA CASE NO. ?Jo l~t The said Amended ,~Lh.Jrtr' 'Y V1\~- Retw;1s rcfb.:tcd the following material information: 3 2006 Taxable Sales Output Tax Zero-ra ted Domestic Input Tax Sales Purchases First - - 17 583 810.22 6 319 639.48 700 284.19 Second 61107.14 7 332.86 24 017 598.89 6 398 260 .89 767 792.38 Thi rd - - 1-· 17,938,336.65 6,033,666. 58 720,889.64 Fourth 960 000.00 115 200.00 24,218 742.67 5 261,715.65 631 405.80 TOTAL 1 021,107.14 122,532.86 83,756,488.43 24 OB 282.60 2,820 372.01 2007 Taxable Sales Output Tax Zero-rated Domestic Input Tax Sales Purchases First 1 023 840.84 122,354.41 21 343,493.83 5,756,828.60 690,819.79 -t- Second 780 030.00 _J__- __93,6Q}.§.Q -l-____1229.1:264 .77 5 928 395.70 711 407.70 Thi rd 735 763:..5.? : ·- 8~1,29 1 . ~3 II ---·--····-·-·- 24,902,888 .1- 2 - - 4,421,237.95 530 548.62 Fourth 672 403.72- I 8() ,ffr.3.4 s i 12,43 )0~ . 7 0 ~.rm o59.21 710 527.08 TOTAL 3,212,038. 13 L_34e, 9J.~ . o~· I 75,977 , 156, t~8 1 22,027 521.46 2 643,303.190 On March 25, 2008, petitioner filed with respondent, through BIR RDO No. 43-Pasig City, separate claims for refund, covering the excess input ta xes for the four quarters of 2006 and the four qua rters of 2007. 4 Due to respon d r::r~l\ in a ctiO'l and ir, order to suspe nd the running of the two-year prescriptive period on the said administrative claim for refund, petitioner filed this instant Petition for Review on April 2, 2008. In his Answer 5 filed on June 10, 2008, re spondent raised the following Special and Affirmative Defenses: "4. Claims for refund ?re strictly constn..:ec against the taxpayer as the same partakes the nature of a tax exemption; 5. The taxpayer has the burden to show that the taxes were erroneously or ill egally paid. Failure on t he part of the Petitioner to prove the same is fatal to its ca use of action. In the instant case, the Petitioner failed to present proof that the input VAT it is claiming as refund remain ed 3 Par. 9, Summary of Facts Adm itted, Stipulation of Facts, docket, pp. 60-61 4 Annexes "R" and "S", Petition for Review, docket, pp. 25-28; Par. 7, Sum ma r·y of Facls Admitted, Stipulation of Facts, docket, p. 60 5 Docket, pp. 37-38 1 t-J ,,J\.) ("'l

DECISION CTA CASE NO. 7 · .. unutilizeC:. Ir1 ,Jdoiti(JI1, Pelitillnc: fllL Sl prove that the 1 compe ns<:~t:o·l u' · cn~.idcrat;o1 Vl'i::ch it received for the services rendered were actually paid for in acceptable foreign currency and accounted for in accorda nce with th e rules and regu lations of the Banko Sentral ng Pilipinas; 6. The Petitioner should prove its legal basis for claiming the amount being refunded." During trial, petitioner presented documentary and testimonial evidence. On the other hand, this Court declared respondent's right to prese nt evidence waived for failure of respondent's counsel to appear on several hearing dates for the presentation of respondent's evide nce. 6 On July 21, 2009, this Court declared the case submitted for decision, taking into consideration petitioner's Hemorandum filed on July 15, 2009, sans respondent's Memorandum. As jointly stipulated by the parties, the issues 7 to be resolved by t his Court are as follows: "1. Whether tt1e amou nts that Petitioner reported as zero- rated sales/receipts in its quarterly VAT returns for the years 2006 and 2007 were its compen sation for services it rend ered to its non-resident foreign clients 2. Whether sa id receipts or compensation were paid fo r in acceptable foreign currency and accounted for in accordance with the rul es and regu lations of the Bangko Central ng Pilipinas. 3. Whether Petitioner's domesti c purchases of goods and services, for which it paid in put ta x, are attributable to its zero-rated receipts for the period in question. 4. Whether said domestic purchases of goods and services are duly supported by acceptable documentary evid ence. 6 Docket, pp. 107 and 109 7 Statement of the Issues, Stipulation of Facts, docket, p. 62 ,, (\ ~ 1UJ J

DECISION CTA CASE NO. ;·;·. · 5. Wheth er the au. L:mu!atcd ut -'>'~c::~ .;1put taxes for the penod in questio;-~ WJ~; utiiizcu 01 i:~pp.lcd aga inst output t axes during the sa me period or in the succeeding periods. 6. Wheth er Petitioner is entitled to the refund of the excess input taxes in the amount of P2,725,959.03 for the years 2006 and in the amount of P2,258,365.10 for the year 2007." The above-enumerated issues may be summarized as follows: "Whether or not petitioner is entitled to a refund of the amount of P4,984,324.13, representing alleged unutilized input VAT pa id on domestic purchases of taxable goods and servi ces for taxable ye ars 2006 and 2007, attributable to zero-ra ted sales for the same period. " Pertinent to the proper resolution of the present case is Section 112(A) of the NIRC of 1997, as amended, which provides as follows: "SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-.rdcd or Effectively Zero-rated Sales. - Any VAT-regi stered person , whose sa!es are zero-rated or effectively zero- rated may, within two ( 2) yea rs after th e close of the taxable quarter when the sales were made, apply for th e issuance of a tax credit certificate or refund of cred itabl e input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provide~ howeve0 That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108(8)(1) and (2), the acceptable foreign currency exchange proceeds t h r-eof had been duly accou nted for in accordance with the ru les and reg ulations of t he 8angko Sentral ng Pilipinas (8SP): Provide~ further, That whe re the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input ta x due or paid cannot be directly and entirely att:ibuted to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales : Provide~ finally, That for a oerson making sales that are zero-rated under Secti on 108( 8)(6), t he input taxes shall be allocated ratably between Ills ze ro-rated and non-zero-rated sales ." I I

iJEClSlO N CTA CAS[ NO. 7749 Based on the afore-quoted provision, in order to be entitled to a refund/tax credit of unutilized input VAT, the following requisites must be satisfied: 1. that there must be zero-rated or effectively zero-rated sales; 2. that input taxes were incurred or paid; 3. that such input taxes are attributable to zero-rated or effectively zero-rated sales; 4. that the input taxes were not applied against any output VAT liability during and in the succeeding quarters; and 5. that the claim for refund was filed within the two-year prescriptive period. In its Quarterly VAT Returns for taxable years 2006 and 2007, petitioner reported the following zero-rated sales/receipts: Zero-Rated 8 Year 2006 Annex Sales/Rece ipts 1st Quarter J p 17 ,583,810.22 2nd Quarter K 24,017,598.89 3rd Quarter L 17 ,938,336.65 4th Quarter M 24 ,216,742.67 Subtotal p 83,756,488.43 Year 2007 1st Quarter N p 21,343,493.83 2nd Quarter 0 17,291,564.77 3rd Quarter p 24,902 ,888.12 4th Quarter Q 12 ,439 ,209.76 Subtotal p 75,977,156.48 Total p 159,733,644.91 The Court-commissioned Independent Certified Public Accountant (CPA), Mr. Albert G. Alba, noted that petitioner's zero-rated sales/receipts and corresponding bank remittances for taxable years 2006 and 2007 consisted of fees for architectural and structural design services rendered to non-resident foreign clients in the aggregate amount of P149,238,918.87 and to JPMED Asian 8 Attached as Annexes to the Petition for Review 1041

Ul:ClSlON CTA CASE NO. 7749 Page 7 u! 19 Pacific, Inc. (JPMED), an Ecozone IT Enterprise, in the amount of P2,620,000.00. The zero-rated sales/receipts and bank remittances are summarized as follows: 2006 - Exhibit G 2007- Exhibit H Total Period In US$ In Peso In US$ In Peso In US$ In Peso Non-resident foreign clients 1st Quarter $ 358, 497 .77 p 17,583,810.22 $ 437,979.73 p 21 ,343,493.83 $ 796,477.50 p 38,927,304.05 2nd Qua rter 406,533.44 21,397,598.89 365,880.64 17,29 1,564.77 772,414. 08 38,689,163 .66 3rd Qua rter 347,070.84 17,938,336.65 464,118.30 21 ,392, 762.99 811,189.14 39 ,331,099.64 4th Quarter 398,393.23 19,857,269.58 279,238.29 12,434 ,081.94 677,631.52 32,291,351.52 Subtotal $ 1,510,495 .28 p 76 ,777,015.34 $ 1,547,216.96 p 72,46 1,903.53 $ 3,057 '712.24 p 149,2 38,918.87 JPMED - Ecozone IT Enterprise 2nd Quarter - p 2,620,000 .00 - - - p 2,620,000.00 Subtotal - p 2,620,000 .0 0 - - - p 2,620,000 .00 Total $ 1,510,495.28 p 79,397,015.34 $ 1,547,216.96 p 72 ,461,903.53 $ 3,057 ,71 2.24 p 151,858,918.87 A comparison of the amount of zero-rated sales/receipts declared in the Quarterly VAT Returns against the amount reflected in the Schedule of Zero- Rated Receipts and Bank Remittances prepared by the Independent CPA disclosed a discrepancy of P7,874,726.04, detailed as follows: ~ Period 2006 Annex 9 2006 Zero-Rated Receipts Per VAT Returns Exhibit Per Schedule Difference 1st Quarter J p 17 ,583,810.22 G-1-b p 17,583,810.22 p - _.2nd Quarter K 24,017,598.89 G-2-b 24,017,598.89 - 3rd Quarter L 17 ,938,336. 65 G-3-b 17 ,938,336.65 - -· 4th Quarter M 24,2 16,742 .67 G-4-b 19,857,269.58 4,359,473.09 ,_ Subtotal p 83, 756,488.43 p 79,397,015.34 p 4,359,473.09 2007 2007 Zero-rated Receip ts 10 Period Annex Per VAT Returns Exhibit Per Schedule 1st Quarter N p 21,343,493.83 H-1-b p 21,343,493.83 p - 2nd Quarter 0 17,291,564.77 H-2-b 17,291 ,564 .77 - 3rd Quarter p 24,902 ,888.12 H-3-b 21,392,762.99 3,510, 125.13 4th Quarter Q 12,439,209.76 H-4-b 12,434 ,081 .94 5,127.82 p p p t Subtotal Total p 75,977,156.48 159,733,644.91 p 72,461,903.53 151,858,918.87 p 3,515,252.95 7,87 4, 726.04 Since the difference of P7,874,726.04 does not have any supporting documents, the same shall be denied VAT zero-rating. 9 Annexes of the Petition for Review 10 Annexes of the Petition for Review 1 04~

DECIS ION CTA CASE NO . 7749 F'age 8 of 19 As to the VAT zero-rating of the amount of P149,238,918.87, representing fees received by petitioner for architectural and structural design services rendered to non-resident foreign clients, petitioner relies on Section 108(B)(2) of the NIRC of 1997, as amended, which states: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - XXX XXX XXX (B) Transactions Subject to Zero Percent (0%) Rate. -The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: XXX XXX XXX (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" Petitioner presented numerous documents such as Agreements with Kawatetsu Engineering LtdY (JFE Sekkei Ltd.), Authentication of Certificate of Registry Am endment 12 , Schedu le of Zero-rated Receipts and Bank Remittances 13 , VAT official receipts 14 , entries in US dollar passbooks 15 , and Certificate of Export Remittances 16 to prove tha t for the subject period, it act ual ly generated revenues in the aggregate amount of P149,238,918.87 for rendering certain engineering and design services to non-resident fore ign cl ients (JFE Sekkei Ltd., 10 Art-NI Corp., Acrossgate Global Software, Inc., and Kokuyo Engineering and Technology Ltd.) . After a thorough review and evaluation of the documentary evidence 11 Exhibits "B" to "D" 12 Exhibit "E" 13 Exhibits "G" and " H" 14 15 Exhibits "G-1" to "G-16" and "H-1" to " H-14" Exhibits "G-1-a" to "G- 16-a" and "H-1-a" to "H-14-a" \.'Y..J1 16 Exhibits "G-1-b" to "G-4-b" and " H-1 -b" to "H -4-b" (

DECISION ( fA CASE NO. 77'\9 presented, this Court finds however that no evidence was presented to prove the fact that the non-resident foreign clier1ts to whom petitioner rendered service are clients doin g business outside the Philippi!les. In the case of Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. 17 , the Supreme Court held that another essentia l condition to qualify for VAT zero-rating under Section 108(8)(2) [the n Section 102(b)(2)] is that the recipient of such services is doing business outside the Philippines. This Court quotes the significant portions of the said Decision, to wit: "The Ta x Code not only requires that the services be other than 'processing, manufacturing or repacking of goods' and that payment fo r such servi ces be in acceptable foreign curren cy accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second parag raph of Section 102(b), this is clearly provi ded in the first paragraph of Section 102(b) wh ere the listed services must be 'for other persons doing business outside the Philippines'. The phrase 'for other persons doing business outside the Philippines' not only refers to the se rvices en umerated in the first paragraph of Section 102(b ), but also pertains to the general term 'services' appearing in the second paragraph of Section 102(b). In short, services oth er than processing, manufacturing, or repacking of goods mu st likewise be performed fo r persons doing business outside the Philippines. This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the 'other services' are both doing business in the Philippines, the payment of the foreign currency is irrelevant. Otherwise, those subject to the regular VAT und er Section 102(a) can avoid the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipi ent of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. 17 G.R. No. 153205, January 22, 2007 ,-1. I . __) / /

DECISION CTA CASE NO. 7749 The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section l02(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution." In the present case, the documents submitted by petitioner merely establish the existence of sale and the receipt of fo reign currency remittances. Petitioner failed to prove that the engineering and design services it rendered for taxable years 20 06 and 2007 were made to non-resident foreign clients doing business outside the Philippines; thus, petitioner's alleged sales therefrom in the amount of P149,238,918.87 cannot qualify for VAT zero -rating under Section 108(8)(2) of the NIRC of 1997, as amended. On the other hand, with respect to petitioner's declared zero-rated receipts in the amount of P2,620,000.00 pertaining to services it rendered to JPMED Asian Pacific, Inc., an Ecozone IT Enterprise 18, Section 108(8)(3) of the NIRC of 1997, states: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. - XXX XXX XXX (B) Transactions Subject to Zero Percent {0%) Rate. - The fol lowing services performed in the Philippines by VAT- registered person s shall be subject to zero percent (0% ) rate; XXX XXX XXX (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0°/o) ra t e;" (Emphasis supplied) 18 Exh ibit "G-19" ( 1045

DECISION CTA CASE NO. 7749 Relative thereto, Section 24 of Republic Act (R.A.) No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995", states that: "Section 24. Exemption from National and Local Taxes. - Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5% ) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) Three percent (3%) to the National Government; (b) Two percent (2%) which shall be directly remitted by the business establ ishments to the treasurer's office of the municipality or city where the enterprise is located." Clearly, R.A. No. 7916 is a special law which grants exempti ons from national (includin g VAT) and local ta xes to duly registered business establishments operating within its proper jurisdiction except payment of the preferential tax rate of fiv e percent (5%) on gross income earned. Considering the foregoing, the sales of services by VAT-registered entities in Customs Territory, like herein petitioner, to Philippine Economic Zone Authority (PEZA) entities are effectively subj ect to zero percent (0%) VAT under Section 108(8)(3) of the NIRC of 1997, as amen ded. Moreover, the High Tribunal in the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. 19 , explained the foregoing in this wise: "Section 8 of Rep . Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate custom s territory; thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the 19 G.R. No . 150154, Auqusl 9, /00) ;d ( 1:j4G

DECI SION CTA CASE NO. 7749 ECOZON E shall be treated as an exportation from the Customs Territory. Converse ly, sales made by a supplier from the ECOZOr~E to a pu rchaser in the Customs Territory shall be consid ered as an importation into the Customs Territory . Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise? Th e Phil ippi ne VAT system adheres to the Cross Border Doctri ne, according to which, no VAT shall be imposed to form part of the cost of goods destined for consum ption ou tside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Ph il ippines to a foreign country must be free of VAT; while, th ose destined for use or consumption within the Philippin es shall be imposed with ten percent (10%) VAT." (Emphasis supplied) Similarly, in the case of Commissioner of Internal Revenue vs. Sekisui Jushi Philippi nes, Inc.20 , the Supreme Court held that: "Notably, while an ecozone is geographically within the Philippin es, it is deemed a separate customs territory and is regarde d in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales arc zero-rated or subject to a tax rate of zero percent." The VAT zero· rating of sales of services made by a VAT-registered taxpayer to a PEZA entity was further clarified in Revenue Memorandum Circular (RMC) No. 74-99, the ap plicable provisions of which read as follows: "·'S eCTION 3. Tax Treatment Of Sales Made By A VAT Registered Supplier From The Customs Territory, To A PEZA Registered Entctprise. - XXX XXX XXX 3. In th e final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, 20 G.R. No . 14967 1, July 21, 2006 I

DECISION CTA CASE NO. 77 49 regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to Art. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT regi stered suppliers from the Customs Territory, shall be treat ed effectively subject to 0°/o VAT, pursuant to Section 108(8)(3), NIRC, in relation to the provisions of R.A. 7916 and the 'Cross Border Doctrine' of the VAT system." (Emphasis supplied) Thus, petitioner's sales of services to JPMED, a PEZA-registered entity, qualify for VAT zero-rating under Section 108(8)(3) of the NIRC of 1997, as amended. However, out of the P2,620,000.00 reported zero-rated receipts from services rendered by petitioner to JPMED for the subject period of claim, only the amount of P1,714,422.41 is properly supported by VAT zero-rated official receipts, to wit: -- Exhibit Client O.R. No. Total G-17 and 17a JPMED 0265 p 1,594,42241 G-18 and 18a JPMED 0267 120,000.00 p 1,714,422.41 Consequently, only the portion of the input VAT claim attributable to the substantiated zero-rated receipts of P1,714,422.41 will be considered for refund. The rate to be applied is based on the total amount of reported zero-rated receipts and is computed as follows: Substantiated zero-rated receipts p 1,714,42241 Divided by total declared zero-rated receipts + 159,733 ,644.91 Rate of substantiated zero-rated receipts 1.07% The Court proceeds to determine the amount of unutilized input VAT attributable thereto. 1048

DECISION CTA CASE NO. 7749 Petitioner's total input VAT based on its Am ended Quarterly VAT Returns 21 for taxable years 2006 and 2007, amounted to P5,463,675.30, detailed as follows: Input Tax Period 2006 2007 Total 1st Quarter p 700 ,284.19 p 690,819.79 p 1,39 1,103.98 2nd Quarter 767 ,792 .38 71 1,407.70 1,479 ,200.08 3rd Quarter 720,889.64 530,548.62 1,251,438.26 4th Quarter 63 1,405 .90 7 10,527.08 1,341 ,932 .98 Tota l Input Tax p 2,822,378.11 1 p 2 ,645,310 .19 p 5,463,675 .30 In order to prove that it actually incurred t he afore-stated input VAT of P5,463,675.30, petitioner presented its Sch edule of Input Ta xes on Domestic Purchases 22 covering the first qu arter of 2006 to the fourth quarter of 2007 and the related suppli ers' invoices/official receipts 23 , whi ch were examined by the Independent CPA. After a thorough revi ew of the Report submitted by the Independent CPA and petitioner's other supporting documents, th e following input ta xes in the total amount of P390,245.35 would be disallowed from petitioner's claim for failure to meet th e substantiation requ irements under Section 113(A) of the NIRC of 1997, as amended, and Section 4.110-7 of Revenue Regulations No. 14- OS: Disallowed Input VAT Findin gs Refe rence 200 6 2007 Tota l Purchase of services supported by VAT official rece ip ts not in Exhibit F, page 4 , 1 Petition er's name item no. 9(a) 267.60 - 267. 60 21 Annexes "J", "K", "L", " M", "N", "0", "P", and "Q", Petition for Review; Pa r. 9, Summary of Facts Admitted, Stipulati on of Facts, docket, pp. 60-6 1 22 Exhibits " K" to "R" 23 Exhibits " K-1" to " K-148", " L-1" tG " L-95", "M -1" to "M-116", "N-1 " to "N-143", "0- 1" to "0-1 18", " P-1" y to " P-93", "Q-1" to "Q- 103", and " R-1" to "R-95" 1 1 G4 Q

DEClSION CTA CASE NO. 7749 ----,-------~ Exhibit F, pages Purchase of services suppo1ted by 4 & 5, item Nos. 2 Non VAT official receipts 9(a) & (b) I 138,087.60 498.12 138,585.72 Exhibit F, pages Purchase of services without 4 & 5, item Nos. 3 supporting documents 9(a) & (~ 36,886.92 22,485.99 59,372.91 Exhibit F, pages Purchase of goods suppol1ed by 4 & 5, item Nos . 4 Non VAT invoices 9(a) & (b) 73,682.83 4,050.65 77,733.48 Purchase of goods without Exhibit F, page 4, 5 suppol1ing documents item no. 9(a) 485.89 - 485.89 Exhibit F, page 4, 6 Unreconciled difft1rence item no. 9(a) 0.17 - 0.17 Purchase of services suppol1ed by Exhibit F, page 6, 7 undated official receip ts item No . 10-(b) - 98.25 98.25 Purchase of serv1ces suppol1ed by VAT official recoipts with Exhibit F, pages erroneous computation of input 7 & 8, item Nos. 8 VAT 14(a) & (b) 42,138.13 12,689.64 54,827.77 9 Out of period receipts Exhibit F, page 6, a. Dated 4th quarter of 2005 item No. 10(a) 606 .36 - 606.36 Exhibit F, page 6, b. Dated 1st quarter of 2008 item No. 10(b) - 25,274.50 25,274.50 -- Purchase of service not properly 10 supported by off1cialmceipt Smart Commun1cations, Inc. Exhibit K-57 532.00 - 532.00 Purchase of services supportecl by official receipt not 111 Petitioner's 11 name Dunkin Donuts, Inc. ~l~ ibit 0-81 - 12.86 12.86 Purchases of goods suppol1ed by invoices with TIN V instead of TIN 12 VAT Ro lens Enterprises Exhibit K-133 471.50 - 471.50 Rolens Enterprises Exhibit K-141 471.50 - 471.50 Rolens Enterprises Exhibit K-142 471 .50 471.50 I 1 CJ3 0

DECISION GA CASE NO. 7749 Rolens Enterprises Exhibit K-14 3 471.50 - 471 .50 Rolens Enterprises Exhibit K-144 471.50 - 471.50 Rolens Enterprises Exhibit K-145 316.10 - 316.10 Rolens Enterprises Exl1ibit K-147 15540 - 15540 Rolens Enterprises Exhibit K-148 471.50 - 471.50 Rolens Enterpris es Exhibit L-72 77 .70 - 77.70 Rolens Enterprises Exhibit L-73 77.70 - 77.70 Rolens Enterprises Exhibit L-74 316.10 - 316.10 Rolens Enterp rises Exhibit L-75 77.70 - 77.70 Rolens Enterprises Exhibit L- 81 235.71 - 235.71 Rolens Enterprises Exhibit L-84 471.43 - 47143 Rolens Enterprises Exh ibit L-85 235.71 - 235.71 Rolens Enterprises Exhibit L-86 471.43 - 471.43 Rolens Enterprises Exhibit L-89 235.71 - 235 .71 Rolens Enterprises Exh ibit L-90 235.7 1 - 235.71 Rolens Enterprises Exhibit L-91 235.71 - 235.71 Rolens Enterprises Exhibit L-92 235.71 - 235.71 Rolens Enterprises Exhibit L-93 235.7 1 - 235.71 Rolens Enterprises Exhibit L-94 313.39 - 313.39 Rolens Enterp rises Exhibit L-95 471.43 - 471.43 Rolens Enterprises Exhibit M-95 316.07 - 316.07 Rolens Enterprises Exhibit M-99 316.07 - 316 .07 Ro lens Enterprises Exhibit M-1 02 471.43 - 471.43 Rolens Enterprises Exhibit M-104 235.71 - 235.71 Rolens Enterprises Exhibit rJi-1 05 235.71 - 235.7 1 Rolens Enterprises Exhibit M 106 471.43 - 471.43 Rolens Enterprises Exh ibi t M-108 787.50 - 787.50 Rolens Enterprises Exhib it M-114 1,885.71 - 1,885.71 Rolens Enterprises Exhibit N-115 77.68 - 77.68 Rolens Enterprises Exhibit N-116 155.36 - 155.36 Rolens Enterprises Exhibit N-117 77 .68 - 77 .68 Rolens Enterpris es Exhibit N-118 471.43 - 471.43 Rolens Enterprises Exhibit N-125 233.04 - 233.04 Rolens Enterprises Exhib it N-127 93 .75 - 93.75 Rolens Enterprises Exhib it N-128 31.07 - 31.07 Rolens Enterprises Exhibit N-129 46.61 - 46.61 Rolens Enterprises Exhibit N-130 140.36 - 140.36 Rolens Enterprises Exhib it N-133 316.07 - 316 .07 Rolens Enterprises Exhibit N-134 155.36 - 155.36 Rolens Enterprises Exhibit N-135 316.07 - 316.07 Rolens Enterprises Exhibit N-1 36 155.36 - 155.36 Rolens Enterprises Exhibit N-137 62.14 - 62.14 Rolens Enterprises Exhibit N-138 46.61 - 46 .61 Rolens Enterprises Exh ibit N-139 316 .07 - 316.07 Role ns Enterprises Exh ibit N-140 77.68 - 77.68 Rolens Enterprises Exhibit N-141 77.68 - 77.68 - Rolens Enterprises Exhibit N-143 942.86 - 942.86 Rolens Enterprises Exhibit 0-98 - 155.36 155.36 Ro lens Enterprises Exhibit 0 -99 - 393.75 393.75 Rolens Enterprises Exhibit 0-104 - 316.07 316.07 Rolens Enterprises Exhibit 0-1 05 - 310.71 310.7 1 Rolens Enterprises Exhibit 0-106 - 316.07 316.07 Role ns Ente rpri ses Exhibit 0-108 - 1,264 .29 1,264.29

DECISION CTA CASE NO . 7749 Rolens Enterprises Exhibiti 0-109 - 310.71 310.71 - Purchases of goods without 13 supporting invoices JPMED Asian Pacific. Inc. Exl1ibit N-1 09 1,355.74 - 1,355.74 JPMED Asian Pacific , Inc. Exhibit N-11 0 11 ,607.97 - 11 ,607.97 JPMED As ian Pacific , tnc. Exhibit N-114 677.31 - 677.31 Total 322,068.38 68,176.97 390,245.35 -- Based on the foregoing disallowances, petitioner's valid creditable input VAT for 2006 and 2007 amounts on ly to PS,U73,429.95, computed as follows: -·----- ~ - Total Declared Input VAT p 5,463,675.30 Less: Disallowances 390,245.35 Creditable Input VAT p 5,073,429.95 Since petitioner reported an output VAT liability in its Quarterly VAT Returns for 2006 and 2007 in the amount of P507,977.44, the same shall be offset against the creditable input VAT of P5,073,429.95. The portion of the output VAT allegedly paid by petitioner in the amount of P28,119.78 24 shall not be given credence for petitioner's failure to show proof of actual payment. Consequently, only the remaining input VAT of P4,565,452.51 can be attributed to the entire zero-rated receipts declared by petitioner in the amount of P159,733,644.91 and only the input VAT of P49,001.04 is attributable to the substantiated zero-rated receipts of P1,714,422.41, as computed below: -·-- ~~-----------~~-~ - ~ ~---- Output VAT 2006 2007 Total 1st Quarter p - p 122 ,860.90 p 122,860.90 2nd Quarter 7,332.86 93 ,603.60 100,936.46 3rd Quarter - 88,291.63 88 ,291 .63 4th Quarter 115,200.00 80 ,688.45 195,888.45 Total p 122,532.86 p 385,444.58 p 507,977.44 24 Annex "K", line 25 (P2,199.86) and Annex "M", line 25 (P25,919.92), Petition for Review, docket, pp. 18 and 20 105 2

.. DECISION CTA CASE NO. 7749 Creditable Input VAT p 5,073,429.95 Less: Output VAT 507,977.44 Excess Input VAT p 4,565,452.51 - Multiply by rate of substantiated zero-rated receipts 1.07% Excess Input VAT attributable to substantiated zero-rated receipts p 48,850.34 As evidenced by its Quarterly VAT Returns for taxable years 2006 and 2007, the input VAT of P48,850.34 was not carried over to the succeeding quarters 25 . Lastly, anent th e issue of whether or not the claim for refund/tax credit certificate was filed within the two-year prescriptive period, the answer is in the affirmative. The reckoning of the two-year prescriptive period for the filing of a claim for input VAT refund starts from the date of filing of the corresponding Quarterly VAT Return 26 . The present claim pertain s to input VAT incurred for the first to fourth quarters of 2006 and of 2007. Reckoned from April 20, 2006, July 19, 2006, October 18, 2006, January 18, 2007, April 20, 2007, July 23, 2007, October 22, 2007, and January 25, 2008 27 , petitioner had until April 20, 2008, July 19, 2008, October 18, 2008, January 18, 2009, April 20, 2009, July 23, 2009, October 22, 2009, and January 25, 2010 within which to file its claim both in the admi nistrative and judicial levels. Apparently, the administrative claim filed on March 25, 2008 28 and the Petition for Review fil ed with this Court on April 2, 2008 are we ll with in the two-year prescriptive period. 25 Annexes "K" to "Q", Line 23D, " VAT Refund/TCC claimed", Petition for Review, docket, pp. 18-24 26 Atlas Conso lidated Mining and Development Corporation vs. Commissioner of Internal Revenue, G.R. Nos. 141104 and 148763, June 8, 2007 27 Pars. 3 and 5, Summary of Facts Admitted, Stipulation of Facts, docket, p. 60 28 Par. 7, Summary of Facts Admitted, Stipu lation of Facts, docket, p. 60 1053

DECISION CTA CASE NO. 7749 WHEREFORE, premises co nsidered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND in favor of petitioner the reduced amount of P48,850.34, representing excess or unutilized input VAT on domestic purchases of goods and services, attributable to zero-rated sales of services for taxable years 2006 and 2007. SO ORDERED. ( ',LQVEL A1 ociate Justice ( WE CONCUR: ~"'v, ~ (With Concurring and Dissenting Opinion) ERNESTO D. ACOSTA Presiding Justice ~ CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case wa s assigned to the writer of the opinion of the Court's Division. t~4.- t.~t_ ERNESTO D. ACOSTA Presiding Justice Chair-person, First Division 1 0 5:1