TAKENAKA CORPORATION PHILIPPINES BRANCH v. COMMISSIONER OF INTERNAL REVENUE

REPUBUC OF THE PHIUPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION *************** TAKENAKA CORPORATION PHILIPPINES BRANCH, C.T.A. CASE NO. 6653 Petitioner, Members: -versus- ACOSTA, Chairman COMMISSIONER OF INTERNAL REVENUE, BAunSTA, and Respondent. CASANOVA, JJ. Promulgated: APR 2 1 2006 X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X DEOSION ACOSTA, E., P..J.: Before Us is a Petition for Review under Section 11 of Republic Act No. 1125, as amended by Republic Act No. 9282, seeking a refund or issuance of a tax credit certificate in the amount of Fifty Two Million Two Hundred Forty Thousand Nine Hundred Twenty One Pesos and 72/100 (P52,240,921.72) allegedly representing petitioner's unutilized and unapplied input value added tax paid on purchases of goods and services attributable to its zero-rated sales for the first quarter of taxable year 2001.

DECISION C.T.A. CASE NO. 6653 Page 2 Takenaka Corporation Philippine Branch (''petitioner'') is a foreign corporation duly organized and existing under the laws of Republic of Japan and licensed to transact business in the Philippines. 1 It is registered as a value-added tax (''VAT'') taxpayer as evidenced by its Certificate of Registration bearing Taxpayer Identification No. 005-301-571-000. For purposes of constructing the Ninoy Aquino International Airport Passenger Terminal III (''NAIA-IPT3 Project''), petitioner entered into a subcontracting agreement with the Philippine International Air Terminals Company Incorporated (''PIATCO'') denominated as "On-shore Construction Contract" for the construction of the Ninoy Aquino International Airport Passenger Terminal III (''NAIA-IPT3 Project''). 2 PIATCO is a corporation duly organized and existing under the laws of the Republic of the Philippines and duly registered with the Philippine Economic Zone Authority (''PEZA'') as an Ecozone Developer/Operator evidenced by its Certificate of Registration No. EZ-98-01.3 On April 25, 2001, petitioner filed its 1st Quarterly VAT Return for taxable year 2001 declaring input VAT in the amount of P121,542,661.27: 4 Zero Rated Sates/Receipts P794.243.609.43 Input Tax Carried Over from Previous Quarter P472,273,978.46 p 74,315,259.31 Domestic Purchases for the Quarter 165.558.98 47,227,401 .96 Purchases Not Qualified for Input Tax Total Purchases P472 439 537 44 p 121 542,661 .27 Total Available Input Tax cp121 542 661 27) Excess Input Tax On May 25, 2001, petitioner amended its 1st Quarterly VAT Return for taxable year 2001 reflecting a nil input tax carried over from previous quarter:5 Zero Rated Sales/Receipts P794,243.609 .43 Input Tax Carried Over from Previous Quarter P472,273 ,978 .46 p 47,227,401 .96 Domestic Purchases for the Quarter 165.558.98 Purchases Not Qualified for Input Tax Total Purchases P472 439 537 44 1 Par. 1, Joint Sipulation of Facts and Issues, Rollo, p. 56 2 Par. 4, Joint Stipuation of Facts and Issues, Rollo, p. 57 3 Par. 5, Joint Stipuation of Facts and Issues, Rollo, p.57 4 Exhibit c 5 Exhibit D

DECISION C.T.A. CASE NO. 6653 Page 3 Total Available Input Tax p 47.227.401 .96 Excess Input Tax cp47 227 401 96) On November 15, 2001, petitioner again amended its 1st Quarterly VAT Return for taxable year 2001 increasing its input VAT to P48,953,903.72, thereby increasing its excess input taxes to P48,953,903. 72: 6 Zero Rated Sales/Receipts P794.243 .609.43 Input Tax Carried Over from Previous Quarter P489,538 ,997 .98 p 48,953,903.72 Domestic Purchases for the Quarter 165,558.98 Purchases Not Qualified for Input Tax p 48,953,903.72 Total Purchases P489 704 556 96 (p48 953 903 72) Total Available Input Tax Excess Input Tax For the third time, on September 10, 2002, petitioner amended its 1st Quarterly VAT Return for the taxable year 2001, again increasing its input taxes to PS2,240,921.72, thus, correspondingly increasing its excess input VAT as follows: 7 Zero Rated Sales/Receipts P794.243,609.43 Input Tax Carried Over from Previous Quarter P522,409 ,177.95 p 52,240,921 .72 Domestic Purchases for the Quarter 165,558.98 Purchases Not Qualified for Input Tax p 52,240,921 .72 Total Purchases P522 574 736 93 (p52 240 921 72) Total Available Input Tax Excess Input Tax Through an Application for Tax Credits/Refunds and a letter filed with the Bureau of Internal Revenue District Office No. 51, Pasay City on November 5, 2002,8 petitioner requested for the refund or issuance of a tax credit certificate in the amount of PS2,240,921.72 representing its reported unutilized excess input VAT for the first quarter of 2001. The inaction of the respondent on its daim prompted the petitioner to elevate its case before this Court on April 11, 2003. (� 6 Exhibit E 7 Exhibit F 8 Exhibits H & I

DECISION C.T.A. CASE NO. 6653 Page 4 On June 9, 2003, respondent filed by registered mail his Answer, raising the following Special and Affirmative Defenses: "5. Petitioner's �lleged clllim for refund/issu�nce of l:llx credit certificllte is still subject to lldministnltive routin�ry investiglltion/exllmin�tion by the respondent's Bul'ellu; 6. Petitioner's clllim for refund/l:llx credit in the �mount of P52,240,921.72 representing Petitioner's �lleged unutilized �nd un�pplied input VAT for the first qllllrter of tiiX6ble ye~~r 2001 wel8 not fully substtlntillted; 7. Petitioner's Slife of goods �nd services in fllvor of PIA TCO is not subject to VAT 6t zero petT:Jent r�te under Section 108{8)(2) of the 1997 T�x Code; B. It is incumbent upon the petitioner to show tllllt it h�s complied with the provisions ofSection 204 in rellltion to Section 229 of the TIIX Code; ��mended; 9. Clllims for refund 618 construed strictly llfl�inst the cl�im�nt for the Slime plll'fllkes ofthe n6tul8 ofexemption from tiiXIItion (Commissioner of Intern�! Revenue w. Ledesm~~, G.R. No. L-13509, J6nllllry 34 1974 31 SCRA 95) �nd liS such, they 618 looked upon with the disfllvor (Westem Nino/co Corp. w. Commissioner ofIntem�l Revenue, 124 SCRA 121); 10. T�xes p11id �nd collected 618 presumed to h�ve been mllde in IICCOrdilnce with l�w �nd regullltions, hence, not refund�ble; �nd 11. In �n IICtion for l:llx refund/credit, the burden ofproof is on the l:llxp11yer to estllblish its right to refund �nd fllilu18 to lldduce sufficient proof is f��l to the IICI:ion for tllx refund/credit.., The parties mutually agreed that the sole issue to be resolved by this Court is whether or not petitioner's unutilized input tax in the amount of P52,240,921.72 incurred in the first quarter of taxable year 2001 were duly substantiated by documentary evidence to entitle the petitioner to its claim for refund or issuance of a tax credit certificate. 10 Petitioner asserts that it is entitled to the claim for refund or issuance of a tax credit certificate of unutilized input VAT on its zero-rated sales to a PEZA registered enterprise pursuant to Sections 108(8)(3), 110(8) and 112(A) of the 1997 National Internal Revenue Code (''NIRC''), 9 Rollo, p. 34 10 JOint Stipulation of Facts and Issues, Rollo, p. 59

DECISION C.T.A. CASE NO. 6653 Page 5 Section 3 Of of Revenue Memorandum Circular No. 74-9911 and Bureau of Internal Revenue VAT Committee Ruling No. 011-2003, 12 which read: "SEC. 108. V11/ue-Added TIIX on Sll/e of Services 11nd Use or LeiiSe of Properties. - XXX XXX XXX (B) Tr1111S11Ctions Subject to Zero Percent (0%) R11te. - The following services performed in the Philippines by VAT-registered persons sh11/l be subject to zero percent (0%) r~~te: (1)xxx (2)xxx (3) Services rendered to persons or entities whose exemption under speci11/ l11w or inl:emlltioiJIII llflreetnents to which the Philippines is 11 sigiJIItory effectivelysubjects the supply ofsuch services to zero percent {0%) rllte. � "SEC. 110. TIIX Credits. - (A) XXX (B) Excess Output or Input TIIX. - I f11t the end of11ny tllx11ble qUIIrter the output tllx exceeds the input fiiAI. the excess sh111/ be p11id by the VAT-registel ed pei'SOn. If the input l:llx exceeds the output t11x, the excess sh11/l be c11rried over to the succeeding qUIIrter or qUIII'tels. Any input t11x llttributllb/e to the purchllse of Cllpitlll goods or to zem-rllted Sllles by 11 VAT-registered pei'SOn tniiY 11t his option be refunded or credited llfllllnst other intern11/ nwenue tllxes, subject to the provisions ofSection 112. � ''SEC. 112. Refunds or TIIX Credits ofInput TIIX. - (A) Zero-Tilted or EHectively Zero-Tilted Sllles. -Any VAT registered pei'SOn whose s11/es 11re zero-Tilted or elfed:ive/y zero-rllted tniiY within two (2) ye11rs lifter the close of the tllx11ble qUIIrter when the Sllles wetw IJJIIde, 11pp/y for the issu11nce of 11 tllx credit certif"ICIIte or relilnd of creditllb/e input tJJx due or p11id llttributllble to such Sllles except trllnsltioiJIII input fiiAI. to the extent thllt such input l:llx hilS not been 11pp/ied llflllinst output l:llx: x x x' REVENUE MEMORANDUM CIRCULAR NO. 74-99 Section 3. TIIX Trelltment ofSll/es Hilde by 11 VAT Registered Supplier fmm the Customs Territory, to 11 PEZA Registered Enterprise. - XXX XXX XXX (3) In the finlllllnll/ysis, 11ny Sllle ofgoods, property or sewic:es mllde by 11 VAT registered supplier from the Customs Territory to 11ny registered enterprise oper~~ting in the ecozon4 reg~~rdless of the clllss or type of the /litter's PEZA registrlltion, Is IICtulll/y quill/lied11nd thus leg�lly entitled to the zem percent (0%) VAT. Acc:ordingly, 11/1 Sllles ofgoods or pmperty to such enterprise miKie by 11 VAT registered supplier fro the Customs Territory sh11/l be trellted subject to 0% VAT, pursullnt to Sec. 106{A)(2){11) {5), NIRC, in rel11tion to ART. 77(2) of the Omnibus Investments Code, while 111/ s11/es of 11 Dated October 15, 1999 12 Exhibit J, dated January 13, 2003

DEQSION C.T.A. CASE NO. 6653 Page 6 services to the Sllid enterprises, mlKie by VAT registered suppliers from the Customs Territory, sh111/ be tTellted effectively subject to the 0% VAT, purswmt to Section 108{8){3), NIRC, in rellltion to the provisions of R.A. 791611nd the "Cross BorderDoctrine"'ofthe VAT System. VAT COMMITTEE RULING NO. 011-2003 "Therefore, the Sllle ofgoods 11nd services rendered by T11ke1111k11 to PIATCO 11re subject to zero percent (0%) VAT 11nd requires no prior 11pprov11/ for zero-Tilting bllsed on RHC No. 74-99. Accordingly, T11ken11k11 is entitled to refund or the issu11noe of 11 l1lx credit certificllte {TCC) covering 111/ its IICCIImulllted VAT input taxes in rellltion to its services ~endered to PIA TCO 11nd from its purchllse ofgoods 11nd services from duly registered VAT t11xp11yers, duly supported by 11 VAT invoice or offickl/ receipt conforming with the requirements of Section 113 11nd 237 of the T11x Code of1997; provided thllt the 11pp/iclltion for refund or issUIInce of11 T11x Credit Certificllte {TCC) is mllde within tiMJ ye~~rs lifter the dose of the l:llx11ble qUIIrter when the Sllles went mllde."' Based on the above, services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subject the supply of such services to zero percent (0%) VAT.13 Thus, petitioner's sales of services to PIATCO are subject to zero percent (0%) VAT. Accordingly, petitioner's reported sales for the first quarter of 2001 in the amount of P794,243,609.43 which are duly supported by VAT offidal receipts14 are subject to zero percent (0%) VAT. We now determine whether petitioner's unutilized input taxes in the amount of P52,240,921. 72 incurred in the first quarter of taxable year 2001 was duly substantiated by documentary evidence to entitle petitioner to its claim. Upon verification of the suppliers' invoices and official receipts submitted by petitioner,15 the commissioned independent CPA, Mr. Richard Dy Go, found that out of the total claimed input VAT of P52,240,921.72, only the amount of P47,402,168.78 was duly substantiated and the remaining amount of P4,838,752.94 should be disallowed due to the following reasons: 16 13 See also TAKENAKA CDRPORATION PHIUPPINES BRANDi VS. COMMISSIONER OF INTERNAl.. REVENUE, CTA CASE NO. 6654, September 7, 2005 14 Exhibits KK-600-2, KK-601-2, KK-602-2, KK-603-2, KK-604-2, KK-605-2 & KK-606-2 15 Exhibits KK-1 to KK-461-3 16 Exhibit K

DECISION C.T.A. CASE NO. 6653 Page 7 Item Nature Reference Amount 1 Input VAT on purchases of goods not claimed in the period when the supporting VAT invoices are dated. K-2 P2,429,821 .10 K-3 2 373 679.42 2 Input VAT on purchases of goods supported by K-4 12,324.84 VAT invoices with stamoed "TIN VAT" K-5 9 545.46 K-6 5,090.91 3 Input VAT on purchases of services with K-7 2,236.36 supporting documents not in the name of the K-8 1,678.00 K-9 1,561 .74 Company K-10 1537.84 4 Input VAT on purchases of goods supported by K-11 750.00 invoices without "BIR oermit to orint� K-12 527.27 P4,838,752 .94 5 Input VAT on purchase of services supported by VAT invoices with stamoed "TIN VAT" 6 Input VAT on purchase of goods supported by invoices printed after January 1, 1996 marked with the suppliers' "TIN V" and not "TIN VAT". 7 Input VAT on purchase of services supported by Non VATORs. 8 Input VAT on PUrchases of aoods supported by VAT Invoices not In the name of the Company. 9 Input VAT on purchases of goods without supporting documents. 10 Input VAT on purchases of services not claimed in the same quarter when the supporting VAT ORs are dated. 11 Input VAT on purchases of goods supported by invoices with pre-printed "TIN V" and stamped "TIN VAT". A careful examination of the said report and petitioner's supporting documents shows that the recommended substantiated input VAT of P47,402,168.78 shall be further reduced by the following input taxes in the amount of P1,972,636.49: (a) Purchase of service not supported by an official receipt. VOUCHER SUPPUER AMOUNT INPUT VAT MARKED AS p 253,129.80 p 23,011 .80 EXHIBIT 177,594.12 16,144.92 61,631 .09 5,602.83 KK-12 PLOT 2,933 .34 266.67 KK-43 PLOT 1,710.50 155.50 KK-46A Hankyu lnt' Transport Phils 676.00 61 .45 KK-50 Floro Blue Printing 146.00 13.27 KK-60 Kenta Japanese Restaurant 408.50 37 .14 KK-62 Floro Blue Printing 103.50 9.41 KK-71 Kodak Express KK-76 Floro Blue Printing KK-77 Kameraworld, Inc.

DECISION C.T.A. CASE NO. 6653 Page 8 KK-85 Aoro Blue Printing 150.00 13.64 KK-88 Sea Food Wharf 20 ,218 .78 1,838.07 KK-92 Floro Blue Printing KK- 158 Peking Garden 1,169.50 106.32 KK-181 VSL Philippines 13,543.52 1,231 .23 KK-199 PLOT 227,362.34 20,858.93 KK-202 Hei Chin Rou 294,000.85 26,727.35 KK-205 Floro Blue Printing KK-219 Floro Blue Printing 3,500.00 318.18 KK-220 Jade Garden 50.00 4.55 KK-254A Hotel Taxicab Co. 50.00 4.55 KK-255 Hotel Taxicab Co. KK-262 Floro Blue Printing 13,530.00 1,230.00 KK-407 Floro Blue Printing 1,080.00 98 .18 KK-410 Floro Blue Printing 500 .00 45 .45 KK-422 Juju-tei Restaurant 706.53 64 .23 KK-422 Juju-tei Restaurant 220 .99 20 .09 KK-424 Floro Blue Printing 226 .49 20 .59 KK-429 Floro Blue Printing 2,050.00 KK-431 Floro Blue Printing 2 ,800 .01 186.36 KK-439 Pharoah 568 .48 254.55 KK-441 Athena Disco 185.02 KK-442 DM Consunji 568 .59 51 .68 Subtotal 9 ,595 .96 16.82 3 ,025 .99 51 .69 872.36 514,265.33 275.09 p 1,607,701 .23 47 180.31 p 146 773.21 (b) Purchase of goods not supported by an invoice KK-40 CADD Shoppe, Inc. p 17,500.00 p 1,590 .90 EXHIBIT SUPPLIER REFERENCE INVOICE/O.R. INPUT VAT NO AMOUNT (c) Purchase of goods supported by TAN invoice, stamped TIN-VAT KK-17- 1 to 4 OMNICO Consortium various P19,392,128.23 P 1,779,094.35 (d) Purchase of goods/services not in the name of the company. KK 86-1 Anson Emporium 0913785 p 99.00 p 9.00 KK 200-1 Pharoah 77979 2,285.82 KK 201-1 Pharoah 77851 25 ,144. 00 2,106.36 KK 203-1 Motorists House 014807 KK207-1 South Supermarket 11473 23 ,170.00 6.64 KK 212- 1 LBC Express 539236 28 .65 KK 223-1 LBC Express 539239 73.00 KK228-1 Motorists House 007987 6.82 KK 233-1 Kameraworld 315. 15 6.82 KK 243-1 PacifiC Internet 6454232 4.18 KK-246-1 Motorists House 43835 75.00 43 .64 KK-246-1 Motorists House 066122 171 .00 KK 259-1 Motorists House 008171 75.00 12.45 221091 6.64 46.00 45 .45 480.00 1,881 .00 137.00 73.00 500 .00

DECISION C.TA. CASE NO. 6653 Page 9 KK 391-2 Pro Golf Ventures, Inc 94211 7 ,494 .70 681 .34 KK 408-2 South Supermarket 14674 314 .82 28 .62 KK 41~1 Pharoah 78087 KK423 RYG Enterprises 00340 20,862 .49 1,896.59 KK 433-1 Anson Emporium 0952211 330.00 30.00 KK434-1 South Supermarket 16182 Subtotal 2,635.05 239.55 75437 349.80 Shld be 3H!O p 84,055.01 p 7 641 .37 76252 (e) Overstated input tax KK-290-30 Steel Asia Manufacturing Corp. p 358,237.01 p 32,567.01 KK-290-70 Steel Asia Manufacturing Corp. 212,737.00 19,339.73 p 145,500.01 p 13,227.28 KK-290-89 Steel Asia Manufacturing Corp. 76265 p 58,345.50 p 5,304.14 4,961 .55 451 .05 p 53,383,95 p 4,8:23.09 p 211,358.64 p 19,214.42 163,503.68 14,863.97 p 47 854.96 p 4 350.45 p 246,738.92 p 22,430.82 (f) Date with erasure KK 357-1 Bakahan at Manukan Eatery 19553 p 4,931 .96 p 448 .36 (g) Purchase of goods without supporting document p 97,956.41 p 8,905.13 Steel Asia Manufacturing 781 .94 71.09 143.76 1,581 .40 41,626 .39 3,784.22 19,286.12 1.Z:23.28 p 161,232.26 p 14 657.48 TOTAL P21 ,514,287.61 P1,972,636.49 Therefore, only the claimed input VAT amounting to P45,429,532.29 (P47,402,168.78 less P1,972,636.49) was properly supported by VAT invoices/offidal receipts. However, the independent CPA also noted that petitioner issued VAT Official Receipts in the amount of P401,454.61 on certain receipts which might be potentially subjected to output VAT. According to petitioner's Finance and Accounting Manager, Mr. Forcadela, these receipts merely

DECISION C.T.A. CASE NO. 6653 Page 10 represent refunded rental deposits, thus, it was not declared for VAT purposes. Since a VAT offidal receipt was issued, the commissioned CPA computed an output tax in the amount of P36,496.87. 17 We agree with the findings of the commissioned independent CPA. Hence, the output VAT of P36,496.87 shall be deducted from the substantiated input VAT of P45,429,532.29, thereby leaving a refundable excess input VAT of P45,393,035.42 which are all attributable to zero-rated sales. WHEREFORE, premises considered, the Petition is partially GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE to petitioner in the amount of Forty Five Million Three Hundred Ninety Three Thousand Thirty Five Pesos and 42/100 (P45,393,035.42), representing unapplied or unutilized input taxes for the first quarter of taxable year 2001. SO ORDERED. ~~.~ ERNESTO D. ACOSTA Presiding Justice WE CONCUR: (On Leave) CAESAR A. CASANOVA Associate Justice 17 Exhibit K, CPA's Report, p.S

DEOSION C.T.A. CASE NO. 6653 Page 11 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 was assigned to the writer of the opinion of the Court's Division. ~ \ -,- "� ~ ERNESTO D. ACOSTA Presiding Justice Chairman, First Division