CTA Case No. 5152 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY INDUSTRIAL INSPECTION (INT'L.) INCORPORATED, Petitioner, - versus - C.T.A. CASE NO. 5152 LIWAYWAY VINZONS CHATO in her Promu l gated : capacity of the as The Commissioner �r... Bureau of Internal MAY 1 9 1997 Revenue, Respondent. X-- -------------------------X D E c. s 0 N Before us is a petition for review of the decision of respondent Commissioner of Internal Revenue denying the Request for Reconsideration of a deficiency business tax (VAT) assessment amounting to P46,677.09 for the third and fourth quarter of 1989. Petitioner is a VAT registered domestic corporation organized and existing under the Philippine laws. It is, engaged in the practice of general engineering and contractorship services, specia Iizing in radiographic inspection, ultrasonic thickness gaging, Iiquid penetrant testing and ultrasonic flow detection. On September 28, 1992, petitioner received an Assessment Notice (Exh. G) with accompanying computations from the

DECISION - C.T.A. CASE NO. 5152 - 2- respondent, requiring it to pay the amount of P46,677.09 representing deficiency value added tax inclusive of urcharges, interests and compromise penalty for the third and fourth quarters of 1989. The assessment was computed as foIIows: 3rd Qtr. 4th Qtr. Gross receipts P3,181,738.10 P2,604,819.40 Add: DisaIIowances 125,605.32 91,220.61 Total gross receipts P3,307,337.42 P2,696,040.01 per inv. Tax due thereon .. p 330,733.74 p 269,604.00 Less: Tax paid per return 252,555.18) (172,757.10) Input tax 65,618.03) ( 87,724.84) Deficiency business tax p 12,560.53 p 9,122.06 Add: 25% surcharge 2,280.51 3,140.13 5,798.12 20% interest 2,000.00 Compromise penalty 8,775.74 3,000.00 Total Amount Due & p 27,476.40 p 19,200.69 CoIIectibIe ====:= : == Petitioner traced the origin of the assessments as those coming from the disallowance of the services rendered for ALCORN PRODUCTION (PHILIPPINES), INC., and HYUNDAI ENGINEERING & CONSTRUCTION co. ' LTD., which according to petitioner are exempt and effectively zero- rated transactions, respectively. On October 28, 1992, petitioner filed a request for reconsideration with the following contentions: (pp. 220- 225, BIR records)

DECISION - C.T.A. CASE NO. 5152 -3- 1. The gross receipts from the services rendered as subcontractor to Hyundai Engineering & Construction Co., Ltd., a contractor engaged by Asian Development Bank (ADB> to construct the ADB Building, is tax exempt. We quote the explanation of petitioner, to wit: "When the Phi I ippine Government and the Asian Development Bank agreed pursuant to Section 6 of the supplementary agreement dated December 28, 1984 and reiterated in paragraph 16 of the Memorandum of Understanding dated March 20, 1985, exempting all transactions related to the new ADB Bldg. Project from the .. payment of VAT, then this exemption must extend to the herein Protestor simply because as a subcontractor, it is performing its services in favor of the ADB pon the behest of Hyundai. Again to assess the Protestor of the value added tax pursuant to the contract it performed in favor of Hyundai and in the same vein exempt Hyundai from paying the same assessment is opposed to the equal protection clause of the Constitution." (p. 221, BIR record) 2. The gross receipts for services rendered for AIcorn Production (PhiIs.), Inc., an entity contracted by the Phi I ippine Government to drill oi wells in strategic sites within the Philippine territory, is tax exempt. This position is anchored on VAT Ruling 516-88 (Exh. H, p. 167, CTA rec.), dated November 16, 1988, which In portion states that: "In reply, please be informed of the following:

DECISION - C.T.A. CASE NO. 5152 - 4- 1. By virtue of FlAB Resolution No. 19- 87, PNOC Marine Corporation is exempt from VAT, and should not incorporate VAT on its billings to Alcorn (Production) Philippines, Inc. and to all other petroleum service contractors it transacts with." The said exemption is based upon the Fiscal Incntives, dated June 24, 1987, restoring the tax and duty exemption to subcontractors and petroleum service contractors. The petitioner, submitting that it falls under the category of a subcontractor, is exempt from the payment of 10% VAT for services rendered for Alcorn Philippines. On August 27, 1994, petitioner through counsel received the decision of the herein respondent, dated February 7, 1994, denying the request for reconsideration and reiterating her demand for the payment of the deficiency business tax (VAT). The pertinent portion of the decision is quoted hereunder, to wit: "In brief, hereunder is a rundown of your client's total receipts which this Bureau's examiner disaIIowed after InvestIgation and for which reason has slapped thereto a deficiency tax of P46,677.09 inclusive of increments: l{ Name of Customer Amount 1� From Alcorn Production (Phils.), Inc. p 36,840.00 2. Hyundai Engineering & .l Construction Corporation 152,188.00 3. Economic Support Fund Secretariat 20,300.00

DECISION - C.T.A. CASE NO. 5152 -5 - 4. Vincotte I nternationa I , Limited 125,191.68 Total Amount Disallowed P334,519.68 Records of the case disclose that your c I ient has not app I ied for nor obtained from the B I R an application for the imposition of "zero-rate" for the transactions under consideration. After careful review of the facts of the case as wei I as the laws, rules and regulations applicable thereto, we come to conclude that your position cannot withstand the test of legal scrutiny for the following reasons: 1. Under Section 8 of Revenue Regulations 5-87, implementing the Value-Added Tax Law, it states: "Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an application in a form prescribed therefor with the Commissioner of I nternal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer sha I I remain va I id unti I revoked." 2. This requirement has been notably reiterated in B I R Rulings 513-88 and 088-90, the facts of which bear striking semblance to your cae, and we quote the Identical dispositive portions thereof. "xxx In other words, billings by the seller of goods or services who executed the projects funded by ESF shal not Include the value-added tax: Provided, however, that the seller of said goods or services shall first apply for zero rating In accordance with Section 9(b) of Revenue

DECISION - \ C.T.A. CASE NO. 5152 -6- Regulations No. 5-87". (Underscoring Supp Iied) In the light of the foregoing, we sustain and reiterate the validity of the examiner's Imposition re deficiency business tax liabilities (value-added tax) against your cl lent, x x x. this This constitutes the final decision of 267, Bureau on the matter." (Exh. 4, pp. 266- BIR reo.> The request for reconsideration having been denied by the respondent Commissioner, petitioner filed this '. case on September 26, 1994. Based on the foregoing facts, we are obi iged to focus ourselves with the issue of whether or not the petitioner is a tax exempt or a zero-rated taxpayer with regard to its gross receipts from the services rendered to Alcorn Production (Phi Is.), Ino., and Hyundal Engineering & Construction Co., Inc.. Sections 102(a)(3) and 103(u) of the Tax Code provide: "Sec. 1 02. Va I ue-added tax on sa I e of' services. - (a) Rate and base of tax. There sha I I be Ievied, assessed and co I Iected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services. x x the x Provided That following services performed in the Philippines by VAT-registered persons shal I be subject to 0%: XXX

DECISION - C.T.A. CASE NO. 5152 -7 - (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 rate." "Sec. 103. Exempt Transactions. - The following shall tax: be exempt from the value-added XXX (u) Transactions which are exempt under specia I I aws or internati ana I agreements to which the Philippines is a signatory." The Value-Added Tax implementing regu Iat I on, Revenue '. Regulations No. 5-87, under Sections B(a), 8(c)(2), 8(d}, 9(a) and 9(b)(16) provide the following: "Sec. 8. Zero-rating. <a> In general. A zero-rated sale is a taxable transaction for value-added tax purposes. A sale by a VAT registered person of goods and/or services taxed at zero-rate sha I I not resu It in any output tax. The input tax on his purchases of goods and services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations. XXX (c) Zero-rated sales of services. - The fo I Iowl ng services rendered by VAT-registered persons are zero-rated: XXX (2) Services rendered to persons or entities which are effectively zero-rated under special laws or international agreements. In this case, if under the law or agreement, it Is not only the entity that is exempt from taxes but also its suppliers, the sales of services to

DECISION - C.T.A. CASE NO. 5152 -8- such entity are effectively zero-rated. The example given above with respect to sale of goods to U.S. mi I itary faci I ity and the Asian Development Bank shal I also apply to those rendering services. (d) Application for the imposition of zero rate. - Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shal I ,file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shal I remain valid until revoked." #. "Sec. 9 Exemptions. - (a) In general. .- - An exemption means that the sale of goods or services is not subject to value-added tax (output tax). The � se I Ier is not a I Iowed any tax credit on VAT (input tax) previously paid. The person making the exempt sales of goods or services shaII not separate I y bi I I any output tax to his customers because the said transaction is not subject to VAT. XXX (b) Exempt transactions. - XXX (16) Transactions which are or exempt under special laws the international agreements to which Philippines is a signatory." Petitioner bas I ca I I y re I ied on the agreement entered into between the Phi I ippine Government and the ADB per the "Memorandum of Understanding Between the Government of the Republic of the Philippines and the Asian Development Bank Regarding the Headquarters of the Asian

DECISION - C.T.A. CASE NO. 5152 -9 - Development Bank", which states in part, under Section 16 Title IV thereof, that: "IV. PROCUREMENT 16. Pursuant to Section 6(a) of the SuppIementary Agreement, aII materiaIs, equipment, fixtures, furnishings, supplies and .services required for the Project (the Project Goods) are exempt from aII taxes, custom duties and other levies. x x x." <Exh. E-1, p. 148, CTA record; Underscoring suppIied.) This Memorandum of Understanding, effective March 20, I� . 1985, has been duly ratified by the late Pres. Ferdinand E'. Marcos. <Exh. E, p. 137, CTA rec.) Furthermore, petitioner pointed out that the Office of Energy Affairs issued OEA CircuIar No. 89-01-01 series of 1989, dated December 22, 1989, signed by W.R. Del a Paz, Executive Director, informing all petroleum service contractors and sub-contractors that the VAT Committee of the Bureau of InternaI Revenue (BIR) had issued VAT Ruling No. 516-88, November 16, 1988, which ruled that: �� i �: P, t r pIe ni y b q ontracto r s . a, r e p * e pt . f r om : P h rr?: : ').!T.from ts qros::�tl.ps for aery J. p e . � , p J �:: l:!v;...: ' t h � � rR ! em � . servIce contractas �s lrtue o f : t e ' F I6'I hcent ives resolution' under Review Board (FlAB) FlAB Resolution No. 19-87 dated June 24, 1987, restoring the tax and duty exemption (including VAT) to subcontractors and petroleum service contractors subject however to the terms and condition of P.O. 1354." (p. 261, BIR records.)

DECISION - C.T.A. CASE NO. 5152 - 10 - We shall tackle each of the disallowance ruled by the respondent, to wit: (1) Alcorn Production (Phils.), Inc. p 36,840.00 (2) Hyundai Engineering & Construction Corporation 152,188.00 (3) Economic Support Fund Secretariat 20,300.00 (4) Vincotte International, Limited 125,191.68 T0 T A L P334,519.68 (1) ALCORN PRODUCTION (PHILS.), INC. - P36,840.00 With respect to the services rendered for Alcorn Production (Phlls.), Inc., this Court agrees with the petitioner. Therefore, the decision of respondent disallowing the receipts amounting to P36,840.00 iS incorrect. Section of P.O. 1354 [Imposing Final Income Tax on Subcontractors and AI Jen Employees of S e v l c e. Contractors : ;� �.';<'�)' ; : : : � :>:: ' ,;,; ; �;,: ; ' .. .� �: ' . . > ' ... . : �. � !l!:;f; ln �; '��, ' ,�: �: :; �.�, : : ; p S u b co n t:� r; ': a o t (' r , t:ngaQq I h. Petrp I f3 u:'11m1,!�. .o�;, pH� ij:";, A- t'� I on, ;. �\ .. t: h,; e;.� i 4. .", � , �,.: �t' : , .. \ �.:_� �� !t:. . . ; �; .r:,: P l ! pP; '! , r r _! ent i ft I .p :p r e :, l ',.;;< P r.l - :� 1 , 1978, .provides: .� 1'-t. .. "SECTION 1. Tax on subcontractors. Every subcontractor, whether domestic or n foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight

f. DECISION - C.T.A. CASE NO. 5152 - 11 - percent (8%) of its gross income derived from such contract, such tax to be in Iieu of any and a I I taxes, whether nati anaI or IocaI: x x x." (Underscoring supplied.) Petitioner, as subcontractor of Alcorn Production (Phils.), Inc., an entity engaged in petroleum operations in the Philippines, is already subject to the 8% final income tax. Therefore, this tax shall be paid in ieu o1' a I I taxes (including the VAT) pursuant to P.O. 1354. This was strengthened by VAT Ruling No. 516-88, November 16, 1988 (Exh. H, pp. 166-167, CTA record) and OEA .. Circular No. 80-01-01, December 22, 1989, (p. 261, BIR record) holding that petroleum subcontractors are exempt from the payment of the VAT from its gross receipts for services paid by the petroleum service contractors. In all aspect, petitioner should not be held IiabI for the VAT for services rendered to Alcorn, being a contractor engaged in petroleum operations in the Philippines. al'iect . . ��� � I (Exh. E), the Philippine Government, the procurement of !. supplies and services required for the project (which is the deveIopment of a new headquarters bu I I ding for the bank)

DECISION - C.T.A. CASE NO. 5152 - 12 - are exempt from alI taxes, customs duties and other levies. In addition, Section 8(c)(2) of Rev. Regs. No. 5-87, explicitly provides that the sale of goods and services to the Asian Development Bank shal be considered effectively zero-rated under special laws. However, there is a hitch. Section 8(d) of the said regulation also provides for an additional requirement, that is, the need to file an application with the Commissioner of .. Internal Revenue justifying the imposition of zero-rate on the said transactions. In the case at bar, petitioner failed to file the requIred appIication needed to be entitIed to a zero-rate VAT. A close scrutiny of the BIR records would reveal that petitioner has not proven by documentary evidence that Indeed it has applied for a zero-rate on this kind of transaction with Hyundai Engineering and Construction , Therefor. the gross receipts from Hyundal . '� .; r� h l ri and n$)1 er Q Co. 1 l-td. I subjec j corstrup lon �:: : �. t. �� � ; -( - " .' . should be '' . ;' I; � :1: ; ' �' t HiE! V J. '� .' ' ,. ' I �. ( 3) .P:.. '2'.:� 0.: .',300.00 and (4) V,IN(;OTT INTRNATIONAL, LTD. - P125,191.68 . �:..' The d i saIIowances on the gross receipts from the Economic Support Fund Secretariat and Vincotte

DECISION - C.T.A. CASE NO. 5152 - 13 - International, Ltd. remain to be valid, there being no evidence presented by petitioner to support its protest dn these disallowances. The same is therefore presumptively correct <Fed. Tax Practice, par 8-6, p ol 201; C i. Bohol v. Land Transp. Co., GR L-13099, Apri I 29, 1960). Per this Court's computation, the deficiency business tax (VAT) Iiabi Iity of the petitioner should be as follows: ' .. 3rd Qtr. 4th Qtr. Gross receipts P3, 181,738.10 P2,604,819.40 Add: Disa I Iowances 901765.30 891220.60 Total gross receipts P3,272,503.40 P2,694,040.00 per inv. Tax due thereon p 327,250.34 p 269,404.00 Less: Tax paid per 252,555.18) ( 172,757.10) return 651618.03) Input tax ( 87,724.84)' Deficiency business tax p 9,077.13 p 8,922.06 I Add: 25% surcharge 21269.28 2,230.51 Total Amount Due & Collectible p 11,346.41 p 11,152.57 . Compromise P!Hlli I ty shou Id not ! !f1 P seq e to t. h'. e �!, I r ., t �� �,; ;I II '� .' ab enoe qf n ,. agrl9mnt :f, r. eel�: y� , enterf'!d Into n b etw ee . \ . ! :. �: ) , :; . . v � � � . ( ' ; ':' ' : \ .: :�� :�' . :.. , ; : r� . .:: : t pelitlone'and r�ponent . I ' �: . . . qo' lepor r i n t e r na l .. Rev enue ' '- � �. , ' i ! .' �l " ; �. ;' : �. .� � � v. UST, GR L-11274 & L-11280, Nov. 28, 1958; M.A. Arick v. Comm., CTA 1679, May 30, 1969). WHEREFORE, in view of all the foregoing, the decision of respondent, dated February 7, 1994, is hereby

DECISION - C.T.A. CASE NO. 5152 - 14 - MODIFIED. The petitioner is hereby directed to pay the respondent the amount of P22,498.98, representing dficiency busines (value-added) tax inclusive of surcharge for the third and fourth quarters of 1989, plus 20% Interest per annum from the date prescribed for payme.nt unti I its fu I I payment pursuant to Section 249 of the National Internal Revenue Code. SO ORDERED. Q_, .. ERNESTO D. ACOSTA Presiding Judge WE CONC,UR: ' /Z RAMON 0. DE CEfl.T F CATigN . . .. .. .; nr?,r .. . � ;r! tr r! . f' ! . s .. ;achR d� rM'�f-P:PrJ m(?f' ,r rtr r.,f!,!", Tax Appeals fn accordnce with Se6tlon 1j, Article Vi 1! of the Constitution. .C2 ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals