PSI DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

I REPUBLIC OF THE PHILIPPINES Court a_{Tax Appeals QUEZON CITY ~ ENBANC PSI DEVELOPMENT C.T.A. EB NO. 318 (C.T.A. CASE NO. 6926) CORPORATION, Present: Petitioner, -versus- ACOSTA, Presiding Justice, CASTANEDA, JR., BAUTISTA, UY, CASANOVA, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, APR l 0, 2fi08 4~.4;P.c~- Re~pondent. /,' 1.1'"" / ' .?1) � X ------------------------------------------------------------------------------------ X DECISION PALANCA-ENRIQUEZ, J.: THE CASE This is a Petition for Review filed by PSI Development Corporation (hereafter "petitioner") under Section 11 ofRA 9282 (An Act Expanding the Jurisdiction of the Court of Tax Appeals) in relation to ~ .. � 391

.., ' C.T.A. EB CASE NO. 318 2 (C.T.A. CASE NO. 6926) DECISION Rule 43 ofthe 1997 Rules ufCivi/ Procedure, as amended, which seeks to set aside the Decision dated July 11, 2007 rendered by the First Division of this Court in the C.T.A. Case No. 6926, the dispositive portion of which reads as follows: "WHEREij'ORE, the Petition for Review is hereby DENIED for insuifidency of evidence. SO ORDERED." Petitioner's Motion for Reconsideration and Supplement to the Motion For Reconsideration were denied by the First Division in its Resolution dated September 17, 2007, the dispositve portion of which reads as follows: "WHEREl"i'OltE, Petitioner's Motion for Reconsideration and Supplement to the Motion for Reconsideration are hereby�DENIED for lack of merit. SO OIID.EH.~O." THI~ FACTS The facts, as culled from the records, are as follows: Petitioner is a domt;stic corporation duly organized and existing under the laws of the Republic of the Philippines, authorized to engage in high ri~e development and construction of real estate of all kinds, and (W 392

.. ) I f C.T.A. EB CASE NO. 318 3 (C.T.A. CASE NO. 6926) DECISION also manages, operates, or disposes buildings, houses, apartment and other immovable, whdher as principal, agent or broker, with principal address at New Medical City, Meralco Complex, Ortigas Center, Ortigas Avenue, Pasig City. Respondent, on lhe other hand, IS the duly appointed Commissioner of Internal Revenue with exclusive and original jurisdiction to (i) interpret the provisions of RA 8424 ( The Tax Code); (ii) to decide disputed assessments; (iii) to refund internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the Tax Code and other laws administered by the Bureau of Internal Revenue, subject to the exclusive appellate jurisdiction ofthe CTA. Petitioner engaged the services of Summa Kumasai, Inc.-Kumasai Gumi ("SKI-KG JV") to constmct the Medical Arts Tower Building, also known as the "New Medical City", situated at Meralco Avenue, Pasig City. Petitioner paid the amount ofP152,599,090.91 inclusive of VAT, as partial consideration ior the construction of the said building, as shown in 393

.. C.T.A. EB CASE NO. 318 4 (C.T.A. CASE NO. 6926) DECISION a receipt with no. 153, dated February 15, 2002, issued by SKI-KG (Exhibit "A. '). On April 10, 2002, petitioner 11led an original quarterly VAT Return for the first quarter of 2001. On March 29, 2004, petitioner filed an amended return reflecting the purchases of capital goods in the amount of P155,425,000 and the corresponding input VAT in the amount of P14,129,545.00, and also requested for a refund of P14,129,545.00, - representing the unutilized input VAT on the purchase of capital goods in connection with the construction costs of the building. Respondent's inaction prompted the petitioner to elevate the case before this Court. On April 12, 2004, petitioner filed wilh this Court a Petition for Review, docketed as C.T.A. Case No. 6926. For failure of respondent to file his answer within the reglemcntary period, petitioner filed a "Motion for Order of Default and Ex-Parte Presentation of Evidence," which the Court granted and respondent was declared in default and petitioner was allowed to present evidence ex- parte. ~ 394

,. C.T.A. EB CASE NO. 318 5 (C.T.A. CASE NO. 6926) DECISION Thereafter, the petitioner presented both testimonial and documentary evidence ex-parte. On July 11, 2007, the First Division rendered the assailed Decision dismissing the Petition for Review for insuflidency of evidence. On August 6, 2007, petitioner filed a "Motion for Reconsideration" and "Supplement to the Motion For Reconsideration" on August 28, 2007. In a Resolution dated September 17, 2007, the First Division denied the "Motion for Reconsideration" and "Supplement to the Motion For Reconsideration" for lack of merit. ISSUES Hence, this Petition for Review raising the following issues, to wit: I ' THE HONORABLE CTA FIRST DIVISION ERRED WI-lEN IT APPLIED THE RULE ON STRICTISSIMI JURIS IN THE APPRECIATION OF THE EVIDENCE PRESENTED BY THE PETITIONER-APPELLANT. II THE EVIDENCE PRESENTED BY THE PETITIONER- APELLANT, WHICH WERE UNCONTROVERTED BY REASON OF DEPAULT OF THE RESPONDENT, ARE ~ 395

... C.T.A. EB CASE NO. 318 6 (C.T.A. CASE NO. 6926) DECISION IN COMPLIANCE WlTH THE REQUIREMENTS OF THE TAX CODE AND REVENUE REGULATIONS AND ARE SUFFICIENT TO PROVE THAT THE BUILDING IS A CAPITAL UUOD OWNED AND USED IN THE BUSINESS OF THE PETITIONER-APPELLANT. On February 4, 2008, wilhout necessarily giving due course to the petition, We required respondent to file her comment, not a motion to dismiss, within ten (10) days from notice. Despite notice, respondent failed to file her comment. Hence, the instant petition is now deemed submitted for decision. THE COURT t.-wBANC'S RULING The petition is bere1l of merit. Being interrelated, the first and second issues will be discussed jointly. Petitioner contends that the First Division erred in denying its claim and should have applitd the rule on "preponderance of evidence" and not the principle of "strictissimi juris" in the appreciation of the � evidence it presented. We do not agree. 39S

' .. ' C.T.A. EB CASE NO. 318 7 (C.T.A. CASE NO. 6926) DECISION It is well to note that the present action instituted by herein petitioner is a claim for tax refund. It is a doctrinal rule in taxation that claims for tax refund/credit, as in the instant case, are in the nature of claims for exemption. Accordingly, the law relied upon is not only construed in strictissimi juris against the taxpayer, but also the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized. (ME. Holding Corporation vs Court ofAppeals, G.R. No. 160193, March 3, 2008; Atlas Consolidated Mining and Development Corporation vs Commissioner of Internal Revenue, G.R. No. 15Y49V, Februmy 18, 2008). Going now to the rm;rits of the case, the rule is that, in on.ler for a refund or issuance of tax credit certificate of unutilized input VAT paid on capital goods may be granted, petitioner must comply with the following requirements: 1) that petitioner is a VAT registered entity; 2) that input taxes claimed were paid on capital goods duly supported by VAT invoices and/or official receipt; 3) that petitioner did not o!fset or apply the claimed input VAT payment on capital goods against any output VAT liability; and 397

.. I C.T.A. EB CASE NO. 318 8 (C.T.A. CASE NO. 6926) DECISION 4) that the claim for refund was filed within the two-year pr~;;scnpltve period both in the administrative and judicial levels. As to the first requisite, there is no dispute that petitioner is a VAT- registered entity as evidenced by the Certificate of Registration issued by the BIR (Exhibit "G). As regards the second requisite, it is essential first to determine the nature of the capital goods or properties as basis for refund or issuance of tax credit certificate. Sec/ion 4.106-1 (b) of Revenue Regulations No. 7-95 provides that "capital goods or properties" refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29 (F) of the NJRC of 1997[now Section 34 (F)), and used directly or indirectly in the production or sale of taxable goods or services. Pursuant to the above provtswn, the purchased goods and properties must have the following qualities to qualify as capital goods: 1) useful life greater than one year; 2) treated as depreciable assets under Section 34 (F); and 398

.. ~ ' C.T.A. EB CASE NO. 3 18 9 (C.T.A. CASE NO. 6926) DECISION 3) used directly or indirectly in the production or sale of taxable goods or services. At this point, the First Division ruled that petitioner's evidence is inadequate to convince the court of the fact that the downpaymcnt of P152,599.090.91 is a payment made for the purchase of "capital goods" used for the construction of the Medical Arts Tower building. Thusly: "Although, the downpayment in the amount of PJ52,599.UYIJ.91, inclusive of VAT, for the construction of the Medical Tower Building tv SKI-KG JV is eswbitshed, the Court cannot ascertain whether the said payment should be dwss!fit:d as payment for capital goods. 1he testimonies of witness Amy l'del, petitioner's accountant, and .Ms. Benita J. Macalagay, petitioner's Chief Operating Ojficer, as to the purpose of constructing the subjed building are cvriflicting. Ms. Ydel testijied that petitioner was selling shares jvr a. corresponding unit of the building; while Ms. Macalagay testijied that petitioner leases commercial spaces. Ms. Amy Ydel TestiJicd: 'JUSTICE llAUTISTA: Q. Is this Medical Arts Building, the units to be sold or lu be rented by the doctors who occupy the units ofthe building? MS. YDEL: A. The Medical Arts Tower, sir, is selling shares for the dodors after they buy the share, a unit is assigned to them ior them to practice their prokssion. JUSTICE BAUTISTA: Q. So, one (I) share is equivalent to one (1) unit? 399

.. C.T.A. EB CASE NO. 3 18 10 (C.T.A. CASE NO. 6926) DECISION MS. YDEL: A. It depends on Lhe number of square meters and the t1oors. There is an equivalent number of shares fur each unit. JUSTICE BAU'l1SJ'A: Q. For each unit? MS. YDEL: A. Yes, sir. XXX XXX xxx' On the other hand, Ms. Benita J. Macalagay testified: 'ATTY. AZARAGGA: Q. Ms. WiLn~:ss, cau you please stale what essentially the business of lhe petitioner? MS. MACALAGAY: A. PSI Development Corporation is involved in realty devdopment, and management of building, particularly the Medical Arts Tower. ATTY. AZARRAGA: Q. And how do you know that petitioner is involved in the foregoing business? MS. MACALAGAY: A. Because as COO, of course, and because I'm involved in the business operation of the company on a day to day business. ATTY. AZARRAGA: Q. Could you please desaibe what do you mean of the day Lo day business being involved by petitioner'! MS. MACALAGAY: A. We, leas~: wnune-rcial spaces in the building. ATTY. AZARRAGA: Q. Why is that you are leasing the commercial spaces? 4Q{J

.. �" C.T.A. EB CASE NO. 318 11 (C.T.A. CASE NO. 6926) DECISION MS. MACALAGA Y: A. We are leasing as our business because this is not a condominium corporation.' In view of the conilicting testimonies of said witnesses, petitioner should have presented its Books of Accounts (Journal and Ledger), Audited Finandal Statements, as well as its Income Tax Return, so that this Court may be able to ascertain whether petitioner had really capitalized the payment made to the contractor and that the related depreciation was recognized. Absence of such important documents is fatal to petitioner's claim." After a careful examination of the evidence adduced by the petitioner, We sustain the 1imlings of the First Division that the testimonial and documentary evidence presented by the petitioner is insufficient to grant its claim for tax refund. Section 34 (f) of the NJRC of 1997, as amended, explicitly provides that "capital goods" should not only be depreciable in nature but the same should be treated as depreciable asset. In this regard, petitioner failed to submit the documentary evidence necessary to support its claim, such as its books, financial statements and income tax retums. The Court, therefore, cannot determine with certainty whether or not it has treated the building as its "capifa/ good. " 401

.� ... C.T.A. EB CASE NO. 318 12 ' (C.T.A. CASE NO. 6926) DECISION As to the petitioner's allegation that the uncontroverted evidence presented by the petitioner is sufficient to prove that the building is a "capital good" is likewise untenable. While it is true that respondent was unable to file his answer and petitioner was allowed to present its evidence ex-parte, it does not imply the admission of facts anJ the cause of action of the petitioner (Monarch Insurance vs. Court of Appeals, 333 SCRA 71). The petitioner, as claimant of tax refund, bears the burden of proving the factual basis of its claim; and showing, by words too plain to be mistaken, that the legislature intended to exempt it (Commissioner of Internal Revenue vs. Seagate Technology [Philippines], 451 SCRA 132). Petitioner failed to discharge this burden. Moreover, the evidence presented ex-parte by the petitioner lS subject to Court's evaluation anJ it is up to the Court's sound judgment whether it shall be given credence or not. With the foregoing premises, the Court finds no necessity to discuss the other requisites. 402

' C.T.A. EB CASE NO. 318 13 (C.T.A. CASE NO. 6926) DECISION -~ In the light of the laws and jurisprudence on the matter, We see no reason to reverse the assailed Decision dated July 11, 2007 and Resolution dated September 17, 2007 of the First Division. WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE COURSE, and accordingly DISMISSED for lack of merit. SO ORDERED. ~-~~ OLGA PALANCA-ENRIQUEZ Associate Justice WE CONCUR: L-\.p. ~ ERNESTO D. ACOSTA Qz., ~. a.Y--~~1.,. \)._, . ~ .JiJANITO C. CASTANED.K','JR. CAESAR A. CASANOVA Associate Justice Associate Justice (On Official Business) ERLINDA P. UY Associate Justice 403

' C.T.A. EB CASE NO. 318 14 (C.T.A. CASE NO. 6926) DECISION CEll.rfiFICA TION Pursuant to Sediun 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with the members of the Court l!,n Bane before the cas~ was assigned to the writer of the opinion of the Court. D~LP- ~ ERNESTO D. ACOSTA Presiding Justice 404