PROCTER & GAMBLE ASIA, PTE. LTD v. COMMISSIONER OF INTERNAL REVENUE ( Consolidated with Case No. 7556)

\ . REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION "' ********* PROCTER & GAMBLE ASIA, CTA Case Nos. 7523 and 7556 Members: PTE. LTD., Petitioner, -versus- UY, and FASON-VICTORINO, JJ. COMMISSIONER OF INTERNAL Promulgated: . REVENUE, _MAY 17 2016~ ~ ' �. s~ ~-J\1\� Respondent. )( --- -- - - - ----- - - - --- - - - ---- - ---- - AMENDED DECISION UY, J.: These consolidated Petitions for Review were remanded by the Supreme Court to this Court, pursuant to its Resolution rendered in the case of "Procter and Gamble Asia Pte, Ltd., petitioner, v. Commissioner of Internal Revenue, respondent" in G.R. No. 2020711, for further proceedings and determination of whether the claims of petitioner for refund or ta>< credit of unutilized input valued- added ta>< (VAT) are valid, in the aggregate amount of P32,706,446.71 . Said case was a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Ta>< Appeals (CTA) En Bane Decision and Resolution in CTA EB No. 746, which denied petitioner's claim for refund of unutilized input value-added ta>< (VAT) for not observing the mandatory .120-day waiting p.eriod under ,a 1 G.R.. No. 202071, February 19,2014, Chief Justice Ma. Lourdes P.A. Sereno, ponente and Chairperson of the First Division of the Supreme Court, concurred by Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Lucas P. Bersamin, Associate Justice Martin S. Villarama, Jr., and Associate Justice Bienvenido L. Reyes. "'

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 2 of23 Section 112 of the National Internal Revenue Code. Petitioner's claim for refund or tax credit of unutilized input valued-added tax (VAT) in the aggregate amount of P32_, 706,446.71 allegedly represents unutilized input VAT paid on purchases of goods and services attributable to zero-rated sales for the period covering July 1, 2004 to December 31, 2004, broken down as follows: Case No. Amount Taxable Period 7523 7556 p 17,117,309.41 July 1, 2004 to September 30, 2004 15,589,137.30 October 1, 2004 to December 31, 2004 p 32,706,446.71 -- THE FACTS Culled from Our Decision dated January 17, 2011, the undisputed facts of these cases are quoted hereunder, to wit : "Petitioner, Procter and Gamble Asia, Pte., Ltd., is a foreign corporation duly organized and existing under the laws of Singapore and is maintaining a Regional Operating Headquarter in the Philippines, with office address at the 18/F Petron Megaplaza, 358 Sen. Gil Puyat Ave., Makati City. It provides management, marketing, technical and financial advisory, and other qualified services to related companies as specified by its Certificate of Registration and License issued by the Securities and Exchange Commission. Petitioner as a VAT-registered taxpayer, is covered by a Bureau of Internal Revenue (SIR) Certificate of Registration No. 9RC0000071787. Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue, empowered to perform the duties of said office including, among others, the duty to act upon and approve claims for refunds or tax credits as provided by law. She holds office at the 5th Floor, SIR National Office Building, Agham Road, Diliman, Quezon City. For the periods covering the quarters from July to September 2004, and from October to December 2004, (\

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 3 of23 petitioner allegedly rendered services to its affiliates in the Philippines and abroad pursuant to its Service Agreements. For its services abroad, petitioner was paid in the form of foreign currency, which was allegedly accounted for in accordance with the rules of the Bangko Sentral ng Pilipinas (BSP). During the same period, petitioner purchased goods and services from VAT-registered suppliers and service providers, supported by invoices and official receipts, with input VAT in the following amounts: Period Goods Input VAT Services Input VAT July to P8,836,426.36 P883,642.64 P291,883,815.09 P29,188,381.51 September P3,676,074.12 October to P367,607.41 P273,651 ,709.60 P27,365, 170.96 December On the belief that it is entitled to a refund of its alleged unutilized input VAT, petitioner filed applications and letter-requests with the BIR Revenue District Office (ROO) No. 49 for the refund or tax credit of its input tax attributable to its zero-rated sales, covering the periods of July to September 2004 and October to December 2004, on the following dates: Period of Claim Filing Date of Input Tax Administrative Claim July to September 2004 September 26, 2006 P17, 117,309.41 October to December 2004 P15,589,137.30 December 13, 2006 As respondent has not yet issued any decision regarding its refund claims, petitioner filed the instant Petitions for Review for the periods covering July to September 2004 and October to December 2004 on the following dates: CTACASE PERIOD OF FILING DATE OF Amount of NO. CLAIM PETITION FOR REVIEW Claim 7523 July to October 2, 2006 ! 7556 September 2004 October to December 29, 2006 P17,117,309.41 December 2004 P15,589, 137.30 In the separate Answers filed in C.T.A. Case No. 7523 on November 27, 2006, and in C.T.A. Case No.~

AMENDED DECISION CTA Case Nos. 7523 and 7556 .Page 4 of23 7556 on February 27, 2007, except for the amounts involved and the periods covered by the claims, respondent similarly interposes the following Special and Affirmative Defenses, summarized as follows: 1. Respondent reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses; 2. Petitioner's alleged claim for refund or issuance of tax credit certificate is still subject to administrative routinary investigation/examination by the respondent Bureau; 3. . Taxes paid and collected are presumed to have been made in accordance with law, hence, not refundable. � 4. Petitioner's claim for refund or issuance of tax credit certificate in the amounts of: P17,117,309.41 for CTA Case No. 7523 and P15,589, 137.30 for CTA Case No. 7556, as alleged unutilized input VAT attributable to its " zero-rated sales of goods and services for the� periods covering: July 2004 to September 2004, and October to December 2004, respectively, were not fully substantiated by proper documents. 5. In an action for refund/credit, the burden of proof is on the petitioner to establish its right to refund and failure to adduce sufficient proof is fatal to the claim for tax refund/credit. 6. Petitioner's sales of goods and services to various alleged clients/affiliates do not qualify as zero-rate VAT. 7. The amount subject of the claim for refund of petitioner do not pertain in full to its input VAT paid attributable to its zero-rated sales of goods and services for the periods covering July 2004 to September 2004 in CTA ~

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 5 of23 Case No. 7523 and October to December 2004 in CTA Case No. 7556. 8. Petitioner's right to claim for refund/tax credit of the alleged unutilized input VAT attributable to its zero-rated sales of goods and services for the period covering July 2004 to September 2004 have already prescribed pursuant to Section 112 of the NIRQ. 9. Petitioner failed to comply with the substantiation requirements under Revenue Regulations No. 7-95 in relation to Section 113 and 237 of the 1997 Tax Code. 10. It is incumbent upon the latter to show that it has complied with the provisions under Section 204 (c) in relation to Section 229 of the Tax Code. Otherwise, its failure to prove the same is fatal to its claim for refund. 11. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211). .. In the Resolution dated July 9, 2007, this Court granted petitioner's motion to consolidate these two cases to expedite the resolution thereof and in the interest of justice. During trial, both parties presented their respective documentary and testimonial evidence. Thereafter, upon submission of both parties' respective Memorandum, these consolidated cases were submitted for decision on July 12, 2010."2 On January 17, 2011, this Court rendered its Decision3 dismissing the instant Petitions for Review for having been prematurely filed, the dispositive portion of which reads: ~ 2 Docket (CTA Case No. 7523)-Vol. III, pp. 2118 to 2121. 3 Docket (CTA Case No. 7523)-Vol. III, pp. 2117 to 2129.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 6 of23 "WHEREFORE, the instant Petitions for Review are hereby DISMISSED for being prematurely filed. SO ORDERED." A Motion for Reconsideration was filed on January 27, 2011,4 which was denied in the Resolution dated March 15, 2011.5 On March 30, 2011, petitioner appealed to the CTA En Bane,6 which docketed the case as CTA EB No. 746. The CTA En Bane later affirmed the ruling of this Court in the Decision dated December 20, 2011.7 On January 10, 2012, petitioner filed a Motion for Reconsideration, which was denied via the CTA En Bane's Resolution dated May 24, 2012.8 Thereafter, petitioner filed a Petition for Review on Certiorari before the Honorable Supreme Court which was docketed as G. R. No. 202071 entitled "Procter & Gamble Asia Pte. Ltd., Petitioner. vs. Commissioner of Internal Revenue, Respondent." On February 19, 2014, the High Court issued the Resolution9 remanding the case to this Court for further proceedings and determination of the validity of petitioner's claims for refund or tax credit of unutilized input VAT. The dispositive portion of the said Resolution states: . . "WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court of Tax Appeals En Bane in CTA EB No. 746 are REVERSED and SET ASIDE. This case is hereby REMANDED to the CTA First Division for further proceedings and a determination of whether the claims of petitioner for refund or tax credit .. of unutilized input value-added tax are valid. SO ORDERED." f\. )-Vol. III, pp. 2130 to 2149. 5 Docket (CTA Case No. 7523}-Vol. III, pp. 2162 to 2167. 6 Docket (CTA Case No. 7523}-Vol. III, pp. 2168 to 2195. 7 Docket (CTA Case No. 7523}-Vol. III, pp. 2595 to 2609. 8 Docket (CTA Case No. 7523)-Vol. III, pp. 2634 to 2640. 9 Docket (CTA Case No. 7523}- Vol. IV, pp. 3326 to 3327.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 7 of23 . Subsequently, the Honorable Supreme Court issued an Entry of Judgment, 10 declaring that its Resolution dated February 19, 2014 in G.R. No. 202071 became final and executory on July 9, 2014. In view thereof, and taking into consideration the period of time from the promulgation of the Decision on January 17, 2011, and the remanding of the consolidated cases to this Court, the Resolution on February 23, 2015 was issued, 11 directing both parties to submit a Manifestation informing this Court of any supervening event which may have transpired that would affect the final resolution of the subject consolidated cases; and to determine whether there is a need to conduct further proceedings. On March 16, 2015, petitioner submitted a Manifestation12 stating that it will submit within thirty (30) days a supplemental memorandum to discuss petitioner's entitlement to the claimed refund for the subject periods. The instant consolidated cases were submitted for decision as of May 19, 201513 after petitioner filed the Supplemental Memorandum14 on April 29, 2015 while no compliance was filed by respondent, Hence, this Decision. THE ISSUES The jointly stipulated issues for this Court's resolution are as follows: 1) Whether or not Petitioner's sales of services are zero-rated for VAT purposes under Section 108(8)(2) of the 1997 Tax Code; 2) Whether or not Petitioner carried-over to the succeeding taxable quarter(s) or year(s) the alleged unutilized input VAT paid on goods and services 10 Docket (CTA Case No. 7523)-Vol. IV, p. 3346. (' .. 11 Docket (CTA Case No. 7523)-Vol. IV, pp. 3359 to 3361. 12 Docket (CTA Case No. 7523)-Vol. IV, pp. 3362 to 3364. 13 Docket (CTA Case No. 7523)-Vol. IV, p. 3372. 14 Docket (CTA Case No. 7523)-Vol. IV, pp. 3367 to 3369.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 8 of23 attributable to its zero-rated sales, for the periods covering July 2004 to September 2004 and October 2004 to December 2004, and applied the same amount in full to its output VAT liability for the said periods; 3) Whether or not the amount ofP17,117,309.41 "' and P15,589, 137.30 being claimed by petitioner as unutilized input VAT, for the periods covering July 2004 to September 2004 and October 2004 to December 2004, respectively, pertain in full to its zero-rated sales of services; 4) Whether or not petitioner's sales of services to non-resident foreign corporations qualify as zero-rated VAT' 5) Whether or not petitioner complied with the substantiation requirements prescribed under Revenue Regulations (RR) No. 7-95 in relation to Sections 113 and 237 of the 1997 Tax Code; and 6) Whether or not petitioner is entitled to its claimed refund or tax credit in the amounts of P17, 117,309.41 and �. P15,589, 137.30, as alleged unutilized input VAT paid on goods and services attributable to its zero-rated sales, for the periods covering July 2004 to September 2004 and October 2004 to December 2004, respectively. 15 Petitioner's arguments: Petitioner primarily argues that while petitioner's sales of services to its affiliates in the Philippines were subjected to 1Oo/o VAT as shown in its monthly VAT declarations and quarterly VAT returns for the period July 1 to December 31, 2004, petitioner's sales of services to its affiliates abroad are definitely zero-rated for VAT purposes under Section 108(8)(2) of the 1997 Tax Code. According to petitioner, it neither carried-over to the succeeding taxable quarter or quarters the alleged unutilized input VAT paid on goods and services attributable to its zero-rated sales for the periods July 1 to September 30, 2004 and October 1 to December 31, 2004 r/b 15 Refer to Docket (CTA Case No. 7523)-Vol. I, pp. 165 to 166; and Docket (CTA Case � No. 7566), pp. 194 to 195. . "'

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 9 of23 nor applied the same to any of its output VAT liability during the same period. Moreover, petitioner likewise claims that the amounts of P17, 117,309.41 and P15,589, 137.30 being claimed as unutilized input VAT for the periods covering July 1 to September 30, 2004 and October 1 to December 30, 2004, respectively, pertain in full to its zero-rated sales of services for the respective periods. Furthermore, petitioner asserts that its affiliates abroad are non- resident foreign corporations to whom petitioner rendered services for " the period July 1 to December 31, 2004; and that the consideration for the services rendered by petitioner to said affiliates were paid for in acceptable foreign currency and duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. Thus, according to petitioner, its sales of services to non-resident foreign corporations qualify as zero-rated sales. In addition, petitioner submits that it complied with the substantiation requirements provided under the law, as shown by the official receipts issued by petitioner to its affiliates abroad and to those based in the Philippines for the period of the claim. Lastly, petitioner maintains that having satisfied all the requisites under Section 112(A) of the 1997 Tax Code, petitioner is entitled to the refund or issuance of tax credit certificate of its unutilized input VAT paid on goods and services attributable to its zero-rated sales of the periods under consideration. Respondent's counter-arguments: Respondent contends that petitioner failed to comply with the invoicing requirements under Section 113(A) in relation to Section 237 of the 1997 Tax Code, and Section 4.108-1 of Revenue Regulations No. 7-95. According to respondent, although Sections 113 and 237 of the National Internal Revenue Code (NIRC) of 1997 use the words "invoice' and "receipt" without distinction, the 1997 Tax Code provides a separate provision, which must be read in relation thereto. In connection,. respondent avers that the VAT on the sale of~

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 10 of23 goods or properties accrues upon the consummation of sale, whether or not the consideration was actually received already by the seller; thus, Section 106(0)(1) provides that the tax shall be computed by multiplying the total amount indicated in the invoice by one-eleventh (1/11 ). Upon the other hand, in the case of sale of services, as in the case at bar, the VAT is computed based on gross receipts as indicated in the official receipts as provided for under Section 108(A); therefore, Section 108(C) prescribes that the tax on the sale of services shall be computed by multiplying the total amount indicated in the official receipt by one-eleventh (1/11 ). . . Finally, respondent stresses that tax refunds, being in the nature of tax exemption, are construed strictissimi juris against petitioner. THE COURT'S RULING .. The instant consolidated Petitions for Review are partly meritorious. Considering that these consolidated cases involve claims for refund of alleged unutilized input VAT for the periods covering July 1 to September 30 and October 1 to December 31 of taxable year 2004, the applicable provisions are Sections 11 0(8) and 112 of the NIRC of 1997, prior to its amendment under Republic Act (RA) No. 9337. These provisions state: SEC. 110. Tax Credits.- XXX XXX XXX (B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: xxx Provided, however, That any input tax attributable to zero- rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112. XXX XXX XXX SEC. 112. Refunds or Tax Credits of Input Tax.- ~

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 11 of23 (A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable 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: Provided, however, 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 thereof had been duly accounted for in accordance� with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or pai.d cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. XXX XXX XXX (D) Period within which Refund or Tax Credit of " Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty- day period, appeal the decision or the unacted claim with the Court of Tax Appeals. Pursuant to the afore-quoted provisions, and as laid down by the Supreme Court in a number of cases16, a taxpayer may claim a ~ Revenue vs. Toledo Power Company, G.R. Nos. 195175 & 199645, August 10, 2015; Luzon Hydro Corporation vs. Commissioner of Internal

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 12 of23 refund or tax credit certificate for input taxes paid on purchases of goods and services attributable to zero-rated sales upon compliance with the following requisites: 1. the taxpayer-claimant must be VAT-registered; 2. there must be zero-rated or effectively zero-rated sales; 3. input taxes were incurred or paid; 4. such input taxes are attributable to zero-rated or effectively zero-rated sales; 5. said input taxes were not applied against any output VAT liability; and 6. the claim was filed within the prescriptive period. We shall first determine whether petitioner complied with the sixth and last requisite. Timeliness of the filing of the administrative and judicial claims. In accordance with the above-quoted Section 112(A), the administrative claim for the issuance of a tax credit certificate or refund of input VAT must filed with BIR tlwithin two (2) years after the close of the taxable quarter when the sales were made". Thus, as the subject claims are for the periods covering July 1 to September 30, and October 1 to December 31 of taxable year 2004, said administrative claims must be filed on or before September 30, 2006, and December 31, 2006, respectively. In this case, petitioner filed its administrative claims for the subject periods on September 26, 2006, " and December 13, 2006, both well within the said prescriptive period. As to whether petitioner timely filed its judicial claims, the Supreme Court has already settled the matter, when petitioner appealed this Court's Decision dated January 17, 2011, declaring that petitioner's case fall under the exception in the observance of the ~ period of filing judicial claims under Section 112. As held in Procter & Revenue, G.R. No. 188260, November 13, 2013; Southern Philippines Power Corporation vs. Commissioner of Internal Revenue, G.R. No. 179632, October 19, 2011; Silicon Philippines, Inc. (Formerly Intel Philippines Manufacturing, Inc.) vs. Commissioner of Internal Revenue, G.R. No. 172378, January 17, 2011; AT&T Communications Services Philippines, Inc. vs. Commissioner ofInternal Revenue, G.R. No. 182364, August 3, 2010; San Roque Power Corporation vs. Commissioner of Internal Revenue, G.R. No. 180345, November 25, 2009; Intel Technology Philippines, Inc. vs. Commissioner ofInternal Revenue, G.R. No. 166732, April27, 2007.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 13 of23 Gamble Asia Pte. Ltd. vs. Commissioner of Internal Revenue, 17 the High Court held: "xxx. Citing the recent case of CIR v. San Roque Power Corporation, 18 respondent counters that the 120- day period to file judicial claims for a refund or tax credit is mandatory and jurisdictional. Failure to comply with the waiting period violates the doctrine of exhaustion of administrative remedies, rendering the judicial claim premature. Thus, the CTA does not acquire jurisdiction over the judicial claim. Respondent is correct on this score. However, it fails to mention that San Roque also recognized the validity of BIR Ruling No. DA-489-03. The ruling expressly states that the 'taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review.' The Court, in San Roque, ruled that equitable estoppel had set in when respondent issued BIR Ruling No. DA-489-03. This was a general interpretative rule, which effectively misled all taxpayers into filing premature judicial claims with the CTA. Thus, taxpayers could rely on the ruling from its issuance on 10 December 2003 up to its reversal on 6 October 2010, when CIR v. Aichi Forging Company of Asia, Inc. was promulgated. The judicial claims in the instant petition were filed on 2 October and 29 December 2006, well within the ruling's period of validity. Petitioner is in a position to 'claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity."' Hence, petitioner timely filed both its administrative and judicial claims. We shall now proceed to make a determination of petitioner's compliance with the other requisites. 17 G.R. No. 202071, February 19,2014. (\ 18 G.R. Nos. 187485, 196113 and 197156, February 12,2013.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 14 of23 " Petitioner is a VAT-registered entity and had zero-rated sales during the subject periods. . Petitioner complied with the first requisite considering that it is a VAT-registered taxpayer with BIR Certificate of Registration No. 9RC0000071787 dated October 8, 1999.19 On the second requisite, i.e., the existence of zero-rated sales, petitioner claims that the services it rendered to its affiliates abroad, which were paid for in foreign currency, are transactions subject to zero percent (0%) VAT in accordance with Section 108(8)(2) of the NIRC of 1997, as amended, which states that: "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: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, 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);" Case~ etitioner and Respondent, JSFI, Division docket (CTA No. 7523)-Vol. I, p. 165; Division Docket (CTA Case No. 7556), p. 202; Exhibit "B".

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 15 of23 In the case of Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. 20, the Supreme Court held that in order for the sale of service to be zero- rated under Section 108(B)(2) of the NIRC of 1997, the following �requisites must be met: 1. the services must be other than processing, manufacturing or repacking of goods; 2. the payment for such services must be in acceptable foreign currency- accounted for in accordance with the BSP rules and regulations; and 3. the recipient of such services is doing business outside the Philippines. Records show that petitioner is a multinational company organized and existing under the laws of Singapore. In order to provide management, marketing, technical, and financial advisory services to related companies, it established a regional operating headquarters in the Philippines under Securities and Exchange Commission ~SEC) Certificate of Registration and License No. A199913443. 2 Pursuant to the Business Services Agreements22 entered into between petitioner and its client-affiliates, petitioner shall provide its � client-affiliates with accounting and financial reporting services, employee services, customer logistics financial services, purchases, business intelligence services, information technology business solution, workplace and other services within an agreed period including the subject periods. These services clearly fall within the scope of "services other than processing, manufacturing or repacking of goods" contemplated by the afore-mentioned provision. For services rendered to its affiliates abroad, petitioner received US dollar payments that were accounted for in accordance with the BSP rules and regulations, as evidenced by the Certifications of Inward Remittances23 issued by Citibank N.A, Philippine Branch and attested to by Ms. Teresita 0. Sugay, Citibank's representative, through her Judicial Affidavit24 and duly supported by VAT zero-rated ~ 20 G.R. No. 153205, January 22,2007. 21 Exhibit "A". . 22 Exhibits "C-1" to "C-27", inclusive ofsubmarkings. 23 Exhibits "G-1" and "G-2". 24 Exhibits "AA" to "AA-1". ..

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 16 of23 official receipts25 issued by petitioner to its client-affiliates abroad. However, out of the reported zero-rated receipts for the periods July 1, 2004 to September 30, 2004 and October 1, 2004 to December 31, 2004 in the amounts of P750,290,890.1026 and P370,452,519.3227, respectively, or in �the sum of P1, 120,743,409.42, the Court-commissioned Independent CPA (CPA), At~. Alexander B. Cabrera, found a total disallowance of P7,019,703.89 8; consisting of transactions which were not paid in acceptable foreign currency and a transaction where petitioner was the seller and the purchaser at the same time, in the respective amounts of P6,630,939.2229 and P388,764.6730 (USD6,955.0031 ). Aside from the Independent CPA's recommended disallowance of P7,019, 703.89, petitioner has declared zero-rated receipts in the amount of P217,573,351.71 for the period July 1, 2004 to September 30, 2004, and in the amount of P127,639,695.47 for the period October 1, 2004 to December 31, 2004, totaling P345,213,047.18, the foreign currency proceeds of which cannot be traced from the Certifications of� Inward Remittances issued by Citibank N.A., Philippine Branch. Hence, in addition to the Independent CPA's disallowance, the receipts in the total amount of P345,213,047.18 will not be considered zero-rated sales, the breakdown of which is as follows: OR Exhibit Declared Zero-Rated Receip1s No. No. Client in USD in PhP32 July- September 2004 1411 G-8 P & G Far East Inc. 491,043.10 27,447,909.47 347,904.60 19,446,875.49 1424 G-15 P & G Taiwan Ltd. 326,282.43 18,238,257.69 1,206,620.05 67,446,621.02 1435 G-25 P & G K.K. 28,997.18 1,620,859.70 1439 G-28 P & G International Operation Pte Ltd 559.25 31,400.90 1440 G-29 P & G International Operation Pte Ltd 1447 G-31 P & G Far East Inc. ------- �-- ~ 25 Exhibits "G-3" to "G-142". 26 Line 20, Exhibit "H". 27 Line 20, Exhibit "L-3". 28 Annex "R", Exhibit "D". 29 Annex "R" as summarized in Annex "P", Exhibit "D". 30 Annex "R", Exhibit "D". 31 Annex "Q", Exhibit "D". 32 Annex "F", Petition for Review, Division docket (CTA Case No. 7523)-Vol. I, pp. 76 to 83; Vol. III, pp. 2488 to 2495.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 17 of23 1455 G-38 P & G Taiwan Ltd. 180,458.08 10,078,350.19 1456 G-39 P & G Trading (Thailand) Ltd. 275,988.75 15,427,760.82 1457 G-40 PT P & G Home Products Indonesia 180,566.34 10,093,209.34 1458 G-41 P & G Vietnam Ltd. 1460 G-43 P & G K.K. 572.93 32,169.01 1464 G-46 The P & G Company 1,090.50 61,229.64 1470 G-50 P&G Hygiene & Health Care 91,415.06 5,118,424.41 1474 G-54 P&G India Ltd 304,146.72 17,020,491.99 1478 G-58 P&G Home Prod (India) Ltd 111,288.66 6,231,167.98 1483 G-63 P&G Northeast Asia Pte Ltd 139,292.48 7,786,052.53 1484 G-64 P&G Northeast Asia Pte Ltd 22,267.42 1,211,390.12 183,621.90 10,281,181.41 Subtotal-July 1, 2004 to September 30, 2004 . 217,573,351.71 . 3,892,115.45 October - December 2004 1496 G-69 The P&G Company 148,040.59 8,316,100.26 1497 G-70 P&G Far East 102,674.36 5,766,215.15 1498 G-71 P&G Australia 1500 G-73 P&G Hygiene & Healthcare Limited 14,838.84 833,315.47 1502 G-75 P&G Malaysia Sdn Bhd 60,708.48 3,402,692.53 1506 G-77 P&G Singapore Pte Ltd 62,273.58 3,492,895.26 1507 G-78 P&G Taiwan 16,696.76 1510 G-82 P&G Home Products 106,000.91 938,042.67 1516 G-89 P&GKK 15,432.26 5,955,107.31 1519 G-92 P&G International Operations Pte Ltd 44,585.06 1523 G-94 The P&G Company 141,862.61 863,623.55 1524 G-95 P&G Far East Inc. 91,514.57 2,504,403.51 1526 G-97 P&G Guangzhou 105,958.73 7,969,809.55 1528 G-99 P&G Hygiene & Healthcare Limited 5,152,847.41 1534 G-104 P&G.Taiwan Ltd 7,586.30 5,966,144.71 1538 G-108 P&G Home Products (India) Ltd. 45,919.42 1546 G-117 P&G International Operations Pte Ltd 102,147.77 424,052.55 1549 G-119 P&G Far East Inc. 24,635.40 2,579,742.70 1552 G-122 P&G Hygiene & Healthcare Limited 209,292.03 5,751,563.63 1558 G-127 P&G Taiwan Ltd 192,697.02 1,384,011.24 1562 G-131 P&G Home Products (India) Ltd. 136,827.62 11,784,461.29 1564 G-133 P&G Vietnam Ltd 164,920.20 10,850,057.43 1571 G-141 P&G International Operations Pte Ltd 43,215.14 7,704,257.89 Subtotal-October 1, 2004 to December 31, 2004 141,322.70 9,286,047.30 289,908.20 2,433,284.91 2,269,058.55 7,957,359.24 16,323,659.91 127,639,695.47 Total -July 1, 2004 to December 31, 2004 6,161 '174.00 345,213,047.18 In compliance with the third requisite, petitioner presented the ~ following documents showing that its clients are non-resident foreign corporations doing business outside the Philippines:

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 18 of23 1. SEC Certifications of Non-Registration33; 2. Certificates of Incorporation or Registration and Judicial Affidavits executed by petitioner's foreign affiliates' officers34; 3. Exhibit 21 of The Procter and Gamble Company and Subsidiaries Report to the U.S. Securities and Exchange Commission35; and 4. Business Services Agreements36. In order to be considered a non-resident foreign corporation doing business outside the Philippines, each entity must be supported, at the very least, by both Certificate of Non-registration of Corporation/Partnership issued by the Philippine SEC, and proof of foreign incorporation/association/business registration, and that there is no other indication which would disqualify said entity in being classified as a non-resident foreign corporation. A careful scrutiny of the documents submitted shows that petitioner failed to establish that the following entities are non- resident foreign corporations doing business outside the Philippines: With SEC Certification of Non-Registration but without roof of forei n incor oration 1. P. T. Procter & Gamble Indonesia TBK 2. Max Factor Kabushi Kaisha Hence, petitioner's declared zero-rated receipts from the afore- mentioned entities for the period July 1, 2004 to September 30, 2004 in the amount of P37,446,240.22 and for the period October 1, 2004 to December 31, 2004 in the amount of P15,969,610.37, totaling P53,415,850.59, detailed below, shall not be considered zero-rated sales: Transaction Exhibit Declared Zero-Rated Date No. Receipts July 26, 2004 OR No. G-11 Client-Affiliate In USD In PhP 1414 PT P&G Indonesia TBK 164,445.46 9,192,032.42 Aug, 30,2004 1450 G-34 PT P&G Indonesia TBK 137.84 7,739.47 G-12 credit note-no OR37 (16,711.29) (938,309.38) July 27, 2004 1415 527,750.97 29,499,774.73 Max Factor K.K. 33 Exhibits "G-143" to "G-170". ~ 34 Exhibits "JJ" to "CCC", inclusive of submarkings. 35 Exhibit "DDD". 36 Exhibits "C-1" to "C-27", inclusive of submarkings. 37 Annex "F", Petition for Review, Division docket (CTA Case No. 7523)-Vol. I, p. 79.

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 19 of23 Auq,30,2004 1451 G-35 Max Factor K.K. 1,213.26 68,122.40 Sept. 24, 2004 1471 G-51 Max Factor K.K. credit note-no OR38 55,007.74 3,079,940.66 Subtotal l61,677.1Q)_ _{3,463,060.08) 670,166.88 37,446,240.22 Oct. 28, 2004 1501 G-74 Max Factor K.K. 4,404.48 243,864.32 Nov. 25, 2004 1529 G-100 Max Factor K.K. 80,945.12 4,557,720.72 Dec.21,2004 1553 G-123 Max Factor K.K. 198,344.13 11 '168,025.33 Subtotal 283,693.73 15,969,610.37 Total 953,860.61 I 53,415,850.59 In sum, out of the P1, 120,743,409.42 zero-rated receipts reported by petitioner for the period covering July 1, 2004 to December 31, 2004, only the amount of P715,094,807.76 represents valid zero-rated receipts, computed as follows: Zero-Rated Receipts per VAT Returns p 7,019,703.89 P1, 120,743,409.42 Less: Disallowances 345,213,047.18 . 405,648,601.66 Per Independent CPA's findinQs 53,415,850.59 P71 ~,094,807.76 Per this Court's Further Verification Without foreign currency remittances Receipts from entities without proof of foreign incorporation/association/busines~ registration Valid Zero-Rated Receipts Petitioner incurred/paid input taxes attributable to zero-rated sales and said input taxes were not applied against any output "" VAT liability. We shall now determine whether petitioner incurred input taxes in connection with its zero-rated sales and if said input taxes were not applied against any output VAT liability of petitioner. Petitioner's Amended Quarterly VAT Returns for the periods covering July 1, 2004 to September 30, 2004 and October 1, 2004 to December 31, 2004 reflected input VAT carried over from previous quarter (i.e., April 1, 2004 to June 30, 2004) in the amount of P5,793,355.41, and input VAT from current purchases for July 1,~ 38 Ibid. f\J

" AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 20 of23 2004 to September 30, 2004 in the amount of P30,072,024.15, and for October 1, 2004 to December 31, 2004 in the amount of P27,732,778.37, totaling P63,598, 157.93, broken down as follows: July 1, 2004 to Oct. 1, 2004 to Dec. Total Sept30,2004 31, 2004 (Exhibit "L- (Exhibit "H'J ~ 5,793,355.41 3'1 ~ 344,986.45 Input Tax Carried Over from Previous ~ 5,793,355.41 Quarter (Apr 1, 2004- June 30, 2004) 798,338.60 Input Tax from Current Purchases: ~ 306,887.36 ~ 38,099.09 56,553,552.47 I Domestic Purchases-Capital Goods 468,830.28 329,508.32 107,925.00 Domestic Purchases-Goods other 29,188,381.51 27,365,170.96 ~57 ,804,802.52 than Capital Goods 107,925.00 - ~63,598,157.93 Domestic Purchases-Services P30,072,024.15 Importations-Capital Goods P35,865,379.56 P27,732,778.37 Subtotal P27,732,778.37 Total Input VAT per Returns In support thereof, petitioner presented various VAT invoices and official receipts (0Rs)39, which were all examined bla the � Independent CPA. In the Reports dated December 27, 2007 and August 15, 200841 , the Independent CPA found unallowable input VAT credits in the amounts of P3,644,242. 75 and P1, 735,579.07 from the input VAT carried ~ver from previous quarter (April 1, 2004 to June 30, 2004) and input VAT from current purchases (July 1, 2004 to December 31, 2004), respectively, or in the aggregate sum of P5,379,821.82, detailed as follows: Findings/Exceptions Input VAT Claim Reference Input VAT Carried Over from Previous Quarter (April1, 2004 to June 30, 2004) . ~ 948,003.21 Exhibit "FF, Annex "A" Input VAT relating to purchases of goods which are 52,985.00 Exhibit "FF", Annex "A" not supported by invoices 1,006,885.59 Exhibit "FF", Annex "B" Input VAT relating to importation of goods which are not covered by Import Entry and Internal Revenue 29,540.75 Exhibit "FF", Annex "C" Declarations Input VAT relating to purchases of services which 1,606,828.20 Exhibit "FF", Annex D " � are not covered by official receipts P3,644,242. 75 Input VAT relating to purchases of services which are supported by non-VAT official receipts Input VAT relating to purchases of services which were paid outside the period covered by the claim Subtotal Input VAT from Current Purchases ~ 11,903.64 Exhibit "D", Annex "C" (July 1, 2004 to December 31, 2004) Purchases of goods supported by non-VAT invoices 39 Exhibits "I-1" to "1-334", "J-1" to "J-554", and "GG-1'' to "GG-282". I \ 40 Exhibit "D". I' \l 41 Exhibit "FF".

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 21 of23 Purchases of services supported by non-VAT official 312,137.71 . receipts 377,645.09 175,872.99 Exhibit "D", Annex "D" Out of period purchases of goods Exhibit "D", Annex "E" 60,757.74 Exhibit "D", Annex "F" Out of period purchases of services 31,568.65 Exhibit "D", Annex "G" Exhibit "D", Annex "H" Out of period importation 673,181.47 Exhibit "D", Annex "I" Purchases of goods not supported by invoices Purchases of services not supported by official 961.00 Exhibit "D", Annex "J" receipts 69.00 Exhibit "D", Annex "K" Importation not supported by an Import Entry and Internal Revenue Declaration 1,818.18 Exhibit "D", Annex "L" Purchases of goods not made by P&G Asia Pte. Ltd. 43,713.78 Exhibit "D", Annex "M" Purchases of services not made by P&G Asia Pte. Ltd. 1,690.18 Exhibit "D", Annex "N" Importations where P&G Asia Pte. Ltd. is not the 44,259.64� Exhibit "D", Annex "0" consignee or importer of record Purchases of goods covered by invoices not tt1 ,735,579.07 registered with the BIR tt5,379,821.82 Non-VAT transaction Subtotal Total Upon examination of the Independent CPA's disallowed input VAT, amounting to P5,379,821.82, due to failure to comply with the substantiation requirements prescribed under Sections 11 O(A) and 113(A) of the NIRG of 1997, and Sections 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulations No. 7-95, the Court finds the same to be proper. Thus, out of petitioner's reported accumulated input VAT credits of P63,598, 157.93, only the amount of P58,218,336.11 represents its valid input VAT, computed as follows: Input VAT Carried Over from Previous Quarter fit 5,793,355.41 Input VAT from Current Purchases p 30,072,024.15 July to September 2004 27,732,778.37 October to December 2004 fit 57,804,802.52 Subtotal fit 63,598,157.93 Total Accumulated Input VAT Less: Not Properly Substantiated Input VAT 5,379,821.82 Valid Input VAT P58,218,336.11 However, a portion of the P58,218,336.11 input VAT shall be applied against petitioner's reported output VAT liability of P15,265,389.0842, for the period July 1, 2004 to September 30, 2004, . f \ 42 Line 19B, Exhibit "H".

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 22 of23 and P1 0,998,152.5243, for the period October 1, 2004 to December 31, 2004, or a total of P26,263,541.60. As a result, for the subject periods, only the remaining input VAT of P31 ,954,794.51 can be attributed to the entire zero-rated receipts amounting to P1, 120,743,409.42, and only the input VAT of P20,388,884.24 is attributable to the valid zero-rated receipts of P715,094,807. 76, as computed below: " Valid Input VAT p 715,094,807.76 ~ 58,218,336.11 Less: Output VAT P1 I 120,743,409.42 26,263,541.60 Excess Input VAT Mulitplied by: ~ 31,954,794.51 Valid Zero-Rated Receipts 63.8053993% + Total Declared Zero-Rated Receipts P20,388,884.24 Excess Input VAT Attributable to Valid Zero- Rated Receipts Finally, it was established that the aforesaid excess input VAT was not carried over in the succeeding quarters. Records show that petitioner's entire excess input VAT claims for the periods July 1, 2004 to September 30, 2004 and October 1, 2004 to December 31, 2004 in the respective amounts of P17,117,309.41 44 and P15,589, 137.3045 were deducted as "VAT Refund/TCC claimed" in the Quarterly VAT Returns for the same taxable quarters preventing the carry-ov,er or application of such input taxes in the next taxable quarters. In fine, petitioner has sufficiently proven its entitlement to a refund or issuance of tax credit certificate in the amount of P20,388,884.24 representing its unutilized excess input VAT for the periods covering July 1 to December 31, 2004 attributable to its zero- rated receipts for the same period. WHEREFORE, premises considered, the instant Petitions for Review are hereby PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND OR TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the amount of TWENTY MILLION THREE HUNDRED EIGHTY-EIGHT THOUSAND EIGHT f 43 Line 19B, Exhibit "L-3". 44 Line 25A, Exhibit "H". 45 Line 25A, Exhibit "L-3".

AMENDED DECISION CTA Case Nos. 7523 and 7556 Page 23 of23 .HUNDRED EIGHTY-FOUR PESOS AND 24/100 (P20,388,884.24), representing petitioner's unutilized input VAT for the periods July 1 to September 30, 2004 and October 1 to December 31, 2004. SO ORDERED. . ER~.UY. I CONCUR: Associate Justice r.v .... .RABON-VICTORINO ATTESTATION I attest 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. ER~.UY Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution and the Division Chairperson's Attestation, 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. Presiding Justice