NIPPON EXPRESS PHILIPPINE CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY SECOND DIVISION NIPPON EXPRESS PHILIPPINES C.T.A. CASE NO. 7429 CORPORATION, Members: Petitioner, -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, DEC 0 5 2008 / Respondent. 7 / <::::tL !�.'~ 0 f' '" X -------------------------------------------------------------~--------------------- X DECISION PALANCA-ENRIQUEZ, J.: Pursuant to Section 112 (A) of the National Internal Revenue Code of 1997 (hereafter "NIRC of 1997"), as amended, petitioner filed a claim for refund of its creditable input VAT attributable to its zero-rated sales. To do so, however, petitioner must be able to show that its input VAT paid and output VAT transactions are properly substantiated. Failure to w show proof of proper documentation is fatal to one's claim for refund or credit.

C.T.A. CASE NO. 7429 2 DECISLON THE CASE This is a Petition For Review filed on March 31, 2006 by Nippon Express Philippines Corporation (hereafter "petitioner") praying for the issuance of a tax credit certificate in the amount of P27,828,746.95, representing petitioner's alleged unutilized input tax attributable to its zero-rated sales for the taxable year 2004. THE PARTIES Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines. It is registered with the Securities and Exchange Commission under Certificate of Registration No. AS095-005669. Its principal office is at U-2701 Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Salcedo Village, Makati City. It is registered with the Large Taxpayer District Office (LTDO) of the Bureau of Internal Revenue, Revenue Region No. 8 (Makati) as a VAT taxpayer. Respondent Commissioner of Internal Revenue, on the other hand, is the duly appointed government officer vested with the power to decide, approve, and grant refunds or tax credits of overpaid internal revenue taxes, as provided by law. ~

C.T.A. CASE NO. 7429 3 DECISION THE FACTS In their "Joint Stipulation of Facts and Issues", the parties stipulated, as follows : "4. Petitioner filed an administrative claim for tax credit of the excess/unused Php27,828,746.95 input taxes attributable to its zero-rated sales with the LTDO, Revenue District No. 8 (Makati City) on 30 March 2005. 5. Petitioner filed its VAT returns for the first, second, third and fourth quarters of taxable year 2004, as follows: Return Period Reference Filin~ Date Tax Type Form Type 1'1 Qtr 2005 100400000141 952 04-25-2005 VT 2550-Q 100400000141 952 2550 1' 1 Qtr 2004 I 001000001493 93 04-26-2004 VT 2550 1'1 Qtr 2004 100400000178789 05-22-2004 VT 2550 (Am e nd e d) 100500000720555 2550 2"d Qtr 2004 07-26-2004 VT 100400000273031 2550 2"0 Qtr 2004 100500000378693 I 0-07-2005 VT 2550 (Amended) 100500000380955 2550 3'0 Qtr 2004 10-25-2004 VT 41' Qtr 2004 Ol -24-2005 VT 41" Qtr 2004 01-2 2-2 00 5 VT (Amended) 6. Respondent has not yet resolved Petitioner's administrative claim for refund filed on March 30, 2006." In her Answer, respondent alleged by way of special and affirmative defenses: "4. Petitioner's alleged claim for issuance of tax credit certificate is still subject to administrative routinary investigation/examination by the respondent's Bureau; 5. Taxes paid and collected are presumed to have been made in accordance with law, hence, not refundablv

C.T.A. CASE NO. 7429 4 DECISION 6. Petitioner' s claimed refund or tax credit in the amount of P27,828,746.95, as alleged excess VAT input tax paid on its domestic purchases of goods and services attributable to its zero-rated sales, for the four quarters of taxable year 2004 were not fully substantiated by proper documents. 7. Petitioner fai led to comply with the substantiation requirements under Revenue Regulations No. 7-95 in relation to Section 113 and 237 of the 1997 Tax Code. 8. In an action for refund/credit, the burden of proof is on the petitioner to establish its right to ref-und and failure to adduce sufficient proof is fatal to the claim for tax refund/credit. 9. Petitioner's sales of services to Philippine Economic Zone Authority (PEZA) registered enterprises do not qualify as zero-rate VAT. 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 fai lure to prove the same is fatal to its claim for refund. 11. Claims for refund are construed strictly against the claimant for the same partakes 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 R evenue, 124 SCRA 1211)." Petitioner presented Normita L. Villaruz, the Managing Partner of Villaruz, Villaruz & Co., the Court-Commissioned Independent Certified Public Accountant (!CPA); and Virgincita B. Alapan, its As~t

C.T.A. CASE NO. 7429 5 DECISION Finance Manager, as witnesses; and documentary evidence marked as Exhibits "A" to "V", inclusive of their submarkings, which were admitted by the Court in the Resolutions dated August 7, 2007 and January 28, 2008. On the other hand, respondent submitted the case for decision without presenting any evidence. Thereafter, both parties were granted thirty (30) days from May 14, 2008 to file their simultaneous memoranda. Upon motion of petitioner, petitioner was granted an extension of fifteen (15) days from June 13, 2008 or until June 28, 2008 to file its memorandum in a Resolution dated June 17, 2008. On June 30, 2008, petitioner filed its "Memorandum For the Petitioner". On July 3, 2008, for failure of respondent to file her memorandum, the case was deemed submitted for decision. Hence, this decision. THE ISSUES As stipulated upon by the parties, the Issues for this Court's resolution are: I WHETHER OR NOT PETITIONER'S ALLEGED SALES OF SERVICES TO VARIOUS PHILIPPINE ECONOM~

C.T.A. CASE NO . 7429 6 DECISION ZONE (PEZA) REGISTERED ENTERPRISES ARE ZERO-RATED FOR VAT PURPOSES UNDER SECTION 108(B)(2)(3) OF THE 1997 TAX CODE. II WHETHER OR NOT PETITIONER'S CLAIM FOR REFUND/TAX CREDIT IN THE AMOUNT OF PHP27,828,746.95 , AS ALLEGED EXCESS CREDITABLE INPUT VAT PAID ON ITS DOMESTIC PURCHASES OF TAXABLE GOODS AND SERVICES ATTRIBUTABLE TO ITS ZERO-RATED SALES, FOR THE FOUR (4) QUARTERS OF TAXABLE YEAR 2004 WERE DULY SUBSTANTIATED BY PROPER INVOICES OR RECEIPTS, IN ACCORDANCE WITH THE TAX CODE. III WHETHER OR NOT THE AMOUNT OF PHP27,828,746 .95 , BEING CLAIMED BY PETITIONER AS ALLEGED EXCESS CREDITABLE INPUT VAT PAID ON ITS DOMESTIC PURCHASES OF TAXABLE GOODS AND SERVICES, ARE ATTRIBUTABLE TO ITS ZERO-RATED SALES FOR THE FOUR (4) QUARTERS OF TAXABLE YEAR 2004. IV WHETHER OR NOT PETITIONER HAS CARRIED OVER TO THE SUCCEEDING TAXABLE QUARTERS/YEARS THE ALLEGED EXCESS CREDITABLE INPUT VAT PAID ON ITS DOMESTIC PURCHASES OF TAXABLE GOODS AND SERVICES ATTRIBUTABLE TO ITS ZERO-RATED SALES, FOR THE FOUR (4) QUARTERS OF TAXABLE YEAR 2004 AND APPLIED THE SAME TO ITS OUTPUT VAT LIABILITY FOR THE SAID PERIOD. ~

C.T.A. CASE NO. 7429 7 DECJSlON v WHETHER OR NOT PETITIONER IS ENTITLED TO THE CLAIMED REFUND IN THE AMOUNT OF PHP27,828,746.95, AS ALLEGED EXCESS CREDITABLE INPUT VAT PAID ON ITS DOMESTIC PURCHASES OF TAXABLE GOODS AND SERVICES ATTRIBUTABLE TO ITS ZERO-RATED SALES, FOR THE FOUR (4) QUARTERS OF TAXABLE YEAR 2004. Principal Issue The foregoing issues boil down to the principal issue of whether or . � not petitioner is entitled to the refund or issuance of a tax credit certificate in the amount of P27,828,746.95, representing unutilized input VAT attributable to its zero-rated sales for taxable year 2004. THE COURT'S RULING The petition is without merit. Petitioner anchors its claim for refund on Section 108(B)(2) and (3) of the NIRC of 1997, as amended, which provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease ofProperties. - XXX XXX (B) Transactions Subject to Zero Percent (0%) Rate. - The fo llowing services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: XXX XXX (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable forei~

C.T.A. CASE NO. 7429 8 DECISION currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; XXX xxx" Corollary thereto, Section 3(3) of Revenue Memorandum Circular No. 74-99, dated October 15, 1999, provides: "SEC 3. Tax Treatment Of Sales Made By A VAT Registered Supplier From the Customs Territory, To a PEZA Registered Enterprise. - XXX XXX (3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. I06(A)(2)(a)(5), NlRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Sec. I08(B)(3), NIRC, in relation to the provisions of R.A. 7916 and the 'Cross Border Doctrine' of the VAT system . This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular." Pursuant to the aforecited provision, petitioner's alleged sales m the total amount ofP1,079,734,740.46 (Exhibit"!") derived from fr~

C.T.A. CASE NO. 7429 9 DECISION forwarding services rendered to PEZA-registered entities are subject to 0% VAT. Consequently, petitioner is not liable to pay any output VAT thereon, and the reported unutilized input VAT attributable thereto may be the proper subject of a claim for refund or issuance of a tax credit certificate, under Section 112(A) of the NJRC of 1997, as amended, which provides: "SEC. 112. Refunds or Tax Credits ofI nput Tax- (A) Zero-rated or E.ffectively Zero-rated Sales.- Any VAT-registered person, whose sa les are zero-rated or effectively zero-rated may, within two(2) years after the close of the taxab le 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 I 06(A)(2)(a)( l), (2) and (B) and Section 108(B)(l) 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 (SSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entire ly attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." Pursuant to the above provision, an unutilized input tax ansmg from purchases of goods and services evidenced by a VAT invoice or official receipt issued, in accordance with Section 113 of the NJRC of 1997, as amended, which is attributable to zero-rated sales or effectively zero-rated sales under Sections 106 and 108 of the same Code, may be refunded or credited against other internal revenue taxes of the clairna0P

C.T.A. CASE NO. 7429 10 DECISION Invoicing Requirements However, Sections 106, 108, 110, and 112 of the NIRC of 1997, as amended, should be read in conjunction with Section 113 of the same Code, which provides for the invoicing and accounting requirements for VAT-registered persons, as follows: "SEC. 113. Invoicing and Accouuting Requirements for VAT-registered Persons. - (A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TTN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. (B) Accounting Requirements. Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance." Corollary thereto, Section 237 of the NIRC of 1997, as amended, provides: "SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however. That in theca~

C.T.A. CASE NO. 7429 11 DECISION of sales, receipts or transfers in the amount of One hundred pesos (PI 00.00) or more, or regardless of amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered person , in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser. The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in hi s place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period . The Commissioner may, in meritorious cases, exempt any perso n subject to internal revenue tax from compliance with the provisions of this Section." It is clear from the aforecited provisions that the law requires the issuance of invoices or receipts for every sale of a VAT registered person. Such requirement is mandatory in nature and consequently, non- compliance regarding the issuance of such important documents is fatal to one's claim for credit or refund of its input taxes. The relevance of such requirement is obvious: the presentation of invoices and/or receipts will prove the existence and nature of the transactions and will be a basis for computation of taxes. The law does not only demand the substantiation of invoices or receipts for input taxes, but more importantly for output taxes especially for those claiming zero-rated sales as this will dete~

C.T.A. CASE NO. 7429 12 DECISION the creditable or unutilized input taxes that are available for refund. It must be stressed that the invoicing requirements not only pertain to the documents required to prove input taxes, but also requires the presentation of proper documents to prove the existence and/or non- existence of output taxes. In suppmt of its claim, petitioner submitted the following documents: 1) Report of the Court-Commissioned Independent CPA (ICPA) {Exhibit "N''); 2) Summary of Sales/Summary of Input Taxes and Output Taxes, and the Allocation of Unutilized Input Tax to zero-rated sales {Exhibit "! '); 3) Certification/Confirmation issued by the PEZA manager for Enterprise Regulation and Support Service Group containing the list of petitioner's customers who are registered Zero-Rate Enterprises of the PEZA {ExhibUs "VVV" to "VVV- 1 ''); 4) Airway Bills/ Bills of Lading, Debit Memos and Sales Invoices {Exhibits "T", "T- 1 " to "T-142222 '');

C.T.A. CASE NO. 7429 13 DECISION 5) Offsetting Agreements, Intercompany Statement of Accounts, Transfer Slips Payment Summary, Bank Certificate of Inward Remittance and Bank Credit Advice (Exhibits "U"to "U-40). After a careful examination of the evidence presented by the petitioner, the Court finds that the documents suppmiing petitioner's zero-rated sales, as verified by the Court-Commissioned ICPA, consisted of documents, other than official receipts. The question now is whether the sales invoices petitioner issued to its PEZA registered entities are sufficient to prove the alleged zero-rated sales which, in turn, would entitle it to a ref1.md of input taxes for the said period. We rule in the negative. Petitioner's claim for refund is founded on its zero-rated sales of services, therefore, the applicable law is Section 108 (B)(2)and (3) ofthe NIRC of 1997, as amended, which requires the issuance of official receipts, to wit: "SEC. 108. Valued-Added Tax on Sale of Services and Use or Lease of Properties. - (A)Rate and Base of Tax. -There shall be levied, assessed and collected, a value added tax equivalent to ten percent (10%) of gr~

C.T.A. CASE NO. 7429 14 DECISION receipts derived from the sale or exchange of services, including the use or lease of properties. XXX XXX (C) Determination of the Tax. - The tax shall be computed by multiplying the total amount indicated in the official receipt by one- eleventh (1/11)." Pursuant to the above provision, in case of sale of services, the 10% VAT is computed based on gross receipts, which is defined under Section 108 (A) of the NIRC of 1997, as amended, as the "total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Accordingly, the VAT on the sale of services accrues upon actual or constructive receipt of the consideration, regardless of whether or not the service has been rendered. It is for this reason why the tax shall be computed by multiplying the total amount indicated in the official receipt by 1111. These distinctions in the substantiation requirements between the sale of goods and services are expressly provided under Section 11 of~

C.T.A. CASE NO. 7429 15 DECISION 9337, amending Section 113 of the NIRC of 1997, as amended, which expressly provides for the invoicing requirements of VAT-registered persons to issue a VAT invoice for every sale, barter or exchange of goods or properties, and a VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Thus, being engaged in the sale of services to its clients, petitioner should produce official receipts to prove the alleged zero-rated sales of services to its PEZA registered entities. The sales invoices that petitioner issued are not sufficient to meet the invoicing requirements prescribed by Jaw. Section 237 of the NIRC of 1997, as amended, explicitly provides that an official receipt should cover sales of services. It does not provide for any other document which can be used as an alternative to or in lieu of an official receipt. Failure to Comply with the Invoicing Requirements: Effects thereof Revenue Memorandum Circular No. 42-2003 (Clarifying Certain Issues Raised Relative to the Processing of Claims for Value-Added Tax (VA1) Credit/Refund, Including Those Filed with the Tax and Revenue Group, One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, Department of Finance (OSS) by Direct Exporters) expressly provides that the failure to comply with the invoicing requirements on the documents supporting the sale of g~

C.T.A. CASE NO. 7429 16 DECISION and services will result to the disallowance of the claim for input tax of the taxpayer claimant. Pertinent portion of said Revenue Memorandum Circular reads as follows: "A-13. Failure by the supplier to comply with the invotcmg requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant. If the claim for refund/TCC is based on the existence of zero- rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TlN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer." The aforequoted provision clearly mandates that if the claim for refund/issuance of tax credit certificate is based on the existence of zero- rated sales by the taxpayer, but it fails to comply with the invoicing requirements, the claim for tax credit/refund of input VAT shall be denied. Without proper VAT official receipts issued to its clients, the payments received by petitioner for providing services to PEZA- registered entities cannot qualify for zero-rating for VAT purposes. Therefore, petitioner is not entitled to a ref-und.

C.T.A. CASE NO. 7429 17 DECISION Having definitively disposed of the case through the resolution of the principal issue, We find no need to pass upon the other incidental issues raised for being moot and academic. WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE, and accordingly, DISMISSED for lack of merit. SO ORDERED. ~ OLG~ ~ PALAN~ CA-EN-R~ IQUEZ Associate Justice WE CONCUR: EA~R~~st.iUcYe fV~Af NIToOeC. .CA~ST~AN~ED~Q-J.R. Associate Justice 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. 9.:::~fu c .as-~;~c~ ~ - JUANITO C. CASTANEDA, JR. Associate Justice Chairperson, Second Division

C.T.A. CASE NO. 7429 l8 DECISION 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. t-v~.~~~ ERNESTO D. ACOSTA Presiding Justice