Sitel Philippines Corporation (formerly Clientlogic Philippines, Inc.) v. Commissioner of Internal Revenue

REPUBliC OF THE PHiliPPINES COURT OF TAX APPEAlS QUEZON CITY FIRST DIVISION SITEL PHILIPPINES. INC., C.T.A. CASE NO. 7186 {Formerly Clientlogic Philippines, Inc.) � Petitione~ . Members: -ve rsu s- ACOSTA,Chakperso~ BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, Respondent. �X--------- ------ - - - --- -- ---- ----- -- - -X DECISION ACOSTA, P.J.: The instant Petition for Review seeks the refund or issuance of tax credit �certificate in the total amount of P28,416,338.34i representing unutilized input va lue- added tax (VAT) allegedly incurred by petitioner for taxable year 2003 from its domestic purchases of goods and services attributable to zero-rated transactions and purchases/importations of capital goods. 114

DECISION CTA Case No. 7186 STATEMENT OF FACTS Sitel Philippines, Inc. (Petitioner) is a corporation organized and existing under the laws of the Philippines, with office address at the 22nd floor, Wynsum Corporate Plaza, Emerald Avenue, Ortigas Center, Pasig City.1 It is engaged in the business of providing call center services from the Philippines to domestic and offshore businesses, including tactical telemarketing campaigns and programs and customer relationship management services. Petitioner was formerly known as "Contact World, Inc." prior to the change in its corporate name to "Ciientlogic Philippines, Inc.", as evidenced by the Certificate of Filing of Amended Arti<:les of Incorporation issued by the Securities and Exchange Commission (SEC) . It is registered with the Bureau of Internal Revenue I � (BIR) as a VAT taxpayer, with Tax Identification No. (TIN)/VAT Registration No. 208- 780-708 effective December 14, 2000 and BIR Certificate of Registration No. OCN � 3RC0000244761. It is also registered with the Board of Investments (BOI) as a new information technology service firm in the field of call center on pioneer status, with BOI Certificate of Registration No. 2001-091. On the other hand, respondent is the duly appointed Commissioner of Internal Revenue, vested under appropriate laws with the authority to carry out all the functions, duties and responsibilities of the said office, including, inter alia, the power to decide, approve, and grant refunds and tax credits of erroneously paid or illegally collected � internal revenue taxes. He holds office at 5th Floor, BIR National Office Building, Agham Road, Quezon City. 1 Par. 1, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 70. 11 5

DECISION CfA Case No. 7186 For ta xable year 2003, peliliuner fi led ~ and subsequently ame:i-.ded3 its Quarterl'{ � VAT Returns on t he following dates: Period Covered Date Filed Date Amended 1st Qua rter 2003 April 11 2003 A_Qril 12, 2004 2nd Quarter 2003 July 10 2003 December 6 2004 3rd Quarter 2003 October 27 2003 December 17 2004 4th Quarter 2003 January 26, 2004 December 28 2004 Petitioner fil ed its separate formal cl aims for refund or issuance of tax credit with the One Stop Shop Inter-Ag ency Tax Credit and Duty Drawback Center of the Departme~t of Financ.e on the fallowing da~es4 : Period Covered Date Fi led 1st Qua rter 2003 July 21 2004 2nd Quarter 2003 December 13 2004 3rd Quarter 2003 December 20 2004 4th Quarter 2003 December 29 2004 Up to this date, respondent has not acted upon petition er's claim for refund or tax credit. Thus, in order to toll the run ning of the statutory period of two (2) years within which to fi le a judicial acti'on for refurid or issuance of tax cred it certificate, � petitioner fil ed this instant Petition for Review on March 31, 2005. On May 30, 2005, respondent fil ed his Answer raising the f ollowing Special and Affirmative Defenses: 2 Par. 8, JS A, Docket, p. 71 3 Par. 9, JSFI, Docket, p. 71 4 � Annexes "E", "F", "G", " H", Petiti on for Review; Par. 10, JSFI, Docket, pp . 71-72 11G

DECISION CfA Case No. 7186 "8. The claim for refund is still under examination by the re:sponLient's Bureau ; 9. The burden of proof is upon the petitioner to prove that it is entitled to the claim for refund or issuance of tax credit certificate; 10. The grant of claim for refund tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; 11. The taxes sought to be refunded were paid in accordance with law; the burden of proof to the contrary is upon the petitioner-claimant to show with clear and unambiguous-�provision of law supporting the same." On February 7, 2008, this case was subm itted for decision considering the Memorandum filed by petitioner on January 17, 2008, while respondent did not file any. STATEMENT OF ISSU'ES "1. Whether or not the petitioner has unutilized input VAT arising from purchases of goods and services; 2. Whether or not the transactions of the Petitioner are subject to VAT at zero percent (0%); 3. Whether or not there is unutilized VAT after applying the output VAT; and 4. Whether or not the claim is duly substantiated." THE COURT'S RULING The issues raised by the parties may be summed up into one issue: Whether or not petitioner is entitled to a refund or issuance of tax credit certificate of its alleged unutilized input VAT in the amount of P28,416,338.34, arising 117

DECISION CTA Case No. 7186 from domestic purchases of goods and services attributable to zero-rated sales and purchases/importations of capital goods for taxable year 2003. For the four quarters of taxable year 2003, petitioner filed with the BIR its VAT Returns declaring zero-rated sales/receipts in the amount of P378,217,532.95, taxable sales in the amount of P11,671,688.80, output VAT due in the amount of P1,167,168.87, and input VAT in the amount of P28,872,713.69, broken down as follows: Year Zero-Rated Taxable Sales. Exhibit 2003 SalesI Receipts Output VAT Input VAT p 5,114,598.32 p 511,459.83 p 4,298,417.44 A 1st qtr p 30,769J97.62 2,506, 766.89 76,150,758 .12 1,324,654.34 250,676 .68 8,460,869.81 B 2nd qtr 92,193,058.46 2 72 5 669.25 132,465 .43 10,900,669.29 272 566.93 5 212 757.15 c 3rd qtr 179 103 918.75 Pll 671 688.80 P1 167 168.87 P28,872 713.69 P378 217 532.95 D 4th qtr Total Out of the reported input VAT of P28,872,713.69, only the amount of P28,416,338.34 is the subject of the present claim, which alleged ly consisted of P14,941,962.02 input VAT on capital goods purchased and P13,474,376.32 input VAT attributable to zero-rated sales, detailed as follows: Period Input Tax from Input Tax Attributable Total Input Tax For 1st qtr Capital Goods to Zero-rated Sales Refund or Tax Credit 2nd qtr p 1,277,208.17 3rd qtr p 2,808,909 .96 3,600,068.86 p 4,086, 118.13 4th qtr 4,742 ,292 .17 8,342,361.03 Total 6,195,204.85 4,616 ,450.09 2,40 1,894.44 10,811,654.94 2,774,309 80 p 13,474,376.32 5, 176,2 04.24 p 14,941 ,962.02 p 28,416,338.34 118

DECISION CTA Case No. 7186 Petitioner anchors its cla im on Sections 110(8) and 112(A) and (R) of the National Internal Revenue Code (NIRC) of 1997, which are all quoted hereunder: "SEC. 110. Tax Credits. - XXX XXX XXX {B) Excess Output or I nput 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 t he succeeding quarter or quarters. Any input tax attributable to .the purchase of capital goods or to zero-rated sales by a VAT-registered persdn may : CJt his option be refunded or credited against other internal reven ue taxes, subject to t he provisions of Section 112." "SEC. 112. Refunds or Tax Credits of I nput Tax. - {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) yea rs after the close of the t axable quarter when the sales were made, apply for the issuance of a tax credit certitlcate or refund of creditable input tax due or paid attributable to such sa les, except transitional input tax, to t he 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 Bang ko Sentra l ng Pili pinas (BSP): Pro vided further, That where the ta xpayer is engaged in zero-rated or effectively zero- rated sale and also in taxable or exem pt sale of goods or properties or services, and the amount of creditabl e input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportion ately on the basis of volume of sa les. {B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certi fi cate or refund of input taxes paid on capita l goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) yea rs after the close of t he taxable quarter when the importation or purchase was made." 11!)

DECISION J CTA Case No. 7186 The Court shall first disc.uss petitioner's claimed input VAT attribulalile lo zero - rated sales in the amount of P13,474,376.32. Section 112 of the NIRC of 1997 entitles a VAT-registered person to a refund/tax credit of input VAT attributabl e to zero-rated sa les/receipts su bject to its compliance with the following requisites : 1. there must.be zero-rated or effectively zero-rated sales; 2. that input taxes were �incurred �or�paid; � . 3. that such input VAT payments are di~ectly attributable to zero-rated sales or effectively zero-rated sales; 4. that the input VAT payments were not applied against any output VAT liability; and 5. that the claim for refund was filed within the two-year prescriptive period. Petitioner generated majority of its sales for taxable year 2003 from its call center services from the Philippines to domestic and offshore business including, but not limited to, tactical telemarketing campaigns and programs and customer relationship management services. In order to prove its alleged zero.rated sa les, petitioner forma lly offered, among others, its VAT SeJVices Invoices and Billing Statements, VAT Official Receipt~, Bank Account PassbooK, Certificate of Inward Remittance dated July 26, 2004 bearing number 0124/04 issued by Metropolttan Bank and Trust Company, I Schedule of Inward Remittances for 200f, Breakdown of Remittances Not Related to 5 Exhibits "W", "VV-1" to "VV-951 ", inclusive of sub-markings 6 " WW ", "WW-1" to "WW-41", inclu sive of sub- markin gs P<hibits ~Exhibits "XX', "XX-1" to "XX-11", inclusive of sub-markings 8 Exhibit "NN" 9 Exh~its "YY" and "YY-1", inclusive of sub-markings .. 120

DECISION J CTA Case No. 7186 Zero -Rated Sale s 0 and Various Documents Supporting Remittances Not Related to / Zero-Rated Sales1� Value-added tax at zero percent (0%) rate is imposed on revenues derived from sale of services aside from processing/ manufacturing or repackaging of goods for other person doing business outside the Philippines which .goods are subsequently exported 1 provided that the transaction is paid for in acceptable foreign currency and accounted for in accordance with the rules .and regulations of the Bangko Sentral ng Pilipinas (BSP) under Section 108(8)(2) of the NIRC of 1997, Which states: "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�/o) 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, t he 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 (SSP);." Nevertheless, after a thorough review and evaluation of the documentary evidence submitted, the Cou rt notes that petitioner did not present any evidence to prove that � 10 11 Exhibits"ll" and "ZZ-1"1 inclusive of sub-markings Exhibits "AAA-1" to "AAA-73"1 inclusive of sub-markings 121

DECISION J CTA Case No. 7186 the foreign clients to whom petition er rendered service were doin g business outside the Philippines. In the case of Commissioner of Internal Revenue vs. Burmeister and Wai n Scandinavian Contractor Mindanao, I n c . 12 the Supreme Court held that another , essential condition to qualify for zero-rating under Section 108(8)(2) [then Section 102(b)(2)] is that the recipient of such services is doing business outside the Philippines. Th~ Court quotes the pertinent portion of the said Decision: "The Tax Code not only requires that the services be other than 'processing, manufacturing or repacking of goods' and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102 (b) (2) is that the recipient of such services is doing business out~ide the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102 (b), this is clearly provided in the first paragraph of Section 102 (b) where the listed services must be 'for other persons doing business outside the Philippines.' The phrase 'for other persons doing business outside the Philippines' not only refers to the services enumerated in the first paragraph of Section 102 (b), but also pertains to the general term 'services' appearing in the second paragraph of Section 102 (b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippi nes. " This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the 'other services' are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102 (a) dependent .on the generosity of the taxpayer. The provider of services can choose -to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102 (a) as a tax measure in the Ta x Code, I 12 G.R. No. 153205, January 22, 2007 122

DECISION CTA Case No. 7186 an interpretation this Court cannot sanction . A tax is a mandatory exaction, not a voluntary contribution." Likewise in the case of Accenture Inc. vs. Commissioner of Internal Revenue13, this Court ruled that it is improper to simply assume that a foreign client is doing business outside the Philippines, and explained the same in th e following manner: "The phrase 'foreign clients' is couched in its generality that the Court cannot simply just assume that they are engaged in doing business otJtsiqe the Phil ippines. . A 'foreign client' may also be engaged in doing business in the Philippines and in that cas~, when petitioner and recipient of its services are both doing business in the. Philippines, thei r transaction falls squarely under Section 108 (A) of NI,RC of 1997 governing domestic . sale or exchange of services subject to 12% VAT. Even if there is an allegation that these foreign clients are doing business outside the Philippines, still the Court ca nnot give weight to such all egation. Mere allegations are not sufficient but must be accompanied by supporting evidence." In the instant case, petitioner did not submit proof that petitioner's foreign clients are doing business outside the Phi lippines. The docum ents submitted by petitioner merely established the existence of the fol lowing: (1) the sa le; (2) the payments of its service fees were in accepta ble fore_ign currency; and (3) the proceeds of such sales tra.nsactions were inwardly remitted to the Phi lippines and accounted for in accordance with BSP rules. In this regard,, petitioner failed to prove that its sales of '. services to foreign clients qualify for zero percent VAT. Well-settled is the rul e that a claim for refund is �constru ed strictissimi juris against the taxpayer as it partakes the nature of exemption from taxation .14 Besides, 13. CfA Case Nos. 7158, 7285 and 7313, August 7, 2008 123

DECISION J CTA Case No. 7186 the Court believes that in claims for re fund, the law mandates courts to observe a higher standard of caution in appreciating and evaluating evi~ence . If indeed a claim for refund is wanting in pertinent and supporting evidence, then the granting thereof could prove to be improper, if not difficult. 15 Therefore, petitioner in claiming for tax refund has the burden of proof to establish the factual basis of its claim. Due to petitioner's failure to establish that it had zero-rated sales/receipts for the subject peri od of claim, the input VAT Claim in the amount of P13,474,376.32 which is allegedly attributabie thereto cannot be granted; since the refund/tax credit of input VAT I I under Section 112(A) of the NIRC of 1997 is premised on the existence of zero-rated or effectively zero-rated sales. The Court now proceeds to discuss the rema ining input VAT claim of P14,941,962.02 allegedly attributable to petitioner's capital goods purchases. Pursuant to the earlier quoted provision of Section 112(8) of the NIRC of 1997, in order to be entitled to a refund/tax credit of input tax paid on capital goods purchased, petitioner must prove : 1. that it is a VAT-registered entity; 2. that input taxes were paid on capital goods imported or locally purchased; 3. that such input taxes were not applied against any output VAT liability; and 11 vs. Court of Appeal s, eta!., G.R. No. 107434, October 10, 1997 Otibank N.A. 15 EON Joint Venture Inc. vs. Comm issioner of Internal Revenue, CTA Case No. 6398, f'v1ay 26, 2003 124

DECISION CfA Case No. 7186 4. that the claim fo r refu nd was fil ed within the two-year prescri ptive period. The parties stipulated that petitioner is a VAT-reg istered entity16. Similarly, it is established that the claimed amount of P14,941,962.02 was not applied against any output VAT liability during and in the succeeding period of claim, as evidenced by petitioner's Quarterly VAT Returns for the four quarters of taxable year 2003 and first quarter of taxable year 2004.17 Moreover, records disclosed that the subject cla im was seasonably filed both in the administrative and judicial levels. The reckoning of the two- year prescriptive period for the filing of a claim for input VAT refund commences from the date of filing of the corresponding Quarterly VAT Return and payment of the tax due/8 which in the instant case was on April 11, 2003. Counting from the sa id date, the administrative claims filed on July 21, 2004, December 13, 2004, December 20, 2004, and December 29, 2004/9 and the Petition for Review filed on March 31 , 2005, were� timely filed within the two-year prescriptive period. ,. As to whether or not �petitioner incurred input taxes in the amount of P14,941,962.02 on capital goods purchased, the Court--commissioned Independent CPA made the following findings and observations in her Final and Consolidated Report dated November 15, 2006: 20 �. � ' 16 Par. 6, Stipulated Facts, JSFI, Docket, p. 71 17 Exhibits "A"," B", " C", "D", "E" and " F" 18 Atlas Consolidated Mining and Development Corporation vs. Commissioner of Interna l Revenue, G.R. Nos. 141104 and 148763, June 8, 2007 J' , . . .__._ 19 Annexes "E", "F", "G", and "H", Petition for Review 20 Exhibit "TT", pages 17 and 18 125

DECISION _j ITA Case No. 7186 VI. . VERIFICATION OF HIE UN UHLIZED/UNAPPLIE D :fNPUT VAT ON PURCHASES OF CAPITAL GOODS. 1. XXX 2. Based on the proced ures we performed to check the Company's compliance with the substantiation requirements of input ta x on purchases of ca pital goods clai med for t he period from January 1, 2003 to December 31, 2003 amounting to P14,94 1,962.76, which is part of t he Company's claim for refund/tax credit as indicated in the Petition for Review, we present below our findings and observations: Fin dings Refe r ence Amount of I nput Tax 1. There are input taxes cla imed on purcha's.:s of goods and services wh ich ar�e substantiated for VATpurposes: a. Domestic purchases of goods properly_ (Annex 30) p 4,594,035.12 supported by VAT invoices b. Domestic purchases of services properly (Annex 31) 753,733 .93 supported by VAT ORs c. Domestic purchases of services supported (Annex 32) 3,5 76,444.27 by ORs pre-printed TIN-V after July 31 , 199 1 but before January 1, 1996 d. Domestic purchases of services supported by (Annex 33) 721,511.87 ORs printed before July 31, 1991 There are input taxes claimed on purchases of 2. Capital goods and services which are supported by the following documents: a. Domestic purchases of goods supported by (Annex 34) 17,823.64 documents, other than invoices, showing that 764,047.49 VAT was passed (e.g. VAT ORs) 62 7,140 .58 b. Domestic purchases of goods and services (Annex 35) 1, 685,3 71.82 supported by documents, other than VAT invoices or ORs (e.g. telegraphic transfer, f~ deposit slips, progress billings, etc.) c. Domestic purchases of goods and services (Annex 36) supported by invoices and ORs printed with (Annex 37) "TAN-VAT", "NON VAT" or "TIN" :. d. Domestic purcha ses of goods supported by VAT invoices but the same are not dated 12G

DECI SION J GA Case No. 7186 within the taxable year of claim e. Purchases of Capital Goods Supported by (Annex 38) 2,019,949 .00 Photocopy of Import Entry & Internal Revenue Declaration where the amount of Claimed Input Tax is in Excess of t11e Amount Claimable as Independently Computed 3. Tl1ere are input taxes cla imed on purchases of . (Annex 39) 181,905.04 capital goods and services without supporting Documents Grand Total P14,941,962.76 I Based on the above findings, only trhe input taxes under items l.a, l.b, 2.a and 2.c, in the respective amounts of P4,594,035.12, P753,733.93, P17,823.64, and P627,140.58 respectively, in the total amount of P5,992,733.27 are duly supported by the evidence requ ired by law. The remaining' input VAT claim in the amount of P8,949,229.49 shal l be denied for the above-stated reasons. Per petitioner's Reconciliation of Additions to Prope1ty, Plant and Equipment, 21 audited balance sheets as of December 31, 2003 and 2002, and the related Notes to Financial Statements (Nos . 3 and 5, pages� 3 and 5)/2 the substantiated input VAT of P5,992,733.27 pertains to petitioner's purchases of software, computers and peripherals, telecommunication equipment, office furniture and equipment and leasehold improvements. Since these purchases (a) are in the nature of depreciable assets which have economic useful life of more than one year, (b) formed part of petitioner's Property, Plant and Equipment and (c) used directly or indirectly in petitioner's business, 21 Exhibits "EEE-1" to "EEE-8" 22 Exhibit "SS" 127

. ,., DECI SION ) CfA Case No. 7186 the same fall within t he defini tion of "capital goods" under Section 4.106- 1 of RR 7-95, to wit: "SEC. 4.106- 1. Refunds or Tax Credits of Input Tax.- (a) xxx (b) Capita l Goods- xxx '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 (fl used directly or indirectly in the production or sale of taxable goods or se!Vices. '' From the foregoing, petitioner is entitled to the issuance of tax credit certificate or refund of the am ount of P5,992,733.27, representing input VAT paid on capita l goods purchased for taxabl e year 2003. WHEREFORE, petitioner's claim for refund or issuance of tax credit certificate is hereby PARTIALLY GRANTED. Accordingly, respondent is hereby ORD ERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of P5,992,733 .27, representing input VAT paid on capital goods purchased for taxable yea r 2003 . SO ORDERED. ~ '\--=--�IP � c~ ~ ERNESTO D. ACOSTA Presiding Justice ..~f-1'..1-L---ft', BAUTISTA ;tXssociate Justice /' -~ CAESARA. CASANOVA Associate Justice 128 I

DECISION j GA Case No. 7186 CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consu ltation before the case was assigned to the writer of the opinion of the Court's Division. L~.c~ ERNESTO D. ACOSTA Presiding Justice 129