NICHIMEN CORPORATION (MANILA BRANCH) v. THE COMMISSIONER OF INTERNAL REVENUE

,, REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY NlCHlMEN CORPORATION (MANILA llRANCH), Petitioner, "'versus - C.T.A. CASE NO. 5746 THE COMMISSIONER OF INTERNAL Promulgated: REVENUE, R~�pondent. JAN 04 200! ?~ "'~ 5 X .. - - ., - - ...... ,. "'"' - - - - - - - - X ~~- ~ t..o - .... - - - ._ - - - ""' - - - - - - - - - - - - - - - - - - - - - - - ,.. - . ,. DECISION i his is a Petition for Review filed by Petitioner seeking for the refund or issuance of a tax credit certificate in the amount of ONE MILLION EIGHTY NINE THOUSAND FIVE HUNDRED FIFTY TWO and 37/100 PESOS (Pl,089,552.37) allegedly representing the excess unutilized input value-added tax (VAT) payments on its purchases of taxable goods and services for the taxable year 1997. The stipulated facts as admitted by ~he panies are as follows: "1. Petitioner is a resident foreign corporation organized and existing w1der and by virtue of the faws of Japan but duly licensed to do business in the Philippines, through its Manila Branch with office at the 20/F Pacific Star Bldg., Sen. Gil Puyat Avenue, Makati City; 2. Respondent is the duly appointed Commissioner of Internal Revenue, vested by law with power and authority to act and decide upon applications for refund or tax credit of excess internal revenue tax payments, as provided by law, with office at the 5/F, BIR, National Office Building, Diliman, Quezon City; 3. Petitioner is duly licensed, among others, to engage in the business of purchase, acquisition, import and export, sale on wholesale 51

DECISION- CTA CASE NO. 5746 PAGE2 basis and indenting of all kinds of merchandise of goods as well as to engage in manufacturing activities; 4. Pursuant to Section 107 of the National Internal Revenue Code, as amended by Executive Order No. 23, Petitioner is registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) taxpayer, with Registration No. 000-164-832-V; 5. Petitioner is subject to Value-Added Tax at zero-rate (0%) on its sales of indenting services pursuant to Section 102 (b) (2) now Section 108(B)(2) of the Tax Code, as decided in the decisions of this Honorable Court in CTA Case Nos. 5159, 5221 and 5537; 6. Petitioner timely filed with the BIR its quarterly VAT returns for the year 1997; 7. To date, Respondent has neither approved nor denied the duly filed application for tax credit or refund submitted by Petitioner to the Revenue District Qffice of the BIR; 8. Petitioner has duly filed this instant Petition for Review within the two-year prescriptive period prescribed by then Section 230 of the Tax Code." (Joint Stipulation of Facts and Issues, September 22, 1999, pp. 47-48, CTA docket) In compliance with the VAT provisions of the Tax Code and its implementing rules and regulations, Petitioner on various dates from April 18, 1997 to January 14, 1998, filed with the BIR its quarterly VAT ret1.1rns fqr ta~able year 1997. Said VAT returns ' ,.. showed that Petitioner has an aggregate amount of taxable sales ofP109,090.91 with the corresponding output VAT of P 10,909.09; zero-~ated sales of P 11,342, 128.14; input VAT paid of P1,100,461.46 on domestic purch~ses of taxable goods/services and excess unutilized input VAT ofP1,089,552.37, broken down as follows: Input VAT on Excess Taxable Output Zero-rated Purchases of Unutilized Exh. 1997 Sales VAT Sales Goods/Serv. Input VAT ((2) (1) (1) less (2) W-1 1st qtr p 1,977,549.54 p 157,688.28 p 157,688.28 W-2 nd qtr P 45,454.55 p 4,545.45 9,364,578.60 269,559.25 265,013.80 52

DECISION- CTA CASE NO. 5746 PAGE3 W-3 3rd qtr 63,636.36 6,363.64 207,214 .5 8 200,850.94 W-4 4th qtr 465,999.35 465,999 .35 P 109,090.91 P 10,909.09 P11,342,128.14 P1,100,461.46 P 1,089,552.37 On March 4, 1999, Petitioner filed with the BIR an application for tax Credit/Refund of value-added tax paid in the amount of Pl,089,552.37 on pmchases of taxable goods and services allegedly directly attributable to its zero-rated sales of services for the year 1997 in accordance with Section 112(A) of the Tax Code. However, as Respondent failed to act upon said claim for refund and the two-year prescriptive period _, provided by law was then about to expire, Petitioner was constrained to file the instant , Petition for Review on March 24, 1999. -. In answer to the said Petition for Review, Respondent for his part raised the following Special and Affirmative Defenses, to wit: "5. Petitioner failed to show compliance with the substantiation requirements under the provision of Sec.:ion 16(c)(3) of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 3- 88; 6. Petitioner has not shown proof that the alleged VAT input taxes are attributable to its export sales and that the same have not yet been applied to the output tax for the period covered in its claim or any succeeding period anq that the alleged total foreign exchange proceeds have been account~d f.~r by the Central Bank; 7. The petition states no cause ofaction as it does not allege the date/s when the taxies '$o~ght to be refunded was/were actually paid; � . ' ., � � '� � 8. In an action for tax refund/credit, the burden of proof is on the taxpayer to establish its right to the refund and failure to sustain the bmden is fatal to the action for tax refund; 9. Taxes paid and collected are presumed to have been made m accordance with law and regulations, hence, not refundable; 5.)

DECISION- CTA CASE NO. 5746 PAGE4 10. Well-settled is the rule that claims for refund are construed against the claimants since it partakes of the nature of an exemption from taxation." During the course of the trial, Petitioner formally offered the following documentary evidence which were properly identified by its witness: Exhibit Description A to V Various credit advices for the year 1997 W-1 VAT return for the 1st qtr. Of 1997 -' D,E,F Vat returns for the 211d, 3rd and 4th qtr. of 1996 G,H Written claim for refund filed with the BIR and BIR J.:qrm No. 2552 I Report of the Independent Auditor 1-1 to 1-93 Photocopies of invoices/receipts issued to Petitioner 2-1 to 2-70 for the 15\ 2"d, Yd and 4th quarter ofCY 1996 3-1 to 3-86 4-1 to 4-83 The issues to be resolved in the case at bar which are stipulated by the parties in their Joint Stipulation of Facts and Issues (CTA records, pp. 48 and 49) are as follows: "1. Whether or not Petition~r has 4nutilized input taxes in the amount of P1,089,552.37 for the ' p~rj'~d of January 1 to December 31, 1997, which are directly a Hr. jp~fable to its zero-rated sales; . '._ 2. Whether or not the inp4t f~xes ipcurred by Petitioner for the period of January tlu-ough December 1997 are duly substantiated by official receipts and invoices; 3. Whether or not Petitioner generated zero-rated sales for the period January 1 to December 31, 1997; 4. Whether or not the input taxes incurred by the Petitioner for the year 1997 have been carried over to the Sticceeding year; f

DECISION- CTA CASE NO. 5746 PAGES 5. Whether or not Petitioner is entitled to a tax credit certificate/refund in the aggregate amount of Pl,089,552.37 representing the amotHU of input taxes paid on its purchases of goods and services for the period January 1 to December 31, 1997." Considering that the third issue is substantial to the resolution of the other issues as it predetermines the verdict as to the others, this Court finds it necessary to preemptorily discuss first the merit of the said third issue before proceeding with the other issues at hand. Records show that Petitioner is a VAt registered entity (Admitted fact pat. 4 of Joint Stipulation of Facts and Issues, CTA n~cords p. 48) which derived sales amouhting ., to P11 ,342j 128.14 from indenting sr,rvices (Exhs. W-1 and W-2; TSN, October 14j 1999) for the year 1997, said sale of services were paid f01 in acceptable foreign currency inwardly remitted to the Philippines in accordance with the BSP rules and regulations as evidenced by the various RCBC bank credit advices (Exhs. A to V, inclusive, TSN, October 14, 1999). The evidence presented by Petitioner leads this Court to conclude that Petitioner is a zero-rated VAT taxpayer falling squarely within the provisions of Section 102(a) and (b) ofthe Tax Cod_e.'!o qupJe: "Section 102. (a) Rate and base of lax - There shall be levied, assessed and collected, a value added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, inclu~ing the use or lease of properties. Tl1e. -phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, x x x (b) Transactions subject to zero-rate - The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

DECISION- CTA CASE NO. 5746 PAGE6 (l)xxx (2) Services other than those mentioned in the preceding subparagraph, the consideration for ~hich is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas x x ~ (underscoring supplied) On the basis of the foregoing, it could be said that Petitioner is not liable to pay any output tax thereon and can claim tax credit/refund of the input VAT it paid on purchases of goods, properties or services which are related to such zero-rated sales. Thus, Section 4.102-2 ofRevenue Itegulation No. 7-95 in relation with Sections 110(B) and 112(A) of -' the 1997 Tax Code provides: "Sectioq 4~1 02-2. Zero-Rating.- (a) In general. -A zero.. rated sale by a VAT registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations." XXX XXX XXX "Section 110. Tax Credits. - (B) Excess Output or Input Tax. - If at the end of any taxable quarter the outpp_p~x)~?'ceeds the input tax, the excess shall be paid by the VAT-regis~er~d �person. If the input tax exceeds the output tax, the excess shall be��carried over to the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subje~t to the provisions of Section 112. ' . . XXX XXX XXX "Section 112. Refunds or Tax Credits oflnput Tax. - (A) 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,

DECISION- CTA CASE NO. 5746 PAGE? 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)(l), (2) and (13) and Section 108(B)(l) and (2), the acceptable forei gn 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 whete the taxpayer is engaged in zero-rated or effectively zero-rated sale 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 entirely attributable to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.'' Havihg proven that Petitioner generated zero-rated sales, this brings u5! to the second issue of whether or not the input taxes incurred by Petitioner are duly substantiated by official receipts and invoices, - ,., A circumspect examination of all the records of this case reveals failure on the part of Petitioner to fully substantiate the input taxes incurred from the period of January to December 1997. The commissione~ auditing firm, SGV and Co., noted in its report (Exh. Y) th t out of the total input taxes of P l, 100,461.46 declared by Petitioner in its 1997 quarterly VAT retYrns, the amount of P224,568.5l (Exh. Y-1, detailed per Annexes 1 to 4 of Exh. Y) was not properly substantiated by VAT invoices and/or official receipts . 't oHft Same findings were arrived at by this _upon verification of Petitioner's suppliers invoices and official receipts (Exhs. A-1 ~Q A-80, B-1 to B-93, C-1 to C-131 and D-1 to D-111, inclusive). ~s the said SGV repor~ was found to be in order, this Court is inclined to adopt said findings and .consider only the amount of P875,892.95 as the total input taxes (net of the P224,568.5 1 exceptions noted by SGV and Co.) incurred by Petitioner for the year 1997. True enough, said input taxes are the only amounts which were properly supported by VAT invoices and official receipts in accordance with Section 5 '(

DECISION- CTA CASE NO. 5746 PAGE& 4.104-5 of Revenue Regulations No. 7-95 in relation to Sections 113 and 23 7 of the 1997 Tax Code, to wit: "SEC. 4.104-5. Substantiation of claims for input tax credit. - (a) Input taxes shall be allowed only if the domestic purchase of goods, properties or services is made in the course of trade or business. The input tax should be supported by an invoice or receipt showing the information as required under Section 108 (a) and 238 ofthe Code. XXX XXX XXX Sec. 113. invoicing and Accounting 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 reQeipt: . ,., (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); 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. XXX XXX XXX Sec. 237. Issuance of Receipts or Sales or Commercial Invoices. - x x x Provided, however, x x x 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 issu.ed tp cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, bush1ess~ style, if any, and address of the purchaser, customer or client: Provided, �furth er, That where the purchaser is a VAT-regis-tered person, in addition to the information herein required, the invoice or receipt_shall further show the Taxpayer Identification Number (TIN) of the purchaser." Going back to the first Issue, We conclude that not the full amount of P1 ,089,552.37 as claimed by Petition-er, represents its 1997 unutilized input taxes which are directly attributable to its zero-rated sales. The amount of Pl,089,552.37 is the excess so

DECISION- CTA CASE NO. 5746 PAGE9 of the total input taxes of P 1,100,461.46 over the total output VAT payable of P10,909.09 reported by Petitioner in its 1997 quarterly VAT returns. Since as earlier mentioned, Petitioner was not able to fully substantiate by proper VAT invoices/receipts the total amount ofP1,100,461.46 but only the amount ofP875,892.95, it is essential that the total output VAT payable of P10,909.09 be taken out from the latter amount of P875,892.95 instead of the former amount of P1,1 00,461.46. The resulting net amount of P864,983 .86 represents Petitioner's excess unutilized input taxes which are directly attributable to its zero-rated sales. As to the fourth issue, Petitioner's 1997 excess unutilized input taxes of iY P864,983.86 were not carried. qver to the succeeding first quarter of 1998. This is evidenced by Petitioner's 1998 first quarter VAT return (Exh. X-1) wherein no amount of input tax was indicated as "VAT Input Tax Carried Over from Previous Quarter." This fact alone suffices to ascertain whether or not said input taxes were carried over to the succeeding quarters. Thus, as held by this Court in the case entitled AMI Philippines, Inc. vs. CIR, CTA Case Nos. 5187 and 5199, October 2, 1997, " ...Not only must the Petitioner present as evidence the VAT returns for the period involved in the claim but also Petitioner's VAT Return for the immediately succeeding quarter to accurately prove that the excess input VAT sought to be refunded by the Petitioner had not been forwarded to the succeeding quarter." (citing AMI Philippines, Inc. vs. CIR, CTA Case No. 5304, Janumy 20, 1998). As to the last issue, We answer in the affirmative. On the basis of the foregoing findings, We rule that Petitioner is entitled to a tax credit certificate/refund of the 1997 excess unutilized input taxes on its purchases of taxable goods and services which are

DECISION- CTA CASE NO. 5746 PAGEIO attributable to its zero-rated sales but in a reduced amount of P864,983.86 in contrast to Petitioner's original claim ofP1,089,552.37. WHEREFORE, premises considered, the Petition for Review filed by Petitioner is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to ISSUE A TAX CREDIT CERTIFICATE OR TO REFUND the reduced amount ofP864,983.86 in favor of the Petitioner which represents the excess unutilized input VAT payments for the period January to December 1997. SO ORDERED. _ ,.... WE CONCUR: ~(Sl.c~ ERN;?eTO D. ACOSTA 1:~di:r:?v/~ MONO. DEVEY Associate Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court ofTax Appeals in accordance with Section 13, Article VIII of the Constitution. ~LQ~~ ;�I, ERNESTO D. ACOSTA Presiding Judge en 0 �� � :1