TOLEDO POWER COMPANY v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS Quezon City SpecialSecond Division j TOLEDO POWER COMPANY, CTA CASE N0.11109 Petitioner, Members: -versus- RINGPIS-LIBAN, P.J. & Chairperson MODESTO-SAN PEDRO, and FERRER-FLORES, Jl. COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. 6 __,___ X-----------------------------------------------------------------~~ J�i~~~--\---------X DECISION RINGPIS-LIBAN,[: The Petition .for Review filed on March 27, 2023, prays for the refund or issuance of tax credit certificate in the amount of P14,208,017.90, allegedly representing petitioner's unutilized input taxes attributable to its zero-rated sales for the 4rh quarter of calendar year (CY) 2020. 1 THE PARTIES Petitioner Toledo Power Company is a general partnership duly organized and existing under the laws of the Philippines, with office address at TPC Power Plant, Daanglungsod, Toledo City, Cebu.2 It is also registered with the Bureau of Internal Revenue (BIR) under Certificate of Registration OCN No. 8RC00012255440E, with Taxpayer Identification No. (TIN) 003-883-626- 0000~ 1 Summary of the Case, Pre-Trial Order dated February 7, 2024, Docket, p. 251. 2 Par. 1, Stipulation of Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 213. 3 Exhibit "P-2", Docket, pp. 371 to 372.

DECISION CTA CASE NO. 11109 Respondent is the duly appointed Commissioner of Internal Revenue vested under the appropriate laws with the authority to carry out the functions, duties, and responsibilities of his Office, including, inter alia, the power to decide disputed assessments, cancel, and abate tax liabilities pursuant to the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended, and other tax laws, rules, and regulations.4 THE FACTS On December 28, 2022, petitioner flied with the BIR its Applicationfor Tax Credits/Rifunds (BIR Form No. 1914),5 requesting for the refund or tax credit of its unutilized and excess creditable input VAT amounting to 'P14,208,017.90 for the period from October 1, 2020 to December 31, 2020. Thereafter, on February 23, 2023, petitioner received the VAT Rifund/ Credit Notice of the BIR dated February 2, 2023,6 and signed by Officer- in-Charge Assistant Commissioner of the Large Taxpayers Service, Mr. Jethro M. Sabariaga, which states that as per the BIR's computation, there is no refund allowed on petitioner's claim. PROCEEDINGS BEFORE THIS COURT As previously stated, petitioner flied the present Petition for Review on March 27, 2023.7 On April 25, 2023, the Court issued its Resolution,8 giving petitioner ten (1 0) days from notice to submit an Amended Verification and Certification if Non- Forum Shopping. Thus, on May 18, 2023, petitioner filed its Compliance and Submission,9 with the attached Amended Verification and Certification if Non-Forum Shopping; 4 Par. 2, Stipulation of Facts, JSFI, Docket, pp. 213 to 214. 5 Exhibit "P-18", Docket, p. 435. 6 Exhibit "P-19", Docket, p. 153. 7 Docket, pp. 1 to 21. 8 Docket, pp. 154 to 155. 9 Docket, pp. 157 to 158. 10 Docket, pp. 159 to 160.

DECISION CTA CASE NO. 11109 On September 5, 2023, respondent filed his Answer,11 interposing the following special and affirmative defenses, to wit: (1) petitioner is not entitled to the claim of input VAT refund; (2) based on the verification procedures made, there is no VAT refundable amount due to insufficient input taxes with valid documents to support the amount of the claim; and (3) in an action for refund, the burden of proof is upon the petitioner to establish its right to the claimed refund, and failure to adduce sufficient proof is fatal to its claim. The Pre-Trial Conference was set and held on October 19, 2023.12 Prior thereto, Petitioner's Pre-Trial Brief was filed on October 11, 2023, 13 while respondent's Pre-Trial Briefwas submitted on October 13, 2023. 14 Respondent transmitted the BIR Records of the present case on December 5, 2023, consisting of six (6) folders. 15 On November 9, 2023, the parties submitted their joint Stipulation ofFacts and Issues,16 which was admitted and approved by the Court in its Resolution dated November 28, 2023,17 thereby deeming the termination of the Pre-Trial. The Pre-Trial Order dated February 7, 2024 was then issued. 18 As trial ensued, the parties presented their respective testimonial and documentary evidence. Petitioner offered the testimonies of the following individuals, namely: (1) Ms. Alicia G. Brion, 19 petitioner's First Vice President/Controller; and (2) Ms. Gadiosa R. Martinez, 20 the Court-commissioned Independent Certified Public Accountant (ICPA).21 !/ 11 Docket, pp. 172 to 178. 12 Notice of Pre-Trial Conference dated September 12, 2023, Docket, pp. 180 to 181; Minutes of the hearing held on, and Order dated, October 19, 2023, Docket, pp. 209 to 212. 13 Docket, pp. 182 to 194. 14 Docket, pp. 195 to 198. 15 Respondent's Compliance dated December 4, 2023, Docket, pp. 245 to 247. 16 Docket, pp. 213 to 222. 17 Docket, p. 236. 18 Docket, pp. 251 to 256. 19 Exhibit "P-20", Docket, pp. 22 to 36; Minutes ofthe hearing held on, and Amended Order dated, February 20, 2024, Docket, pp. 265 and 269 to 270, respectively. 20 Exhibits "P-21", Docket, pp. 279 to 296; Minutes of the hearing held on, and Order dated, May 22, 2024, Docket, pp. 298 and 299-A, respectively. 21 Oath of Commission dated February 20, 2024, Docket, p. 266; Minutes of the hearing held on, and Amended Order dated, February 20, 2024, Docket, pp. 265 and 269 to 270, respectively.

DECISION CTA CASE NO. 11109 The Reporiof the ICPA was submitted on March 21,2024.22 On June 3, 2024, petitioner filed its Formal Offir of Evidence,23 to which respondent flied his Comment (On Petitioner's Formal Offir ofEvidence) on June 14, 2024.24 In the Resolution dated July 16, 2024,25 the Court admitted petitioner's offered exhibits, except Exhibit "P-3", for failure to present original for comparison, and Exhibits "P-34-c-1 to P-34-c-3", for not being found in the records. For his part, respondent presented the testimony of Revenue Officer (RO) Irelene V. Galleno-Coca. 26 On July 29, 2024, respondent flied his Formal Offir ofEvidence,27 to which petitioner posted its Comment (Re: Respondent's Formal Offir ofEvidence datedJu!J 29, 2024) on August 9, 2024.28 In the Resolution dated January 2, 2025,29 the Court admitted all of respondent's offered exhibits. On February 13, 2025, petitioner flied its Memorandum. 30 Respondent, however, failed to file his memorandum.31 The present case was considered submitted for decision on March 20, 2025. 32 THE ISSUES The parties submit the following issue for this Court's resolution: "3.1 WHETHER OR NOT PETITIONER IS ENTITLED TO ITS CLAIM FOR REFUND OF THE AGGREGATE ~ 22 Exhibit "P-22" (in a separate binder). 23 Docket, pp. 301 to 317. 24 Docket, pp. 436 to 438. 25 Docket, pp. 441 to 443. 26 Exhibit "R-6", Docket, pp. 445 to 449; Minutes of the hearing held on, and Order dated July 18, 2024, Docket, pp. 444, and 451 to 452, respectively. 27 Docket, pp. 454 to 457. 28 Docket, pp. 460 to 462. 29 Docket, pp. 467 to 468. 30 Docket, pp. 470 to 491. 31 Records Verification dated February 27, 2025 issued by the Judicial Records Division of this Court, Docket, p. 493. 32 Minute Resolution dated March 20, 2025, Docket, unpaginated.

DECISION CTA CASE NO. 11109 AMOUNT OF PHP14,208,017.90, REPRESENTING PETITIONER'S EXCESS AND UNUTILIZED INPUT VALUE ADDED TAX (VAT) ATTRIBUTABLE TO ITS ZERO-RATED SALES FOR THE 4TH QUARTER OF CY 2020. 3.2 WHETHER OR NOT THE RESPONDENT ERRED IN DENYING THE CLAIM FOR REFUND BASED ON THE EVIDENCE PRESENTED BY THE PETITIONER IN THE ADMINISTRATIVE PROCEEDINGS."33 THE ARGUMENTS OF THE PARTIES Petitioner argues that it is a VAT-registered entity; that its sales of services to its customers are zero-rated sales; that petitioner paid or incurred input VAT which are properly substantiated in accordance with the law and regulations; that the input VAT paid or incurred by petitioner are attributable to zero-rated sales or effectively zero-rated sales; that the input taxes are not transitional input taxes; that the input VAT being refunded have not been applied against output taxes during the same and in the succeeding periods; and that petitioner's claim for refund was flied within the mandatory period provided under the law. Respondent, in his Answer, contends that petitioner is not entitled to the claim for refund; that based on the verification procedures made, there is no VAT refundable amount due to insufficient input taxes with valid documents to support the amount of the claim; and that in an action for refund, the burden of proof is upon the petitioner to establish its right to the claimed refund, and failure to adduce sufficient proof is fatal to its claim. THE RULING OF THE COURT The present Petition for Review is partly meritorious. Requisites for the grant ofthe refund or issuance oftax credit certificate under the lau;v 33 Proposed Issues for Stipulation, JSFI, Docket, p. 214.

DECISION CTA CASE NO. 11109 Section 112 of the NIRC of 1997, as last amended by Republic Act (RA) No. 10963,34 provides, in part, as follows: "SEC. 112. Refunds or Tax Credits ofInput Tax.- (A) Zero-Rated or Effective!J 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(B)(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 or properties or services, and the amount of creditable input tax due or paid 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: Provided, jinal!J, That for a person making sales that are zero- rated under Section 108(B)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales. XXX XXX XXX (C) Period within which Refund ofInput Taxes shall be Made.- In proper cases, the Commissioner shall grant a refund for creditable input taxes within ninety (90) days from the date of submission of the official receipts or invoices and other documents in support of the application filed in accordance with Subsections (A) and (B) hereof: Provided, That should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial. In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30) days from the receipt )V 34 AN ACT AMENDING SECTIONS 5, 6, 24, 25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 58, 74, 79, 84, 86, 90, 91, 97, 99, 100, 101, 106, 107, 108, 109, 110, 112, 114, 116, 127, 128, 129, 145, 148, 149, 151, 155, 171, 174, 175, 177, 178, 179, 180, 181, 182, 183, 186, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 232, 236, 237, 249, 254, 264, 269, AND 288; CREATING NEW SECTIONS 51-A, 148-A, 150-A, 150-B, 237-A, 264-A, 264-B, AND 265-A; AND REPEALING SECTIONS 35, 62, AND 89; ALL UNDER REPUBLIC ACT NO. 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES.

DECISION CTA CASE NO. 11109 of the decision denying the claim, appeal the decision with the Court of Tax Appeals: Provided, however, That failure on the part of any official, agent, or employee of the BIR to act on the application within the ninety (90)-day period shall be punishable under Section 269 of this Code." Based on the foregoing provision, jurisprudence has laid down certain requisites which the taxpayer-applicant must comply with to successfully obtain a credit/refund of input VAT. Said requisites are classified into certain categories, to wit: As to the timeliness of the filing of the administrative and judicial claims: 1. the refund claim is flied with the BIR within two (2) years after the close of the taxable quarter when the sales were made;35 2. in case of full or partial denial of the refund claim, or the failure on the part of the Commissioner to act on the said claim within a period of ninety (90) days, the judicial claim has been flied with this Court, within thirty (30) days from receipt of the decision or after the expiration of the said ninety (90)-day period;36 With reference to the taxpayer's registration with the BIR: 3. the taxpayer is a VAT-registered person;37 In relation to the taxpayer's output VAT: 4. the taxpayer is engaged in zero-rated or effectively zero-rated sales�38 'i/ 35 Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 166732, April 27, 2007; San Roque Power Corporation vs. Commissioner of Internal Revenue, G.R. No. 180345, November 25, 2009; and AT&T Communications Services Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 182364, August 3, 2010. 36 Refer to Energy Development Corporation vs. Commissioner of Internal Revenue, G.R. No. 203367, March 17, 2021; Commissioner of Internal Revenue vs. CE Casecnan Water and Energy Company, Inc., G.R. No. 212727, February 1, 2023; and Commissioner of Internal Revenue vs. Vestas Services Philippines, Inc., G.R. No. 255085, March 29, 2023. 37 Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue, supra; San Roque Power Corporation vs. Commissioner of Internal Revenue, supra; and AT&T Communications Services Philippines, Inc., vs. Commissioner of Internal Revenue, supra. 38 ld.

DECISION CTA CASE NO. 11109 5. for zero-rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108(B)(1) and (2),39 the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations;40 As regards the taxpayer's input VAT being refunded: 6. the input taxes are not transitional input taxes;41 7. the input taxes are due or paid;42 8. the input taxes claimed are attributable to zero-rated or effectively zero-rated sales. However, where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume;43 and 9. the input taxes have not been applied against output taxes during and in the succeeding quarters.44 In addition, in claims for VAT refund/ credit, applicants must satisfy the substantiation and invoicing requirements under the NIRC and other implementing rules and regulations.45 Thus, petitioner's compliance with all the VAT invoicing requirements is required to be able to file a claim for input taxes attributable to zero-rated sales.46 The invoicing and substantiation requirements should be followed because it is the only way to determine the veracity of the taxpayer's claims.47 Moreover, it must be pointed out that compliance with all ~ 39 Under RA No. 10963, Section 106{A)(2)(a)(2) was renumbered to Section 106(A)(2)(a)(3) while Section 106(A)(2)(b) was deleted. However, there was no corresponding amendment to the subsections cited in Section 112(A) of the NIRC of 1997, as amended. 40 Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue, supra; San Roque Power Corporation vs. Commissioner of Internal Revenue, supra; and AT&T Communications Services Philippines, Inc., vs. Commissioner of Internal Revenue, supra. 41 ld. 42 ld. 43 Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue, supra; and San Roque Power Corporation vs. Commissioner of Internal Revenue, supra. 44 Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue, supra; San Roque Power Corporation vs. Commissioner of Internal Revenue, supra; and AT&T Communications Services Philippines, Inc. vs. Commissioner of Internal Revenue, supra. 45 Team Energy Corporation vs. Commissioner of Internal Revenue, et seq., G.R. Nos. 197663 and 197770, March 14, 2018. 46 J.R.A. Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 171307, August 28, 2013. 47 Nippon Express {Philippines) Corporation vs. Commissioner of Internal Revenue, G.R. No. 191495, July 23, 2018.

, DECISION CTA CASE NO. 11109 the VAT invoicing requirements provided by tax laws and regulations 1s mandatory.48 Strict compliance with substantiation and invoicing requirements is necessary considering VAT's nature and VAT system's tax credit method, where tax payments are based on output and input taxes and where the seller's output tax becomes the buyer's input tax that is available as tax credit or refund in the same transaction. It ensures the proper collection of taxes at all stages of distribution, facilitates computation of tax credits, and provides accurate audit trail or evidence for BIR monitoring purposes.49 Furthermore, it must be emphasized that in cases flied before this Court, which are litigated de novo, party-litigants must prove every minute aspect of their case. 50 Thus, it behooves petitioner to show compliance with each of the foregoing requisites and invoicing requirements. Petitioner~s administrative and judicial claims for refund/credit were timely filed. The first requisite pertains to the filing of a claim for tax refund or tax credit of input VAT before the BIR, within two (2) years from the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made. The present claim covers the 4rh quarter of CY 2020, or for the period from October 1, 2020 to December 31,2020. Thus, counting two (2) years from the close of the said quarter, petitioner had until January 3, 2023,51 within which to file its administrative claim for refund. By filing the Application for Tax Credits/ Rifunds (BIR Form No. 1914) in the amount ofP14,208,017.90 for the period from October 1, 2020 to Decem~ 48 Eastern Telecommunications Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 183531, March 25, 2015. 49 Team Energy Corporation vs. Commissioner of Internal Revenue, et seq., supra. 50 Edison (Bataan) Cogeneration Corporation vs. Commissioner of Internal Revenue, et seq., G.R. Nos. 201665 and 201668, August 30, 2017; Commissioner of Internal Revenue vs. Philippine National Bank, G.R. No. 180290, September 29, 2014; Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.}, Inc., G.R. No. 197515, July 2, 2014; Dizon vs. Court of Tax Appeals, eta/., G.R. No. 140944, April 30, 2008; Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, G.R. No. 145526, March 16, 2007; and Commissioner of Internal Revenue vs. Manila Mining Corporation, G.R. No. 153204, August 31, 2005. 51 December 31,2022 {the 2nd year from the close of the quarter) fell on a Saturday, while January 2, 2023, Monday, is a Special (Non-Working) Day.

DECISION CTA CASE NO. 11109 31, 2020 on December 28, 2022,52 the administrative claim of petitioner was timely made, and thus, petitioner complied with the first requisite. As for the second requisite, the same necessitates that the judicial claim must have been flied within thirty (30) days from receipt of respondent's decision or after the expiration of the ninety (90)-day period from the date of submission of the official receipts (ORs) or invoices and other documents in support of the application for refund under Section 112(C) of the NIRC of 1997, as amended by RA No. 10963. Counting ninety (90) days from petitioner's submission of its administrative claim on December 28, 2022, respondent had until March 28, 2023 to act on the said claim. Thus, respondent's VAT Refund/ Credit Notice dated February 2, 2023,53 informing petitioner that its application for VAT refund was denied, was issued well-within the ninety (90)-day period. Petitioner received said VAT Refimd/ Credit Notice on February 23, 2023.54 Counting thirty (30) days therefrom, petitioner had until March 27, 202355 within which to file its judicial claim. Therefore, the filing of the present Petitionfor Review on March 27, 2023 was likewise timely made. 56 Such being the case, petitioner fulfilled both the above-stated first and second requisites. Petitioner is a VAT-registered entity. Anent the third requisite, it is undisputed that petitioner is a VAT- registered entity, under TIN 003-883-626-00000Y Thus, petitioner complied with the said requisite. Petitioner had zero-rated sales or effectively zero-rated sales in the amount ofP335,801,460.ji/ 52 Exhibit "P-18", Docket, p. 435. 53 Exhibit "P-19", Docket, p. 153. 54 !d. 55 March 25, 2023 (the 30th day) fell on a Saturday. 56 Docket, pp. 1 to 21. 57 Exhibit "P-2", Docket, pp. 371 to 372.

DECISION CTA CASE NO. 11109 The jottrth and fifth requisites require that the taxpayer be engaged in zero- rated or effectively zero-rated sale, and for zero-rated sales under Sections 106(A)(2)(a)(1), (2) and (b), and 108(B)(1) and (2) of the NIRC of 1997, as amended, the acceptable foreign currency exchange proceeds thereof have been duly accounted for in accordance with BSP rules and regulations. Petitioner alleges that its claim for refund and/ or issuance of tax credit certificate for its excess and unutilized input VAT for the 4th quarter of CY 2020 is based on Section 106(A)(2)(a)(5) of the Tax Code in relation to Section 4.106- 5(a)(5) of Revenue Regulations (RR) No. 16-2005. Petitioner adds that in order for the transaction to be considered as zero-rated, Section 4.106-5(a)(5) of RR No. 16-2005, as amended by RR No. 04-2007, provides that sales of goods, properties or services made by a VAT-registered supplier to a Board of Investments (BOI)-registered manufacturer/producer whose products are one- hundred percent (100%) exported are considered export sales. Moreover, Section 4.106-5(c) of RR No. 16-2005, as amended, also states that sales to enterprises duly registered and accredited with the Philippine Economic Zone Authority (PEZA) shall be effectively subject to VAT at zero-rate. In its amended Qttarter!J Vaitte-Added Tax Retttrn for the 4th quarter of CY 2020, petitioner declared total sales/receipts amounting to P759,371,938.50, which included zero-rated sales/receipts in the amount of P344,058,207.88, as follows: 58 Particulars Amount Vatable Sales/Receipts Sale to Government p 399,957,213.60 Zero Rated Sales/Receipts Exempt Sales/Receipts 14,155,228.25 Total 344,058,207.88 I I 1,201,288.77 P759,371,938.50 Per the ICPA, Ms. Gadiosa R. Martinez, the petitioner's zero-rated sales amounting to P344,058,207.88 for the 4th quarter of CY 2020, consist of the following: 59 Schedules Amount Exhibit No. Zero-rated sale of services to entities registered with: PEZA/BOI P336,081,997.53 "P-30-a" Zero-rated sale of services to CEBECO 2,256,187.71 "P-30-b" Zero-rated sale of services to IEMOP 5,720,022.64 "P-30-c" 58 Exhibit "P-7-2", Docket, pp. 401 to 402. 59 Item 0.1., Annex II, p. 2, Exhibit "P-22".

DECISION CTA CASE NO. 11109 Zero-Rated Sales Per Schedule P344,058,207 .88 Zero-Rated Sales Per VAT Return "P-26-a" to "P-26- P344,058,207.88 c" Section 106(A)(2)(a)(5) of the NIRC of 1997, as amended, provides the following, to wit: "SEC. 106. Valtte-added Tax on Sale ofGoods or Properties.- (A) Rate and Base ofTax. -There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. XXX XXX XXX (2) The following sales by VAT-registered persons shall be subject to zero-percent (0%) rate: (a) Export Sales.- The term 'export sales' means: XXX XXX XXX (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; xxx" Relative thereto, the applicable provision of law on petitioner's sale of services to PEZA-registered entities is Section 108(B) (3) of the NIRC of 1997, as amended, which provides as follows: "SEC. 108. Valtte-added Tax on Sale ofServic-es and Use or Lease ofProperties. - (A) Rate and Base ofTax. - xxx XXX XXX XXX (B) Transactions Stt~jed to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: ~

DECISION CTA CASE NO. 11109 XXX XXX XXX (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�/o) rate;" (Emphases added) Moreover, Sections 4.106-5(a)(4) and 4.108-5(b)(3) ofRR No. 16-2005, as amended, also provide the following, to wit: "SEC. 4.106-5. Zero-Rated Sales rfGoods or Properties.- xxx The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export sales.- 'Export Sales' shall mean: XXX XXX XXX (4) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. 'Considered export sales under Executive Order No. 226' shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same: Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents: Provided, further, That without actual exportation the following shall be considered constructively exported for purposes of these provisions: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones; (3) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); (4) sales to diplomatic missions and other agencies and/ or ~

DECISION CTA CASE NO. 11109 instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. For purposes of zero-rating, the export sales of registered export traders shall include commission income. The exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee; and Provided,final!J, that sales of goods, properties or services made by a VAT-registered supplier to a BOI-registered manufacturer/producer whose products are 100% exported are considered export sales. A certification to this effect must be issued by the Board of Investments (BOI) which shall be good for one year unless subsequently re-issued by the BOI." (Emphases added) "SEC. 4.108-5. Zero-Rated Sale ofServices. - XXX XXX XXX (b) Transactions Subject to Zero Percent {0%) VAT Rate.- The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) rate: XXX XXX XXX (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;" (Emphases added) Based on the foregoing provisions, sales of goods and services by a VAT- registered taxpayer, such as petitioner, to a BOI-registered manufacturer/producer whose products are 100% exported, and to entities located in the ECOZONEs are considered "export sales" subject to VAT zero- rating, pursuant to Sections 106(A)(2)(a)(5) and 108(B)(3) of the NIRC of 1997, as amended, and as implemented by Sections 4.106-5(a)(4) and 4.108-5(b)(3) of RR No. 16-2005, as amended. To stress, in order for an export sale to qualify for VAT zero-rating under Section 106(A)(2)(a)(5) and 108(B)(3) of the NIRC of 1997, as amended, the following essential elements must be present: ~

DECISION CTA CASE NO. 11109 1. the sale was made by a VAT registered person; and, 2. there was sale of goods to an entity which is entitled to incentives under Executive Order No. (EO) 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. As for the first essential element, it is already settled that petitioner is a VAT-registered person. With regard to the second essential element, petitioner must present the following documents: 1. the Sis as proof of sale of goods and ORs as proof of sales of services; and 2. proof of entitlement to zero-rating under the Omnibus Investment Code, other special laws, or international agreements to which the Philippines is a signatory. To prove that its clients are subject to VAT zero-rating, petitioner submitted the following certifications:60 Customer Reason for Supporting Document Amount Exhibit Zero-rating No. "P-30-a" Carmen Copper BOI- BOI Exporter p 323,695,551.33 Registered "P-30-b" Corporation (CCC) CertificateG1 "P-30-c" PEZA- FDC Retail Electricity Registered PEZA Certificate of Sales Corporation VAT Zero-Ratingr,2 12,386,446.20 (FDC) Cebu III Electric CIPDI ls a CIPDI PEZA PEZA- Cooperative Inc. registered Certificate of VAT Zero- 2,256,187.71 entity Ratm. g63 5,720,022.64 (CEBECO III) BIR Ruling Independent Electricity OT 323-2021 BIR Ruling OT 323- Market Operator of the 2021 (,4 Philippines (IEMOP) Total Zero-rated Sales P344,058,207.88 L 7 60 Item V.B.4, Exhibit "P-22", p. 12. 61 Exhibit "P-27-a", USB (Exhibit "P-23"}. 62 Exhibit "P-27-b", USB (Exhibit "P-23"}. 63 Exhibit "P-27-c", USB (Exhibit "P-23"}. 64 Exhibit "P-27-e", USB (Exhibit "P-23"}.

DECISION CTA CASE NO. 11109 The ICPA verified the ORs supporting the petitioner's declared total zero- rated sales amounting to P344,058,207.88 for the 4rh quarter of CY 2020, as follows: 65 Name of Official Date Customer/ Amount Exhibit Receipts (month/day/year) Contractee in Peso No. A. VAT Zero-rated Sales with valid VAT Zero-rated Official Receipts and VAT Zero-rating Certifications OR-TPC- 10/23/2020 FDC p 4,044,366.83 "P-30-a-1" 000000231 OR-TPC- 11/23/2020 FDC 4,132,833.37 "P-30-a-2" 000000245 OR-TPC- 11/18/2020 CCC 1,824,254.68 "P-30-a-3" 000000251 OR-TPC- 11/26/2020 CCC 45,589,412.41 "P-30-a-4" 000000252 OR-TPC- CCC 60,759,918.06 "P-30-a-5" 000000253 11/26/2020 OR-TPC- 12/01/2020 CCC 88,223.96 "P-30-a-6" 000000256 OR-TPC- 12/01/2020 CCC 280,536.82 "P-30-a-7" 000000257 OR-TPC- 12/01/2020 CCC 73,260.00 "P-30-a-8" 000000258 OR-TPC- 12/01/2020 CCC 168,316.64 "P-30-a-9" 000000260 OR-TPC- 12/03/2020 CCC 65,132,277.56 "P-30-a- 000000259 10" OR-TPC- 12/03/2020 CCC 40,821,492.01 "P-30-a- 000000261 11" OR-TPC- 12/15/2020 CCC 1,824,254.68 "P-30-a- 000000262 12" OR-TPC- 12/23/2020 FDC 4,209,246.00 "P-30-a- 000000263 13" OR-TPC- 12/23/2020 CCC 61,071,098.65 "P-30-a- 000000264 14" OR-TPC- 12/23/2020 CCC 46,062,505.86 "P-30-a- 000000265 15" Subtotal P336,081,997.53 B. VAT Zero-rated Sales with valid VAT Zero-rated Official Receipts but No VAT Zero-rating Certifications OR-TPC- CEBECO 000000229 10/23/2020 III p 609,549.67 "P-30-b-1" OR-TPC- CEBECO 000000247 11/25/2020 III 722,085.79 "P-30-b-2" OR-TPC- CEBECO 000000267 12/28/2020 III 924,552.25 "P-30-b-3" jV' 65 Detailed Schedule, Exhibit "P-30", USB (Exhibit "P-23").

DECISION CTA CASE NO. 11109 Subtotal IP 2,256,187.71 I I C. VAT Zero-rated Sales without issued VAT Zero-rated Official Receipt I INV0102908 10/13/2020 IEMOP p 2,150,717.82 "P-30-c-1" INV0105149 11/12/2020 IEMOP 2,321,078.52 "P-30-c-2" INV0106665 12/14/2020 IEMOP 1,248,226.30 "P-30-c-3" Subtotal p 5,720,022.64 TOTAL P344,058,207 .88 -- ---- L_____ ---- -- Out of the total declared zero-rated sales of P344,058,207.88, the ICPA disallowed the amount ofP5,720,022.64 pertaining to sales to IEMOP for which no VAT zero-rated ORs were issued, as reflected under item C of the foregoing table. The Court finds the ICPA's disallowance proper for failure to comply with the substantiation requirements under the tax regulations. In addition, the Court finds that the sales to Carmen Copper Corporation in the amount of P280,536.82 was unreceipted or unsubstantiated,66 hence, the same should be excluded from the petitioner's valid zero-rated sales. Moreover, the total zero-rated sales to CEBECO III amounting to P2,256,187.71, as reflected under item B of the foregoing table, shall likewise be disallowed for lack of the required VAT zero-rating certification. Accordingly, in compliance with thefourth requisite, petitioner's valid zero- rated sales for the 4rh quarter of CY 2020 amounted only to P335,801,460.71, computed as follows: Zero-rated sales/receipts per Quarterly VAT Return P344,058,207 .88 Less: ICPA AcfjttJtment 5,720,022.64 a. Sales to IEMOP Col!rt'Jjitrther JJerijication 280,536.82 2,256,187.71 a. Unsubstantiated Zero-Rated Sales P335,801,460. 71 b. Sales to Cebu III Electric Cooperative, Inc. Valid Zero-rated Sales/Receipts Notably, considering that petitioner's zero-rated sales fall under Sections 106(A) (2) (a) (5) and 1OS (B) (3) of the NIRC of 1997, as amended, thefifth requisite does not apply. The input VAT being claimed do not appear to be transitional input taxes~ 66 The Official Receipt and Billing Statement marked as Exhibit "P-30-a-7", USB (Exhibit "P-23"), do not correspond with the details shown on the Schedule.

DECISION CTA CASE NO. 11109 The sixth requisite provides that the claimed input taxes are not transitional input taxes, pursuant to Section 111 (A) of the NIRC of 1997, as amended, to wit: "SEC. 111. Transitional/Presumptive Inpttt Tax Credits.- (A) Transitional Inpttt Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT- registered person shall, subject to the filing of an inventory according to the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax." Transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisitions of their beginning inventory of goods, materials and supplies. During the period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer.67 The claimed input taxes do not appear to be transitional input taxes, as understood under Section 111 (A) of the NIRC of 1997, as amended, as such, petitioner has complied with the sixth requisite for the grant of an input VAT refund. Not all ofpetitioner's input VAT being claimed for refund were duly substantiated. Anent the seventh requisite in claiming VAT refund, it is of fatal importance for petitioner to provide supporting documents to prove that the input taxes claimed were actually due or paid in accordance with Section 11 O(A) of the NIRC of 1997, as amended, as implemented by Sections 4.110-1 to 4.110-3 and 4.110- 8 ofRR No. 16-2005, as amended. In addition, the said documents must likewise comply with the invoicing requirements under Sections 113(A) and (B), 237 and 238 of the NIRC of 1997, as amended, and as implemented by Section 4.113- 1(A) and (B) of RR No. 16-2005. I 67 Fort Bonifacio Development Corporation vs. Commissioner of Internal Revenue, eta/., et seq., G.R. Nos. 158885 and 170680, April 2, 2009.

DECISION CTA CASE NO. 11109 To support the unutilized input VAT subject for refund or issuance of tax credit certificate of P14,208,017.90, petitioner submitted, among others, the following: (1) Summary List of Purchases;68 (2) Summary List of Importations;69 and (3) ORs, Sis and billing statements issued by its suppliers/0 which were all examined by the ICPA. Based on petitioner's amended Quarter!J VAT Return for the 4th quarter of CY 2020/1 petitioner reported total allowable input VAT of P73,279,281.00, detailed as follows: Current Input VAT p 116,588.87 Purchase of Capital Goods not exceeding P1Million 36,910,327.93 Domestic Purchases of Goods Other than Capital Goods 10,660,252.65 Importation of Goods Other than Capital Goods 25,377,445.12 Domestic Purchase of Services ?73,064,614.57 Subtotal ~ 481,754.72 Input VAT amortized for the period 1,274,792.67 Purchase of Capital Goods exceeding ~1Million {1,541,880.96) Add: Input Tax Deferred on Capital Goods Exceeding P1Million p 214,666.43 from Previous Quarter P73,279,281.00 LeJJ: Input Tax on Purchases of Capital Goods exceeding P1 Million deferred for the succeeding period Subtotal Total Input Tax Out of the total allowable input VAT ofP73,279,281.00 for the 4th quarter of CY 2020, petitioner was able to provide schedules and/or supporting documents for its current input VAT amounting only to P31,358,560.41, as summarized below: 72 Findings Goods Services Capital Importations Total P4,845, 183.24 Goods P1 0,660,252.65 No 2,275.74 P145,3 71.42 P30,804,074.18 exceptions P15, 153,266.87 80,601.73 - 337,177.35 317,925.73 - Out of 80,601.73 - period 16,975.88 tv Inaccurate Input VAT - 68 Exhibit "P-26-f", USB (Exhibit "P-23"}. 69 Exhibit "P-26-g", USB (Exhibit "P-23"}. 70 Exhibits "P-32" to "P-35", USB (Exhibit "P-23"). 71 Exhibit "P-7-2", Docket, pp. 401 to 402. 72 Item V.C.2, Exhibit "P-22", p. 15.

DECISION CTA CASE NO. 11109 No 1,660.71 - 135,046.44 - 136,707.15 supporting P598,343.59 document P15,171,903.46 P4,928,060.71 P10,660,252.65 P31,358,560.41 - Total The unsubstantiated input VAT amounting to P41 ,920,720.5973 shall be disallowed outright. Of the P31,358,560.41 input VAT, the ICPA found that input VAT in the amounts ofP337,177.35, P80,601.73, and P136,707.15, or a total ofP554,486.23, as reflected in the above table, shall be disallowed due to the out-of-period nature of the claim, the inaccurate claim of input VAT, and the absence of proper supporting documents. In addition, the input VAT in the amount ofP140,500.92 shall likewise be disallowed for failure to meet the substantiation and invoicing requirements under the VAT law and regulations, as follows: Exhibit Registered N arne Invoice No. of Supplier No. Input Tax 1. Input VAT on purchase of capital goods exceeding P1Million wherein the sales invoice does I not contain the phrase "THIS INVOICE SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE." (refer toRR No. 10-2015) "P-34-a- Alfa Laval 1" Philippines Inc. 000006938 P66,160.71 "P-34-a- Alfa Laval 2" Philippines Inc. 000006939 66,160.71 Subtotal ?132,321.42 2. Unamortized portion of input VAT on capital goods exceeding P1Million which must be amortized over 60 months (5 years) or the useful life of the asset, whichever is shorter (refer to Section 4.110-3 ofRR No. 16-2005) Claimed input VAT Amortization Unamortized (a) (b=a/60x3mos) (a-b) "P-34-a- Durich Sales and 3" Trading Inc. 0108 P4,650.00 P232.50 P4,417.50 Hydrauking "P-34-a- Industrial 4" Cor_I>_oration 0006717 3,960.00 198.00 3,762.00 Subtotal ?8,179.50 TOTAL P140,500.92 I' 73 !}73,279,281.00 less !}31,358,560.41.

DECISION CTA CASE NO. 11109 Summarizing the above findings relative to petitioner's compliance with the seventh requisite, the Court finds that out of petitioner's reported input VAT of P73,279,281.00 for the 4th quarter of CY 2020, only the total amount of P30,663,573.26 represents petitioner's valid unutilized input VAT, computed as follows: Total Current Input VAT P41 ,920,720.59 P73,279 ,281.00 Less: Disallowances 554,486.23 42,615,707.74 Unsubstantiated Purchases 140,500.92 p 30,663,573.26 Per ICPA findings Per Court's further verification Substantiated valid input VAT A portion ofpetitioner's valid input VATofP30,663,573.26 is attributable to its zero-rated sales. The eighth requisite is to the effect that the input taxes claimed are attributable to zero-rated or effectively zero-rated sales. However, where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume. To reiterate, the petitioner's valid zero-rated sales, as verified by this Court, amounted only to P335,801,460.71, whereas the petitioner reported P759,371,938.50 in total sales in its amended Quarter!J VAT Return74 for the 4th quarter of CY 2020. However, since petitioner's valid input VAT for the 4th quarter of CY 2020 in the total amount ofP30,663,573.26 cannot be directly of entirely attributed to specific sales, the said valid input VAT shall be allocated on the basis of the volume of petitioner's sales, thus: Valid Zero-Rated Sales p 335,801,460.71 Divided by: Total Reported Sales 759,371,938.50 Ratio of Zero-rated sales over Total Sales 44.220946769% Multiply by: Valid Input Tax Input Tax Allocable to Zero-Rated Sales p 30,663,573.26 P13,559, 722.41 ~ 74 Exhibit "P-7-2", Docket, pp. 401 to 402.

DECISION CTA CASE NO. 11109 Thus, for purposes of, and with regard to petitioner's compliance with the eighth requisite, only the amount ofP13,559,722.41 represents valid input VAT attributable to its valid zero-rated sales for the 4th quarter of CY 2020. The input VAT has not been applied against output VAT during and in the succeeding quarters. Having determined that petitioner had valid input VAT attributable to its zero-rated sales, the Court shall now determine whether the same was not applied against its output VAT liability during and in the succeeding quarters, relative to the ninth requisite for the successful prosecution of an input VAT refund claim. Per the ICPA Report, the total amount of unutilized input VAT subject for refund or issuance of tax credit certificate amounting to P14,208,017.90 was computed as follows: 75 1. Computation ofPercentage of Zero-rated Sales frorJ1, Toted Reported Sales Particulars Amount Zero-rated Sales/Receipts P344,058,207.88 Divide by: Total Sales/Receipts P759,371,938.50 Ratio of Zero-rated Sales over Total Sales 45.31% ================== 2. Allocation ofInput VAT attributable to Zero-Rated Sales Particulars Input VAT per Allocation Applied for Exhibit Refund No. 4Q 2550Q Rate "P-32" Goods P15,171,903.46 45.31% P6,874,125.38 "P-33" "P-34" Services 4,928,060. 71 45.31% 2,232,818.53 "P-35" Capital Goods 598,343.59 45.31% 271,099.07 Importations 10,660,252.65 45.31% 4,829,974.93 Total P31,358,560.41 P14,208,017. 91 Based on petitioner's foregoing computation, the claimed input VAT of P14,208,017.90 has not been applied against its output VAT liability for the 4th quarter of CY 2020. Although the claimed input VAT of P14,208,017.90, which includes the unutilized valid input VAT of P13,559 ,722.41, was carried over by petitioner in its succeeding quarters/period, the same remained unutilized as it was deducted ~ 75 Items V.B.2 and V.C.1, Exhibit "P-22", pp. 11 and 14, respectively.

DECISION CTA CASE NO. 11109 as "VAT Refund/TCC claimed"76 in its Qztarter!J VAT Return for the 4th quarter of CY 2022. Accordingly, the subject claim no longer formed part of the excess input VAT ofP621 ,135,716.4877 as of the end of the 4th quarter of CY 2022, that was carried over to the succeeding quarter of CY 2023. Hence, petitioner is deemed to have fulfilled the ninth requisite for the refund/ tax credit of input VAT under Section 112(A) of the NIRC of 1997, as amended, and has sufficiently proven its entitlement to the refund or issuance of tax credit certificate in the amount of P13,559,722.41, representing unutilized input VAT attributable to its valid zero-rated sales for the 4th quarter of CY 2020. WHEREFORE, in light of the foregoing considerations, the present Petition for Review is PARTIALLY GRANTED. Accordingly, respondent is ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner, the amount of P13,559,722.41, representing the latter's unutilized input VAT attributable to its zero-rated sales for the 4rh quarter of CY 2020. SO ORDERED. ~. ~ y--._ MA. BELEN M. RINGPIS-LIBAN Presiding Justice WE CONCUR: ~~tf'�~ COKYUN G.~E~~-o/lRES AJJodate juJtice 76 Line 23D, Exhibit "P-17", Docket, p. 434. 77 Line 29, Exhibit "P-17", Docket, p. 434.

DECISION CTA CASE NO. 11109 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. ~. ~-")- MA. BELEN M. RINGPIS-LIBAN Presiding Justice