SPECIALTY PULP MANUFACTURING, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PIDLIPPINES Court Of Tax Appeals QUEZON CITY FORMER SECOND DIVISION SPECIALTY PULP C.T.A. CASE NO. 7425 MANUFACTURING, INC., Petitioner, Members: CASTANEDA, JR., Chairperson, -versus- UY,and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, JUN 0 1 2010 / Respondent. 71:/N a." . X ----------------------------------------------------------------------------------- X DECISION PALANCA-ENRIQUEZ, J.: Section 112(A) and (B) of RA 8424 allows the refund or issuance of a TCC of excess input VAT in two instances, namely: ( 1) when the excess input VAT is attributable to zero-rated or effectively zero-rated sales; and (2) when the excess input VAT is attributable to capital goods purchased by a VAT -registered person, provided the taxpayer complied - with the requisitesprescribed by the aforesaid law. ~ - od ~ !lt

C.T.A. CASE NO. 7425 2 DECISION THE CASE This IS a Petition for Review filed by Specialty Pulp Manufacturing, Inc. (hereafter "petitioner") praymg for refund or Issuance of a tax credit certificate ("TCC") in the amount of P10,203,699.07, representing excess input VAT paid on zero-rated sales, and purchases of capital goods for the four quarters of 2004. THE PARTIES -Petitioner is a corporation duly registered m accordance with Philippine laws, with principal office located at Room 403, CSP Building, 815 Quezon Avenue, Quezon City. It is registered with the Securities and Exchange Commission ("SEC"), as a manufacturer and exporter of pulp, paper and paperboard, wholesaler of agricultural raw materials and live animals. Petitioner is registered with the Bureau of Internal Revenue (BIR), with Tax Identification Number (TIN) 214-820- 909-000, dated December 7, 2001. Respondent, on the other hand, IS the duly appointed Commissioner of Internal Revenue ("CIR"), empowered to perform the duties of said office including, among others, the power to decide, approve, and grant refunds or tax credit of erroneously or excessively paid taxes. ~ 50 5

C.T.A. CASE NO. 7425 3 DECISION THE FACTS For the four quarters of 2004, petitioner filed the following VAT Returns: .,/zt ~<k/ •. ·· , .,, ' Exhibits ~·•· ·.r:;..:~, ,.,~~I·\t~·~~~. Quafit~f\\,·· ,;1. ~r_;l.~.·~\.~1it' .· "'-.,~;~: . }.\;. :Dattl1¥FHed ~.·. First Quarter of 2004 April27, 2004 ''A" Second Quarter of 2004 Ju ly 26, 2004 ''B " Third Quarter of 2004 October 25, 2004 "C " Fo urth Quarter of2004 January 25, 2005 "D " Amended First Quarter of June 28, 2005 "A-1 " 2004 Amended Second Quarter of June 28, 2005 "B-1 " 2004 Amended Third Quarter of June 28, 2005 "C-2 " 2004 Amended Fourth Quarter of June 28, 2005 "D-1 " 2004 On October 27, 2005, petitioner filed an administrative claim for refund/issuance of a TCC for its alleged excess input VAT in the amount of P10,203,699.07, for the period January 2004 to December 2004, with the BIR Revenue District Office No. 38, West Avenue, Quezon City. Considering that the claim for refund or tax credit is still under examination by respondent, on March 31 , 2006 petitioner elevated its claim before this Court by way of a Petition for Review. In her Answer, respondent alleged by way of special and affirmative defenses that the claim for refund is still under examination by the respondent Bureau; the burden of proof is upon the petitioner to prove that it is entitled to the claim for refund or issuance of a TCC; the ·• · ~oc

.. C.T.A. CASE NO. 7425 4 DECISION grant of claim for refund is tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; and 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. Petitioner presented Gilbert Lim, its Comptroller, and Jerome Antonio Constantino, the Court-Commissioned Independent CPA, as witnesses, and documentary evidence, marked as Exhibits "A" to "H ", inclusive of their submarkings, which were all admitted by the Court in a Resolution dated November 6, 2007. On April 2, 2008, upon motion of petitioner' s counsel and for the repeated failure of respondent's counsel to appear despite notice, respondent was declared to have waived the right to present her evidence. Consequently, petitioner was granted thirty (30) days therefrom to file its memorandum; while respondent was granted twenty (20) days from notice to file her memorandum, afterwhich the case shall be deemed submitted for decision. Petitioner filed its Memorandum on May 23, 2008. ~ 507

.. I C.T.A. CASE NO. 7425 5 DECISION On September 17, 2008, petitioner filed a "Motion To Re-Open Case for Reception Of Additional Evidence of Petitioner" on the ground that the CPA Report dated June 18, 2007 does not contain proper cross- referencing of the Summary of Findings to the general ledger and further cross-reference to the balances of property, plant and equipment in the general ledger to the Audited Financial Statements, which the Court granted on December 24, 2008. Petitioner offered additional documentary evidenc~ , marked as Exhibits "G-41 " to "G-44 ", "! " to "M ", inclusive of their sub-markings, which were admitted, except for Exhibits "] " to "1-2 " and "K-4 ", which were denied admission for failure to present the original copies for comparison, in a Resolution dated August 12, 2009. Thereafter, the case was deemed submitted for decision. Hence, this decision. ISSUE The sole issue stipulated upon by the parties is: WHETHER OR NOT PETITIONER IS ENTITLED TO BE GRANTED ITS REFUND OR BE ISSUED- CERTIFICATE OF TAX CREDIT OF ALLEGED UNUTILIZED AND UNAPPLIED INPUT VAT IN THE AMOUNT OF PHP10,203 ,699.07 FOR THE TAXABLE YEAR 2004. 5 08

.. C.T.A. CASE NO. 7425 6 DECISION THE COURT'S RULING The petition is partly meritorious. Petitioner anchors its claim on Section 112(A) and (B) of the National Internal Revenue Code (NIRC) of 1997, as amended, which provides: "SEC.112. Refunds or Tax Credits of Input 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) 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)(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 (BSP): 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 entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. (B) Capital Goods. - A VAT registered person may apply for the issuance of a tax credit certificate or refund of inp_u t taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made ~

.. C.T.A. CASE NO. 7425 7 DECISION only within two (2) years after the close of the taxable quarter when the importation or purchase was made." The aforequoted provision allows the refund or issuance of a TCC of excess input VAT in two instances, namely: ( 1) when the excess input VAT is attributable to zero-rated or effectively zero-rated sales; and (2) when the excess input VAT is attributable to capital goods purchased by a VAT-registered person. Records show that petitioner's Amended Quarterly VAT Returns for the four quariers of taxable year 2004 reflect the following: In~ut Tax on In~ut Tax on Domestic Im~ortation Taxable Purchases of of Ca~ital Exhibit Quarter Zero-Rated Sales Ca~ital Goods Goods Total In~ut Tax A-1/G-3 1st Qtr'04 P I ,565 ,704.76 p 186,321 .00 p 1,752,025.76 B-I /G-4 2nd Qtr 1,731 ,624.15 8I 7,593.99 2,549,2 I 8.14 C-2/G-5 3rd Qtr P I I ,548,558 . I 2 1, I 5 I ,893 .26 252, 157.00 1,404,050.26 D-l/G-6 4th Qtr 152,727,4I4.30 3,823 ,916.65 674,788.26 4,498 ,704 .91 Total P164,275,972.42 p 8,273,138.82 p 1,930,860.25 p 10,203,999.07 It must be noted that petitioner's claim for refund or issuance of a TCC pertains to taxable year 2004, before the effectivity of RA 9337. Hence, the Tax Code applicable in the instant case is RA 8424, as .amended, or the NIRC of 1997, as amended. Petitioner's claim for refund or issuance of a TCC under Section 112 (B) of the NIR C of 199 7, as amended, pertains to input taxes related to ~

C.T.A. CASE NO. 7425 8 DECISION its purchases of capital goods for the period January to August 2004, amounting to P5,475,800.42, since the Company has not yet started its commercial operation. On the other hand, petitioner's claim for refund or issuance of a TCC under Section 112(A) of the NIRC of 1997, as amended, pertains to input taxes attributable to zero-rated sales for the period September 2004 to December 2004, as shown hereunder: INPUT VAT Domestic lm[!ortation Total [Exhibit G-7l (ftxhibit G-8l January p 383,267.92 p 133 ,637.19 p 516,905 .11 February 706,357.59 27,4 16.00 733,773 .59 March 476,079.30 25 ,268.00 501,347.30 April 512,692.78 280,533.00 793,225.78 May 521,114.84 249,097.99 770,212.83 June 697,816.69 287,963 .00 985 ,779.69 July 646,791.11 ] 0,977.00 657,768.11 August 287,430.01 229,358.00 516,788.01 Sub-total p 4,231,550.24 p 1,244,250.18 p 5,475,800.42 September 217,372.19 11 ,822.00 229,194.19 October 2,241 ,896. 77 592,279.29 2,834,176.06 November 814,028.18 814,028.18 December 767,992.71 82,509.34 850,502.05 Sub-total p 4,041,289.85 p 686,610.63 p 4,727,900.48 Grand Total p 8,272,840.09 p 1,930,860.81 p 10,203,700.90 While petitioner claims for refund or issuance of a TCC in the amount of Pl0,203 ,699.07, said amount is lower by P300.00 than the input tax reported in its Quarterly VAT Returns of Pl0,203,999.07, as shown above. Thus, we will consider only the amount of Pl 0,203,699.07, as prayed for by petitioner in its Petition for Review. ~

C.T.A. CASE NO. 7425 9 DECISION We will first discuss petitioner's claim for refund or issuance of a TCC of input taxes on purchases of capital goods. Claim for Refund of Input Taxes Attributable to Purchases of Capital Goods in the Amount ofP5,475,800.42 Corollary to Section 112(B) of the NIRC of 1997, as amended, Sections 4.106-1 (b) and 4.104-5 of Revenue Regulations No.7-9 5 provide: "SEC. 4.106-1. Refunds or tax credits of input tax. - (a) XXX (b) Capital Goods - Only a VAT registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported . or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made. Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations. 'Capital goods or properties ' refer to goods or properties with an estimated useful life of greater than one year and which are treated as depreciable assets under Section 29(/), used directly or indirectly in the production or sale of taxable goods or services. ' "

C.T.A. CASE NO. 7425 10 DECISION "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 required under Section 108(a) and 238 of the Code ... XXX XXX (b) Input tax on importations shall be supported with the import entry or other equivalent documents showing actual payment ofVAT on the imported goods." Pursuant to the above provision, in order to be entitled to a refund or issuance of a TCC of input VAT paid on capital goods purchased, petitioner must prove the following requisites: 1) that it is a VAT-registered entity; 2) that it paid input taxes on capital goods imported or locally purchased; 3) that its input VAT payments on capital goods are duly supported by VAT invoices or official receipts; 4) that such input taxes were not applied against any output VAT liability; and 5) that the claim for refund was filed within the two-year prescriptive period. 51 3

C.T.A. CASE NO. 7425 11 DECISION First Requisite: Petitioner is a VAT Registered Entity As regards the first requisite, there is no dispute that petitioner is duly registered with the BIR, with Tax Identification No. 214-820-909- 000 dated December 07, 2001. (Par. 3, Joint Stipulation ofFacts and Issues). Second and Third Requisites: Input Taxes were Paid on Capital Goods Purchased and Payments on Capital Goods are Duly Supported by VAT Invoices or Official Receipts Section 4.106-1 (b) of Revenue Regulations No. 7-9 5 defines capital goods as "goods or properties with an estimated useful life of greater than one year and which are treated as depreciable assets under Section 29(±), used directly or indirectly in the production or sale of taxable goods or services. " It is clear from the aforesaid definition that in order that purchases can be classified as "capital goods", the following conditions must be present: a) that the goods or properties must have estimated useful life of more than one year; b) they are treated as depreciable assets under Section 29(±); and c) they are used directly or indirectly in the production or sale of taxable goods or services.

C.T.A. CASE NO . 7425 12 DECISION To prove its purchases of capital goods, petitioner presented and offered in evidence various suppliers' invoices, official receipts, petty cash vouchers, cash vouchers and cash advance liquidation forms (Exhibits "1q-1" to "1q-1190," "2q-1" to "2q-1203 ", "Jq-1 ", "Jq-994 " and "4q-1 " to "799 ''), Schedule of Importations (Exhibit "G-8 ") and Schedule of Purchases and Input VAT for the months of January to December 2004 (Exhibits "G-9 " to "G-20''), and the report of the Court-Commissioned Independent CPA (Exhibits "G-1 " and "G-41 ''). In addition, petitioner offered its general ledger (Exhibit "G-43 ''), Annual Audited Financial Statements for the Year Ended December 31, 2004 (Exhibit "G-44 ") and Schedule of Property, Plant and Equipment and Other Related Accounts (Exhibit "G-42 "). A careful perusal of the above documentary evidence shows that petitioner's claimed input tax pertains to purchases and importation of capital goods like buildings, machinery and equipment, land improvements, office furniture and equipment, and the like. As ascertained and testified to by the Court Commissioned ICPA, Jerome Antonio Constantino of CG & Co., the related purchases were booked either under the accounts Machineries and Equipment, Office Furniture and Equipment, Construction in Progress or Building (Exhibit "H ", pp. 2 to ~ 5l!:i

C.T.A. CASE NO. 7425 13 DECISION 3). 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 and indirectly in petitioner's business, the same fall within the definition of capital goods under Section 4.106-1 ofRR 7-95. However, records show that not all of the claimed input taxes on capital goods were duly substantiated by VAT invoices or official receipts. Of the total claimed input taxes on capital goods in the amount P5,475,800.42, only the amount of P3,432,775.35 has been duly substantiated by supporting documents, as presented below: REFERENCE (Ann exed to 3rd Qtr (July FINDINGS Exhibit G-41) 1st Otr 2nd Otr to Au!!: 2004) Total ~ 1put VAT on domestic purchases of capital goods duly supported by original pre-printed TIN VAT mvoJces with BIR registration, 1Q-PSG/2Q- issued in the name of the Company, and PSG/3Q-PSG claimed within the period January 2004 to August 2004 . P1 ,099,139.68 p 814,884.58 p 392,574.43 P2,306,598.69 2 Input VAT on domestic purchases of capital services duly supported by original pre-printed 1Q-PSS/2Q- TfN VAT ORs with SIR registration, issued in PSS/3Q-PSS the name of the Company, and claimed within the period January 2004 to August 2004. 23 ,772.49 416,036.00 191 ,658.37 631,466.86 3 Input VAT on importation of capitalized goods duly supported by original BOC Import Entry Internal Revenue Declaration and 1Q-PSI/2Q- official receipt or Land Bank of the PSI/3Q-PSI Philippines official receipt, and claimed within the period January 2004 to August 2004. 90,540.20 256,199.86 147,969.7.4 494,709.80 TOTAL P1,213,452.37 Pl ,487,120.44 p 732,202.54 P3,432, 775.35 5.1G

C.T.A. CASE NO. 7425 14 DECISION The remammg input taxes m the amount of P2,043,025.07 are hereby disallowed for non-compliance with Section 11 O(A) of the NIRC of 1997, as amended, in relation to Section 113(A) ofthe same Code, as implemented by Sections 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulations No. 7-95, as detailed below: .1 REFERENCE (A nn exed to 3 r d Qtr (J uly FINDINGS Ex hibit G-41) 1st Otr 2nd Otr to Aut! 2004) Total 1 Input VAT on capitalizable domestic purchases of services which were 1Q-5a/2Q-5a supported by TIN V ORs for the period January 2004 to August 2004 p 35,327.91 p 1,278.41 p 36,606.32 2 Input VAT on capitalizable domestic purchases of services which were 1Q-6a/2Q- supported by TIN V invoices for the 6a/3Q-6a period January 2004 to August 2004 7,980.00 8,364.95 5,845.45 22,190.40 3 Input VAT on domestic purchases of capital services debited to Machinery and I Q-3/3Q-3 Equipment - Consigned with VAT ORs dated January 2004 to August 2004 7,859.49 756.55 8,616.04 4 Input VAT on domestic purchases of capital serv ices debited to Consignment 1Q-3a/2Q- related expenses with VAT ORs dated 3a/3Q-3a Janu ary 2004 to August 2004. 896.31 1,208.51 1,886.52 3,991.34 5 Input VAT on domesti c purchases of services were not capitalized (supporting 1Q-1/2Q- documents were dated Janu ary 2004 to 113Q-1 August 2004). 71,592.60 43,787.90 36,696.58 152,077.08 6 Input VAT on domestic purchases of services which were debited to "Inventory 1Q-I b/2Q- and Chemicals" (supporting documents 1b/3Q-1b were dated January 2004 to August 2004) 9,638.03 38,817.21 47,934.55 96,389.79 7 Input VAT on domestic purchases of goods which were not capitalized, 1Q-2/2Q- (supporting documents were dated 2/3Q-2 January 2004 to August 2004). 33,047.51 36,967.15 - 44,-783.29 114,797.95 51 7

·.• C.T.A. CASE NO. 7425 15 DECISION 8 Input V AT on importation of capital ized goods duly supported by orig inal Import E ntry Internal Revenue Decl aration and BOC official receipt, or Land Bank of the 1Q-2a/2Q-2- Philippines official receipt, and claim ed a/3Q-2a under the period of refund, but charged to inventory (supporting documents were dated January 2004 to August 2004). 95,780. 80 554,736.99 I 03,432.00 753,949.79 9 Input VAT on domestic purchases of g oods debited to Inventory, Chemi cals and Laboratory Supplies account, not 2Q-2b/3Q-2b capitali zed by Company (supporting documents were dated January 2004 to August 2004) 139,952.65 3 1,422 .66 171 ,375.31 '() Input VAT on domesti c purchases of services not dul y supported by original 1Q-5/2Q- pre-printed TIN VAT ORs dated January 5/3Q-5 2 004 to August 2004 23,867.45 6, 177.35 53 .46 30,098.26 II Input VAT on domestic purchases of g oods not dul y supported by original pre- 1Q-6/2Q- printed T IN VAT invoi ces dated January 6/3Q-6 2 004 to August 2004 84;969 .20 124,955.07 53 ,563 .27 263,487.54 12 Input VAT on purchases whose supporting documents dated January 2004 2Q-7/3Q-7 to August 2004 are not in the name of the Compa ny 36,783 .09 272. 18 37,055.27 13 Input VAT on purchases supported by d ocuments dated January 2004 to August 2Q-8/3Q-8 2004 w ith no visible supplier nam e or the date of BIR printing is not visibl e. 872 .73 95.00 967.73 14 Purchase recorded during the period January 2004 to August 2004 cann ot be 2Q-9 d etermined if capita lized 11,056.9 1 11,056.91 15 lnput VAT claimed cannot be determined 2Q-9a/3Q-9a to what spec ific account debited 8,886. I 8 4,466.3 8 13,352.56 16 Input V AT on capitalizable domestic purchases of services c la imed during the peri od January 2004 to A ugust 2004 but I Q -1 0 VAT ORs were dated out of the period of refund . 2, 146.95 2,146.95 17 Input VAT o n domestic purchases of goods c laimed during the peri od January 1Q- 11 2 004 to August 2004 but VAT ORs we re d ated out of the period under refund. 25 ,802.34 25,802.34 18 lnput V AT on domesti c purchases of " services capitali zed by the Company and - properl y supported by orig inal pre-printed 1Q-1 2/2Q- VAT O Rs dated January 2004 to A ugust 12/3Q-1 2 2 004, but the nature of th e charges were determined not capitalizable. 40,277 .64 33 ,334.24 25,557 .9 1 99,169.79 51 8

C.T.A. CASE NO. 7425 16 DECISION 19 Input VAT on domestic purchases of goods cap italized by the Company and properly supported by original pre-printed 1Q-13/2Q- VAT Invoices dated January 2004 to 13/3Q-13 August 2004, but the nature of the charges were determined not capitalizable. 2,034.55 4,025.73 3,349.80 9,410.08 20 Input VAT on domestic purchases of services duly supported by original pre- printed TIN VAT ORs dated January 1Q-14/3Q-14 2004 to August 2004 but input VAT erroneously computed ( overclaimed). 12.00 881.70 893.70 21 Overclaimed input tax on importation of goods/services due to erroneous 2Q-14/3Q-14 computation (i.e., arithmetical error) 1.14 97.26 98.40 22 Input VAT on domestic purchases of services duly supported by original pre- 3Q-14b/4Q- printed TIN VAT ORs dated September 14b 2004 to December 2004 but input VAT erroneously computed ( overclaimed). 4,212.65 4,212.65 23 Input VAT on domestic pu.rchases of goods duly supported by original pre- 1Q-15/2Q- printed TIN VAT invoices dated January 15/3Q-15 2004 to August 2004 but input VAT erroneously computed (overclaimed). 8,350.67 467.18 10,690.94 19,508.79 24 Input taxes on purchase transactions . recorded during the period January 2004 1Q-18/2Q-18 to August 2004 not supported by any documents 4, I 95.38 5,907.94 10,103.32 25 Input taxes on purchase transactions recorded during the period January 2004 2Q-I8b to August 2004 not supported by any documents. 155.81 155.81 26 Unaccounted difference 84,794.80 4,360.72 66,355.43 155,510.95 Total p 538,573.63 P1,062,097.86 p 442,353.58 P2,043,025.07 Based on the above findings, petitioner's duly substantiated input VAT attributable to its purchases of capital goods for taxable year 2004 amounts_to P3,432,775.35 (P5,475,800.42- P2,043,025.07) only.

C.T.A. CASE NO. 7425 17 DECISION Fourth Requisite: Input Taxes were Not Applied Against Any Output VAT Liability As regards the fourth requisite, records show that the input taxes sought to be refunded/credited were not utilized by petitioner during the subject period since it has no output tax liability against which said input taxes could be applied. In fact, the claimed input taxes in the amount of P10,203,699.07 were already deducted from the accumulated input taxes as of December 31, 2005, as shown in its 2005 4th quarterly VAT returns (Exhibit "G-21 ") . This means that petitioner can no longer utilize the claimed input VAT in its future output tax liabilities. Fifth Requisite: The Claim for Refund was Filed Within the Two-year Prescriptive Period As regards the fifth requisite, Section 112(B) of the NJRC of 1997, as amended, provides that the claim for refund or issuance of a TCC must be filed, within two years after the close of the taxable quarter when the importation or purchase was made. The earliest period involved m petitioner's claim for refund or issuance of a TCC is the first quarter of 2004. Considering that the last day for the first quarter of 2004 is March 31, 2004, it is from this date that the two-year prescriptive period will commence to run with respect~ O

.. C.T.A. CASE NO. 7425 18 DECISION petitioner's administrative and judicial claims for refund. Petitioner, therefore, had until March 31, 2006 within which to file the administrative and judicial claims for refund or tax credit. Hence, the administrative claim for refund filed with the BIR on October 27, 2005 (Exhibit "E "), as well as the Petition for Review filed with this Court on March 31, 2006 are well within the two-year prescriptive period. Therefore, for its unutilized input VAT attributable to its purchases of capital goods for taxable year 2004, petitioner is entitled to a refund or issuance of a TCC in the amount P3,432,775.35. Claim for Refund of Input Taxes Attributable to Zero-Rated Sales in the Amount ofP4,727,900.48 We now proceed to determine petitioner' s entitlement to a refund or issuance of a TCC in the amount ofP4,727,900.48, representing input taxes attributable to zero-rated sales. Pursuant to the aforequoted Section 112(A) of the NIRC of 1997, as amended, in order to be entitled to a refund or issuance of a TCC of input VAT due or paid attributable to zero-rated or effectively zero-rated sales, petitioner must comply with the following requisites: 1) there must be zero-rated or effectively zero-rated sales;

·. C.T.A. CASE NO. 7425 19 DECISION 2) input taxes were incurred or paid; 3) such input taxes are directly attributable to zero-rated or effectively zero-rated sales; 4) the input taxes were not applied against any output VAT liability during and in the succeeding quarters; and 5) the claim for refund was filed within the two-year prescriptive period. First Requisite: There Must be Zero-Rated or Effectively Zero-Rated Sales Petitioner is engaged in the manufacture and export of pulp, paper and paperboard, and as wholesaler of agricultural raw materials and live animals (Par. 3, Statement of Facts, Memorandum for Petitioner, Orig. Docket, p. 168). For the third and fourth quarters of taxable year 2004, petitioner actually generated export sales in the amount ofP158,727,414.38 and the foreign exchange proceeds thereof were duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), as evidenced by various export documents, such as sales invoices, bills of - lading, export declarations, official receipts and passbook entry for export sales (Exhibits "G-35. I " to "G-35. 65 ") and presented by the ICP A in his Summary of Export Sales and Collection (Exhibit "G-40.S") . This ~ort ~ 5 22

C.T.A. CASE NO. 7425 20 DECISION sales fall within the transactions referred to as subject to zero percent (0%) VAT under Section 106(A)(2)(a)(l) of the NIRC of 1997, as amended, which states: "SEC.106. Value-Added Tax on Sale of Goods or Properties.- '(A) Rate and Base of Tax. - x x x XXX XXX (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. -The tenn 'export sales' means: ( 1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)." Although, the Quarterly VAT Returns for the third and fourth quarters of 2004 reflect a higher amount of zero-rated sales of P164,275,972.42 compared to zero-rated sales of P158,727,414.38, per Summary of Export Sales -and Collection, the Court-Commissioned ICPA explained that the discrepancy of P5,548,558.04 was attributable to 52J

•. C.T.A. CASE NO. 7425 21 DECISION errors made when the VAT Return and Summary List of Sales for the fourth quarter of 2004 were prepared (Exhibit G-1, p. 22). Second and Third Requisites: Input Taxes were Incurred or Paid and Such Input Taxes are Attributable to Zero-Rated Sales Upon a careful examination of the documentary evidence presented by petitioner, we find that out of the total input taxes of P4,727,900.48 claimed for refund or issuance of a TCC, attributable to zero-rated sales, the input VAT of P226,695.21 should be disallowed for the following reasons: REFERENCE (Annexed to 3rd Qtr FINDINGS Exhibit G-40) (Sept 2004) 4th Qtr TOTAL 1 Input VAT on domestic purchases of services which were supported by TIN V 4Q-5c ORs dated September 2004 to December 2004 p 113.65 p 113.65 2 Input VAT on capitalizable domestic purchases of services which were supported by TIN V invoices for the 3Q-6c period September 2004 to December 2004 818.18 135.45 953.63 3 Input VAT on domestic purchases of services were not capitalized (supporting 1Q-l/2Q- documents were dated January 2004 to 1/3Q-1 /4Q-1 August 2004). 9.09 9.09 4 Input VAT on domestic purchases of goods which were not capitalized, 1Q-2/2Q- {supporting documents were dated 2/3Q-2/4Q-2 Januar)' 2004 to August 2004). 118.18 118.18 5 Input VAT on domestic purchases of services not duly supported by original 3Q-5b/4Q-5b pre-printed TIN VAT ORs dated September 2004 to December 2004 68,012.23 13,059.12 81,071.35

C.T.A. CASE NO. 7425 22 DECISION 6 Input VAT on domestic purchases of goods not duly supported by original pre- IQ-6/2Q- printed TIN VAT invoices dated January 6/3Q-6/4Q-6 2004 to August 2004 14,127.27 14,127.27 7 Input VAT on domestic purchases of goods not duly supported by original pre- 3Q-6b/4Q-6b printed TIN VAT invoices dated September 2004 to December 2004 19,502.76 43 ,357 .19 62,859.95 8 Input VAT on purchases whose supporting documents dated September 3Q-7b/4Q-7b 2004 to December 2004 are not in the name ofthe Company 9.55 129.57 139.12 9 Input VAT on purchases of goods supported by documents dated September 2004 to December 2004 with no visible 4Q-8b supplier name or the date ofBlR printing is not visible. 244 .55 244.55 10 Input VAT on domestic purchases of service with VAT OR not dated 4Q-l0b September 2004 to December 2004 but input tax claimed in 2004. 10,591.11 10,591.11 11 Input VAT on domestic purchases of goods claimed in September 2004 to 4Q-ll b December 2004 but invoices are not dated within 2004. 40,982.98 40,982.98 12 Input VAT on domestic purchases of services duly supported by original pre- 3Q-14b/4Q- printed TIN VAT ORs dated September 14b 2004 to December 2004 but input VAT erToneously computed (overclaimed). 4,962.31 4,962.31 13 Input VAT on domestic purchases of goods duly supported by original pre- printed TIN VAT invoices dated 4Q-15b September 2004 to December 2004 but input VAT erroneously computed (overclaimed). 12,468.19 12,468.19 14 Supporting documents not available 3Q-18/4Q-18 658.00 17,289.00 17,947.00 15 Input taxes on purchase transactions recorded during the period September to 3Q-18b/4Q- December 2004 not supported by any 18b documents. 23.82 250.82 274.64 16 Unaccounted difference (71 ,693.16) 51,525.35 (20,167.81) Total p 17,331.38 p 209,363.83 p 226,695.21

C.T.A. CASE NO. 7425 23 DECISION On the other hand, we find that the allowable input taxes consist of the following: REFERENCE 3rd Qtr (Annexed to (Sept FINDINGS Exhibit G-40) 2004) 4th Otr TOTAL 1 Input VAT on domestic purchases of capital goods duly supported by original pre-printed 1Q-PSG/2Q- TIN VAT invoices with BIR registration, PSG/3Q- issued in the name of the Company, and PSG/4Q-PSG claimed within the period January 2004 to August 2004. p 7,595.11 p 7,595.11 2 Input VAT on domestic purchases of capital goods duly supported by original pre-printed TIN VAT invoices with BIR registration, 3Q-PSGb/4Q- issued in the name of the Company, and PSGb claimed within the period September to December 2004. 108,010.38 344,769 .60 452,779:98 3 Input VAT on domestic purchases of capital services duly supported by original pre- IQ-PSS/2Q- printed TIN VAT ORs with BIR registration , PSS/3Q- issued in the name of the Company, and PSS/4Q-PSS claimed within the period January 2004 to August 2004. 2,341,750.04 2,341,750.04 4 Input VAT on domestic purchases of capital services duly supported by original pre- printed TIN VAT ORs with BIR registration, 3Q-PSSb/4Q- issued in the name of the Company, and PSSb claimed within the period September to December 2004. I 03,852.43 937,728.45 I ,041,580.88 5 Input VAT on importation of capitalized goods duly supported by original BOC Import Entry Internal Revenue Declaration and 1Q-PSI/2Q- official receipt or Land Bank of the PSl/3Q- Philippines official receipt, and claimed PSI/4Q-PSI within the period January 2004 to August 2004. 657,499.26 657,499.26 Total Substantiated Input VAT p attributable to Zero-rated Sales 211,862.81 P4,289,342.46 P4,501,205.27 Based on the foregoing, petitioner's duly substantiated input VAT attributable to zero-rated sales for taxable year 2004 amounts to P4,50 I ,205.27 (P4, 727,900.48 - P226,695 .21) only ·{JJ 52 G

C.T.A. CASE NO. 7425 24 DECISION Fourth and Fifth Requisites: Input Taxes were Not Applied Against Any Output VAT Liability, and the Claim For Refund was Filed Within the Two- year Prescriptive Period As heretofore discussed, petitioner was able to prove that its claim for refund or issuance of a TCC was not applied against any VAT liability during and in the succeeding quarters, and that the claim for refund/TCC was filed within the two-year prescriptive period. In sum, petitioner has sufficiently proven its entitlement to a refund or issuance of a TCC, representing unutilized input" VAT on capital goods purchased and on its domestic purchases and importations of goods and services attributable to zero-rated sales for taxable year 2004, in the reduced aggregate amount ofP7,933,980.62, computed, as follows: Substantiated Input VAT paid on capital goods p 3,432,775.35 Substantiated Input VAT attributable to zero-rated sales 4,501 ,205.27 Total Refundable Input VAT P7.933.980.62 WHEREFORE, premises considered, the present Petition for Review is hereby PARTLY GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner Specialty Pulp Manufacturing, Inc. in the reduced amount of SEVEN MILLION, NINE HUNDRED THffiTY THREE THOUSANDS w

C.T.A. CASE NO. 7425 25 DECISION NINE HUNDRED EIGHTY and 62/100 PESOS (P7,933,980.62), representing input VAT paid on capital goods purchased, and on its domestic purchasers, and importations of goods and services attributable to zero-rated sales for taxable year 2004. SO ORDERED. ~~,! ~ ~ ~ OLGA'PAl:AN&-ENRIQUEZ Associate Justice WE CONCUR: ~~cav--~ Q ruANrf6 c.·CASTANEDK,·jR. Associate Justice ER~.UY Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, 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. ~:,.b c._.~ ?f;. mANifo c. cAsTANEDA\ JR. Acting Presiding Justice Chairperson, Former Second Division