CTA Case No. 4670 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY KUMAGAI-GUM! CO., LTD., C.T.A. CASE NO. 4670 (Phil. Branch) Petitioner, - versus - DECISION This case involves a claim for tax credit or refund of the amount of P6, 184,463.77 as excess input value added tax (VAT) paid during the period from February to October 1989. Petitioner is a resident foreign corporation, duly I icensed by Securities and Exchange Commission to transact business in the Philippines thr�ougll its Manila branch, particularly to engage in general construction business. It registered as a VAT entity and was issued a VAT Certificate with Registration No. 32A- 1-003227. For the period from February 1, 1989 to October 3 1, 1989, it undertook the construction of specified projects

DECISION - C.T.A. CASE NO. 4670 -2 - of the Phi I ippine government which were financed by the government of Japan pursuant to various Exchanges of Notes between the two governments. As the construction and related services rendered by petitioner were paid in U.S. dollars remitted into the Philippines, petitioner claimed that its sale of services is zero-rated for VAT purposes pursuant to Section 102(a)(2) of the Tax Code. Hence, it fi I ed VAT returns for the quarters February to Apri I 1989, May to July 1989 and August to October 1989, declaring therein refundable value added taxes in the respective amounts of P2,020,566.60, P2,141,232.94 and P2,022,664.23 or a total amount of P6,184,463.77. Then on August 15, 1991 it filed with the BIR an application for tax credit/refund of its value added taxes paid in the said total amount. There being no action on its application, petitioner filed the instant petition for review with this Court on November 20, 1991, alleging that it is entitled to the aforementioned claim for refund or tax credit. Respondent fi I ed her Answer ( pp. �t8-20, CTA rec. > on February 13, 1992 alleging as Special and Affirmative Defenses the following:

DECISION - C.T.A. CASE NO. 4670 -3- 1. In a claim for refund, taxpayer has the tax paid the burden of proof to show that was erroneous I y co I Iected; 2. A claim for refund is construed strictly against the taxpayer; 3. Taxes are presumed to have been collected in accordance wi! h law; 4. Petitioner must show compliance with the provisions of Section 230 and paragraph 5 of Section 204, both of the 1988 Tax Code; and 5. Petition for Review states no cause dates of action as it failed to indicate the when the value added taxes were paid. After several hearings were conducted for the presentation of petitioner's evidence, � the latter realized that there was a need to amend its Petition for Review. Thus, on May 7, 1994, petitioner filed a Motion to Admit Amended Petition for Review (pp. 92-93, CTA rec.). In its amended petition ( PP � 94-98, ibid.) petitioner stated two (2) alternative causes of action, namely: 1. First Cause of Action - That it is sub j ec.t to VAT at zero-rate percent (0%) on its sale of services in the Philippines, pursuant to Section 102(a)(2) of the Tax Code, and also ..;J zero percent (0%) rate on its sale of goods pursuant to Section 100(a)(2) of the Tax Code. 2. Second Cause of Action That it is exempt from the 10% value-added tax as the pertinent Exchanges of Notes between the Phi I ippine and Japanese governments exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the

DECISION - C.T.A. CASE NO. 4670 -4- Philippines with respect to the supply of products and services under the verified contracts for the undertaking of Pl1 iIippine pro j ects funded by the Japanese government. Petitioner also stated in its amended petition that respondent has a Iready denied petitioner's appIication for tax credit/refund which is the sub j ect of the instant petition for review. 100, CTA In its Resolution of May 20, 1994 (p. rec.), the Court granted petitioner's motion to amend and admitted the amended petition for review. Respondent's Answer to the amended petition for review (pp. 156-159, CTA rec.) was filed on October 5, 1994. Aside from the same special and affirmative defenses mentioned in her previous answer, the amended answer contained two additional defenses to controvert petitioner's alternative causes of action. Such defenses are: 1. Petitioner did not qualify as a zero rated VAT person for it faiIed to secure an approved appIication for zero-rated taxpayer as required under Section 8(c)(3) and (d) of Revenue ReguIations No. 5-87; and 2. Petitioner's alleged exemption under the exchange of notes is without IegaI basis. Needing ventilation in this case is the lone issue of whether or not petitioner is entitled to the refund of the amount of P6,184,463.77 as VAT input taxes paid from February to October 1989.

DECISION - C.T.A. CASE NO. 4670 -5- The Court rules in favor of respondent. Petitioner is not entitled to the refund sought. As correctly argued by the respondent, petitioner cannot be classified as a zero-rated VAT entity for it fai Ied to present an of approved appIication for ' Section 8(d) zero-rating. Revenue Regulations 5-87 expressly provides that: "(d) Application for the imposition of zero-rate - Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an appIication in a form prescribed therefor with the Commissioner of Internal Revenue j ustifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shaII remain va Iid unt i I revoked." Clearly from the foregoing, to qualify as effectively zero-rated VAT person under Sections 100 and 102, an application for that purpose must be filed with, and the same must be duly approved by, the BIR. In the case at bar, petitioner fa i Ied to present such application duly approved by the BIR. For such fai Jure, petitioner cannot be legally classified as a zero-rated -vAT person. Hence, this contradicts its first cause of action as mentioned in its Amended Petition for Review. Petitioner is not a zero-rated VAT entity and therefore, not entitIed to the refund of its input taxes. With respect to petitioner 's second cause of action, We find legal basis that it is VAT exempt based on the

DECISION - C.T.A. CASE NO. 4670 -6- exchange of notes between the Japanese and PhiIippine governments, pert.inent portion of which states: "xxx ( 1 ) The Government of the RepubIic of t 11 e PhiIippines wiII take necessary measures: XXX ( d) to exempt Japanese nationals from customs duties, internal taxes and other fiscal levies which ma1 be imposed in the Republic of the Phi I ippines with respect to the supply of the products and services under the Verified Contracts; xxx." <Exh. "C", Pet.; p. 209, CTA rec.) Therefore, the petitioner herein being Japanese nationals may be considered exempted from value-added tax pursuant to Section 103 ( u) of the NIRC. However, this pertains to its own direct tax I i abiIity by reason of its own supply of products and services, meaning the output value added tax due. This cannot refer to input value added taxes pass on to it by its suppIiers as forming part of the invoice price. This is in fact the essence of the provision of Section 1 03 of the NIRC. A VAT exempt person is exempted for value added tax but is not entitled to claim input tax credit. Therefore, the Court cannot grant the refund being sought by the petitioner. It is expressIy mandated under Section 9(a) of Revenue Regulations No. 5-87 that a VAT

DECISION - C.T.A. CASE NO. 4670 -7- exempt seIIer of goods or services is not entitIed to any tax credit on input tax previously paid. Thus: "Sec. 9. Exemptions. (a) In general. An exemption means that the sale of goods or service is not subject , to value-added tax (output tax). The seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods or services shaII not separateIy biII any output tax to his customers because the said transaction is not subject to VAT. xxx" (Underscoring suppIi ed l To support its contention that it is VAT-exempt, petitioner cited on page 20 (p. 337, CTA rec.) of its Memorandum, this Court's decision promulgated on July 24, 1991 in CTA Case Nos. 4163 and 4239 entitled "P & N Corporation v. Commissioner of Internal Revenue," wherein We resolved in the affirmative the issue of whether Exchanges of Notes are a va I id sour-ce of tax exemption even without legislative concurrence. The Court rules out the applicability of said decision to_ the case at bar. The cited case involves claim for refund of contractor's and withholding taxes. Instant case involves refund of input VAT. legal basis for refund of the former taxes is not applicable for the refund of input VAT. The latter's legal basis for refund is strictly governed by Section 104 of the Tax Code as implemented by Revenue Regulations No. 5-87,

DECISION - C.T.A. CASE NO. 4670 -8- particularly Section 16 thereof, which in summary provides that refund or tax credit of VAT is aIIowed onI y in the following cases: < 1) for input taxes corresponding to zero-rated saIes; and (2) for input taxes paid on capital goods. Petitioner 's use of two alternative causes of action that it is a VAT zero-rated person or that it is VAT- exempt, did not serve its purpose of proving its entitlement to the refund soght. The Court has resolved that it fa i Ied to quaIify as a zero-rated VAT entity and that even if it is to be assumed that the exchange of notes made it VAT-exempt, its claim for refund should be denied pursuant to the aforementioned Revenue Regulations No. 5-87. WHEREFORE, in view of a II the foregoing, the Court finds the instant claim for tax credit or ,efund unmeritorious and hereby DENIES the same. No pronouncement as to cost. SO ORDERED. Q. ERNESTO D. ACOSTA Presiding Judge

DECISION - C.T.A. CASE NO. 4670 -9- CERTIF CATION hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. '- ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals