MIRANT NAVOTAS CORPORATION v. COMMISSIONER OF INTERNAL REVENUE (Consolidated with case no. 5968)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MIRANT NAVOTAS CORPORATION (formerly Southern Energy Navotas, Inc.), Petitioner, -versus- C.T.A. CASE NOS. 5936 & 5968 COMMISSIONER OF INTERNAL Promulgated: REVENUE, JAN 16 2002 _/J" Respondent. a�'/Jy~~' X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X DECISION These two Petitions for Review seek the refund of unutilized input value-added tax (VAT, for brevity) on domestic purchases of goods and services in the total amount of P529,010.56 allegedly attributable to zero-rated sales of services for the third and fourth calendar quarters of 1997, broken down as follows: CTA Case No. Period Involved Amount 5936 Third Quarter of 1997 P288,955.92 5968 Fourth Quarter of 1997 240,054.64 Tot a 1 P529.010.56 These two cases were consolidated pursuant to an order given in open court on January 8, 2000, upon written motion of Petitioner's counsel (see minutes of the session, January 8, 2000, CTA records, p. 55). The facts of the case are briefly stated as follows:

DECISION- CTA CASE NOS. 5936 & 5968 PAGE2 Petitioner is a corporation duly existing under and by virtue of the laws of the Philippines with principal office address located at Suite 501, CTC building, 2232 Roxas Boulevard, Pasay City. It is principally engaged in the business of power generation and subsequent sale thereof to the National Power Corporation (NPC) under the Build, Operate, Transfer (BOT) Scheme. It is registered with the Bureau of Internal Revenue as a VAT taxpayer with Certificate of Registration bearing RDO Control No. 96-051- 005718 (Annex B). It was originally registered with the Securities and Exchange Commission under the name "Hopewell Energy (Philippines), Corp." and later was changed to "Southern Energy Navotas, Inc." (Exhibits A and A-1). As early as March 1, 1996, Petitioner already filed with the BIR Revenue District Office No. 51 an Application for Effective Zero Rating with respect to its sales of services to National Power Corporation for the construction and operation of a gas turbine power station under the Build Operate Transfer (BOT) scheme (Exhibits B and B-1 ). This application remains unacted upon by the Revenue District Officer up to this time. For the third and fourth quarters of 1997, Petitioner seasonably filed its quarterly Value-Added Tax Returns on October 20, 1997 and January 20, 1998 (Exhibits C, C-9, G, and G-9). These VAT returns were simultaneously amended on October 8, 1999, reflecting total zero rated sales in the amount ofP139,979,228.70 for the third and fourth quarters of 1997 with the corresponding aggregate input taxes in the sum of P529,0 10.56 for the same period (Exhibits E, E-1, E-3, E-5, I, I-1, I-3, and 1-5).

DECISION- CTA CASE NOS. 5936 & 5968 PAGE3 On June 30, 1999, Petitioner filed its administrative claim for refund with RDO No. 51 of the Bureau of Internal Revenue believing that its sales of services to the NPC are subject to VAT at 0% hence it is entitled to the refund of unutilized input VAT attributable thereto (Exhibits N, N-1 and N-2). The inaction of Respondent on its claim for refund compelled Petitioner to file the instant petitions for review on September 29, 1999 and December 6, 1999 in order to toll the running of the two-year prescriptive period under the law. The petition for review for the third quarter of 1997 was docketed as CTA Case No. 5936 while the petition for review for the fourth quarter of 1997 was docketed as CTA Case No. 5968. The consolidated issues to be resolved by the Court are as follows: 1. Whether or not the power generation services rendered by Petitioner for supply to NPC are subject to zero percent (0%) VAT pursuant to Section 108(8)(3) of the Tax Code of 1997 (formerly Section 102[b][3] ofthe Old Tax Code); 2. Whether or not Petitioner has unapplied or unutilized creditable input value-added taxes for the third and fourth quarters of 1997 arising from its domestic purchases of goods and services which can be a proper object of a claim for refund pursuant to Section 108(8)(3) [formerly Section 102[b][3] of the Old Tax Code] and Section 112(A) [formerly Section 106(b) of the Old Tax Code] of the National Internal Revenue Code, as amended; 3. Whether or not the said creditable input value-added taxes of Petitioner for the third and fourth quarters of 1997 were substantiated by documentary evidence; 4. Whether or not the said unutilized creditable input value-added taxes for the third and fourth quarters of 1997 were carried over to the succeeding taxable quarter(s) and applied against any of the output value- added tax liability of the Petitioner for the said period; and

DECISION- CTA CASE NOS. 5936 & 5968 PAGE4 5. Whether or not the Petitioner complied with the requirements necessary for the refund of VAT input taxes of P288,955.92 and P240,054.64 representing its alleged unutilized input value added taxes for the third and fourth quarters of 1997, respectively. Anent the first issue, Petitioner asserts that the services it rendered to the National Power Corporation are subject to 0% VAT pursuant to Section 102(b)(3) of the Tax Code, as amended, quoted, thus: SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) xxx (b) Transactions subject to zero-rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) XXX (2) XXX (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines 1s a signatory effectively subjects the supply of such services to zero rate. Based on the foregoing provision, Petitioner now seeks the refund of the input VAT it paid during the period July 1, 1997 to December 31, 1997 in accordance with Section 106(a) of the same code which provides: SEC. 106. Refunds or tax credits of creditable input 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, to the extent that such input tax has not been applied against output tax; xxx"

D EC ISI O N - CTA CASE NOS. 5936 & 5968 PAG E S On the other hand, Respondent argues that Petitioner is not entitled to the refund because of its failure to present an approved application for zero-rating. He cites as basis this Court' s ruling in the case of ABB Power Generation Ltd. vs. Commissioner of Internal Revenue, CT A Case No. 5270, dated March 3, 1999 1 Hereunder are excerpts � of the aforementioned decision, thus: Moreover, granting arguendo, that petitioner' s sale of services to the NPC are considered effectively zero-rated sales under Section 102(a)(3) of the Tax Code, supra, nevertheless, this Court has to deny the instant claim for refund as petitioner failed to comply with Section 8(d) of Revenue Regulations No. 5-87 which requires that any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an application with the Commissioner of Internal Revenue justifying the imposition of zero-rate on said transactions. Quoted hereunder is Section 8(d) of Revenue Regulations No. 5-87, thus: (d) Application for zero rate. - Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero-rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked. (F)ailure to get an approval from the Commissioner for a zero-rating classification will make the said sale of services by Petitioner to NPC an EXEMPT transaction under paragraph (u) of Art. 103 of the Tax Code, thus, petitioner shall not be entitled to the refund of any input tax it paid on its purchase of goods and services during the period in question. There is no argument that Petitioner failed to secure from the Bureau of Internal Revenue an approved application for effective zero-rating. However, records show that as early as March 1, 1996, Petitioner had already filed with the Revenue District Office

DECISION- CTA CASE NOS. 5936 & 5968 PAGE6 No. 51 of Pasay City an application for effective zero-rating regarding its sales of services to NPC but the latter office failed to process. We shall resolve the issue based on the existing law, jurisprudence, and evidence on record. In the case of Ernesto M. Maceda vs. Hon. Catalino Macaraig, G. R. No. 88291, May 31, 1991, the total exemption ofNational Power Corporation (NPC) from all kinds of taxes whether direct or indirect was already settled by the Supreme Court. The NPC ' s exemption from all kinds of taxes was further elucidated by the High Court in its Resolution dated June 8, 1993 resolving the same issue in the motion for reconsideration, and we quote, thus: A chronological review of the NPC laws will show that it has been the lawmaker' s intention that the NPC was to be completely tax-exempt from all forms of taxes - direct or indirect. One common theme in all these laws is that the NPC must be enabled to pay its indebtedness which, as P.D. No. 938 was P12 Billion in total domestic indebtedness, at any one time, and US$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. In the light of the aforementioned decision, the Secretary of the Department of Finance issued a Memorandum dated January 28, 1998, addressed to the Commissioner of Internal Revenue, upholding the ruling of the Supreme Court with respect to the total exemption of NPC from all kinds of taxes and further ruled that purchases by NPC of 1 With Entry of Judgment, dated March 24, 1999.

DECISION- CTA CASE OS. 5936 & 5968 PAGE 7 lectricity from indep nd~nt power producers ar subject to VAT at 0%. Pertinent po1tions of said memorandum read as follows: As explained by the Supr~me Court, th' rational~ for the NPC's ta: x m tion is to ensure cheaper power. If the BIR's recent view is to be implemented, the VAT, beino an indirect tax, may be passed on the by s ll r of c! ctricity to NPC. Effedively, this m ans that l �ctricity will be sold at a higher rated to th consum 'rs. Estimates show that a 10% VAT on electricity which is purchased by NPC from its indepcnd nt power producers will increase power cost by about P1 09.4 million a month or about Pl.30 billion a year. The effect on the consumer is an additional charge of P0.059 per kilowatt-hour. The recognition of NPC's broad privilege will inure to the ultimate benefit of the Fi lipino consumer. In view of the foregoing and using the power of review granted to the Secretary of Finance under Section 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the PC is exempt under its charter and subsequent la\�\S from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases by NPC of electricity from independent power producers arc subject to VAT at zero-rate. (Underlining supplied). The affirmations of both the Supreme Court and the Secreta!) of Finance regarding NPC's exemption from all kinds of taxes should be enough bases for the Revenue District Officer of RDO No. 51 to approve the pending application of Petitioner. Hovvcver, the said office chose to be silent on the matter (probably) because its approval >vvould result to the granting of Petitioner's claim for refund. It cannot be denied that Petitioner failed to secure an approved application for effective zero-rating Vl.ith the RDO No. 51 of Pasay City. IIowevcr, the inaction of the said office regarding the application should not be taken against Petitioner. We quote our Resolution dated December 12, 2001 in Mirant (Navotas II) C01�poration vs.

DECJSlON- CTA CASE OS. 5936 & 5968 PAul:..8 Commissioner of _ntcrmL _ cvcnuc; CT _ Case _ro. 591 , invoh.:ing the s<m1e parties, a follovvs: "We note that as early as March 1, 1996, Petitioner filed with _es ondent's _ ev�enue District fficc (R_DOJ No. 51 Pasay City an Application for Effective Zero Rating. However, up to this time, Respondent has failed to act u on said application. We clicvc that if _cspondcnt had a valid ground to disapprove the application, he would have done so S\\ illly instead of"sitting on" the ap lication for an interminable lenbrth of time to the detriment of the tax aycr's rights." In fact, in numerous V_ T and IR rulings, the Res ondent had already ackno\vkdgcd that urchascs of NPC of electricity from indc endcnt o-vvcr producrrs arc subject to '- _Tat zero-rate ( _ T Ruling os. 015- 9, 022-99, 52- - , 067-9 , j 8- 00, BIR Ruling_ ros. D_ -::~ 47-04-19-99, D" -632-11-10-99 ;md DA209-04-04-99). ccords shO\v that Petitioner is engaged in selling e cetricity to C, its sole client (TS \ ril 25, 2000, . 7). Consequently, the ayments received y thL' Petitioner from rpc for the serv�iccs rendered in the generation and sale of electricity are subject to V Tat zero erccnt. The Court's ruling in the _B case cannot be ap lied to the peculiar circumstances surrounding the resmt case. In the _ BB case, Petitioner failed to file an application for effective zero-rating while Petitioner herein did. Thus, there was a total absence of lffort on the part of Petitioner . llB in securing the m:cdcd ap roval. This is contrary to the present case where Petitioner, as early as March 1, 1996, had already filed its ap lication.

.. DECISION- CTA CASE NOS. 5936 & 5968 PAGEl) The legal issue having been settieJ, we shali nm:v procceJ to the factual aspeds of the case which are the n;mainii1g issues at bai'. ;:-.,:;cciv...:J capacity from the National Pov,cr Cor o ration fvr th~ � crio...l Jl!l) tv D...:~cmbcr 1997 in the aggregate aillvUiil. vf P139,979,228.70 (Cxhibil.s f, f - 1, f-2, J, J- 1, <:u-,d J-2). Th...:~...~ fc ... ~ '�v<.:i(- all " in u1~ fourth qumi~rl � VAT rdurns (Exhibits X, X-1 to r-22, E-1, anJ T-1 ). Sin~~ the ::.dvi.._c~ then.: f.Jrc cntitkd to the refund of input taxc~ attributabk lherdv. Hvw~:"ver, Pctitivncr must still prov...� that it ita:> a...�nmwlak...l input tax ...-~ in th...� total amount ofP529,0i 0.56 1..} presenting valid VAT invoice~ and offi\.:ial,cc~ipts. Due lo th...� voluminous natur...� of cvid...�m.\.: to b...� nn:s�.:nkd, Pditioner availed of the services of an independent Certified Public Accountant pursuant to CTA Circular Nv. i -95, as amended. Conset1uentiy, Mr. Ruben R Rubio, an Audit Partner of SGV & Co. \Vas commissioned to examine and verify various n.-ccipts and invoices and other long accounts su porting Pdition~..T� s claim...~d input taxes (TSN, August 2, 2000). Two n.: ;orts dated December 8, 2000 and January 31, 2001 vvcrc submitted detailing the audit procedures performed and the findings arrived at after the examination (Exhibits V and \\'). Detailed below is the gist of the auditvr' s findings, io vvii:

., DECIS ION- CTA CASE NOS. 5936 & 5968 PAGE 10 Based on the rocedures we performed. we present below our findings� Findings 3rd Quarter 4lh Quarter Total I. Input Taxes on Local Puchases of Services ! . S pp rted by T!N OR (Annex A) 7 ,0 2 7 .6 7, 27.68 2. Supported by Non-VAT OR (Annex B) 1,065.9 1 1 ,9 2 9 .5 4 2 ,995.45 3. Supported y TAN Non-VAT OR (Annex C) 1,49 .1� 1,498.1 II. Input Taxes on Local Puchases of Goods ! . Supporte by Handwritten /Stamped T!N 1; 79.55 !0, 9 11 ,9 8.64 Invoices (Annex D) 2. Suppoi1ed by TAN-VAT Invoice (Annex E) 2,427.27 2,427.27 3. Supported by VAT OR , not VAT Invoice 471.97 3,454. 26 3,926.23 (Annex F) 4. Supported by VAT In oice not Dated within 901.68 901.68 he peri<Y uf � a1m Annex G) Ill. Input Taxes on Local Purchases of Goods and 5 ,001.20 5 ,001.20 Services Without Supporting Do uments (Anne.-; H) Total p 10 .947 58 p 24 818 75 p 35 .766 33 After verification of th...: abvh ro... orb, tl1c Cuurt finds the same in vrdcr and ho...�reb adopts the :c.aiJ findings. d was furiho...:r asco...Tlain...,J that t K in ut ia;;.....~;, claimed f~.1r the third anJ fourth caknJar o..luarkr;:, vf 1997 in the tutal amount vf P529,0 I0.5G wo...:ro... already deducted r~.~titioncr from its accumulated in ut laxc;, a;, of Sc1 kmbcr 30, 1999 a~ evidenced by the 1999 third Quarterly VAT Return (Exhibits K, K-1 to K-8, and K-8- a).

DECISION- CTA CASE NOS. 5936 & 5968 PAGE II The ub::.t:rvatiuil uf Rt:.::.pundt:nt m hi::. tlicil10lamlun; tltat ::.cvewl i11vuice::. wer~ dateJ beyonJ the period of the ~laim fur refund ~;:, untenable. A veri fi~aliun vf the fvr L-.hibil P-38. Hvvv.::v...:r, Cxhibil P-}8 Vva.::. alieaJ_y wn.::.iJ~;.X J by the independent lu ~Wll:- Pctitlt.ntcl 1~ ctltitleJ tv I� I' I 1 illllt.H.l!lt vf '- lal!II lUl lCUULCU 3rd Quarter 41h Quarter Total Tnpul Ta."'e~ Claimed P288,955.92 P240,054.64 P529,0 10.56 Less: Exceptions Noted 10 G47.58 24 818.75 35 76G.33 by th�.: CPA P')7g 008.14 P?l <i ?15.89 \VHEREFORE, m V!cw of the foregoing, the petitiun::- f._w rev1ew are hereby partially GRANTED. Re::.pundent ~:; ORDERED to REFUND or ISSUE A TAX CFf.'DIT CERTifiCATE in the amount vfP493,244.23 in favm of Petitioner. ~ .JUANIT~O<C2. C.A~STA~ NED/ A, .JQ ;pr . -A--s-. .�n--c-i-f-l-lc- .Tttdv,� -----~-

DECISION - CTA CASE OS. 5936 & 5968 iJ 1\ I_ L I-, I / \.'-JL lL. ERNESTO D. ACOSTA P- j---,:-_,-1-,1-1--n-;o.; -.~ l-i--d-o)..J-c !TTl ~ ~.!!.