APPLIED FOOD INGREDIENTS COMPANY INC. v. COMMISSIONER OF INTERNAL REVENUE

) REPUBUC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* AP PliED FOOD INGREDIENTS COMPANY, INC., Petitioner, '.?\. 'i C.T.A. CASE NO. 6513 Members: - versu s - ACOSTA, Chairperson BAUTISTA, and CASANOVA, .11 COMMISSIONER OF INTERNAL REVENUE, Promulgated: - Respondent. JUN 1' 2001- :?uPm X - - - - - - - - - - - - - - - - - - - - - - : - - - - - - - - - - - - - - - - - - - - cu 'Z: '..:. DECISION This Petition for Review seeks for the issuance of a tax credit certificate in the amount of P9,528,565.85 allegedly representing accumulated excess input taxes incurred from September 1, 1998 to December 31, 2000 which are attributable to zero-rated sales for the period April 1, 2000 to December 31, 2000. Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines. It is registered with the Securities and Exchange Commission (SEC) under Certificate of Registration No. AS091-198357 dated November 25',' 1991, with principal office at 2505 West Tower, PSE Bldg., Exchange tyl Road, Ortigas Center, Pasig Ci . t Par. 1.0, Joint Stipulation of Facts and Issues

DEOSION C.T.A. CASE NO. 6513 Page 2 Respondent is the duly appointed Cornrnissioner of Internal n Reve ue, d veste with power to decide/ approve and grant refunds or tax credits of overpaid internal revenue taxes as provided by law, and holds office and may be served with summons, orders, pleadings and other processes at the Bureau of Internal Revenue CitY. (BIR) National Office, BIR Bldg., BIR Road, Dilirnan, Quezon Petitioner is registered with Regional District Office (RDO) No. 43 of the BIR in Pasig City (BIR-Pasig) as, among others, a Value-Added Tax (VAT) taxpayer engaged in the importation and exportation business, as a pure buy-sell trader.3 For the period September 1, 1998 to December 31, 2000, petitioner allegedly imported food ingredients on which it paid input taxes in the amount of P9,528,565.85. Subsequently, during the period April 1, 2000 to December 31, 2000, petitioner allegedly exported the purchased food ingredients and generated sales in therefrom in the amount of P114,577,937.24. The proceeds thereof were paid for n US dollars inwardly remitted into petitioner's dollar accounts with Equita ble Ba k n Corporation and with Australia-New Zealand Bank-Philippine Branch. Petitio er believes that the said export sales are zero-rated for VAT purposes pursuant to ( Section 106(A)(2)(a)(1) of the National Internal Revenue Code NIRC) of 1997. Inasmuch as the accumulated input VAT for the period September 11 1998 to , December 31, 2000 had allegedly remained unutilized or unapplied petitioner filed with the BIR on March 26, 2002 and June 28, 2002, two separate applications for the issuance of tax credit certificates in the respective amounts of P5,385,208.32 2 Par. 2.0, Joint Stipulation of Facts and Issues I 3 Par. 3.0, Joint Stipulation of Facts and l�ues 37

DECISION C.T.A. CASE NO. 6513 Page 3 1-.JIRC of 1997 as legal basis of its claim. Due to respondent's inaction on its claim, petitioner filed a Petition for Review before this Court on July 24, 2002. In his Answer filed on August 28, 2002, respondent raised the following Spedal and Affirmative Defenses: 6. The request for tax credit certificate is still under examination by respondent's examiners; 7. Taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not refundable. Claims for tax refund are construed in !Jtrictissimi jwis against the claimant as they partake of the nature of an exemption from tax (Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1979, 31 SCRA 95) and it is incumbent upon the petitioner to prove that it is entitled thereto under the law (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121) and he who claims exemption must be able to justify his claim by the dearest grant of organic or statutory law; 8. Petitioner's allegation that it erroneously and excessively paid the tax during the year under review does not ipso fado warrant the refund/credit or the issuance of a certificate thereto; 9. Moreover, petitioner must prove U1at it has complied with the governing rules with reference to tax remvery or refund, which are found in Sections 204(C) and 229 of the Tax Code, as amended. During the trial on the merits, petitioner presented documentary and testimonial evidence. Respondent, on the other hand, manifested that he is no longer presenting any evidence ronsidering U1at there is no rerx>rt of investigation and there are no BIR records of this case. On February 26, 2007, the case was submitted for dedsion sans the memorandum of respondent. j ' Pages 28-33, CTA Records I

. l ...;) DECISION C.T.A. CASE NO. 6513 Page 4 The sole issue for this Court's resoluUon is: Whether or not petitioner is entitled to the issuance of a tax credit certificate in tile amount of P9,528,565.85 representing accumulated excess input taxes incurred for the period September 1, 1998 to December 31, 2000 that are attributa ble to zero-rated sales for the period April 1, 2000 to December 31, 2000. The petition has no merit. Petitioner anchors its claim on Section 112(A) of the NIRC of 1997, which provides as follows: 'SEC. 112. Refunds or Tax Credits ofInput Tax- "(A) Zeo-rated or Efceftively 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: PmvidfXt 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). xxx" From the foregoing, in order to be entitled to a refund or tax credit of input VAT payments directly attributable to zero-rated or effectively zero-rated sales, the following requisites must be complied, to wit: 1) There must be zero-rated or effectively zero-rated sales; 2) That input taxes were incurred or paid; 3) TI1at such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales; 4) That the input VAT payments were not applied against any output VAT liability; and 5) Th at the claim for refund was filed witliin the two-year prescriptive period. Anent the first requisite, petitioner maintains that its export sales which were paid for in US dollars, inwardly remitted and accounted for in accordance with the I - 377

J DECISION C.TA CASE NO. 6513 Page 5 rules and regulations of the Bangko Sentral ng Pilipinas are subject to zero percent (0%) VAT pursuant to Section 106(A)(2)(a)(1) of the NIRC of 1997, which states: - "SEC. 106. Value-Added Tax on Sale of Goods or Properties. - "(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value added tax equi valent to ten percent ( 10%) 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. X X X "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: "(a) Export Sales. -The term '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 dete1mine 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)." To substantiate its export sales for the period April 1, 2000 to December 31, 2000 and the foreign currency proceeds thereof, petitioner submitted before th is Court the following documents: EXHIBIT NO. B to B-9 pOCUMENT C to C-4 Export Documents D Bank Credit Advices E Export DeclaratiollS H Export Invoices Bills of Lading I to I-5 VAT Returns for the 2''d to the 41h quarters of 2.000 CPA Report Summary of Sales and Corresponding Excess Input Taxes per VAT Ret�urn Supplemental CPA Report Official Receipts 378 )

DECISION C.T.A. CASE NO. 6513 Page 6 A !Jetusal of lhe diurementione<..l <.l.ucumc:11ts ieveals that petitioner's products were actually scld arLl shipped abroad and in consideration thereof/ pelitioner received foreign currenry payments, which were inwardly remitted in accordance with the BSP ruk: .. d c. .. reg ulations. These expo1t soles may fall within the export sales transactions subject to zero percent (0%) VAT referred to under Section 106(A)(2)(a)(1) of tLc; 1IRC of 1997. However, Section 106(A)(2)(a)(1) of the NIRC of 1997 shoul d not be read in isolation but in conjunction with Section 113 of the same Code, which prescribes that a VAT reg istered person l ike petitioner, shall for eve ry sale, issue an invoice or receipt which must contain the following information: "SEC. 113. Invoidng and Accounting Requirements for VAT Registered Persons. - (A) Invoicing RequirenJents. -A VAT-reg istered person shall, for every sale, issue an invoice or receipt. In addition to the information required un der Section 237, tile following information shall be in dica ted in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN)i and (2) The total amount which tt1e purchas er pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. JJ Corollary thereto, Section 4.108-1 of Revenue Regulations No.7-95, reads as follows : "SEC. 4.108-1. Invoicing Requirements. - All VAT registered persons shalt for every sale or lease of goods or properties or services/ issue duly registered receipts or sales or commercial invoices which must show: 1. the name/ TIN, aod address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name/ TIN/ business style/ if any, and address of the VAT-reg i stered purchaser, customer or client; I 379

DECISION C.T.A. CASE NO. 6513 Page 7 5. the word "zero-rated" irnprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. )()()( XXX XXX Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices or receipts and this shall be considred as a "VAT Invoice". All purchases covered by invoices other than "VAT Invoice" shall not g ive rise to any input tax." (Emphasis supplied) Such invoice or receipt must be duly registered with the Bureau of Internal Revenue as prescribed under Section 237 of U1e NIRC of 1997, to wit: "SEC. 237. Issuance of Receipts or Sales or Comrclamei Invoices. -All persons subject to an internal revenue tax shall, for each sale or transfer of rnerchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or _ ales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service x x x." (Emphasis supplied) A scrutiny of petitioner's sales invoices (included in Exhibits 8 to 8-9) shows that petitioners TIN-VAT number. and the word "zero-rated" were not imprinted thereon in violation of Section 4.108-1 of Revenue Regulations No. 7-95, implementing Section 113 of the NIRC of 1997. Ukewise, the said invoices were not duly registered with the BIR as mandated under Section 23 of the NIRC of 1997. There was no authority to print or BIR permit number reflected on the said invoices. Basic is the rule that before a printer can print receipts or sales or commercial invoices an authority to print must be secured first from the BIR by all persons who are engaged in business pursuant to Section 238 of the Tax Code. Pertinent portion of Section 238 is quoted hereunder for easy reference: 380

' ..9 DECISION C.T.A. CASE NO. 6513 Page 8 "SEC. 238. Pdnting ofReceipts or Sales or Commercial Invoices. - All persons who are eng aged in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before a printer can print the same. xxx"(Emphasis supplied) The above provision seeks to eliminate the use of unregistered and double or multiple sets of receipts by striking at the very root of the problem - the printer (Intel Philippines /olanufacturing/ Inc. vs. Commissioner of Internal Revenue/ CTA Case No. 633/t July 1 2005). The law and reg ulations are explicit in emphasizing strict compliance with the invoici n g requirements because for the same tra nsactions the output VAT of the seller becomes the input VAT of the purchaser. Pursuant to Sections 106(0)(1) and 108(C), in relation to Section 110 of the NlRC of 1997, as amended/ the output or input tax on the sale or purchase of goods is determined by the total amount indicated in the invoice, while the output or input tax on the sale or purchase of services is determined by the total amount indicate�'' in the official receipt. I n the case of zero-:�ilted sales transactions, the regulatior:c: "urther require that U1e word "zero-rated' .Je imprinted on the face of the coveri ng invoices or official receipts (AMERICAN EXPRESS INTERNATIONAl/ INC./ PHILIPPINE BRANCH vs. COMMISNOSI ER OF INTERNAl REVENU CTA EB No. 103/ March 2006). The ratior 1 dle for the imprinting of the word "zero-rated" on the face of the covering invoice or offiual receipt of the seller is for the buyer or purchaser not to claim any i nput VAT from such purchase. The same was comprehensively .elucidated by the Court En Bane in the case of J.R.A. PHILIPPINE INC. vs. COMMISSIONER OF INTERNAl REVENU C. T.A. CASE EB No. 12 January 1 200 to wit: '81 !

DECISION l..T.A. CASE NO. 651] Page 9 Furtherrnoie, SecUon 110 uf tile NlRC of 1997, as amended, provides tllat: "Any 1nput tax evideBC.d.i uy i:l VAl invoice or omual recei pt issued in accordance with Section 113 hereof on the following transactions shall be credita ble against U1e output tax: x x x." If the invoice or official receipt was not imprinted with "zero-rated", there is a danger that the purchaser of the goods or services may be able to claim input tax on the sale to it by the taxpayer of the goods or services, as the case may be, notwithstanding the fact that no VAT was actually paid on such goods or services since the taxpayer is zero-rated. This is the rationale for the mandatory requirement in Revenue Regulations No. 7-95 that the words "zero-rated" be imprinted in the invoice or recei pt, as the case may be. The zero-rated taxpayer should be entitled to a tax credit/ refund on input taxes paid on its purchase of goods or services subject to the mandatory compliance with the in11oicing requirements under the regulations. Otherwise, there may result the absurd situation where the government would be crediting/ refunding non-existent input tax to purchasers of goods or services of such zero-rated taxpayer. (Emphasis supepi)dl In the case of TAGANITO MINING COJ?.PORA TION vs. COMMISSIONER OF INlcRNAL REVENU CTA EB No. J;;Jnuary 31/ 200 the Court En Bane likewise explained the basis for the issuance of Revenue Regulations No. 7-95, which was made pursuant to the respondent's duty of implementing the VAT provisions of the NIRC, thus: "Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulatious, was promulgated by the Secretary of Finance pursuant to the authority granted by Section 245 of the Na tional Internal Revenue Code of 1977, which provides: SEC. 245. Authority of Secretary of Finance to promulgate Rules aud Regulations. - The Secretary of Finance, upon the recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. (Emphasis supplied) The above provision was re-enacted in toto under Section 244 of the 1997 NIRC. Moreover, to further strengthen the rule making power of the Secreta ry of Finance in coordination with the Bureau of Internal Revenue, an additional section (SEC. 245) was incorporated I 382

DECISION C.T.A CASE NO. 6511 Page 10 defining the extent of such rule making power. Section 245, in pertinent part, provides: SEC. 245. Specific provisions to be contained in rules and regulations. - The rules and regulations of the Bureau of Internal Revenue shall, among other things, contain provisions spedfying, prescribing or defining: XXX XXX XXX (g) The manner �in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper boko s, records, invoices and other papers shall be kept and entries therein 1nade by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes; (Emp!Jasis/italics supplied) Considering the legislative grant of authority to the Secretary of Finance to promulgate all needful r ules and regulations for the effective enforcement of the provisions of the NIRC, Section 4.108-1 of Revenue Regulations No. 7-95 requiling the irnprinting of the words "zero-rated" on sales invoices or official receipts cannot be said as having no valid basis or legislative root. On the contrary, it is both reasonable and necessary for the effective implementation of the provisions of the NIRC concerning zero-rated sales. Hence, the requirement that sales invoices be imprinted with the word "zero rated" cannot be taken as an enlargement or expansion of the law for the reason that it rnerely implements the provisions of the 1997 NIRC on sales that are subject to 10% VAT, zero-rated sales (0% VAT) and exempt sales. The imprinting of "zero-rated' is necessary to distinguish sales subject to 10% VAT, those that are subject to 0% VAT (zero rated) and exempt sales, to enable the Bureau of Internal Revenue to properly implement and enforce the other provisions of the 1997 NIRC on VAT, namely: 1. Zero-rated sales [Sec. 106(A)(2) and Sec. 108(8)]; 2. Exempt transactions [Sec. 109] in relation to Sec. 112(A); 3. Tax Credits rSec. 110]; and 4. Refunds or tax credits of input tax [Sec. + 12]. The rule is that as long as the administrative regulation is not in conflict with the law it seeks to implement the same should be taken as part of the law taking into cqnsideration the underlying purpose of the rule or regulation. 383 I

DECISION C.T.A. CASE J,O. 6513 Page 11 In a recent decision, tile Supreme Court held that regulations JSsued by the Department of Finance/Bureau of Internal Revenue t11at would give effect to the law are valid regulations, thus: "Petitioner's arguments impugning the validity of Revenue Regulations V-39 and 17-67 deserve scant consideration. First, both regulations were issued pursuant: to Section 245 (now Section 244) of the Tax Code. TJJe authority of the Sea-etary of Rnance/ in conjuncdon with the Corrvnissioner of Internal Revenue/ to pmmulgate needful rules and regulations for the effective enforcement ofintemal revenue tax laws cannot be contJoverted Such rules and regulations, as well as� administrative opinions and rulings, ordinarily deserve to be given weight and respect by the courts. Second, our scrutiny of Revenue Regulations ios. V-39 and 17-67 show that said regulations did not modify or deviate from the text of Sections 137 and 141 but merely implemented and clarified said two provisions by providing certain conditions under which stemmed leaf tobacco may be exempted from p repayment of specific tax.112 (Emphasis supplied; dtations omitted) We agree with the respondent that the issuance of Revenue Regulations No. 7-95 was made pursuant to the respondent's duty of implementing the 1977 NIRC as amended. The requirement of imprinting the word "zero-rated" fulfills the intent of the law. It is useful, practical and necessary not only with respect to the proper implementation of the provisions of the 1997 NIRC on zero-rated transactions but more importantly, to prevent the granting of refund or tax credit of non-existent input VAT. It is an act of tax administration which is not violative of the rule on non -delegation of delegated powers. XXX XXX XXX Hence, the need for strict cornpliance with the mandatory requirement of imprinting the word "zero-rated" on sales invoices or official receipts regardless of whether or not the business entity engages only in export sales since Revenue Regulations No. 7-95 did not make any distinction on the different kinds of zero-rated sales." 2 Campania General de Tabacos ,Je Filipinas vs. Han. Court of Appeal5 and The Commissioner of Internal Revenue' G.R. No. 147361, March 23, 2004 (426 SCRA 203). 384 I

_)I DECISION C.T.A. CASE NO. 6513 Page 12 To ernpllasize, it is explicit from the provisions of Section 113 of the NIRC of 199"7, in r elation to Section 237 of the same Code and Section 4.108-1 of Revenue Regulations No. 7-95 that a VAT registered person like he re in petitioner must issue a duly registered VAT invoice or receipt for evel}' sale transaction. Such VAT in voice or receipt must show the taxpayer's identification number (TIN) fol lowe d by the word VAT, printer's BIR permit number and lhe word "zero-rated" imprinted on the in voice or receipt covering a zero-rated sale. Cons idering so, the export sales referred to under Section 106(A)(2)(1)(a) of the NIRC of 1997 as subject to zero percent (0%) VAT are those covered by duly registered VAT invoices bearing all the required information. Without valid VAT invoices, petitioner's reported export s ales for the period April 1, 2000 to December 31, 2000 cannot qualify for VAT zero- rating. Consequently, the claimed unutilized input VAT attributabl e thereto i n the amount of P9,528,565.85 cannot be granted. It is clear from the provisions of Section 112(A) of the NIRC of 1997 that there must be zero-rated or effectively zero-rated sales in order th at a refund of input VAT could prosper. Accordingly, this Court 1'inds it un necessary to delve on the other requisites. IN VIEW OF THE FOREGOING, the instant Petition for Review is hereby DENIED. SO ORDERED. \. 385

DECISION C.T.A. CASE NO. 6513 Page 13 WE CONCUR: ( With Dissenting Opinion ) ERNESTO D. ACOSTA Presiding Justice CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the mnclusions in U1e abuve Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. t- c ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division