HITACHI GLOBAL STORAGE TECHNOLOGIES PHILIPPINES CORP. (Formerly HITACHI COMPUTER PRODUCTS (ASIA) CORPORATION) v. COMMISSIONER OF INTERNAL REVENUE

r REPUBLIC OF THE PHII .IPPINES COURT OF TAX APPEALS QUEZON CITY HITACHI COMPUTER PRODUCTS (ASIA) CORPORATION, Pcti tioncr, -versus- C.T.A. CASE NO. 5676 COMMISSIONER OF INTERNAL REVENUE, Pr�omulgatcd: Respondent. JUL 2;, 2001 /} (!i;'<J/(7 (7b/f C1-4t:~ X---------------------------------------------------------- -X DECISION The present case seeks the refund or issuance of a tax credit certificate in the amount of P3 ,736,075.92 allegedly representing excess creditable VAT taxes paid by Petitioner on its domestic purchases of services for the period July 1, 1996 to September 30, 1996. The antecedent facts follow. Petitioner is a domestic corporation organized and existing under the laws of the Republic of the Philippines, with principal office at Special Export Processing Zone, Laguna Technopark, Binan, Laguna. It is engaged in the business of manufacturing, exporting, buying, selling or otherwi se dealing in at wholesale electric, electronic and software products and industrial properties, including but not limited to hard disk drive and component parts, and supplies used or employed in or related to the manufacture of such products (Exhibit K). According to Petitioner, its manufactured products are sold 100% to export market.

DI �:CISION- ( T/\ C/\SI �: NO . SC�7C� ('1\( il: 2 On Ma y II. ltJtJ4. th L: l�:xport l'rocL:ss i11g /.onl: Authority (1':1'/./\) dul y n.:g isll:IUI Petitioner as an Export Enterprise at the Special Ex port Processi ng Zo ne declared lo r the purpose at Laguna Technopark, pursuant to the provisions of Presidential Decree No . 66, as amended, and was issued Certificate of Registration No. 94-28. It was also registered as a value-added tax taxpayer on June 28, 1994 and was issued a certificate of registration bearin g ROO Control No . 94-570-00028 (Ex hibit A) . On October 7. 1994, the EPZA passed Board Resolution No. 94-212 (Exhibit L) approving the application of Petitioner for pioneer status of its small-sized, high density hard di sk drive and thin fih)1 magnetic head manufacturin g facility. The said resolution likewise granted a six (6) year income tax holiday to Petitioner subj ect to all applicable procedural guidelines under EPZA General C ircul ar No . 90-00 1. On October 25, 1996, Petitioner fil ed with the Bureau of Intern al Revenue (BIR) its 1996 third quarterl y VAT return (Exhibit C). The said return, however, was subsequently amended on October 25, 1999 (Exhibit M), showing total input VAT payments fro m Jul y I, 1996 to September 30, 1996 in the amount of P3.736.075.92. The payments were allegedly made on its domestic purchases o f services tota lling P37,360,759.20 . On September 28, 1998, Petitioner filed w ith the Tax and Reve nue G roup of the One-Stop-Shop Inter-Agency Tax and Credit Duty Drawback Center of the Department of Finance, an Application for Tax Credit/Refund of Value-Added Tax Paid from Jul y I , 1996 to September 30, 1996 in the amount ofP3,736,075.92. (Exhibit D) As the application for refund was not immed ia:ely acted upon and to toll the running of the two-year prescriptive peri od under Secti on 230 of the Tax Code, Petitioner elevated its claim before thi s Court on September 30, 1998. 9iJ tj

DECISION- CTA CASE NO. 5676 PAGE 3 In his Answer filed on November 4, 1998, Respondent claimed by way of Special and Affirmative Defenses that: "4. Granting without admitting that petitioner filed a claim for refund, the same is subject to investigation by the Bureau of Internal Revenue. 5. Petitioner miserably failed to demonstrate that the tax subject of the case at bar was erroneously or illegally collected. 6. Taxes paid and collected are presumed to have been paid 111 accordance with law and regulation, hence, not refundable. 7. In an action for refund/credit, the taxpayer has the burden of showing that the taxes paid are erroneously collected and that failure to me.et such a burden is fatal to his cause, as such claim for refund is strictly construed against the claimant. (Citibank N.A. Philippine Branch vs . The Commissioner of Internal Revenue, CTA Case No. 4258, April I, 1994) 8. The burden of proof lies upon the taxpayer to establish its right to refund, and failure to adduce sufficient proof is fatal to the action for tax refund/credit. 9. It is incumbent upon the petitioner to show that it has complied with the provision of section 229 of the Tax Code, as amended . 10. Claims for refund arc construed strictly against the claimants and cannot be allowed unless proven explicitly and categorically. (Caltex (Phil.) Inc. vs. Com. of Internal Revenue, CTA CASE No. 2871, January 29, 1986). The taxpayer has the burden of proof to show that it is entitled to the refund of the amount claimed as refundable because taxes arc presumed to have been collected in accordance with laws and regulations." That the instant Petition was timely filed is not disputed by Respondent. Likewise, he admitted that Petitioner is both a VAT-regi stered entity and an EPZA-rcgistered export enterprise. Thus, to support its claim, Petitioner invokes the provisions of Section 106(A)(2)(a)(i) in relation to Section 112 (A) of the National Internal Revenue Code (NIRC) of 1997 (then Section 100 (a)(2)(A)( I) in relation to Section 106 (a) of the old 9tJ 5

L)ECISION- CTA CASE NO. 5676 PAGE4 Tax Code) which grants zero-rated ex porters of goods the pri vilege to apply for a refund or tax credit of its unutili zed input VAT payments insofar as they are attributab le to its export sales. Respo ndent, however, counters Petitioner's argument by in voking Section 24 of Republic Act No . 7916, otherwise known as "The Special Economic Zone Act," which provides in part: "SEC. 24 . Exemption from Taxes Under the National Internal Revenue Code. -Any provision of existing laws, rul es and regul ations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business estab li shments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earn ed by all businesses and enterprises within the ECOZONE shall be remitted to the national government x x x" He alleges that being an ECOZONE or PEZA-registered enterpri se, Petitioner is not subj ect to VAT under the aforementioned secti on of RA 7916. Co nseq uentl y, it is not allowed any tax credit on VAT input tax previously paid pursuant to Section 4.103-1 of Revenue Regulations No. 7-95 : "SEC. 4.103-1. Exemptions. - (A) In general. - An exemption means that the sa le of goods o r properties and/or services and the use or lease of properties is not subj ect to VAT (output tax) and the seller is not all owed any tax credit on VAT (input tax) previously paid x x x." (underscoring supolied) T hrough a resolution promulgated on A ugust 2, 2000 111 CTA Case No. 5650 entitled Ccbu Toyo Corporation vs. Commissionct� of lntcmal H.cvcnuc, thi s Co urt first passed upon the issue, thus: " Respondent is correct in arguin g that if an entity is registered with PEZA as an ecozone enterpri se and is remitting 5% of its gross income to the national government, it is exempt fro m payment of the VAT pursuant to the provisions of Section 24 of Republic Act No. 7916, to quote:

DECISION- CTA CASE NO. 5676 PAGE 5 "Section 24. Exemption fi"om Taxes Under the National Internal Revenue Code.- Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government x x x." Underlining supplied. However, We do not agree that the aforequoted law is applicable to the case at bar. Section 23 of Republic Act No. 7916 provides: "Section 23. Fiscal incentives. - Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided for under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987." Under the aforementioned law, a PEZA registered enterprise has the option to choose between two sets of fiscal incentives. One, that whic h is provided for under Presidential Decree No. 66, as amended, and Section 24 of RA 7916 which includes the 5% preferential tax on gross income earned, which is in lieu of national and local taxes and second, as that provided for under Book VI of Executive Order No. 226, including but not limited to an income tax holiday (ITH) of 4 or 6 years depending o n whether an entity is registered as a pioneer or non-pioneer enterprise. If an ecozone enterprise choos�cs the 5% preferential tax, it is exempt from payment of a ll national and loca l taxes. Howe, � ~r if an ecozone enterprise opted for the income tax holiday, it is only exempt from payment of the income tax but still subj ect to other national internal revenue taxes including the value-added tax. These were explicitly elucidated by the Bureau of Internal Revenue in VAT Ruling Nos. 037-98; 043-98; 027-99; and 063-99." This aforequoted ruling was affirmed recently by the Court of Appeals in the case entitled Commissioner of lntemal Revenue vs. Seagate Technology Philippines, CA-G.R. SP No. 61189 promulgated on June 18, 2001. It is a lso important to note that the question of whether or not Petitioner is legally entitled to claim for a refund of its unutilized VAT input taxes paid had already

DECISION- CTA CASE NO. 5676 PAGE6 been settled by this Court in a number of similar cases previously brought by Petitioner before Us, to wit: 1. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5651, promulgated February 2, 2001; 2. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5756, promulgated March 15 , 200 l ; and 3. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5707, promulgated June 20,2001. ln all of the aforementioned cases, We upheld the legality of Petitioner's claim. We proceed, therefore, to the main iss ues raised in Petitioner's Pre-Trial Brief which were admitted by Respondent's counsel during the Pre-Trial Conference on February 17, 1999 and approved by this Court on June 2, 1999. These are: "I. Whether or not Petitioner has unapplied or unutilized creditable value-added tax inputs as of September 30, 1996 arising from its domestic purchases of goods and services which is a prc-.Jcr object of a claim for refund pursuant to Section 112 of the National Internal Revenue Code, as amended; 2. Whether or not the said creditable value-added tax inputs of Petitioner for the Quarter ended September 30, 1996 are substantiated by documentary evidence in the form of invoices and official receipts; and 3. Whether or not said unapplied or unutilized creditable value-added tax inputs for the Quarter ended September 30, 1996 was carried forward to the succeeding taxable Quarter and applied against any of the value-added tax output of the Petitioner for said period ." For purposes of clarity, quoted hereunder arc Sections 100 (a)(2)(A)(i) and 106(a) ofthe 1996 Tax Code applicable to the case at bar and relied upon by Petitioner: "Sec. 100. Value-added tax on sale a/goods or properties. -(a) x x x (2) The following sales by a VAT-registered person shall be subject to 0% :

DECISION- CTA CASE NO. 5676 PAGE 7 (A) Export sales.-The term 'export sales' means: (i) The sale and actual shipment of gJods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determi ne the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods and services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" "SEC. I06. Refunds or tax credits of creditable input tax.-(a) Any VAT-registered person, whose sales arc 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 iss uance 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 I00 (a) (2) (A) (i), (ii) and (b) and Section I02 (b) (1) and (2), the acceptab le fo reign currency exchange proceeds thereof had been duly accounted for in accordance with the 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 vo lum e of sales." (U ndcrscori ng suppl icd) From the above, it is clear that a claimant is allowed to file a claim for refund or tax credit of its creditable input tax that can be directl y attributed to its zero-rated sales. In the absence of a showing, therclore, that Petitioner 's products were exported in its entirety, then Petitioner's claim must correspondingly be reduced. For the period July I , 1996 to September 30, 1996, Petitioner alleged ly paid input VAT in the amount of P3 ,736,075.92 arising from its domestic purchases of services. On the other hand, in its amended Quarterly Value-Added Tax Return for the 3rd quarter of 1996 (Exhibit M), Petitioner declared ze ro-rated sales amounting to PI ,707 ,608,362.80. Petitioner showed proofs of the inward remittances representing payments of export sa les 9d J

DECISION- CTA CASE NO. 5676 PAGE 8 such as certifications from Rizal Commercial Banking Corporation (RCBC) and Pilipinas Bank (Exhibits H-8, R-2 & R-3) and Petitioner's passbook hom RCBC (Exhibits H-5 to H-7). However. when verified by the independent CPA, only the total amount of PI ,373,232,468 .22 was supported by export documents such as Export Sales Invoices, Export Declarations and Airway Bills (Exhibits Q-1 to Q-392, Addendum Report of SGY- Exhibit P) The amount of P334,375,894 .5 8 was not properly documented. In the case of Commissioner of Internal R�!venue vs. Philippine Bobbin Corporation, CA-G.R. SP. NO. 59452 promulgated on February 19, 2001, the Court of Appeals denied the claim for refund of Philippine Bobbin because of its failure to submit export documents and We quote: "By and large, export sales invoices alone are inadequate proofs that the subject goods were actually exported. Such invoices are merely written accounts of the particulars of merchandise shipped or sent to a purchaser or consignee with the value or prices and charges annexed (Philippine Law Dictionary, yu Ed .. p. 495) . By no means are they accurate confirmations that goods were actually shipped out of the country. Yet, that is what the law requires. Section 1OO(a)(2) of the National Internal Revenue Code (then in effect at the time of the alleged exportation) defines "Export Sales" as the salt. and 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. In that case, it is imperative for any claimant of a tax refund or credit in relation to the Input VAT paid to prove not only the existence of the sale but also the actual shipment of the goods from the Philippines to a foreign country. Rather than limiting the documentary requirements to just the export invoices, the law specifically enjoined the production of "export documents" to affirm the authenticity of the export sales. In commercial practice, export documents include commercial invoices or receipts, bills of lading, airway bills, and export declarations or permits. These documents, taken collectively, are the best means to prove the exportation of goods." (Underlining supplied) 910

DECISION- CT/\ C/\S I: NO. 5(J7(J I'Nil �: 'I \\', , l111d 1111 � 1tl111\'1' 1!1'1 1'111111 iljljolll 11i,j, � Ill lit �� 1 ,, .,, 111 111 11 't lllll ' lito ' l ' 'o)lllll t111k :� :llllllllltlill)'. Ill I'\ 1�1. 1'/'� .H'I�I .'d( "' IC! ',)(", "' lill' ltd :d 1' .\ )Hlll ::: tit- :: "I' 1'1 .'/ 11 '/ .1,1))(. llt .1 .HII l:trk L':\)llll'l dol'llllll'lll s s11r lt :ts :tinv: ty hill :: :ttHil' .\ )HIII dn�l:tr:tlioll s. Si 11n� I'J. 'J X' ~u ol' lltL� :dll'gcd lol :d L'Xporl saks dct:l: 11n l hy l'c liliolll'l' l:tck lite II L'CL'ss: try cx pml doc untcnl s. il l'ollows lhL:n tktl I l).5X'X, ol' tilL: :dlowahk inpul V /\T ol' l'clitiottl' r should bL: di sallowL:d for the said portion cannot be sa id to bL: direc tl y attributable to Petitioner's zero- rated export sales. With reference to the second issue, Petitioner substantia ted its claim by submitting various VAT invoices and oilici al receipts (Exhibits 1-1 to 1-226). But again, the special audit conducted by the independent CPA resulted in the disallowance of the amount of P43 2,803.47 because they we re not properly substanti ated for VAT purposes (Ex hibit J - Report of SGV dated September 17, 1999). And fu rth er verificatio n by this Court of the various invoices and orfic ial receipts also resulted to add itional disallowances of the input VAT for the following reasons: REFERENCE INPUT VAT SUPPLIER EXHIBIT DATE NO . AMOUNT 12,125.38 (a) No supporting document Subtotal 121,253.80 890.91 8,909 .10 CITY SERVICE CORP. 12,225 .11 DOLPHIN ENVIRONMENTAL 122,251 .10 25,241.40 PINPIN SECURITY 252,414.00 3,794 .55 (b) Not within the period of claim 2,323 .64 1-10 6/26/96 352 37 ,945.45 DOLPHIN ENVIRONMENTAL 23,236 .36 891 .00 DOLPHIN ENVIRONMENTAL 1- 11 6/17/96 342 3 ,485.00 DOLPHIN ENVIRONMENTAL 8,909 .00 DOLPHIN ENVIRONMENTAL 1-12 6/21/96 345 34 ,855 .00 1-13 6/21/96 346 91.J..

DEC IS ION- CTA CASE NO. 5676 PAGE IO DOLPHIN ENVIRONMENTAL 1- 14 6/26 /96 35 1 11 ,636.36 1,163 .64 DOLPHIN ENVIRONMENTA L 37 ,963 .64 3,796 .36 DOLPHIN ENVIRONMENTAL 1- 15 2 6 / 14/96 337 42.508 .87 4 ,250 .89 DOLPHIN ENVIRONMENTAL 33 ,016.82 3,30 1.68 1-153 6/ 5/9 6 376 1-1 54 5/5/96 335 Subtotal 230,071 .50 23 ,006.76 (c) Overstatement of input VAT SAV.E. INT'L LANGUAGES INC. 1-2 10 9/5/96 10,658 .18 Shld. Be 10.200 00 ALLKEY INT'L, INC. 1-1 to 1-5 7/ 13/96 4,58 1.80 458 .18 Shld . Be 6,380.4 5 10 ,200 .00 1,02 0.00 5,360.45 Subtotal 14,781 .80 1,478.18 Total 497 ,267.30 49 ,726 .34 Therefore, out of th-e amount of P3.736,075 .92 input taxes being refunded by Petitioner, onl y the amount of P3,253,546. 11 was properl y substantiated, detailed as follow s: Amount Claimed P3,736,075 .92 Less : Disall owances (a) Per SGV 's verifi cati on (Ex h. J)P432.803.47 (b) Per Court's ve rificati on 49.726 .34 482,529 .81 Allowabl e Input VAT U253.546. I I Finall y, anent the third issue, although Petiti oner carri ed forward to the succeeding taxable quarter the unutili zed creditable va lue-added tax inputs for the peri od Jul y 1, 1996 to September 30, 1996 as shown in the quarterl y V/\T return lo r the 4111 quarter of taxable year 1996 (Exhibit N), the amount was also deducted from the total ava il able input tax under Any VAT Refund/TCC Claimed (Ex hi bit N-3). Hence, the amount bein g claimed was not applied against any output VAT. .. 91r::

DECISION- CTA CASE NO. 5676 PAGE II In sum, Petitioner has shown its entitlement to the refund sought. However, in view of the disallowances made by the independent CPA and this Court, Petitioner's claim is accordingly reduced to the amount of P2,616,50 I. 78, computed as follows: AMOUNT CLAIMED P3,736,075.92 Less: Disallowances 482,529.81 P3,253,546.11 (a) Per SOY's verification (Exh. J)P432,803.47 637 044.33 (b) Per Court's verification 49 726.34 P2,616.501.78 ALLOWABLE INPUT VAT Less: Portion pertaining to export sales w ithout.export documents (P3,253,546.11 X 19.58%) AMOUNT REFUNDABLE WHEREFORE, in the light of all the foregoing, Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P2,616,50 I. 78 representing input value added tax paid by Petitioner on its domestic purchases of services for the period July 1, 1996 to September 30, 1996. SO ORDERED. L-. Ls-~~ ERNESTO D. ACOSTA Presiding Judge I CONCUR: 91 3

DECISION- CTA CASE NO. 5676 PAG E I2 CERTIFICATION l here by certify that the above deci sion was reached after due co nsultatio n wi th the members of the Co urt of Tax Ap pea ls in accordance w ith Secti on 13, A rti cle Vlll of the Constitution. LlQ~ C? ~ ERNESTO D. ACOSTA Pres iding Jud ge