KEPCO PHILIPPINES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Coon ol Tax Appeals QUEZON CITY SECOND DIVISION KEPCO PHILIPPINES C.T.A. CASE NO. 6965 CORPORATION, Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. THE COMMISSIONER OF Promulgated: FEB 2 S ZOO] ( -0--------- INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION UY,J.: Before Us is the petition for review filed by petitioner, Kepco Philippines Corporation , against respondent, Commissioner of Internal Revenue , seeking for the refund of the input value-added tax which it incurred from its alleged zero-rated sales of electricity to the National Power Corporation in the total amount of ELEVEN MILLION SEVEN HUNDRED TEN THOUSAND EIGHT HUNDRED SIXTY EIGHT AND 86/100 PESOS (P11, 71 0,868.86) covering the four quarters of the taxable year 2002.

DECISION C.T.A. CASE NO. 6965 Page 2 of23 THE PARTIES Kepco Philippines Corporation (petitioner) is a corporation duly organized and existing under and by virtue of the Republic of the Philippines, with principal place of business at the 181h Floor, Citibank Tower, 8741 Paseo de Roxas , Salcedo Village , Makati City. It is a duly registered value-added tax (VAT) taxpayer under the jurisdiction of the Revenue District Office (ROO) No. 43 of Pasig City,1 engaged in the production and sale of electricity (as an independent power producer) . On the other hand , respondent Commissioner of Internal Revenue is vested under the National Internal Revenue Code (NIRC) with the authority to carry out all the functions , duties, and responsibilities of the Bureau of Internal Revenue (SIR) , including inter alia , the power to decide, approve, and grant refunds and/or tax cred its of erroneously paid or illegally collected internal revenue taxes , and holds office at the 51h Floor, SIR National Office Building , SIR Road , Diliman , Quezon City. THE FACTS As culled from the records and as stipulated by the parties in their Joint Stipulation of Facts and Issues, these are the facts of the case. On December 4, 2001 , petitioner filed an application for zero-rated sales with the respondent, through its ROO No. 43. The same was eventually approved under VAT Ruling 64-01. 2 For the calendar (taxable) year 2002, petitioner filed its Quarterly VAT Returns declaring zero-rated sales in the aggregate amount of P3,285,308,055.85 as follows: ~ 1 Certificate of Registratio n, Exhibit "A". 2 Application for VAT Zero-Rate, Exhibit " F, F- 1 and F-2".

DECISION C.T.A. CASE NO. 6965 Page 3 of23 Exhibit Quarter Involved Zero-Rated Sales 8 1st Quarter p 651 ,672,672.47 c 2nd Quarter 725 , 104,468.99 D 3rd Quarter 952 ,053 ,527 .29 E 4th Quarter 956.477 ,387 . 10 Total P3.285.308.055.85 In the same year, petitioner allegedly incurred expenses representing domestic purchases of goods and services in the amount of P117,108,688.60, which became the basis for the computation of its input VAT in the sum of P11 ,7 10,868.86 as declared in its Quarterly VAT Returns ,3 to wit: Exhibit Quarter Involved Purchases Input VAT 8 1st Quarter p 6,063,184.90 p 606,318.49 2nd Quarter 18,410,193.20 1,841 ,019.32 c 3rd Quarter 16,811 ,819.21 1,681 ' 181 .93 4th Quarter 75,823,491 .20 7 ,582 ,349 .12 D E Total P117, 108,688.51 P11,710,868.86 Allegedly , the expenses represent the costs attributable to its production and sale of electricity to the NPC, its sole customer.4 Accord ing to petitioner, such sale is effectively zero-rated for VAT purposes and the input VAT incurred in connection thereto is available for tax refund/cred it. Thus , on April 20, 2004, petitioner filed a claim for refund of the input VAT incurred in the amount of P11 ,710,868.86 for taxable year 2002 with respondent (through Revenue District Office No. 43)5. Two days later, the instant Petition for Review was filed with this Court on April 22, 2004. 3 Quarterly Value Added Tax Return for: 1�t, 2"ct, 3'd and 41h Quarter of 2002, Exhi bits " B, C, D, E", respectively. 4 Par. 1, Memorandum for Petitioner, p. 2, Records, p. 144. 5 Letter application for VAT Refund for the Taxable Year 2002 dated April 19, 2004, Exhibit " G".

DECISION C.T.A. CASE NO. 6965 Page 4 of23 In his Answer, respondent submits the following Special and Affirmative Defenses: "6. Claims for refund are strictly construed against the taxpayer as the same partakes (sic) the nature of a tax exemption ; 7. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the part of the Petitioner to prove the same is fatal to its cause of action ; 8. The Petitioner should prove that (sic) its legal basis for claiming for the amount being refunded .6" During trial , petitioner presented its evidence , both testimonial and documentary. This included the testimony of the court commissioned Independent Certified Public Accountant, Victor 0. Machacon, who conducted an audit of the voluminous documentary evidence of petitioner, such as official receipts , invoices and vouchers in support of its claim for refund of its unutilized input VAT. 7 After the admission of petitioner's evidence in the Resolution dated May 3, 2006, 8 presentation of respondent's evidence was set on July 19, 2006. However, due to the failure of respondent's counsel to appear on said date, the Court considered respondent to have waived his right to present evidence and the parties were directed to file their respective memoranda . Only petitioner filed its Memorandum on August 23, 2006,9 and this case was considered submitted for decision in the Resolution dated September 6, 2006 without any memorandum having been filed by respondent. Hence, this Decision . 6 Answer, Records, pp. 37-38. 7 Minutes during the hearing held on September 7, 2005 , Records, p. 9 1. Resolution, Records, p. 132. 9 Records, pp. 143-153.

DECISION C.T.A. CASE NO. 6965 Page 5 of23 THE ISSUES As jointly stipulated by the parties, these are the issues submitted for this Court's resolution : "1. Whether or not the sale of electricity by a VAT-registered entity such as the Petitioner to the NPC qualifies as a sale of services subject to a VAT rate of zero percent (0%) or otherwise called a zero-rated VAT transaction ; 2. Whether Petitioner, as a VAT-registered entity and during the taxable year 2002, actually incurred expenses representing domestic purchases of goods and services and which expenses represent costs attributable to petitioner's production and sale of electricity to the NPC; 3. Whether or not Petitioner is entitled to the refund of the total amount of P11 ,71 0,868.68, representing the input VAT incurred for the four (4) quarters of the taxable year 2002 from its sale of electricity to the NPC; and 4. Whether or not Petitioner's claim for refund is substantiated by documentary evidence. "10 THE COURT'S RULING On the first issue, We rule in the affirmative. Section 108 (8)(3) of the National Internal Revenue Code (NIRC) of 1997 provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - X X X (B) Transactions Subject to Zero Percent (0%) Rate. -The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate: X X X (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; X X x" 10 Joint Stipulation of Facts and Issues, Records, pp. 59-62, at p. 61.

DECISION C.T.A. CASE NO. 6965 Page 6 of23 The NPC is one such entity exempt from taxes under special laws, specifically, under Section 13 of Republic Act (R.A.) No. 6395,11 as amended by Presidential Decree (P.O.) Nos. 380 and 938, which provides: "Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities. - The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion . To enable the Corporation to pay the indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section One of this Act, the Corporation , including its subsidiaries is hereby declared exempt from the payment of all forms of taxes. duties, fees , imposts as well as costs and service fees including filing fees , appeal bonds, supersedeas bonds , in any court or administrative proceedings." (Underscoring supplied) The tax-exempt status of NPC had been affirmed in the case of Ernesto M. Maceda vs. Catalina Macaraig, Jr., et al., 12 wherein the Supreme Court en bane pronounced that: "The use of the phrase 'all forms' of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC 'shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, . . .' The preamble of P.O. No. 938 states- 'WHEREAS , in the application of the tax exemption provision of the Revised Charter, the non-profit character of the NPC has not been fully utilized because of restrictive interpretations of the taxing agencies of the government on said provisions . . .' (Emphasis supplied .) 11 An Act Revising the Charter of the National Power Corporation. 12 G.R. No. 88291. May 3 1, 199 1 (Decision).

DECISION C.T.A. CASE NO. 6965 Page 7 of23 It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.O. No. 938 shall be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax-exempt status of NPC." In the light of the foregoing pronouncement of the Supreme Court, petitioner's sale of electricity to the NPC, a tax-exempt entity under R.A. No. 6395, effectively subjects such sale to zero percent (0%) rate . The second , third , and fourth assigned issues, being interrelated , shall be discussed together. In claiming a refund for input VAT directly attributable to effectively zero-rated sales, the following legal provision and revenue regulation must be observed : Section 112 (A) of the National Internal Revenue Code of 1997: "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)(1 ), (2) and (B) and Section 108 (8)(1) 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 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 volume of sales. " [Underscoring supplied}

DECISION C.T.A. CASE NO. 6965 Page 8 of23 "Section 4.106-1 and Section 4.104-5 of Revenue Regulations No. 07-95: "Section 4.106-1. Refunds or tax credits of input tax. - (a) Zero-rated sales of goods or properties or services - Only a VAT-registered person may be given a tax credit certificate or refund of VAT paid corresponding to the zero-rated sales of goods, properties or services , excluding the presumptive input tax and to the extent that such input tax has not been applied against the output tax. The application should be made within two (2) years after the close of the taxable quarter when the sales were made." "Section 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 as required under Section 108 (a) and 238 of the Code. Input tax on purchases of real property should be supported by a copy of the public instrument i.e. deed of absolute sale, deed of conditional sale, contract/agreement to sell , etc., together with the VAT receipt issued by the seller. x x x" [Underscoring supplied] Based on the above-cited legal provisions, petitioner must comply with the following requisites to be entitled to the refund of input VAT directly attributable to effectively zero-rated sales: 1. Both administrative and judicial claims for refund must be filed within two (2) years after the close of the taxable quarter when the sales were made; 2. The claimed input VAT payments must be directly attributable to zero-rated sales; 3. The claimed input VAT payments must be duly supported by VAT invoices or official receipts ; and 4. The claimed input VAT payments must not be applied against any output tax carried over to the succeeding month(s) .

DECIS ION C.T.A. CASE NO. 6965 Page 9 of23 Were the administrative and judicial claims for refund filed within the two- year prescriptive period? For the four quarters of taxable year 2002, petitioner filed its Quarterly VAT Returns on April 25, 2002 (1 5t quarter) , July 25, 2002 (2nd quarter) , October 25, 2002 (3rd quarter) , and January 27, 2003 (4th quarter).13 Thereafter, petitioner filed its administrative claim for refund with the BIR on April 20, 2004 and its Petition for Review Uudicial claim) with this Court on April 22, 2004. Since both claims were filed within the two (2)-year prescriptive period reckoned from the dates when petitioner filed its Quarterly VAT Returns, We find petitioner to have complied with the first requisite. Were the claimed input VAT payments directly attributable to zero-rated sales? As to the second requisite , petitioner presented in evidence its Rehabilitation, Operation Maintenance and Management Agreement with the NPC and Korea Electric Power Corporation 14 and the various official receipts15 to prove its sales to the NPC. Since all of its sales are zero-rated , all payments of input VAT on its purchases of goods and services amounting to P11 ,71 0,868.86 should be directly attributable to its declared zero-rated sales of P3,285,308,055.85. However, out of the declared zero-rated sales of P3,285,308,055.85, petitioner was able to substantiate only the amount of P1 ,451 ,788,865.52 , to wit: 13 Exhibits "B", "C", "D" and "E". 14 Exhibit "H". 15 Exhibits "K", " K-1 " to " K-25".

DECISION C.T.A. CASE NO. 6965 Page 10 of23 Exhibit OR No. Date Amount K 196 1/7/2002 p 73,947,108.77 K-1 197 1/17/2002 93 ,128 ,704 .04 K-2 198 2/7/2002 71 ,358,271 .95 K-3 199 2/11/2002 89 ,203 ,098 .59 K-4 200 73,381 ,775.74 K-5 201 3/13/2002 42,852 ,305.83 K-6 202 4/10/2002 73 ,308 ,066 .29 K-7 204 5/8/2002 65,470 ,983 .71 K-8 205 5/15/2002 85,847 ,822.37 K-9 206 6/11/2002 74,697 ,771.34 K-10 209 7/11/2002 72 ,299,993.43 K-11 211 8/8/2002 74 ,850 ,280 .55 K-12 213 9/6/2002 72 ,325,968.86 K-13 215 10/9/2002 74 ,319 ,232.09 K-14 216 10/30/2002 87 ,146 ,130 .17 K-15 217 K-16 219 11/7/2002 128,230,460 .22 K-17 220 12/11/2002 74 ,389 ,194.98 K-18 221 12/11/2002 34 ,880,455.30 K-23 212 88 ,192 ,294 .29 Total 8/8/2002 1,958,947.00 P1,451,78~Ml65.52 In view of the foregoing findings , it becomes necessary to apportion the validly supported input VAT to its substantiated zero-rated sales of P1 ,451 ,788,865.52. The rate to be applied will be based on the total volume of declared zero-rated sales, computed as follows: Substantiated zero-rated sales to NPC P1 ,451 ,788,865.52 Divided by the total declared zero-rated sales 3,285,308,055.85 Rate of substantiated zero-rated sales 44.19% Therefore, the proper subject of petitioner's claim for refund shall only be 44.19% of the validly supported input VAT. Were the claimed input VAT payments duly supported by VAT invoices or official receipts? Petitioner partly complied with this third requisite .~

DECISION C.T.A. CASE NO . 6965 Page 11 of23 Based on the findings of the commissioned independent Certified Public Accountant contained in his Report submitted on January 11 , 2006,16 petitioner's claimed input VAT in the amount of P11 ,71 0,868.86 should be reduced by P125,556.40, as follows : "Conclusion Based on the results of the procedures performed, as outlined in Annex H, on the Company's accounting and related records supporting the Company's claim for refund/tax credit on the Input VAT, such claim requires adjustments based on exceptions noted as summarized in Annexes B to G. Based on the above findings , the claim for refund/tax credit by the Company on Input VAT should be adjusted as follows : Amount of Input VAT claimed Annex Total A P11 ,710 ,868 .86 � Invoices and/or statements of account and or official receipts subject to 8 (106,001 .52) overseas commun ication tax c (17,661 .83) � Input VAT recognized for unpaid service invoices and/or statement of account D 266 .08 � Erroneous amounts indicated in the E (203 .28) Schedule of Input VAT as compared to related invoices or statements of account F (766 .76) or official receipts resulting to net understatement of the Input VAT Cla im G (1 ' 189.09) � Input VAT recognized and recorded in J P11 ,585,312.46"" the books for non-VAT suppliers � Input VAT recognized for invoices not named to client or buyers � Input VAT recognized but not supported by official receipts and/or sales invoices 16 Report marked as Exhibit "N". 17 Records, p. I03 .

DECISION C.T.A. CASE NO. 6965 Page 12 of23 However, a careful scrutiny of petitioner's supporting documents reveals that input VAT in the aggregate amount of P5,045,357 .80 should further be disallowed for the reasons hereunder stated : Exhibit Supplier Date Invoice/OR Input VAT Amount p 954.55 (a) Input VAT on purchase of goods not supported by an invoice 52 .73 13.27 A2X Communications Trading 6/19/2002 p 10,500 .00 41 .27 ABC Strategic Solutions 4/15/2002 580 .00 84.55 ANC Commercial 1/12/2002 146 .00 27 .27 Big R Stores Incorporated 2/16/2002 453 .95 52.73 Bo . San Juan Lumber & Hardware 1/12/2002 930 .00 91 .18 Bon Vincent Enterprises 3/17/2002 300 .00 14 .55 Bon Vincent Enterprises 4/15/2002 580 .00 CD-R King Gen Mdse 10/20/2002 1,400 .00 Christine Auto Supply 3/26/2002 1,003 .00 496 .36 CO-Green Trading Corp. 4/30/2002 160 .00 288 .00 Contract Design & System Furniture 11/22/2002 16.82 Contract Design & Systems Design 4/30/2002 15,400 .00 27 .27 Data Hardware & Electrical Supply 1/25/2002 5,460 .00 34 .55 DMM Gloves & Rugs 2/24/2002 3, 168 .00 34 .55 DMM Gloves & Rugs 3/12/2002 185 .00 362 .73 DMM Gloves & Rugs 4/15/2002 300 .00 34 .55 DMM Gloves & Rugs 4/29/2002 380 .00 34 .55 DMM Gloves & Rugs 5/6/2002 380 .00 34 .55 DMM Gloves & Rugs 6/28/2002 3,990 .00 29 .09 DMM Gloves & Rugs 9/15/2002 380 .00 29 .09 DMM Gloves & Rugs 10/29/2002 380 .00 34 .55 DMM Gloves & Rugs 11/20/2002 380 .00 71 .39 DMM Gloves & Rugs Gen Mdse 1/7/2002 320 .00 148 .07 Eastern Tanay Supermarket 1/2/2002 320 .00 152 .59 Eastern Tanay Supermarket 1/7/2002 380 .00 85 .91 Eastern Tanay Supermarket 1/7/2002 785 .25 58 .00 Eastern Tanay Supermarket 1/24/2002 1,628 .75 263 .62 Eastern Tanay Supermarket 1/7/2002 1,628 .50 52 .05 Eastern Tanay Supermarket 1/10/2002 945 .00 132.95 Eastern Tanay Supermarket 1/31/2002 638 .00 141 .16 Eastern Tanay Supermarket 1/31/2002 2,899 .85 59 .57 Eastern Tanay Supermarket 1/31/2002 572 .50 40 .29 Eastern Tanay Supermarket 2/18/2002 1,462 .50 274 .56 Eastern Tanay Supermarket 3/20/2002 1,552 .75 57 .05 Eastern Tanay Supermarket 3/7/2002 655.25 145 .65 Eastern Tanay Supermarket 3/7/2002 443 .25 125 .23 Eastern Tanay Supermarket 3/7/2002 3,020 .20 86 .80 Eastern Tanay Supermarket 3/7/2002 627 .50 Eastern Tanay Supermarket 3/18/2002 1,602.10 59 .72~ Eastern Tanay Supermarket 3/7/2002 1,377 .50 954 .75 656 .95 (tip)

DEC I SI ON 4/12/2002 294 .50 26 .77 C.T.A. CASE NO. 6965 4/12/2002 327 .00 29 .73 Page 13 of 23 4/21/2002 437 .25 39 .75 4/12/2002 1,133 .00 103 .00 Eastern Tanay Supermarket 4/12/2002 1,604 .75 145 .89 Eastern Tanay Supermarket 4/10/2002 2,770 .00 251 .82 Eastern Tanay Supermarket 5/16/2002 3,993 .70 363 .06 Eastern Tanay Supermarket 5/23/2002 326 .75 29 .75 Eastern Tanay Supermarket 6/7/2002 3,569 .50 324 .50 Eastern Tanay Supermarket 7/4/2002 3,104 .00 282 .17 Eastern Tanay Supermarket 8/5/2002 2,877 .75 261 .61 Eastern Tanay Supermarket 8/6/2002 3,119.55 283 .60 Eastern Tanay Supermarket 8/22/2002 478 .50 43 .50 Eastern Tanay Supermarket 7/30/2002 113.50 10.32 Eastern Tanay Supermarket 8/5/2002 544 .50 49 .50 Eastern Tanay Supermarket 8/5/2002 714 .75 64 .98 Eastern Tanay Supermarket 8/26/2002 2,828 .75 257 .16 Eastern Tanay Supermarket 8/29/2002 305 .00 27 .73 Eastern Tanay Supermarket 9/5/2002 591 .00 53 .73 Eastern Tanay Supermarket 9/4/2002 Eastern Tanay Supermarket 9/5/2002 67 .00 6.09 Eastern Tanay Supermarket 9/5/2002 806 .25 73 .30 Eastern Tanay Supermarket 9/5/2002 3,240 .50 294 .59 Eastern Tanay Supermarket 9/10/2002 137 .50 12.50 Eastern Tanay Supermarket 9/5/2002 361 .50 32 .86 Eastern Tanay Supermarket 9/5/2002 1,148 .00 104 .36 Eastern Tanay Supermarket 10/8/2002 1,935 .80 175 .98 Eastern Tanay Supermarket 10/8/2002 863 .50 78 .50 Eastern Tanay Supermarket 10/8/2002 1,588 .00 144 .36 Eastern Tanay Supermarket 10/8/2002 754 .75 68 .62 Eastern Tanay Supermarket 10/10/2002 902 .90 82 .08 Eastern Tanay Supermarket 11/6/2002 3,497 .50 317 .96 Eastern Tanay Supermarket 11/6/2002 658 .25 59 .84 Eastern Tanay Supermarket 11/6/2002 752 .10 68 .36 Eastern Tanay Supermarket 11/6/2002 1,497 .25 136 .11 Eastern Tanay Supermarket 11/11/2002 944 .75 85 .89 Eastern Tanay Supermarket 12/5/2002 3,105 .70 282 .34 Eastern Tanay Supermarket 11/26/2002 3,364 .25 305 .89 Eastern Tanay Supermarket 7/6/2002 5,400 .00 490 .91 Eastern Tanay Supermarket 8/6/2002 33,387 .25 3,035 .20 Eastern Tanay Supermarket 10/22/2002 1,911 .92 173 .82 Family Mate Trading 3/18/2002 31,443 .33 2,858.48 Farmacia Amoin 6-Sep 19,760 .00 1,796 .36 Farmacia Peralta 6/30/2002 2,700 .00 245.45 Farmacia Peralta 8/15/2002 1,350 .00 122 .73 FAT Kee Computer System 9/13/2002 450 .00 40 .91 FAT Kee Computer System 11/9/2002 1,800 .00 163 .64 Filaway Awards 10/26/2002 1,150 .00 104 .55 Filway Awards 12/4/2002 1,800 .00 163 .64 Filway Awards 12/17/2002 2,000 .00 181 .82 Filway Awards 10/10/2002 3,800 .00 345.45 Filway Awards 6/18/2002 488 .00 44 .36 Filway Awards 9/3/2002 700 .00 63 .64 Filway Awards 1,800 .00 163 .64 First ADB Construction Supply Firticor Inc ~ Holland Blooms (/kq

DEC ISION 6/24/2002 1, 100 .0 0 100.00 C.T.A. CASE NO. 6965 10/31/2002 1,820 .0 0 165.45 Page 14 of23 2/6/2002 3,000 .00 272 .73 11/18/2002 Information Products Corp 11/3/2002 900 .00 81 .81 JVS Worldwide, Inc 12/23/2002 870 .00 79 .09 Lightning Sales Marketing 3/26/2002 1,768 .50 160 .77 Max Saver Corporation 4/30/2002 131 .00 11 .91 Merriam & Webster Bookstore 6/21/2002 6 ,328 .90 575 .35 National Bookstore 7/28/2002 748.75 68 .07 New Tanay Hardware & Canst. 8/10/2002 3,350.00 304 .55 Office Plus Phils. 9/10/2002 3,500 .00 318 .18 Office1 Superstore 10/11/2002 2,422 .50 220 .23 Premium Logic 6/1/2002 10,311.00 937 .36 Premium Logic 7/17/2002 1,600.00 145.45 PT Office Furniture 8/15/2002 1,500 .00 136 .36 PT Office Furniture 8/16/2002 1,380 .00 125.45 Pumpcraft Industrial Sales 8/30/2002 3 ,850 .00 350 .00 Pumpcraft Industrial Sales 10/15/2002 2 ,7 5 0 . 0 0 250 .00 Pumpcraft Industrial Sales 2/16/2002 1,440 .00 130 .91 Pumpcraft Industrial Sales 8/18/2002 431 .75 39.25 Pumpcraft Industrial Sales 9/10/2002 796 .00 72 .36 Pumpcraft Industrial Sales 9/10/2002 440 .00 40 .00 Robinsons Department Store 1/3/2002 9 , 144 .75 831 .34 Robinsons Department Store 5/2/2002 215.00 19.55 Rustan's Commercial Corp 4/12/2002 1, 125 .0 0 102 .2 7 Rustan's Commercial Corp 7/12/2002 6 ,200 .00 563 .63 Ruvyrich Trading 7/26/2002 4 ,100.00 372 .73 Ruvyrich Trading 10/22/2002 6 ,800 .00 618 .18 Son-Rise Tire & Battery Supply 7/5/2002 2,600 .00 236 .36 Son-Rise Tire & Battery Supply 1/7/2002 237 .34 21 .58 Son-Rise Tire & Battery Supply 1/7/2002 1,487.75 135 .25 Son-Rise Tire & Battery Supply 1/30/2002 553 .75 50 .34 Sta Lucia East Dept Store 7/5/2002 908 .50 82 .59 Sta Lucia East Dept. Store 7/5/2002 410 .25 37 .30 Sta Lucia East Dept. Store 7/5/2002 831 .65 75 .60 Sta Lucia East Dept. Store 7/5/2002 586 .85 53 .35 Sta Lucia East Supermarket 7/5/2002 1,268 .00 115 .27 Sta Lucia East Supermarket 9/11/2002 1,344 .75 122 .25 Sta Lucia East Supermarket 2/26/2002 1,854 .90 168 .63 Sta Lucia East Supermarket 6/4/2002 940 .75 85.48 Sta Lucia East Supermarket 9/13/2002 729 .25 66 .30 Sta Lucia East Supermarket 9/13/2002 2,051 .00 186.45 Sta . Lucia East Dept. Store 10/24/2002 3 , 192 .88 290 .26 Sta . Lucia East Dept. Store 2/14/2002 585 .50 53 .23 Sta . Lucia East Dept. Store 2/6/2002 3 ,159 .68 287 .24 Sta . Lucia East Dept. Store 2/6/2002 1,000 .00 90 .91 Sta . Lucia East Dept. Store 3/8/2002 1,962 .50 178.41 Sta . Lucia East Supermarket 3/8/2002 519 .60 47 .27 Sta. Lucia East Supermarket 4/11/2002 963 .00 87 .55 Sta. Lucia East Supermarket 6/4/2002 639 .50 58 .14 Sta . Lucia East Supermarket 9/13/2002 429 .55 39 .05 Sta. Lucia East Supermarket 8/14/2002 1,417.50 128.86 Sta. Lucia East Supermarket 140.00 12 .7 3 Sta. Lucia East Supermarket Sta. Lucia East Supermarket ~ Tanay Cycle Parts & Gen Mdse

DECISION C.T.A. CASE NO. 6965 Page 15 of23 Tanay Cycle Parts & Gen Mdse 9/26/2002 970 .00 88 .18 TCA 4/11/2002 240 .00 21 .82 The DIY Shop Corp 9/5/2002 1,024 .25 93 .11 The DIY Shop Corp 9/23/2002 356 .00 32 .36 Up-Town Industrial Sales, Inc 1/10/2002 18,576 .00 1,688 .73 UR Photo Corp 7/31/2002 591 .00 53 .73 Venice Furniture Corp 10/16/2002 132,000 .00 12 ,000 .00 Venture Trading 9/9/2002 28 ,742.21 2 ,612 .93 World Net Comm Enterprises 4/6/2002 430 .00 39 .09 World Net Comm Enterprises 6/30/2002 800 .00 72 .73 Subtotal p 506,906.09 p 64,509.50 (b) Input VAT on purchase of service not supported by an official receipt AML Auto Aircon & Elec . Supply 5/18/2002 p 1,100.00 p 100.00 Delfin's Portrait & Photo Supply 9/28/2002 143 .50 13 .05 Delfin's Portrait & Photo Supply 9/7/2002 148 .00 13 .45 DHL 6/28/2002 Ding's Auto Repair 2/5/2002 1,216.82 110 .62 East Photo 10/29/2002 3,000 .00 272 .73 Eastern Telecoms 3/1/2002 Eurasian Motors Co 5/27/2002 116 .50 10 .59 Eurasian Motors Co 5/27/2002 88 .77 8.07 First Imperial Cargo, Inc 10/30/2002 Globe Telecom 2/5/2002 1,100.00 100 .00 Globe Telecom 1,160 .00 100.00 Globe Telecom various 205,658 .86 18,696 .26 Globe Telecom 11/20/2001 2,064 .75 404 .13 Globe Telecom 26,497 .67 2,408 .88 HD Edsa Auto Center Corp. various 4 ,707.28 427 .93 INFOCOM various 30,769 .64 2,797 .24 INFOCOM 6/28/2002 30 ,264 .19 2,751 .29 INFOCOM 1/1/2002 27,803 .05 2 ,527 .55 INFOCOM 2/1/2002 16,500 .00 1,500 .00 INFOCOM 4/26/2002 41 ,454 .60 3,768 .60 Mr. Quickie Corp 5/1/2002 37 ,159.10 3,378 .10 Mr. Quickie Corp 6/28/2002 16,500 .00 1,500 .00 Omni Workx, Inc 1/31/2002 30 ,800.00 2,800 .00 Omni Workx, Inc 23 - Nov PLOT 5/21/2002 60 .00 5.45 PLOT various 30 .00 2.73 PLOT 2/28/2002 652,415 .06 59 ,310.46 PLOT various 253 ,225 .26 23 ,020.48 PLOT 2/24/2002 4,523 .32 411 .21 PLOT 4/26/2002 2,979 .02 270 .82 PT & T 5/15/2002 45,302 .73 4 ,118.43 PT & T 5/27/2002 67,318 .24 6 ,119 .84 St. Francis Transport System 6/30/2002 63 ,044 .52 5,731 .32 Unisun Supermarket, Inc 6/28/2002 50 ,380 .77 4 ,580 .07 Globe Telecom 6/20/2002 27 ,720.00 2 ,520 .00 Philippine Fuji Xerox 1/30/2002 72 ,553 .14 6,595 .74 Fuji Zerox 5/23/2002 5,649.49 513 .59 Fuji Zerox 6/28/2002 172.00 15 .64 12/2/2002 61 ,280.34 5,570 .94 8/31/2002 2 ,237 .51 203.41 2,687 .63 244 .33 921 .58 83 .78 ~/m)

DECISION C.T.A. CASE NO. 6965 Page 16 of23 3N Copy Systems 9/6/2002 1,225 .00 111 .36 3N Copy Systems 9/9/2002 1,225 .00 111 .37 Tirelandia, Inc. 8/9/2002 Globe Telecom various 60 .00 5.45 Globe Telecom various 31 ,640.73 2,876.43 PLOT 10/11/2002 39 ,419.27 3,583 .57 PLOT 10/30/2002 135 ,843 .29 12,349 .39 Hankook Insurance Agency 6/27/2002 INFOCOM 12/1/2002 6 ,273 .30 570 .30 PLOT 12/1/2002 22,421 .63 2,038 .33 Fast Clean Laundry & Dry Cleaning 4/15/2002 23,650 .00 2,150 .00 lhsung Engineering 12/27/2002 Subtotal 6,273 .30 570.30 952 .00 86 .55 761,532 .20 69,230 .20 P2,821,269.06 P256,689.98 (c) Input VAT on purchase of goods/service not in the name of the company 0-3529 4L Auto Parts 8/12/2002 p 580 .00 p 52 .73 0-106 Aileen Ligores 1/3/2002 11 .82 0-2559 Christine Auto Supply 6/11/2002 130 .00 43 .64 0-2564 Christine Auto Supply 6/18/2002 15 .00 0-3533 Data Hardware & Electrical Supply 8/12/2002 165 .00 9.09 0-3534 Data Hardware & Electrical Supply 8/28/2002 0-3535 Data Hardware & Electrical Supply 8/18/2002 740 .00 149 .09 0-3538 Eastern Tanay Supermarket 8/7/2002 42 .73 0-1599 Electroworld 4/17/2002 100 .00 78 .87 0-2061 Gold Mine Motorists Center 5/26/2002 130.00 0-3002 Highland Radio Supply Inc. 7/17/2002 1,640 .00 27 .27 0-91 JR Auto Parts Inc. 1/2/2002 0-2486 Maxim us 6/9/2002 470 .00 9.09 0-3020 Mr. Quickie Corp 7/1/2002 87 .27 0-3050 Multiflex Enterprises 9/16/2002 867 .50 18 .18 0-3681 National Bookstore 9/11/2002 0-197 New Capitol Tire Trading Corp 1/11/2002 1,430.00 6 .82 0-2065 PNCC Skyway Corp. 5/14/2002 68 .18 0-5217 PNCC Skyway Corp. 10/29/2002 300 .00 152 .73 0-3080 Ramil Tire Supply, Inc 8/7/2002 16 .36 0-3562 Ruvyrich Trading 7/26/2002 100 .00 90 .91 0-1084 Searton Marketing 3/17/2002 63 .64 0-2067 Wellington Insurance Company 5/8/2002 960 .00 618 .18 0-2068 Wellington Insurance Company 5/8/2002 0-3826 Zenith Insurance Corp 9/9/2002 200 .00 7.73 Subtotal 136 .36 75 .00 106 .91 106 .91 750 .00 106 .91 p 2,156.42 1,680 .00 180.00 1,000 .00 700.00 6,800.00 85 .00 1,500 .00 1,176 .00 1,176 .00 1 176.00 p 23,980.50 (d) Input VAT on purchase of goods not within the period of claim 0-6049 PC Quarters 1/4/2003 p 3,340 .00 p 621 .81 0-187 Tanay Flying V Gasoline Station 5.73 Subtotal 12/26/2001 63 .00 p 3,403.00 p 627.54 (e) Input VAT on purchase of goods/service supported by Stamped TIN-VAT, Non-VAT and without TIN-VAT invoice/official receipt. 0-1968 MAPFRE Asian Insurance 5/30/2002 p 14,509 .00 p 1 , 319.00~ (/]3)

DECISION C.T.A. CASE NO. 6965 Page 17 of23 0-4460 Babcock-Hitachi (Philippines) 10/22/2002 24 ,327,000 .00 2,252 ,500 .00 0-4495 Bethel Auto Supply & Electric Serv 10/10/2002 4,400 .00 400 .00 0-3967 Dina M. Monforte Motorshop 240 .00 21 .82 0 -1959 9/5/2002 Babcock-Hitachi (Philippines) to 0 - MICES 5/28/2002 4,372,500 .00 397,500 .00 1960 PT CERNA CORP 4/26/2002 20 ,691.00 1,881 .00 0-2302 GSIS 5/27/2002 62 ,940 .00 5,721 .82 0 -2781 Wise & Company, Inc 4/11/2002 38,400 .00 0-1228 8/9/2002 422,400 .00 0-3210 Asan V & P Co 268,351.49 24 ,974 .55 0-5816 WG Super Store to 0 - F. Fernando Auto Supply 12/27/2002 1,792 ,590 .91 162 ,962 .81 5819 Geumhwa PSC 9/9/2002 36 ,900 .00 3,354 .55 0-4150 Geumhwa PSC 1/25/2002 95 .00 8.64 0 -572 High Point Development Corp 0-5936 Subtotal 12/27/2002 1,802 ,659 .32 163,878 .12 0-5942 12/27/2002 13,329 ,836 .52 1,211,803 .32 0-3297 8/22/2002 876,000 .00 72,000 .00 P46,947,113.24 P4, 720,725.63 (f) Input VAT on purchase of goods supported by invoices without dates 0-3545 First ADB Construction Supply p 6,316 .00 p 574 .18 0 -573 Christine Auto Supply 0-574 Christine Auto Supply 30-Jan 700 .00 63.64 Subtotal 31-Jan Total 120 .00 10 .91 p 7,136.00 p 648.73 ~50,309 80Z.89 ~5,045 35Z.80 The disallowances, as verified by this Court, are summarized as follows: a) Input VAT on purchase of goods not p 64,509.50 2 5 6 ,6 8 9 . 9 8 supported by an invoice 2,156.42 627 .54 b) Input VAT on purchase of service not 4 ,720,725.63 supported by an official receipt 6 4 8 .7 3 c) Input VAT on purchase of goods/service not in the company's name d) Input VAT on purchase of goods not within the period of claim e) Input VAT on purchase of goods/service supported by invoice/official receipt without TIN-VAT f) Input VAT on purchase of goods without date/year date Total Disallowed Input VAT Per Court's p 5.045.357.80 Verification

DECISION C.T.A. CASE NO. 6965 Page 18 of23 The disallowances referred to in items (a) and (b) are supported by the provisions of Section 11 O(A)(2)(a) of the NIRC of 1997, which state : "SEC. 110. Tax Credits. - (A) Creditable Input Tax. - X X X (2) The input tax on domestic purchase of goods or properties shall be creditable : (a) To the purchaser upon consummation of sale and on importation of goods or properties; and X X X However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation , rental , royalty or fee ." [Underscoring supplied] In relation thereto , Sections 106(0)(1) and 108(C) of the Nl RC of 1997 provide: "SEC. 106. Value-added Tax on Sale of Goods or Properties. - X X X (D) Determination of the Tax. - (1) The tax shall be computed by multiplying the total amount indicated in the invoice by one-eleventh (1/11) . X X X "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - X X X (C) Determination of the Tax . - The tax shall be computed by multiplying the total amount indicated in the official receipt by one-eleventh (1/11 )." [Underscoring supplied] /11;

DECISION C.T.A. CASE NO. 6965 Page 19 of23 The Court en bane clarified in BASF Philippines, Inc. vs. Commissioner of Internal Revenue18 the use of an invoice and an official receipt as support for valid purchase of goods or service, to wit: "The law is clear; it states 'upon consummation of sale,' in the case of domestic purchases of goods or properties, and 'upon payment of compensation or fee ,' in the case of purchases of services. Pursuant to the aforequoted Section 11 0, the input VAT on domestic purchases of goods or properties shall be allowed as tax credit to the purchaser only upon consummation of sale, which means upon issuance by the seller of the VAT sales invoice evidencing the sale of goods/properties. On the other hand, the input VAT on purchases of services shall be available as tax credit to the purchaser only upon payment of the compensation or fee i.e., upon issuance by the seller of the VAT official receipt evidencing receipt of the payment for services performed or yet to be performed . From the foregoing, it can be concluded that there is a clear delineation between official receipts and invoices. Contrary to petitioner's position , these two documents cannot be used interchangeably as evidence to prove a particular transaction . Such as in the instant case , petitioner presented official receipts and statements of accounts to prove input VAT on its local goods purchases, instead of invoices as required by law." Meanwhile, the disallowances referred to in item (e) are supported by Section 4.108-1 of Revenue Regulations No. 07-95, to wit: "Section 4.108-1. Invoicing Requirements- All VAT- registered persons shall, 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 and 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-registered purchaser, customer or client; 5. the word 'zero rated ' imprinted on the invoice covering zero-rated sales; and 18 C.T.A. EB No. 47, January 5, 2006.

DECISION C.T.A. CASE NO. 6965 Page 20 of23 6. the invoice value or consideration. X X X Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or receipts and this shall be considered as a 'VAT Invoice'. All purchases covered by invoices other than 'VAT Invoice' shall not give rise to any input tax. If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A 'VAT Invoice' shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code. X X x" Applying the abovequoted provisions to the instant case , input VAT on purchases supported by invoices or official receipts stamped with TIN-VAT shall be disallowed because these purchases are not supported by "VAT Invoices" under the contemplation of the aforequoted invoicing requirement. To be considered a "VAT Invoice", the TIN-VAT must be printed, and not merely stamped . Consequently, purchases supported by invoices or official receipts , wherein the TIN-VAT are not printed thereon , shall not give rise to any input VAT. Likewise, input VAT on purchases supported by invoices or official receipts which are NON-VAT are disallowed because these invoices or official receipts are not considered as "VAT Invoices". Hence, the claims for input VAT on purchases referred to in item (e) are properly disallowed . Based on the foregoing findings , petitioner's allowable input VAT amounts to P2,890,005.96, computed as follows : Total Input VAT Claimed p 11 '71 0,868 .86 Less: Disallowance p 125,556.40 5 ,170,914 .20~ (a) Per verification of the independent CPA 5,045 ,357.80 (b) Per Court's verification

DECISION p 6,539 ,954.66 C.T.A. CASE NO. 6965 Page 21 of23 44.19% p 2,890,005.96 Validly Supported Input VAT Multiply by Rate of Substantiated Zero-Rated Sales Total Allowed Input VAT Were the claimed input VAT payments unapplied against any output tax carried over to the succeeding month(s)? Lastly, petitioner's Quarterly VAT Returns for the four (4) quarters of 2002 show that it had no output VAT against which the total allowed input VAT payments of P2,890,005.96 maybe credited or applied. For the 4th quarter of 2004, petitioner deducted the total input VAT claim of P11 ,710,868.86 (of which only the amount of P2,890,005.96 is allowable) as "Any VAT Refund/TCC Claimed" from the total available input VAT of P46,153,782.06.19 As a result, the remaining available input VAT of P34,442,913.20 carried over to the first quarter of 2005 no longer included the total allowed input VAT claim of P2,890,005.96. Clearly then , petitioner did not apply the total allowed input VAT claim of P2,890,005.96 to the 1st quarter of 2005 or any succeeding quarters. In sum , petitioner was able to sufficiently prove its entitlement to a refund representing unutilized input VAT arising from its zero-rated sales of electricity to NPC for the four (4) quarters of taxable year 2002 , not for the total amount of its subject claim , but only in the reduced amount of P2 ,890 ,005 .96. WHEREFORE , petitioner's claim for refund is hereby PARTIALLY GRANTED. Accord ingly, respondent is ORDERED to REFUND petitioner the . ,\ 19 Exhibit " I-1 ". ~\

DECIS ION C.T.A. CASE NO. 6965 Page 22 of23 reduced amount of TWO MILLION EIGHT HUNDRED NINETY THOUSAND FIVE PESOS AND 96/100 (P2,890,005.96) representing unutilized input value-added tax for taxable year 2002. SO ORDERED. ~ UY Ass � ustice WE CONCUR: cr c;L__J.~ G. ~~ Q c:~fGANITO C. CASTANEDA, JR/ Associate Justice ATTESTATION I attest 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's Division. ~G.Cb.Y-~.Q. lfR: JUANITO c. CASTANEDA,1 I Associate Justice Chairperson

DECISION C.T.A. CASE NO. 6965 Page 23 of23 CERTIFICATION Pursuant to Article VIII , Section 13 of the Constitution , and the Division Chairperson's Attestation , 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. l__;)-IQ. ' CL...v._ ERNESTO D. ACOSTA Presiding Justice