MIRANT NAVOTAS CORPORATION (SOUTHERN ENERGY NAVOTAS, INC.) v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SOUTHERN ENERGY NAVOTAS, INC., [Formerly Hopewell Energy (Philippines) Corporation], Petitioner, -versus- C.T.A. CASE NO. 5814 COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. MAY 0 4 2001 4rlijr-.Jl~~ x-----------------------------------------------------------x DECISION This is a Petition for Review initiated by SOUTHERN ENERGY NAVOTAS, INC., against the Commissioner of Internal Revenue for the refund of the amount of P194,906.48 representing the former's alleged unapplied or unutilized creditable input value added tax (VAT) for the first quarter of 1997. As represented, Petitioner is a domestic corporation, engaged in the business of . power generation and the subsequent sale thereof, with principal office at Suite 202, CTC Building, 2232 Roxas Boulevard, Pasay City. It is registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer in accordance with Section 107 of the Tax Code, and was issued VAT Registration Certificate No. 96-051-005718, effective January 30, 1996. On March 1, 1996, Petitioner filed with the BIR Revenue District Office (RDO) No. 51 at Pasay City an Application for Effective Zero Rating for its services of

DECISION- CTA CASE NO. 5814 PAGE2 construction and operation of a gas turbine power station under the build-operate-transfer (BOT) scheme with the National Power Corporation (NPC), which was not acted upon by the BIR. For the taxable quarter ending March 31, 1997, Petitioner filed with the BIR, within the legally prescribed period, its VAT return reflecting therein an input tax amounting to P 194,906.48 (Par. 5, Joint Stipulation of Facts and Issues, p. 46-48, docket) and domestic purchases of goods and services amounting to P 1,949,064.47 (Exh. C). On the belief that its sale of power generation services to NPC is zero-rated for VAT purposes, and all the VAT input taxes referred to above were all directly attributable to its zero-rated sales and �that the input VAT amounting to P 194,906.48 were undiminished by any output tax liability during the period covered, Petitioner on March 30, 1999 filed with Respondent a claim for refund of the aforesaid amount. The same was not acted upon by the Respondent, which prompted the Petitioner to file with this Court this Petition for Review on April 16, 1999. Petitioner asseverates in the instant petition that (1) its sale of power generation services to NPC is subject to zero percent (0%) VAT, pursuant to Section IOO(a)(2) [now Section 106(A)(2)(c)] and Section 102(b)(J) [now Section 108(8)(3)] of the Tax Code and Republic Act 6395 , declaring NPC exempt from the payment of all forms of taxes, duties and fees, (2) its creditable VAT inputs for the quarter ended March 31, 1997 are duly substantiated by documentary evidence in the form of invoices and official receipts, (3) its unapplied or unutilized creditable VAT input as of March 31, 1997 in the amount of P 194,906.48 arising from its domestic purchases of goods and services is a proper object of a claim for refund under Section 112(A) of the Tax Code, also quoted below.

DECISION- CTA CASE NO. 5814 PAGE 3 Thus, it argued that since it is not subject to any output VAT as its sales of services to NPC are zero-rated, the input VAT incurred during the first quarter of 1997, should be refunded. Sections l 00, l 02 and 112 of the Tax Code are all hereinbelow quoted, thus: Section 100. Value-added tax on sale ofgoods . - (a) Rate and base oftax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the following sales by VAT-registered persons shall be subject to 0%: (l) X X X (2) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rat~. XXX XXX XXX Section 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base oftax. x x x (b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (l) X X X (2) X X X (3) Services rendered to persons or entiti.:s whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate. XXX XXX XXX

DECISION- CTA CASE NO. 5814 PAGE4 Section 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, 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 l 06(A)(2)(a)(l ), (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 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. On the other hand, Respondent 111 his Answer raised the herein Special and Affirmative Defenses, thus: (1) Petitioner's claim for tax refund/tax credit is still undergoing administrative routinary investigation/exan:.ination by Respondent's bureau; (2) the alleged refundable/creditable taxes were paid and collected pursuant to law and BIR implementing rules and regulations, hence, the same are not refundable; (3) claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer x x x. The issues presented by the parties in their Joint Stipulation of Facts and Issues may be summarized into one and that is whether or not Petitioner's sales of power generation services to NPC are subject to zero-rate under Section 102(b)(3) of the Tax Code, therefore not subject to any output tax, thus, enabling the Petitioner to claim the refund of r

DECISION- CTA CASE NO. 5814 PAGE 5 the input VAT it paid during the period January I to March 3 1, 1997 in the total amount ofP194,906.48. Tax refund partakes the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical manner (Commissioner of Internal Revenu e vs. Rio Tuba Nickel Mining, 207 SCRA 550). As the power of taxation is a high prerogative of sovereignty, its relinquishment is never presumed and any reduction or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be couched in clear and unmi stakable terms in order that it may be applied . Needless to say, the law frowns against exemption from taxation and it looks upon it with a jaundiced eye (American Express International, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 5031 promulgated on August 16, 1996). In the case at bar, it is an uncontroverted fact that Petitioner fa il ed to adduce in evidence its approved appl ication for zero-rating for the period in question . Thus, the Court cannot consider the Petitioner's sales of services to NPC as effectivel y zero-rated without the approved application. In the case entitled ABB Power Generation, Ltd. vs. The Commissioner of Internal Revenue, CTA Case No. 5270, March 3, 1999, this Court ruled that a VAT entity who failed to present an approved application for zero-rating as required by Section 8(d) of Revenue Regulations No . 5-87 wi ll not be considered a zero-rated enterprise. Pertinent portions of said decision are quoted below: "Moreover, granting arguendo, that petitioner's sale of services to the NPC are considered effectively zero-rated sales under Section I02 (a)(3) of the Tax Code, supra, nevertheless, this Court has to deny the instant claim for refund as petitioner failed to comply with ~ection 8(d) of Revenue

DECISION- CTA CASE NO. 58I4 PAGE6 Regulations No . 5-87 which requires that any person claiming that its sales of goods or services are effectively zero-rated under ~ections 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 I02 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. Petitioner in the instant case did not adduce in evidence its approved app lication for zero-rating in the face of the allegation made by respondent that petitioner failed to obtain the approval of the, Commissioner of Internal Revenue pursuant to the aforecited section 8 (d) of Revenue Regulations No. 5-87 (see respondent's Answer, page 7, CTA records) Failure 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. Sec. 9 of Rev. Reg. No. 5-87 provides as follows : Section 9. Exemptions. - (a) In general.- An exemption means that the sale of goods or services is not subject to value- added tax (output tax) . The seller is not allowed any tax credit on VAT (input tax) previously paid . A VAT entity who failed to present an approved application for zero- rating as required by Sec. 8(d) of Revenue Regul..:.tions No. 5-87 will not be considered a zero-rated enterprise, hence, not entitled to the refund of its input taxes (see Kumagai-Gumi Co., Ltd. (Phil. Branch) vs. The Commissioner oflnternal Revenue, CTA Case No. 4670, July 29, 1997)." We do not think any different conclusion ought to be reached in the case at bar, as the circumstances of this case are on all fours with the above-cited case decided by this Court. 5 :~ � ;

DECISION- CTA CASE NO. 58I4 PAGE 7 lt is true that Petitioner waited for a long time for the Respondent to act on its application for effective zero-rating considering that the application was filed on March 1, 1996, and until now there was no action from the Re~lJondent. However, this scenario could have been prevented had Petitioner exercised its right to compel Respondent to act on its application. A petition for mandamus should have been resorted to by Petitioner to secure the much needed approval. This Court is of the impression that Petitioner did not exert an effort to follow-up its application with the BIR and waited this long for the Court to rule on it. Sad to say, such authority to rule on the application for zero-rating is only . vested upon the Respondent (Southern Energy Navotas II Power, Inc. vs. Commissioner oflnternal Revenue, CTA Case No. 5815, March 1, 2001). IN THE LIGHT OF ALL THE FOREGOJN,:;, judgment is hereby rendered denying the instant Petition for Review for lack of merit. No costs . SO ORDERED. ~Q.~ ERNESTO D. ACOSTA Presiding Judge I CONCUR: CERTIFICATION [ hereby certify that the above decision was reached after due consultation with the r members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~~. c~ ERNESTO D. ACOSTA Presiding Judge