CTA Case No. 4717 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OFTAX APPEALS QUEZON CITY KUMAGAI-GUM! CO., LTD. (PHIL. BRANCH), Petitioner, -versus- C.T.A. CASE NO. 4717 THE COMMISSIONER OF INTERNAL REVENUE, ProMmAuYlgu,a4ted1:998 Respondent. X------------------------------------------------------ DECISION This case before Us prays for the refund or issuance of a tax credit certificate in favor of the petitioner in the amount of P3,086,647.55, representing alleged excess input value-added tax for the quarter November 1, 1989 to January 31, 1990. The petition at bench stemmed from the following factual backdrop. Petitioner is a resident foreign corporation duly authorized to do business in the Philippines. It is a registered value-added taxpayer with VAT Registration Certificate No. 32A-1-003227 (Exh. "E") and is licensed to undertake in the Philippines exclusively foreign financed projects awarded through international competitive bidding (Exh. "A"). It has particularly been undertaking specified projects of the Philippine government which are financed (as Grant Aid) by the Government of Japan under Exchanges of Notes between the two governments (Exh. "D").

DECISION- CTA CASE NO. 4717 -2- Pursuant to the provisions of the aforementioned R'Xchanges of Notes, a contract (Exh. uB'') between the Department of Education, Culture and Sports of the government of the Republic of the Philippines and Kumagai-Mitsubishi Consortium. was executed on Janwny 30, 1989 for the conshuction of ptim.aty and secondary school buildings in the Philippines. Under the said contract, the Japanese government shall pay the cost of the construction to the petitioner's head office through an account opened in an authorized Japanese Foreign Exchange Bank in the name of the Government of the Republic of the Philippines. For the actual construction and related services, petitioner then received remittances from the Japan Head Office in the form of US dollars remitted through local commercial banks. Claiming that its sale of services is zero-rated for VAT purposes, pursuant to Section 102(a)(2) of the Tax Code, petitioner filed its VAT return on February 20, 1990(Exh. "F") for the quarter November 1, 1989 to January 31, 1990, indicating an excess input value-added tax in the amount of P3,086,647.55 con1puted as follows: Domestic purchase of taxable goods P1,622,079 .44 Purchase of taxable services 2)98, 920.96 Less output tax for the quarter P3, 921,000.40 834,352.85 Excess input tax P3,086,647.55 On August 15, 1991, petitioner filed an application for tax credit/refund of value-added tax paid (Exh. "L'') with the respondent Bureau of Internal

DECISION- CTA CASE NO. 4717 -3- Revenue for unused input tax credit for the period covering February 1, 1989 to January 31, 1990. To preserve its right to judicially claim for the tax refund or issuance of a tax credit cel'tificate, petitioner filed the instant petition before Us on Februa1y 20, 1992. In her Answer (CTA recs., pp. 13-15), respondent alleged the following Special and Affirmative defenses: "6. The tax in question was collected in accordance with law. 7. Petitioner's claim for refund is pending administrative investigation; thus, the petition is premature. 8. ClainlS for refw1d of Laxes are conslrued slrlcUy agaltlSL U1e claimant, the same being in the nature of an exemption from taxation. In an action for refund, therefore, the burden of proof is upon the claimant to establish the right to refund. 9. Petitioner failed to show in its petition that it is entitled to a refund. Mere allegations regarding refundability does not ipso facto entitle petitioner to the refund claimed. Thus, petitioner is failure to sustain the burden is fatal to its action for refund." Subsequently, on May 7, 1994, petitioner filed a Motion to Admit Amended Petition for Review (CTA recs. pp. 94-100) which was granted by this Court through its Resolution dated May 20, 1994 (CTA recs. p. 103). In its Amended Petition for Review, petitioner stated two (2) alternative causes of action, namely: First Cause of Action: Petitioner is subject to VAT at zero- rate (0%) on its sale of services in the Philippines, pursuant to Section 102(a)(2) of the Tax Code.

DECISION- CTA CASE NO. 4717 -4- Second Cause of Action: Petitioner is exempt from the 10% value-added tax because the pertinent Exchanges of Notes between the Philippine and Japanese governments exempts Japanese nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of products and services under the verified conb:acts fOl' the undel'tak.ing of Philippine projects fw1ded by the JapanP.SP. eovP.rnmP.nt. On October 5, 1994, respondent filed her Answer to the Amended Petition for Review which contained additional defenses to controvert petitioner's alternative causes of action. Aside from the same Special and Affirmative defenses mentioned in her original Answer, the Amended Answer contained the following defenses: 1. The alleged exchru1ge of noles by pelilioner which ls the basis of petitioner's tax exemption is without legal basis. Petitioner failed to cite an express provision of law granting them an exemption; 2. Petitioner furthermore, cannot qualify as zero-rated taxpayer in accordance with Section 102(a)(2) of the Tax Code for its failure to present an approved application for zero-rated taxpayer as required under ~ection 8(c)(3) and (d) of l{evenue Regulations No. 5-87; and 3. h1 the case at bal', the an1ended petition fol' review statP.s no c.ausP. of action as it doP.s not statP. thP. datP.s (not mPrPly the period) when the value added taxes were allegedly paid (Manufachrrer's Bank and Trust Co., as trustee for GE Trust Plan vs. Commissioner of Internal Revenue, CTA Case No. 1659, December 29, 1965). The lone issue to be resolved in this case is whether or not the petitioner is entitled to the refund of P3,086,647.55 as VAT input taxes paid for the quarter November 1, 1989 to January 31, 1990. lvVe rule in favor of U1e responde.nl.

DECISION- CTA CASE NO. 4717 -5- The foregoing issue had been settled in a case involving the same party, that is, Kumagai-Gumi Co., Ltd. vs. The Commissioner of Internal Revenue, CTA Case No. 4670, July 29, 1997, wherein this Court ruled that the petitioner is not entitled to the l'efund of VAT input taxes because it failed to qualify as an effe(;tively zero-rated VAT person and even as an exempt taxpayer by virtue of the Exchanges of Notes between the Philippine and Japanese governments. Section 9(a) of Revenue Regulations No. 5-87 expressly mandates that an exempt seller of goods and services is not entitled to any tax credit on input tax previously paid. On August 15, 1997, the decision in this case became final and executorv. J Pertinent portions of the aforesaid Kumagai-Gumi case are quoted hereunder for emphasis: "The Court rules in favor of respondent. Petitioner is not entitled to the refund sought. As correctly argued by the respondent, petitioner cannot be classified as a zero-rated VAT entity for it failed to present an approved application for zero- rating. Section 8(d) of Revenue Regulations 5-87 expressly provides that: (d) Application for the imposition of zero- rate - Any person daiming that its sales of goods or services are effectively zero-rated tmder Sections 100 and 102 shall file an application in a form prescribed therefor �with the Commissioner of Internal revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero- rated taxpayer shall remain valid until revoked. Oearly from the foregoing, to qualify as effectively zero- rated VAT person under Sections 100 and 102, an application for that purpose must be filed with, and the same must be duly approved by, U\e BIR.

DECISION- CTA CASE NO. 4717 -6- In the case at bar, petitioner failed to present such application duly approved by the BIR. For such failure, petitioner cannot be legally classified as a zero-rated VAT person. Hence, this contradicts its first cause of action as mentioned in its Amended Petition for Review. Petitioner is not a zero-rated VAT entity and therefore, not entitled to the refund of its input taxes. AnPnt thP SPcond causp of action of thP pPtitionPT, thP samP Kumaeai- Gumi case has this to say: uWith respect to petitioner's second cause of action, We find legal basis that it is VAT exempt based on the exchange of notes behveen the Japanese and Philippine governments, pertinent portion of which states: XXX (1) The Government of the Republic of the Philippines will Lake necessary n1easures: XXX (d) to exempt Japanese nationals from custom duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of the products and services under the Verified Contracts; xxx." (.Exh. uc', Pet., p. 209, CTA rec.) Thel.'efOl'e, the petitiona� ha�ein being Japanese nationals may hP considPTPd PXPmptPd from valuP..addPd tax pursuant to Sel:tion 103(u) of the NIRC. However, this pertains to its own direct tax liability by reason of its own supply of products and services, meaning the output value added tax due. This cannot refer to input value added taxes pass on to it by its suppliers as forming part of the invoice price. This is in fact the essence of the provision of Section 103 of the NIRC. A VAT exempt person is exempted for value added tax but is not entitled to claim input tax credit. Therefore, the Court cannot grant the refund being sought by the petitioner . It is expressly mandated under Section 9(a) of Revenue Regula lions No. 5-87 U1al a VAT exempt seller of goods or

DECISION- CTA CASE NO. 4717 -7- services is not entitled to any tax credit on input tax previously paid. Thus: Sec. 9. .Exemptions. - (a) 1n general. - An exemption means that the sale of goods or service is not subject to value-added tax (output tax). The seller is not allowed any tax credit on VAT (input tax) previously paid. The person makine the exempt sale of goods or servkes shall not separately bill any output tax to his customers because the said transaction is not subject to VAT." We do not intend to depart from the wisdom of the aforementioned rulings and thus, the same should be apphed in the case at bar. WHEREFORE, in the light of all the foregoing, the instant claim for refund or issuance of tax credit certificate is hereby D NIED : .� r lz ack f merit. SO ORDERED. fP /) 1 RAM"""O" NOr.;.DE Associate Ju WE CONCUR: ~0-~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, ATticle VIII of the Constitution. ~ <S::l - o~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals