PHILIPPINE PHOSPHATE FERTILIZER CORPORATION v. THE HONORABLE COMMISSIONER OF CUSTOMS

H.EPlJBLI C OF THE PHILIPPINES COlJRT OF TAX APPEALS QUEZON CITY PHILIPPINE PHOSPATE C. T.A. CASE NO. 5524 FERTILIZER CORPORI\.TION, Promulgated: Petitioner, 20 MAR 2 7 -versus- THE HONORABLE COIVIMISSIONER OF CUSTOIVIS, Respondent. X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X DECISION This is a petition for Review instituted by petitioner praying for the refund or issuance of a tax credit cetiificate in the total amount of FOUR HUNDRED THOUSAND SLX HUNDRED SLXTY FIVE PESOS AND T\VENTY SLX CENTAVOS (P400,665.26) representing customs duties paid on petroleum products covering the period of January 1995 to June 1995. The facts of the case are as follows: Herein Petitioner, Philippine Phosphate Fertilizer ! �.11p0r:>!: n (PI-llLPHOS, for brevity) is a domestic corporation engaged in th-.: busir � v... manufacturing fertilizers for domestic and international distribution. T� " registered with the Export Processing Zone Authority (EPZA) up to a:�!l until June 3, 1995 (See TSN, November 27,1997, p.S). In the production of the exportable fertilizer, it is essential for PI-ITLPHOS to procure from local oil companies its fuel requirements like diesel, fuel oil and lubricant. \Vhile these fuel supplies do not fonn part of the fmished product, they are indispensable in the manufacturing cycle because these fuel supplies, particularly the fuel oil and lubricants

DECISION- CTA CASENO. 5524 PAGE2 are necessary to run the machineries and lubrication of the equipmen t which transfonn raw materials into exportable fmished products and for other pUil)Oses. The diesel fllel on the other hand is used as a coating agent in the fertilizer product (See TSN, Nov.27, 1997 p.7). These fuel requirements are procured by PI-ITLPHOS from local oil companies like PETRON which impmts the same and which pays the conesponding customs duties to the Bureau of Customs and the Ad Valorem and Specific taxes to the Bureau of Jntemallevenue. These taxes are then passed on by PETRON to PfilP_l HOS. Thus, in a letter dated December 23, 1996, petitioner filed a claim for refund of the conesponcling duties of petroleum products passed on to it by PETRON for the months of January 1995 to June 1995 (Annex A of the Petition, CTA docket pp . 10-ll). In a letter elated April 7, 1997, Respondent denied the claim for refuncVtax credit, the portion of which reads as follows: XXX XXX XXX ''In as much as previous claim of similar tenor and impmt has already been resolved in a letter elated October 15, 1992, copy enclosed, and considering that there is no new matter introduced in this late! letter, we regret to infonn you that your request is hereby DENIED lack of merit." Hence on April 21, 1997, Petitioner elevated the 1 � ,..1,. � bel�� . 1is Court as a Petition for Review. This Comt takes cognizance of the 1 .., on the basis of Section 2402 of the Tariff and Customs Code and Secti",. , \2) of Republic Act No. 1125. Section 2402 of the Tariff and Customs Code provides for the remedy of appeal to the Court of Tax Appeals fi-om th.. ruling of the Commissioner of Customs in any matter brought�

DECISION- CTA CASE NO. 5524 PAGE3 before him upon or by his action or ruling in any case involving customs duties, fees or other money charges. Petitioner filed a claim for refund with the Respondent stating its desire to recover enoneously paid customs duties. Petitioner, after receiving d1e adverse decision of responden filed within thirty (30) clays its Petition for Revievv by way of appeal to this Court pursuant to Section 7(2) of Republic Act No.l125. Having pursued all legal r emedies allowed by law in the administrative level, petitioner's next recourse was to file a Petition for Review with this Court within the prescriptive period. All having been accomplished, this Court has nothing to do but to adjudicate the case based on the merits. During trial, petitioner presented the following documentary evidence to support its claim for refund: (1) Cettification. from PETRON which shows thatPETRON paid customs duties to the Bureau of Customs in the amount ofP400,665.26 (Exhibit A); (2) Summary of petroleum products sold and delivered to PHll..P. HOS which shows the volume of diesel oil delivered to PHILPHOS with the conesponding computation of customs duties (Exhibit A-5); (3) Import Entry and Internal Revenue Declarations (Exhibit A-6) and OfJicial Receipts from the Bureau of Customs (Exhibits A-6 and A-7) shmving that there was importation of the products and that the taxes were paid by PETRON; (4) Invoices fromPETRON which shows thatPETRON delivered and billed the fuel products toPHll.P.. HOS (Exhibits D-1 to D-74). 4.. -�; t'')"

DECISION- CTA CASE NO. 5524 PAGE4 Petitioner alJeges that it is entitled to the refund being claimed pursuant to Section 17 of Presidential Decree No. 66 of the EPZA law, also citing a previous ruling of the Secretary of Finance on the matter. Petitioner advanced the concept of the Export Processing Zone as a foreign tenitory for customs puq)oses, for which reason, when merchandise is brought into the zone, no Philippine tax may be imposed. It also cited Letter of Instruction No. 942, dated October 16, 1979 and paragraph 2 of A.r. ticle 17 of Executive Order No. 226, considering merchandise brought to the zone as "export sale''. Respondent, on the other hand, claims that mere invocation of the laws cited by Petitioner does not automatically confer the benefits of exemption to the latter because exemptions from taxation are highly disfavored in law and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Fm1hemore, Respondent alleges that the ruling relied upon by Petitioner \Vhich \Vas issued by Deputy Minister Alfredo Pio de Roda, Jr. has already been superseded by the mling of Secretary Jesus P. Estanislao in a letter elated July 18, 1991 where the claim for refund of excise taxes paid on purchases of petroleum products by PASAl was disallowed for the following reasons: a. Section 18(i) of PD 66 allows refunds tluough tax credit of duties and taxes paid on supplies only if the supplies used in the manufacture, processing or production of export products fonn part of the fmished products; b. The tax exemption must be justified by the clearest grant of organic or statute law and that this should be explicit and categorical. The issues submitted for resolution of tllis Court are as follows: 1A.! .. -4> .!. 0

DECISION- CTA CASE NO. 5524 PAGES 1. WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OF THE CUSTOMS DUTIES IT ALLEGEDLY PAID ON TI-IE PETROLEilvl1 PRODUCTS SUPPLIED TO IT BY PETRON; AND IF IN THE AFFffiNIAfilE, 2. Vv'HETHER OR NOT THE CLAIM FOR REFUND IS DULY SlJPPORTED BY SUFFICIENT EVIDENCE. The controversy that is set upon us is one that should be resolved in the light of the relevant provisions of Section 17(1) and Section 18(i) of Presidential Decree No. 66 as amended by P.D.No. 1449, quoted hereunder as follows: XXX XXX XXX Section 17. Tax Treatment of Merchandise in the Zone. - ( 1) Except as otherwise provided in this D ecree, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare pm1s and wares of every description, except those prohibited by law, brought into the zone to be sold, stored , broken up, repacked, assembled, installed, sorted, cleaned, graded or othenvise process ed, manipulated, manufactured, mixed with foreign and domestic merchandise or U')ed whether directly or indirectly in such ac tivity, shall nol be subject to customs and intemal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwi thst andi ng. (2) 1v1erchandise purchased by a registered zone enteq)rise fmm the customs territory, if paid for in the United States convcrtibk foreign currency and subsequently brought into the zone, shall be conc;idcred as exported, and the expm1er thereof shall be e1 1 �I led t,.. ,..; benefits allowed by law for such transaction. Sec. J 8. Additional TncentiYcs. A zone regis tered enteq)rise shall also enjoy the following incentives and benefits x x x : (i) Tax Credit. Every registered zone enterprise shall enjoy tax credit equivalent to sales, compensating and specific IYP.<.: nd dnt1P.<.: nn <.:nnn11P.<.: t�w mtP.ri:1l<.: nd <.:on1i

DECISION- CTA CASE NO. 5524 PAGE6 manufactured products used in the manufacture, processing of production of its expot1 products and fanning pat1 thereof; Provided, that the tax credit shall accrue to the registered zone enterprise only after the fmal product has in fact been expm1ed. This Section 18 is fut1her amended by PD No. 1449 adding new paragraphs which grants tax credit to every registered zone enterprise equivalent to the sales, compensating and specific taxes and duties on supplies and raw materials used in the manufacture of products exported and fom1ing pat1 thereof. Letter of Instruction No. 942 introduced the concept of Constmctive Export whereby the sales and delivery of products to bonded warehouse of export-oriented manufacturers and to Export Processing Zone enterprises can be considered "export sales", such that tax credit and duty drawback can be availed of immediately without awaiting for actual exportation of the fmished products abroad. Executive Order No. 226 othetwise known as the Omnibus Investments Code of 1987, retained Section 17 (1) and (2) of PD No. 66 but with a little modification such that the requirement on the foreign exchange payment for merchandise was deleted. Thus, it provides: E.O. No. 226 The Omnibus Investment Code of 1987 Art. 77. Tax Treatment of Merchandise in the � � >le.- (1) Except as otherwise provided in this Code, foreign ann � � ;mestic merchandise, raw materials, supplies, articles, cquJpr- , , machineries, spare parts and wares of every description, exr.r; . �1tose prohibited by law, brought into the zone to be sold, stu eel, broken up, repacked, assembled, installed, sorted, cleaned, graded. ')r othenvise processed, manipulated, manufactured, mixed with �vreign or domestic merchandise whether directly or indirectly rdated in such activity, shall not be subject to customs and intemal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding.

DECISION- CTA CASE NO. 5524 PAGE? (2) Merchandise purchased by a registered zone enterprise from the cw;toms tetTitory and subsequently brought into the zone, shall be considered as export sales and the exporter shall be entitled to the benefits allowed by law for such transaction. It is evident from the aforementioned laws that the provision of Section 17 (1) of PD No. 66 is retained by Article 77(1) of E.O. No. 226 as a principal source of tax incentives for entetvrises registered with the export processing zone. The granting of the tax exemption was never deleted, expressly or by implication, from the provisions of the EPZA law. Although Section 18 (i) of PD No. 66 as amended by PD 1449 was not reproduced under E.0.226, it was merely referred to in Article 78 as one of the additional incentives that an EPZA registered enteq)rise may be entitled under Alticle 39 of the said Executive Order. It goes to show that the tax privilege enjoyed by EPZA entetvrises still subsists notwithstanding the series of changes in the provisions of the EPZA law. The tax advantages granted by the aforequoted EPZA laws were conceived in order to attract enterprises especia11y foreign investors who will be manufacturing products pti.marily for expmt. Expot1 is the backbone of our economy and is being encouraged by providing the enterprises with all the tax incentives available. For this reason, the law fmther states that "All doubts conceming the benefits and incentives granted enteqJrises and investors by the Code shall be resolved in favor of investors and registered enterprises (Atticle 79, EO. 226). The tax exemption privilege of said EPZA enterprise is clear. The law guarantees to them such incentives as they are vital to our economy. However, what shonld be given focus in the instant case perusing the issue at bar is the tax treatment of the petroleum

DECISION- CTA CASE NO. 5524 PAGES products supplied by a local oil company (PETRON) to an export processing zone- registered enteqJrise. Tlus is the subject of the dispute between the Petitioner and Respondent which this Court is called upon to interpret. Section 17(1) of PD 66 covers domestic merchandise, raw materials, supplies, articles and wares of every description, except those prohibited by law, brought into tl1e zone to be sold, stored, broken up, repacked, assembled, installed, so11ed, cleaned, graded or othetwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activity shall not be subject to customs and internal revenue laws and regulations. In fact this question has already been settled by this Court in several cases of the same nature and subject matter, and we quote: "Oil products produced by local oil companies may be classified as domestic merchandise, raw materials or supplies as legally defmed in the Supreme Court case of Commissioner of Customs vs. Caltex (Phllippines), Inc. (G.R. No. L-13067, Dec. 29, 1959, 106 Phll. 829) which states that supplies or materials shall include gasoline and other petroleum products for puqJoses of exemption from customs duties under Article 103 of RA No. 387. For what purpose, among others, these products maybe brought into the zone for processing, manipulation, manufacture, mixed with foreign and domestic merchandise or used directly or indirectly in such activity. In our particular case, the petroleum products delivered to Petitioner is used in the processing of fet1ilizers for exp011. While Respondent may be conect that these products did not fonn part of the fertilizer exported, nevertheless, the law does not provide for such requirement but only requires the use of such materials directly or indirectly in such activity. The use of petroleum products like bunker oil as fuel will easily fall under the plu�ase "used directly or indirectly in such activity". Clearly these petroleum products can easily qualify for tax and duty free privileges under Section 17(1) of PD 66. (Pllilippine Phosphate Fet1ilizer Cmvoration vs. The Honorable Commissioner of the Bureau of Internal Revenue, CTA Case No. 5523 dated October 25,1999; Philippine Phosphate Fertilizer Corporation vs. The Honorable Commissioner of Internal Revenue, CTA Case No. 5128 dated August 18, 1998; Pllilippi.ne Phosphate

DECISION- CTA CASE NO. 5524 PAGE9 Fettilizer Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4993 dated July 7, 1996; Philippine Phosphate Fettilizer Corporation vs. The Honorable Bureau of Internal Revenue, CTA Case No. 5033, dated .May 5, 1996 and Philippine Phosphate Fertilizer C01voration versus The Honorable Commissioner of Customs CTA Case No. 4661, May 31. 1993) With all of the foregoing, it can now be concluded that the bunker fuel oil and other oil products sold and delivered by local oil companies to EPZA registered enterprises shall be exempted from customs duties and internal revenue taxes and if said duties and taxes were passed on by the supplier to the EPZA registered enteqJrises, duty drawback and tax credit shall be granted to the latter pmsuant to the provisions of Section 17 (1) (2) of PD 66 as amended by Alticle 17 (1) (2) of EO 226. Having established the legal right of the Petitioner to refund the customs duties it allegedly paid to the Respondent, we now proceed to evaluate whether the relief sought by Petitioner is duly substantiated with relevant and sufficient evidence. In the most recent case of Philippine Pllospllate Fertilizer Corporation vs. Commissioner of Internal Revenue, C�4 Case No. 5523 promulgated on October 25, 1999, this court granted petitioner's claim for refund on the basis of the invoices presented. The court has accepted these invoices issued by PETRON to show proof that the COlTesponding taxes thereon were shifted and paid by petitioner Pl-ilP_l HOS to the respondent thru PETRON. Prescinding from the "law of the case" with regard to the substantiation requirements, we rule that the documents submitted by petitioner are sufficient to grant the amount claimed. True enough petitioner in the case at bar submitted the various invoices issued by PETRON. Accompanying these invoices are certifications issued by

DECISION- CTA CASE NO. 5524 PAGElO PETRON attesting that PETRON paid the customs duties to the Bureau of Customs which was later billed to PI-DLPOS; the summary of petroleum products sold and delivered to PI-DLPHOS; Import Entry and Internal Revenue Declaration and Official Receipt showing the fact of payment. This Court relies on the probative value of all the documents presented as it is consistent with the facts alleged by the petitioner. On the other hand, we gtve credence to the photocopied invoices as its cotTectness and authenticity is certified by PETRON as evidenced by the violet ink stamped on the face of the said documents. However, out of the total amount of P400,665.26, the amount of P74,374.87 is being disallowed by this court. This disallowed amount conesponds to the time when petitioner was no longer an EPZA registered entity. As alleged in the petition and testified to by a witness, petitioner is registered with EPZA only up to June 3, 1995. (See TSN, Nov. 27, 1997, p. 8). This shows that the tax incentive provided by Section 17 (1) and 18 (i) of P.D. No. 66 as amended by Art. 17 of EO 226 no longer applies to the petitioner. Hence, the claimed amount is reduced to P326,290.39, computed as follo\vs: Amount per claim P400,665.26 Less: Customs duties paid on deliveries beyond June 3, 1995 Exhibit Invoice No. Invoice Date Volume (in liters) D-7 5-41571 6-14-95 12,000 14,000 D-3 738524 6-27-95 12,000 12,000 D-9 914213 6-06-95 12,000 D-8 914214 6-21-95 0.0062899 P190.7176 D-6 967705 6-21-95 Total Volume in Liters Nlultiply by the conversion factor in bbl. Total volume in bbl. 74.374.87 E.l,6l 290.39 Amount Refundable

DECISION- CTA CAE NO. 5524 PAGE 11 WHEREFORE, in view of the foregoing, the instant petition for review is hereby pat1ially GRAlTED. Respondent is ordered to issue in favor of petitioner a tax credit Certificate in the reduced amount of P326,290.39 representing enoneously paid customs duties on purchases of fuel and petroleum products covering the months of January 1995 to June 3, 1995. SO ORDERED ' . Associate Ju g \:VE CONCUR: [Q ERNESTO D. ACOSTA I CERTIFICATION I II I hereby certif-y that this decision was reached after clue consultation with the members of the Court of Tax Appeals in accordance with Section 13 At1icle VIII of the Constitution. \R ERNESTO D. ACOSTA Presiding Judge