KSS PHILIPPINES INC., v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY KSS PHlLII'PINES, INC., Petitioner, - ve rsus - C.'I'.A. CASE NO. 5888 COMMISSIONER OF INTERNAL REVENUE, Promulgated: - AUG- t--D-2-0tU- - t"#Ji j;.f!,;:. Respondent. 0/{~ x ------ ----- --- --- ---------------------------------- DECISION Petitioner, by way of thi s petition for review, is seeki ng for the refund of the amount of P 18 ,55 I ,282 .04, representing unutili zed input value-add ed tax (VAT, for brevity) on dom estic purchases of goods and services for the period February I , 1997 to December 3 1, 1997. The followin g facts and issues were jointly stipulated by the parties and approved by the Co urt 1 : 1. Stipulated Facts (a) Petitioner is a domesti c corporati on organi zed and ex isting under Philippine laws, w ith principal office at th e New Ceb u Township One, Special Eco nomi c zo ne, Barangay Cantao-a n. Naga, Cebu. Lt may be served with notices, pleadin gs. and other processes o r th e court at the add ress of unders igned counsel at S uite 406 Keppel Center, Cebu Business Park , Cardinal R.osales co rn er Samar Loop, Cebu City; (b) Respondent Commissioner of Internal Revenue is sued in hi s official capacity, having been dul y appointed and empowered to perfo rm the duti es of hi s office, including, among others, the duty to act on and approve claim s for refund or tax c redit as provided by law. He may be 1See Reso lution , dated September 29, 1999, CTA Record s, p. 54. 930

DEC ISION- CTA CASE NO. 5888 PAGE 2 served w ith s ummo ns, noti ces and other co urt processes at hi s offi ce at the BIR N ati onal Office Building, Diliman, Q uezo n C ity; (c) Petiti oner is registe red w ith th e Phili ppine Expo rt Processb1g Zo ne A uth ority (P EZA), as ev idenced by PEZA Certifi cate o f Registrati on No. 97-01 6, iss ued on February 20. 1999, to engage in th e manufacture and sale of surface mounted dev ice (S MD ) quartz crysta ls used for computers, videotape reco rd ers, te lev ision sets and tel eco mmunicati ons e q u i p m e nt. (d) Petiti oner was iss ued on June 2, 1 997 , VAT Registra ti on Certifi cate bearin g registrati on or co ntrol num ber 97-083 -0006 14-V; (e) Petiti oner f-il ed its clai m fo r refun d o f VAT in put taxes in the amount of P 18 ,552,093.33 fo r th e peri od between February I, 1997 to December 3 1, 1997, along w ith all s upportin g doc uments on April 6, 1999 w ith th e Revenue Di stri ct Offi ce No. 83 ; (f) Petiti oner, however, began filin g its VA T ret urn s fo r the taxabl e quarters covered by the aforecited peri od on Ap ril 25 , 1997 or nearl y two (2) years pri or to th e instant petiti on; (g) N o ac ti on on the c la im lo r re fund has bee n taken by the Co mmi ss ioner o f Internal Revenue on th e c laim fo r refund , eve n as the two (2) year peri od from the tim e of filin g of the qua rterl y V AT returns was about to ex pire at the tim e th e instant petiti on was fil ed ; 2. Proposed Factual Issues for Trial (a) Wheth er or not pe titi oner gene rated and reco rded ze ro-rated sales ari sing from the expo rt of its products in the amount of ONE M ILLION SIX HUNDRED TWENTY- FO UR T HO USAN D TW O H UN DRED S EV ENTEEN P ESOS AND EIG I-JT CENTAVOS (Pl ,624,2 17.08) fo r the peri od be twee n fe brua ry I, 199 7 to December 3 1, 1997 ; (b) Whe ther or not the proceeds of petiti oner's reco rd ed zero-rated ex port sales we re inwardl y remitted in acceptabl e fo re ign currency 111 acco rd ance w ith ex istin g reg ul ati ons o f th e Bangko Sentra l ng Pilipinas; (c) W he ther or not petiti oner' s ex port sales in the amount of PI ,624,2 17.08 for the peri od be tween Fe bruary I , 1997 to December 3 1, 1997 qua lify as a utomati call y zero- rated transactio ns unde r app li ca ble tax laws and reg ul ati ons; (). . t.J ;_) .1..

DEC ISION- CTA CASE NO. 5888 PAGE 3 (d) Whether .or not the VAT-input taxes of Pl 8,552,093.33 2 are directl y attributabl e to the petiti oner's zero-rated sales; (c) Whether or not petitioner has excess input taxes attributable to the transacti ons invo lved in thi s petiti on in the amount o f P 18,552,093.33 3 Tor the peri od betwee n February I, 1997 to December 3 1, 1997; (f) Whether or not the VAT- in put taxes of P18.552,093.33 4 were paid by the petiti oner in the co urse of its trade and business; and (g) Whether or not the VAT-i nput taxes of P18,552,093.33 5 paid by the petiti oner have not been appli ed against any VAT out put tax. Befo re We answer all the afo rementi oned interrelated issues, We believe that the arguments raised by the Respondent in hi s Memorandum arc paramount and should be addressed first. Respondent contends that Petiti oner, being registered with the Philippine Economic Zone Authority (PEZA) as an Ecozo ne Ex port Ente rpri se, should not be subject to Vi\T pursuant to Secti on 24 of Repubi ic /\c t No. 79 16. Respondent furth er ave rs that since Petiti oner's business is not subject to VAT, the capital goods and services it purchased are considered not used in VAT taxab le business hence, it is not entitled to the refund of input taxes on such capital goods pursuant to Secti on 4.106-1 and Secti on 4. 103-1 of said regul ati ons. We arc not convinced. 2 Reduced to P 18 ,55 1,282. 04 in the Memorandum of the Petiti oner. 3 ibid. 4 ibid. 5 Ibid.

D EC ISION- CTA CA SE NO. 5888 PA GE4 In th e case of Read-Rite Philippines, Inc. (Formerly Sunwat�d Technologies Phils., Inc.) vs. Commissioner of Internal Revenm, CTA Case No. 5659, dated September 29, 2000 w hich in vol ves simil ar iss ues, the Co urt rul ed in thi s m am~r: " We agree w ith the Res ponde nt th at if an entity is registe red w ith PEZA as an ecozone enterpri se and is remitting 5% of its gross income to th e national governm ent, it is exempt from the pay ment o f VAT. However, no ev idence was introduced by the Respondent to prove that Petitioner is remitting 5% fin al tax to the gove rnment. What is evident from the records is th at Petitioner is a VAT registered entity li abl e to pay the value-added tax as sho wn by the registrati on certifi cate xxx. This Court would like to stress th at under Secti on 23 of Republic Ac t 79 16, two diff~ rent fi scal ince nti ves are granted to an ecozone enterpri se, to w it: SEC. 23. Fiscal Incenti ves. B u s in ess establi shments operatin g w ithin the ECOZON E shall be entitl ed to the fi scal incenti ves as prov ided fo r under the Presidenti al Decree N o. 66, the law c reatin g the Ex port Process ing zo ne Authority, or th ose provided fo r und er Boo k VI of Executi ve Orde r No. 226, otherw ise kn ow n as the Omnibus In vestm ents Code of 198 7. Based on th e aforequ oted Secti on 23 o f RA 79 16, a PEZA registered enterprise has the opti on to choose betwee n two sets o f fi scal incentives. One is th at which is pro vided fo r under Presidential Decree No . 66 , as amended and Secti on 24 o f RA 79 16 whi ch includes the 5% prefe renti a l ta x on gross income ea rned whi ch is in li eu o f nati onal a nd local taxes; a nd second, as those provided for und er Book VI of Executi ve Order No. 226, including but not lin~ ited to an inco me tax holiday (ITH) of 4 to 6 years depend ing on whether or not an entity is registered as a pioneer or non-pi oneer enterprise. If an eeozo ne enterpri se chooses th e 5% preferenti al tax, it is exempt from payment of all nation al a nd local taxes. However, if an ecozone enterpri se chooses th e income tax ho liday, it is only exempt from pay ment of the income tax but still subj ect to other nati onal internal revenue taxes including the value-add ed tax. T he eli fference between these 2 sets o f fi scal incentives we re ex pl ained by the Burea u of Intern al Revenue in VAT Ruling N os. 037-98; 043-98; 027-99; and 063 -99. (sec also Resolutions in the cases of Seagate Techology (Philippines) vs.

D EC ISION - CTA C ASE NO. 5888 PAGES Commissioner of.lnternal Revenue, CTA Case No. 5921, September 20, 2000 and Cebu Toyo Corporation vs. Commissionet� of Internal Revenue, CTA Case No. 5650, August 2, 2000) . The a forequoted rulin g o f thi s Co urt was recentl y a ffirm ed by the Court of Appeal s in the case entitled Commissioner of Internal Revenue vs. Sea gate Technology, CA- GR S.P. No. 61189 promulgated on June 18,2001. It is wo rth stress ing th at Res pond ent here in fa il ed to introd uce any ev idence to support hi s all egati o n that Petiti oner is exempt from the value-add ed tax, on the contra ry, in the Jo int Stipul ation of Facts and Iss ues for Tri a l, Res po nd ent admitted that Petiti oner is a VAT registered perso n w ith Certifi cate of Registrati on RDO Contro l No. 97-083- 000614-V issued by RD O No. 83 ofTali say, Ceb u6. Upon th e other hand , Petitio ner firml y es tabli s h~d th at it enj oyed an inco me tax ho liday in 1997, the year subj ect o f the c la im. by fo rm a ll y offe rin g in evidence the Registrati on Agreement it entered into w ith th e PEZA (Ex hibit "T") and the Certific ati on from PEZA (Ex hibit "U") both prov ing th at it was granted a Corpo rate Inco me Tax Holiday fo r the year in questi on. Go ing now to the iss ues j o intl y sti pul ated by th e parti es, thi s Co urt a fter a th orou gh examinati on of a ll th e ev ide nce on reco rd favo rs the gra ntin g o f the c laim for re fund. A verifi cati on of the report s ubmitted by th ~ indepe ndent Certifi ed Publi c Accounta nt and the VAT o ffi c ia l receipts, in vo ices, a nd other s upportin g doc um ents, 6 Lette r (d) o f Stipul ated Facts, Jo int Stipul ati on of Facts and Iss ues fo r T ri a l, CTA record s, p. 49; and Ex h. A). \'.)'..__, �t

DEC IS ION- CTA CASE NO. 5888 PAGE 6 shows us that the in put taxes paid by Petiti oner on loca l purchases of goods and services were properl y substanti ated lo r VAT purposes and were attributabl e to Petiti oner's ex port sa les (Ex hib its P- 1 to P-1 64). Likew ise, the 1997 in put taxes so ught to be refLmd ed were no longer carri ed over to the 1998 first quarterl y VAT return (Ex hi bits M, M-1 , and M- 2). The ev idence furth er reveal s that Petiti oner's sa les invo ices, import declarati ons, and airway bills support its expo rt sales in the amoun t of US$47,092.29 (Ex hibits Q-1 to Q- 8). It is also ev ident that the payments or the ex port sal es were inwardl y re mitted through The Fuji Bank, Limited, Manila Branch, as certified to by Ms. Mil a R. Madayag, VP- Operations of the said bank (Exhi bit S), therefore, prov ing th at Petitioner's sales are subj ect to VAT at 0% pu rsuant to Secti on I06(A)(2)(a)( 1) of the 199 7 Tax Code and therefore entitled to the refund of input taxes purs uant to Section 11 2 of the same code. WHEREFORE, in view of the forego in g, Petiti oner's claim fo r refund is hereby GRANTED . Respondent is ORDERED to REFUND in l~lvo r of Petitioner the sum of P 18,55 1,2 82.40, representing unutili zecl input VAT fo r the peri od February I, 1997 to December 3 1, 1997. SO ORDERED. k~~ pA~"ClO Q. SAs;A / Associate Judge I CONCUR: ~to.~ ERNESTO D. A COSTA Presiding Judge

DEC ISION- CTA CASE NO. 5888 PAGE 7 CERTIFICATION I hereby certiry that the above dec ision was reached al'ter due consultation with the members of the Co urt of Tax Appea ls in acco rda nce wit h Section I3, Article VIII or the Constituti on. LLQ. e_~ ERNESTO D. ACOSTA Presid ing Judge '-J '� ) 0,,.., t. ,_:.