CTA Case No. 5321 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY HOPEWELL POWER (PHILIPPINES) CORP., Petitioner , - versus - C.T.A. CASE NO. 5321 COMMISSIONER OF INTERNAL Promulgated: REVENUE , OCT 07 1998 Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This petition for review is seeking for the refund or issuance of a tax credit certificate in the amount of ~969,818.51, representing input value-added tax (VAT, for brevity) on capital goods for the period December 1, 1992 to March 31, 1994. Petitioner is a domestic corporation duly organized and existing under the la ws of the Philippines. It is engaged in the business of power generation and subsequent sale thereof (Exh. G). It is registered with the Bureau of Internal Revenue as a VAT registered person with VAT Registration Certificate No. 330-001-726-870-V, dated July 16, 1992. (Exh. H). For the period December 1, 1992 to March 31, 1994, petitioner alleges that i t paid input VAT on capital

DECISION - C.T.A. CASE NO. 5321. - 2- goods in the total amount of P969,818.51. The details of which are covered by the following quarterly VAT returns: Period Covered Amount Date Filed Exh. 12-01-92 to 02-28-93 P.231,488.21 03-22-93 A 03-01-93 to 03-31-93 04-20-93 8 04-01-93 to 06-30-93 46,187.60 07-20-93 c 07-01-93 to 09-30-93 194,631.73 10-20-93 0 10-01-93 to 12-31-93 128,675.44 01-20-94 E 01-01-94 to 03-31-94 368,835.53 04-20-94 F Tot a 1 P969,818.51 On January 12, 1996, pursuant to Section 106(b) of the Tax Code, as a mended by Republic Act No. 7716, petitioner filed an application for tax credit/refund of va lu e-added tax paid on capital goods with Revenue District Office No . 51 of the Burea u of Internal Revenue (Exhs. J and J-1). On January 19, 1996, petitioner lodged the instant petition for review in order to toll the running of the two-year prescriptive p eriod for clai ming a refund under the law. I n her Answer, r espondent raises the following special and affirmative defenses: 7. Petitioner's alleged payments of creditable inp u t tax made prior to January 19, 1994 have already prescribed and/or barred pursuant to Section 230 of the Tax Code; 8. Tax refunds are in the nature of tax exe mptions. Exemptions from taxatio n are h ig h ly disfavored i n law; and he who clai ms an exemption must be able to justify his claim by the clearest grant of organic or statute law.

DECISION - C .T.A. CASE NO. 5321. 3- An exe mption from the common burden cannot be permitted to exist upon vague implication ( Asiatic Petroleum Co . vs. Ll ane s . 49 Phil. 466) ; and 9. That in an action for tax refund/credit the taxpayer has the burden of showing that t he taxes paid are erroneously collected and that failure to meet such is fatal to its cause, as such claims for refund are strictly construed against the claimant ( Citibank N.A. Phil Branch vs. The CIR. CTA Case No. 4258. April 1 . 994 ). The Court is now confronted with the following iss ues: 1. Wh ether or not the claim for refund of petitioner prior to January 19, 1994 has prescribed; and 2 . Whether or not the petitioner was able to support with substantial evidence its entitlement to the claim for refu n d of input taxes on capital goods pursuant to Section 106(b) of the Tax Code, as amended by R� A� 7716. Anent the first issue, We agree with the respondent that some of the input taxes claimed by the petitioner are already barred by prescription. This is because the two-year prescriptive period in claiming a refund of input VAT is now reckoned from the filing of the quarterly VAT ret u rn as ruled by t h is Court in the recent Resolution, dated July 20, 1998, entitled Atlas Consolidated Mining and Development Corporation vs. Commiss i oner of Internal Revenue. C.T.A. Case No . 5296 and We quote:

DECISION - C.T.A. CAS E NO. 5321. 4- xxx (t)his Court, after a careful study of the arguments adduced by petitioner, reconsiders the decision with regard to the issue of prescription and consequently agrees with the interpretation of petitioner that the two-year period should be counted from the date of filing of the corresponding VAT quarterly return which is within twenty (20) days after the close of each taxable quarter. This will harmonize Section 106 with Section 230 of the Tax Code which was interpreted by the Supreme Court in the cases of Commissioner of Interna l Revenue vs. TMX Sales Inc. and the Cour t of Appeals. G.R. No. 83736, dated January 15, 199 2 ; and ACCRA Investments Co r po r ation v s. Commissioner of Internal Revenue. 204 SCRA 95 7, that the two (2) year period should be counted from the filing of the final income tax return, because it is only during that date that the exact tax liability or refundability of tax can be determined. In the same manner, it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax. All these things can only be determined if a return is filed. It is logical therefore, to conclude that the two - year period should not immediately be counred from the close of the quarter but from the date of fil i ng o f the VAT return . (Underlining Ours). Therefore, considering that the petition for review was filed on January 19, 1996, t h e claim for refund of petitioner covering the period December 1 � 1992 to September 3 0 ' 1993 in the amount of P379,932.34 has prescribed, because these payments all fall outside the two (2) year prescriptive period, to wit: Period Covered Amount Date of Filing of VAT Return Exh. 12-01-92 to 02- 28-93 6 P231,488.21 03-22- 93 A

DECISION - C.T.A. CASE NO. 5321. 5- 03-01-93 to 03-31-93 04-20-93 B 04-01-93 to 06-30-93 46,187.60 07-20-93 c 07-01-93 to 09-30-93 194,631.73 10-20-93 D To t a 1 .P379,932.34 As to the remaining two quarters, they are well within the two-year period allowed under Section 230 of the Tax Code. We now delve on the legal and factual aspect of the case which is the second issue at bar. Petitioner originally anchored its entitlement to the claim for refund of input VAT on Section 106(b) of the Tax Code, as amended by R.A. 7716. However, in its memorandum, petitioner changed its legal basis to Section 106(c) of the 1994 Tax Code for the reason that the period covered herein, still pertains to the old VAT law which contains essentially the same provisions as 106(b) of the later law. For easy reference, Section 106(c) of the 1994 Tax Code is hereby quoted as follows: Sec. 106. Refunds or tax credits of input tax. - (a) Export sales. - xxx. (b) Zero-rated or effectively zero-rated sales. - xxx. (c) Capital goods. A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application for refund may be made only after the expiration of 2 succeeding quarters following the quarter in which the importation

DECISION - C.T.A. CASE NO. 5321. 6- or local purchase was made: Provided . That a VAT-registered person who is just commencing business may apply for refund of input taxes under this paragraph not earlier than 180 days from the date of registration or actual start of business operations, whichever comes later: Provided, however, That the application is filed not later than 2 years from the dates h erein prescribed. Based on the above proviso, petitioner should prove that: (1) it is a VAT registered person; (2) the input taxes claimed by petitioner was paid on capital goods; (3) the input taxes have not been applied against output tax liability; and ( 4) the administrative claim for refund was seasonably filed . After a circumspect study of the evidence presented by petitioner, it was established that petitioner is a VAT-registered person with a VAT Registration Certificate No. 330-001-726-870-V issued by the Bureau of Internal Revenue (Exh. H). The input taxes allegedly paid on capital goods remain unapplied as shown by the second quarter VAT return for the year 1996 (Exhs. K and K-1) . Furthermore, the administrative claim for refund was seasonably filed within the time required under Section 106(c) of the 1994 Tax Code. However, it appears that most of the purchases made by petitioner, as evidenced by the sales invoices and official receipts are for engineering and structural services whic h according to the respondent do not constitute capital goods (Exh. 2). Hence, We should resolve such corollary issue.

DECISION - C. T .A. CASE NO . 5321. - 7- Section 2(o) of Revenue Regulations No. 5-87 of the Value-Added Tax Reg u lations defines capital goods as - (o) "{'apit:al goods" refer to goods with estimated usef u l life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services. Generally, a capital expendit u re involves a pay ment which creates or enha n ces wh at is essentially a separate and distinct asset. Stat utorily, capital expenditures are specified as a mo un ts paid o u t for new buildings or for perma n ent i mprovements or betterme n ts made to increase the val ue of any property or estate or amounts expended in restoring p r operty or in making good exhaustion thereof for which an allowance is or h as been made ( 6 MERTE NS Law of Federal Inco me Taxation, S25.37, pp. 114 to 115). In determining what constitutes capita l goods, co u rts will look to t h e origi n and character of the expendit u re to deter mine wh et h er it is a capital asset (6 MERTE NS Law of Federal Income Taxation, S25.37, p. 115' supra). For example, it was held that "t h e cost of a topographical survey made for the p u rpose of establishing boundary li nes of t h e pro perty, of ascertaining t he topogra ph y of the land, and of recording t h e location on the property of valuable s h rubs and shade trees is a

DECISION - C.T.A. CASE NO. 5321. - 8- ca p ital expe n dit u re" (Jo hn so n vs. Com m., TC Me mo 1955- 2 4 7, cite d i n 6 MER T ENS Law o f Federal I n co me Taxatio n S25.63, p. 179 ) . Th e sa me t r eat me nt is accor d ed to a mo u nts expende d for ma p s, a b stracts, l ega l tit l e o p i n i on s, r ecor d i n g fees a nd survevs (6 MERTE NS La w of Fe d er al I n c om e Taxatio n , S 25.63, p. 1 79, supra) . Th e recor d s s ho w t h at p eti t io n e r ex p e nd e d fo r e n ginee r i ng a nd str uctural se rv ices for t h e purpo se o f c on s t r uc t in g pow er p la nt faci l ities n eeded i n t h e pr o du c tion of e l ect r ici ty, wh ic h is p etitio n e r' s mai n p ro du ct. We are t h e r e for e c on vi n ce d th a t sai d ex p e n ses a r e n ecessa ry a nd s hould fo rm p a rt o f t h e c o s t of t h e p o we r pl a n t faci l i ti es. Be low a r e the allow a bl e input VAT on ca p i t al go od s: Name of Supplier O.R./Invoice Amount Input Tax Number Date Ex h. BHP Engineering Phils., Inc. 1291 12-09-93 E-2 p. 108,000 . 00 p. 10,800.00 BHP Engineering Phils., Inc. BHP Engineering Phils., Inc. 1291 12-09-93 E-3 249,800.00 24,980 . 00 BHP Engineering Phils., Inc. BHP Engineering Phils., Inc. 1291 12-09-93 E-4 129,750.00 12,975.00 BHP Engineering Phils., Inc. Jade Philippines 1291 12-09-93 E-5 372,015.00 37 '201. 50 BHP Engineering Phils. , Inc . BHP Engineering Phils., Inc. 1291 12-09-93 E-6 180,687.00 18,068.70 BHP Engineering Phils., Inc. BHP Engineering Phils., Inc. 1290 12-09-93 E-7 198,000.00 19,800.00 BHP Engineering Phils., Inc. Electrobus Consolidated, Inc . 23203 10-27-93 E-26 11,018.18 1,101.82 T 0 T Al 1347 01-28-94 F-1 129,750.00 12,975.00 1347 01-28-94 F-2 372,015.00 37' 201.50 1367 02-11 - 94 F-3 249,800.00 24,980 . 00 1367 02-11-94 H 310,013.00 31,001.30 1403 03-18 -94 H 71,000.00 7,100.00 5742 03-14-94 722,727.30 72,272.73 P3,104,575.48 P310,457 .55 A caref u l scr uti ny of t he rest of the p etitio ner ' s in v o ices a nd o f f ic i a l r ece ipt s r evea l s t h at t h ese pertai n

DECISION - C.T.A. CASE NO. 5321. - 9- to the purchase of supplies which are not material in putting up a power plant project; and that some of the official receipts and invoices are dated beyond the period covered by t h e claim for ref u nd t hu s were n ot included in the final computation. WHEREFORE , finding t h e petition for review partially meritorious, respo n dent is hereby ORDERED to REFUND or, in t h e alternative, to ISSUE a tax credit certificate in favor of p etitio n er t h e a mount of P310,457.55, representi n g i n p u t tax payme n ts on capital goods purchased for t h e period October 1, 1993 to Marc h 31, 1994. SO ORDERED. WE CONCUR: 11 CERTIFICATION I hereby certify that the above decision was reached after due consultati o n wit h t h e me mbers of the Court of Tax Appeals i n accordance with Section 13, Article VIII of the Constit u tio n . GQ~ ERNESTO D. ACOSTA Presiding Judge