DEUTSCHE KNOWLEDGE SERVICES, PTE LTD. v. COMMISSIONER OF INTERNAL REVENUE

{. REPUBLIC OF THE PHILIPPINES Court ofTax Appeals QUEZON CITY En Bane DEUTSCHE KNOWLEDGE CTA EB CASE NO. 827 SERVICES, PTE., LTD., (CTA Case No. 7775) Petitioner, Present: Del Rosario, P.J. - vers.us- Castaneda, Jr., Bautista, Uy, Casanova, Fa bon-Victorino, Mindaro-Grulla, Cotangco-Manalastas, and Ringpis-Liban, IL COMMISSIONER OF Promulgated: INTERNAL REVENUE, NOV 2~J 2013 h.r~7,(~.. Respondent. X-----------------------------------------------------------------------------------------X AMENDED DECISION BAUTISTA, I.: Before the Court En Bane is a "Motion for Reconsideration (Re: Decision dated May 3, 2013)," filed by petitioner on May 30, 2013, praying for the reconsideration of the Court En Bane's Decision dated May 3, 2013, and accordingly for the issuance of an Order instructing respondent to refund or issue a tax credit certificate in the amount of Php2,841,935.82, representing its unutilized and excess input VAT for the first quarter of Calendar Year (" CY") 2006; without any Comment/Opposition from respondent despite due notice. On May 3, 2013, the Court En Bane issued a Decision. The dispositive portion of the assailed Decision reads:

Amended Decision CfA EB Case No. 827 (CfA Case No. 7775) Page 2of14 "WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for lack of merit. SO ORDERED." In the said "Motion for Reconsideration," petitioner argues that its failure to indicate the amount of zero-rated sales in its VAT returns is not a sufficient ground to deny its claim for input VAT refund, when there are pieces of evidence that supports its claim, such as official receipts on sales of services to non-resident clients, accrual notifications, fund transfer credit advice, Securities and Exchange Commission and Board of Investments (BOI) Certifications, and Audited Financial Statements as of and for the year ended December 31, 2006.1 Furthermore, respondent even recognizes that even in the absence of zero-rated sales in the VAT returns, there are evidences such as books of accounts, export invoices and other financial records to establish its claim. A second look on the records of the case and upon consideration, the Court En Bane resolves to reconsider petitioner's "Motion for Reconsideration (Re: Decision dated May 3, 2013)." The Supreme Court in the case of Southern Philippines Power Corporation vs. Commissioner of Internal Revenue,2 has ruled that failure of therein petitioner to indicate in its VAT returns its zero-rated sales is not sufficient reason to deny the claim for tax credit or refund, when there are other documents from which the Court can determine the veracity of such claim, to wit: "One and Two. The Court reiterated in San Roque Power Corporation v. Commissioner of Internal Revenue the following criteria governing claims for refund or tax credit under Section 112(A) of the NIRC: (1) The taxpayer is VAT-registered; (2) The taxpayer is engaged in zero-rated or effectively zero-rated sales; I The input taxes are due or paid; (3) The input taxes are not transitional input (4) taxes; 1 Exhibits "FF-1" to "FF-19." 2 G.R. No. 179632, October 19, 2011, 659 SCRA 658.

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page3 of14 (5) The input taxes have not been applied against output taxes during and in the succeeding quarters; (6) The input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (7) For zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(l) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with BSP rules and regulations; (8) Where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (9) The claim is filed within two years after the close of the taxable quarter when such sales were made. While acknowledging that SPP's sale of electricity to NPC is a zero-rated transaction, the CTA En Bane ruled that SPP failed to establish that it made zero-rated sales. xxx XXX XXX XXX Four. The Court finds that SPP failed to indicate its zero-rated sales in its VAT returns. But this is not sufficient reason to deny it its claim for tax credit or refund when there are other documents from which the CTA can determine the veracity of SPP's claim. Of course, such failure if partaking of a criminal act under Section 255 of the NIRC could warrant the criminal prosecution of the responsible person or persons. But the omission does not furnish ground for ' f the outright denial of the claim for tax credit or refund if ,/) such claim is in fact justified.

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page4of14 Five. The CTA denied SPP's claim outright for failure to establish the existence of zero-rated sales, disregarding SPP's sales invoices and receipts which evidence them. That court did not delve into the question of SPP's compliance with the other requisites provided under Section 112 of the NIRC. Consequently, even as the Court holds that SPP's sales invoices and receipts would be sufficient to prove its zero-rated transactions, the case has to be remanded to the CTA for determination of whether or not SPP has complied with the other requisites mentioned. Such matter involves questions of fact and entails the need to examine the records. The Court is not a trier of facts and the competence needed for examining the relevant accounting books or records is undoubtedly with the CTA." In the instant case, while petitioner was unable to reflect any amount of zero-rated sales in its Quarterly VAT Return for the first quarter of 2006,3 petitioner has sufficiently proven through the various documents it submitted that it actually generated zero-rated sales for the said period. However, in order to be entitled to refund or issuance of a Tax Credit Certificate ("TCC") of unutilized input taxes attributable to zero- rated or effectively zero-rated sales, petitioner must prove that it complied with Section 112 of the 1997 National Internal Revenue Code ("NIRC"), as amended, to wit: "SEC. 112. Refunds or Tax Credits ofInput Tax. - (A) Zero-rated or Effectively Zero-rated Sales. - Any VAT- registered person, whose sales are zero-rated or effectively 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 106(A)(2)(a)(1), / 1 3 Exhibits "EE-2" to "EE-4." 'I

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) PageS of14 (2) and (b) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas." Based from the foregoing, the following requisites must be met: 1. that there must be zero-rated or effectively zero-rated sales; 2. that input taxes were incurred or paid; 3. that such input taxes are attributable to zero-rated or effectively zero-rated sales; 4. that the input taxes were not applied against any output VAT liability; and 5. that the claim for refund was filed within the two-year prescriptive period. It is worthy to note that the fifth requisite was already discussed by the Court in its Decision dated May 3, 2013.4 Therefore, the Court deems it no longer necessary to discuss this requisite. Now we proceed to determine whether petitioner complied with the first requisite. Relevant to the first requisite is the discussion of Section 108(B)(2) of the 1997 NIRC, as amended, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - XXX XXX XXX (B) Transactions Subject to Zero Percent (0%) Rate.- The following services performed in the Philippines by VAT- registered persons shall be s~bject to zero percent (0%) rate:/ 4 Rollo, pp. 164-174. ( ~~V J "'--_/

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page6 of14 (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" In addition, the case of Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.,s is a case in point, where the Supreme Court has held that in order for the supply of services to be VAT zero-rated under Section 108(B)(2) of the NIRC of 1997, as amended [then Section 102(b)(2) of the NIRC of1977, as amended], the following requisites must be complied with: 1) the services by a VAT registered person must be other than processing, manufacturing or repacking of goods; 2) payment for such services must be in acceptable foreign currency accounted for in accordance with the BSP rules and regulations; and 3) the recipient of such services is doing business outside the Philippines. Likewise, from the aforesaid ruling, corollary to the second requisite is Sections 113(A)(2), (B)(1), (2)(c) and (3) of the NIRC of 1997, as amended, as implemented by Sections 4.113-1(A)(2), B(1) and (2)(c) of Revenue Regulations (RR) No. 16-05,6 which provide that a VAT taxpayer, like herein petitioner, shall for every lease of goods or properties and for every sale, barter or exchange of services, issue a VAT official receipt which must contain the following information: f f 5 G.R. No. 153205, January 22, 2007, 512 SCRA 124. 6 Prescribes the Consolidated Value-Added Tax Regulations of 2005 superseding RR No. 14-2005, Octobe< 19,2005. '/ {ill/ '------

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page 7 of14 "SEC. 113. Invoicing and Accounting Requirements for VAT-registered Persons. - (A) Invoicing Requirements. - A VAT-registered person shall issue: XXX XXX XXX (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services (B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information shall be indicated in the VAT invoice or VAT official receipt: (1) A statement that the seller is a VAT-registered person, followed by his Taxpayer's Identification Number (TIN); (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That: XXX XXX XXX (c) If the sale is subject to zero percent (0%) value- added tax, the term 'zero-rated sale~ shall be written or printed prominently on the invoice or receipt; XXX XXX XXX (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and xxx (underlining supplied) XXX XXX XXX SEC. 4.113-1. Invoicing Requirements. - (A) A VAT-registered person shall issue: - XXX XXX XXX /

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) PageS of14 (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or official receipts. Said documents shall be considered as a 'VAT Invoice' or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. VAT invoice/ official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records. (B) Information contained in VAT invoice or VAT official receipt. - The following information shall be indicated in VAT invoice or VAT official receipt: (1) A statement that the seller IS a VAT-registered person, followed by his TIN; (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT; Provided, That: XXX XXX XXX (c) If the sale is subject to zero percent (0%) VAT, the term 'zero-rated sale' shall be written or printed prominently on the invoice or receipt;" (underlining supplied) Pursuant to the foregoing provisions, the foreign currency remittances referred to under Section 108(B)(2) of the 1997 NIRC, as amended, must likewise be supported by VAT zero-rated official receipts. j Evidence on record shows that petitioner complied with the first _/ j requisite for VAT zero-rating of sales of services.

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page9 of14 Petitioner is duly registered with the BIR as a VAT taxpayer,7 and the services it performs in the Philippines, through its Regional Operating Headquarters, such as accounting, valuation and information systems maintenance and development services,8 are not the same category as "processing, manufacturing or repacking of goods." Furthermore, for the first quarter of 2006, petitioner rendered services to the following entities: Deutsche Group Services, Pty., Limited Deutsche Bank AG Frankfurt Deutsche Bank Aktiengesellschaft Filiale Hongkong Deutsche Bank Aktiengesellschaft Filiale Indonesia Deutsche Bank AG London Deutsche Bank Aktiengesellschaft Asia Pacific Head Office Singapore Deutsche Bank Aktiengesellschaft Filiale Singapur Deutsche Bank Aktiengesellschaft Filiale New York Deutsche Asia Pacific Holdings Pte., Ltd. These entities are non-resident foreign corporations doing business outside the Philippines as indicated in the Securities and Exchange Commission ("SEC") Certifications of Non-Registration of Corporation/Partnership,9 and authenticated certifications1o of foreign registration of the aforesaid entities. For services rendered for the first quarter of 2006, petitioner received foreign currency payments which were accounted for in accordance with the BSP rules and regulations as evidenced by the accrual notifications,11 and official receipts,12 issued by petitioner as well as the fund transfer credit advices from banks.13 The foreign currency remittances received by petitioner in the year 2007 in the amount of EUR09,079,701.60 represents collections of combined sales in 2005 and 2006 (including the first quarter of 2006).14 7 Joint Stipulated of Facts and Issues, Admitted Facts, par. 4, CTA Case No. 7775, Records, p. 187. 8 Exhibit "FF-8," Notes to the Financial Statements, No. 1, Reporting Entity. 9 Exhibits "LL," "MM," "NN," "00," "QQ," "RR," "SS," and "III." 10 Exhibits "TT," "UU," "VV," "WW," "YY," "ZZ," "N4," "Q4," "R4," and "T4." n Exhibits "BB-1" to "BB-122." 12 Exhibit "DD-1." 13 Exhibits "CC-1"to "CC-11." 14 Exhibit "II."

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) PagelO of14 Having determined that petitioner complied with the first requisite that it had VAT zero-rated sales for the first quarter of 2006, we now determine whether petitioner complied with the second, third and fourth requisites of Section 112 of the 1997 NIRC, as amended. In its amended Quarterly VAT Return15 for the first quarter of 2006, petitioner reflected the following input VAT: Nature of Purchases Input VAT Domestic Purchases of Goods other than Capital p 413,082.06 Goods Domestic Purchases of Services 2,428,853.76 Total p 2,841,935.82 However, upon examination of the various suppliers' invoices and official receipts16 supporting petitioner's claimed input VAT of P2,841,935.82, the Court Commissioned Independent Certified Public Accountant ("ICPA"), noted that the total amount of P295,190.42 lack supporting documents:17 Exhibit Nature of Findings Input VAT "II" Purchases of Services Not Supported by Suppliers' Official P250,700.68 AnnexA.l Receipts Purchases of Goods Not Supported by Suppliers' Sales 16,995.42 AnnexA.2 Invoices Purchases of Services/Goods Outside the Cut-off Period 26,775.88 Annex A.3 Sales Invoices/Official Receipts not in the name of DKS 375.00 Annex A.4 Overstatement in the Recorded and Claimed Input VAT 343.43 Annex A.5 TOTAL P295,190.42 In addition, as recommended by the ICPA, the following input taxes in the amount of P549,146.63 should be denied for not being properly substantiated by VAT invoices or official receipts in accordance with Sections 110(A) and 113(A) and (B) of the NIRC of 1997, as amended and as implemented by Sections 4.110-8 and 4.113-1 of Revenue Regulations No.16-2005, as amended: Exhibit I Supplier Input VAT 1) Input VAT on purchases of goods without VAT sales invoices 1s Exhibit "EE-4." 16 Exhibits" AA-1" to" AA-308." 17 Exhibit "II," Annex A. ~)

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Pagell of14 AA-4 Accent Micro Technologies, Inc. p 42,049.09 38,213.46 AA-5 Accent Micro Technologies, Inc. 113,097.09 51,127.27 AA-6 Accent Micro Technologies, Inc. 2,393.73 AA-6 Accent Micro Technologies, Inc. 2,263.26 249,143.90 AA-171 to AA-173 National Bookstore 12,600.00 AA-174 to AA-185 National Bookstore 706.19 827.24 Subtotal p 633.93 Input VAT on purchases of services wherein the VAT was not 9,676.80 633.21 2) separately shown in the VAT official receipts 612.23 724.63 AA-16 Asia PartnershiiJ Philippines, Inc. p 212.13 584.44 AA-18 Asia Select, Inc. 1,389.11 AA-18 Asia Select, Inc. 1,389.11 1,178.64 AA-21 Asia Select, Inc. AA-21 Asia Select, Inc. 34.89 AA-23 Asia Select, Inc. 34.89 AA-23 Asia Select, Inc. 34.89 AA-23 Asia Select, Inc. 845.46 AA-23 Asia Select, Inc. 128.57 AA-23 Asia Select, Inc. 1,731.96 AA-51 Display Logic (Design & Creative Logic, Inc.) 22,311.73 AA-52 Display Logic (Design & Creative Logic, Inc.) 19,230.75 AA-54 Display Logic (Design & Creative Logic, IncJ 450.00 604.55 AA-67 DHL Express Phils Corp 604.55 190.91 AA-67 DHL Express Phils Corp 107.14 1,249.37 AA-67 DHL Express Phils Corp 3,808.20 AA-72 Electronic Security Systems Corporation 199.50 AA-75 Elite Arts & Frames Kingdom 136.91 136.91 AA-77 Exclusive Cars, Inc. 151.97 2,470.73 AA-117 Jones Lang LaSalle 138.16 AA-118 Jones Lang LaSalle 136.91 AA-133 King of Travel, Inc. 38,791.82 AA-145 Leaves & Branches Enterprises 23,607.27 148,181.82 AA-146 Leaves & Branches Enterprises 150.00 AA-149 Mapecon Philippines, Inc. / AA-186 NFF Enterprises AA-188 Oakwood Premier AA-189 Oakwood Premier AA-206 Philippine Long Distance Telephone Company AA-206 Philippine Long Distance Telephone Company AA-206 Philippine Long Distance Telephone Company AA-209 Philippine Long Distance Telephone Company AA-209 Philippine Long Distance Telephone Coml'_any AA-215 Philippine Long Distance Telephone Company AA-215 Philippine Long Distance Telephone Company AA-250 Siemens, Inc. AA-251 Siemens, Inc. AA-267 Total Ventures, Inc. AA-284 Lane Moving & Storage - (a/& ) ~

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page 12 of14 Subtotal p 296,637.52 Input VAT on purchases of goods wherein the VAT was not 3) separately shown in the VAT sales invoices AA-33 BS Borja Builders, Inc. p 350.00 AA-112 JED Philippines, Inc. 1,458.64 AA-114 JED Philippines, Inc. 374.00 AA-116 JED Philippines, Inc. 863.64 AA-223 Power & Telephone Supply 318.93 Subtotal p 3,365.21 Total p 549,146.63 From the foregoing, only the amount of P1,997,598.77 represents petitioner's valid input VAT for the first quarter of 2006, as it complied with the second and third requisites of Section 112 of 1997 NIRC, as amended which is computed as follows: Input VAT Claim p 2,841,935.82 Less: Disallowances p 295,190.42 1) Per !CPA's findings 2) Per this Court's further verification 549,146.63 Total Disallowances Valid Input VAT p 844,337.05 p 1,997,598.77 Furthermore, anent the fourth requisite, although the claimed input VAT for the first quarter of 2006 amounting to P2,841,935.82 was carried-over by petitioner in its succeeding Quarterly VAT Returns,ts the same remained unutilized until it was deducted as "Any VAT Refund/TCC Claimed"19 in its Quarterly VAT Return for the second quarter of 2008. Thus, the excess input VAT of P157,581,523.2820 as of the end of the second quarter of 2008 which was to be carried-over to the succeeding third quarter of 2008 no longer included the subject claim. Thus, petitioner has substantiated the amount of P1,997,598.77 representing its unutilized input VAT attributable to its zero-rated sales for the first quarter of 2006 pursuant to Section 112 of the NIRC of 1997, ~ as amended. 1s Exhibits "D" to "R." 19 Exhibit "R," line 23D. 2o Exhibit "R," line 29.

Amended Decision CTA EB Case No. 827 (CTA Case No. 7775) Page 13 of14 Hence, petitioner is entitled to refund or issuance of a tax credit certificate in the reduced amount of Pl,997,598.77 representing its unutilized input VAT attributable to its zero-rated sales for the first quarter of 2006. WHEREFORE, petitioner's Motion for Reconsideration is hereby PARTIALLY GRANTED. Accordingly, the Court En Bane's Decision promulgated on May 3, 2013 is hereby REVERSED and SET ASIDE. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of Pl,997,598.77 representing unutilized input VAT attributable to its zero- rated sales for the first quarter of 2006. SO ORDERED. WE CONCUR: Presiding Justice <;J~.,_.~ L .~_; ~ I Ch . JUA~ITO C. CASTANEDA, J-l. ER~UY Associate Justice Associate Justice CAES~VA Associate Justice ~N.M..:Mt..~ ~c--?4-- ciELtTo N. MINDARO-GRULr:A AMELIA R. COTANGCO-MANALASTAS Associate Justice Associate Justice (On Leave) '- --- MA. BELEN M. RINGPIS-LIBAN Associate Justice

Amended Decision CfA EB Case No. 827 (CTA Case No. 7775) Page14 of14 CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court. Presiding Justice