KEPCO PHILIPPINES CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION KEPCO PHILIPPINES CORPORATION, C.T.A. CASE NO. 6413 Petitioner, Members: -versus- Castaneda, Jr. , Chairman THE COMMISSIONER OF INTERNAL Uy, and REVENUE, Palanca-Enriq uez, JJ. Respondent. Promulgated: X ---------------------------------------------------------------------------- X DECISION CASTANEDA, JR., .j_.: This case involves a claim for refund of unutilized input value-added tax arising from the domestic purchases of goods and services allegedly attributable to zero-rated sales of electricity to the National Power Corporation for the four calendar quarters of taxable year 2000. Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with its principal place of business located at Suite 2501-A, 25111 Floor, Tektite Tower I, Exchange Road, Ortigas Center, City of

DEC ISION CTA CASE NO. 6413 Page 2 Pasig .1 lt is a value-added ta'l: (VAT) registered taxpayer engaged in the production and sale of electricity as an i~dependent power producer? ' It sells electricity to National Pow�er Corporation (NPC) . On December 15, l 999, petitioner filed an Application/Certificate for Zero- Rate with the Bureau of Internal Revenue.3 The said application was received by the Audit Information, Tax Exemption/ Incentives Division of the Bureau of Internal Revenue on January 17, 2000 and was subsequently appro ved by the then respondent Commissioner of Internal Revenue, Mr. Dakila B. Fonancier, through the Chief, Audit Information, Ta'l: Exemption/Incentives Division, Ms. Nora C. Villanueva. The NPC was named as contractee therein. 4 For the four taxable quarters of2000, petitioner purchased goods and services necessary in the pT'oduction and sale of electricity to the NPC. The said expenses allegedly yielded input VAT in the total amount of P5 ,928,498 .26 reported by petitioner in the corresponding quarterly VAT returns as follows : Period Exhibit Input VAT l st Qtr. 2000 K , K-1 p 651 ,053.90 2nd Qtr. 2000 L, L-1 3rd Qtr. 2000 M, M-1 1,092, 198.44 41h Qtr. 2000 N , N-1 1,690, 5 2 2 .3 8 2,494, 723 .54 Tot a I P5 928 498 .26 Believing that its sales to NPC are subject to VAT at 0% in accordance w�ith Section l 08(8)(3) the National Internal Revenue Code of 1997 thereby entitling it to a reftmd of input VAT allegedly attributable to such zero-rated sales pursuant to Section 1Facts Admilled. Joint Stipulation of Facts and Issues, Paragraph 1. 2Jbid. . Paragraph 2 . 3Jbid. , Paragraph 5 . 4Annex ''F'' of Petition for Review.

DECISION CTA CASE NO. 6413 Page 3 11 2(A) of the same Code. petitioner filed written claims for refund of its unutilized input VAT. The letter-applications for refund for the first. sec'ond and third quarters of 2000 \Yere simultaneously filed on January 2Y, 200 I \Yhile the letter-request for ret"und for th e fourth quarter of2000 was filed on March 21 , 2001. 5 Respondent has not acted on the subject claims for refund .6 Hence, on March 31. 2002. petitioner filed the instant Petition for Review with this Court in order to to ll the runnin g of the !\Yo-year prescriptive period under the law. On Juiy 24 , 2002, respondent filed his Answer raising the following as Special and AffirmatiYe Defenses, to \Yit: 5. That the herein petitioner is not entitled to the refund of the amow1ls prayed for in the instant petition for review; G. That the instant petition for review \vas prematurely filed as petitioner has not exhausted the administrative remedies required by law and jurisprudence on the actions of this nature as no decision has as yet been rendered by the respondent: 7. In an action for refund, the taxpayer has the burden to show that the taxes paid \Yere erroneously or illegally collected and failure to do so is fatal to the action: and 8. Claims for tax refund are strictly construed against the taxpayer. Petitioner has no cause of action. This case was submitted for decision on January 7, 2005 without any e,�idence from the respondent and memorandum ofboth parties.7 The jointly stipulated issues to be resolved by the Court are as follows : ' Facts Admitted. Joint Stipulation of Facts and Issues. Paragraph 6. Sec also Annexes G. H. I and J of the Petition for Review. 6Facts o\dmitted. Joint Stipulation of Facts and Issues. Paragraph 7. 7Page 4 78. CTA records .

DECISION CTA CASE NO. 6"13 Page 4 I . Whether or not the petitioner is entitled to the refund of the amount of P5,928,498 .26 as alleged unutilized accumulated input VAT for the year 2000; 2. Whether or not the petitioner incurred accumulated input VAT from the purchase of goods and services for the calendar year 2000, which purchases are attributable to the sale by petitioner of electricity to NPC; 3. Whether or not the sale by pettttOner of electricity to NPC for calendar year 2000 is subject to VAT at zero rate; 4. Whether or not the alleged accumulated input VAT are duly supported by VAT invoices and/or official receipts; and 5. Whether or not the accumulated input VAT for the calendar year 2000 were utilized or applied by the petitioner to the succeeding taxable year. We deemed it best to resolve first the third issue. The law appli~able is Section 108(B)(3) [then Section 102(b)(3)] of the National Internal Revenue Code of 1997 in relation to Section 13 of Republic Act No . 6395 (the Revised NPC Charter), as amended by Presidential Decree Nos. 380 & 938, to wit: SEC. 108 . Value-Added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - xxx . (B) Transactions Sul?ject to Zero Percent (0 %) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate; ( l) XXX . (2) XXX. (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such set-vices to zero percent (0%) rate. (Emphasis supplied). XXX XXX XXX

DECISION CTA CASE NO. 6413 Page 5 Section 13. Non -pn~/il Charac/er of 1he Corpora/ion : E'Cemption .fi"om All Taxes. Duties. Fees. Imposts and pther Charges by th e Governmenl and Go vernment Instrumentalities. - The Corporation shall be non-profit and shall deYote all its retums from its capital inYestment as well as excess reyenues from its operation. for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance of effecti ve implementation of the policy enunciated in Section One of this Act, the Corpo��ation, including its subsidial'ies is he��eby declat�ed exempt ft�om the payment of all fot�ms of taxes, duties, fees, imposts as \\�ell as costs and service fees including filing fees , appeal bonds. supersedeas bonds. in any court or administratiYe proceedings. (Emphasis supplied). The wo rdings of Section 13 of Republic Act No . 6395 , as amended, are clear. NPC is a non-profit corporation declared as exempt from the payment of all form s of taxes. This exemption includes the value-added ta-x . Hence, by virtue of the said re ,�ised charter, the services rendered by a VAT registered entity to N PC are effecti vel y subject to zero percent (0%) VAT pursuant to Section I 08(B)(3) of the Nationallntemal Revenue Code of 199 7.8 Moreover, no less than the Supreme Court anirmed NPC's tax exemption from all kinds of taxes in the case of Macer/a vs. Macaraig, .Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771 , \\�here the 1-ligh Court rul ed in this wise: lPiresidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all form s of taxes, duties, fees , imposts, as well as costs and sen�ices including filing fees , appeal bonds, supersedeas bonds, in any court or administrative proceedings. The use of the phrase " all forms " of taxes demonstrate the intention of the law to gi ve NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non- profit the NPC shall devote all its retums from its capital investment as well a" excess revenues from its operation, for expansion. xxx RMiraut Nm�otas Corporation vs. Conm1issioner of Intemal Revenue. CTA Case No. 6044. October t6. 2002.

DECISION CTA CASE NO. 6413 Page 6 XXX XXX XXX It is evident from the provisions of P.D . No . 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6395 and P.O . No . 380 if it is to attain its goals. In fact, the issue of whether or not the sale of electricity by a VAT-registered entity to NPC is effectively zero-rated for VAT purposes is not one of first itnpression. In nurnerous VAT and BLR rulings, the respondent had already recognized that purchases by NPC of electricity from independent power producers are subject to VAT at zero-rate9 More importantly, this Court and the Court of Appeals have resolved the legal issue in the affirmative in several analogous cases, namely : I. Mirant (Phils.) Mobile Corporation (formerly Southern Energy Mobile, Inc .) vs. Commissioner of Internal Revenue, CTA Case Nos. 5935 & 5969. January I5, 2002; with CTA Entry of Judgment dated April 25, 2002 : 2. Mirant (Navotas II) Corporation, Inc. vs. Commissioner of Internal Revenue, CA-G.R. SP No . 6481I , October 29, 2002; 3. Mirant Pagbilao Corporation (formerly Southern Energy Quezon, Inc.) vs. Commissioner of Internal Revenue, CTA Case Nos . 5933 & 5984, January 15, 2002; CA-G.R. SP No . 69I15, April29, 2004; with Court of Appeals Entry of Judgment dated June 3, 2004; 4. Mirant Navotas Corp. (formerly Southern Energy Navotas, Inc.) vs . Commissioner of Internal Revenue, CTA Case No . 5936 and 5968, January 16, 2002; CA-G.R. SP No. 69114, June 27, 2002; with Court of Appeals Entry of Judgment dated August 16, 2002; 5. Mirant (Navotas II) Corporation (formerly Southern Energy Navotas ll Power, Inc.) vs. Commissioner of Internal Revenue, CTA Case Nos. 5944 and 5963, January 21, 2002; with CTA Entry of Judgment dated March 14, 2002; 9VAT Ruling Nos . 015-99, 022-99, 052-99, 067-99, 018-00, BIR Ruling Nos. DA- 247-04-19-99, DA-632-11-10-99 and DA-209-04-04-99.

DECISION CTA CASE NO. 6413 Page 7 (l . Magellan Cogeneration. Incorporated YS. Commissioner of Internal Re\enue. CTA Case No . 5765. February 26, 2m'>2; with CTA Entry of Judgment dated April 25. 2002: 7. Mirant Pagbilao Corporation (formerly Southem Energy Quezon, Inc.) "S. Commissioner of Internal ReYenue, CTA Case No . 6041 , March 5, 2002: CA-G.R. SP No. 69843 , February 27, 2004; with Court of Appeals Entry of Judgment dated April 6, 2004 ; 8. Magellan Cogeneration Inc. vs. Commissioner of internal ReYenue. CTA Case No. 5938 , May 28, 2002: with CTA Entry of Judgment dated August 9, 2002: 9. Mirant (Navotas II) Corporation (formerly Southern Energy Na,�otas II Po\\�er. Inc.) vs. Commissioner of Internal Revenue. CTA Case No . 6043 , July 5, 2002: \\ith CTA Entry of Judgment dated September 30. 2002: 10. KEPCO Philippines Corporation vs. The Commissioner of Internal Re\�enue, CTA Cases Nos. 5675 & 5704, March 18, 2003 : II . Mirant' Pagbilao Corp . (formerly Southern Energy Quezon, Inc.) YS. Commissioner of Internal Revenue, CTA Case No . 6133 , March 18. 2003: 12. Magellan Cogeneration Incorporated vs. Commissioner of Internal ReYenue, CTA Case No. 6033 , May 19, 2003 ; with CTA Entry of Judgment dated August I, 2003 ; 13. Mirant Pagbilao Corp. (formerly Southern Energy Quezon. Inc .) vs. Commissioner of Internal Revenue, CTA Case No. 6183 , February 18, 2004: \Yith CTA Entry of Judgment dated March 12, 2004: 14. Mirant Pagbilao Corp. (formerly Southern Energy Quezon, lnc .) vs. Commissioner of Internal Revenue, CTA Case No . 6262, October 20, 2004:and 13 . KEPCO Philippines Corporation vs. Commissioner of Internal Reyenue, CTA Case No. 6100, February 9, 2005 . Notwithstanding the above pronouncements, petitioner must still proYe that it actually sells electricity to NPC in order for such sales to be qualified as effectively /.ero-rated under Section I08(8)(3) . To prove this fact , petitioner presented its service

DECISION CTA CASE NO. 6413 Page 8 contract w1.th NPC 10 and severaI 9ffitct.aI recet.pts II . After a careful perusal thereof, I We have noted that not all of petitioner' s declared zero-rated sales in the 2000 Quat1erly VAT Returns were substantiated. In the respecti ve 2000 quarterly VAT returns, the following were declared by petitioner as zero rated sales: 1st Qtr 2nd Qtr 3rd Qtr. 4th Qtr. Total Exh . K Exh. L Exh . M Exh. N P2.754.302.005 32 P559 061 502 50 P735 857 511 71 P582.517 204.48 P876.865.786.63 However, based on the official receipts likewise formally offered by petitioner as exhibits, only the following 2000 zero-rated sales to NPC 12 were established, to wit : ' Date Exh. O.R. No. 1st Qtr 2nd 3rd ~ Total 03-06-00 151 P74,666 ,735 .62 p 74,679,090.12 p 74,666,735.62 04-03-00 R 154 p 72,250,997.18 p 64,549,345.47 05 -09 -00 R- 1 157 ~I4 66:6 Z35 62 69,764,211 .54 74 ,649 ,209 .79 54,722,259.90 74 ,679 ,090 .12 06-05-00 R-2 74 ,724 ,067 .62 72,271 ,487.22 57,305,471 .81 69,764,211 .54 07-00-00 R-3 1 ~9 74,724,067 .62 08-07-00 R-4 ~21916Z 369 28 ~219 1I1 6!M..19 ~1Z65ZZQZZ 18 72,250 ,997 .18 09 -05-00 R-5 160 74 ,649,209 .79 10-05-00 R-6 162 72,271 ,487.22 11-07-00 R-7 166 64,549 ,345.47 12-07-00 R-8 169 54,722,259.90 Tot a I R-9 171 57 305 471 .81 173 ~689 582,8I6.2Z Considering the above findings, We shall allocate the (valid) input VAT against the supported zero-rated sales because the input taxes sought to be refunded in the total amount of P5,928,498 .26 is attributable to total declared zero-rated sales of P2, 754,302,005 .32. Inasmuch as only the sum of P689,582,876.27 was proven as )()Exhibits P and Q, inclusive of subrna.rkings . 11 Exhibits Rand R-1 to R-11. 12Exhibits R-l 0 and R-ll were not considered because the sales pertained to taxable Year 200 I .

DECISION CTA CASE NO. 6413 Page 9 /.era-rated sales of electricity to NPC. it is but proper to apportion the input taxes equiYalent thereto. The rate io be applied \\�ill be based oh the total volume of declared sales. computed as follo\\s : Supported zero-rated sales to NPC p 689,582,876.27 Divided by the total declared zero-rated sales P2. 754.302.005 .32 Rate of supported zero-rated sales 0 25 We now proceed to the detem1ination of Yalidly supported input VAT. Petitioner aYers that it has unutilized input VAT in the aggregate amow1t of P5.928 ,498.26 for the )'ear 2000 derived from its various purchases of goods and services. To support such claim. petitioner engaged the sen�ices of an independent certified public accountant (CPA) pursuant to CTA Circular 1-95 , as amended , to Yerify the accuracy of its supporting documents for the summary of input taxes for 2000. Consequently, We have commissioned an independent CPA from Joaquin Cunanan & Co.. in the person of Mr. Rodelio Acosta. Based on his report 13, input VAT in the total amount of P3.891.82 failed to comply with VAT invoicing requirement, detailed as follows: � Supplier�s invoices or Statements of Account p 309.03 or official receipts are not available � Supported by NON-VAT invoices and/or 735 .01 Statements of accounts and/or official receipts � Erroneous amounts indicated in the Schedule 2,487 .78 of Input VAT as compared to related invoices or statements of accow1t or official receipts resulting to net overstatement of the Input VAT Claim 13Exhibits A to I. inclusiYe of submarkings .

DECISION CTA CASE NO. 6413 Page 10 � Supported by official Teceipt without VAT 360 .00 Identification number P3 891 .82 Tot a I We find the above report in order. However, after a further perusal of the pre- marked exhibits supporting the input taxes claimed, We have also found that input taxes in the sum ofP303,849.95 cannot be allowed for the following reasons : � Purchases of goods and services supported p 22,650 .39 14 only by statement of account, provisional receipt, acknowledgement slip, cash voucher or check � Purchases of goods supported by invoices 68 .18 15 Without BIR permit � Purchases of services not supported by 49' 783 .65 16 official rec~ipts 222,737 .61 17 � Purchases of goods and services without Supporting documents � Overstatement of input VAT claimed Tot a I P303 849 95 The above disallowances were not included in the exception of the commissioned auditor. Therefore, only the input taxes in the .sum of P5,620, 756.49 are validly supported by VAT invoices and/or official receipts, to wit: Total Input VAT Claimed p 3,891 .82 P5,928,498 .26 Less: Disallowances 303,849 .95 307 741.77 a. Per commissioned independent CPA b. Per Court' s further verification 14Exhibits 2-25 , 3-54, 8-7, 12-9, 12-10, 12-118, 12-140, 12-147, 12-148, 12-151 , 12- 154 and 12-456. 15Exhibits 12-76 and 12-77. 16Exhibits 12-160 and 12-161 . 17Exhibits 10-1 2 1 and 12-20to 12-24 . 18Exhibits 3-37. 4-72, 7-07, 7-31 , 8-73 and 12-12. 12-25 and 12-36.

DECISION CTA CASE NO. 6413 Page 11 Validly Supported Input VAT P5,620, 7:)6.42 Finally, We have to determine if the validly supported input taxes can be refunded based on Section 112(A) [then Section 106(b)] of the National Internal Revenue Code of 1997 which provides: SEC. I 12. Refunds or Tax Credits of Input Tax. - (A) Zero-rated or E;(fectil�ely 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, holl'ever, That in the case of zero-rated sales under Section I06(A)(2)(a)( I), (2) and (B) and Section I08(8)( I) 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 (BSP) . Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Prescinding from the above prov1s1on, petitioner must comply, insofar as applicable, with the following requisites: (I) that it is a VAT registered person; (2) that its sales are zero rated ; (3) that its administrative claim for refund was seasonably filed ; (4) that the input taxes claimed were attributable to zero-rated sales; and (5) that the input taxes were not applied against the output tax liability. We shall tackle the foregoing requisites simultaneously.

DECISION CTA CASE NO. 6413 Page 12 It is alread~� undisputed that petitioner is a VAT registered person . This \vas I already admitted by the respondent in paragraph 2 ofthe Joint Stipulation of Facts. In addition. We have ruled earlier that petitioner"s sales to NPC are subject to VAT at tn'\,. Records also sho\\� that the claims for refund, both in the administrative and judicial levels, \vere filed \Vithin the two-year period reckoned from the respecti,�e dates of filin g of the quarterly VAT returns since petitioner filed its claim for refund '' ith the Bureau of Internal Revenue on January 2Y, 200 I and March 21. 200 J and the Petition for Revi e\v on March 3 I. 200 I. Furthermore, the claimed input taxes were all attributable to petitioner"s declared zero-rated sales as evidenced by the 2000 quarterly VAT returns \\herein petitioner had no ta....able or exempt sales. It should be emphasized. however, that out of the total declared zero-rated sales of P2. 754,302,005 .32; petitioner \Vas only able to substantiate the amount of P689.582.876.27 as zero-rated sales ofserYices to NPC as discussed earlier. As to the last requirement. the subject input ta\:es of P5.928.498.26 \Vere not applied against output VAT and was finally deducted from the total available input tax as of March 21. 200 l as part of "AnY VAT RefundffCC Claimed"' in the amount of PI 07 .468.940. 30 .19 In sum. petitioner is entitled to the refund of input taxes attributable to proven zero-rated sales of sen �ices to NPC in the amount of P 1.405 , 189. J2. computed as lo llO\VS: Validly supported input VAT P5 ,620,756.4 9 Multiply by the Rate of Zero-rated Sales to NPC 0.25 Amount Refundable PI 405 18Y 12 19Exhibit 0 or S.

DECISION CTA CASE NO. 6413 Page 13 WHEREFORE. the instant Petition for ReYie\\ is hereb)' PAR11AL/,Y I GRANTED. Respondent is ORDERED to REFUND in fayor of the petitioner the amount of P J.405.1 XtJ . 12 representing unutilized input Yalue-added ta-.; for taxable ~ear 2000 attributable to proYen ~:ero-rated sales of electricity to NPC. No pronouncement as to cost. SO ORDERED. - ~~~ C!..~.c;>., l"UANITO C. CASTANEDA, J{(. Associate Justice \Ve Conc m�: L - ~~~ ER~~ OLG1 PALANCA-E�RIQUEZ Assoc i, :Justice Associate Justice CERTIFICATION I hereby certi~� that the aboYe decision \Yas reached after due consultation among the members of this Division in accordance with Section 13 , Article VIII of the Consti tution . ~~C - ~~-~- JUANITO C. CASTANEDA, J'W'. . Chairman