AT & T COMMUNICATIONS SERVICES PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

~EPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC AT & T COMMUNICATIONS SERVICES PHILIPPINES, INC., Petitioner, C.T.A. EB No. 291 (C.T.A. Case No. 6907) Present: -versus- Acosta, P.J., Castaneda, Jr.,7 Bautista, . Uy, � Casanova, and Palanca-Enriquez, JJ.: COMMISSIONER OF INTERNAL REVENUE, Respondent. Promulgated: �. FEB 1 B 2008 tfr~ "d7'~Jv~;::_-Y"r~/-� ------------------------------------X ' . x-- DECISION I CASTANEDA, JR., J_;: 11 This Petition for Review under $ection 11 of Republic Act f'R.A. ) 9282 seeks the reversal of the Decision dated Febru.ary 23, 2007 issued by ' . the Court in Division denying the amount of P1,801,826.82 in CTA Case ?z-

DEOSION CTA EB Case 291(CfA Case No. 6907) No. 6907, and instead prays for the refund or issuance of a tax credit certificate in the amount of P2,050,736.69 allegedly representing its unutilized input Value Added Tax f'VAT') attributable to zero-rated sales for the year 2002. Likewise assailed is the Resolution dated June 19, 2007 denying its Motion for Reconsideration for lack of merit. The material antecedent facts are: Petitioner is a domestic corporation duiy organized and existing under and by virtue of ~he laws of the Republic of the Philippines, with principal place of business at the 18th Floor, SA-Lepanto Building, 8747 Paseo de Roxas, Makati City. It is principally engaged in the business of rendering information, promotional, supportive and liaison services, particularly to- AT & T Communications Services International, Inc. (AT&T- US), AT&T Solutions, Inc. (AT&T-51), and to its other affiliates, all of which are non-resident foreign corporations and are not engaged in trade -... or business in the Philippines, as well as to Subic Bay Freeport .�.~..�, Enterprises. It is duly registered with the Bureau of Int~rnal Revenue as a value-added tax (VAT) Taxpayer. wi'th Taxpayer Identification No. 050- ~ 004-519-384 as shown ir,J its BIR Certificate of Registration dated January 1, 1996. Respondent, on the other hand, is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR), vested by law to decide, approve and grant claims for refund or tax credit of~ erroneously or excessively paid taxes, including excess or unutilized input VAT payments, with office address at 4th Floor, BIR National Office Building, BIR Road, Diliman, Quezon City. . On January 1, 1999, petitioner' entered into a Service Agreement (E)_<hibit "N") with AT&T-�US whereby compensation for such services is paid in US Dollars (Exhibit "N-1"). Likewise, on July 21, 1999, petitioner entered into an Assignment Agreement (Exhibit "0") with AT&T-51 wherein services are also paid in US dollars. As part of such agreement, petitioner is required to render services tb Acer Information Products (Philippines), Inc., a Subic Bay Freeport Enterprise, which services shall be paid for in US Dollars to be inwardly remitted to the Philippines by AT&T Singapore acting as collecting agent. Subsequently, petitioner filed its Quarterly VAT Returns and its 9z-" Amended Quarterly Returns with the BIR for the period January 1, 2002. to December 31, 2002, within the period prescribed by law on the following dates:

j DECISION CfA. EB Case 291(CTA Case No. 6907) Period Exhibit Date of Filing 1st Quarter "D" April 171 2002 2nd Quarter "G" 3rd Quarter ' JOuclyto9b1er20204?~002 4th Quarter -- "L" January 271 2003 Amended Quarterly VAT Returns Period Exhibit Date of Filing 1st Quarter "E" &"F" October 241 2002; April 221 2003 2nd Quarter "H" & "I" October 241 2002; April 221 2003 3rd Quarter April 221 2003 4th Quarter IIKII April221 2003 "M" . According to petitioner1 for the period January 11 2002 to December 311 2002i it paid VAT input taxes of P218361770.71 on its domestic purchases of capital goods and other taxable goods and services/ and importation of capital goods1 which amounted to P2813671712.52. During the same year/ petitioner likewise claimed that it generated and recorded zero-rated sales from the above-described services in the aggregate amount of P5618981744.051 which was paid to petitioner in US Dollars inwardly remitted in accordance with existing rules and regulations of the Bangko Sentral ng Pilipinas (BSP). On the other hand/ the VAT input taxes of P218361770.711 which have been incurred for the purchases of capital goods and 9ther taxable goods and services/ as well as importation of capital goods used in the business operations of petitioner/ have been applied against the VAT output tax payable in th~ amount of P7861034.021 resulting in an excess and unutilized VAT input tax of P210501736.691 which have not been applied nor carried over to any succeeding quarter(s)1 and are duly supported by VAT invoices and/or official receipts. The following are the details: Taxable Total Domestic lnputVAT Zero-rated Sales Domestic Sales of VAT Output Quarters Purchases Payments Taxable Services Tax Due p 19,613,455.23 1st P11,828,776.24 P1,182,877.71 P3,351,504.85 P335, 153.29 Exhs. "E" & "F" 5,042,780.90 I 504,278.14 2"" 4,325,645.55 9,120,971.54 1,031,147.98 103,025.36 Exhs. "H" and "I" 7,170,509.82 .43?,561.67 3'd 717,053.19 12,351 ,060.35 1 ,406,553.58 140,656.23 E2fi 367 712 51 P2 836 770 71 Exh. "K" 15,813,256.93 2,Q71,960.22 207,199,14 41h P56 898 744.115 PZ 86!Ufi!i63 Exh. "M"� pc- .ezB6034 02

DECISION CTA EB Case 29l(CTA Case No. 6907) Total Input VAT Tax Payments P2,S36,770.71 Total Output VAT Due ( 786,034.02) Excess and unutili~ed VAT Input Tax e2.QSD.736.69 Going further, petitioner explained that since the entjre amount of unutilized VAT input taxes for calendar year ending December 31, 2002 could not be directly and exclusively attributed to either of its zero-rated sales or its domestic sales, an allocation of the said VAT input taxes were made, resulting in the amount of P1,801,826.82 as the VAT input taxes allocable to its zero-rated sales, computed as follows: = -D-om-e's-ti-c-S-alexs Total unutilized Vat input taxes VAT input taxes allocated to Total Sales domestic sales Thus, = P7,860,166.62 ' P248,909.87 X P2,050,736.69 P2,050,736.69 P64,158,910.67 248,909.87 Then, P1,801,826.821 Total unutilized VAT input taxes =========== Less: VAT input taxes allocated to domestic sales Allowable VAT input taxes attributable to zero-rated sal~s On the basis of its alleged entitlement to the unutilized input VAT paid for the calendar year ending December 31, 2002, th~ petitioner filed an application for refund and/or tax credit with the Bureau of Internal Revenue ("BIR'') District Offic~ No. so; South Makati, on March 26, 2004. The BIR's inaction on its claim for refund prompted petitioner to file a Petition for Review docketed as CTA Case No. 6907 with the Court in Jv Division, on March 31, 200~. 1 Rollo, pp. 300-303.

DECISION CfA EB Case 291(CfA Case No. 690Y) In the Decision dated February 23, 2007, the Court in Division dismissed the Petition due to petitioner's failure to substantiate the amount of its alleged claim. I Dissatisfied, the petitioner moved for the reconsideration of the ' I Decision dated February 23, 2007 which was denied in the Resolution dated June 19, 2007. I Unfazed, th.e petitioner appealed' with the Court En Bane interposing the following assignment of errors committed by the Court in Division: I. THE 1997 TAX CODE DOES NOT LIMIT THE PROOF OF INPUT OR OUTPUT VAT TO A SINGLE DOCUMENT. THERE IS NO DISTINCTION OF THE EVIDENTIARY VALUE OF THE SUPPORTING DOCUMENTS. II. THE USE OF THE VAT OFFICIAL RECEIPT AS PROOF OF PAYMENT OF THE SALE OF SERVICE LOSES ITS SIGNIFICANCE DUE TO THE REQUIREMENT THAT PETITIONER PROVE THE VALIDm OF ITS INWARD REMITTANCES. III. PETITIONER PRESENTED . ., THAT ~UBSTANTIA)._ . EVIDENCE UNEQUIVOCALLY PROVED � � PETTIONER'S ZERO-RATED TRANSACfiONS FOR THE YEAR 2002. IV. IN CIVIL CASES, SUCH AS CLAIMS FOR REFUND OR ISSUANCE OF A TCC, A MERE PREPONDERANCE OF. EVIDENCE WILL SUFFICE TO JUSTIFY THE GRANT OF CLAIM2 The respondent failed to file her Comment to the Petition within the period fixed bythe Court. � Being interrelated, the first, second and fourth issues shall be Jt- discussed in seriatim. In essence, these issues revolve on whether or not 2 Rollo, p.23.

DECISION CTA EB Case 291(CfA Case No. 6907) Page 6 of 16 ' a taxpayer is required to proffer proof of VAT invoices to substantiate sale ' of goods, and by official receipts the sale of services. The Petitioner argues that the Court in"~ Division erred in denying petitioner's claim for refund due to its failure to submit VAT official receipts l in support of its sale of services. The 1997 NIRC, as amended does not limit the proof of input or output VAT to a single document. The disjunctive term "or" used to dissociate the wordings "invoices" from "receipts" simply means that these documents are used without distinction as shown in Sections 113 and 237 of the 1997 NIRC, as amended. In the same manner, nowhere is it stated in Sections 106 and 108 of the 1997 NIRC, as amended that only VAT invoices maybe utilized to prove sales of goods, while VAT official receipts,may be used to substantiate sale of servic.es. These provisions refer to the basic rules on the imposition and computation of VAT on the sale of goods or services. In several instances, the respondent has allowed taxpayers to. prove input or output VAT with the use of either VAT invoices or official receipts. The respondent never raised any such issue in the administrative level, or before this Court. Thus,. .'there should be no bar admitting petitioner's VAT invoices, together with its other pieces of evidence in � 7/v: proving its entitlement to a r~fund.

.. DECISION erA EB case 291(CfA Case No. 6907) The petitioner also maintains that in civil cases, such as in this case, a mere preponderance of evidence will suffice to justify the grant of the claim for refund. There is no provision in the Rules of Court which states that only certain documents. are competent to. prove the existence of input and output VAT, ~omestic purchases or export sales. Petitioner further alleges that the zero-rated sales do not result to any output VAT on sales to its foreign customers. Thus, there is no need to determine the output VAT due thereon using the VAT official receipts required by Section 108 of the 1997 NIRC, as amended. Also, there is no danger that petitioner's customers shall be able to utilize, as their input VAT, unsubstantiated or non-existent output VAT. Being foreign corporations located oversea~, .such customers cannot use any output VAT I generated by petitioner in its operations. Hence, the Court in Division erred in requiring VAT official' receipts as additional proof of the sales and I output VAT, if any, generated by petitioner. Logically, there is no need to apply Section 108 to. the instant case~ Petitioner's .contentions deserve scant consideration. ' ' Sections 113 and 237 of the 1997 NIRC, as amended, prescribe the . issuance of a VAT invoice or official receipt, as follows: SEC. 113. Invoicing and Accounting Requirements for VAT- registered persons. - ~

D~CISION . trA EB case 291(CTA Case No. 6907) (A) Invoicing Requirements.- A VAT registered person shall, for every sale, issue and invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: 1. A statement that the seller is aVAT-registered person, followed by his taxpayer's identification number ("TIN"); and . I 2. The total amount whic;h, the purchaser pays or is obligated to pay to the seller _with the indication that such amount includes the value-added tax. xxx (Underscoring Ours for emphasis). XXX XXX XXX SEC. 237. Issuance of Receipts or Sales or Commercial Invoices.- All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty� -five pesq~ _(P25.00) or n:tor~, issue duly registered receipts or sales of commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity unit cost and description of merchandise or nature of service: Provide~ however, That in the case of sales, receipts or transfers in the amount, of One hundred pesos (PlOO.OO) or more, or regardless of amount, where the sale or transfer is made by a person liable to value-added tax to another person is also liable to value-added tax; or where, the receipt is issued to cover payment made as rentals, cgmmissions, compensations or fees, receipts or invoices shall be issued .. which shall show the name, business style, if any, and address of the purchaser, customer or client: . Provided �further, �That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer/s Identification Number of the purchaser. At a glance, Sections 113 and 237 of the 1997 NIRC, as amended bear no distinction between a VAT invoice and/or official receipt, however, these provisions should be read in conjunction with Sections 106 and 108 of the same Code which provide the manner of determining the output I VAT on the sale of goods and se1vices, reading: . . _SEC. 106. Value-added Tax on Sale of Goods or Properti.es. - �.

DECISION , CIA EB case 291(CfA case No. 6907) I (A) Rate and Base of Tax. - There shall be levied, assessed and collected on� every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent(lO%) of the gross selling price or gross value in money of the goods or properties sold, bartered or :exchanged, such tax to be paid by the seller or transferor. ..;-...) (D) Determination of the Tax- (l).The tax shall be computed by multiplying the total amount indicated in the invoice by one-eleventh (1/11) XXX SEC. 108. Value-added Tax on Sale.of Services and Use' or Lease of Properties. - (A)Rate and Base of Tax -There shall be levied , assessed and collected, a value-added tax equivalent to ten percent(10%) of gross receipts derived from the sale or exchange of services including the use or lease or properties. XXX (C) Determination of the Tax- The tax shall be computed by multiplying the total amount indicated in the official receipt by one-eleventh (1/11). (Underscoring Ours for emphasis). . For every'sale of goods or properties, the law imposes a ten. (10%) output VAT o~.the gross se!ling price thereof; while in the case of sale of services, the 10�/o VAT is based on the gross receipts. The gross selling price is defined vis-a-vis with gross receipts under Sections 106(A)(1) 2nd paragraph and 108(A) of the 1997 NIRC, as amended, respectively as follows: SEC. 106. Value-added T~x on Sale of Goods or Properties. - I\ XXX (A) Rate and Base of Tax - ., .... .,., :ti)\J

DECISION CfA EB Case 291(CTA Case No. 6907) (1) The term "goods or properties' shall mean xxx \ The term 'gross selling price means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange of the goods or properties, excluding the value-added tax. The e~cise tax, if any, on such goods or properties shall form part of the gross selling price. SEC. 108. Value-added tax on Sale of Seavices and Use or Lease of Properties. --" (A} Rate and Base of Tax. - XXX The term 'gross receipts means the total amount of money or its equivalent repres~nting the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and ' deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax, xxx The law mandates that the VAT on the sale of goods or properties accrues upon the consummation of sale, regardless of whether or not the I consideration thereof was actually received. This serves as basis why the tax shall be computed by multiplying the total amount indicated in the VAT I invoice by one-eleventh(1/11)�. 3 On .the other hand, the VAT on the sale ' of services arises �upon actual or constructive receipt of the consideration, irrespective of whether or not there is performance of the service. This is the reason why the sale of services shall be computed by multiplying the ~otal amount indicated in the VAT official receipt by one-eleventh (1/11).4 For the same transaction~ the output VAT of the sel,er becomes the f - input VAT ofthe purchaser,. and this explains why th~ law requires that the 3 Section 106(0) of the 1997 NIRC, as amended~ 4 Section 108 (C) of the 1997 NIRC, as amended. 2lll

DECISION CfA EB Case 291(CfA Case No. 6907) document used as proof to. establish output VAT is the same document made as reference in ascertaining the input VAT pursuant to Section 110 of the 1997 NIRC, as amended which provides: "i SEC.110.Tax CreditS.~ I (A)Creditable Input Tax- (l)Any input tax evidenced by a VAT invoice of official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: i ' ' ' (a) Purchase or importation of�goods: (i) For sale; or (ii) For conversion into or intended or form part of a finished product for sale including packaging materials; � (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. (b) Purchase of services on which a value-added tax has been actually paid. � (2) The input tax on domestic purchase of goods or properties shall be creditable: (a) To the purchaser upon consummation of sale and on importation of goods or properties: and (b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs' ; However, in the case of purchaser of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental. royalty or fee. (Underscoring Ours for emphasis). Otherwise stated, the input VAT on domestic purchases of goods or properties is allowed as tax credit to the purchaser upon consummation of sale which means upon the issuance. by the seller of the VAT invoices eviaencing the sale of goods or' � properties. The input VAT on the 9c- purchases of services shall be available as tax credit to the purchaser upon �Z Ll2

DECISION CfA EB Case 291(CfA Case No. 6907) Page 12 of 16 ' the issuance by the seller of the VAT ,official receipt evidencing receipt of the payment for services- performed or yet to be performe~. Apparently, the sale of goods should be evidenced by VAT invoices, and the sale of services by official receipts. To bolster its claim on the dispensability of VAT invoices and official receipts, petitio.. ner's posture is. anchored in the case of Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenui' where the Supreme Court ruled that 'the evidence of input VAT may be proven by other export docyments, rather than the supporting documents for the zero-rated export sales. We disagree. Petitioner's reliance in the Intel case is misplaced. The two cases \ delve on distinct set of fact and issues. In the herein case, the petitioner raises. the issue of whether or not its zero-rated transactions are evidenced by VAT official receipts. On the other hand, the Intel case focuses on the relevance of the authority to print. Pertinent excerpts of the Intel case are as follows: On the latter point, the Court disagrees with the CTA and CA. As correctly argued by petitioner, there is no law or BIR rule or regulation requiring petitioner's authority from the BIR to print its sales invoices (BIR authority,.to print) to be reflected or indicated therein. xxx ' It is clear from the foregoing that while entities engaged in business are required to . secure from the BIR an authority to print receipts or invoices anp to issue duly registered receipts or invoices, it is ~ 5 G.R. 166732, April 27, 2007.

DECISION CfA EB Case 291(CTA Case No. 6907) '� not required that the BIR authority to print be reflected or indicated therein. Only the following items are required to be indicated in the receipts or invoices x xx (Underscoring Ours for emphasis).6 Indubitably, a taxpayer is required to is,sue invoices or receipts involving transactions subject to VAT. According to petitioner, the use of the VAT official receipts as proof of payment of the sale of service loses its significance due to the requirement that it WQS able to ' establish the Validity Of its inward remittances. The independent Certified Public Accountant's (''CPA") Report dated July 14, 2005 also verified that the zero-rated sales declared by the petitioner for calendar year 2002 wereproperly supported by original VAT invoices with the wordings, "zero-rated" imprinted therein as well as Bank � ililb Credit Advices. Bank Credit Advic~s from Citibank N.A. show that the inward remittances were made to petitioner in foreign currency in the aggregate amount of US$1,102,315.48(P56,898,744.05) from JP Morgan Chase� Bank - New York, U.S.A., Citibank - Lonqon, U.K., and Citibank N.A. - New York, U.S.A. Payment for, the four invoices adc;Jressed to Acer, Inc. is 1 evidenced by a Bank Credit Advice showing an incoming foreign payment from AT & T- Singapore. In a litany of cases, this Court considered Bank Credit Advices as credible evidence to prove tha.t ,inward remittances were made in foreign~ 6 Intel Technology Philippine~ Inc. vs. Commis;ioner ofIrltetnal Re~enut!, supra.

DECISION CTA EB Case 291(CTA Case No. 6907) currency1 duly accounted. for in accordance with Bangko Sentral ng PilipinasC'BSP1') rules and regu!a~ions. Such being the case, it is clear that I petition~r's sales qualify within the purview of tne definition of zero-rated sales under the 1997 NIRC, as amended. The Bank Credit Advices likewise prove that petitioner has received the compensation for its services. I We are not persuaded. Proofs of inward remittances cannot be issued in lieu of VAT official receipts to demonstrate petitioner's zero-rated transactions. Under Section ' 1.13 of. the 1997 NIRC1 as amended1 irrespective of the nature of transaction, be it taxable, exempt or zero-rated sale, the law mandates that the taxpayer ''for evety sale, issue an invoice or receipt // Thus, the enumerated zero-rated transactions' under Se~tions 106 and 108 are those which are duly covered by VAT Invoices (in the case of sales of goods), and official receipts (in the case of sa.les of services). Petitioner asserts that the� 'testimony � of the commissioned independent CPA� corroborated its declared zero-rated sales consiSting of sales of services to non-residents evidenced by original VAT invoices imprinted with the word, ."zero-rated" and by the Bank Credit Advices. Moreover/ petitioner's invoices, credit memos and other documents evidem:ing its zero-rated sales of services for the year 2002 reflecting /It-- SIR's authority to print as well as petitioner's name1 address and TIN. The

DECISION CTA EB Case 291(CfA Case No. 6907) I Bank Credit Advices satisfy the evidentiary requirement in pr.oving petitioner's zero-rated sales for the year 2002. Petitioner's stance is unmeritorious. '') \ ' As earlier discussed, the issuance of VAT official receipts is required to validate sale of services. Documents other than VAT official receipts such as invoices are only corroborative evidence, and may not conclusively establish the existence of petitioner's sale of services. This Court finds no reason to modify the ruling of the Division which aptly m'ade the following observation: An exaptination of the documents presented in this case shows that petition~r really incurred zero- rated sales. However, they were not supported by official receipts as required by law/ Thus, the Court in Division correctly denied the refund or the issuance of tax credit certificate of petitioner's claimed input VAT. WHEREFORE, premises considered, the Petition is hereby DISMISSED. The Decision dated February 23, 2007 and the Resolution dated June 19, 2007 are hereby AFFIRMED.. ' SO ORDERED. - Sf.~ a.~--~ ~ Cju�ANITO c. cA5TANe6i,JR. Associate Justice 7 Rollo, p. 312...

( DECISION CfA EB case 291(CTA Case No. 6907) WE CONCUR: L -ra. oc.y,L_ (With Dissenting Opinion) ERNESTO D. ACOSTA Presiding Justice ."' STA E~P.UY Assoctate Justice �~' oiGAtM:fN~z Associate Justice CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~W� o~ ERNESTO D. ACOSTA Presiding Justice