CE LUZON GEOTHERMAL POWER COMPANY INC. v. COMMISSIONER OF INTERNAL REVENUE (Consolidated with Case No. 6837)

REPUBLIC OF THE PHILIPPINES Cour(_OfTax {lppeals QUEZON CITY SECOND DIVISION CE LUZON GEOTHERMAL POWER C.T.A. CASE NO. 6792 COMPANY, INC., Petitioner, -versus- COMMISSIONER OF INTERNAL C.T.A. CASE NO. 68~7 REVENUE, Members: Respondent. )(----------------------------------------------)( CE LUZON GEOTHERMAL POWER COMPANY, INC., Petitioner, -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, ' zJooe Nov�2s Respondent. ./ to:d'J t; . hi. )( ----------------------------------------------------------------------------------- )( DECISION PALANCA-ENRIQUEZ, J.: THE CASES Before the Court are two consolidated Petitions for Review filed by CE Luzon Geothermal Power Company, Inc. (hereafter "petitioner"), to ~UJ

C .T.A. CASE NOS. 6792 & 6837 2 DECISION wit: C.T.A. Case No. 6792 filed on September 30, 2003, which seeks the refund or issuance of a tax credit certificate in the amount of P2,921,085.31, representing petitioner's unutilized Input VAT for the third quarter of taxable year 2001 for the zero-rated sales of petitioner, artd C.T.A. Case No. 6837 filed on December 19, 2003, which seeks the refund or issuance of a tax credit certificate in the amount of P21,229,990.80, representing petitioner's unutilized input VAT for the fourth quarter1oftaxable year 2001 and for all the quarters of2002 for the zero rated sales of petitioner. THE FACTS The antcedent facts of the case are as follows: Petitioner CE Luzon Geothermal Power Company, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at the 24th Floor, 6750 Bldg., 6750 Ayala Avenue, Makati City. Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue, vested with authority to act as such, .including, amc.mg others, the power to grant refunds of unutilized input value added taxes, pursuant to the provisions of the National Internal Revenue Code. He may be served with summons and other legal Gf'

� C.T.A. CASE NOS. 6792 & 6837 3 DECISION processes of this Honorable Court at his office located at the Fifth Floor, BIR, National Office Building, ~gham Road, Diliman, Quezon City. Petitioner is engaged in the business of power generation for which it is accredited and certified to as such by the Department of Energy, as evidenced -by its DOE Certificate of Accreditation (OSAC91- 12) issued on June 15, 1994. Petitioner is a registered value added taxpayer (VAT) with the Bureau of Internal Revenue, as evidenced by its Certificate of Registration with Tax Identification Number 047-003-924- 336-VAT. On June 26, 2001, RA 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (hereafter "EPIRA Law" ) took effect. The EPIRA Law is a legislativ'e act which,ordained reforms in the electric power industry, amending for the purpose certain laws and for other purposes. As a consequence of the effectivity of the EPIRA Law, petitioner, as one of the generating companies recognized by the DOE, treated the delivery and supply of electric energy to PNOC-EDC as VAT zero-rated. Prior to the effectivity of the EPIRA Law, such transactions were subject to 10% VAT and petitioner paid the corresponding output tax. ~

C.T.A. CASE NOS. 6792 & 6837 4 DECISION For the third quarter oftaxable year 2001, petitioner declared zero- rated sales in its amended quarterly VAT return in the amount of P661,007,570.05 and unutilized input VAT in the amount of P2,921,085.31. Its original quarterly VAT returns for the third and fourth quartets of taxable year 2001 was' filed on October 25; 2001 and January 10, 2'002, respectively, and its amended quarterly VAT returns for the third quarter of taxable year 2001 was filed on November 12, 2001. Petitioner likewise filed its original and amended quarterly VAT returns for the first, second, third and fourth quarters of taxable year 2002 on April 10, 2002, May 15, 2003, May 15, 2003 and April1, 2003, respectively. On September 26, 2003, petitioner filed its administrative claim for refund of unutilized input VAT for the third quarter of taxable year 2001. While the administrative claim for refund of unutilized input VAT for taxable year 2002 was filed on December 18, 2003. Alleging inaction of respondent, petitioner filed a Petition For Review with this Court on September 30, 2003 for unutilized input VAT I for the third quarter of taxable year 2001, docketed as C.T.A. Case No. 6792. On December 19, 2003, petitioner filed another Petition For (gP

C.T.A. CASE NOS. 6792 & 6837 5 DECISION Review with this Court, docketed as C.T.A. Case No. 6837 for unutilized input VAT for the fourth quarter of taxable year 2001 and for all the quarters of 2002 for the zero rated sales of petitioner. In C.T.A. Case No. 6792; in her Answer, respondent alleged by way of special and affirmative defenses: "4. Petitioner's claim for refund is subject to administrative investigation/examination by the respondent; 5. To support its claim, it is imperative for petitioner to prove, the following, viz: a. The registration requirements of a value-added taxpayer in compliance with Section 6 (a) and (b) of the Revenue Regulations No. 6-97 in relation to Section 4;107-1(a) of Revenue Regulations No. 7-95, and Section 236 o1 f the Tax Code, as amended; b. The invoicing and accounting requirements for VAT registered persons, as well as the filing and payments of VAT in compliance ~ith the provisions of Sections 113 and 114 of the Tax Code, as amended; c. Proof of compliance with the prescribed checklist of requirements to be submitted involving claim for VAT refund in pursuance to Revenue Memorandum Order No. 53-98, otherwise, there would be no sufficient compliance with the filing of administrative claim for refund which is a condition sine qua non prior to the filing of judicial claim in accordance with the provision of Section 229 of the Tax Code, as amended. It is worthy of emphasis that Section 112 (D) of the Tax Code, as amended, requires the submission of complete documents in support of the application filed with the Bureau of Internal Revenue before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies as provi~

C.T.A. CASE NOS. 6792 & 6837 6 DECISION for in the law. Hence, petitioner's failure to submit proof of compliance with the above-stated requirements warrants immediate dismissal of the petition for review; d. That the input taxes of P1,142,666.32 artd P19~,070,378.18 allegedly paid by the petitioner on its purchases of goods and services for the third quarter of tax~ble year 2001 and the fourth quarter of 2001 up to the fourth quarter of 2Q,02, respectjvely, were attributable to its Ziero-rated sales and such have not been applied against any output tax and were not carried over in the succeeding taxable quarters; e. That petitioner's administrative and judicial claims for tax credit or refund of the unutilized input tax (VAT) was filed within two (2) years after the close of the taxable quattter when the sales were made in accordance with Sections 112 (A) and:�{D) and 229 of the Tax Code, as amended; f. That petitioner's domestic purchases of goods and services were made in the course of its trade or business, properly supported by VAT invoices and/or official receipts and other documents, such as subsidiary purchase Journal, showing that it actually paid VAT in accordance with Sections 110(A) (2) and 113 of the Tax Code as amehded, in pursuance to Section 4.104-5 (a) & (b) of Revenue Regulations No. 7-95 (Re: Substantiation of Claims of Input Tax Credit); g. The requirements as enumerated under Section 4.104-2 of the Revenue Regulations 7-95 (Re: Persons who can avail of the Input Tax Credits); 6. Furthermore, in an action for refund the burden of proof is on the taxpayer to establish its right to refund and failure to sustain the burden is fatal to the claim for refund/credit. This is so because exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest ~

C.T.A. CASE NOS. 6792 & 6837 7 DECISION organic or statutory law. An exemption from common burden cannot be permitted to exist upon vague implications (Asiatic Petroleum Co. {P.I} v. Lanes, 49 Phil. 466 cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670); ahd 7. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation." In C.T.A. Case No. 6837, respondent raised the same special and affirmative defenses. On January 30, 2004, petitioner orally moved for the consolidation of both cases, which was granted by the First Division in a Resolution dated March f, 2004. On July 21, 2004, in View of the consolidation, petitioner and respondent submitted the following Joint Stipulation of Facts: "JOINT STIPULATION OF FACTS AND ISSUES PETITIONER and RESPONDENT, through their respective counsels, to this Honorable Court with its order during 'the pre-trial conference held on June 11, 2004, respectfully submit the following Joint Stipulation of Facts and Issues: I. SIJ'IPULATION OF FACTS Tile parties agree to the following stipulation of facts; 1. Respondent is the duly appointed Commissioner of Internal Revenue, vested with the authority to act as such, including, among others, the power to grant refunds uf unutilized input value added taxes pursuant to the (j)V

C.T.A. CASE NOS. 6792 & 6837 8 DECISION provisions of the National Internal Revenue Code. He may be served with summons and other legal processes of this Honorable Court at his office located at the Fifth Floor, BIR, National Office Building, Agham Road, Diliman, Quezon City. 2. Section 110 of the Tax Code provides: 'Section 110. Tax Credits- XXX XXX (B) Excess output or input tax --- If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If th<t input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter. Any input tax attributable to the purchase of capital goods or to zero rated sales by a VAT registered person may at liis option be refunded or credited against other internal revenue taxes subject to the provisions of Section 112.' 4. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Victorias Milling Co., Inc., 22 SCRA 12, held that: 'The claim for refund with the Bureau of Internal Revenue and the subsequent appeal to the Court of Tax Appeals must be filed within the two year period. If however, the Commissioner takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding mpst be started in the Court of Tax Appe~ls before the end of the two year period without awaiting the decision of said Collector. ' 5. Petitioner is a corporation duly organized and existing under and by virtue of Philippine laws; 6. Petitioner is registered as a value-added taxpayer with the Bureau oflntemal Revenue;~

C.T.A. CASE NOS. 6792 & 6837 9 DECISION 7. Authenticity and due execution of Petitioner's BIR Certificate of Registration, dated June 25, 2004; 8. For the third quarter of taxable year 2001, Petitioner declared zero-rated sales in its amended quarterly VAT return in the amount ofll661,007,570.05; 9. For the third quarter of taxable year 2001 , petitioner declared unutilized input VAT in the amount of P2,921 ,085.31 ; and declared the same in its quarterly VAT return for the third quarter of taxable year 2001; 11 . Authenticity , due execution and filing with the Bureau of Internal Revenue of the Petitioner's original quarterly VAT returns for third and fourth quarters of taxable �year 2001 filed on October 25, 2001 and January 10, 2002, respectively, and Petitioner' s amended quarterly VAT returns for the third quarter of taxable year 2001 filed on November 12, 2001 ; 12. Authenticity, due execution and filing of the Petitioner's original and amended quarterly VAT returns for the first, second, third at;1d fourth quarters of taxable year 2002 filed on April 10, 2002, May 15, 2003, May 15, 2003 and April1 , 2003, respectively; 13 . Authenticity and due execution of the Petitioner' s administrative claims for refund and/or Tax Credit Certificate (TCC) of unutilized input VAT for the third quarter oftaxable year 2001, dated September 25, 2003 which was filed on September 26, 2003 ; 14. The administrative claim for refund of unutilized input VAT dated December 11 , 2003 was filed on December 18, 2003; 15. The present claims for refund with this Honorable Court for unutilized input VAT were both filed on September 30, 2003 and December 19, 2003 . �~

C.T.A. CASE NOS. 6792 & 6837 10 DECISION Petitioner presented Ma. Mary Ann C. Capuchino, as witness, and documentary evidence, marked as Exhibits "A" to "JJJ", inclusive of their submarkings, which were all admitted by the Court. On the other hand, respondent presented Luzviminda G. Sabile, as witness, and Exhibits "1" to �-''8 ", inclusive of their submarkings, which were all admitted by the Court. On May 24, 2007, petitioner manifested that he will not present rebuttal evidence, and instead filed a Motion To Present Additional Evidence; which the Court granted. As additional witness, petitioner presented Trinity Gatuz, and after the completion of her testimony, moved for fifteen days until May 31 , 2007 to file a Supplemental Offer of Evidence, which the Court granted. Respondent was granted fifteen (15) days from notice to file her comment. In a Resolution dated July 9, 2007, the Court admitted the additional exhibits, marked as Exhibits "KKK" to "PPP ", inclusive of their submarkings, and both parties were ordered to file their simultaneous memoranda, within thirty (30) days from notice. Both parties having complied thereto, the consolidated petitions were deemed submitted for decision on November 28, 2007. Hence, this decision. ~

C.T.A. CASE NOS. 6792 & 6837 11 DECISION THE ISSUES As stipulated upon by the parties, the following are the issues for the consideration of this Court: I WHETHER OR NOT PETITIONER GENERATED ZERO- RATEID SALES FOR THE THIRD AND FOURTH QUAR1ERS OF TAXABLE YEAR 2001 AND FOR EACH OF THE FOUR QUARTERS OF TAXABLE YEAR 2002 AS A RESULT OF THE APPLICABILITY OF THE EPIRA LAW. II WHETHER OR NOT PETITIONER INCURRED UNUTILIZED INPUT VAT, AS A RESULT OF ITS VAT ZERO-RATED SALES, AS FOLLOWS: FOR THE THIRD QUARTER OF TAXABLE YEAR 2001 IN THE AMOUNT OF P2)921,085.31; FOR THE FOURTH QUARTER OF TAXABLE YEAR 2001 AND FOR ALL THE FOUR QUARTERS OF TAXABLE YEAR 2002 IN THE AMOUNT OF P21,229,990.80. III WHETHER OR NOT THE UNUTILIZED INPUT VAT SOUGHT TO BE REFUNDED HEREIN WERE APPLIED AGAINST ANY OUTPUT VAT LIABILITY IN SUCCEEDING TAXABLE QUARTERS IN 2001 AND IN 2002 AND THEREAFTER. IV WHETHER OR NOT THE CLAIMS FOR REFUND OF THE UNUTILIZED INPUT VAT FOR THE THIRD AND FOURTH QUARTERS OF TAXABLE YEAR 2001 AND FOR ALL THE FOUR QUARTERS TAXABLE YEAR w 2002 WITH THE BUREAU OF INTERNAL REVENUE

C.T.A. CASE NOS. 6792 & 6837 12 DECISION WERE FILED BY PETITIONER WITHIN THE TWO- YEAR PERIOD PROVIDED BYLAW. v WHE'FHER OR NOT BOTH THE PRESENT PETITIONS FOR REVIEW FILED BY THE PETITIONER WITH THIS HONORABLE COURT WERE FILED WITHIN THE TWO-YEAR PERIOD PROVIDED BY LAW. Principal Issue I The foregoing tssues raised by both parties boil down to the principal issue of whether or not petitioner is entitled to a refund or the issuance of a tax credit certificate in the aggregate amount of P24,151,076.11, representing unutilized excess input VAT paid on its domestic purdhases of goods and services which are attributable to zero- rated sales for the third and fourth quarters of 2001 and for all four quarters of2002. THE RULING OF THE COURT The petition is partly meritorious. The applicable laws are Sections 11O(B) and 112(A) ofthe National Internal Revenue Code (NIRC) of 1997, 'as amended, which provide, as follows: "SEC. 110. Tax Credits. - (A) Creditable Input Tax. -

C.T.A. CASE NOS. 6792 & 6837 �� 13 DECISION (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: XXX XXX (B) Excess Output or Input Tax. -If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess snail be carried over to the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions ofSection 112." "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)(l),(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 (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 volume of sales." Pursuant to the above provisions, in order to be entitled to a refund or tax credit certificate of input VAT directly attributable to zero-rated or effectively zero-rated sales, the following requisites must be complied with: 1) there must be zero-rated or effectively zero-rated sales;

C.T.A. CASE NOS. 6792 & 6837 14 DECISION 2) that input taxes were incurred or paid; 3) that such input taxes are attributable to zero-rated sales 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. First Requisite: There must be zero-rated or effectively zero rated sales As regards the first requisite, petitioner claims that its sales of electricity as a power generation company, qualify for VAT zero-rating in accordance with paragraph 5, Section 6 ofRA 9136, which states: "SEC. 6. Generation Sector. xxx XXX XXX Pursuant to the objective of lowering electricity rates to end- users, sales of generated power by generation companies shall bervalue added tax zero-rated. XXX XXX." With the enactment of RA 9136, related provisions of the National Internal Revenue Code of 1997 were deemed amended by modifying the

C.T.A. CASE NOS. 6792 & 6837 15 DECISION VAT rate applicable to sales of;generated power by generation companies from ten (10%) percent to zero (0%) percent. However, to qualify for VAT zero-rating under RA 9136; petitioner must be able to establish that: 1) it is a generation company, and 2) it derived sales from power generation. Records show that petitioner is engaged in the business of power generation and the subsequent sale of generated power to the Philippine National Oil Company-Energy Development Corporation [PNOC-EDC] (Exhibit "A-1 "; TSN, July 29, 2004, pp. 8-10). As such, petitioner owns and operates a 180-megawatt power plant facility located in Mahanagdong, Province of Leyte, which was .accredited by the Department of Energy, as a Block Power Production Facility since June 15, 1994 (Exhibit "B "). Hence, petitioner was able to establish that it is a generation company. Likewise, it was established that for the period commencing from July 1, 2001 to December 31 , 2002, petitioner generated gross receipts from sales of power generation services rendered to PNOC-EDC as evidenced by sales invoices and official receipts by petitioner to PNOC- EDC for the period (Exhibits "Z-1 " to "Z-18", "AA-1 " to "AA-2 " and "BB-1 " to "BB-61 "). However, in his Report, the Court-Commissioned Independent CPA noted that there is a discrepancy between _the amounts of gross

C.T.A. CASE NOS. 6792 & 6837 16 DECISION receipts from sales of generated power, as reflected in the VAT returns and as shown in the official receipts (Exhibit "Y", p age 7), to wit: "Our comparison of the amount of proceeds of the sales of generated power supported by ORs and the amount of sales of generated power presented in the VAT Returns disclosed the following: Gross Receipts of the Sales of July 1, 2001 to October 1, 2001 to Generated Power September 30, 2001 December 31, 2002 (inclusive of VAT Collected) Per Officiai 'Receipts (ORs) p 1,050, 699,959.30 p 4,850, 680, 562.55 (Annex 2) Per VAT R~tums 3 6 5,3 4 7, 7 5 9.0 0 5,318, 146, 689.21 Subjected to the 10% VAT 661 , 0 0 7, 5 7 0.0 5 p 5,318, 146,689.21 Treated as Zero-Rated Sales p 1,026, 355,329.05 (Annex 3) Difference -�Gross Receipts of the Sales o~ Generated Power p Per ORs is Overi(Under) 24,344,630.25 (P 467,466, 126.662 We noted that for the period from July 1, 2001 to September 30, 2001, the :difference of P24,344,630.25 represents collectiohs per OR Nos. 0521, 0525, 0010 and 0013 issued in the CY 2001 pertaining: to the 4% VAT charged and collected by the company from PNOC-EDC which was not reported in the VAT Returns for the period from July 1, 2001 to September 30, 2001. On the other hand, for the period from October 1, 2001 to Decembefi 31, 2002, the difference of P467,466, 126.66 is accounted for as follows : Per Sales Invoice Per Official Difference - Receipt Amount Per Sales Computation of Zero-rated P701,394,953. 66 P684,456,806.69 Invoice is Over Sales Bases on Sales p 16,938,146.97 (Annex 2) Invoice (accrual basis instead on ORs (cash basis) 4th Quarter of 2001 (OR Nos. 0001, 0002, 0003 and 0009 for Sales Invoice No. 0053 and OR Nos. 0004, 0006 and 0007 for Sales Invoice No. 0054) 1st Quarter of 2002 (OR Nos. 738,495,853.29 655,392,246.26 83,103,607.03 (Annex 2) 0014, 0015 and 0016 for w

C.T.A. CASE NOS. 6792 & 6837 17 DECISION Sales Invoice ,No. 0001 and (P321,493.29) (Annex 2) OR Nos. 0017, 0018 and 0019 for Sales Invoice 367,745,865.96 (Annex 3) No. 0002) (0.01! OR Nos. 0011 and 0012 for 1'467 466 126 66 Sales Invoice No. 0052 not considered as gross receipts ih the VAT returns . Sales Invoice No. 0003 considered both in 1st Quarter of 12002 (accrual basis) and amended ~ Quarter of' 2002 (cash basis) VAT Returns Rounding off Difference Total A furtlter scrutiny of the records discloses that the difference m zero-rated sales of P24,344,630.25 covering the period July 1, 2001 to September 30~ 2001 represents not only 4% VAT, but also service fees and capital/operating cost recovery collected by petitioner from PNOC- EDC, as shown below: Official Receipts I Sales Invoices Issued to PNOC-EDC Customer OR Date OR I Nature of Income Invoice Amount Numbet No. PNOC-EDC 22-Aug-01 0521 4% VAT 0049 14,348,174.14 PNOC-EDC 21-Sep-01 0525 0050 265,736.22 PNOC-EDC 28-Dec-01 0010 4% VAT 0051 4,419,912.45 PNOC-EDC 28-Dec-01 0013 Service Fee Revenue 0051 Capital Cost 5,310,807.48 p 24,344,630.29 Recovery/Operating Cost Recovery Under the VAT law, the 4% VAT collected by petitioner from PNOC-EDC in the amounts of P14,348,174.14 and P265,736.22 do not form part of taxable gross receipts and it was correct on the part of

C.T.A. CASE NOS. 6792 & 6837 18 DECISION petitioner notto declare the said amounts. However, the service fees and capitaVrecovery costs collected by petitioner from PNOC-EDC in the amounts ofP4,419,912.45 and P5,310,807.48 or in the aggregate amount of P9,730,719.93 should have been declared by petitioner, as part of its zero-rated receipts for the thi~d quarter ~f 2001. Petitioner's zero-rated receipts for the third quarter of 2001 should have been P670,738,289.98 instead of P661,007,570.05, hence, there is an underdeclaration of P9,730,719.93. On the 10ther hand, the discrepancy in zero-rated receipts for the fourth quarter of 2001 to the fourth quarter of 2002 in the amount P467,466,126.:66 pertains to the overstatement of petitioner's zero-rated receipts for the said period. Thus, instead of the declared amount of P5,318,146,689.21, the Court considers the amount of P4,850,680;562.55 supported by zero-rated VAT official receipts, as -petitioner's valid zero- rated receipts for the said period. In sum, petitioner's substantiated zero-rated receipts for the third quarter of 200 1 to the fourth quarter of 2002 amounted to P5,511,688,132.60, computed as follows: I Zero-Rated Receipts Per ORs July 1, 2001 to Oct. 1, 2001 to Total Less: Undeclared Portion Sept. 30 2001 Dec.31,2002 P5,521 ,418,852.53 Substantiated Zero-Rated Receipts p 670,738,289.98 P4,850,680,562.55 9,730,719.93 9,730,719 .93 P4,850,680,562.55 P5,511,688,132.60 p 661,007,570.05

1 ) C.T.A. CASE NOS. 6792 & 6837 19 DECISION Second and Fhird Requisites: Input taxes were incurred or paid and that such input taxes are attributable to zero-rated sales or effectively zero-rated sales As regards the second and third requisites, petitioner presented in evidence the suppliers' invoices, official receipts, Import Entries and Internal Revenue Declarations [IEIRDs] {Exhibits "DD-1 " to "DD-3866''), Summary List of Purchases {Exhibits "CC-I " to "CC-28''} and general ledgers (Exhibits "EE-l" to "EE-24'') for the period July 1, 2001 to December 31, 2002, in support of its reported input tax for the said period in the amount ofP25,749,880.18, broken down as follows: Exhibit Period Covered Input VAT G " p 4,519,889.38 H 3,059,611 .70 I 3rd quarter -2001 1,956,223 .67 4th quarter- 2001 2,432,000.14 J 1st quarter - 2002 4,049,983 .55 K 2nd quarter- 2002 9,732,171.74 L 3rd quarter- 2002 4th quarter- 2002 p 25.749.880.18 Total After a careful examin.ation of the report of the Court- Commissioned Independent CPA and petitioner's supporting documents, the Court fmds that out ofthe reported input VAT ofP25,749,880.18, the following input taxes in the amount of P10,199,791.42 should be denied for failure to meet the substantiation requirements prescribed under Sections 110(A) and 113(A) of the NIRC of 1997, as implemented by Sections 4.104-1, 4.104-5 & 4.108-1 ofRevenue Regulations No. 7-95:

C.T.A. CASE NOS. 6792 & 6837 20 DECISION Findings Reference Disallowed (Annexed to Input VAT Exhibit Y) 459 .00 1. Input taxes on importation of goods supported by original Annex 7 26,457.52 copy of IEIRD and an original BOC OR but not issued in the name of the company 580,010 .02 96 ,233 .63 2. Input taxes claimed on purchases of goods and services which are supported by the following documents: 234,018.88 81,997 .55 a. Domestic purchases of goods supported by pre- Annex 9 7,343.22 printed TIN-V invoices after July 31, 1991 but before 71 ,842.51 January 1, 1996 13,554.55 823 .74 b. Domestic purchases of services supported by pre- Annex 10 75 .00 printed TIN-V ORs after July 131 , 1991 but before 4,168.79 62,288.76 January 1, 1996 40,785.08 3,562 .11 c. Domestic purchases of goods supported by Annex 11 182,857 .66 documents other than a VAT invoice d. Domestic purchases of services supported by Annex 12 documents other than VAT OR e. Dome$tic purchases of goods supported by VAT Annex 13 Invoice$ but are not original copies f. Domestic purchases of services supported by a VAT Annex 14 OR but hot an original copy g. Domestic purchase$ of goods supported by original Annex 15 VAT invoices not issued in the name of the petitioner h. Domestic purchases of services supported by original Annex 16 VAT ORs not issued in the name of the petitioner i. Domestic purchases of goods supported by a tape Annex 17 receipt Without the petitioner's name and/or TIN j. Domestic purchases of services supported by a tape Annex 18 receipt without the petitioner's name and/or TIN k. Domestic purchases of goods supported by a VAT Annex 19 Invoice but no date indicated ,, I. Domestic purchases of services supported by a VAT Annex 20 OR but no date indicated m. Domestic purchases of goods supported by zero-rated Annex 21 VAT invoice n. Domestic purchases of goods supported by VAT Annex 22 Invoices' not dated within the taxable year o. Domestic purchases of services supported by VAT Annex 23 Ors not dated within the taxable year

C.T.A. CASE NOS. 6792 & 6837 '' 21 DECISION p. Domestic purchases of goods supported by invoices Annex 24 112,623.60 with TIN# only, TIN-V, TAN-VNAT, TIN NV/NONVAT stamped/handwritten TIN-VNAT (printed after Annex 25 323,764.24 January 1, 1996) Annex 26 Annex 27 300,266 .20 q. Domestic purchases of services supported by ORs Annex 28 5,926 .86 with TIN# only, TIN-V, TAN-VNAT, TIN NV/NONVAT Annex 29 stamped/handwritten TIN-VNAT (printed after Annex 30 386,645 .00 January 1, 1996) Annex 31 55.32 Annex 33 r. Domestic purchases of services supported by a TIN- Annex 34 1,871.27 NV/NONVAT ORs but stamped with "TIN-VAT" or the Annex 35 78,451 .39 word "NON" was erased 4,490 .60 s. Over-claimed input tax on purchases of goods and 1,022 .74 services due to erroneous computation 7,578,196.18 p 10 199 791.42 t. Input tax claimed on purchases of vehicles with engine displacement of more than 2000cc u. Input tax on payments to insurance companies for DST and local taxes V. Input tax on payment to travel agencies for airfare, security fare, terminal fee and other charges w. Input tax claimed on petroleum products (e.g. , diesel and gasoline) y. Input tax claimed on payment to brokerage companies for "non-VATable" reimbursable charges supported by aTIN_VATOR z. Input tax claimed pertaining to dST on payments for check p'rinting services 3. Input taxes !aimed on purchases of goods and services without suppOrting documents TOTAL Disallowed Input VAT Thus, only the following input taxes m the amount of P15,550,088.76 represents petitioner's valid claim, to wit: Findings Reference Valid 1. Input taxes claimed on purchases of goods and services and (Annexed to Input VAT ExhibltY) Annex 4 P14,654, 160.66

C.T.A. CASE NOS. 6792 & 6837 22 DECISION importation of goods which are properly substantiated for VAT Annex 5 614 ,732 .00 purposes Annex 6 201 ,774.00 Annex 8 2. Input taxes claimed on importation of goods which are Annex 32 77,231 .00 supported by the following documents: 2,191 .10 a. Importation of goods supported by a photocopy of Import P15,550;088.76 Entry Internal Revenue Declaration (IEIRD) and an original BOC OR b. Importation of goods supported by original IEIRDs but with no BOC,Ors c. Importation of goods supported by a photocopy of IEIRD and an original LBP OR d. Input tax on brokerage and other service fees paid to brokerage companies supported by a TIN-VAT OR Total Valid Input VAT Fourth Requi&ite: Input taxes wtire not applied against any output VAT liability We now proceed to the determination of whether or not the substantiated input VAT of P15,550,088.76 was applied against any output VAT. A perusal of petitioner's Quarterly VAT Returns for the subject period of claim shows that it was only in the third quarter of 2001 that petitioner incurred an output tax liability in the amount ofP36,534,175.90 on taxable sales ofP365,347,759.00. Such output tax was partially offset by petitioner against its reported creditable VAT withheld in the amount of P21,920,865.53 and VAT payment for July 2001 in the amount of P13,015,106.29.

C.T.A. CASE NOS. 6792 & 6837 23 DECISION To prove the actual withholding of the creditable VAT withheld of P21,920,865.53, petitioner presented Certificates of Creditable Tax Withheld at Source issued by PNOC-EDC for the months of July, August and September 2001, which reflected creditable VAT withheld in the amount of P33,684,203.31, which is higher than the reported amount of P21,920,865.53, as shown below: Per VAT Per Supporting Return Documents Exhibits G, G-8 (Exhibits II,KK,LL 6% VAT ,withheld by PNOC-EDC p 21,522,261 .20 July 398,604.33 August September TotalS% VAT withheld b PNOC-EDC Since petitioner did not file an amended VAT return to reflect the higher creditable VAT withheld ofP33,684,203.31, this Court shall consider the amount of P21,920~865.53 as the basis for the computation of petitioner's claim. As regards the VAT payment of Pl3,015,106.29, petitioner was able to prove actual payment thereof through the presentation of the machine validated Monthly VAT Declaration for July 2001 and - corresponding bank official receipt (Exhibits "Il-l" & "JJ-1 "). ~

� C.T.A. CASE NOS. 6792 & 6837 24 DECISION After applying the creditable VAT withheld ofP21,920,865.53 and monthly VAT payment of Pl3,015, 106.29 totalling to P34,935,971.82 against petitioner's output tax liability of P36,534,775.90, there still remains an output tax due of P1,598,804.08, which shall be offset against the substantiated input VAT of P15,550,088.76~ Thus, only the net input VAT amount of Pl3,951,284.68 is unutilized or unapplied, as of the fourth quarter of 2002. Although petitioner carried-over the subject claim to the succeeding taxable quarters until the fourth quarter of 2003 (Exhibits "R" to "U", inclusive of submarkings), the same remained unapplied as petitioner had no output VAT liability during those quarters. Moreover, in its VAT return for the 'third and fourth quarters of 2003 (Exhibits "T-4" & "U'-4 "), petitioner deducted the said input VAT as "Any VAT Refund/TCC Claimed" from the "Total Available Input Tax". This means that the substantiated claim of Pl3,951,284.68 can no loriger be used as credit against petitioner's future out~~t VAT lial?ility. Fifth Requisite: The claim for refund was filed within the two-year prescriptive period Finally, as to the two year prescriptive period, the Court fmds that petitioner's cl'aim was timely filed. The reckoning of the two-year

C.T.A. CASE NOS. 6792 & 6837 25 DECISION prescriptive period for the filing of a claim for input VAT refund commences from the date of filing of the corresponding Quarterly VAT Return (Atlas Consolidated Mining and Development Corporation vs. Commissioner ofInternal Revenue, 524 SCRA 733). Counting from the date when petitioner filed its Quarterly VAT Return for the third quarter of 2001 on October 25, 2001 {Exhibit "G-9''), both the administrative claim filed on September 26; 2003 {Exhibit "E-2''} and the Petition for Review (C.T.A. Case No. 6792) filed on September 30, 2003, fell within the two-year prescriptive period. Likewise, counting from the dates when petitioner filed its Quarterly VAT Returns for the 4th quarter of 2001 and the four quarters of 2002 on January 10, 2002 (Exhibit "H-2)", April 10, 2002 I {Exhibit "/-2 ''), July 24, 2002 {Exhibit "K3 ) , October 25, 2002 {Exhibit "M), and January 27, 2003 {Exhibit "d), respectively, both the administrative claim filed on December 18, 2003 {Exhibit "F-2 '') and the Petition for Review {C.TA. Case No. 683 7) filed on December 19, 2003 fell within the two-year prescriptive period. In sum, the Court finds that petitioner is entitled to a refund or issuance of a tax credit certificate, representing unutilized input VAT attributable to zero-rated sales for the third and fourth quarters of 2001 ~

C.T.A. CASE NOS. 6792 & 6837 26 DECISION and all four quarters of 2002, but m the reduced amount of Pl3 ,926,697.51, computed as follows: Output VAT p 36,534,775.90 Less: Tax credits/payment p 21 ,920,865.53 Creditable VAT Withheld 13.015,106.29 34,935,971 .82 VAT payment- July 2001 p 1,598,804.08 Output VAT still Clue 15.550,088..76 Less: Substantiated Input VAT p 13,951,284.68 Excess Input VAT Attributable to Zero-Rated Receipts Multiply by the ratio of: 5 ,5 1 1 , 6 8 8 ,1 3 2 . 6 0 0 .998237641 Substantiated Zero-rated Receipts +5,521 ,418.852.53 Divided by: Total Zero-Rated Receipts Refundable Excess Input VAT Attributable to Zero-Rated Rec~i ts WHEREFORE, premises considered, the present Petition for Review is P!ARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICA1fE in favor of petitioner the reduced amount of THIRTEEN MILLION NINE HUNDRED TWENTY-SIX THOUSAND ~ SIX HUNDRED NINETY-SEVEN AND 511100 PESOS (P13,926,697.51), representing the unutilized input VAT attriDutable to zero-rated sales for the third and fourth quarters of 2001 and all four quarters of 2002. SO ORDERED. ~~ OLGA PALANCA~ENRIQUEZ Associate Justice

... C.T.A. CASE NOS. 6792 & 6837 27 DECISION (On Leave) WE CONCUR: ERLINDA P. UY Associate Justice Q..~'..k G.. CoL~~./~ . WANTfO C. CASTANEDA,aR. Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that 1the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. .1~ UAN~ ITOa C. C~ AST~ ANE~ D~<iQfR. �. Acting Presiding Justice Chairperson, Second Division